<PAGE>
As filed with the Securities and Exchange Commission on June 3, 1999
Registration No. 333-76587
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
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
Alan C. Smith 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. [_]
---------------
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 JUNE 3, 1999
[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. The selling stockholders identified
in this prospectus are selling an additional shares. We will not receive
any of the proceeds from the sale of shares by the selling stockholders.
We expect that the initial public offering price will be between $ and $
per share. We have requested listing on the Nasdaq National Market under the
symbol WGRD.
Investing in this stock involves significant risks. See "Risk Factors"
beginning on page 6.
-----------
<TABLE>
<CAPTION>
Total
-----------------------------
Without With
Per Share Over-Allotment Over-Allotment
--------- -------------- --------------
<S> <C> <C> <C>
$ $ $
Price to Public.......................
Underwriting Discounts & Commissions..
WatchGuard's Proceeds, Before
Expenses.............................
Selling Stockholders' Proceeds, Before
Expenses.............................
</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
, 1999
<PAGE>
GATEFOLD ARTWORK DESCRIPTION TEXT:
The WatchGuard LiveSecurity Internet Broadcast Service
How it Works:
1. WatchGuard LiveSecurity Broadcast Service--WatchGuard's team of
security experts broadcast alerts, threat responses and security software
updates via the Internet directly to security managers at subscribing SME
customers and to ISP network operation centers (NOC).
2. Security Policy Management--Easy-to-use monitoring and reporting tools
enable SME customers to configure their security systems, implement security
policies and monitor all of their protected offices. In the NOC, specially
designed scalable software enables ISPs to centrally track, configure, update
and individually monitor thousands of managed security customers.
3. Comprehensive Security Protection--The standard security suite
includes:
. Firewall
. User authentication
. Remote User VPN
. Branch Office VPN
. Web surfing control
ISP's may easily extend the standard security suite by bundling their
own value-added services, such as intrusion, detection, 24-hour monitoring and
expanded reporting and analysis.
4. WatchGuard Firebox--Easily installed into the SME or managed
customer's existing network, the WatchGuard Firebox simply plugs in between the
Internet router and the internal network of each office. This dedicated security
appliance implements the customer's security policies and protection.
WatchGuard LiveSecurity System.
The WatchGuard LiveSecurity System is used by small- to medium-sized
enterprises (SME) that use the Internet for e-business and communications.
Some current customers are:
. Norm Thompson Outfitters, Inc.
. Bolle' Inc.
. JDA Sofware Group, Inc.
. Unimed Pharmaceuticals, Inc.
. Boston Architectural Center
WatchGuard LiveSecurity for MSS
WatchGuard LiveSecurity for MSS (Managed Security Services) is used by
Internet service providers (ISPs) to deliver the LiveSecurity protection to
their SME business, government and education customers around the world.
Some current ISPs:
. AT&T EasyLink Services Asia/Pacific, Ltd.
. GTE Internetworking, Inc.
. PSINet Inc.
. Verio, Inc.
================================================================================
Diagram: The WatchGuard LiveSecurity Internet Broadcast Service
================================================================================
Graphics:
Diagram showing WatchGuard LiveSecurity broadcasts going through the
Internet to:
(1) A Firebox and then to the security manager at SME headquarters. From
the security manager, the broadcast goes to Fireboxes at SME branch offices.
(2) An ISP network operations center. From the ISP security manager, the
broadcast goes to Fireboxes on the premises of the ISP's subscribing SME
customers. Behind the diagram is an outline of a world map.
<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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
---- ----
<S> <C> <C> <C>
Prospectus Summary.................. 3 Management.......................... 52
Risk Factors........................ 6 Certain Transactions................ 60
Forward-Looking Statements.......... 15 Principal and Selling Stockholders.. 62
Use of Proceeds..................... 16 Description of Capital Stock........ 65
Dividend Policy..................... 16 Shares Eligible for Future Sale..... 69
Capitalization...................... 17 Underwriting........................ 71
Dilution............................ 18 Legal Matters....................... 73
Selected Financial Data............. 19 Experts............................. 73
Management's Discussion and Analysis Where You Can Find More
of Financial Condition and Results Information........................ 73
of Operations...................... 20 Index to Financial Statements....... F-1
Business............................ 32
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information that we present more fully in the rest of
this prospectus. This summary does not contain all the information you should
consider before buying shares in this offering. You should read the entire
prospectus carefully.
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. International Data Corporation estimates that, in the United
States, 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-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 a desktop personal computer to all security appliances on their
corporate network, while retaining centralized control and administration.
Alternatively, SMEs can 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 customer sites quickly, easily and economically.
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 predecessor. 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.
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.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by WatchGuard........... shares
Common stock offered by the selling
stockholders................................ 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 April 30, 1999, and excludes
. 1,952,910 shares available for grant under our stock option plan;
. 5,757,880 shares of common stock issuable upon exercise of options
outstanding under our stock option plan, at a weighted average exercise
price of $1.03 per share, of which options to purchase 2,009,304 shares
are currently exercisable;
. 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; and
. 600,000 shares of common stock available for issuance under our employee
stock purchase plan.
4
<PAGE>
Summary Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period From
February 14,
1996 Year Ended Three Months
(Inception) December 31, Ended March 31,
to December 31, ----------------- ----------------
1996 1997 1998 1998 1999
--------------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenues........... $ 331 $ 5,098 $ 11,379 $ 2,034 $ 3,938
Operating loss........... (462) (4,396) (9,000) (1,401) (3,129)
Net loss................. (468) (4,334) (9,119) (1,424) (3,213)
Basic and diluted net
loss per share.......... N/A $(17.17) $ (11.34) $ (2.23) $ (2.28)
Shares used in
calculation of basic and
diluted net loss per
share................... N/A 252 804 639 1,407
Pro forma basic and
diluted net loss per
share................... $ (0.68) $ (0.22)
Shares used in
calculation of pro forma
basic and diluted net
loss per share.......... 13,374 14,832
</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>
March 31, 1999
------------------------------
Pro Forma
Actual Pro Forma as Adjusted
------- --------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................ $ 2,046 $2,346 $
Working capital (deficit)........................ (3,449) (3,149)
Total assets..................................... 10,101 10,401
Long-term debt, less current portion............. -- -- --
Total stockholders' equity (deficit)............. (1,915) (1,615)
</TABLE>
The preceding table summarizes
. actual balance sheet data;
. pro forma balance sheet data to give effect to the conversion of all
outstanding preferred stock into 13,425,316 shares of common stock and
the issuance of 42,856 shares of common stock upon the exercise of
warrants issued on March 9, 1999 at an exercise price of $7.00 per share;
and
. pro forma balance sheet data as adjusted to give effect to the sale by
WatchGuard of shares of common stock offered through this
prospectus at an assumed initial public offering price of $ per
share, after deducting underwriting discounts and commissions and
estimated offering expenses.
----------------
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, (4) a 2-for-1 split of our common stock effected on , 1999, and
(5) the filing and effectiveness of our restated certificate of incorporation
approved by our board of directors on May 26, 1999 and by our stockholders on
, 1999.
5
<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.
We have a limited operating history and may experience difficulties typically
encountered by early-stage companies in new and rapidly evolving markets.
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.
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 March 31, 1999, we had an accumulated deficit of
approximately $1.9 million.
Our operating results fluctuate and could fall below expectations of securities
analysts and investors, resulting in a decrease in our stock price.
Our quarterly and yearly operating results have varied widely in the past and
will probably continue to fluctuate. Our operating results for a particular
quarter or year are likely to fall below the expectations of securities
analysts and investors, which could result in a decrease in our stock price. We
believe that 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; and
. the timing of the announcement, introduction and market acceptance of
new or enhanced products and services by us or our competitors.
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 for a particular quarter or year, we may be unable
to adjust our spending in time to compensate for any unexpected quarterly or
annual shortfall in revenues.
6
<PAGE>
In addition, our domestic and international sales tend to be lower in the
summer months, when businesses often defer purchasing decisions. Also, as a
result of customer buying patterns and the efforts of our sales force to meet
or exceed quarterly and year-end quotas, 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 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.
If SMEs do not accept our LiveSecurity products and services, our business will
not succeed.
We currently expect all future revenues to be generated through sales of our
LiveSecurity Internet security products and related services, particularly
subscription and license fees. Our success depends on 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.
Because many potential SME customers are unaware of the need for Internet
security or may perceive it as costly and difficult to implement, our products
and services may not achieve market acceptance.
We believe that many potential customers, particularly SMEs, are not fully
aware of the need for Internet security products and services. Historically,
only enterprises having substantial resources have developed or purchased
Internet security solutions. 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 about the need for Internet security and convince SMEs
of our ability to provide this security in a cost-effective and
administratively feasible manner. Although 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. Despite our innovation,
however, SMEs may reject our security solution. For example, 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. 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 on widespread acceptance of the outsourcing of Internet security
services to third parties. Enterprises
7
<PAGE>
that have already invested resources in other methods of Internet security may
be reluctant to adopt new products and services that may limit or compete with
their existing investment.
Our success depends on the performance of third-party resellers and
distributors.
We sell our products and services through value-added resellers and
distributors, and we expect our success to continue to depend in large part on
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; and
. our inability to replace lost resellers or distributors on acceptable
terms, in a timely manner or at all.
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.
Our success depends on newly established and unproven relationships with ISPs
for implementation of our LiveSecurity for MSS solution.
Recently, we have contracted with several domestic and international ISPs to
implement our LiveSecurity for MSS solution. We expect a substantial percentage
of our revenues to be derived from these relationships. If these ISPs are
unsuccessful in marketing and implementing our LiveSecurity for MSS solution,
our operating results will be materially harmed. 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 this
development and implementation. Until and unless this 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 decide not to subscribe or 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.
Product returns or retroactive price adjustments could exceed our allowances,
which could adversely affect our operating results.
We provide some of our distributors and resellers with product return rights
for stock rotation. We also provide some of our distributors and resellers with
price protection rights for inventories of our products held by those
distributors or resellers if we lower our prices for those products. We may
experience significant returns and price adjustments for which we may not have
adequate allowances. The short life cycles of our products and the difficulty
of predicting future sales increase the risk that new product introductions or
price reductions by us or our competitors could result in significant product
returns or price adjustments. In September 1998, when we introduced the latest
version of our security appliance, we experienced an increase in returns.
8
<PAGE>
If we are unable to compete successfully in the highly competitive market for
Internet security products and services, our business will fail.
The market for Internet security products is intensely competitive and we
expect competition to intensify in the future. We may be unable to compete
successfully against our current and future competitors. An increase in
competitive pressures in our market or our failure to compete effectively may
result in pricing reductions, reduced gross margins and loss of market share.
Currently, the dominant competitor in our industry is Check Point Software
Technologies Ltd. Other current and potential competitors include hardware,
software and operating system vendors such as Axent Technologies, Inc., 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 sale of their products and services,
initiate 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.
Rapid changes in technology and industry standards could render our products
and services unmarketable or obsolete, and we may be unable to introduce new
products and services timely and successfully.
To succeed, we must continually change and improve our products in response
to rapid technological developments and changes in operating systems, Internet
access and communications, application and networking software, computer and
communications hardware, programming tools, computer language technology and
hacker techniques. We may be unable to successfully and timely develop these
new products and services or achieve and maintain market acceptance. 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. In the
past, we have on occasion experienced delays in the scheduled introduction of
new and enhanced products and services, and we may experience delays in the
future. When we do introduce new or enhanced products and services, we may be
unable to 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.
9
<PAGE>
We may be required to defend lawsuits or pay damages in connection with the
alleged or actual failure 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 our products and services. Anyone who
circumvents our security measures could misappropriate the confidential
information or other property of end-users using 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 standard
software 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. Even networks protected by 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
frequently and generally are not recognized until launched against a target, in
most cases we are unable to anticipate these techniques.
If we are unable to prevent attacks on our internal network system by computer
hackers, public perception of our products and services will be harmed.
As the public has become more aware of our capabilities in monitoring,
detecting and thwarting the activities of computer hackers, we have become a
greater 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 have experienced
attacks by computer hackers in the past and expect attacks to continue. We may
be unable to respond to future attacks in a timely or effective manner.
Failure to address strain on our resources caused by our rapid growth will
result in our inability to effectively manage our business.
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. Because we intend to
continue to expand our operations, we will need to
. recruit additional administrative, technical, operations, customer
support and sales personnel;
. train, motivate and manage additional employees;
10
<PAGE>
. expand our research and development capabilities; and
. improve or replace our operational, financial and management controls,
reporting systems and procedures.
We may be unable to timely and successfully accomplish these tasks.
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 implementing our
LiveSecurity products, we have experienced periodic interruptions affecting all
or a portion of our systems, and we believe that 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 may be unable to deliver our products and services if we cannot continue to
license third-party technology that is important for the functionality of our
products.
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.
We may be unable to deliver our products and services if our single-source
manufacturers fail to supply hardware with acceptable quality, quantity and
cost.
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
11
<PAGE>
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 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 18 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 and the growth of our sales and
marketing capabilities. 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 on acceptable terms.
We may be unable to adequately protect our 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 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.
Intellectual property claims and litigation could subject us to significant
liability for damages and invalidation of our 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. 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.
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.
12
<PAGE>
Undetected product errors or defects could result in loss of revenues, delayed
market acceptance and claims against us.
Our products and services may contain undetected errors or defects,
especially when first released. 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 controls over the export or import of encryption technology could
cause us to lose sales.
Any additional governmental regulation of imports or exports or failure to
obtain required export approval of our encryption technologies 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 encryption products
and public networks for secure communications. This, in turn, could result in
decreased demand for our products and services.
In addition, some foreign competitors are subject to less stringent controls
on exporting their encryption technologies. 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.
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
13
<PAGE>
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.
The year 2000 computer problem could disrupt our operations.
Year 2000 compliance efforts may involve significant time and expense, and
uncorrected problems could disrupt our ability to accept or fill customer
orders and provide LiveSecurity updates. Computer systems, software and
computer chips 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 ability to deliver our products and services could be
disrupted. In addition, our year 2000 compliance plan may not adequately
address any year 2000 issues relating to our internal management information
and other systems. 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."
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;
. changes in business conditions affecting our customers, our competitors
and us; and
. changes in accounting standards that adversely affect our revenues and
earnings.
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.
14
<PAGE>
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..................... 227,776
180 days after the date of this prospectus.................... 14,651,730
At various times after 180 days, when one-year holding periods
expire....................................................... 42,856
</TABLE>
See "Shares Eligible for Future Sale."
FORWARD-LOOKING STATEMENTS
Some of our statements in this prospectus, including those under the captions
"Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," are forward-looking statements that involve risks and
uncertainties. These forward-looking statements include statements about our
plans, objectives, expectations, intentions, future financial performance and
other statements that are not historical facts. We use words such as
anticipates, believes, expects, future and intends, and similar expressions to
identify forward-looking statements, but the absence of these 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."
15
<PAGE>
USE OF PROCEEDS
We expect to receive approximately $ million in net proceeds from the sale
of the shares of common stock sold by us in this offering, assuming an
initial public offering price of
$ per share, and after deducting estimated underwriting discounts and
commissions and expenses to be paid by us. Our net proceeds will be
approximately $ million if the underwriters exercise their over-allotment
option in full. We will not receive any proceeds from shares being sold by the
selling stockholders.
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 year.
In addition, we intend to use up to $2.25 million of the net proceeds to
repay our bridge loan facility with Silicon Valley Bank ($1.0 million
outstanding principal balance, plus accrued interest, as of June 1, 1999). This
debt matures on the earlier of the closing date of our initial public offering
or August 26, 1999 and bears interest at the prime rate plus 2% per year.
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 any event, our
line of credit agreement with Silicon Valley Bank prohibits the payment of
dividends without the bank's prior written consent.
16
<PAGE>
CAPITALIZATION
The following table shows
. our actual capitalization on March 31, 1999;
. our pro forma capitalization assuming the conversion of all outstanding
preferred stock into 13,425,316 shares of common stock and 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;
. our pro forma capitalization as adjusted to reflect the sale by us 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>
March 31, 1999
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- ----------- -----------
(unaudited)
(In thousands, except share
data)
<S> <C> <C> <C>
Stockholders' equity:
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....... $ 6 $ -- $ --
Common stock, $0.001 par value per share:
80,000,000 shares authorized; 1,441,614
shares issued and outstanding, actual;
14,909,786 shares issued and outstanding,
pro forma; shares issued and
outstanding, pro forma as adjusted........ 1 13
Paid-in-capital............................ 16,586 16,880
Deferred stock-based compensation.......... (1,374) (1,374) (1,374)
Accumulated deficit........................ (17,134) (17,134) (17,134)
-------- -------- --------
Total capitalization..................... $ (1,915) $ (1,615) $
======== ======== ========
</TABLE>
The number of shares of common stock issued and outstanding excludes
. 2,494,974 shares available for grant under our stock option plan,
including 900,000 shares approved by our board of directors on May 26,
1999, subject to stockholder approval;
. 5,228,398 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 1,902,194 shares
are currently exercisable;
. 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; and
. 600,000 shares of common stock available for issuance under our employee
stock purchase plan, as approved by our board of directors on May 26,
1999, subject to stockholder approval.
17
<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 March 31, 1999, after giving effect
to the conversion of all outstanding preferred stock into common stock and 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, was a deficit of
$1,615,000, or $0.13 per share of common stock. After giving effect to the sale
of shares of common stock by us 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 March 31, 1999 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................... $
Net tangible book value per share at March 31, 1999............. $(10.01)
Increase due to the conversion of preferred stock............... 9.88
Pro forma net tangible book value per share at March 31, 1999... (0.13)
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 March 31, 1999, 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..... 14,909,786 % $13,495,000 % $0.91
New investors.............
---------- ----- ----------- -----
Total................. 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
At March 31, 1999, 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................................. 5,228,398 $0.37
Warrants.......................................... 245,000 0.32
---------
5,473,398 0.37
=========
</TABLE>
Additionally, there were 2,494,974 option shares available for future grant
under our stock option plan and 600,000 shares available for issuance under our
employee stock purchase 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.
18
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share 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>
Three
Period From Year Ended Months Ended
February 14, 1996 December 31, March 31,
(Inception) to ---------------- ----------------
December 31, 1996 1997 1998 1998 1999
----------------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues, net:
Product............... $ 329 $ 4,975 $10,678 $ 1,993 $ 3,387
Service............... 2 123 701 41 551
----- ------- ------- ------- -------
Total revenues...... 331 5,098 11,379 2,034 3,938
Cost of revenues........ 104 1,610 3,925 619 1,635
----- ------- ------- ------- -------
Gross margin............ 227 3,488 7,454 1,415 2,303
Operating expenses:
Sales and marketing... 224 4,369 8,666 1,637 2,936
Research and
development.......... 274 2,192 5,273 805 1,548
General and
administrative....... 191 1,323 2,515 374 948
----- ------- ------- ------- -------
Total operating
expenses........... 689 7,884 16,454 2,816 5,432
----- ------- ------- ------- -------
Operating loss.......... (462) (4,396) (9,000) (1,401) (3,129)
Interest income
(expense), net......... (6) 62 (119) (23) (84)
----- ------- ------- ------- -------
Net loss................ $(468) $(4,334) $(9,119) $(1,424) $(3,213)
===== ======= ======= ======= =======
Basic and diluted net
loss per share......... N/A $(17.17) $(11.34) $ (2.23) $ (2.28)
===== ======= ======= ======= =======
Shares used in
calculation of basic
and diluted net loss
per share.............. N/A 252 804 639 1,407
===== ======= ======= ======= =======
Pro forma basic and
diluted net loss per
share.................. $ (0.68) $ (0.22)
======= =======
Shares used in
calculation of pro
forma basic and diluted
net loss per share..... 13,374 14,832
======= =======
</TABLE>
See note 6 of Notes to Financial Statements for information concerning the
calculation of basic and diluted net loss per share and pro forma basic and
diluted net loss per share.
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997 1998 March 31, 1999
----- ------ ------ --------------
(unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $ 232 $ 603 $1,712 $ 2,046
Working capital (deficit)................. (464) 658 (274) (3,449)
Total assets.............................. 597 3,303 9,032 10,101
Long-term debt, less current portion...... -- -- -- --
Total stockholders' equity (deficit)...... (318) 1,382 881 (1,915)
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 totaled $331,000 in 1996 and grew significantly to $5.1 million
in 1997. Our revenues totaled $11.4 million in 1998, 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 March
31, 1999, we had an accumulated deficit of $1.9 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 total 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. To
date, service subscription renewals directly from our enterprise customers have
not been material.
20
<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
The following table provides certain financial data for the periods indicated
as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE
MONTHS
PERIOD FROM YEAR ENDED ENDED MARCH
FEBRUARY 14, 1996 DECEMBER 31, 31,
(INCEPTION) TO --------------- -------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Revenues, net:
Product............... 99.4 % 97.6 % 93.8 % 98.0 % 86.0 %
Service............... 0.6 2.4 6.2 2.0 14.0
------ ------ ------ ----- -----
Total revenues...... 100.0 100.0 100.0 100.0 100.0
Cost of revenues........ 31.4 31.6 34.5 30.4 41.5
------ ------ ------ ----- -----
Gross margin............ 68.6 68.4 65.5 69.6 58.5
Operating expenses:
Sales and marketing... 67.7 85.6 76.2 80.4 74.6
Research and
development.......... 82.8 43.0 46.3 39.6 39.3
General and
administrative....... 57.7 26.0 22.1 18.4 24.0
------ ------ ------ ----- -----
Total operating
expenses........... 208.2 154.6 144.6 138.4 137.9
------ ------ ------ ----- -----
Operating loss.......... (139.6) (86.2) (79.1) (68.9) (79.5)
Interest income
(expense), net......... (1.8) 1.2 (1.0) (1.1) (2.1)
------ ------ ------ ----- -----
Net loss................ (141.4)% (85.0)% (80.1)% (70.0)% (81.6)%
====== ====== ====== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
REVENUES
Total revenues, which consist of product revenues and service revenues,
increased from
$2.0 million in the three months ended March 31, 1998 to $3.9 million in the
three months ended March 31, 1999, an increase of 94%. During these periods, no
one customer accounted for 10% or more of total revenues.
Product revenues include (1) the perpetual software license fees for the
security management system and the sale of our security appliance as part of
the LiveSecurity System and (2) the sale of our NOC Security Suite software and
our security appliance as part of LiveSecurity for MSS. Product revenues were
$2.0 million in the three months ended March 31, 1998 and $3.4 million in the
three months ended March 31, 1999, an increase of 70%. As a percentage of total
revenues, product revenues decreased from 98% in the three months ended March
31, 1998 to 86% in the three months ended March 31, 1999. 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, which is sold as a part of the LiveSecurity System and LiveSecurity
for MSS. Service revenues were $41,000 in the
21
<PAGE>
three months ended March 31, 1998 and $551,000 in the three months ended March
31, 1999. As a percentage of total revenues, service revenues increased from 2%
in the three months ended March 31, 1998 to 14% in the three months ended March
31, 1999. 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.
The increase in total revenues was primarily due to increases in sales volume
caused by increased distribution in the European and Asia/Pacific markets and
increased market awareness of our products in North America. Total
international revenues represented approximately 43% of total revenues in the
three months ended March 31, 1998 and 47% in the three months ended March 31,
1999.
The provision for sales returns and allowances was $56,000, or 3% of total
revenues, for the three months ended March 31, 1998 and $400,000, or 9% of
total revenues, for the three months ended March 31, 1999. The provision for
returns and allowances for the year ended December 31, 1998 was approximately
14% of total revenues. The returns and allowances reserve, established in 1998
to address the return rights and pricing protection rights of some of our
customers, primarily related to anticipated returns originating from the
introduction of the latest version of our security appliance, the Firebox II,
during the last half of 1998. Returns and allowances before that time were
immaterial. The lower provision, as a percentage of total revenues, for the
three months ended March 31, 1999 as compared to the provision for all of 1998,
reflects a reduction in the expected returns remaining from the 1998
introduction of the Firebox II plus a recurring provision for future expected
returns.
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 was $619,000 in the three months
ended March 31, 1998 and $1.6 million in the three months ended March 31, 1999.
As a percentage of total revenues, cost of revenues increased from 30% in the
three months ended March 31, 1998 to 42% in the three months ended March 31,
1999.
The dollar increases in cost of revenues were primarily due to increases in
sales volume. The increase in cost of revenues as a percentage of total
revenues was primarily due to an increase in the cost of manufacturing our
Firebox II security appliance and, to a lesser extent, to an increase in
personnel-related costs of our service organization.
In the third quarter of 1998, we released an enhanced version of our security
appliance, the Firebox II, which incorporated additional features 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 total cost of revenues 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
22
<PAGE>
cost of revenues as a percentage of total revenues to remain at or slightly
above our first quarter 1999 level. As revenues from service subscriptions
increase, and become a greater percentage of total revenues, we expect our
gross margin to increase.
Operating Expenses
Sales and Marketing. Sales and marketing expenses include salaries, travel
expenses, recruiting fees, commissions, public relations costs, marketing
collateral and trade show expenses. Sales and marketing expenses were $1.6
million in the three months ended March 31, 1998 and $2.9 million in the three
months ended March 31, 1999. As a percentage of total revenues, sales and
marketing expenses decreased from 80% in the three months ended March 31, 1998
to 75% in the three months ended March 31, 1999.
The dollar increase in sales and marketing expenses was due primarily 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. Specifically, components of the increase included
. an increase in payroll and related expenses from $747,000 to $1.5
million;
. an increase in travel expenses from $304,000 to $461,000;
. an increase in marketing costs from $372,000 to $492,000; and
. an increase in amortization of deferred stock compensation from $1,000 to
$96,000.
The decrease in sales and marketing expenses as a percentage of total
revenues reflects both increased productivity of and efficiencies in managing
our indirect channel network and realization of our previous investments to
expand distribution, capture market share and establish brand recognition of
our products. We expect to see a gradual reduction in sales and marketing
expenses as a percentage of total 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 $805,000 in the three
months ended March 31, 1998 and $1.5 million in the three months ended March
31, 1999. As a percentage of total revenues, research and development expenses
decreased from 40% in the three months ended March 31, 1998 to 39% in the three
months ended March 31, 1999.
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 product and our
efforts to respond to new and emerging security threats through our
LiveSecurity broadcast service. Specifically, components of the increase
included
. an increase in payroll and related expenses from $525,000 to $930,000 and
. an increase in amortization of deferred stock compensation from $1,000 to
$121,000.
We will continue to increase our research and development expenses in total
dollar amount 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.
23
<PAGE>
General and Administrative. General and administrative expenses include costs
of executive, human resource, finance and administrative support functions,
provision for uncollectible accounts and legal and accounting professional
services. General and administrative expenses were $374,000 in the three months
ended March 31, 1998 and $948,000 in the three months ended March 31, 1999. As
a percentage of total revenues, general and administrative expenses increased
from 18% in the three months ended March 31, 1998 to approximately 24% in the
three months ended March 31, 1999.
The dollar increase in general and administrative expenses reflects the
expansion of our infrastructure to manage the growth of our operations.
Specifically, components of the increase included
. an increase in payroll and related expenses from $154,000 to $225,000;
. an increase in the provision for uncollectible amounts from $0 to
$125,000, reflecting additional exposure related to the overall growth of
our operations; and
. an increase in professional fees from $48,000 to $143,000.
We expect that these expenses will continue to increase in total dollar
amounts but will decrease as a percentage of total revenues.
Deferred Compensation. Deferred compensation is recorded as the difference
between the exercise price of options we granted and the deemed fair value for
financial reporting purposes of our common stock during the periods in which
the options were granted. Deferred compensation is amortized over the vesting
periods of the options. We recorded $162,000 of deferred compensation in the
three months ended March 31, 1999. This deferral, along with the $1.9 million
of deferred compensation recorded in 1998, resulted in the amortization of
compensation expense aggregating $3,000 for the three months ended March 31,
1998 and $254,000 for the three months ended March 31, 1999. Amortization of
deferred compensation is included in the sales and marketing, research and
development and general and administrative expense categories, as described
above.
Interest Income (Expense)
Interest expense of $24,000 in the three months ended March 31, 1998 resulted
from borrowings on our bank line of credit and our equipment term loan, and was
partially offset by $1,000 of interest income generated from our investment of
proceeds from the sale of preferred stock. Interest expense of $93,000 in the
three months ended March 31, 1999 resulted from borrowings on our bank line of
credit, our equipment term loan and our convertible note agreements, and was
partially offset by $9,000 of interest income generated from our investment of
proceeds from the sale of preferred stock.
Income Taxes
We have experienced losses since inception, resulting in a net operating loss
carryforward position of $13.0 million as of March 31, 1999. These
carryforwards, if not utilized, will begin to expire in 2011, and may be
subject to limitations under Section 382 of the Internal Revenue Code.
24
<PAGE>
Period Ended December 31, 1996 and Years Ended December 31, 1997 and 1998
The discussion and analysis set forth below includes revenue and cost
information for the period ended December 31, 1996 and the years ended December
31, 1997 and 1998. We have not discussed in detail the results of operations
for the period ended December 31, 1996. During 1996, WatchGuard was a startup
operation focused on validating the technological feasibility of its products.
We introduced our initial Internet security appliance on a preproduction basis
in September 1996, and shipped our first production model, the Firebox 10, in
December 1996. Beginning in early 1997, we began to implement our business
model and develop our operational infrastructure. Due to the limited nature of
our operations in the period ended December 31, 1996, we believe that further
comparisons between 1996 and 1997 would not be meaningful.
Revenues
Total 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 these
periods, no one customer accounted for 10% or more of total revenues. 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 decreased from 99% in 1996 to 98% in 1997 and to 94% in 1998.
Service revenues were $2,000 in 1996, $123,000 in 1997 and $701,000 in 1998. As
a percentage of total revenues, service revenues increased from 1% in 1996 to
2% in 1997 and to 6% in 1998.
The increase in total revenues from 1996 to 1998 was primarily due to
increases in sales volume caused by increased distribution in the 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% in 1998.
The establishment of reserves for sales returns and allowances negatively
impacted our revenues for 1998. The provision for sales returns and allowances
in 1998 was $1.7 million, or approximately 14% of total revenues before giving
effect to the provision. The returns and allowances reserve was established in
1998 primarily to address return rights and price protection rights for some of
our customers, including anticipated returns originating from the introduction
of the Firebox II. Before 1998, we did not experience any material returns and
therefore provided no reserve.
Cost of Revenues
Cost of revenues was $104,000 in 1996, $1.6 million in 1997 and $3.9 million
in 1998. 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 dollar
increases in cost of revenues from 1996 to 1998 were primarily due to increases
in sales volume. The increase in cost of revenues as a percentage of total
revenues from 1997 to 1998 was primarily due to an increase in the cost of
manufacturing our security appliance. As discussed above, the Firebox II, which
we released in the third quarter of 1998, is more expensive to manufacture than
the previous version of our security appliance.
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $224,000 in 1996,
$4.4 million in 1997 and $8.7 million in 1998. As a percentage of total
revenues, sales and marketing expenses increased from approximately 68% in 1996
to 86% in 1997, and decreased to 76% in 1998.
The dollar increase in sales and marketing expenses was due primarily 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. Specifically, components of the increase from 1997
to 1998 included
25
<PAGE>
. an increase in payroll and related expenses from $2.0 million to $3.9
million;
. an increase in travel expenses from $771,000 to $1.4 million;
. an increase in marketing costs from $1.1 million to $2.0 million;
. a $470,000 charge for a common stock warrant in 1998 issued to a
strategic partner; and
. an increase in amortization of deferred stock compensation from $0 to
$146,000.
The decrease in 1998 sales and marketing expenses as a percentage of total
revenues reflects increased productivity of and efficiencies in managing our
indirect channel network and our utilization of our prior years' investment to
expand distribution, capture market share and establish brand recognition of
our products.
Research and Development. Research and development expenses were $274,000 in
1996, $2.2 million in 1997 and $5.3 million in 1998. As a percentage of total
revenues, research and development expenses decreased from 83% in 1996 to 43%
in 1997, and increased to 46% in 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 product and our
efforts to respond to new and emerging security threats through our
LiveSecurity broadcast service. Specifically, components of the increase from
1997 to 1998 included
. an increase in payroll and related expenses from $1.5 million to $2.5
million;
. a $628,000 charge for compensation expense for stock options granted to
a consultant in 1998, which was based on the fair value of the options
at the termination of the consulting agreement; and
. an increase in amortization of deferred stock compensation from $0 to
$203,000.
General and Administrative. General and administrative expenses were $191,000
in 1996, $1.3 million in 1997 and $2.5 million in 1998. As a percentage of
total revenues, general and administrative expenses decreased from
approximately 58% in 1996 to 26% in 1997 and to 22% in 1998.
The dollar increases in general and administrative expenses primarily reflect
the increase in personnel and related expenses and other overhead items in
connection with the expansion of our business. Specifically, components of the
increase from 1997 to 1998 included
. an increase in payroll and related expenses from $516,000 to $786,000;
. an increase in the provision for uncollectible amounts from $122,000 to
$418,000, reflecting additional exposure related to the overall growth
of our operations; and
. an increase in professional fees from $150,000 to $218,000.
The decrease in expenses as a percentage of total revenues from 1996 to 1998
reflects increased efficiencies of scale resulting from a larger revenue base.
Deferred Compensation. Amortization of deferred compensation is included in
the sales and marketing, research and development and general and
administrative expense categories and totaled $411,000 in 1998.
Interest Income (Expense)
Interest expense of $6,000 in 1996 resulted from borrowings on our bank line
of credit. Interest income of $88,000 in 1997 was generated from our investment
of proceeds from the sale of preferred stock, and was partially offset by
$26,000 of interest expense that resulted from borrowings. Interest
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<PAGE>
expense of $203,000 in 1998 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 proceeds from the sale of preferred stock.
Quarterly Results of Operations
The following table provides both our unaudited quarterly results of
operations for the five quarters ended March 31, 1999 and our results of
operations expressed as a percentage of total revenues. In our opinion, this
unaudited information has been prepared on the same basis as our audited
financial statements. This information 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 the notes to the financial statements. 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,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues, net:
Product........................ $ 1,993 $ 2,867 $ 2,544 $ 3,274 $ 3,387
Service........................ 41 116 205 339 551
------- ------- ------- ------- --------
Total revenues................ 2,034 2,983 2,749 3,613 3,938
Cost of revenues................. 619 872 1,038 1,396 1,635
------- ------- ------- ------- --------
Gross margin..................... 1,415 2,111 1,711 2,217 2,303
Operating expenses:
Sales and marketing............ 1,637 2,654 2,080 2,295 2,936
Research and development....... 805 1,104 1,465 1,899 1,548
General and administrative..... 374 597 645 899 948
------- ------- ------- ------- --------
Total operating expenses...... 2,816 4,355 4,190 5,093 5,432
------- ------- ------- ------- --------
Operating loss................... (1,401) (2,244) (2,479) (2,876) (3,129)
Interest income (expense), net... (23) (60) 24 (60) (84)
------- ------- ------- ------- --------
Net loss......................... $(1,424) $(2,304) $(2,455) $(2,936) $(3,213)
======= ======= ======= ======= ========
</TABLE>
The following table provides unaudited quarterly results of operations as a
percentage of total revenues for 1997, 1998 and the three months ended March
31, 1999.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues, net:
Product........................ 98.0 % 96.1 % 92.5 % 90.6 % 86.0 %
Service........................ 2.0 3.9 7.5 9.4 14.0
----- ----- ----- ----- -----
Total revenues................ 100.0 100.0 100.0 100.0 100.0
Cost of revenues................. 30.4 29.2 37.8 38.6 41.5
----- ----- ----- ----- -----
Gross margin..................... 69.6 70.8 62.2 61.4 58.5
Operating expenses:
Sales and marketing............ 80.4 89.0 75.7 63.5 74.6
Research and development....... 39.6 37.0 53.3 52.6 39.3
General and administrative..... 18.4 20.0 23.4 24.9 24.0
----- ----- ----- ----- -----
Total operating expenses...... 138.4 146.0 152.4 141.0 137.9
----- ----- ----- ----- -----
Operating loss................... (68.9) (75.2) (90.2) (79.6) (79.5)
Interest income (expense), net... (1.1) (2.0) 0.9 (1.7) (2.1)
----- ----- ----- ----- -----
Net loss......................... (70.0)% (77.2)% (89.3)% (81.3)% (81.6)%
===== ===== ===== ===== =====
</TABLE>
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<PAGE>
The trends discussed in the annual comparison of operating results from 1996
to 1998 and in the quarterly comparison of operating results for the three
months ended March 31, 1998 and 1999 generally apply to the comparison of
results of operations for the five quarters ended March 31, 1999. 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 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 March 31, 1999, net proceeds from private placements of preferred stock
totaled $13.2 million. We have also financed our operations through equipment
financing, traditional financing arrangements and convertible notes.
We have a working capital revolving line of credit with a bank, secured by
our accounts receivable. The amount available under this facility is limited to
the greater of our borrowing base or $4.5 million (reduced to $3.5 million in
May 1999). 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 March 31, 1999,
we had borrowed $2.5 million on this line of credit, which expires in September
1999. The amount exceeded the borrowing base by $317,000.
In May 1999, we amended our loan and security agreement with this bank. The
amendment primarily provides for a secured bridge loan facility that
immediately makes available to us an additional $2.25 million. The loan carries
a commitment fee of up to 1.5%, an interest rate of prime plus 2% and a
maturity date of the earlier of our initial public offering closing date or
August 28, 1999. Depending on our use of the bridge loan and the repayment
dates of any funds borrowed, our bank is entitled to receive warrants to
purchase 4,500 to 14,500 shares of common stock at an exercise price equal to
the greater of $7.00 per share or the initial public offering price. As of June
1, 1999, we had borrowed $1.0 million under the bridge loan facility. Also,
under the amendment, the $4.5 million line of credit was temporarily reduced to
$3.5 million until the closing of an initial public offering.
We also have two term-loan facilities with this bank to finance new capital
equipment purchases. The first facility closed to further advances on March 5,
1998 and is being paid in 36 equal monthly payments. The first of these
payments was made on April 5, 1998. The loan matures March 5, 2001, at which
time all unpaid principal and interest will be due and payable. The second
facility closed to further advances on December 31, 1998 and is being paid in
36 equal monthly payments. The first of these payments was due on January 31,
1999. The loan matures December 31, 2002, at which time all unpaid principal
and interest will be due and payable. As of March 31, 1999, we had a combined
principal balance of $548,000 due under these term loans.
The agreements under which the line of credit, the bridge loan facility and
the term loans were established contain financial covenants, including a
provision requiring us to maintain specified
28
<PAGE>
financial ratios. At December 31, 1998, we were not in compliance with the
financial covenants, but we obtained a waiver for noncompliance at December 31,
1998. In addition, the bank has deleted these covenants through the earlier of
July 31, 1999 or the completion of an initial public offering of our stock. We
have classified the outstanding balance of long-term debt as current on the
balance sheet.
In March 1999, we entered into convertible note agreements with existing
investors for a total of $3.0 million. The notes bear interest at 6% and will
be repaid with the proceeds of this offering. We also issued warrants to
purchase 42,856 shares of common stock at an exercise price of $7.00 per share,
which are exercisable immediately. These warrants, if not exercised before the
initial public offering, will automatically convert into common stock on a net
exercise basis at the completion of this offering.
Our operating activities resulted in net cash outflows of $131,000 in 1996,
$5.3 million in 1997, $7.6 million in 1998 and $2.1 million for the three
months ended March 31, 1999. The operating cash outflows in 1997, 1998 and the
three months ended March 31, 1999 resulted primarily from significant
investments in sales and marketing and research and development, all of which
led to operating losses.
Cash used in operating activities was net of noncash charges totaling
$207,000 for 1997, $1.7 million for 1998 and $401,000 for the three months
ended March 31, 1999. These noncash charges were primarily associated with
depreciation and amortization of capital assets and compensation charges
associated with the issuance of stock options and warrants during 1998 and the
three months ended March 31, 1999. Cash used in operating activities from
working capital components impacting operating activities was $1.1 million in
1997 and $231,000 in 1998. Cash provided by operating activities from working
capital components impacting operating activities was $728,000 in the three
months ended March 31, 1999. However, there were large fluctuations within some
major working capital components, as described below:
(a) Inventories increased to $2.2 million at December 31, 1998 from
$218,000 at December 31, 1997 and then decreased to $1.7 million at March
31, 1999. These changes reflect (1) our decision in 1998 to change from an
off-the-shelf to a custom-made motherboard component in our Firebox
products, which resulted in our taking an inventory position on these
components before their final assembly; (2) larger initial manufacturing
volumes of Firebox II in the third and fourth quarters of 1998; (3) our
efforts in 1998 to accommodate actual and anticipated increases in sales
volume; and (4) the impact in the three months ended March 31, 1999 of
first-quarter sales of Firebox II products balanced with lower purchases
during the quarter.
(b) Receivables increased to $3.5 million at December 31, 1998 and to
$4.3 million at March 31, 1999, from $1.6 million at December 31, 1997.
These increases are attributable primarily to the overall increase in
revenues during these periods and, to a lesser extent, to sales mix and
timing differences arising from varying payment cycles and terms in our
customer agreements. Reserves for uncollectable accounts were $449,000 at
December 31, 1998 and $399,000 at March 31, 1999, compared to $124,000 at
December 31, 1997. The increase reflects additional exposure related to the
overall growth of our operations. Reserves for estimated product returns
were $615,000 at both December 31, 1998 and March 31, 1999, reflecting our
estimate of returns and allowances associated with the return rights and
price protection rights of some of our customers.
29
<PAGE>
(c) Accounts payable and accrued expenses increased to $3.2 million at
December 31, 1998 and to $3.6 million at March 31, 1999, from $1.1 million
in 1997. These increases reflect liabilities associated with the growth in
inventories, the increased employee base required to sustain and build our
company and expenses associated with the overall growth of our business.
(d) Deferred revenue increased to $1.8 million at December 31, 1998 and
to $2.4 million at March 31, 1999, from $313,000 at December 31, 1997. The
increases reflect service subscriptions associated with the continued
growth of product sales and, to a lesser extent, with service subscription
renewals. Service subscriptions are generally amortized ratably over a one-
year period.
Investing activities used cash of $87,000 in 1996, $461,000 in 1997, $1.0
million in 1998 and $528,000 in the three months ended March 31, 1999,
primarily for capital expenditures, including computing equipment.
Financing activities provided cash of $450,000 in 1996, $6.1 million in 1997,
$9.7 million in 1998, and $3.0 million in the three months ended March 31,
1999, primarily from the sale of preferred stock, borrowings on our line of
credit and proceeds from the issuance of convertible notes.
As of March 31, 1999, we had $2.0 million in cash and cash equivalents
invested primarily in money market accounts. We have financed our operations to
date primarily through the issuance of equity securities and debt financing.
Further development, establishment and maintenance of our business for at least
the next 12 months will require additional equity or debt financing, which we
believe can be obtained from existing or new sources if it is not obtained from
this offering. In addition, our current investors have indicated that they will
provide sufficient financing in order for us to continue to operate through
1999. We believe, however, that existing cash balances, cash equivalents and
lines of credit, together with the net proceeds from this offering, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least 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 that 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 we use in our Firebox family of
security appliance products consists of a combination of industry-standard
components configured to our specifications and driven by
30
<PAGE>
internally developed software technologies. We have tested and analyzed 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 and 100 and the version that drives the Firebox II, which we are
currently shipping. While we are not aware of any year 2000 issues with
previous versions, we are recommending to our customers that they implement our
current versions. In addition to other internally developed software, our
LiveSecurity service incorporates current technologies acquired from third-
party vendors. We expect to complete our year 2000 assessment of the 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.
We are currently reviewing our internal management information and other
administrative systems to identify and modify any products, services or systems
that are not year 2000 compliant. Our internal information management and other
administrative systems generally are based on technologies and products
acquired from industry-leading third-party vendors. We have contacted these
vendors to determine whose products, services or systems may be impacted by
year 2000 compliance issues and whose technologies and products will require
upgrades. We have scheduled necessary upgrades with these vendors, which we
expect will be completed by the end of the third quarter of 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 use 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 products and services. 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 if 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 if we do not successfully
execute 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.
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<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 minimal 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. 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, global reach and
versatility, the Internet is a particularly powerful and necessary tool for
SMEs.
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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, online
customer service and supply chain management to gain competitive advantage. IDC
estimates that approximately 3.5 million SMEs will be connected to the Internet
in the United States by the end of 1999, increasing to approximately 4.7
million SMEs 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 in 1998. 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.
Because SMEs increasingly depend 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 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-
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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 42 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.
IDC estimates that approximately 3.5 million SMEs in the United States 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. 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 Internet security.
Easy installation and use We offer (1) a security appliance with plug-
in installation, (2) management and security
software with an automated installation guide
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 expect to deliver new versions of our major products
approximately two to three times per year. We were the first, and remain the
leader, in
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<PAGE>
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 the central management system, which
utilizes a familiar Windows-based interface. Our 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, 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, including the addition of two to four employees by the end of
1999;
. expansion of our LiveSecurity Advisory Council of industry experts,
including the addition of one to three outside experts by the end of
1999; and
. development of third-party industry relationships, including the addition
of one to four new relationships by the end of 1999, 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 develop our
web site as 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. Our web site currently features links to the web sites of
PSINet and GTE. We plan to add additional links in 1999 and the early part of
2000 and to further integrate our
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<PAGE>
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 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 deploying 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,
governmental entities 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.
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<PAGE>
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.]
The LiveSecurity System has three key components: our Security Management
System software with security and management features, our 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.
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<PAGE>
. 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 allow 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 30 minutes.
Security appliance. Our security appliance, the WatchGuard Firebox, is a
standalone 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.
. 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, which substantially reduces
personnel costs. Every new LiveSecurity System includes a one-year subscription
to our broadcast service.
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<PAGE>
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 time premises of the ISP's subscribing customers.]
LiveSecurity for MSS has four components: our NOC Security Suite software
with security and management features, our 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 scalable WatchGuard event processor
software provides monitoring and reporting for customer sites.
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 those customers.
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<PAGE>
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 its 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 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 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. Pacific standard time, 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.
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<PAGE>
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. When the Rapid Response Team identifies a new security threat, 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 Avolio and Rik Farrow.
Frederick 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 in designing and
implementing 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.
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
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<PAGE>
manages. The licenses, the cost of which 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. International sales generated over
35% of our revenues in 1998 and approximately 47% of our revenues in the three
months ended March 31, 1999.
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., Integrated
Network Technologies, Kent DataComm, Network Computing Architects, Inc.
and Solunet; and
. ISPs, such as AT&T EasyLink Services Asia/Pacific Ltd., FASTNET, GTE,
Interpath, PSINet and Verio.
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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, publishing
technical and educational articles in industry journals, participating 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 a
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 and GTE are
featured on the WatchGuard web site. The WatchGuard site has active links to
PSINet's and GTE's sites, which contain 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 a
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 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, Worldtalk Corporation and Verio.
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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. The following is a
representative list of our ISP and end-user customers:
<TABLE>
<S> <C> <C>
Internet Service Technology Manufacturing
Providers
AlphaBlox Corporation Blair Inc.
AT&T EasyLink Services Inc. Bolle Inc.
Asia/Pacific Ltd. Bentley Systems, Brown Shoe Company
GTE Internetworking, Inc. Incorporated Durkan Patterned
Interpath Communications, e-DOCS.net Carpet, Inc.
Inc. JDA Software Group, Inc. Ferguson
PSINet Inc. Pentax Technologies Metals/Aerospace
Verio, Inc. Corporation Alloys Inc.
You Tools Corporation/ Sheridan Software Graham Steel
FASTNET Systems, Inc. Corporation
J.E. Dunn Construction
Services Education Company
Boullioun Aviation Boston Architectural Government
Services Center
Bull Housser & Tupper Canon City Schools City of Bellingham, WA
Camp, Inc. Huntsville Intermediate City of Dandenong,
Catholic Charities School District Australia
Digital Magic Summit Board of Education City of Garden Grove,
Hawthorne Direct, Inc. Woodridge School District CA
Javelin Technology #68 Lenoir County (NC) MIS
Mornington Peninsula
Medical Financial Services Shire Council,
Australia
Bendigo Health Care Group Atlantic Mortgage & North Carolina State
CoreCare Systems, Inc. Investment Corp. Ports
Health Technologies Pty Hudson Valley Federal Credit Union Pierce County (WA)
Ltd KDP Investment Advisors Library Service
NeoTherapeutics, Inc. McMahan Securities Co., LP
PATH Seritis Services Group, LLC Entertainment
Southeast Alabama Medical Center Sunflower Bank
Unimed Pharmaceuticals, Argosy Gaming Company
Inc. Retail Black Hawk Gaming &
Development Company
Media Norm Thompson Outfitters, Crave Entertainment,
Inc. Inc.
KSTW-UPN 11 Television Rebel Sport Limited Everton Football Club
The Herald
University of Toronto Utilities and
Press Telecommunications
Globecomm Systems,
Inc.
MACtel
</TABLE>
Case Studies
The following are case studies of WatchGuard customers that endorse our
products and services:
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 sophisticated international frame relay network with
over 500 points-of-presence worldwide, servicing over 32,000 business accounts
in 11 countries.
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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, New York. 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 our 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, Massachusetts, 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 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 member of our preferred service provider program, 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, Incorporated 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.
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,
Pennsylvania and its branch offices in Huntsville, Alabama and Littleton,
Massachusetts, and relies on WatchGuard's Remote User VPN software to
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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 wide area network 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 applicance,
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.
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.
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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. Those network services that require
special security, such as mail and file transfers, 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
downloading 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 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
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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. Research and development expenses were approximately $274,000 in 1996,
$2.2 million in 1997, $5.3 million in 1998 and $1.5 million in the three months
ended March 31, 1999. 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. Currently, the dominant competitor in
our industry is Check Point Software Technologies Ltd. Other competitors
offering security products include hardware and software vendors such as Axent
Technologies, Inc., 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. Many of
our 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 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.
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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 standard software
license included with our products;
. confidentiality agreements with our employees and third parties;
. invention assignment agreements with our employees and contractors;
. protective contractual provisions in our agreements with some of our
consultants, resellers and customers; and
. limited access to our software, documentation and other proprietary
information.
WatchGuard(R) is a registered trademark in the United States, Norway and New
Zealand. Firebox(TM) and LiveSecurity(TM) are trademarks in the United States
and in some foreign jurisdictions. We have no patents, but we have four 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
blocking of particular web addresses 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 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.
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
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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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MANAGEMENT
Executive Officers, Directors and Key Employees
The following table lists the executive officers, directors and key employees
of WatchGuard as of April 30, 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,
Treasurer and Director
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................... 36 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.
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. 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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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 member 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 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 Bachelor of Business in information processing from Curtin
University.
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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;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; 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
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maintain directors' and officers' liability insurance, under which our
directors and officers may be indemnified against liability they 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.
Mr. Ellman is a member of RRE Investors II, LLC, the managing member of RRE
Investors, L.P., which purchased 500,241 shares of our Series C preferred
stock. RRE Investors II, LLC is also the indirect manager of RRE Investors Fund
L.P., which purchased 275,403 shares of our Series C preferred stock. Mr.
Verhalen is the general partner of Matrix IV Management Co., L.P., the general
partner of Matrix Partners IV, L.P., which purchased 1,100,416 shares of our
Series B preferred stock and 276,324 shares of our Series C preferred stock.
Matrix IV Management Co., L.P. is also the general partner of Matrix IV
Entrepreneurs Fund, L.P., which purchased 57,917 shares of our Series B
preferred stock and 14,543 shares of our Series C preferred stock. Mr. Waite is
the general partner of OVMC III, L.P., the general partner of Olympic Venture
Partners III, L.P., which purchased 489,685 shares of our Series B preferred
stock and 122,964 shares of our Series C preferred stock. OVMC III, L.P. is
also the general partner of OVP III Entrepreneurs Fund, L.P., which purchased
25,773 shares of our Series B preferred stock and 6,472 shares of our Series C
preferred stock. Mr. Waite is also the managing member of OVMC IV, LLC, the
general partner of Olympic Venture Partners IV, L.P., which purchased 610,731
shares of our Series B preferred stock and 153,360 shares of our Series C
preferred stock. OVMC IV, LLC is also the general partner of OVP IV
Entrepreneurs Fund, L.P., which purchased 32,144 shares of our Series B
preferred stock and 8,071 shares of our Series C preferred stock.
We sold the Series B preferred stock on May 9, 1997 at $2.59 per share. We
sold the Series C preferred stock on April 24, 1998 at $5.16 per share.
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Executive Compensation
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 $100,000 in fiscal 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual Compensation
---------------------- Securities
Name and Principal Underlying Other Annual All Other
Position Salary($) 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>
The following table provides information regarding stock options we granted
in fiscal 1998 to our chief executive officer and the other executive officer
whose compensation exceeded $100,000 in fiscal 1998. The table includes the
potential realizable value over the five-year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. The
assumed rates of appreciation are prescribed by the Securities and Exchange
Commission for illustrative purposes only and are not intended to forecast or
predict future stock prices. Any actual gains on option exercises will depend
on the future performance of our stock.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
------------------------ Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to for Option Term
Options Employees in Exercise Expiration ----------------------
Name Granted(#) Fiscal Year Price ($/Sh) Date 5%($) 10%($)
- ---- ---------- ------------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Christopher G. Slatt.... 70,000 5.77% $0.14 01/28/03 $ 2,700 $ 6,000
Steven N. Moore......... 70,000 5.77 0.14 01/28/03 2,700 6,000
</TABLE>
Approximately 2% of Mr. Slatt's and Mr. Moore's options vest and become
exercisable each month, commencing February 28, 1998. 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.
56
<PAGE>
The following table provides 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.
Fiscal 1998 Year-End Option Values
<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 439,564 shares of our common stock. If a change
of control of WatchGuard occurs, half of the unvested shares subject to this
option will vest and become exercisable.
Employee Benefit Plans
1996 Stock Incentive Compensation Plan
In March 1996, our board of directors and stockholders adopted our 1996 Stock
Incentive Compensation Plan. The purpose of the stock option plan is to enhance
long-term stockholder value by offering opportunities to selected persons to
participate in our growth and success, and to encourage them to remain in our
service or in the service of our subsidiaries and to acquire and maintain
ownership in WatchGuard. The stock option plan provides for awards, which may
include incentive stock options, nonqualified stock options and stock awards.
The board has reserved a total of 8,634,986 shares of common stock under the
plan, of which 1,952,910 remain available for grant as of April 30, 1999. In
addition, the plan provides for an automatic annual increase, to be added on
the first day of each fiscal year beginning on January 1, 2000, equal to the
least of
. 750,000 shares;
. 3% of the average number of outstanding common shares used to calculate
fully diluted earnings per share as reported in our annual financial
statements for the preceding year; and
. a lesser amount determined by our board of directors.
As of April 30, 1999, 924,196 shares had been issued upon the exercise of stock
options granted under the stock option plan and 5,757,880 shares were subject
to outstanding options.
The compensation committee of our board of directors serves as the plan
administrator of the stock option plan. Unless the plan administrator permits
otherwise, no awards granted under the stock option plan may be assigned or
transferred by the holder other than by will or the applicable laws of descent
and distribution. During the holder's lifetime, awards generally may be
exercised only by the holder. The board may suspend or terminate the stock
option plan at any time. Unless sooner terminated by the board, the plan will
terminate on May 26, 2009.
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<PAGE>
Stock Option Grants. The plan administrator has the authority to select
individuals to receive options under the stock option plan and to specify the
terms and conditions of each option granted, the exercise price, the vesting
provisions and the option term. For incentive stock options, the exercise price
must be equal to at least the fair market value of the common stock on the
grant date and, for nonqualified stock options, must be not less than 85% of
the fair market value of the common stock on the grant date. Unless otherwise
provided by the plan administrator, options granted under the stock option plan
will expire 10 years from the grant date.
Stock Awards. The stock option plan authorizes the plan administrator to
award shares of common stock subject to terms, conditions and restrictions
established by the plan administrator in its sole discretion. The terms,
conditions and restrictions that the plan administrator has the power to
determine include the manner in which shares subject to stock awards are held
during the periods they are subject to restrictions and the circumstances under
which forfeiture of restricted stock will occur because of termination of the
holder's services. Holders of restricted stock are stockholders of WatchGuard
and generally have all the rights of stockholders with respect to those shares.
Corporate Transactions. Unless individual letter agreements provide
otherwise, if certain corporate transactions, such as a merger or sale of
WatchGuard, occur, each outstanding option will automatically accelerate and
become 100% vested and exercisable immediately before the corporate
transaction, unless the option is assumed, continued or replaced with a
comparable award by the successor corporation or the parent of the successor
corporation. If option vesting is accelerated, any forfeiture provisions
applicable to the stock awards will lapse. Any option or stock award that is
assumed, continued or replaced with a comparable award in the corporate
transaction will accelerate if the holder's employment or services are
terminated by the successor corporation without cause or by the holder
voluntarily and with good reason within two years.
1999 Employee Stock Purchase Plan
In May 1999, our board of directors approved our 1999 Employee Stock Purchase
Plan, subject to stockholder approval. We will implement our stock purchase
plan upon the effectiveness of this offering to encourage employees to remain
in our employ or the employ of our subsidiaries. We intend for the plan to
qualify under Section 423 of the Internal Revenue Code.
Our stock purchase plan permits our eligible employees and eligible employees
of our subsidiaries to purchase common stock through payroll deductions of up
to 15% of their salary or wage compensation. Under our stock purchase plan, no
employee may purchase common stock with a fair market value of more than
$25,000 in any calendar year, or purchase more than 1,000 shares of common
stock in any single purchase period.
We will implement the stock purchase plan with two-year offering periods.
Each two-year offering period has four consecutive six-month purchase periods.
The first offering period will commence on the effectiveness of this offering
and end on August 31, 2001. The first purchase period under the first offering
period will commence on the effectiveness of this offering and end on February
29, 2000. Subsequent purchase periods will begin on each March 1 and September
1 and end on the next August 31 and February 28, or February 29 in the case of
leap years. The plan administrator generally may establish a different term and
different commencing and ending dates for future offerings.
58
<PAGE>
The price of the common stock purchased under the stock purchase plan will be
the lesser of 85% of the fair market value on the first day of the applicable
offering period and 85% of the fair market value on the last day of the
applicable purchase period. The purchase price for the first offering period,
however, will be equal to the lesser of 100% of the initial public offering
price of the common stock and 85% of the fair market value on the last day of
the applicable purchase period. The stock purchase plan terminates 10 years
after the date of adoption by our board of directors, but the board may
terminate it at any earlier time. We have not yet issued any shares of common
stock under the stock purchase plan.
Employees generally will be eligible to participate in the stock purchase
plan if they are customarily employed by WatchGuard for 20 hours or more per
week and are not, as of the beginning of a purchase period, holders of 5% or
more of our common stock or the common stock of our subsidiaries. Options
granted under the stock purchase plan generally are not transferable and are
exercisable only during the optionee's lifetime.
We authorized the issuance under the stock purchase plan of a total of
600,000 shares of common stock. In addition, the plan provides for automatic
annual increases, to be added on the first day of our fiscal year beginning on
January 1, 2000, equal to the least of
. 400,000 shares;
. 1.5% of the average outstanding common shares used to calculate fully
diluted earnings per share as reported in our annual financial statements
for the preceding year; and
. a lesser amount determined by our board of directors.
If a merger or consolidation resulting in a change of control or acquisition
by another corporation of all or substantially all our assets occurs, each
outstanding option to purchase shares under the stock purchase plan will be
assumed or an equivalent option substituted by the successor corporation. If
the successor corporation refuses to assume or substitute for the option, the
offering period during which a participant may purchase stock will be shortened
to a specified date before the proposed transaction. Similarly, if a
liquidation or dissolution of WatchGuard is proposed, the offering period
during which a participant may purchase stock will be shortened to a specified
date before the date of the proposed liquidation or dissolution.
401(k) Plan
We maintain a 401(k) plan that covers all our employees who satisfy the
plan's 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 ----------------------------
Purchaser Date Share Series A Series B Series 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 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.
60
<PAGE>
On March 9, 1999, we borrowed an aggregate of $1,500,000 from entities
affiliated with Olympic Venture Partners and an aggregate of $1,500,000 from
entities affiliated with Matrix IV Management Co., L.P. We issued each entity a
promissory note, which bears interest at 6% per year 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, L.P., a
shareholder of WatchGuard.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table provides information regarding the actual beneficial
ownership of our outstanding common stock as of April 30, 1999, and as adjusted
to reflect the sale of common stock offered by this prospectus, 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;
. all of our directors and executive officers as a group; and
. all other selling stockholders.
Under the rules of the Securities and Exchange Commission, beneficial
ownership 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, we believe that 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.
<TABLE>
<CAPTION>
Shares of Common
Stock
Shares of Common Beneficially
Stock Beneficially Owned After
Owned Before Offering Shares Offering
--------------------- to Be -----------------
Name and Address Number Percentage Sold Number Percentage
- ---------------- ---------- ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Entities affiliated with Matrix
IV Management Co., L.P.(1).... 2,919,828 19.57%
2500 Sand Hill Road
Menlo Park, CA 94025
Entities affiliated with
Olympic Venture Partners(2)... 2,919,828 19.57
2420 Carillon Point
Kirkland, WA 98033
Entities affiliated with RRE
Investors II, LLC(3).......... 1,551,288 10.40
156 East 56th St., 22nd Floor
New York, NY 10022
Christopher G. Slatt(4)........ 3,024,794 20.24
Steven N. Moore(4)............. 3,024,794 20.24
Stuart J. Ellman(5)............ 1,551,288 10.40
Andrew W. Verhalen(6).......... 2,919,828 19.57
Charles P. Waite, Jr.(7)....... 2,919,828 19.57
Directors and executive
officers as a group
(6 persons)(8)................ 13,447,256 89.82
Randall C. Boroughs(9)......... 71,872 *
Dennis Cloutier(10)............ 512,184 3.40
Michael Martucci(11)........... 327,824 2.15
Mazama Software Labs, Inc. .... 400,000 2.68
</TABLE>
62
<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 April
30, 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) Includes 1,289,788 shares issuable upon conversion of the preferred stock
and 9,540 shares subject to warrants exercisable within 60 days of April
30, 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. Also includes 1,608,612
shares issuable upon conversion of the preferred stock and 11,888 shares
subject to warrants exercisable within 60 days of April 30, 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 III, L.P. and OVMC IV, LLC disclaim beneficial ownership
of these shares except to the extent of their pecuniary interests in these
shares. Charles P. Waite, Jr., a director of WatchGuard, is a general
partner of OVMC III, L.P. and a managing member of OVMC IV, LLC.
(3) 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.
(4) Represents 3,000,004 shares issuable upon conversion of the preferred stock
and 24,790 shares subject to an option exercisable within 60 days of April
30, 1999.
(5) 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.
(6) Represents 2,898,400 shares issuable upon conversion of the preferred stock
and 21,428 shares subject to warrants exercisable within 60 days of April
30, 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.
(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 April
30, 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 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. 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
63
<PAGE>
Entrepreneurs Fund, L.P., except to the extent of his pecuniary interest
arising from his interest in these entities.
(8) Includes 49,580 shares subject to options exercisable within 60 days of
April 30, 1999 and 42,856 shares subject to warrants exercisable within 60
days of April 30, 1999.
(9) Includes 69,872 shares subject to options exercisable within 60 days of
April 30, 1999.
(10) Includes 123,968 shares subject to options exercisable within 60 days of
April 30, 1999.
(11) Represents 327,824 shares subject to options exercisable within 60 days
of April 30, 1999.
64
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 80,000,000 shares of common stock and
10,000,000 shares of preferred 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 April 30, 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 14,922,362 shares of common stock outstanding, held
of record by 40 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. Under our certificate
of incorporation, the board of directors will then 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 April 30, 1999, there were outstanding warrants to purchase 287,856
shares of common stock. One holder holds a warrant to purchase 15,000 shares of
common stock, which expires on July 24, 2001 and another holds a warrant to
purchase 20,000 shares of common stock, which expires on September 24, 2001,
each 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
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
65
<PAGE>
$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 Provisions of Our Certificate of Incorporation, Our
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 takeover bid 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 disposition or encumbrance of a substantial part of our assets other
than in the usual course of business, be approved by the holders of at least
two-thirds of the outstanding shares. If the business combination has been
approved by a majority of the board of directors, however, 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 25% 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 transactions between foreign corporations
and significant stockholders. Chapter 23B.19 of the Washington Business
Corporation Act generally prohibits a target corporation from engaging in
significant business transactions with an acquiring person. An acquiring person
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, unless a majority of the members of the target
corporation's board of directors approves the transaction before the
acquisition. Prohibited transactions include
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
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<PAGE>
. 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; and
. 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 the 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
. before 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 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 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.
67
<PAGE>
Registration Rights
After this offering, the holders of 13,425,316 shares of common stock will
have rights with respect to the registration of those shares under the
Securities Act, under a 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 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 conditions
and limitations, including 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.
68
<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, or shares if the underwriters exercise their over-allotment
option in full. Of these shares, the shares that we expect to sell
in this offering, or 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. In
general, affiliates include directors, officers and 10% stockholders.
The remaining 14,922,362 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.
The executive officers, directors and most stockholders and employees of
WatchGuard, who collectively hold an aggregate of 14,651,730 restricted shares,
have agreed not to offer, sell, contract to sell, grant any option to purchase
or dispose of their shares by any other means for a period of 180 days from the
date of this prospectus. This 180-day period is known as the lock-up period. We
also have entered into an agreement with the underwriters that we will not
offer, sell or otherwise dispose of common stock during the lock-up period.
Ninety days after the date of this prospectus, 227,776 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 14,651,730 restricted shares will be eligible for immediate sale,
of which 13,425,316 shares will be subject to the volume, manner of sale and
other limitations of Rule 144. The remaining 42,856 restricted shares will be
eligible for sale under Rule 144 when one-year holding periods expire.
After the lock-up periods expire, some of the shares issued upon exercise of
options we granted before the date of this prospectus will also be available
for sale in the public market under Rule 701 under the Securities Act. Rule 701
permits resales of those shares in reliance on Rule 144 but without compliance
with some of the restrictions imposed by Rule 144, including the holding period
requirement. 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, which will be
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.
69
<PAGE>
Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about
WatchGuard. Under Rule 144(k), a person who is 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 5,305,398 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. Some holders, however, will
be subject 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 have rights to require us to
register their shares for future sale.
70
<PAGE>
UNDERWRITING
Each of the underwriters named below, acting through its 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, has agreed, subject to the terms and conditions of the
underwriting agreement, to purchase from us and the selling stockholders the
number of shares of common stock listed opposite its name below. The
underwriters have committed to purchase and pay for all of the 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
the shares of common stock to the public at the initial public offering price
stated on the cover page of this prospectus and to 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, WatchGuard and the selling stockholders 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 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 and the
selling stockholders. If purchased, the underwriters will sell the additional
shares on the same terms as those on which the shares are being
sold.
71
<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........................... $ $ $
By the selling stockholders.............
</TABLE>
We will also pay offering expenses estimated to total $1,200,000.
Most of our stockholders and option holders have agreed, for the 180-day
lock-up period after the date of this prospectus, not to sell, transfer, grant
any third party the right to purchase or dispose of by any other means any
shares of common stock or other securities that they own or acquire, without
the written consent of the underwriters. 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
dispose of by any other means any shares of our common stock or other
securities during the lock-up period without the written consent of the
underwriters. This agreement does not include shares of common stock or other
securities issued under our stock option plan or employee stock purchase 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, some
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, 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 these 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;
72
<PAGE>
. an assessment of our management; and
. market valuation of companies in related businesses.
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
WatchGuard's legal counsel is Perkins Coie LLP of Seattle, Washington. The
underwriters' legal counsel is Wilson Sonsini Goodrich & Rosati, Professional
Corporation, of 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, and for the period from
our inception on February 14, 1996 to December 31, 1996 and for the years ended
December 31, 1997 and 1998, as described in their reports. We have included our
financial statements and schedule in this 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.
WHERE YOU CAN FIND MORE 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. Because some information is omitted, you should refer to the
registration statement and its exhibits. For copies of actual contracts or
documents referred to in this prospectus, you should refer to the exhibits
attached to the registration statement. You may review a copy of the
registration statement, including the 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.
73
<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 June , 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
June 2, 1999
F-2
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
BALANCE SHEETS
(In thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
----------------- March 31, March 31,
1997 1998 1999 1999
------- -------- ----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....... $ 603 $ 1,712 $ 2,046
Trade accounts receivable, net.. 1,596 3,491 4,275
Inventories..................... 218 2,156 1,721
Prepaid expenses................ 162 450 457
------- -------- --------
Total current assets........ 2,579 7,809 8,499
Equipment and furniture, net...... 372 1,140 1,550
Deposits, intangibles, and other
assets........................... 352 83 52
------- -------- --------
Total assets................ $ 3,303 $ 9,032 $ 10,101
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.................. $ 500 $ 2,500 $ 2,500
Equipment term loan............. -- 609 548
Notes payable................... -- -- 2,874
Accounts payable................ 682 2,185 2,497
Accrued expenses................ 426 1,016 1,133
Deferred revenue................ 313 1,773 2,396
------- -------- --------
Total current liabilities... 1,921 8,083 11,948
Deferred revenue.................. -- 68 68
Commitments.......................
Stockholders' equity:
Preferred stock, $0.001 par
value:
Authorized shares --
10,000,000
Shares issued and
outstanding -- 5,316,670,
6,712,658 and 6,712,658 at
December 31, 1997 and 1998
and March 31, 1999,
respectively (none pro
forma).......................
Liquidation preference --
$13,250..................... 5 6 6 $ --
Common stock, $0.001 par value:
Authorized shares --
80,000,000
Shares issued and
outstanding -- 532,916,
1,362,744 and 1,441,614 at
December 31, 1997 and 1998
and March 31, 1999,
respectively (14,866,930
pro forma)................... -- 1 1 13
Additional paid-in capital.... 6,179 16,261 16,586 16,580
Deferred stock-based
compensation................... -- (1,466) (1,374) (1,374)
Accumulated deficit............. (4,802) (13,921) (17,134) (17,134)
------- -------- -------- --------
Total stockholders' equity
(deficit).................. 1,382 881 (1,915) $ (1,915)
------- -------- -------- ========
Total liabilities and
stockholders' equity ...... $ 3,303 $ 9,032 $10,101
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period from Year Ended Three Months Ended
February 14, 1996 December 31, March 31,
(Inception) to ---------------- --------------------
December 31, 1996 1997 1998 1998 1999
----------------- ------- ------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues, net:
Product............... $ 329 $ 4,975 $10,678 $ 1,993 $ 3,387
Service............... 2 123 701 41 551
----- ------- ------- --------- ---------
Total revenues...... 331 5,098 11,379 2,034 3,938
Cost of revenues........ 104 1,610 3,925 619 1,635
----- ------- ------- --------- ---------
Gross margin............ 227 3,488 7,454 1,415 2,303
Operating expenses:
Sales and marketing... 224 4,369 8,666 1,637 2,936
Research and
development.......... 274 2,192 5,273 805 1,548
General and
administrative....... 191 1,323 2,515 374 948
----- ------- ------- --------- ---------
Total operating
expenses........... 689 7,884 16,454 2,816 5,432
----- ------- ------- --------- ---------
Operating loss.......... (462) (4,396) (9,000) (1,401) (3,129)
Interest income......... -- 88 84 1 9
Interest expense........ (6) (26) (203) (24) (93)
----- ------- ------- --------- ---------
Net loss................ $(468) $(4,334) $(9,119) $ (1,424) $ (3,213)
===== ======= ======= ========= =========
Basic and diluted net
loss per share......... N/A $(17.17) $(11.34) $ (2.23) $ (2.28)
===== ======= ======= ========= =========
Shares used in
calculation of basic
and diluted net loss
per share.............. N/A 252 804 639 1,407
===== ======= ======= ========= =========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (0.68) $ (0.22)
======= =========
Shares used in
calculation of pro
forma basic and diluted
net loss per share
(unaudited)............ 13,374 14,832
======= =========
</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 Additional Deferred
---------------- ---------------- Paid-in Stock-Based Accumulated
Shares Amount Shares Amount Capital Compensation Deficit Total
--------- ------ --------- ------ ---------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of Series A
Preferred Stock........ 3,000,004 $ 3 -- $-- $ 147 -- $ -- $ 150
Net loss................ -- -- -- -- -- -- (468) (468)
--------- --- --------- --- ------- ------- -------- -------
Balance, December 31,
1996................... 3,000,004 3 -- -- 147 -- (468) (318)
Sale of Series B
preferred stock, net
of issuance costs of
$21.................. 2,316,666 2 -- -- 5,977 -- -- 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 5 532,916 6,179 -- (4,802) 1,382
Sales of Series B
preferred stock...... 38,610 -- -- -- 100 -- -- 100
Sales of Series C
preferred stock, net
of issuance costs of
$25.................. 1,357,378 1 -- -- 6,974 -- -- 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 1 33 -- -- 34
Net loss.............. -- -- -- -- -- -- (9,119) (9,119)
--------- --- --------- --- ------- ------- -------- -------
Balance, December 31,
1998................... 6,712,658 6 1,362,744 1 16,261 (1,466) (13,921) 881
Deferred stock
compensation
(unaudited).......... -- -- -- -- 162 (162) -- --
Amortization of
deferred stock-based
compensation
(unaudited).......... -- -- -- -- -- 254 -- 254
Issuance of stock
warrants
(unaudited).......... -- -- -- -- 155 -- -- 155
Exercise of common
stock options and
warrants
(unaudited).......... -- -- 78,870 -- 8 -- -- 8
Net loss (unaudited).. -- -- -- -- -- -- (3,213) (3,213)
--------- --- --------- --- ------- ------- -------- -------
Balance, March 31, 1999
(unaudited)............ 6,712,658 $ 6 1,441,614 $ 1 $16,586 $(1,374) $(17,134) $(1,915)
========= === ========= === ======= ======= ======== =======
</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 Three Months
(date of inception) December 31, Ended March 31,
to December 31, ---------------- ----------------
1996 1997 1998 1998 1999
------------------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $(468) $(4,334) $(9,119) $(1,424) $(3,213)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization......... 23 207 235 40 118
Stock and warrant
issued in exchange
for services......... -- -- 1,509 27 254
Non-cash interest
expense.............. -- -- -- -- 29
Changes in operating
assets and
liabilities:
(Increase) in trade
accounts
receivable......... (167) (1,429) (1,895) (408) (784)
(Increase) decrease
in inventories..... -- (214) (1,938) 2 435
(Increase) in
prepaid expenses... (52) (113) (288) (67) (6)
(Increase) decrease
in deposits and
other assets....... (41) (273) 269 (57) 31
Increase in accounts
payable and accrued
expenses........... 240 868 2,093 535 429
Increase (decrease)
in deferred
revenue............ 334 (22) 1,528 325 623
----- ------- ------- ------- -------
Net cash used in
operating activities... (131) (5,310) (7,606) (1,027) (2,084)
Investing activities
Purchase of equipment
and furniture.......... (77) (391) (1,003) (142) (528)
Purchase of intangible
assets................. (10) (70) -- -- --
----- ------- ------- ------- -------
Net cash used in
investing activities... (87) (461) (1,003) (142) (528)
Financing activities
Borrowings on line of
credit and long-term
debt................... 300 700 2,663 1,000 2,845
Issuance of warrants.... -- -- -- -- 155
Principal repayments on
line of credit......... -- (500) (54) (19) (62)
Repayment of note
payable................ -- (40) -- -- --
Proceeds from sale of
preferred stock........ 150 5,979 7,075 100 --
Proceeds from exercise
of common stock options
and warrants........... -- 3 34 8 8
----- ------- ------- ------- -------
Net cash provided by
financing activities... 450 6,142 9,718 1,089 2,946
----- ------- ------- ------- -------
Net increase (decrease)
in cash and cash
equivalents............ 232 371 1,109 (80) 334
Cash and cash
equivalents at
beginning of period.... -- 232 603 603 1,712
----- ------- ------- ------- -------
Cash and cash
equivalents at end of
period................. $ 232 $ 603 $ 1,712 $ 523 $ 2,046
===== ======= ======= ======= =======
Supplementary disclosure
of cash flow
information:
Cash paid for
interest............. $ 6 $ 21 $ 179 $ -- $ 51
===== ======= ======= ======= =======
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 AND LIQUIDITY
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 recorded losses of $9.1 million and used $7.6 million to fund
operations during the year ended December 31, 1998. At December 31, 1998,
WatchGuard had cash and cash equivalents of $1.7 million, a working capital
deficit of $274,000 and 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. WatchGuard's current investors have indicated that they will
provide sufficient financing in order for WatchGuard to continue to operate
through 1999.
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
its 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, implementation guidance could lead to unanticipated
changes in current revenue accounting practices, and these changes could
materially adversely affect the timing of WatchGuard's future revenues and
earnings.
WatchGuard generates revenues through sales of its Firebox products,
including related software licenses, and subscriptions for its LiveSecurity
broadcast service, which includes threat responses, information alerts,
software updates and maintenance. Software license revenues are generated from
licensing the rights to use WatchGuard's products directly to end-users, from
sublicense fees from resellers, distributors and, beginning in late 1998, from
sales of its products to Internet service
F-7
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
providers (ISPs), which utilize the product to provide managed security
services to the ISPs' customers. Revenues from LiveSecurity subscriptions are
recognized ratably over the term of the contract, typically one year.
Revenues from software license agreements are generally recognized upon
delivery of software if persuasive evidence of an arrangement exists,
collection is probable and the fee is fixed or determinable, and vender-
specific objective evidence exists to allocate the total fee to elements of the
arrangement. 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, on the price established by authorized management, if it is
probable that the price, once established, will not change before market
introduction. WatchGuard uses the residual method, as defined in SOP 98-9, to
allocate revenue to delivered elements once it has established vendor-specific
objective evidence for all undelivered elements. Under the residual method, any
discount in the arrangement is allocated to the delivered element. Revenues are
reduced by the provision for estimated returns and allowances at the time the
sale is made.
FAIR VALUES OF FINANCIAL INSTRUMENTS
At December 31, 1998, WatchGuard had 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 and 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
F-8
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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.
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 these 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 in 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
F-9
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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.
Unaudited Interim Financial Information
The financial information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited, but includes all adjustments, consisting
only of normal recurring adjustments, that WatchGuard considers necessary for a
fair presentation of the financial position at those dates and of the
operations and cash flows for the periods then ended. Operating results for the
three months ended March 31, 1999 are not necessarily indicative of results
that may be expected for the entire year.
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.
F-10
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Balance Sheet Account Detail
Trade Accounts Receivable
Trade accounts receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------- March 31,
1997 1998 1999
------ ------ -----------
(unaudited)
(In thousands)
<S> <C> <C> <C>
Trade accounts receivable........................ $1,720 $4,555 $5,289
Reserve for returns.............................. -- (615) (615)
Allowance for uncollectible accounts............. (124) (449) (399)
------ ------ ------
$1,596 $3,491 $4,275
====== ====== ======
</TABLE>
Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
December
31,
----------- March 31,
1997 1998 1999
---- ------ -----------
(unaudited)
(In thousands)
<S> <C> <C> <C>
Finished goods....................................... $218 $1,203 $ 861
Components........................................... -- 953 860
---- ------ ------
$218 $2,156 $1,721
==== ====== ======
</TABLE>
Equipment and Furniture
Equipment and furniture consisted of the following:
<TABLE>
<CAPTION>
December
31,
----------- March 31,
1997 1998 1999
---- ------ -----------
(unaudited)
(In thousands)
<S> <C> <C> <C>
Computer equipment................................... $361 $ 831 $1,104
Furniture and fixtures............................... 57 337 444
Software............................................. 50 302 450
---- ------ ------
468 1,470 1,998
Less accumulated depreciation........................ 96 330 448
---- ------ ------
$372 $1,140 $1,550
==== ====== ======
</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 for a
three-year period to make royalty payments on the sale of products that
utilized the Mazama technology, with the total royalty payments not to exceed
$4 million. In June 1997, WatchGuard and Mazama agreed to a buy-out of the
royalty payments due Mazama, with WatchGuard paying $70,000 in cash and issuing
400,000 shares of its common stock valued at $52,000, the deemed fair value at
that date. This amount is included in other assets, net of accumulated
amortization of $157,600 at December 31, 1998, and is being amortized over its
useful life of three years.
F-11
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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
available 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. Principal and interest are due at maturity. Borrowings under the line
of credit bear interest at the bank's prime interest rate plus 1.0% (8.75% at
December 31, 1998). 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 bank's prime interest rate plus
1.5% (9.25% at December 31, 1998) and matures in March 2001. The $432,000 term
loan bears interest at the bank's prime interest rate plus 1% (8.75% at
December 31, 1998) 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
noncompliance at December 31, 1998. In addition, the bank has deleted these
covenants through the earlier of July 31, 1999, as amended (see Note 11) or the
completion of an initial public offering of WatchGuard's stock. WatchGuard has
classified the outstanding balance of long-term debt as current on the
accompanying balance sheets.
The contractual 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 an aggregate of $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 before the initial public offering. WatchGuard also issued warrants
to purchase 42,856 shares of common stock (21,428 to each group of funds), at
an exercise price of $7.00 per share, which 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 the initial public offering. The warrants were assigned a fair
value of $155,139 based upon the Black Scholes pricing model. WatchGuard is
amortizing the resulting discount on the notes over the expected term of the
notes.
F-12
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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
connection with the restatement of its Articles of Incorporation in March 1997,
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 $6.0
million. In March 1998, WatchGuard issued an additional 38,610 shares of Series
B preferred stock at $2.59 per share, aggregating gross proceeds of $100,000.
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 $7.0 million.
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 these Series A, B, and C preferred stock could then be
converted and, with respect to that vote, have full voting rights and powers
equal to those of the holders of common stock.
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 the preferred
stockholders in the case of Series A or Series B, or 75% in the case of Series
C, 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 will convert into two shares 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>
F-13
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Stock Options
In 1996, WatchGuard adopted the 1996 Stock Incentive Compensation Plan (the
Plan), which provides for the granting of incentive and nonqualified stock
options to employees, officers, directors, agents, consultants and independent
contractors. As of December 31, 1998, WatchGuard had 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. Of the
shares of common stock covered by the options, 25% become vested on the first
anniversary of the date of grant, with the remaining shares covered by the
option vesting at 2.08% every month thereafter, and 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>
At December 31, 1998, 1,756,974 shares of common stock were available for
future grant under the Plan.
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>
F-14
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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 the 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 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 vested 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 warrants for 145,000 shares of common stock at
an exercise price of $0.03 per share to various consultants and vendors for
technical and marketing services, including public relations and technical
writing. The warrants expire five years from date of issuance, beginning in
July 2001. During 1997 and 1998, 100,000 and 10,000 shares, respectively, of
these warrants were exercised.
In January 1997, WatchGuard granted warrants for 20,000 shares at an exercise
price at $0.03 per share to an individual for recruiting services. In July
1997, the warrant was exercised for all 20,000 shares.
F-15
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
In March 1998, WatchGuard granted a warrant to purchase 10,000 shares of
common stock at an exercise price of $0.13 per share to a bank in connection
with a debt financing.
WatchGuard performed an analysis to value all warrants using the Black
Scholes pricing model based upon the exercise prices described above, a risk-
free interest rate of 6%, a dividend yield rate of 0%, volatility of .6 and an
expected life of one year. The fair value associated with these warrants was
immaterial.
In June 1998, WatchGuard entered into a two-year license and sales agreement
with a strategic partner, under which the partner has committed to minimum
purchase quantities. This agreement may be terminated by either party for
nonperformance. The only recourse for nonperformance is the return of all
product and promotional material. WatchGuard granted a warrant to purchase
200,000 shares of common stock at an exercise price of $0.39 to this strategic
partner as consideration for entering into the license and sales agreement. The
warrants are fully vested, nonforfeitable and fully exercisable at the date of
grant. The fair value of the warrant, 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.
<TABLE>
<CAPTION>
Period from Years Ended Three Months Ended
February 14, 1996 December 31, March 31,
(date of inception) ---------------- --------------------
to December 31, 1996 1997 1998 1998 1999
-------------------- ------- ------- --------- ---------
(unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net loss................ $(468) $(4,334) $(9,119) $ (1,424) $ (3,213)
===== ======= ======= ========= =========
Basic and diluted net
loss per common share.. N/A $(17.17) $(11.34) $ (2.23) $ (2.28)
===== ======= ======= ========= =========
Weighted average number
of common shares used
for basic and diluted
per share amounts...... N/A 252 804 639 1,407
===== ======= ======= ========= =========
Weighted average common
shares issuable upon
pro forma conversion of
preferred stock........ 12,570 13,425
------- ---------
Weighted average number
of shares used for pro
forma per share amounts
(unaudited)............ 13,374 14,832
======= =========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (0.68) $ (0.22)
======= =========
</TABLE>
F-16
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Options to purchase 5,145,268 shares of common stock and warrants to purchase
245,000 shares of common stock 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
Returns reserve.......................................... -- 215
Allowance for bad debts.................................. 42 153
Accrued expenses......................................... 43 102
------- -------
Total deferred tax assets.................................. 1,600 4,046
Valuation allowance........................................ (1,600) (4,046)
------- -------
Net deferred taxes......................................... $ -- $ --
======= =======
</TABLE>
WatchGuard's valuation allowance increased $159,000, $1,441,000, and
$2,446,000 for 1996, 1997, and 1998, respectively.
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.
F-17
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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 (in thousands):
<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 Internet security products and services
throughout the world, and operates in a single industry segment. While certain
expenses for sales and marketing activities are incurred in various
geographical regions, the majority of WatchGuard's assets are located, and the
majority of its operating expenses are incurred, at its corporate headquarters.
Revenue information by geographic region is the only segment information
presented as follows:
<TABLE>
<CAPTION>
Three Months
Year Ended December Ended March
31, 31,
------------------- -------------
1996 1997 1998 1998 1999
---- ------ ------- ------ ------
(unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
United States.............................. $285 $2,262 $ 7,401 $1,167 $2,101
Europe..................................... 42 1,140 2,049 449 935
Asia....................................... 2 1,209 1,106 206 616
Other...................................... 2 487 823 212 286
---- ------ ------- ------ ------
Total...................................... $331 $5,098 $11,379 $2,034 $3,938
==== ====== ======= ====== ======
</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 March 31, 1999.
Stock Split
On May 26, 1999, the board of directors authorized a 2-for-1 stock split of
WatchGuard's common stock and approved an amendment to the certificate of
incorporation to increase the number of authorized common and preferred shares
to 80,000,000 and 10,000,000 shares, respectively. The
F-18
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
stock split was effected on , 1999. The related common share, preferred
share and per share data in the accompanying financial statements have been
retroactively restated to reflect the stock split, including preferred share
data on an assumed converted to common stock basis.
Bridge Loan
In May 1999, WatchGuard amended its loan and security agreement with its
bank. The amendment primarily provides for a secured bridge loan facility that
immediately makes available to WatchGuard an additional $2.25 million. The loan
carries a commitment fee of up to 1.5%, an interest rate of prime plus 2% and a
maturity date of the earlier of WatchGuard's initial public offering closing
date or August 26, 1999. Depending on WatchGuard's use of the bridge loan and
the repayment dates of any funds borrowed, the bank is entitled to receive
warrants to purchase 4,500 to 14,500 shares of common stock at an exercise
price equal to the greater of $7.00 per share or the initial public offering
price. In connection with the amendment, the bank has extended the waiver and
deletion of certain debt covenants, as described in Note 4 above, through July
31, 1999. Also, in connection with the amendment, the $4.5 million line of
credit was reduced to $3.5 million. The amount will be increased to $4.5
million after the completion of an initial public offering.
Stock Option Grant
On April 12, 1999, R. Michael Peronto, WatchGuard's chief operating officer,
was granted an option to purchase 439,564 shares of WatchGuard's common stock.
If a change of control of WatchGuard occurs, half of the unvested shares
subject to this option will vest and become exercisable. If the initial public
offering occurs on or before July 31, 1999, the exercise price of the option
will be equal to the greater of $7.00 per share and the initial public offering
price. If the initial public offering occurs after July 31, 1999, the exercise
price of the option will be $7.00 per share.
1999 Employee Stock Purchase Plan
In May 1999, the board of directors approved the 1999 Employee Stock Purchase
Plan (the ESPP), subject to stockholder approval. WatchGuard will implement the
ESPP upon the effectiveness of the initial public offering. The ESPP, subject
to certain limitations, permits eligible employees of WatchGuard to purchase
common stock through payroll deductions of up to 15% of their compensation.
WatchGuard authorized the issuance under the ESPP of a total of 600,000 shares
of common stock, plus an automatic annual increase, to be added on the first
day of the fiscal year beginning in 2000, equal to the lesser of (a) 400,000
shares, (b) 1.5% of the average common shares outstanding as used to calculate
fully diluted earnings per share as reported in WatchGuard's annual financial
statements for the preceding year, or (c) a lesser amount determined by the
board of directors.
Amended 1996 Stock Incentive Compensation Plan
In May 1999, the board of directors approved amendments to the Stock
Incentive Compensation Plan (SICP), subject to stockholder approval. The
amendment provides for the expansion of the SICP by 900,000 shares, plus an
automatic increase, to be added on the first day of the fiscal year beginning
in 2000, equal to the lesser of (a) 750,000 shares, (b) 3.0% of the average
common shares outstanding as used to calculate fully diluted earnings per share
as reported in WatchGuard's annual financial statements for the preceding year,
or (c) a lesser amount determined by the board of directors.
F-19
<PAGE>
[INSIDE BACK COVER ARTWORK DESCRIPTION]
Text: WatchGuard LiveSecurity
The Security Manager's View
Point-and-click management tools allow security managers to view
their security policies at a glance.
WATCHGUARD LIVESECURITY THREAT RESPONSE
After WatchGuard's security experts identify and neutralize a newly
discovered threat, WatchGuard transmits a software update that
specifically addresses the new threat.
WATCHGUARD LIVESECURITY SOFTWARE UPDATE
WatchGuard broadcasts ongoing functional enhancements to security
managers, which enables them to keep their defenses current with
minimal effort.
WATCHGUARD LIVESECURITY INFORMATION ALERT
WatchGuard notifies its customers of breaking news and current issues
in Internet security, keeping security managers around the world
informed about the fast-changing Internet security landscape.
Watchguard LiveSecurity--dynamic security protection, timely Internet
broadcasts and responsive security experts protecting small- to
medium-sized enterprises around the world that use the Internet for
e-business and communications.
Graphics: Screen shot showing WatchGuard and other software program icons on a
Windows desktop.
[WatchGuard logo]
<PAGE>
[BACK COVER]
LIVE
LiveSecurity
[WatchGuard's logo]
WatchGuard LiveSecurity--dynamic security protection, timely Internet
broadcasts, and responsive security experts protecting small- to medium-sized
enterprises around the world that use the Internet for e-business and
communications.
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.
<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 those 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 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, under 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 as partial consideration for
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.
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 Incentive Compensation 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.
10.10 1999 Employee Stock Purchase Plan.
10.11* Loan Modification Agreement, dated May 26, 1999, between Silicon
Valley Bank 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.
27.2 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.
+ Previously filed.
(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. If 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
II-4
<PAGE>
(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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, on the 1st day of June, 1999.
WATCHGUARD TECHNOLOGIES, INC.
/s/ Christopher G. Slatt
By: _________________________________
Christopher G. Slatt, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities indicated below on the 1st day of June, 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)
* Stuart J. Ellman Director
________________________________________
Stuart J. Ellman
* Andrew W. Verhalen Director
________________________________________
Andrew W. Verhalen
* Charles P. Waite, Jr. Director
________________________________________
Charles P. Waite, Jr.
/s/ Steven N. Moore
*By: ____________________________________
Steven N. Moore
Attorney-in-Fact
</TABLE>
II-6
<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 Incentive Compensation 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.
10.10 1999 Employee Stock Purchase Plan.
10.11* Loan Modification Agreement, dated May 26, 1999, between Silicon
Valley Bank 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.
27.2 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.
+ Previously filed.
<PAGE>
EXHIBIT 3.1
WATCHGUARD TECHNOLOGIES, INC.
Restated Certificate of Incorporation
WatchGuard Technologies, Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware, does hereby certify:
1. The corporation's original name was Seattle Software Labs, Inc.
2. The original Certificate of Incorporation was filed with the Secretary
of State on May 7, 1997.
3. The following Restated Certificate of Incorporation was duly proposed
by the corporation's Board of Directors pursuant to the applicable provisions of
Sections 242 and 245 of the General Corporation Law of the State of Delaware. In
lieu of a me eting of the stockholders, written consent has been given for the
adoption of said Restated Certificate of Incorporation and the amendments to be
made thereby pursuant to the applicable provisions of Sections 228, 242 and 245
of the General Corporation La w of the State of Delaware, and written notice of
the taking of such corporate action has been given as provided in said Section
228.
ARTICLE 1. NAME
The name of this corporation is WatchGuard Technologies, Inc.
ARTICLE 2. REGISTERED OFFICE AND AGENT
The address of the initial registered office of this corporation is
Corporation Trust Center, 1209 Orange Street, Wilmington, County of New Castle,
State of Delaware 19801, and the name of its initial registered agent at such
address is The Corporation Trust Company.
ARTICLE 3. PURPOSE
The purpose of this corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware (the "DGCL").
ARTICLE 4. SHARES
The total authorized stock of this corporation shall consist of 80,000,000
shares of common stock, having a par value of $.001 per share (the "Common
Stock"), and
<PAGE>
10,000,000 shares of preferred stock, having a par value of $.001 per share (the
"Preferred Stock"). Authority is hereby expressly granted to the Board of
Directors to fix by resolution or resolutions any of the designations and the
powers, preferences and rights, and the qualifications, limitations or
restrictions that are permitted by the DGCL in respect of any class or classes
of stock or any series of any class of stock of this corporation. The Preferred
Stock shall be divided into series, and 3,000,004 shares of Preferred Stock are
designated Series A Convertible Preferred Stock (the "Series A Stock"),
2,374,581 shares of Preferred Stock are designated Series B Convertible
Preferred Stock (the "Series B Stock"), and 1,357,378 shares of Preferred Stock
are designated Series C Convertible Preferred Stock (the "Series C Stock").
This corporation shall from time to time in accordance with the laws of the
State of Delaware increase the authorized amount of the Common Stock if at any
time the number of shares of Common Stock remaining unissued and available for
issuance shall not be sufficient to permit conversion of the Preferred Stock.
Authority is hereby expressly granted to the Board of Directors, subject to
the provisions of this Article 4 and to the limitations prescribed by law, to
authorize the issue of one or more additional series of Preferred Stock, and,
with respect to each such series, to fix by resolution or resolutions providing
for the issue of each series the number of shares of such series and the
relative rights, limitations and preferences of the shares of any such series so
established with respect to any matter allowable under the DGCL.
The relative powers, preferences, special rights, qualifications,
limitations and restrictions granted to or imposed on the respective classes of
the shares of capital stock or the holders thereof are as follows:
4.1 Dividends
The holders of Series A Stock, Series B Stock and Series C Stock shall, in
preference to the holders of other stock of the corporation, including, without
limitation, the Common Stock, be entitled to receive, out of funds legally
available therefor, when and if declared by the Board of Directors, dividends at
the rate per annum of $.01 per share (the "Series A Dividends"), $.155 per share
(the "Series B Dividends") and $.311 per share (the "Series C Dividends"),
respectively (as adjusted for any stock dividends, combinations or splits with
respect to such shares). Together, the Series A Dividends, Series B Dividends
and Series C Dividends are referred to herein as the "Preferred Stock
Dividends". The Preferred Stock Dividends shall not be cumulative. No right
shall accrue to holders of Common Stock or Preferred Stock by reason of the fact
that dividends on said shares are not declared in any prior period. In addition
to their respective Preferred Stock Dividends, holders of Series A Stock, Series
B Stock and Series C Stock shall be entitled to dividends at the same rate as
dividends (other than dividends paid in additional shares of Common Stock) are
paid
2
<PAGE>
with respect to the Common Stock (treating each share of Preferred Stock as
being equal to the number of shares of Common Stock (including fractions of a
share) into which such share is then convertible).
4.2 Liquidation Preference
4.2.1 Preferred Stock Preference
Upon the voluntary or involuntary dissolution, liquidation or winding
up of this corporation, the assets of this corporation available for
distribution to its stockholders shall be distributed in the following order and
amounts:
(i) First, the holders of Series C Stock shall be entitled to receive
$5.157 for each outstanding share of Series C Stock held by them
plus any declared but unpaid dividend per share on such
outstanding shares of Series C Stock (as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like
with respect to such shares) (the "Series C Liquidation Amount").
If, upon the occurrence of such event, the assets of this
corporation shall be insufficient to permit the payment of the
Series C Liquidation Amount payable to the holders of Series C
Stock, then the assets of this corporation available for
distribution shall be distributed ratably among the holders of
the Series C Stock in the same proportions as the full Series C
Liquidation Amount each such holder would otherwise be entitled
to receive bears to the total Series C Liquidation Amount that
would otherwise be payable to all holder of Series C Stock.
(ii) If, upon completion of the distribution required by subsection
(i), assets remain in this corporation, the holders of Series A
Stock shall be entitled to receive $.05 for each outstanding
share of Series A Stock held by them plus any declared but unpaid
dividend per share on such outstanding shares of Series A Stock
(as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares) (the
"Series A Liquidation Amount"), the holders of Series B Stock
shall be entitled to receive $2.59 for each outstanding share of
Series B Stock held by them plus any declared but unpaid dividend
per share on such outstanding shares of Series B Stock (as
adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares) (the
"Series B Liquidation Amount"), and any other outstanding shares
of preferred stock of this corporation having a preferential
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right to liquidation payments ranking equal to the rights of the
holders of Series A Stock and Series B Stock (together, the
"Parity Shares") shall be entitled to receive the liquidation
payment specified for such shares held by them (the "Parity
Liquidation Amount"). If, upon the occurrence of such event, the
assets of this corporation shall be insufficient to permit the
payment of the Liquidation Amounts payable to the holders of each
series, then the assets of this corporation available for
distribution shall be distributed ratably among the holders of
the Series A Stock, Series B Stock and the Parity Shares in the
same proportions as the aggregate of the Series A Liquidation
Amount, the Series B Liquidation Amount and the Parity
Liquidation Amount each such holder would otherwise be entitled
to receive bears to the total Series A Liquidation Amount, Series
B Liquidation Amount and Parity Liquidation Amount that would
otherwise be payable to all such holders.
(iii) If, upon completion of the distribution required by subsection
(ii), assets remain in this corporation, the holders of Series A
Stock, Series B Stock, Series C Stock and any Parity Shares
entitled to participate in distributions hereunder, in addition
to their respective Liquidation Amounts, and the holders of
Common Stock shall be entitled to receive liquidation payments on
a pro rata basis (assuming the conversion of all shares of
Preferred Stock to Common Stock at the then applicable conversion
rates for each series of the Preferred Stock) until, (A) with
respect to the holders of Series A Stock, they shall have
received an aggregate liquidation payment pursuant to subsections
(ii) and (iii) equal to one and one half times the Series A
Liquidation Amount distributed to the holders of Series A Stock
pursuant to subsection (ii), (B) with respect to the holders of
Series B Stock, they shall have received an aggregate liquidation
payment pursuant to subsections (ii) and (iii) equal to one and
one half time the Series B Liquidation Amount distributed to the
holders of Series B Stock pursuant to subsection (ii), (C) with
respect to holders of Series C Stock, they shall have received an
aggregate liquidation payment pursuant to subsection (i) and
(iii) equal to one and one half times the Series C Liquidation
Amount distributed to the Series C holders pursuant to subsection
(i) and, (D) with respect to holders, if any, of Parity Shares,
they shall have received an aggregate liquidation payment
pursuant to subsections (ii) and (iii) equal to
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any applicable limit thereon but not in excess of one and one
half times the amount distributed to such holders of Parity
Shares pursuant to subsection (ii).
(iv) If, upon completion of the distributions required by subsections
(i), (ii) and (iii), assets remain in this corporation, the
holders of Common Stock shall be entitled to receive such assets
on a pro rata basis based on the number of shares of Common Stock
held by each such holder.
4.2.2 Merger or Consolidation
The acquisition of this corporation by another entity or entities by
means of any transaction or series of related transactions (including, without
limitation, any consolidation or merger which results in the exchange of
outstanding shares of this corporation for securities or other consideration
issued or paid or caused to be issued or paid by any such entity or affiliate
thereof, but excluding (a) a merger to reincorporate this corporation in a
different jurisdiction and (b) a merger in which this corporation's stockholders
own or control 50% or more of the surviving entity's voting shares), and the
sale or other disposition by this corporation of all or substantially all its
assets, shall be deemed to be a liquidation, dissolution or winding up of this
corporation within the meaning of the provisions of this Section 4.2; provided,
however, that each holder of convertible Preferred Stock of this corporation
shall have the opportunity to convert Preferred Stock into Common Stock pursuant
to Section 4.4 in lieu of receiving payment in liquidation, dissolution or
winding up of this corporation pursuant to this Section 4.2.
4.2.3 Noncash Distributions
If any of the assets of this corporation are to be distributed other
than in cash under this Section 4.2 or for any purpose, then the Board of
Directors shall determine in good faith the fair value of the assets to be
distributed to the holders of Preferred Stock or Common Stock. This corporation
shall give prompt written notice to each holder of shares of Preferred Stock or
Common Stock of the fair value so determined.
4.3 Voting Rights
4.3.1 Preferred Stock
Except as otherwise provided herein or as required by law, the holder
of each share of Preferred Stock shall be entitled to vote together with all
other classes and series of stock of this corporation as a single class on all
actions to be taken by the stockholders of this corporation, including, but not
limited to, actions amending the
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Certificate of Incorporation of this corporation to increase the number of
authorized shares of Common Stock or Preferred Stock. If, as provided herein or
as required by law, the Preferred Stock is entitled to vote as a separate class
from the Common Stock, then except as otherwise provided herein, all series of
Preferred Stock shall vote together as a single class and not as a separate
series. Each share of Preferred Stock shall entitle the holder thereof to such
number of votes per share on each such action as shall equal the number of
shares of Common Stock (including fractions of a share) into which such share of
Preferred Stock is then convertible pursuant to Section 4.4 at the record date
for the determination of the stockholders entitled to vote on such matters or,
if no such record date is established, at the date such vote is taken. Except as
otherwise provided herein or as required by law, the Preferred Stock shall have
voting rights and powers equal to the voting rights and powers of the Common
Stock.
4.3.2 Common Stock
Each holder of shares of Common Stock shall be entitled to one vote
for each share thereof held.
4.3.3 Board Size
The corporation shall not, without the written consent or affirmative
vote of the holders of a majority of the then outstanding shares of each series
of Preferred Stock, given in writing or by vote at a meeting, consenting or
voting (as the case may be) separately as a class, increase the number of
directors constituting the Board of Directors to a number greater than seven.
4.3.4 Board Seats
The holders of the Series A Stock, voting as a separate class, shall
be entitled to elect two directors of this corporation. The holders of the
Series B Stock, voting as a separate class, shall be entitled to elect two
directors of this corporation. The holders of the Series C Stock, voting as a
separate class, shall be entitled to elect one director of this corporation. The
holders of the Common Stock and Preferred Stock, voting together as a single
class (with the Preferred Stock voting on an as-converted basis), shall be
entitled to elect up to two directors of this corporation. At any meeting (or in
a written consent in lieu thereof) held for the purpose of electing directors,
the presence in person or by proxy (or the written consent) of (a) the holders
of a majority of the shares of a series of Preferred Stock then outstanding
shall constitute a quorum of the Preferred Stock of that series for the election
of the directors to be elected solely by the holders of the series and (b) the
holders of a majority of the shares of Preferred Stock and Common Stock then
outstanding voting in accordance with Section 4.3.1 shall constitute a quorum
for the election of the
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directors to be elected jointly by the holders of Preferred Stock and Common
Stock. A vacancy in any directorship or removal of any director elected by the
holders of a series of Preferred Stock shall be filled or accomplished only by
vote or written consent of the holders of that series and a vacancy in any
directorship or removal of any director to be elected jointly by the Preferred
Stock and the Common Stock shall be filled or accomplished only by vote or
written consent of the holders of Preferred Stock and Common Stock as provided
herein.
4.4 Conversion
The holders of Preferred Stock shall have conversion rights as follows (the
"Conversion Rights"):
4.4.1 Optional Conversion
Subject to the terms and conditions of this Section 4.4, each share of
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of this
corporation or any transfer agent for such Preferred Stock, except that upon any
liquidation of this corporation the right of conversion shall terminate at the
close of business on the business day fixed for payment of the amount
distributable on the Preferred Stock. Each share of Preferred Stock shall be
convertible into the number of fully paid and nonassessable shares of Common
Stock that results from dividing the "Conversion Price" per share in effect for
such series of Preferred Stock at the time of conversion (the "Series A
Conversion Price", "Series B Conversion Price" or "Series C Conversion Price,"
as the case may be) into the "Conversion Value" per share of such series of
Preferred Stock. The number of shares of Common Stock into which each series of
Preferred Stock is convertible is hereinafter collectively referred to as the
"Conversion Rate" for such series. Initially, the Conversion Price per share of
the Series A Stock shall be $.05, of the Series B Stock shall be $2.59 and of
the Series C Stock shall be $5.157 and the Conversion Value per share of the
Series A Stock shall be $.05, of the Series B Stock shall be $2.59 and of the
Series C Stock shall be $5.157, so that each share of Series A Stock, Series B
Stock and Series C Stock shall be initially convertible into one share of Common
Stock. The Conversion Price of each series of Preferred Stock shall be subject
to adjustment as hereinafter provided.
4.4.2 Automatic Conversion
Each share of Series A Stock and Series B Stock shall automatically be
converted into shares of Common Stock at its then effective Conversion Rate upon
the earlier to occur of (i) the closing of a firm commitment underwritten public
offering of Common Stock pursuant to an effective registration statement under
the Securities Act of 1933, as amended (the "1933 Act"), with aggregate gross
proceeds, at the public
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offering price, of at least $10,000,000 and a price per share paid by the public
of at least $7.77 (appropriately adjusted to reflect the occurrence of any event
described in Section 4.4.6) , and (ii) the vote or written consent of the
holders of a majority of the outstanding shares of Series A Stock or the holders
of a majority of the outstanding shares of Series B Stock, as the case may be.
Each share of Series C Stock shall automatically be converted into
shares of Common Stock at its then effective Conversion Rate upon the earlier to
occur of (i) the closing of a firm commitment underwritten public offering of
Common Stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended the 1933 Act, with aggregate gross proceeds,
at the public offering price, of at least $15,000,000 and a price per share paid
by the public of at least $10.314 (appropriately adjusted to reflect the
occurrence of any event described in Section 4.4.6), and (ii) the vote or
written consent of the holders of seventy-five percent (75%) of the outstanding
shares of Series C Stock.
4.4.3 Mechanics of Conversion
Before any holder of Preferred Stock shall be entitled to convert the
same into shares of Common Stock, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of this corporation or of
any transfer agent for such Preferred Stock and shall give written notice to
this corporation at such office that such holder elects to convert a stated
number of the shares of Preferred Stock into Common Stock.
This corporation shall, as soon as practicable thereafter, issue and
deliver to such holder of Preferred Stock a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled as
aforesaid, and shall pay in cash any declared and unpaid dividends on the shares
of Preferred Stock being converted. To the extent permitted by law, such
conversion shall be deemed to have been effected and the Conversion Price shall
be determined immediately prior to the close of business (a) on the date such
written notice is given (provided that such holder's certificate or certificates
are delivered to this corporation within two business days after such notice is
given) or (b) in any other case, on the date of such surrender of the shares of
Preferred Stock to be converted, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock on
such date. Notwithstanding the foregoing, no written notice of election to
convert or surrender of certificates shall be required in the event of an
automatic conversion pursuant to Section 4.4.2.
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4.4.4 Conversion Price Adjustments of Preferred Stock for Certain
Dilutive Issuances.
The Series C Conversion Price shall be subject to adjustment from time
to time as follows:
(i) (A) If this corporation shall issue, after the date on
which shares of Series C Stock are first issued (the "Series C Issuance Date"),
any Additional Stock (as defined below) without consideration or for a
consideration per share less than the Series C Conversion Price in effect
immediately prior to the issuance of such Additional Stock, the Series C
Conversion Price in effect immediately prior to each such issuance shall
forthwith (except as otherwise provided in this clause (i)) be adjusted to a
price determined by multiplying such Conversion Price by a fraction, the
numerator of which shall be the total number of Common Stock Equivalents (as
defined below) outstanding immediately prior to such issuance plus the number of
shares of Common Stock that the aggregate consideration received by this
corporation for such issuance would purchase at such Conversion Price, and the
denominator of which shall be the total number of Common Stock Equivalents
outstanding immediately prior to such issuance plus the number of shares of such
Additional Stock. The term "Common Stock Equivalents" shall mean all shares of
Common Stock actually outstanding, plus all shares of Common Stock issuable upon
conversion or exchange of all convertible or exchangeable securities then
outstanding.
(B) In the case of the issuance of Additional Stock for
cash, the consideration shall be deemed to be the gross amount of cash paid
therefor before deducting any discounts, commissions or other expenses allowed,
paid or incurred by this corporation for any underwriting or otherwise in
connection with the issuance and sale thereof.
(C) In the case of the issuance of Additional Stock for
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof, as determined by at least
two-thirds of the Board of Directors irrespective of any accounting treatment.
(D) In the case of the issuance of options to purchase or
rights to subscribe for Additional Stock, securities by their terms convertible
into or exchangeable for Additional Stock or options to purchase or rights to
subscribe for such convertible or exchangeable securities, the following
provisions shall apply for all purposes of this subsection 4.4.4(i) and
4.4.4(ii):
(1) The aggregate maximum number of shares of Common
Stock deliverable upon exercise (assuming the satisfaction of any conditions to
exercisability, including without limitation, the passage of time, but without
taking into account potential antidilution adjustments) of such options to
purchase or rights to subscribe for Additional Stock shall be deemed to have
been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
subsections 4.4.4(i)(B) and 4.4.4(i)(C)), if any, received by this corporation
upon the issuance of such options or rights plus the minimum exercise price
provided in such options or rights (without taking into account potential
antidilution adjustments) for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange (assuming the satisfaction
of any conditions to convertibility or exchangeability, including, without
limitation, the passage of time, but
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without taking into account potential antidilution adjustments) for any such
convertible or exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof shall be deemed to have been
issued at the time such securities were issued or such options or rights were
issued and for a consideration equal to the consideration, if any, received by
this corporation for any such securities and related options or rights
(excluding any cash received on account of accrued interest or accrued
dividends), plus the minimum additional consideration, if any, to be received by
this corporation (without taking into account potential antidilution
adjustments) upon the conversion or exchange of such securities or the exercise
of any related options or rights (the consideration in each case to be
determined in the manner provided in subsections 4.4.4(i)(B) and 4.4.4(i)(C)).
(3) In the event of any change in the number of shares
of Common Stock deliverable or in the consideration payable to this corporation
upon exercise of such options or rights or upon conversion of or in exchange for
such convertible or exchangeable securities, including, without limitation, a
change resulting from the antidilution provisions thereof, the Series C
Conversion Price to the extent in any way affected by or computed using such
options, rights or securities, shall be recomputed to reflect such change, but
no further adjustment shall be made for the actual issuance of Common Stock or
any payment of such consideration upon the exercise of any such options or
rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or rights,
the termination of any such rights to convert or exchange or the expiration of
any options or rights related to such convertible or exchangeable securities,
the Series C Conversion Price to the extent in any way affected by or computed
using such options, rights or securities or options or rights related to such
securities, shall be
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recomputed to reflect the issuance of only the number of shares of Common Stock
(and convertible or exchangeable securities which remain in effect) actually
issued upon the exercise of such options or rights, upon the conversion or
exchange of such securities or upon the exercise of the options or rights
related to such securities.
(5) The number of shares of Common Stock deemed issued
and the consideration deemed paid therefor pursuant to subsections
4.4.4(i)(D)(l) and (2) shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either subsection
4.4.4(i)(D)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to subsection 4(i)(D)) by this
corporation after the Series C Issuance Date, other than the following:
(A) shares of Common Stock issued pursuant to a transaction
described in subsection 4.4.6;
(B) shares of Common Stock issued or issuable pursuant to
options, warrants or convertible Preferred Stock outstanding on or issued as of
the Series C Issuance Date, or pursuant to conversion of any convertible
securities issuable upon exercise of options or warrants outstanding on or
issued as of the Series C Issuance Date;
(C) options for the purchase of up to 3,661,035 shares of
Common Stock (plus any additional shares approved by a majority of this
corporation's Board of Directors granted or available for grant to employees,
consultants, directors, independent contractors and similar parties pursuant to
one or more stock option plans or restricted stock plans approved by this
corporation's Board of Directors, and the shares of Common Stock issuable upon
exercise of such options.
4.4.5 Fractional Shares; Dividends; Partial Conversion
No fractional shares of Common Stock shall be issued upon conversion
of the Preferred Stock and no payment or adjustment shall be made upon any
conversion on account of any cash dividends on the Common Stock issued upon such
conversion. In lieu of any fractional shares to which the holder would otherwise
be entitled, this corporation shall pay cash equal to such fraction multiplied
by the applicable Conversion Price. At the time of each conversion, this
corporation shall pay in cash an amount equal to all dividends, declared and
unpaid on the shares of Preferred Stock surrendered for conversion to the date
upon which such conversion is deemed to take place as provided in Section 4.4.3.
In case the number of shares of Preferred Stock represented by the certificate
or certificates surrendered for conversion exceeds the number of shares
converted, this corporation shall, upon such conversion, execute and
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deliver to the holder, at the expense of this corporation, a new certificate or
certificates for the number of shares of Preferred Stock represented by the
certificate or certificates surrendered which are not to be converted.
4.4.6 Subdivision or Combination of Common Stock; Other Dividends and
Distributions
(i) In case this corporation shall at any time subdivide (by any
stock split, stock dividend or otherwise) its outstanding shares of Common Stock
into a greater number of shares, the Conversion Prices in effect immediately
prior to such subdivision shall be proportionately reduced, and, conversely, in
case the outstanding shares of Common Stock shall be combined into a smaller
number of shares, the Conversion Prices in effect immediately prior to such
combination shall be proportionately increased. Any adjustment under this
Subsection (i) shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(ii) If this corporation issues a dividend or makes a distribution
payable in securities of this corporation other than shares of Common Stock,
provision shall be made so that the holders of Preferred Stock shall receive
upon conversion thereof, in addition to the number of shares of Common Stock
receivable thereupon, the amount of other securities of this corporation which
they would have received had their Preferred Stock been converted into Common
Stock on the date of such event and had they thereafter, during the period from
the date of such event to and including the conversion date, retained such
securities receivable by them as aforesaid during such period, subject to all
other adjustments called for during such period under this Section 4.4 with
respect to the rights of the holders of the Preferred Stock or with respect to
such other securities by their terms.
4.4.7 Reorganization or Reclassification
If any capital reorganization or reclassification of the capital stock
of this corporation shall be effected in such a way that holders of Common Stock
shall be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization or
reclassification, lawful and adequate provisions shall be made whereby each
holder of a share or shares of Preferred Stock shall thereupon have the right to
receive, upon the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock immediately theretofore receivable upon
the conversion of such share or shares of Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the number of
shares of such Common Stock immediately theretofore receivable upon such
conversion had such reorganization or reclassification not taken
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place, and in any such case appropriate provisions shall be made with respect to
the rights and interests of such holder to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the applicable
Conversion Price) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of such conversion rights.
4.4.8 Notice of Adjustment
Upon any adjustment or readjustment of the Conversion Price applicable
to a series of Preferred Stock, then and in each such case this corporation
shall give written notice thereof, by delivery in person, certified or
registered mail, return receipt requested, telecopier or telex, addressed to
each holder of shares of such series of Preferred Stock at the address of such
holder as shown on the books of this corporation, which notice shall state the
Conversion Price for such series of Preferred Stock resulting from such
adjustment or readjustment, setting forth in reasonable detail the method upon
which such calculation is based. In the case of any adjustment or readjustment
of the Series C Conversion Price pursuant Section 4.4.4, the written notice
required by this Section 4.4.8 shall include a statement of (a) the
consideration received or deemed to be received by the corporation for any
Additional Stock issued or sold or deemed to have been issued or sold, (b) the
Series C Conversion Price at the time in effect, (c) the number of shares of
Additional Stock and (d) the type and amount, if any, of other property which at
the time would be received upon conversion of the Preferred Stock.
4.4.9 Minimal Adjustments
All calculations under this Section 4.4 shall be made to the nearest
cent. No adjustment in a Conversion Price need be made if such adjustment would
result in a change in a Conversion Price of less than $0.01. Any adjustment of
less than $0.01 that is not made shall be carried forward and shall be made at
the time of and together with any subsequent adjustment that, on a cumulative
basis, amounts to an adjustment of $0.01 or more in a Conversion Price.
4.4.10 No Impairment
This corporation shall not, through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities, or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by this corporation, but
shall at all times in good faith assist in the carrying out of all the
provisions of this Section 4.4 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of Preferred Stock against impairment. This
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provision shall not restrict this corporation from amending its Certificate of
Incorporation in accordance with the DGCL.
4.4.11 Other Notices
In case at any time:
(a) This corporation shall declare any dividend upon the Common
Stock payable in cash or stock or make any other distribution to the holders of
the Common Stock;
(b) This corporation shall offer for subscription pro rata to
the holders of the Common Stock any additional shares of stock of any class or
other rights;
(c) There shall be any capital reorganization or
reclassification of the capital stock of this corporation, or a consolidation or
merger of this corporation with or into another entity or entities, or a sale,
lease, abandonment, transfer or other disposition of all or substantially all
its assets; or
(d) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of this corporation;
then, in any one or more of said cases, this corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each holder of any shares of Preferred Stock at the address
of such holder as shown on the books of this corporation, (a) at least 20 days'
prior written notice of the date on which the books of this corporation shall
close or a record shall be taken for such dividend, distribution or subscription
rights or for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, disposition, dissolution, liquidation or winding up, at
least 20 days' prior written notice of the date when the same shall take place.
Such notice in accordance with the foregoing clause (a) shall also specify, in
the case of any such dividend, distribution or subscription rights, the date on
which holders of Common Stock shall be entitled thereto and such notice in
accordance with the foregoing clause (b) shall also specify the date on which
the holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding up, as the case may be.
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4.4.12 Stock to Be Reserved
This corporation shall at all times reserve and keep available out of
its authorized Common Stock, solely for the purpose of issuance upon the
conversion of Preferred Stock as herein provided, such number of shares of
Common Stock as shall then be issuable upon the conversion of all outstanding
shares of Preferred Stock. This corporation covenants that all shares of Common
Stock which shall be so issued shall be duly and validly issued and fully paid
and nonassessable and free from all taxes, liens and charges with respect to the
issue thereof, and without limiting the generality of the foregoing, this
corporation covenants that it shall from time to time take all such action as
may be requisite to ensure that the par value per share of the Common Stock is
at all times equal to or less than the Conversion Price applicable to any
outstanding series of Preferred Stock in effect at the time. This corporation
shall take all such action as may be reasonably necessary to ensure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirement of any national securities exchange
upon which the Common Stock may be listed. This corporation shall not take any
action which results in any adjustment of the Conversion Price applicable to a
series of Preferred Stock if the total number of shares of Common Stock issued
and issuable after such action upon conversion of all the outstanding shares of
Preferred Stock would exceed the total number of shares of Common Stock then
authorized by this corporation's Certificate of Incorporation.
4.4.13 No Reissuance of Preferred Stock
Shares of Preferred Stock that are converted into shares of Common
Stock as provided herein shall not be reissued.
4.4.14 Issue Tax
The issuance of certificates for shares of Common Stock upon
conversion of Preferred Stock shall be made without charge to the holders
thereof for any issuance tax or other governmental charges in respect thereof,
provided that this corporation shall not be required to pay any tax that may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Preferred Stock that
is being converted.
4.4.15 Closing of Books
This corporation shall at no time close its transfer books against the
transfer of any Preferred Stock or of any shares of Common Stock issued or
issuable upon the conversion of any shares of Preferred Stock in any manner that
interferes
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with the timely conversion of such Preferred Stock, except as may otherwise be
required to comply with applicable securities laws.
4.4.16 Definition of Common Stock
As used in this Section 4.4, the term "Common Stock" shall mean and
include this corporation's authorized Common Stock $.001 par value per share, as
constituted on April 24, 1998, and shall also include any capital stock of any
class of this corporation thereafter authorized that shall not be limited to a
fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of this corporation; provided
that the shares of Common Stock receivable upon conversion of shares of
Preferred Stock shall include only shares designated as Common Stock of this
corporation on April 24, 1998, or in case of any reorganization or
reclassification of the outstanding shares thereof, the stock, securities or
assets provided for in Section 4.4.9.
4.4.17 Notices
Any notice required by the provisions of this Section 4.4 to be given
to the holder of shares of Preferred Stock shall be deemed given if deposited in
the United States mail, postage prepaid, and addressed to each such holder of
record at such holder's address appearing on the books of this corporation.
4.5 Protective Provisions
4.5.1 Approval of Series A Stock, Series B Stock and Series C Stock
At any time when shares of Series A Stock, Series B Stock or Series C
Stock are outstanding, except where the vote or written consent of the holders
of a greater number of shares of this corporation is required by law or by the
Certificate of Incorporation, and in addition to any other vote required by law
or the Certificate of Incorporation, without the approval of the holders of a
majority of the then outstanding shares of Series A Stock, Series B Stock and
Series C Stock given in writing or by vote at a meeting, with each series
consenting or voting (as the case may be) together as a single class, this
corporation shall not:
(a) Merger or Sale
Sell, convey or otherwise dispose of all or substantially
all of its property, business or assets the disposition of which would have a
material effect upon the business or financial condition of the corporation; or
recapitalize, reorganize or merge into or consolidate with any other corporation
(a "Corporate Transaction"), unless the
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corporation's stockholders of record as constituted immediately prior to such
Corporate Transaction will, immediately after such Corporate Transaction, hold
at least 50% of the voting power of the surviving or acquiring entity.
(b) Redeem Other Capital Stock
Redeem or purchase, or set aside any sum for the redemption
or other purchase of, or pay any dividend or make any distribution on, any
shares of stock other than shares of Preferred Stock, except for dividends or
other distributions payable on the Common Stock solely in the form of additional
shares of Common Stock and except for the purchase of shares of Common Stock
from former employees of this corporation who acquired such shares directly from
this corporation, if each such purchase is made pursuant to contractual rights
held by this corporation relating to the termination of employment of such
former employee and the purchase price does not exceed the original issue price
paid by such former employee to this corporation for such shares.
4.5.2 Approval of Series A Stock
At any time when shares of Series A Stock are outstanding, in addition
to any other vote required by law or the Certificate of Incorporation, without
the approval of the holders of a majority of the then outstanding shares of
Series A Stock given in writing or by vote at a meeting, consenting or voting
(as the case may be) separately as a series, this corporation shall not:
(a) Amend Certificate of Incorporation or Bylaws
Amend, alter or repeal its Certificate of Incorporation or
Bylaws in a manner adversely affecting the Series A Stock; or
(b) Increase the Authorized Shares of Series A Stock
Increase the authorized number of shares of the Series A
Stock.
4.5.3 Approval of Series B Stock
At any time when shares of Series B Stock are outstanding, in addition
to any other vote required by law or the Certificate of Incorporation, without
the approval of the holders of a majority of the then outstanding shares of
Series B Stock given in writing or by vote at a meeting, consenting or voting
(as the case may be) separately as a series, this corporation shall not:
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(a) Amend Certificate of Incorporation or Bylaws
Amend, alter or repeal its Certificate of Incorporation or
Bylaws in a manner adversely affecting the Series B Stock;
(b) Increase the Authorized Shares of Series B Stock
Increase the authorized number of shares of the Series A
Stock or Series B Stock.
4.5.4 Approval of Series C Stock
At any time when shares of Series C Stock are outstanding, in addition
to any other vote required by law or the Certificate of Incorporation, without
the approval of the holders of a majority of the then outstanding shares of
Series C Stock given in writing or by vote at a meeting, consenting or voting
(as the case may be) separately as a series, this corporation shall not:
(a) Authorize Senior Capital Stock
Authorize or create a series or class of equity security
(including any equity security convertible into or exercisable for any other
equity security) with a preference over the Series C Stock as to voting,
dividends or upon liquidation;
(b) Increase or Decrease the authorized shares of Series C Stock
Increase or decrease the authorized number of shares of
Series C Stock.
(c) Amend Certificate of Incorporation or Bylaws
Amend, alter or repeal any provision of, or add any
provision to, its Certificate of Incorporation or Bylaws in a manner changing
the rights of the Series C Stock; or
(d) Redeem Shares of Series C Stock
Redeem, purchase or otherwise acquire any share or shares of
Series C Stock.
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4.6 Amendments Upon Conversion of Outstanding Shares
When, as a result of the conversion of the shares of Series A, Series B and
Series C Preferred Stock to shares of Common Stock, no such shares of Preferred
Stock remain outstanding (a "Full Conversion Event"), the Board of Directors
may, at its discretion and without a vote of the stockholders of this
corporation, cause the modification of Article 2 hereof to (i) cause the
elimination of the provisions of this Restated Certificate of Incorporation that
are no longer operative and in effect by reason of such Full Conversion Event,
including Sections 4.1 through 4.5, (ii) delete this Section 4.6, by providing
for the filing of the applicable amendment or restatement to this Restated
Certificate of Incorporation, and (iii) make such clerical amendments as are
appropriate to effectuate any amendments to the provisions of this Restated
Certificate of Incorporation that become effective upon a Full Conversion Event.
ARTICLE 5. BYLAWS
Subject to Sections 4.3 and 4.4, the Board of Directors shall have the
power to adopt, amend or repeal the Bylaws for this corporation, subject to the
power of the stockholders to amend or repeal such Bylaws. Subject to Sections
4.3 and 4.4, the stockholders shall also have the power to adopt, amend or
repeal the Bylaws for this corporation.
ARTICLE 6. DIRECTORS
Following a Full Conversion Event, the number of Directors of this
corporation shall be determined, and the Directors of this corporation shall be
elected and removed from office, as provided in this Section 6.1.
The number of Directors of this corporation shall be determined in the
manner provided by the Bylaws and may be increased or decreased from time to
time in the manner provided therein. Prior to the first annual election of
Directors following such a Full Conversion Event, unless a Director earlier
dies, resigns or is removed, his or her term of office shall expire at the next
annual meeting of stockholders. At the first annual election of Directors
following such a Full Conversion Event, the Board shall be divided into three
classes, with said classes to be as equal in number as may be possible, with any
Director or Directors in excess of the number divisible by three being assigned
to Class 3 and Class 2, as the case may be. At the first election of Directors
to such classified Board, each Class 1 Director shall be elected to serve until
the next ensuing annual meeting of stockholders, each Class 2 Director shall be
elected to serve until the second ensuing annual meeting of stockholders and
each Class 3 Director shall be elected to serve until the third ensuing annual
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meeting of stockholders. At each annual meeting of stockholders following the
meeting at which the Board is initially classified, the number of Directors
equal to the number of Directors in the class whose term expires at the time of
such meeting shall be elected to serve until the third ensuing annual meeting of
stockholders. Notwithstanding any of the foregoing provisions of this Article,
Directors shall serve until their successors are elected and qualified or until
their earlier death, resignation or removal from office, or until there is a
decrease in the number of Directors.
The Directors of this corporation may be removed only for cause; such
removal shall be in the manner provided by the Bylaws.
ARTICLE 7. PREEMPTIVE RIGHTS
Preemptive rights shall not exist with respect to shares of stock or
securities convertible into shares of stock of this corporation.
ARTICLE 8. CUMULATIVE VOTING
The right to cumulate votes in the election of directors shall not exist
with respect to shares of stock of this corporation.
ARTICLE 9. AMENDMENTS TO CERTIFICATE OF INCORPORATION
This corporation reserves the right to amend or repeal any of the
provisions contained in this Restated Certificate of Incorporation in any manner
now or hereafter permitted by law, and the rights of the stockholders of this
corporation are granted subject to this reservation. Following a Full Conversion
Event, the provisions contained in this Restated Certificate of Incorporation
shall only be amended as follows:
9.1. Supermajority Voting
Except as provided in Section 9.2 or Section 9.3, the following Sections
and subsections may be amended or repealed only upon the affirmative vote of the
holders of at least two-thirds of the outstanding shares and, to the extent, if
any, provided by resolution adopted by the Board of Directors authorizing the
issuance of a class or series of Common Stock or Preferred Stock, by the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of such class or series, voting as a separate voting group:
Article 6 ("Directors")
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Article 9 ("Amendments to Certificate of Incorporation").
Article 11 ("Special Voting Requirements")
Article 12 ("Special Meetings of Stockholders")
9.2. Majority Voting
Notwithstanding the provisions of Section 9.1, and except as provided in
Section 9.3, an amendment or repeal of a Section identified in Section 9.1 that
is approved by a majority of the Continuing Directors (as defined in Section
11.1), voting separately and as a subclass of Directors, shall require the
affirmative vote of the holders of at least a majority of the outstanding shares
entitled to vote thereon and, to the extent, if any, provided by resolution
adopted by the Board authorizing the issuance of a class or series of Common
Stock or Preferred Stock, by the affirmative vote of the holders of at least a
majority of the outstanding shares of such class or series, voting as a separate
voting group.
9.3. No Shareholder Vote
Notwithstanding the provisions of Section 9.1 or 9.2, if the amendment or
repeal of any Section not identified in Section 9.1 shall have been approved by
a majority of the Continuing Directors, voting separately and as a subclass of
Directors, and if such amendment or repeal is not otherwise required to be
approved by this corporation's stockholders pursuant to the provisions of the
DGCL or of this Restated Certificate of Incorporation other than this Article 9,
then no vote of the stockholders of this corporation shall be required for
approval of such amendment or repeal.
This corporation reserves the right to amend or repeal any of the
provisions contained in this Restated Certificate of Incorporation in any manner
now or hereafter permitted by law, and the rights of the stockholders of this
corporation are granted subject to this reservation.
ARTICLE 10. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the DGCL, as it exists on the date hereof or may
hereafter be amended, permits the limitation or elimination of the liability of
directors, a director of this corporation shall not be liable to this
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. Any amendment to or repeal of this Article 10 shall not
adversely affect any right or protection of a
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director of this corporation for or with respect to any acts or omissions of
such director occurring prior to such amendment or repeal.
ARTICLE 11. SPECIAL VOTING REQUIREMENTS
Following a Full Conversion Event, in addition to any affirmative vote
required by law, by this Restated Certificate of Incorporation or otherwise, any
"Business Combination" (as hereinafter defined) involving this corporation shall
be subject to approval in the manner set forth in this Article 11.
11.1. Definitions
For the purposes of this Article 11:
(a) "Business Combination" means (i) a merger, share exchange or
consolidation of this corporation or any of its Subsidiaries with any other
corporation or entity; (ii) the sale, lease, exchange, mortgage, pledge,
transfer or other disposition or encumbrance, whether in one transaction or a
series of transactions, by this corporation or any of its Subsidiaries of all or
a substantial part of this corporation's assets otherwise than in the usual and
regular course of business; or (iii) any agreement, contract or other
arrangement providing for any of the foregoing transactions.
(b) "Continuing Director" means any member of the Board who was a
member of the Board on May 1, 1999 or who is elected to the Board after May 1,
1999 upon the recommendation of a majority of the Continuing Directors voting
separately and as a subclass of Directors on such recommendation.
(c) "Subsidiary" means a domestic or foreign corporation, a majority
of the outstanding voting shares of which are owned, directly or indirectly, by
this corporation.
11.2. Vote Required for Business Combinations
11.2.1. Supermajority Vote
Except as provided in subsections 11.2.2 and 11.2.3, the affirmative
vote of the holders of not less than two-thirds of the outstanding shares
entitled to vote thereon and, to the extent, if any, provided by resolution
adopted by the Board authorizing the issuance of a class or series of Common
Stock or Preferred Stock, the affirmative vote of the holders of not less than
two-thirds of the outstanding shares of such class or series, voting as a
separate
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voting group, shall be required for the adoption or authorization of a Business
Combination.
11.2.2. Majority Vote
Notwithstanding subsection 11.2.1, if a Business Combination shall
have been approved by a majority of the Continuing Directors, voting separately
and as a subclass of Directors, and if such Business Combination is otherwise
required to be approved by this corporation's stockholders pursuant to the
provisions of the DGCL or of this Restated Certificate of Incorporation other
than this Article 11, then the affirmative vote of the holders of not less than
a majority of the outstanding shares entitled to vote thereon and, to the
extent, if any, provided by resolution adopted by the Board authorizing the
issuance of a class or series of Common Stock or Preferred Stock, the
affirmative vote of the holders of not less than a majority of the outstanding
shares of such class or series, voting as a separate voting group, shall be
required for the adoption or authorization of such Business Combination.
11.2.3. No Shareholder Vote
Notwithstanding subsection 11.2.1 or 11.2.2, if a Business Combination
shall have been approved by a majority of the Continuing Directors, voting
separately and as a subclass of Directors, and if such Business Combination is
not otherwise required to be approved by this corporation's stockholders
pursuant to the provisions of the DGCL or of this Restated Certificate of
Incorporation other than this Article 11, then no vote of the stockholders of
this corporation shall be required for approval of such Business Combination.
ARTICLE 12. SPECIAL MEETINGS OF STOCKHOLDERS
Following a Full Conversion Event, special meetings of the stockholders
shall be called in the manner set forth in this Article 12.
The Chairman of the Board, the President or the Board may call special
meetings of the stockholders for any purpose. Further, a special meeting of the
stockholders shall be held if the holders of not less than twenty-five percent
(25%) of all the votes entitled to be cast on any issue proposed to be
considered at such special meeting have dated, signed and delivered to the
Secretary of this corporation no later than 20 days prior to the date of such
meeting one or more written demands for such meeting, describing the purpose or
purposes for which it is to be held.
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[THIS SPACE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, the undersigned has executed this document and affirms,
under penalties of perjury, that the statements herein are true and that this
instrument is the act and deed of WatchGuard Technologies, Inc. as of this
______ day of ___________, 1999.
WATCHGUARD TECHNOLOGIES, INC.
By /s/ Christopher G. Slatt
--------------------------------------
Christopher G. Slatt, President and CEO
ATTEST:
/s/ Steven N. Moore
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Steven N. Moore, Secretary
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EXHIBIT 3.2
RESTATED BYLAWS
OF
WATCHGUARD TECHNOLOGIES, INC.
Originally adopted on May 7, 1997 and amended on May 26, 1999
Amendments are listed on p. i
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
AMENDMENTS
<TABLE>
<CAPTION>
Date of
Section Effect of Amendment Amendment
------- ------------------- ---------
<S> <C> <C>
All Restated in its entirety May 26, 1999
------- ------------------------ ------------
</TABLE>
<PAGE>
CONTENTS
<TABLE>
<C> <S> <C>
SECTION 1. OFFICES............................................................. 1
SECTION 2. STOCKHOLDERS........................................................ 1
2.1 Annual Meeting.............................................. 1
2.2 Special Meetings............................................ 1
2.3 Place of Meeting............................................ 2
2.4 Notice of Meeting........................................... 2
2.5 Business for Stockholders Meetings.......................... 2
2.5.1 Business at Annual Meetings.......................... 2
2.5.2 Business at Special Meetings......................... 3
2.5.3 Notice to Corporation................................ 3
2.6 Waiver of Notice............................................ 3
2.6.1 Waiver in Writing.................................... 3
2.6.2 Waiver by Attendance................................. 4
2.7 Fixing of Record Date for Determining Stockholders.......... 4
2.7.1 Meetings............................................. 4
2.7.2 Consent to Corporate Action Without a Meeting........ 4
2.7.3 Dividends, Distributions and Other Rights............ 5
2.8 Voting List................................................. 5
2.9 Quorum...................................................... 5
2.10 Manner of Acting............................................ 6
2.11 Proxies..................................................... 6
2.11.1 Appointment......................................... 6
2.11.2 Delivery to Corporation; Duration................... 7
2.12 Voting of Shares............................................ 7
2.13 Voting for Directors........................................ 7
2.14 Action by Stockholders Without a Meeting.................... 7
2.15 Inspectors of Election...................................... 8
2.15.1 Appointment................................................. 8
2.15.2 Duties...................................................... 8
SECTION 3. BOARD OF DIRECTORS.................................................. 9
3.1 General Powers.............................................. 9
3.2 Number and Tenure........................................... 9
3.3 Nomination and Election..................................... 9
3.3.1 Nomination........................................... 9
3.3.2 Election............................................. 10
3.4 Annual and Regular Meetings................................. 11
</TABLE>
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<TABLE>
<C> <S> <C>
3.5 Special Meetings............................................ 11
3.6 Meetings by Telephone....................................... 11
3.7 Notice of Special Meetings.................................. 11
3.7.1 Personal Delivery.................................... 11
3.7.2 Delivery by Mail..................................... 12
3.7.3 Delivery by Private Carrier.......................... 12
3.7.4 Facsimile Notice..................................... 12
3.7.5 Delivery by Telegraph................................ 12
3.7.6 Oral Notice.......................................... 12
3.8 Waiver of Notice............................................ 12
3.8.1 In Writing........................................... 12
3.8.2 By Attendance........................................ 13
3.9 Quorum...................................................... 13
3.10 Manner of Acting............................................ 13
3.11 Presumption of Assent....................................... 13
3.12 Action by Board or Committees Without a Meeting............. 13
3.13 Resignation................................................. 14
3.14 Removal..................................................... 14
3.15 Vacancies................................................... 14
3.16 Committees.................................................. 14
3.16.1 Creation and Authority of Committees................ 14
3.16.2 Audit Committee..................................... 15
3.16.3 Compensation Committee.............................. 15
3.16.4 Nominating and Organization Committee............... 16
3.16.5 Minutes of Meetings................................. 16
3.16.6 Quorum and Manner of Acting......................... 16
3.16.7 Resignation......................................... 16
3.16.8 Removal............................................. 16
3.17 Compensation................................................ 17
SECTION 4. OFFICERS............................................................ 17
4.1 Number...................................................... 17
4.2 Election and Term of Office................................. 17
4.3 Resignation................................................. 17
4.4 Removal..................................................... 18
4.5 Vacancies................................................... 18
4.6 Chairman of the Board....................................... 18
4.7 President................................................... 18
4.8 Vice President.............................................. 18
4.9 Secretary................................................... 19
4.10 Treasurer................................................... 19
4.11 Salaries.................................................... 19
</TABLE>
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<PAGE>
<TABLE>
<C> <S> <C>
SECTION 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS............................... 19
5.1 Contracts................................................... 19
5.2 Loans to the Corporation.................................... 20
5.3 Checks, Drafts, Etc......................................... 20
5.4 Deposits.................................................... 20
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER.......................... 20
6.1 Issuance of Shares.......................................... 20
6.2 Certificates for Shares..................................... 20
6.3 Stock Records............................................... 21
6.4 Restriction on Transfer..................................... 21
6.5 Transfer of Shares.......................................... 21
6.6 Lost or Destroyed Certificates.............................. 22
6.7 Shares of Another Corporation............................... 22
SECTION 7. BOOKS AND RECORDS................................................... 22
SECTION 8. ACCOUNTING YEAR..................................................... 22
SECTION 9. SEAL................................................................ 22
SECTION 10. INDEMNIFICATION.................................................... 22
10.1 Right to Indemnification.................................... 22
10.2 Right of Indemnitee to Bring Suit........................... 23
10.3 Nonexclusivity of Rights.................................... 24
10.4 Insurance, Contracts and Funding............................ 24
10.5 Indemnification of Employees and Agents of the Corporation.. 24
10.6 Persons Serving Other Entities.............................. 25
10.7 Procedures for the Submission of Claims..................... 25
SECTION 11. AMENDMENTS OR REPEAL............................................... 25
</TABLE>
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<PAGE>
BYLAWS
OF
WATCHGUARD TECHNOLOGIES, INC.
SECTION 1. OFFICES
The principal office of the corporation shall be located at its principal
place of business or such other place as the Board of Directors (the "Board")
may designate. The corporation may have such other offices, either within or
without the State of Delaware, as the Board may designate or as the business of
the corporation may require from time to time.
SECTION 2. STOCKHOLDERS
2.1 Annual Meeting
The annual meeting of the stockholders shall be held the first Thursday in
May in each year at the principal office of the corporation or such other place
designated by the Board for the purpose of electing Directors and transacting
such other business as may properly come before the meeting. If the day fixed
for the annual meeting is a legal holiday at the place of the meeting, the
meeting shall be held on the next succeeding business day. If the annual
meeting is not held on the date designated therefor, the Board shall cause the
meeting to be held on such other date as may be convenient.
At any time prior to the commencement of the annual meeting, the Board may
postpone the annual meeting for a period of up to 120 days from the date fixed
for such meeting in accordance with this subsection 2.1.
2.2 Special Meetings
The Chairman of the Board, the President or the Board may call special
meetings of the stockholders for any purpose. Holders of not less than one-
tenth of all the outstanding shares of the corporation entitled to vote at the
meeting may call special meetings of the stockholders for any purpose by giving
notice to the corporation as specified in subsection 2.4 hereof.
<PAGE>
2.3 Place of Meeting
All meetings shall be held at the principal office of the corporation or at
such other place within or without the State of Delaware designated by the
Board, by any persons entitled to call a meeting hereunder or in a waiver of
notice signed by all the stockholders entitled to notice of the meeting.
2.4 Notice of Meeting
The Chairman of the Board, the President, the Secretary, the Board, or
stockholders calling an annual or special meeting of stockholders as provided
for herein, shall cause to be delivered to each stockholder entitled to notice
of or to vote at the meeting either personally or by mail, not less than 10 nor
more than 60 days before the meeting, written notice stating the place, day and
hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called. Upon written request delivered to the
corporation in accordance with subsection 2.5 hereof by the holders of not less
than the number of outstanding shares of the corporation, the stockholders may
request that the corporation call a special meeting of stockholders. Within 60
days of such a request, it shall be the duty of the Secretary to give notice of
a special meeting of stockholders to be held on such date and at such place and
hour as the Secretary may fix, and if the Secretary shall neglect or refuse to
issue such notice, the person making the request may do so and may fix the date
for such meeting. If such notice is mailed, it shall be deemed delivered when
deposited in the official government mail properly addressed to the stockholder
at such stockholder's address as it appears on the stock transfer books of the
corporation with postage prepaid. If the notice is telegraphed, it shall be
deemed delivered when the content of the telegram is delivered to the telegraph
company. Notice given in any other manner shall be deemed delivered when
dispatched to the stockholder's address, telephone number or other number
appearing on the stock transfer records of the corporation.
2.5 Business for Stockholders Meetings
2.5.1 Business at Annual Meetings
In addition to the election of directors, other proper business may be
transacted at an annual meeting of stockholders, provided that such business is
properly brought before such meeting. To be properly brought before an annual
meeting, business must be (a) brought by or at the direction of the Board or (b)
brought before the meeting by a stockholder pursuant to written notice thereof,
in accordance with subsection 2.5.3 hereof, and received by the Secretary not
fewer than 60 nor more than 90 days prior to the date specified in subsection
2.1 hereof for such annual meeting (or if less than 60 days' notice or prior
public disclosure of the date of the annual meeting is given or
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made to the stockholders, not later than the tenth day following the day on
which the notice of the date of the annual meeting was mailed or such public
disclosure was made). No business shall be conducted at any annual meeting of
stockholders except in accordance with this subsection 2.5.1. If the facts
warrant, the Board, or the chairman of an annual meeting of stockholders, may
determine and declare that (a) a proposal does not constitute proper business to
be transacted at the meeting or (b) business was not properly brought before the
meeting in accordance with the provisions of this subsection 2.5.1 and, if it is
so determined in either case, any such business shall not be transacted. The
procedures set forth in this subsection 2.5.1 for business to be properly
brought before an annual meeting by a stockholder are in addition to, and not in
lieu of, the requirements set forth in Rule 14a-8 under Section 14 of the
Securities Exchange Act of 1934, as amended, or any successor provision.
2.5.2 Business at Special Meetings
At any special meeting of the stockholders, only such business as is
specified in the notice of such special meeting given by or at the direction of
the person or persons calling such meeting, in accordance with subsection 2.4
hereof, shall come before such meeting.
2.5.3 Notice to Corporation
Any written notice required to be delivered by a stockholder to the
corporation pursuant to subsection 2.2, subsection 2.4, subsection 2.5.1 or
subsection 2.5.2 hereof must be given, either by personal delivery or by
registered or certified mail, postage prepaid, to the Secretary at the
corporation's principal executive offices. Any such stockholder notice shall
set forth (i) the name and address of the stockholder proposing such business;
(ii) a representation that the stockholder is entitled to vote at such meeting
and a statement of the number of shares of the corporation that are beneficially
owned by the stockholder; (iii) a representation that the stockholder intends to
appear in person or by proxy at the meeting to propose such business; and (iv)
as to each matter the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting, the language of the
proposal (if appropriate), and any material interest of the stockholder in such
business.
2.6 Waiver of Notice
2.6.1 Waiver in Writing
Whenever any notice is required to be given to any stockholder under the
provisions of these Bylaws, the Certificate of Incorporation or the General
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Corporation Law of the State of Delaware, as now or hereafter amended (the
"DGCL"), a waiver thereof in writing, signed by the person or persons entitled
to such notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
2.6.2 Waiver by Attendance
The attendance of a stockholder at a meeting shall constitute a waiver of
notice of such meeting, except when a stockholder attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
2.7 Fixing of Record Date for Determining Stockholders
2.7.1 Meetings
For the purpose of determining stockholders entitled to notice of and to
vote at any meeting of stockholders or any adjournment thereof, the Board may
fix a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board, and which record date
shall be not more than 60 (or the maximum number permitted by applicable law)
nor less than 10 days before the date of such meeting. If no record date is
fixed by the Board, the record date for determining stockholders entitled to
notice of and to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled
to notice of and to vote at the meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board may fix a new
record date for the adjourned meeting.
2.7.2 Consent to Corporate Action Without a Meeting
For the purpose of determining stockholders entitled to consent to
corporate action in writing without a meeting, the Board may fix a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board, and which date shall not be more than
10 (or the maximum number permitted by applicable law) days after the date upon
which the resolution fixing the record date is adopted by the Board. If no
record date has been fixed by the Board, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board is required by Chapter 1 of the DGCL,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the corporation by delivery
to its registered office in the State of Delaware, its principal place of
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business, or an officer or agent of the corporation having custody of the book
in which proceedings of meetings of stockholders are recorded. Delivery made to
the corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board and prior action by the Board is required by Chapter 1 of the DGCL,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting shall be at the close of business on the day
on which the Board adopts the resolution taking such prior action.
2.7.3 Dividends, Distributions and Other Rights
For the purpose of determining stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted, and which record
date shall be not more than 60 (or the maximum number permitted by applicable
law) days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board adopts the resolution relating thereto.
2.8 Voting List
At least 10 days before each meeting of stockholders, a complete list of
the stockholders entitled to vote at such meeting, or any adjournment thereof,
shall be made, arranged in alphabetical order, with the address of and number of
shares held by each stockholder. This list shall be open to examination by any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of 10 days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. This list shall also be produced and kept at such meeting for
inspection by any stockholder who is present.
2.9 Quorum
A majority of the outstanding shares of the corporation entitled to vote,
present in person or represented by proxy at the meeting, shall constitute a
quorum at a meeting of the stockholders; provided, that where a separate vote by
a class or classes is required, a majority of the outstanding shares of such
class or classes, present in person or represented by proxy at the meeting,
shall constitute a quorum entitled to take action with respect to that vote on
that matter. If less than a majority of the outstanding shares entitled to vote
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further
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notice. If a quorum is present or represented at a reconvened meeting following
such an adjournment, any business may be transacted that might have been
transacted at the meeting as originally called. The stockholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
2.10 Manner of Acting
In all matters other than the election of Directors, if a quorum is
present, the affirmative vote of the majority of the outstanding shares present
in person or represented by proxy at the meeting and entitled to vote on the
subject matter shall be the act of the stockholders, unless the vote of a
greater number is required by these Bylaws, the Certificate of Incorporation or
the DGCL. Where a separate vote by a class or classes is required, if a quorum
of such class or classes is present, the affirmative vote of the majority of
outstanding shares of such class or classes present in person or represented by
proxy at the meeting shall be the act of such class or classes. Directors shall
be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
Directors.
2.11 Proxies
2.11.1 Appointment
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for such stockholder by proxy. Such
authorization may be accomplished by the stockholder or such stockholder's
authorized officer, director, employee or agent executing a writing or causing
his or her signature to be affixed to such writing by any reasonable means,
including facsimile signature, or (b) transmitting or authorizing the
transmission of a telegram, cablegram or other means of electronic transmission
to the intended holder of the proxy or to a proxy solicitation firm, proxy
support service or similar agent duly authorized by the intended proxy holder to
receive such transmission; provided, that any such telegram, cablegram or other
electronic transmission must either set forth or be accompanied by information
from which it can be determined that the telegram, cablegram or other electronic
transmission was authorized by the stockholder. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission
by which a stockholder has authorized another person to act as proxy for such
stockholder may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile telecommunication
or other reproduction shall be a complete reproduction of the entire original
writing or transmission.
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2.11.2 Delivery to Corporation; Duration
A proxy shall be filed with the Secretary before or at the time of the
meeting or the delivery to the corporation of the consent to corporate action in
writing. A proxy shall become invalid three years after the date of its
execution unless otherwise provided in the proxy. A proxy with respect to a
specified meeting shall entitle the holder thereof to vote at any reconvened
meeting following adjournment of such meeting but shall not be valid after the
final adjournment thereof.
2.12 Voting of Shares
Each outstanding share entitled to vote with respect to the subject matter
of an issue submitted to a meeting of stockholders shall be entitled to one vote
upon each such issue.
2.13 Voting for Directors
Each stockholder entitled to vote at an election of Directors may vote, in
person or by proxy, the number of shares owned by such stockholder for as many
persons as there are Directors to be elected and for whose election such
stockholder has a right to vote.
2.14 Action by Stockholders Without a Meeting
Subject to the following paragraph, any action that is properly brought
before the stockholders by or at the direction of the Board of Directors and
that could be taken at an annual or special meeting of stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall (a) be signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted (as determined
in accordance with subsection 2.7.2 hereof) and (b) be delivered to the
corporation by delivery to its registered office in the State of Delaware, its
principal place of business, or an officer or agent of the corporation having
custody of the records of proceedings of meetings of stockholders. Delivery
made to the corporation's registered office shall be by hand or by certified
mail or registered mail, return receipt requested. Every written consent shall
bear the date of signature of each stockholder who signs the consent and no
written consent shall be effective to take the corporate action referred to
therein unless written consents signed by the requisite number of stockholders
entitled to vote with respect to the subject matter thereof are delivered to the
corporation, in the manner required by this Section 2, within 60 (or the maximum
number permitted by applicable law) days of the earliest dated consent delivered
to the corporation in the manner required by this
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Section 2. The validity of any consent executed by a proxy for a stockholder
pursuant to a telegram, cablegram or other means of electronic transmission
transmitted to such proxy holder by or upon the authorization of the stockholder
shall be determined by or at the direction of the Secretary. A written record of
the information upon which the person making such determination relied shall be
made and kept in the records of the proceedings of the stockholders. Prompt
notice of the taking of the corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing. Any such consent shall be inserted in the minute book as
if it were the minutes of a meeting of the stockholders.
2.15 Inspectors of Election
2.15.1 Appointment
In advance of any meeting of stockholders, the Board shall appoint one or
more persons to act as inspectors of election at such meeting and to make a
written report thereof. The Board may designate one or more persons to serve as
alternate inspectors to serve in place of any inspector who is unable or fails
to act. If no inspector or alternate is able to act at a meeting of
stockholders, the chairman of such meeting shall appoint one or more persons to
act as inspector of elections at such meeting.
2.15.2 Duties
The inspectors of election shall:
(a) ascertain the number of shares of the corporation outstanding and
the voting power of each such share;
(b) determine the shares represented at the meeting and the validity
of proxies and ballots;
(c) count all votes and ballots;
(d) determine and retain for a reasonable period of time a record of
the disposition of any challenges made to any determination by them; and
(e) certify their determination of the number of shares represented at
the meeting and their count of the votes and ballots.
The validity of any proxy or ballot shall be determined by the inspectors
of election in accordance with the applicable provisions of these Bylaws and the
DGCL as then in effect. In determining the validity of any proxy transmitted by
telegram, cablegram or other electronic transmission, the inspectors shall
record in writing the
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information upon which they relied in making such determination. Each inspector
of elections shall, before entering upon the discharge of his or her duties,
take and sign an oath to faithfully execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors of
election may appoint or retain other persons or entities to assist them in the
performance of their duties.
SECTION 3. BOARD OF DIRECTORS
3.1 General Powers
The business and affairs of the corporation shall be managed by the Board.
3.2 Number and Tenure
The Board shall be composed of not less than five nor more than
nine Directors, the specific number to be set by resolution of the Board,
provided that the Board may be less than five until vacancies are filled. No
decrease in the number of Directors shall have the effect of shortening the term
of any incumbent Director.
The Board shall be divided into three classes, with said classes to be as
equal in number as may be possible. At the first election of Directors to such
classified Board, each Class 1 Director shall be elected to serve until the next
ensuing annual meeting of stockholders, each Class 2 Director shall be elected
to serve until the second ensuing annual meeting of stockholders and each Class
3 Director shall be elected to serve until the third ensuing annual meeting of
stockholders. At each annual meeting of stockholders following the meeting at
which the Board is initially classified, the number of Directors equal to the
number of Directors in the class whose term expires at the time of such meeting
shall be elected to serve until the third ensuing annual meeting of
stockholders. Notwithstanding any of the foregoing provisions of this
subsection 3.2, Directors shall serve until their successors are elected and
qualified or until their earlier death, resignation or removal from office or
until there is a decrease in the number of Directors. Directors need not be
stockholders of the corporation or residents of the State of Delaware and need
not meet any other qualifications.
3.3 Nomination and Election
3.3.1 Nomination
Only persons who are nominated in accordance with the following procedures
shall be eligible for election as Directors. Nominations for the election of
Directors may be made (a) by or at the direction of the Board or (b) by any
stockholder of record entitled to vote for the election of Directors at such
meeting; provided,
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however, that a stockholder may nominate persons for election as Directors only
if written notice (in accordance with subsection 2.5.3 hereof) of such
stockholder's intention to make such nominations is received by the Secretary
not later than (i) with respect to an election to be held at an annual meeting
of the stockholders, not fewer than 60 nor more than 90 days prior to the date
specified in subsection 2.1 hereof for such annual meeting (or if less than 60
days' notice or prior public disclosure of the date of the annual meeting is
given or made to the stockholders, not later than the tenth day following the
day on which such notice of the date of the annual meeting was mailed or such
public disclosure was made) and (ii) with respect to an election to be held at a
special meeting of the stockholders for the election of Directors, the close of
business on the seventh business day following the date on which notice of such
meeting is first given to stockholders. Any such stockholder's notice shall set
forth (a) the name and address of the stockholder who intends to make a
nomination; (b) a representation that the stockholder is entitled to vote at
such meeting and a statement of the number of shares of the corporation that are
beneficially owned by the stockholder; (c) a representation that the stockholder
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; (d) as to each person the stockholder proposes
to nominate for election or re-election as a Director, the name and address of
such person and such other information regarding such nominee as would be
required in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had such nominee been nominated by the Board,
and a description of any arrangements or understandings, between the stockholder
and such nominee and any other persons (including their names), pursuant to
which the nomination is to be made; and (e) the consent of each such nominee to
serve as a Director if elected. If the facts warrant, the Board, or the chairman
of a stockholders' meeting at which Directors are to be elected, may determine
and declare that a nomination was not made in accordance with the foregoing
procedure and, if it is so determined, the defective nomination shall be
disregarded. The right of stockholders to make nominations pursuant to the
foregoing procedure is subject to the superior rights, if any, of the holders of
any class or series of stock having a preference over the common stock. The
procedures set forth in this subsection 3.3 for nomination for the election of
Directors by stockholders are in addition to, and not in limitation of, any
procedures now in effect or hereafter adopted by or at the direction of the
Board or any committee thereof.
3.3.2 Election
At each election of Directors, the persons receiving the greatest number of
votes, up to the number of Directors to be elected, shall be the Directors.
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3.4 Annual and Regular Meetings
An annual Board meeting shall be held without notice immediately after and
at the same place as the annual meeting of stockholders. By resolution, the
Board or any committee designated by the Board may specify the time and place
either within or without the State of Delaware for holding regular meetings
thereof without other notice than such resolution.
3.5 Special Meetings
Special meetings of the Board or any committee appointed by the Board may
be called by or at the request of the Chairman of the Board, the Chief Executive
Officer, the President, the Secretary or, in the case of special Board meetings,
any Director, and, in the case of any special meeting of any committee appointed
by the Board, by the Chairman thereof. The person or persons authorized to call
special meetings may fix any place either within or without the State of
Delaware as the place for holding any special meeting called by them.
3.6 Meetings by Telephone
Members of the Board or any committee designated by the Board may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation by such means
shall constitute presence in person at a meeting.
3.7 Notice of Special Meetings
Notice of a special Board or committee meeting stating the place, day and
hour of the meeting shall be given to a Director in writing or orally by
telephone or in person. Neither the business to be transacted at, nor the
purpose of, any special meeting need be specified in the notice of such meeting.
3.7.1 Personal Delivery
If notice is given by personal delivery, the notice shall be effective if
delivered to a Director at least two days before the meeting.
3.7.2 Delivery by Mail
If notice is delivered by mail, the notice shall be deemed effective if
deposited in the official government mail properly addressed to a Director at
his or her address shown on the records of the corporation with postage prepaid
at least five days before the meeting.
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3.7.3 Delivery by Private Carrier
If notice is given by private carrier, the notice shall be deemed effective
when dispatched to a Director at his or her address shown on the records of the
corporation at least three days before the meeting.
3.7.4 Facsimile Notice
If notice is delivered by wire or wireless equipment that transmits a
facsimile of the notice, the notice shall be deemed effective when dispatched at
least two days before the meeting to a Director at his or her telephone number
or other number appearing on the records of the corporation.
3.7.5 Delivery by Telegraph
If notice is delivered by telegraph, the notice shall be deemed effective
if the content thereof is delivered to the telegraph company at least two days
before the meeting for delivery to a Director at his or her address shown on the
records of the corporation.
3.7.6 Oral Notice
If notice is delivered orally, by telephone or in person, the notice shall
be deemed effective if personally given to the Director at least two days before
the meeting.
3.8 Waiver of Notice
3.8.1 In Writing
Whenever any notice is required to be given to any Director under the
provisions of these Bylaws, the Certificate of Incorporation or the DGCL, a
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the Board or any
committee appointed by the Board need be specified in the waiver of notice of
such meeting.
3.8.2 By Attendance
The attendance of a Director at a Board or committee meeting shall
constitute a waiver of notice of such meeting, except when a Director attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened.
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3.9 Quorum
A majority of the total number of Directors fixed by or in the manner
provided in these Bylaws or, if vacancies exist on the Board, a majority of the
total number of Directors then serving on the Board, provided, however, that
such number may be not less than one-third of the total number of Directors
fixed by or in the manner provided in these Bylaws, shall constitute a quorum
for the transaction of business at any Board meeting. If less than a majority
are present at a meeting, a majority of the Directors present may adjourn the
meeting from time to time without further notice.
3.10 Manner of Acting
The act of the majority of the Directors present at a Board or committee
meeting at which there is a quorum shall be the act of the Board or committee,
unless the vote of a greater number is required by these Bylaws, the Certificate
of Incorporation or the DGCL.
3.11 Presumption of Assent
A Director of the corporation present at a Board or committee meeting at
which action on any corporate matter is taken shall be presumed to have assented
to the action taken unless his or her dissent is entered in the minutes of the
meeting, or unless such Director files a written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof, or
forwards such dissent by registered mail to the Secretary of the corporation
immediately after the adjournment of the meeting. A Director who voted in favor
of such action may not dissent.
3.12 Action by Board or Committees Without a Meeting
Any action that could be taken at a meeting of the Board or of any
committee appointed by the Board may be taken without a meeting if a written
consent setting forth the action so taken is signed by each of the Directors or
by each committee member. Any such written consent shall be inserted in the
minute book as if it were the minutes of a Board or a committee meeting.
3.13 Resignation
Any Director may resign at any time by delivering written notice to the
Chairman of the Board, the President, the Secretary or the Board, or to the
registered office of the corporation. Any such resignation shall take effect at
the time specified therein or, if the time is not specified, upon delivery
thereof and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
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3.14 Removal
At a meeting of stockholders called expressly for that purpose, one or more
members of the Board (including the entire Board) may be removed, with or
without cause, by a vote of the holders of a majority of the shares then
entitled to vote on the election of Directors.
3.15 Vacancies
Any vacancy occurring on the Board may be filled by the affirmative vote of
a majority of the remaining Directors though less than a quorum of the Board. A
Director elected to fill a vacancy shall be elected for the unexpired term of
his or her predecessor in office. Any directorship to be filled by reason of an
increase in the number of Directors may be filled by the Board for a term of
office continuing only until the next election of the class for which such
Director shall have been chosen, and until his or her successor shall be elected
and qualify.
3.16 Committees
3.16.1 Creation and Authority of Committees
The Board may, by resolution passed by a majority of the number of
Directors fixed by or in the manner provided in these Bylaws, appoint standing
or temporary committees, each committee to consist of one or more Directors of
the corporation. The Board may designate one or more Directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board establishing
such committee or as otherwise provided in these Bylaws, shall have and may
exercise all the powers and authority of the Board in the management of the
business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers that require it; but no such committee
shall have the power or authority in reference to (a) amending the Certificate
of Incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board as provided in Section 151(a) of the DGCL, fix the designations,
preferences or rights of such shares to the extent permitted under Section 141
of the DGCL), (b) adopting an agreement of merger or consolidation under Section
251 or 252 of the DGCL, (c) recommending to the stockholders the sale, lease or
exchange or other disposition of all or substantially all the property and
assets of the corporation, (d) recommending
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to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (e) amending these Bylaws; and, unless expressly provided by
resolution of the Board, no such committee shall have the power or authority to
declare a dividend, to authorize the issuance of stock or to adopt a certificate
of ownership and merger pursuant to Section 253 of the DGCL.
3.16.2 Audit Committee
In addition to any committees appointed pursuant to this subsection 3.16,
there shall be an Audit Committee, appointed annually by the Board, consisting
of at least two Directors who are not members of management. It shall be the
responsibility of the Audit Committee to review the scope and results of the
annual independent audit of books and records of the corporation, to review
compliance with all corporate policies which have been approved by the Board and
to discharge such other responsibilities as may from time to time be assigned to
it by the Board. The Audit Committee shall meet at such times and places as the
members deem advisable, and shall make such recommendations to the Board as they
consider appropriate.
3.16.3 Compensation Committee
The Board may, in its discretion, designate a Compensation Committee
consisting of one or more Directors as it may from time to time determine. The
duties of the Compensation Committee shall consist of the following: (a) to
establish and review periodically, but not less than annually, the compensation
of the officers of the corporation and to make recommendations concerning such
compensation to the Board; (b) to consider incentive compensation plans for the
employees of the corporation; (c) to carry out the duties assigned to the
Compensation Committee under any stock option plan or other plan approved by the
corporation; (d) to consult with the President concerning any compensation
matters deemed appropriate by the President or the Compensation Committee; and
(e) to perform such other duties as shall be assigned to the Compensation
Committee by the Board.
3.16.4 Nominating and Organization Committee
The Board may, in its discretion, designate a Nominating and Organization
Committee consisting of one or more Directors as it may from time to time
determine. The duties of the Nominating and Organization Committee shall
consist of the following: (a) to report and make recommendations to the Board
on the size and composition of the Board and nominees for Directors; (b) to
evaluate the performance of the officers of the corporation and together with
management, select and recommend to the Board appropriate individuals for
election, appointment and promotion as officers of the corporation and ensure
the continuity of capable management; (c) to report and make recommendations to
the Board on the
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organization of the corporation; and (d) to perform such other duties as shall
be assigned to the Nominating and Organization Committee by the Board.
3.16.5 Minutes of Meetings
All committees so appointed shall keep regular minutes of their meetings
and shall cause them to be recorded in books kept for that purpose.
3.16.6 Quorum and Manner of Acting
A majority of the number of Directors composing any committee of the Board,
as established and fixed by resolution of the Board, shall constitute a quorum
for the transaction of business at any meeting of such committee but, if less
than a majority are present at a meeting, a majority of such Directors present
may adjourn the meeting from time to time without further notice. The act of a
majority of the members of a committee present at a meeting at which a quorum is
present shall be the act of such committee.
3.16.7 Resignation
Any member of any committee may resign at any time by delivering written
notice to the Chairman of the Board, the President, the Secretary, the Board or
the Chairman of such committee. Any such resignation shall take effect at the
time specified therein or, if the time is not specified, upon delivery thereof
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
3.16.8 Removal
The Board may remove from office any member of any committee elected or
appointed by it, but only by the affirmative vote of not less than a majority of
the number of Directors fixed by or in the manner provided in these Bylaws.
3.17 Compensation
By Board resolution, Directors and committee members may be paid their
expenses, if any, of attendance at each Board or committee meeting, a fixed sum
for attendance at each Board or committee meeting or a stated salary as Director
or a committee member, or a combination of the foregoing. No such payment shall
preclude any Director or committee member from serving the corporation in any
other capacity and receiving compensation therefor.
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SECTION 4. OFFICERS
4.1 Number
The officers of the corporation shall be a President, a Secretary and a
Treasurer, each of whom shall be elected by the Board. One or more Vice
Presidents and such other officers and assistant officers, including a Chairman
of the Board, may be elected or appointed by the Board, such officers and
assistant officers to hold office for such period, have such authority and
perform such duties as are provided in these Bylaws or as may be provided by
resolution of the Board. Any officer may be assigned by the Board any
additional title that the Board deems appropriate. The Board may delegate to
any officer or agent the power to appoint any such subordinate officers or
agents and to prescribe their respective terms of office, authority and duties.
Any two or more offices may be held by the same person.
4.2 Election and Term of Office
The officers of the corporation shall be elected annually by the Board at
the Board meeting held after the annual meeting of the stockholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as a Board meeting conveniently may be held. Unless an officer
dies, resigns or is removed from office, he or she shall hold office until the
next annual meeting of the Board or until his or her successor is elected.
4.3 Resignation
Any officer may resign at any time by delivering written notice to the
Chairman of the Board, the President, a Vice President, the Secretary or the
Board. Any such resignation shall take effect at the time specified therein or,
if the time is not specified, upon delivery thereof and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
4.4 Removal
Any officer or agent elected or appointed by the Board may be removed by
the Board whenever in its judgment the best interests of the corporation would
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed.
4.5 Vacancies
A vacancy in any office because of death, resignation, removal,
disqualification, creation of a new office or any other cause may be filled by
the
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Board for the unexpired portion of the term, or for a new term established by
the Board.
4.6 Chairman of the Board
If elected, the Chairman of the Board shall perform such duties as shall be
assigned to him or her by the Board from time to time and shall preside over
meetings of the Board and stockholders unless another officer is appointed or
designated by the Board as Chairman of such meeting.
4.7 President
The President shall be the chief executive officer of the corporation
unless some other officer is so designated by the Board, shall preside over
meetings of the Board and stockholders in the absence of a Chairman of the Board
and, subject to the Board's control, shall supervise and control all the assets,
business and affairs of the corporation. The President may sign certificates
for shares of the corporation, deeds, mortgages, bonds, contracts or other
instruments, except when the signing and execution thereof have been expressly
delegated by the Board or by these Bylaws to some other officer or agent of the
corporation or are required by law to be otherwise signed or executed by some
other officer or in some other manner. In general, the President shall perform
all duties incident to the office of President and such other duties as are
prescribed by the Board from time to time.
4.8 Vice President
In the event of the death of the President or his or her inability to act,
the Vice President (or if there is more than one Vice President, the Vice
President who was designated by the Board as the successor to the President, or
if no Vice President is so designated, the Vice President first elected to such
office) shall perform the duties of the President, except as may be limited by
resolution of the Board, with all the powers of and subject to all the
restrictions upon the President. Any Vice President may sign with the Secretary
or any Assistant Secretary certificates for shares of the corporation. Vice
Presidents shall have, to the extent authorized by the President or the Board,
the same powers as the President to sign deeds, mortgages, bonds, contracts or
other instruments. Vice Presidents shall perform such other duties as from time
to time may be assigned to them by the President or the Board.
4.9 Secretary
The Secretary shall be responsible for preparation of minutes of meetings
of the Board and stockholders, maintenance of the corporation's records and
stock registers, and authentication of the corporation's records and shall in
general perform
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all duties incident to the office of Secretary and such other duties as from
time to time may be assigned to him or her by the President or the Board. In the
absence of the Secretary, an Assistant Secretary may perform the duties of the
Secretary.
4.10 Treasurer
If required by the Board, the Treasurer shall give a bond for the faithful
discharge of his or her duties in such amount and with such surety or sureties
as the Board shall determine. The Treasurer shall: have charge and custody of
and be responsible for all funds and securities of the corporation; receive and
give receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in banks,
trust companies or other depositories selected in accordance with the provisions
of these Bylaws; sign certificates for shares of the corporation; and in general
perform all the duties incident to the office of Treasurer and such other duties
as from time to time may be assigned to him or her by the President or the
Board. In the absence of the Treasurer, an Assistant Treasurer may perform the
duties of the Treasurer.
4.11 Salaries
The salaries of the officers shall be fixed from time to time by the Board
or by any person or persons to whom the Board has delegated such authority. No
officer shall be prevented from receiving such salary by reason of the fact that
he or she is also a Director of the corporation.
SECTION 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 Contracts
The Board may authorize any officer or officers, or agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation. Such authority may be general or confined to
specific instances.
5.2 Loans to the Corporation
No loans shall be contracted on behalf of the corporation and no evidences
of indebtedness shall be issued in its name unless authorized by a resolution of
the Board. Such authority may be general or confined to specific instances.
5.3 Checks, Drafts, Etc.
All checks, drafts or other orders for the payment of money, notes or other
evidences of indebtedness issued in the name of the corporation shall be signed
by
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such officer or officers, or agent or agents, of the corporation and in such
manner as is from time to time determined by resolution of the Board.
5.4 Deposits
All funds of the corporation not otherwise employed shall be deposited from
time to time to the credit of the corporation in such banks, trust companies or
other depositories as the Board may select.
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 Issuance of Shares
No shares of the corporation shall be issued unless authorized by the
Board, which authorization shall include the maximum number of shares to be
issued and the consideration to be received for each share.
6.2 Certificates for Shares
Certificates representing shares of the corporation shall be signed by the
Chairman of the Board or a Vice Chairman of the Board, if any, or the President
or a Vice President and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, any of whose signatures may be a facsimile.
The Board may in its discretion appoint responsible banks or trust companies
from time to time to act as transfer agents and registrars of the stock of the
corporation; and, when such appointments shall have been made, no stock
certificate shall be valid until countersigned by one of such transfer agents
and registered by one of such registrars. In case any officer, transfer agent
or registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if such person was such officer, transfer agent or registrar at
the date of issue. All certificates shall include on their face written notice
of any restrictions that may be imposed on the transferability of such shares
and shall be consecutively numbered or otherwise identified.
6.3 Stock Records
The stock transfer books shall be kept at the registered office or
principal place of business of the corporation or at the office of the
corporation's transfer agent or registrar. The name and address of each person
to whom certificates for shares are issued, together with the class and number
of shares represented by each such certificate and the date of issue thereof,
shall be entered on the stock transfer books of the corporation. The person in
whose name shares stand on the books of the
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corporation shall be deemed by the corporation to be the owner thereof for all
purposes.
6.4 Restriction on Transfer
Except to the extent that the corporation has obtained an opinion of
counsel acceptable to the corporation that transfer restrictions are not
required under applicable securities laws, or has otherwise satisfied itself
that such transfer restrictions are not required, all certificates representing
shares of the corporation shall bear a legend on the face of the certificate, or
on the reverse of the certificate if a reference to the legend is contained on
the face, that reads substantially as follows:
"The securities evidenced by this certificate have not been registered
under the Securities Act of 1933 or any applicable state law, and no
interest therein may be sold, distributed, assigned, offered, pledged or
otherwise transferred unless (a) there is an effective registration
statement under such Act and applicable state securities laws covering any
such transaction involving said securities or (b) this corporation receives
an opinion of legal counsel for the holder of these securities (concurred
in by legal counsel for this corporation) stating that such transaction is
exempt from registration or this corporation otherwise satisfies itself
that such transaction is exempt from registration. Neither the offering of
the securities nor any offering materials have been reviewed by any
administrator under the Securities Act of 1933 or any applicable state
law."
6.5 Transfer of Shares
The transfer of shares of the corporation shall be made only on the stock
transfer books of the corporation pursuant to authorization or document of
transfer made by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney-in-fact authorized by power of attorney duly executed and
filed with the Secretary of the corporation. All certificates surrendered to
the corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificates for a like number of shares shall have been
surrendered and canceled.
6.6 Lost or Destroyed Certificates
In the case of a lost, destroyed or mutilated certificate, a new
certificate may be issued therefor upon such terms and indemnity to the
corporation as the Board may prescribe.
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6.7 Shares of Another Corporation
Shares owned by the corporation in another corporation, domestic or
foreign, may be voted by such officer, agent or proxy as the Board may determine
or, in the absence of such determination, by the Chairman of the Board, the Vice
Chairman of the Board, the President or any Vice President of the corporation.
SECTION 7. BOOKS AND RECORDS
The corporation shall keep correct and complete books and records of
account, stock transfer books, minutes of the proceedings of its stockholders
and Board and such other records as may be necessary or advisable.
SECTION 8. ACCOUNTING YEAR
The accounting year of the corporation shall be the calendar year, provided
that if a different accounting year is at any time selected for purposes of
federal income taxes, the accounting year shall be the year so selected.
SECTION 9. SEAL
The seal of the corporation, if any, shall consist of the name of the
corporation, the state of its incorporation and the year of its incorporation.
SECTION 10. INDEMNIFICATION
10.1 Right to Indemnification
Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved (including, without limitation, as a witness) in any
actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she is or was a Director or officer of the corporation or that,
being or having been such a Director or officer or an employee of the
corporation, he or she is or was serving at the request of the corporation as a
Director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as such a Director,
officer, employee or agent or in any other capacity while serving as such a
Director, officer, employee or agent, shall be indemnified and held harmless by
the corporation to the full extent permitted by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the corporation to provide broader
indemnification rights than permitted prior thereto), or by other applicable law
as then in effect, against all expense, liability and
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loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) actually and reasonably incurred or
suffered by such indemnitee in connection therewith and such indemnification
shall continue as to an indemnitee who has ceased to be a Director, officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators; provided, however, that except as provided in
subsection 10.2 hereof with respect to proceedings seeking to enforce rights to
indemnification, the corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized or ratified by the Board.
The right to indemnification conferred in this subsection 10.1 shall be a
contract right and shall include the right to be paid by the corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition (hereinafter an "advancement of expenses"); provided, however, that
if the DGCL requires, an advancement of expenses incurred by an indemnitee in
his or her capacity as a Director or officer (and not in any other capacity in
which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal that such indemnitee is not entitled to be indemnified
for such expenses under this subsection 10.1 or otherwise.
10.2 Right of Indemnitee to Bring Suit
If a claim under subsection 10.1 hereof is not paid in full by the
corporation within 60 days after a written claim has been received by the
corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. The indemnitee shall be presumed
to be entitled to indemnification under this Section 10 upon submission of a
written claim (and, in an action brought to enforce a claim for an advancement
of expenses, where the required undertaking, if any is required, has been
tendered to the corporation), and thereafter the corporation shall have the
burden of proof to overcome the presumption that the indemnitee is not so
entitled. Neither the failure of the corporation (including its Board,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such suit that indemnification of the indemnitee is
proper in the circumstances nor an actual determination by the corporation
(including its Board, independent legal
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counsel or its stockholders) that the indemnitee is not entitled to
indemnification shall be a defense to the suit or create a presumption that the
indemnitee is not so entitled.
10.3 Nonexclusivity of Rights
The rights to indemnification and to the advancement of expenses conferred
in this Section 10 shall not be exclusive of any other right that any person may
have or hereafter acquire under any statute, agreement, vote of stockholders or
disinterested Directors, provisions of the Certificate of Incorporation or these
Bylaws of the corporation or otherwise. Notwithstanding any amendment to or
repeal of this Section 10, any indemnitee shall be entitled to indemnification
in accordance with the provisions hereof with respect to any acts or omissions
of such indemnitee occurring prior to such amendment or repeal.
10.4 Insurance, Contracts and Funding
The corporation may maintain insurance, at its expense, to protect itself
and any Director, officer, employee or agent of the corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the corporation would have the power
to indemnify such person against such expense, liability or loss under the DGCL.
The corporation, without further stockholder approval, may enter into contracts
with any Director, officer, employee or agent in furtherance of the provisions
of this Section 10 and may create a trust fund, grant a security interest or use
other means (including, without limitation, a letter of credit) to ensure the
payment of such amounts as may be necessary to effect indemnification as
provided in this Section 10.
10.5 Indemnification of Employees and Agents of the Corporation
The corporation may, by action of the Board, grant rights to
indemnification and advancement of expenses to employees or agents or groups of
employees or agents of the corporation with the same scope and effect as the
provisions of this Section 10 with respect to the indemnification and
advancement of expenses of Directors and officers of the corporation; provided,
however, that an undertaking shall be made by an employee or agent only if
required by the Board.
10.6 Persons Serving Other Entities
Any person who is or was a Director, officer or employee of the corporation
who is or was serving (a) as a Director or officer of another corporation of
which a majority of the shares entitled to vote in the election of its Directors
is held by the corporation or (b) in an executive or management capacity in a
partnership, joint venture, trust or other enterprise of which the corporation
or a wholly owned
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subsidiary of the corporation is a general partner or has a
majority ownership shall be deemed to be so serving at the request of the
corporation and entitled to indemnification and advancement of expenses under
subsection 10.1 hereof.
10.7 Procedures for the Submission of Claims
The Board may establish reasonable procedures for the submission of claims
for indemnification pursuant to this Section 10, determination of the
entitlement of any person thereto and review of any such determination. Such
procedures shall be set forth in an appendix to these Bylaws and shall be deemed
for all purposes to be a part hereof.
SECTION 11. AMENDMENTS OR REPEAL
These Bylaws may be amended or repealed and new Bylaws may be adopted by
the Board. The stockholders may also amend and repeal these Bylaws or adopt new
Bylaws. All Bylaws made by the Board may be amended or repealed by the
stockholders. Notwithstanding any amendment to Section 10 hereof or repeal of
these Bylaws, or of any amendment or repeal of any of the procedures that may be
established by the Board pursuant to Section 10 hereof, any indemnitee shall be
entitled to indemnification in accordance with the provisions hereof and thereof
with respect to any acts or omissions of such indemnitee occurring prior to such
amendment or repeal.
The foregoing Bylaws were adopted by the Board of Directors on May 26,
1999.
/s/ Steven N. Moore
-----------------------------------------
Steven N. Moore, Secretary
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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
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<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
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<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
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<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
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<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.
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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
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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
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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
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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.
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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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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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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
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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.
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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
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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.
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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.
18
<PAGE>
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.
19
<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
-------------------------
9
<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 A
[Floor Plan]
<PAGE>
EXHIBIT C
[Text of Rules and Regulations]
<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
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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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(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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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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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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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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<PAGE>
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]
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<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
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<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:
-----------------------------
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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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<PAGE>
EXHIBIT B
[Floor Plan]
<PAGE>
EXHIBIT C
[Text of Work Letter]
<PAGE>
EXHIBIT D
[Text of Rules and Regulations]
<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.
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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
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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
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<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,
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<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.
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<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
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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.
7
<PAGE>
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.
8
<PAGE>
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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<PAGE>
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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<PAGE>
EXHIBIT I
[Floor Plan]
<PAGE>
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
<PAGE>
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
2
<PAGE>
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
3
<PAGE>
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.
4
<PAGE>
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.
5
<PAGE>
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
6
<PAGE>
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
7
<PAGE>
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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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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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
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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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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
21
<PAGE>
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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<PAGE>
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
----------------------
23
<PAGE>
EXHIBIT A
[Text of Borrowing Base Certificate]
<PAGE>
EXHIBIT B
[List of Trade Names, Prior Names, Trademarks, Other locations
and addresses and Material Adverse Litigation]
<PAGE>
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
----------------------
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<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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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 A
[Text of Borrowing Base Certificate]
<PAGE>
EXHIBIT 10.6
WATCHGUARD TECHNOLOGIES, INC.
1996 STOCK INCENTIVE COMPENSATION PLAN
As Amended and Restated as of May 26, 1999
SECTION 1. PURPOSE
The purpose of this 1996 Stock Incentive Compensation Plan (the "Plan") is
to enhance the long-term stockholder 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 Stock Awards, 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 either of the following events:
(a) Consummation of any merger or consolidation of the Company with or
into another corporation; or
(b) Consummation of any sale, lease, exchange or other transfer in one
transaction or a series of related transactions of all or
substantially all of the Company's assets or outstanding securities,
other than a transfer of the Company's assets or securities to a
majority-owned Subsidiary Corporation.
2.7 Disability
As used in the Plan, the term "Disability" refers to a mental or physical
impairment of the Participant 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 Participant to be unable, in the opinion of the Company, to
perform his or her duties for the Company and to be engaged in any substantial
gainful activity.
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 Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the average of the high and low per share sales prices for the Common
Stock as reported by the Nasdaq National Market for a single trading day or (b)
if the Common Stock is listed on the New York Stock Exchange, the average of the
high and low per share sales prices for the Common 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.
If there is no such reported price for the Common Stock for the date in
question, then such price on the last preceding date for which such price exists
shall be determinative of Fair Market Value.
2.11 Good Reason
"Good Reason" means the occurrence of any of the following events or
conditions and the failure of a Successor Corporation to cure such event or
condition within 30 days after receipt of written notice from the Participant:
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(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 in 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 Successor Corporation'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 Successor Corporation's business that is not materially
greater than such travel requirements prior to the Corporate Transaction;
(d) the Successor Corporation'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 Successor Corporation of its
obligations to the Holder under the Plan or any substantially equivalent plan of
the Successor Corporation; 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 on which the Plan Administrator completes the
corporate action relating to the grant of an Award and all conditions precedent
to the grant have been satisfied, provided that conditions to the exercisability
or vesting of Awards shall not defer the Grant Date.
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 Related Party Transaction
"Related Party Transaction" means (a) a merger of the Company in which the
holders of shares of Common Stock immediately prior to the merger hold at least
a majority of the shares of Common Stock in the surviving corporation
immediately after the merger, (b) a mere reincorporation of the Company or (c) a
transaction undertaken for the sole purpose of creating a holding company.
2.20 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, unless otherwise defined by the Plan Administrator from time
to time for purposes of the Plan.
2.21 Securities Act
"Securities Act" means the Securities Act of 1933, as amended.
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2.22 "Stock Award"
"Stock Award" means shares of Common Stock or units denominated in Common
Stock granted under Section 9, the rights of ownership of which may be subject
to restrictions prescribed by the Plan Administrator.
2.23 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.
2.24 Successor Corporation
"Successor Corporation" has the meaning given such term in Section 11.3.1.
SECTION 3. ADMINISTRATION
3.1 Plan Administrator
The Plan shall be administered by the Board and/or a committee or
committees (which term includes subcommittees) appointed by, and consisting of
two or more members of, the Board (a "Plan Administrator"). If and so long as
the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act,
the Board shall consider in selecting the members of any committee acting as
Plan Administrator, with respect to any persons subject or likely to become
subject to Section 16 of the Exchange Act, the provisions regarding (a) "outside
directors" as contemplated by Section 162(m) of the Code and (b) "nonemployee
directors" as contemplated by Rule 16b-3 under the Exchange Act. The Board may
delegate the responsibility for administering the Plan with respect to
designated classes of eligible persons to different committees consisting of one
or more members of the Board, subject to such limitations as the Board deems
appropriate. Committee members shall serve for such term as the Board may
determine, subject to removal by the Board at any time.
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.
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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, the
number of shares of Common Stock that shall be available for issuance under the
Plan shall be
(a) 4,317,493 shares, plus
(b) an annual increase to be added on the first day of the Company's
fiscal year beginning in 2000 equal to the lesser of (i) 375,000 shares and (ii)
3% of the adjusted average common shares outstanding of the Company used to
calculate fully diluted earnings per share as reported in the Company's annual
financial statements for the preceding fiscal year or (iii) a lesser amount
determined by the Board; provided, however, that any shares from any increases
in previous years that are not actually issued shall be added to the aggregate
number of shares available for issuance under the Plan.
Shares issued under the Plan shall be drawn from authorized and unissued
shares or shares now held or subsequently acquired by the Company as treasury
shares.
4.2 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.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and
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; provided, however, that such Participants render
bona fide services that are not in connection with the offer and sale of the
Company's securities in a capital-raising transaction and do not directly or
indirectly promote or maintain a market for the Company's securities.
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 include, but are not limited to, Incentive Stock Options, Nonqualified Stock
Options and Stock Awards. Awards may be granted singly or in combination.
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6.2 Settlement of Awards
The Company may settle Awards through the delivery of shares of Common
Stock, cash payments, the granting of replacement Awards or any combination
thereof as the Plan Administrator shall determine. Any Award settlement,
including payment deferrals, may be subject to such conditions, restrictions and
contingencies as the Plan Administrator shall determine. The Plan Administrator
may permit or require the deferral of any Award payment, subject to such rules
and procedures as it may establish, which may include provisions for the payment
or crediting of interest, or dividend equivalents, including converting such
credits into deferred stock equivalents. The Plan Administrator may at any time
offer to buy out, for a payment in cash or Common Stock, an Award previously
granted based on such terms and conditions as the Plan Administrator shall
establish and communicate to the Participant at the time such offer is made.
6.3 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 and not less than 85% of the Fair Market Value of the
Common Stock on the Grant Date with respect to Nonqualified 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%
After 4 years 100%
</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 a reasonable number of shares at any one time.
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 by check or, unless the Plan Administrator in its sole
discretion determines otherwise, either at the time the Option is granted or at
any time before it is exercised, in any combination of
(a) cash or check;
(b) tendering (either actually or, if and so long as the Common Stock is
registered under Section 12(b) or 12(g) of the Exchange Act, by attestation)
shares of Common Stock already owned by the Participant 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;
(c) if and so long as the Common Stock is registered under Section 12(b)
or 12(g) of the Exchange Act, delivery of a properly executed exercise notice,
together with irrevocable
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instructions, to (i) 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 (ii) the 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
(d) such other consideration as the Plan Administrator may permit.
In addition, to assist a Participant (including a Participant who is an
officer or a 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 payment by a
Participant of a full-recourse promissory note, (ii) the payment by the
Participant 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 Participant from
a third party. Subject to the foregoing, the Plan Administrator shall in its
sole discretion specify the terms of any loans, installment payments or loan
guarantees, including the interest rate and terms of and security for repayment.
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: (a) 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 (b)
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.
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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 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 this 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.
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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 shall cease to qualify
for favorable tax treatment as an Incentive Stock Option to the extent it is
exercised (if permitted by the terms of the Option) (a) more than three months
after termination of employment for reasons other than death or Disability, (b)
more than one year after termination of employment by reason of Disability, or
(c) after the Participant has been on leave of absence for more than 90 days,
unless the Participant's reemployment rights are guaranteed by statute or
contract.
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 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.
8.7 Promissory Notes
The amount of any promissory note delivered pursuant to Section 7.5 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator, but in no case less than the rate required
to avoid imputation of interest (taking into account any exceptions to the
imputed interest rules) for federal income tax purposes.
SECTION 9. STOCK AWARDS
9.1 Grant of Stock Awards
The Plan Administrator is authorized to make Awards of Common Stock or
Awards denominated in units of Common Stock on such terms and conditions and
subject to such restrictions, if any (which may be based on continuous service
with the Company or the achievement of performance goals), as the Plan
Administrator shall determine, in its sole discretion, which terms, conditions
and restrictions shall be set forth in the instrument evidencing the Award. The
terms, conditions and restrictions that the Plan Administrator shall have the
power to determine shall include, without limitation, the manner in which shares
subject to Stock Awards are held during the periods they are subject to
restrictions and the circumstances under which forfeiture of the Stock Award
shall occur by reason of termination of the Participant's employment or service
relationship.
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9.2 Issuance of Shares
Upon the satisfaction of any terms, conditions and restrictions prescribed
in respect to a Stock Award, or upon the Participant's release from any terms,
conditions and restrictions of a Stock Award, as determined by the Plan
Administrator, the Company shall release, as soon as practicable, to the
Participant or, in the case of the Participant's death, to the personal
representative of the Participant's estate or as the appropriate court directs,
the appropriate number of shares of Common Stock.
9.3 Waiver of Restrictions
Notwithstanding any other provisions of the Plan, the Plan Administrator
may, in its sole discretion, waive the forfeiture period and any other terms,
conditions or restrictions on any Stock Award under such circumstances and
subject to such terms and conditions as the Plan Administrator shall deem
appropriate.
SECTION 10. ASSIGNABILITY
Awards granted under the Plan and any interest therein may not be assigned,
pledged or transferred by the Holder and may not be made subject to attachment
or similar proceedings other than by will or by the applicable laws of descent
and distribution, and during the Holder's lifetime, such Awards may be exercised
only by the Holder. Notwithstanding the foregoing, and to the extent permitted
by Section 422 of the Code, the Plan Administrator, in its sole discretion, may
permit such assignment, transfer and exercisability and may permit a Holder to
designate a beneficiary who may exercise the Award or receive compensation under
the Award after the Holder's death; provided, however, that any Award so
assigned or transferred shall be subject to all the same terms and conditions
contained in the instrument evidencing the Award.
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 (a) 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 (b) 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 shall make proportional adjustments as it shall deem appropriate
in the circumstances in (i) the maximum number and kind of securities subject to
the Plan as set forth in Section 4.1, and (ii) the number and kind 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. Notwithstanding the foregoing, a
dissolution or liquidation of the Company or a Corporate Transaction shall not
be governed by this Section 11.1 but shall be governed by Sections 11.2 and
11.3, respectively.
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11.2 Dissolution or Liquidation
In the event of the proposed dissolution or liquidation of the Company,
the Plan Administrator shall notify each Participant as soon as practicable
prior to the effective date of such proposed transaction. The Plan Administrator
in its discretion may permit a Participant to exercise an Option until 10 days
prior to such transaction with respect to all vested and exercisable shares of
Common Stock covered thereby and with respect to such number of unvested shares
as the Plan Administrator shall determine. In addition, the Plan Administrator
may provide that any forfeiture provision or Company repurchase option
applicable to any Award shall lapse as to such number of shares as the Plan
Administrator shall determine, contingent upon the occurrence of the proposed
dissolution or liquidation at the time and in the manner contemplated. To the
extent an Option has not been previously exercised, the Option shall terminate
automatically immediately prior to the consummation of the proposed action. To
the extent a forfeiture provision applicable to a Stock Award has not been
waived by the Plan Administrator, the Stock Award shall be forfeited
automatically immediately prior to the consummation of the proposed action.
11.3 Corporate Transaction
11.3.1 Options
In the event of a Corporate Transaction, except as otherwise provided in
the instrument evidencing the Award, each outstanding Option shall be assumed or
continued or an equivalent option or right substituted by the surviving
corporation, the successor corporation or its parent corporation, as applicable
(the "Successor Corporation"). In the event that the Successor Corporation
refuses to assume, continue or substitute for the Option, the Participant shall
fully vest in and have the right to exercise the Option as to all of the shares
of Common Stock subject thereto, including shares as to which the Option would
not otherwise be vested or exercisable. If an Option shall become fully vested
and exercisable in lieu of assumption or substitution in the event of a
Corporate Transaction, the Plan Administrator shall notify the Participant in
writing or electronically that the Option shall be fully vested and exercisable
for a specified time period after the date of such notice, and the Option shall
terminate upon the expiration of such period, in each case conditioned on the
consummation of the Corporate Transaction. For purposes of this Section 11.3.1,
the Option shall be considered assumed if, following the Corporate Transaction,
the option or right confers the right to purchase or receive, for each share of
Common Stock subject to the Option, immediately prior to the Corporate
Transaction, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding shares); provided, however, that if
such consideration received in the Corporate Transaction is not solely common
stock of the Successor Corporation, the Plan Administrator may, with the consent
of the Successor Corporation, provide for the consideration to be received upon
the exercise of the Option, for each share of Common Stock subject thereto, to
be solely common stock of the Successor Corporation equal in fair market value
to the per share consideration received by holders of Common Stock in the
Corporate Transaction. All Options
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shall terminate and cease to remain outstanding immediately following the
consummation of the Corporate Transaction, except to the extent assumed by the
Successor Corporation.
11.3.2 Stock Awards
In the event of a Corporate Transaction, except as otherwise provided in
the instrument evidencing the Award, the vesting of shares subject to Stock
Awards shall accelerate, and the forfeiture provisions to which such shares are
subject shall lapse, if and to the same extent that the vesting of outstanding
Options accelerates in connection with the Corporate Transaction. If unvested
Options are to be assumed, continued or substituted by a Successor Corporation
without acceleration upon the occurrence of a Corporate Transaction, the
forfeiture provisions to which such Stock Awards are subject shall continue with
respect to shares of the Successor Corporation that may be issued in exchange
for such shares subject to Stock Awards.
11.3.3 Acceleration Upon Termination of Employment
Any such Awards that are assumed or replaced in the Corporate Transaction,
other than a Related Party 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 Successor
Corporation for Cause or by the Holder voluntarily without Good Reason.
11.4 Further Adjustment of Awards
Without limiting the preceding Sections 11.2 and 11.3 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 public
announcement with respect to such sale, merger, consolidation, reorganization,
liquidation or change in control that is the reason for such action.
11.5 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.
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SECTION 12. WITHHOLDING OF TAXES
The Company may require the Participant to pay to the Company the amount of
any withholding taxes that the Company is required to withhold with respect to
the grant, vesting or exercise of any Award. Subject to the Plan and applicable
law, the Plan Administrator may, in its sole discretion, permit the Participant
to satisfy withholding obligations, in whole or in part, (a) by paying cash, (b)
by electing to have the Company withhold shares of Common Stock (up to the
minimum required federal tax withholding rate) or (c) by transferring to the
Company shares of Common Stock (already owned by the Participant for such period
necessary to avoid a charge to the Company's earnings for financial reporting
purposes), in such amounts as are equivalent to the Fair Market Value of the
withholding obligation. The Company shall have the right to withhold from any
Award or any shares of Common Stock issuable pursuant to an Award (up to the
minimum required federal tax withholding rate) or from any cash amounts
otherwise due or to become due from the Company to the Participant an amount
equal to such taxes. The Company may also deduct from any Award any other
amounts due from the Participant to the Company or a Subsidiary.
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 Section 422 of the Code or any applicable
law or regulation, stockholder approval will be required for any amendment that
will (a) increase the total number of shares as to which Options may be granted
under the Plan, (b) materially modify the class of persons eligible to receive
Awards, (c) materially increase the benefits accruing to Participants under the
Plan, or (d) otherwise require stockholder 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. Unless sooner terminated as provided herein, the Plan shall
terminate on May , 2009.
13.3 Consent of Holder
The amendment or termination of the Plan or the amendment of an
outstanding Award shall not, without the consent of the Holder of any Award
under the Plan, impair or diminish any rights or obligations under any Award
theretofore granted under the Plan. Any change or adjustment made to an
outstanding Incentive Stock Option shall not, without the consent of the Holder,
be made in a manner so as to constitute a "modification" that would cause such
Incentive Stock Option to fail to qualify as an Incentive Stock Option.
Notwithstanding the foregoing, any adjustments made pursuant to Section 11 shall
not be subject to these restrictions.
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<PAGE>
SECTION 14. MARKET STANDOFF
In connection with any underwritten public offering by the Company of its
equity securities pursuant to an effective registration statement filed under
the Securities Act, including the Company's initial public offering, a person
shall not sell, make any short sale of, loan, hypothecate, pledge, grant any
option for the purchase of, or otherwise dispose of or transfer for value or
otherwise agree to engage in any of the foregoing transactions with respect to
any shares issued pursuant to an Award granted under the Plan without the prior
written consent of the Company or its underwriters. Such limitations shall be
in effect for such period of time as may be requested by the Company or such
underwriters and agreed to by the Company's officers and directors with respect
to their shares; provided, however, that in no event shall such period exceed
180 days. The limitations of this Section 14 shall in all events terminate two
years after the effective date of the Company's initial public offering.
Holders of shares issued pursuant to an Award granted under the Plan shall be
subject to the market standoff provisions of this Section 14 only if the
officers and directors of the Company are also subject to similar arrangements.
In the event of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
Company's outstanding Common Stock effected as a class without the Company's
receipt of consideration, any new, substituted or additional securities
distributed with respect to the purchased shares shall be immediately subject to
the provisions of this Section 14, to the same extent the purchased shares are
at such time covered by such provisions.
In order to enforce the limitations of this Section 14, the Company may
impose stop-transfer instructions with respect to the purchased shares until the
end of the applicable standoff period.
SECTION 15. GENERAL
15.1 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 that shall contain such terms, conditions, limitations and
restrictions as the Plan Administrator shall deem advisable and that are not
inconsistent with the Plan.
15.2 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 a Subsidiary or limit the Company's or a
Subsidiary's right to terminate the employment or services of the Participant at
any time, with or without Cause.
-16-
<PAGE>
15.3 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, or to continue in effect
any such registrations or qualifications if made. 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.
To the extent that the Plan or any instrument evidencing an Award provides
for issuance of stock certificates to reflect the issuance of shares of Common
Stock, the issuance may be effected on a noncertificated basis, to the extent
not prohibited by applicable law or the applicable rules of any stock exchange.
15.4 No Rights as a Stockholder
No Option or Stock Award denominated in units shall entitle the Holder to
any dividend, voting or other right of a stockholder unless and until the date
of issuance under the Plan of the shares that are the subject of such Awards.
15.5 Compliance With Laws and Regulations
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator, 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.
15.6 Participants in Foreign Countries
The Plan Administrator shall have the authority to adopt such
modifications, procedures and subplans as may be necessary or desirable to
comply with provisions of the laws of foreign countries in which the Company or
its Subsidiaries may operate to assure the viability of the benefits from Awards
granted to Participants employed in such countries and to meet the objectives of
the Plan.
15.7 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.
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<PAGE>
15.8 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.
15.9 Choice of Law
The Plan and all determinations made and actions taken pursuant hereto, to
the extent not otherwise governed by the laws of the United States, shall be
governed by the laws of the State of Washington without giving effect to
principles of conflicts of laws.
SECTION 16. 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. Plan amended and restated by the Board on May 26, 1999 and
approved by the Company's stockholders on __________, 1999.
-18-
<PAGE>
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
<TABLE>
<CAPTION>
Date of
Adoption/
Amendment/ Date of Stockholder
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
May 26, 1999 Plan amended and _____, 1999
restated
</TABLE>
-19-
<PAGE>
EXHIBIT 10.10
WATCHGUARD TECHNOLOGIES, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. PURPOSE
The purposes of the WatchGuard Technologies, Inc. 1999 Employee Stock
Purchase Plan (the "Plan") are (a) to assist employees of WatchGuard
Technologies, Inc., a Delaware corporation (the "Company"), and its designated
subsidiaries in acquiring a stock ownership interest in the Company pursuant to
a plan that is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, as amended, and (b) to
encourage employees to remain in the employ of the Company and its subsidiaries.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means the Company's Compensation Committee.
"Common Stock" means the common stock, par value $0.01 per share, of the
Company.
"Company" means WatchGuard Technologies, Inc., a Delaware corporation.
"Corporate Transaction" means either of the following events:
(a) Consummation of any merger or consolidation of the Company with or
into another corporation; or
(b) Consummation of any sale, lease, exchange or other transfer in one
transaction or a series of related transactions of all or
substantially all of the Company's assets or outstanding securities
other than a transfer of the Company's assets or securities to a
majority-owned Subsidiary Corporation.
"Designated Subsidiary" has the meaning set forth under the definition of
"Eligible Employee" in this Section 2.
"Effective Date" has the meaning set forth in Section 23.
<PAGE>
"Eligible Compensation" means all base salary and wages. Eligible
Compensation does not include overtime, cash bonuses, commissions, severance
pay, hiring and relocation bonuses, pay in lieu of vacations, sick leave, gain
from stock option exercises or any other special payments.
"Eligible Employee" means any employee of the Company or any Subsidiary
Corporation designated by the Board or the Committee (a "Designated
Subsidiary"), who is in the employ of the Company (or any Designated Subsidiary)
on one or more Offering Dates and who meets the following criteria:
(a) the employee does not, immediately after the option is granted, own
stock (as defined by the Code) possessing 5% or more of the total
combined voting power or value of all classes of stock of the Company
or of a Parent Corporation or Subsidiary Corporation of the Company;
(b) the employee's customary employment is for 20 hours or more per week;
provided, however, that the Plan Administrator may decrease this
minimum requirement for any future Offering so long as the required
number of hours does not exceed 20;
(c) if specified by the Plan Administrator for a future Offering, the
employee customarily works a minimum of five months per year or any
lesser number of months established by the Plan Administrator; and
(d) if specified by the Plan Administrator for a future Offering, the
employee has been employed for a certain minimum period of time prior
to an Offering Date; provided, however, that any such minimum
employment period may not exceed two years.
If the Company permits any employee of a Designated Subsidiary to participate in
the Plan, then all employees of that Designated Subsidiary who meet the
requirements of this paragraph shall also be considered Eligible Employees.
"Enrollment Period" has the meaning set forth in Section 7.1.
"ESPP Broker" has the meaning set forth in Section 10.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall be as established in good faith by the Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the average of the high and low per share sales prices for the Common
Stock as reported by the Nasdaq National Market on the Offering Date or the
Purchase Date, as applicable, or (b) if the Common Stock is listed on the New
York Stock Exchange or the American Stock Exchange, the average of the high and
low per share sales prices for the Common Stock as such price is officially
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<PAGE>
quoted in the composite tape of transactions on such exchange on the Offering
Date or the Purchase Date, as applicable. If there is no such reported price
for the Common Stock for the date in question, then such price on the last
preceding date for which such price exists shall be determinative of Fair Market
Value.
"Offering" has the meaning set forth in Section 5.1.
"Offering Date" means the first day of an Offering.
"Option" means an option granted under the Plan to an Eligible Employee to
purchase shares of Common Stock.
"Parent Corporation" means any corporation, other than the Company, in an
unbroken chain of corporations ending with the Company, if, at the time of the
granting of the Option, each of the corporations, other than the Company, owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
"Participant" means any Eligible Employee who has elected to participate in
an Offering in accordance with the procedures set forth in Section 7.1 and who
has not withdrawn from the Plan or whose participation in the Plan is not
terminated.
"Plan" means the WatchGuard Technologies, Inc. 1999 Employee Stock Purchase
Plan.
"Purchase Date" means the last day of each Purchase Period.
"Purchase Period" has the meaning set forth in Section 5.2.
"Purchase Price" has the meaning set forth in Section 6.
"Subscription" has the meaning set forth in Section 7.1.
"Subsidiary Corporation" means any corporation, other than the Company, in
an unbroken chain of corporations beginning with the Company, if, at the time of
the granting of the Option, each of the corporations, other than the last
corporation in the unbroken chain, owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
SECTION 3. ADMINISTRATION
3.1 Plan Administrator
The Plan shall be administered by the Board or the Committee or, if and to
the extent the Board or the Committee designates an executive officer of the
Company to administer the
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<PAGE>
Plan, by such executive officer (each, the "Plan Administrator"). Any decisions
made by the Plan Administrator shall be applicable equally to all Eligible
Employees.
3.2 Administration and Interpretation by the Plan Administrator
Subject to the provisions of the Plan, the Plan Administrator shall have
the authority, in its sole discretion, to determine all matters relating to
Options granted under the Plan, including all terms, conditions, restrictions
and limitations of Options; provided, however, that all Participants granted
Options pursuant to the Plan shall have the same rights and privileges within
the meaning of Section 423 of the Code. 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, unless reserved to the Board or the
Committee, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's other officers or employees as the Plan Administrator so determines.
SECTION 4. STOCK SUBJECT TO PLAN
Subject to adjustment from time to time as provided in Section 21, the
maximum number of shares of Common Stock which shall be available for issuance
under the Plan shall be
(a) 300,000 shares plus
(b) an annual increase to be added on the first day of the Company's
fiscal year in 2000 equal to the lesser of (i) of 200,000 shares of Common Stock
and (ii) 1.5% of the adjusted average common shares outstanding of the Company
used to calculate fully diluted earnings per share as reported in the Company's
annual financial statements for the preceding fiscal year, or (iii) a lesser
amount determined by the Board; provided, however, that any shares from any
increases in previous years that are not actually issued shall be added to the
aggregate number of shares available for issuance under the Plan.
Shares issued under the Plan shall be drawn from authorized and unissued
shares or shares now held or subsequently acquired by the Company as treasury
shares.
SECTION 5. OFFERING DATES AND PURCHASE PERIODS
5.1 Offerings
(a) Except as otherwise set forth below, the Plan shall be implemented by
a series of Offerings (each, an "Offering"). Offerings shall commence on March 1
and September 1 of each year and end on the second February 28 (or February 29
in the case of leap years) and August 31, respectively, occurring thereafter;
provided, however, that the first Offering shall begin on the day (the "IPO
Date") on which shares of the Company's Common Stock are first
-4-
<PAGE>
offered to the public in an underwritten initial public offering of such Common
Stock pursuant to a registration statement filed with and declared effective by
the Securities and Exchange Commission (such day being the first trading day for
the Common Stock on the Nasdaq National Market, the New York Stock Exchange or
other applicable trading market), and shall end on August 31, 2001.
(b) Notwithstanding the foregoing, the Plan Administrator may establish
(i) a different term for one or more Offerings and (ii) different commencing and
ending dates for such Offerings; provided, however, that an Offering may not
exceed five years; and provided, further, that if the Purchase Price may be less
than 85% of the fair market value of the Common Stock on the Purchase Date, the
Offering may not exceed 27 months.
(c) In the event the first or the last day of an Offering is not a regular
business day, then the first day of the Offering shall be deemed to be the next
regular business day and the last day of the Offering shall be deemed to be the
last preceding regular business day.
5.2 Purchase Periods
(a) Each Offering shall consist of four consecutive purchase periods of
six months' duration (each, a "Purchase Period"). The last day of each Purchase
Period shall be the Purchase Date for such Purchase Period. Except as otherwise
set forth below, a Purchase Period shall commence on March 1 and September 1 of
each year and end on the next August 31 and February 28 (or February 29 in the
case of leap years), respectively, occurring thereafter; provided, however, that
the Purchase Period for the first Offering shall begin on the IPO Date and shall
end on February 29, 2000.
(b) Notwithstanding the foregoing, the Board may establish (i) a different
term for one or more Purchase Periods and (ii) different commencing and ending
dates for any such Purchase Period.
(c) In the event the first or last day of a Purchase Period is not a
regular business day, then the first day of the Purchase Period shall be deemed
to be the next regular business day and the last day of the Purchase Period
shall be deemed to be the last preceding regular business day.
5.3 Governmental Approval; Stockholder Approval
Notwithstanding any other provision of the Plan to the contrary, an Option
granted pursuant to the Plan shall be subject to (a) obtaining all necessary
governmental approvals and qualifications of the Plan and of the issuance of
Options and sale of Common Stock pursuant to the Plan and (b) obtaining
stockholder approval of the Plan.
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<PAGE>
SECTION 6. PURCHASE PRICE
(a) The purchase price (the "Purchase Price") at which Common Stock may be
acquired in an Offering pursuant to the exercise of all or any portion of an
Option granted under the Plan (the "Offering Exercise Price") shall be 85% of
the lesser of (a) the fair market value of the Common Stock on the Offering Date
of such Offering and (b) the fair market value of the Common Stock on the
Purchase Date; provided, however, that the Purchase Price for the first Offering
shall be the lesser of (i) 100% of the initial public offering price per share
of Common Stock, before underwriter's discounts or concessions, set forth in
that certain Underwriting Agreement between the Company and the representatives
of the Underwriters and executed in connection with the Company's initial public
offering of the Common Stock and (ii) 85% of the fair market value of the Common
Stock on the Purchase Date.
(b) Notwithstanding the foregoing, if an increase in the number of shares
authorized for issuance under the Plan (other than an annual increase pursuant
to Section 4) is approved and all or a portion of such additional shares are to
be issued during one or more Offerings that are underway at the time of
stockholder approval of such increase (the "Additional Shares"), then, if as of
the date of such stockholder approval, the Fair Market Value of a share of
Common Stock is higher than the Fair Market Value on the Offering Date for any
such Offering, the Purchase Price for the Additional Shares shall be 85% of the
lesser of (i) the Common Stock's Fair Market Value on the date of such
stockholder approval and (ii) the Fair Market Value of the Common Stock on the
Purchase Date.
SECTION 7. PARTICIPATION IN THE PLAN
7.1 Initial Participation
An Eligible Employee shall become a Participant on the first Offering Date
after satisfying the eligibility requirements and delivering to the Plan
Administrator during the enrollment period established by the Plan Administrator
(the "Enrollment Period") a subscription (the "Subscription"):
(a) indicating the Eligible Employee's election to participate in the
Plan;
(b) authorizing payroll deductions and stating the amount to be deducted
regularly from the Participant's pay; and
(c) authorizing the purchase of Common Stock for the Participant in each
Purchase Period.
An Eligible Employee who does not deliver a Subscription as provided above
during the Enrollment Period shall not participate in the Plan for that Offering
or for any subsequent Offering unless such Eligible Employee subsequently
enrolls in the Plan by filing a Subscription with the Company during the
Enrollment Period for such subsequent Offering.
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<PAGE>
The Company may, from time to time, change the Enrollment Period for any future
Offering as deemed advisable by the Plan Administrator, in its sole discretion,
for the proper administration of the Plan.
Except as provided in Section 7.2, an employee who becomes eligible to
participate in the Plan after an Offering has commenced shall not be eligible to
participate in such Offering but may participate in any subsequent Offering,
provided that such employee is still an Eligible Employee as of the commencement
of any such subsequent Offering. Eligible Employees may not participate in more
than one Offering at a time.
7.2 Alternative Initial Participation
Notwithstanding any other provisions of the Plan, the Board or the
Committee may provide for any future Offering that any employee of the Company
or any Designated Subsidiary who first meets the requirements of subparagraphs
(a) through (b) of the paragraph "Eligible Employee" in Section 2 during the
course of an Offering shall, on a date or dates specified in the Offering which
coincides with the date on which such person first meets such requirements or
occurs on a specified date thereafter, receive an Option under that Offering
which Option shall thereafter be deemed to be a part of that Offering. Such
Option shall have the same characteristics as any Options originally granted
under that Offering, except that:
(a) the date on which such Option is granted shall be the "Offering Date"
of such Option for all purposes, including determining the Purchase Price of
such Option; provided, however, that if the Fair Market Value of the Common
Stock on the date on which such Option is granted is less than the Fair Market
Value of Common Stock on the first day of the Offering, then, solely for the
purpose of determining the Purchase Price of such Option, the first day of the
Offering shall be the "Offering Date" for such Option;
(b) the Purchase Period(s) for such Option shall begin on its Offering
Date and end coincident with the remaining Purchase Date(s) for such Offering;
and
(c) the Board or the Committee may provide that if such employee first
meets such requirements within a specified period of time before the end of a
Purchase Period for such Offering, he or she will not receive any Option for
that Purchase Period.
7.3 Continued Participation
A Participant shall automatically participate in the next Offering until
such time as such Participant withdraws from the Plan pursuant to Section 11.2
or 11.3 or terminates employment as provided in Section 13.
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<PAGE>
SECTION 8. LIMITATIONS ON RIGHT TO PURCHASE SHARES
8.1 Number of Shares Purchased
(a) No Participant shall be entitled to purchase Common Stock under the
Plan (or any other employee stock purchase plan that is intended to meet the
requirements of Section 423 of the Code sponsored by the Company, a Parent
Corporation or a Subsidiary Corporation) with a fair market value exceeding
$25,000, determined as of the Offering Date for each Offering (or such other
limit as may be imposed by the Code), in any calendar year in which a
Participant participates in the Plan (or any other employee stock purchase plan
described in this Section 8.1).
(b) No Participant shall be entitled to purchase more than 500 shares of
Common Stock (or such other number as the Board or the Committee shall specify
for a future Offering) under the Plan in any single Purchase Period.
(c) For a future Offering, the Board or the Committee may specify a
maximum number of shares that may be purchased by any Participant, as well as a
maximum aggregate number of shares that may be purchased by all Participants,
pursuant to such Offering. In addition, for a future Offering with more than one
Purchase Date, the Board or the Committee may specify a maximum aggregate number
of shares that may be purchased by all Participants on any given Purchase Date
under the Offering.
8.2 Pro Rata Allocation
In the event the number of shares of Common Stock that might be purchased
by all Participants in the Plan exceeds the number of shares of Common Stock
available in the Plan, the Plan Administrator shall make a pro rata allocation
of the remaining shares of Common Stock in as uniform a manner as shall be
practicable and as the Plan Administrator shall determine to be equitable.
Fractional shares may not be issued under the Plan unless the Plan Administrator
determines otherwise for any future Offering.
SECTION 9. PAYMENT OF PURCHASE PRICE
9.1 General Rules
Subject to Section 9.11, Common Stock that is acquired pursuant to the
exercise of all or any portion of an Option may be paid for only by means of
payroll deductions from the Participant's Eligible Compensation. Except as set
forth in this Section 9, the amount of compensation to be withheld from a
Participant's Eligible Compensation during each pay period shall be determined
by the Participant's Subscription.
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<PAGE>
9.2 Percent Withheld
The amount of payroll withholding for each Participant for purchases
pursuant to the Plan during any pay period shall be at least 1% but shall not
exceed 15% of the Participant's Eligible Compensation for such pay period.
Amounts shall be withheld in whole percentages only.
9.3 Payroll Deductions
Payroll deductions shall commence on the first payday following the
Offering Date and shall continue through the last payday of the Offering unless
sooner altered or terminated as provided in the Plan.
9.4 Memorandum Accounts
Individual accounts shall be maintained for each Participant for memorandum
purposes only. All payroll deductions from a Participant's compensation shall
be credited to such account but shall be deposited with the general funds of the
Company. All payroll deductions received or held by the Company may be used by
the Company for any corporate purpose.
9.5 No Interest
No interest shall be paid on payroll deductions received or held by the
Company.
9.6 Acquisition of Common Stock
On each Purchase Date of an Offering, each Participant shall automatically
acquire, pursuant to the exercise of the Participant's Option, the number of
shares of Common Stock arrived at by dividing the total amount of the
Participant's accumulated payroll deductions for the Purchase Period by the
Purchase Price; provided, however, that the number of shares of Common Stock
purchased by the Participant shall not exceed the number of whole shares of
Common Stock so determined, unless the Plan Administrator has determined for any
future Offering that fractional shares may be issued under the Plan; and
provided, further, that the number of shares of Common Stock purchased by the
Participant shall not exceed the number of shares for which Options have been
granted to the Participant pursuant to Section 8.1.
9.7 Refund of Excess Amounts
Any cash balance remaining in the Participant's account at the termination
of each Purchase Period shall be refunded to the Participant as soon as
practical after the Purchase Date without the payment of any interest; provided,
however, that if the Participant participates in the next Purchase Period, any
cash balance remaining in the Participant's account shall be applied to the
purchase of Common Stock in the new Purchase Period, provided such purchase
complies with Section 8.1.
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<PAGE>
9.8 Withholding Obligations
At the time the Option is exercised, in whole or in part, or at the time
some or all of the Common Stock is disposed of, the Participant shall make
adequate provision for federal and state withholding obligations of the Company,
if any, that arise upon exercise of the Option or upon disposition of the Common
Stock. The Company may withhold from the Participant's compensation the amount
necessary to meet such withholding obligations.
9.9 Termination of Participation
No Common Stock shall be purchased on behalf of a Participant on a Purchase
Date if his or her participation in the Offering or the Plan has terminated on
or before such Purchase Date.
9.10 Procedural Matters
The Company may, from time to time, establish (a) limitations on the
frequency and/or number of any permitted changes in the amount withheld during
an Offering, as set forth in Section 11.1, (b) an exchange ratio applicable to
amounts withheld in a currency other than U.S. dollars, (c) payroll withholding
in excess of the amount designated by a Participant in order to adjust for
delays or mistakes in the Company's processing of properly completed withholding
elections and (d) such other limitations or procedures as deemed advisable by
the Company in the Company's sole discretion that are consistent with the Plan
and in accordance with the requirements of Section 423 of the Code.
9.11 Leaves of Absence
During leaves of absence approved by the Company and meeting the
requirements of the applicable Treasury Regulations promulgated under the Code,
a Participant may elect to continue participation in the Plan by delivering cash
payments to the Plan Administrator on the Participant's normal paydays equal to
the amount of his or her payroll deduction under the Plan had the Participant
not taken a leave of absence. Currently, the Treasury Regulations provide that
a Participant may continue participation in the Plan only during the first 90
days of a leave of absence unless the Participant's reemployment rights are
guaranteed by statute or contract.
SECTION 10. COMMON STOCK PURCHASED
UNDER THE PLAN
10.1 ESPP Broker
If the Plan Administrator designates or approves a stock brokerage or
other financial services firm (the "ESPP Broker") to hold shares purchased under
the Plan for the accounts of Participants, the following procedures shall apply.
Promptly following each Purchase Date, the number of shares of Common Stock
purchased by each Participant shall be deposited into
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<PAGE>
an account established in the Participant's name with the ESPP Broker. Each
Participant shall be the beneficial owner of the Common Stock purchased under
the Plan and shall have all rights of beneficial ownership in such Common Stock.
Subject to Section 15, a Participant shall be free to undertake a disposition of
the shares of Common Stock in his or her account at any time, but, in the
absence of such a disposition, the shares of Common Stock must remain in the
Participant's account at the ESPP Broker until the holding period set forth in
Section 423 of the Code has been satisfied. With respect to shares of Common
Stock for which the holding period set forth above has been satisfied, the
Participant may move those shares of Common Stock to another brokerage account
of the Participant's choosing or request that a stock certificate be issued and
delivered to him or her. Dividends paid in the form of shares of Common Stock
with respect to Common Stock in a Participant's account shall be credited to
such account. A Participant who is not subject to payment of U.S. income taxes
may move his or her shares of Common Stock to another brokerage account of his
or her choosing or request that a stock certificate be delivered to him or her
at any time, without regard to the holding period required by Section 423 of the
Code.
10.2 Notice of Disposition
By entering the Plan, each Participant agrees to promptly give the Company
notice of any Common Stock disposed of within the later of one year from the
Purchase Date and two years from the Offering Date for such Common Stock,
showing the number of such shares disposed of and the Purchase Date and Offering
Date for such Common Stock. This notice shall not be required if and so long as
the Company has a designated ESPP Broker.
SECTION 11. CHANGES IN WITHHOLDING AMOUNTS AND VOLUNTARY WITHDRAWAL
11.1 Changes in Withholding Amounts
(a) Unless the Plan Administrator establishes otherwise for a future
Offering, during an Offering, a Participant may elect to decrease, or on one
occasion only during an Offering may elect to increase, the amount withheld from
his or her Eligible Compensation during an Offering by completing and filing
with the Company an amended Subscription authorizing a change in the payroll
deduction rate. The change in rate shall be effective as of the beginning of the
next calendar month following the date of filing the amended Subscription if the
amended Subscription is filed at least 10 days prior to such date (the "Change
Notice Date") and, if not, as of the beginning of the next succeeding calendar
month. All payroll deductions accrued by a Participant as of a Change Notice
Date shall continue to be applied toward the purchase of Common Stock on the
Purchase Date, unless a Participant withdraws from an Offering or the Plan,
pursuant to Section 11.2 or Section 11.3 below. An amended Subscription shall
remain in effect until the Participant changes such Subscription in accordance
with the terms of the Plan.
(b) Unless otherwise determined by the Plan Administrator for a future
Offering, a Participant may elect to increase or decrease the amount to be
withheld from his or her
-11-
<PAGE>
compensation for future Offerings; provided, however, that notice of such
election must be delivered to the Plan Administrator in such form and in
accordance with such terms as the Plan Administrator may establish for an
Offering.
(c) Notwithstanding the foregoing, to the extent necessary to comply with
Code Section 423 and Section 8.1, a Participant's payroll deductions may be
decreased during any Purchase Period scheduled to end during the current
calendar year to 0% at such time that the aggregate of all payroll deductions
accumulated with respect to the Offering to which such Purchase Period applies
and any other Offering ending within the same calendar year exceed $21,250.
Payroll deductions shall re-commence at the rate provided in such Participant's
Subscription at the beginning of the first Purchase Period that is scheduled to
end in the following calendar year, unless the Participant terminates
participation in the Plan as provided in Section 11.2 or Section 11.3 below.
11.2 Withdrawal From an Offering
A Participant may withdraw from an Offering by signing and delivering to
the Plan Administrator a written notice of withdrawal on a form provided by the
Company for such purpose. Such withdrawal must be elected at least 10 days
prior to the end of the Purchase Period for which such withdrawal is to be
effective or by any other date specified by the Plan Administrator for any
future Offering. If a Participant withdraws after the Purchase Date for a
Purchase Period of an Offering, the withdrawal shall not affect Common Stock
acquired by the Participant in any earlier Purchase Periods. Unless otherwise
indicated, withdrawal from an Offering shall not result in a withdrawal from the
Plan or any succeeding Offering therein. A Participant is prohibited from again
participating in the same Offering at any time upon withdrawal from such
Offering. The Company may, from time to time, impose a requirement that the
notice of withdrawal be on file with the Plan Administrator for a reasonable
period prior to the effectiveness of the Participant's withdrawal.
11.3 Withdrawal From the Plan
A Participant may withdraw from the Plan by signing a written notice of
withdrawal on a form provided by the Company for such purpose and delivering
such notice to the Plan Administrator. Such notice must be delivered at least
10 days prior to the end of the Purchase Period for which such withdrawal is to
be effective or by any other date specified by the Plan Administrator for any
future Offering. In the event a Participant voluntarily elects to withdraw from
the Plan, the Participant may not resume participation in the Plan during the
same Offering, but may participate in any subsequent Offering under the Plan by
again satisfying the definition of Eligible Employee. The Company may impose,
from time to time, a requirement that the notice of withdrawal be on file with
the Plan Administrator for a reasonable period prior to the effectiveness of the
Participant's withdrawal.
-12-
<PAGE>
11.4 Return of Payroll Deductions
Upon withdrawal from an Offering pursuant to Section 11.2 or from the Plan
pursuant to Section 11.3, the withdrawing Participant's accumulated payroll
deductions that have not been applied to the purchase of Common Stock shall be
returned as soon as practical after the withdrawal, without the payment of any
interest, to the Participant and the Participant's interest in the Offering
shall terminate. Such accumulated payroll deductions may not be applied to any
other Offering under the Plan.
SECTION 12. AUTOMATIC WITHDRAWAL
If the Fair Market Value of the Common Stock on any Purchase Date of an
Offering is less than the Fair Market Value of the Common Stock on the Offering
Date for such Offering, then every Participant shall automatically (a) be
withdrawn from such Offering at the close of such Purchase Date and after the
acquisition of the shares of Common Stock for such Purchase Period and (b) be
enrolled in the Offering commencing on the first business date subsequent to
such Purchase Period, provided the Participant is eligible to participate in the
Plan and has not elected to terminate participation in the Plan pursuant to
Section 11.2 or 11.3.
SECTION 13. TERMINATION OF EMPLOYMENT
Termination of a Participant's employment with the Company for any reason,
including retirement, death or the failure of a Participant to remain an
Eligible Employee, shall immediately terminate the Participant's participation
in the Plan. The payroll deductions credited to the Participant's account since
the last Purchase Date shall, as soon as practical, be returned to the
Participant or, in the case of a Participant's death, to the Participant's legal
representative or designated beneficiary as provided in Section 14.2, and all of
the Participant's rights under the Plan shall terminate. Interest shall not be
paid on sums returned to a Participant pursuant to this Section 13.
SECTION 14. RESTRICTIONS ON ASSIGNMENT
14.1 Transferability
An Option granted under the Plan shall not be transferable and such Option
shall be exercisable during the Participant's lifetime only by the Participant.
The Company will not recognize, and shall be under no duty to recognize, any
assignment or purported assignment by a Participant of the Participant's
interest in the Plan, of his or her Option or of any rights under his or her
Option.
14.2 Beneficiary Designation
The Plan Administrator may permit a Participant to designate a beneficiary
who is to receive any shares and cash, if any, from the Participant's account
under the Plan in the event
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<PAGE>
the Participant dies after the Purchase Date for an Offering but prior to
delivery to such Participant of such shares and cash. In addition, the Plan
Administrator may permit a Participant to designate a beneficiary who is to
receive any cash from the Participant's account under the Plan in the event that
the Participant dies before the Purchase Date for an Offering. Such designation
may be changed by the Participant at any time by written notice to the Plan
Administrator.
SECTION 15. MARKET STANDOFF
In connection with the underwritten initial public offering by the Company
of its Common Stock, neither a Participant nor any beneficiary designated
pursuant to Section 14.2 shall sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose of or
transfer for value or otherwise agree to engage in any of the foregoing
transactions with respect to any Common Stock issued under the Plan for a period
of 180 days after the IPO Date, except that the foregoing provision shall not
apply to a Participant in the event of the Participant's death or "disability"
as that term is defined in Section 22(e)(3) of the Code.
In the event of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
Company's Common Stock effected as a class without the Company's receipt of
consideration, any new, substituted or additional securities distributed with
respect to the purchased Common Stock shall be immediately subject to the
provisions of this Section 15.
In order to enforce the limitations of this Section 15, the Company may
issue stop-transfer instructions to the ESPP Broker and/or the Company's
transfer agent until the end of the period ending 180 days after the IPO Date.
SECTION 16. NO RIGHTS AS STOCKHOLDER
UNTIL SHARES ISSUED
With respect to shares of Common Stock subject to an Option, a Participant
shall not be deemed to be a stockholder of the Company, and he or she shall not
have any of the rights or privileges of a stockholder. A Participant shall have
the rights and privileges of a stockholder of the Company when, but not until, a
certificate or its equivalent has been issued to the Participant for the shares
following exercise of the Participant's Option.
SECTION 17. LIMITATIONS ON SALE OF COMMON STOCK
PURCHASED UNDER THE PLAN
The Plan is intended to provide Common Stock for investment and not for
resale. The Company does not, however, intend to restrict or influence any
Participant in the conduct of his or her own affairs. A Participant, therefore,
may sell Common Stock purchased under the Plan at any time he or she chooses,
subject to compliance with Section 15 and any applicable
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<PAGE>
federal and state securities laws. A Participant assumes the risk of any market
fluctuations in the price of the Common Stock.
SECTION 18. AMENDMENT OR TERMINATION OF THE PLAN
(a) The Board may amend the Plan in such respects as it shall deem
advisable; provided, however, that, to the extent required for compliance with
Section 423 of the Code or any applicable law or regulation, stockholder
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) modify
the class of employees eligible to receive Options, or (iii) otherwise require
stockholder approval under any applicable law or regulation.
(b) The Plan shall continue in effect for 10 years after the date of its
adoption by the Board. Notwithstanding the foregoing, the Board may at any time
and for any reason terminate or suspend the Plan. During any period of
suspension or upon termination of the Plan, no Options shall be granted.
(c) Except as provided in Section 21, no such termination of the Plan may
affect Options previously granted, provided that the Plan or an Offering may be
terminated by the Board on a Purchase Date or by the Board's setting a new
Purchase Date with respect to an Offering and a Purchase Period then in progress
if the Board determines that termination of the Plan and/or the Offering is in
the best interests of the Company and the stockholders or if continuation of the
Plan and/or the Offering would cause the Company to incur adverse accounting
charges as a result of a change after the Effective Date of the Plan in the
generally accepted accounting rules applicable to the Plan.
SECTION 19. NO RIGHTS AS AN EMPLOYEE
Nothing in the Plan shall be construed to give any person (including any
Eligible Employee or Participant) the right to remain in the employ of the
Company or a Parent or Subsidiary Corporation or to affect the right of the
Company or a Parent or Subsidiary Corporation to terminate the employment of any
person (including any Eligible Employee or Participant) at any time with or
without cause.
SECTION 20. EFFECT UPON OTHER PLANS
The adoption of the Plan shall not affect any other compensation or
incentive plans in effect for the Company or any Parent or Subsidiary
Corporation. Nothing in the Plan shall be construed to limit the right of the
Company, any Parent Corporation or Subsidiary Corporation to (a) establish any
other forms of incentives or compensation for employees of the Company, a Parent
Corporation or Subsidiary Corporation or (b) grant or assume options otherwise
than under the Plan in connection with any proper corporate purpose, including,
but not by way of limitation, the grant or assumption of options in connection
with the acquisition, by purchase, lease, merger, consolidation or otherwise, of
the business, stock or assets of any corporation, firm or association.
-15-
<PAGE>
SECTION 21. ADJUSTMENTS
21.1 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 (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or kind of
securities of the Company or of any other corporation or (b) new, different or
additional securities of the Company or of any other corporation being received
by the holders of shares of Common Stock, then (subject to any required action
by the Company's stockholders), the Board or the Committee, in its sole
discretion, shall make such equitable adjustments as it shall deem appropriate
in the circumstances in (i) the maximum number and kind of shares of Common
Stock subject to the Plan as set forth in Section 4, (ii) the number and kind of
securities that are subject to any outstanding Option and the per share price of
such securities and (iii) the maximum number of shares of Common Stock that may
be purchased by a Participant in a Purchase Period. The determination by the
Board or the Committee as to the terms of any of the foregoing adjustments shall
be conclusive and binding. Notwithstanding the foregoing, a Corporate
Transaction, dissolution or liquidation of the Company shall not be governed by
this Section 21.1 but shall be governed by Sections 21.2 and 21.3, respectively.
21.2 Merger or Asset Sale of the Company
In the event of a proposed Corporate Transaction, each outstanding Option
shall be assumed or continued or an equivalent option substituted by the
surviving corporation, the successor corporation or its parent corporation, as
applicable (the "Successor Corporation"). In the event that the Successor
Corporation refuses to assume, continue or substitute for the Option, the
Offering then in progress shall be shortened by setting a new Purchase Date.
The new Purchase Date shall be a specified date before the date of the Company's
proposed sale or merger. The Board shall notify each Participant in writing, at
least 10 business days prior to the new Purchase Date, that the Purchase Date
for the Participant's Option has been changed to the new Purchase Date and that
the Participant's Option shall be exercised automatically on the new Purchase
Date, unless prior to such date the Participant has withdrawn from the Offering
or the Plan as provided in Section 11.
21.3 Dissolution or Liquidation of the Company
In the event of the proposed dissolution or liquidation of the Company,
the Offering then in progress shall be shortened by setting a new Purchase Date
and shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The new
Purchase Date shall be a specified date before the date of the Company's
proposed dissolution or liquidation. The Board shall notify each Participant in
writing, at least 10 business days prior to the new Purchase Date, that the
-16-
<PAGE>
Purchase Date for the Participant's Option has been changed to the new Purchase
Date and that the Participant's Option shall be exercised automatically on the
new Purchase Date, unless prior to such date the Participant has withdrawn from
the Offering or the Plan as provided in Section 11.
21.4 Limitations
The grant of Options 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 22. REGISTRATION; CERTIFICATES FOR SHARES
The Company shall be under no obligation to any Participant to register
for offering or resale under the Securities Act of 1933, as amended, or register
or qualify under state securities laws, any shares of Common Stock. 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.
SECTION 23. EFFECTIVE DATE
The Plan's Effective Date is the date on which it is approved by the
Company's stockholders.
Adopted by the Board on May 26, 1999 and approved by the Company's
stockholders on ________________, 1999.
-17-
<PAGE>
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
SUMMARY PAGE
<TABLE>
<CAPTION>
Date of Board Section/Effect of Date of Stockholder
Action Action Amendment Approval
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
May 26, 1999 Initial Plan ____________, 1999
Adoption
</TABLE>
<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 June , 1999, in the
Registration Statement (Form S-1 No. 333-76587) and related Prospectus of
WatchGuard Technologies, Inc. for the registration of shares of its
common stock.
Seattle, Washington
June , 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
June 2, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,712
<SECURITIES> 0
<RECEIVABLES> 4,555
<ALLOWANCES> (1,064)
<INVENTORY> 2,156
<CURRENT-ASSETS> 7,809
<PP&E> 1,470
<DEPRECIATION> (330)
<TOTAL-ASSETS> 9,032
<CURRENT-LIABILITIES> 8,083<F1>
<BONDS> 0
0
6<F2>
<COMMON> 1<F2>
<OTHER-SE> 14,795<F2>
<TOTAL-LIABILITY-AND-EQUITY> 9,032
<SALES> 10,678
<TOTAL-REVENUES> 11,379
<CGS> 3,925
<TOTAL-COSTS> 16,454
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (119)
<INCOME-PRETAX> (9,119)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,119)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,119)
<EPS-BASIC> 11.34
<EPS-DILUTED> 11.34
<FN>
<F1>RECLASSIFIED 393 LONG-TERM DEBT AS CURRENT.
<F2>RECLASSIFIED PREFERRED AND COMMON STOCK TO REFLECT AN ADDITIONAL
PAID-IN-CAPITAL ACCOUNT.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,046
<SECURITIES> 0
<RECEIVABLES> 5,289
<ALLOWANCES> (1,014)
<INVENTORY> 1,721
<CURRENT-ASSETS> 8,499
<PP&E> 1,895
<DEPRECIATION> (432)
<TOTAL-ASSETS> 10,101
<CURRENT-LIABILITIES> 11,949
<BONDS> 0
0
6
<COMMON> 1
<OTHER-SE> 15,212
<TOTAL-LIABILITY-AND-EQUITY> 10,101
<SALES> 3,387
<TOTAL-REVENUES> 3,938
<CGS> 1,635
<TOTAL-COSTS> 5,432
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (84)
<INCOME-PRETAX> (3,213)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,213)
<EPS-BASIC> 2.28
<EPS-DILUTED> 2.28
</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 June , 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
June 2, 1999
