<PAGE> 1
As filed with the Securities and Exchange Commission on May 14, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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N2H2, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
WASHINGTON 7375 91-1686754
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INDUSTRIAL
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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900 FOURTH AVENUE, SUITE 3400
SEATTLE, WASHINGTON 98164
(206) 336-1501
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PETER H. NICKERSON
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
N2H2, INC.
900 FOURTH AVENUE, SUITE 3400
SEATTLE, WASHINGTON 98164
(206) 336-1501
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
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COPIES TO:
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MICHAEL E. MORGAN, ESQ. GREGORY B. ABBOTT, ESQ.
LAWRENCE J. STEELE, ESQ. THOMAS B. YOUTH, ESQ.
ERIC S. CARNELL, ESQ. DOUGLAS H. HAEUBER, ESQ.
LANE POWELL SPEARS LUBERSKY LLP COOLEY GODWARD LLP
1420 FIFTH AVENUE, SUITE 4100 4205 CARILLON POINT
SEATTLE, WASHINGTON 98101-2338 KIRKLAND, WASHINGTON 98033
(206) 223-7000 (425) 893-7700
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
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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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement of the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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Common Stock, no par value.................................. $50,000,000 $13,900
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(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act, as amended.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
THE INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL AND IT IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY , 1999
[ ] SHARES
[N2H2 LOGO]
COMMON STOCK
$ PER SHARE
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This is the initial public offering of N2H2, Inc. We are offering
shares and shareholders identified at page of this prospectus are offering
shares.
We expect that the price to the public in the offering will be between
$ and $ per share. The market price of the shares after the
offering may be higher or lower than the offering price.
We have applied to include the common stock on the Nasdaq National Market under
the symbol "NTWO."
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
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<CAPTION>
PER SHARE TOTAL
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Price to the public.......................... $ $
Underwriting discounts....................... $ $
Proceeds to N2H2, Inc. ...................... $ $
Proceeds to the selling shareholders......... $ $
</TABLE>
N2H2 has granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of
additional shares from N2H2 within 30 days from the date of this prospectus to
cover over-allotments.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS
U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is , 1999.
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[INSIDE FRONT COVER]
GATEFOLD
[SCREEN SHOTS OF WEB PAGES TOGETHER WITH TEXT AND OUR LOGO.]
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Forward-Looking Statements.................................. 18
Use of Proceeds............................................. 19
Dividend Policy............................................. 19
Capitalization.............................................. 20
Dilution.................................................... 21
Selected Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 33
Management.................................................. 50
Principal and Selling Shareholders.......................... 56
Certain Transactions........................................ 58
Description of Capital Stock................................ 61
Shares Eligible for Future Sale............................. 64
Underwriting................................................ 66
Legal Matters............................................... 68
Experts..................................................... 68
Where You Can Find More Information......................... 68
Index to Financial Statements............................... F-1
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As used in this prospectus, the term "N2H2," "we," "us" or "our" means "N2H2,
Inc." and the term "common stock" means our common stock, no par value.
Unless otherwise stated herein, all information contained in this prospectus
assumes no exercise of the over-allotment option granted to the underwriters.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order. The shares should be ready for delivery on or
about , 1999, against payment in immediately available funds.
N2H2, Inc., was incorporated in Washington in June 1995 and commenced operations
in 1995. Our principal executive offices are located at 900 Fourth Avenue, Suite
3400, Seattle, Washington 98164, our telephone number is (206) 336-1501 and our
Website address is www.n2h2.com.
N2H2(R) and Bess(R) are registered United States trademarks of our company. We
also have applied for additional federal trademark registrations. This
prospectus also contains other product names, trade names and trademarks that
belong to us or to other organizations.
INFORMATION CONTAINED ON N2H2'S WEBSITE DOES NOT CONSTITUTE PART OF THIS
PROSPECTUS.
2
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained in other parts of this prospectus.
It is not complete and may not contain all of the information that you should
consider before investing in the common stock. You should read this entire
prospectus carefully, including the section entitled "Risk Factors" and the
financial statements and related notes to those statements included in this
prospectus.
N2H2, INC.
OUR BUSINESS
N2H2 is a leading provider of Internet content filtering services to schools. We
are now extending the availability of our filtering services into increasing
numbers of homes, through approximately 190 Internet Service Providers (ISPs),
and to corporations and other organizations. We were the first company to offer
a server-based Internet filtering solution for a customer's computer network.
With Bess, our flagship product, we currently provide filtering services to
approximately 4.5 million students in more than 6,000 schools in the United
States and Canada. To capitalize on our existing base of school customers, we
introduced our education oriented Internet portal called Searchopolis, which is
designed to appeal to students in grades kindergarten through twelve (K-12).
Searchopolis incorporates our award winning filtering search technology and is
available at www.searchopolis.com to any Internet user who wants access to a
safe, educationally enriched Internet portal.
Our filtering services enable our school and other customers to limit access to
the Internet by allowing them to select from among 32 content categories,
including pornography, profanity, hate crime advocacy, drugs, violence, weapons
instruction and other potentially unsuitable material. Customer control over the
selection of filtering criteria for Internet content is one of the key features
of our filtering solutions. Our customers include the statewide networks serving
most of the public schools in Ohio, Tennessee, Maine, Oklahoma and Wisconsin, as
well as school systems in areas such as Los Angeles County, Baltimore, Boston,
Calgary, Seattle, Stockton and Tampa. In March 1999, students and teachers
accessed approximately 339 million Web pages through Bess. We believe the number
of users accessing the Internet through our filtering services presents us with
a significant opportunity to sell advertising to sponsors who wish to reach K-12
students.
We believe that Bess's strong reputation among teachers and parents, combined
with the growing use of the Internet at home by students, will increase the
demand for our filtering services in the residential market. We also develop,
market and support Internet filtering solutions that enable businesses to
increase productivity by limiting the content that employees can access on the
Internet without blocking material that is appropriate and useful for their
jobs. In addition to filtering pornography and other potentially unsuitable
materials, our services enable customers to limit access to chat, sports,
gambling, free e-mail and other selected Website categories. We are pursuing
marketing alliances with companies in the United States and overseas to increase
our penetration of the corporate market. We recently entered into an agreement
with Computer Sciences Corporation to provide company wide filtering of employee
Internet use. We also recently entered into a marketing alliance with GTE
Interactive to provide Internet filtering for hotel guest rooms.
Our complete filtering solutions offer the following key benefits:
- automated identification of potentially unsuitable Websites backed by human
review to accurately place Internet content into a database of 32 categories,
- customer choice of filtering categories with password-based override for
authorized users,
- ability to restrict access to Websites soliciting personal information from
users,
- minimal customer effort required for installation and maintenance,
- server-based filtering that is difficult to bypass and
- daily electronic updating of the database requiring no customer input.
3
<PAGE> 6
We intend to promote Searchopolis as the premier education oriented portal,
capitalizing on our existing base of school customers using Bess to filter
Internet content. Searchopolis enhances the educational potential of the
Internet by assembling educational content in one place and providing safe
access to the Web through our filtering search technology. We are developing and
plan to integrate additional specialized communication services into
Searchopolis to enhance its capability to serve as the portal of choice for the
community of students, teachers, parents and administrators. These features will
include:
- access-controlled, filtered e-mail,
- an easy-to-use calendar linking schools, students, teachers and parents in
local communities,
- a "Virtual Locker" to store students' favorite Internet sites, classroom
material and homework for access from the home, library or other locations
outside the classroom and
- "GradeChecker" to provide parents, teachers and students Internet access to
grades and other classroom information.
OUR MARKET OPPORTUNITY
In the United States, there are approximately 47 million public school K-12
students within 13,000 school districts and approximately 5 million private
school K-12 students. The introduction and expanded use of the Internet as an
educational tool in the classroom has prompted school board members,
superintendents and teachers to focus on protecting students from objectionable
Internet content. Parents have also become increasingly concerned about the
accessibility to children of certain types of content. Without an effective
Internet content filtering system in place, educators and parents have had to
choose between undesirable alternatives: prohibiting Internet access altogether
or closely supervising each student's use of the Internet.
The Internet has the potential to be a rich educational resource for K-12
students. However, most existing Internet portals are targeted to the needs of
an older audience and do not address the requirements of the growing school and
student Internet communities. In addition, current search engines and portals
are not formatted to meet the specific educational needs and interests of these
communities. This makes it difficult and inefficient for students, parents and
teachers to incorporate the Internet into the classroom and home.
We believe the home and business Internet markets, both domestic and
international, present us with significant opportunities. The Annenberg Public
Policy Center estimates that 60% of United States households with children aged
8 to 17 have computers and 61% of those are connected to the Internet.
International Data Corporation estimates that medium and large businesses will
account for 49 million Internet users worldwide by the year 2000.
OUR STRATEGY
Our strategy is to expand our presence in the school, home and corporate markets
and to make Searchopolis the leading education focused Web portal for K-12
students by:
- continuing to aggressively expand our presence in schools,
- enhancing content and communication features on Searchopolis,
- creating advertising opportunities to reach the student market,
- increasing penetration of the home market through relationships with ISPs,
- building our corporate and international customer base,
- increasing sales and marketing efforts and building brand awareness and
- pursuing additional strategic relationships.
4
<PAGE> 7
THE OFFERING
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Common stock offered by N2H2................................ shares
Common stock offered by the selling shareholders............ shares
Common stock to be outstanding after this offering (1)...... shares
Use of proceeds............................................. For working capital, sales and
marketing, research and
development, capital
expenditures and general
corporate purposes. See "Use of
Proceeds."
NASDAQ National Market Symbol............................... NTWO
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(1) The number of shares outstanding is based on shares outstanding as of May
13, 1999 and excludes:
- 1,133,732 shares of common stock subject to options outstanding, with a
weighted average exercise price of $3.97 per share,
- 42,750 additional shares of common stock that could be issued under our 1997
Stock Option Plan, 1999 Stock Option Plan and 1999 Nonemployee Director Stock
Option Plan,
- 186,000 shares of common stock that could be issued upon exercise of
outstanding warrants, with an exercise price of $7.84 per share and
- 37,200 shares of common stock that could be issued upon exercise of warrants,
with an exercise price of $0.01 per share, which will be canceled upon the
completion of this offering.
See "Capitalization," "Management -- Stock Option Plans" and "Description of
Capital Stock."
5
<PAGE> 8
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31,
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1996 1997 1998 1998 1999
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(unaudited)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $ 108 $ 1,118 $ 3,078 $ 1,298 $ 2,605
Gross profit................. 30 816 1,925 845 1,351
Operating loss............... (817) (762) (1,598) (569) (1,532)
Net loss..................... (827) (881) (1,885) (679) (1,678)
Basic and diluted net loss
per share (1).............. $ (0.28) $ (0.26) $ (0.54) $ (0.20) $ (0.39)
Basic and diluted weighted
average shares
outstanding................ 2,926,743 3,355,951 3,474,974 3,474,564 4,303,202
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999,
---------------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
----------- ------------ --------------
BALANCE SHEET DATA: (UNAUDITED)
<S> <C> <C> <C>
Cash................................................. $1,384 $ 9,184 $
Working capital (deficit)............................ (2,996) 6,750
Property and equipment, net.......................... 2,045 2,045
Total assets......................................... 4,285 12,085
Long-term obligations, excluding current portion
(4)................................................ 775 775
Total shareholders' equity (deficit)................. (1,781) 7,965
</TABLE>
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(1) See Note 10 of the Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing the share data.
(2) Pro forma reflects the sale of 1,082,265 shares of common stock at a per
share price of $9.24 per share on May 11, 1999 and the application of the
net proceeds from that sale.
(3) As adjusted to reflect the sale by us of shares of common stock
at an assumed initial offering price of $ per share and the application
of the estimated net proceeds after deducting estimated underwriting
discounts and commissions and our estimated offering expenses. See "Use of
Proceeds" and "Capitalization."
(4) Includes capital lease obligations.
6
<PAGE> 9
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. The risks
described below are not the only ones that we may face. Additional risks that
are not yet identified or that we currently think are immaterial may materially
adversely affect our business and financial condition in the future. Any of the
following risks could seriously harm our business, financial condition and
operating results and could result in a complete loss of your investment.
WE HAVE A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES.
We have a limited operating history. An investment in our company should be
viewed in light of the risks and uncertainties inherent in an Internet company
in the early stages of development, particularly in light of the rapidly
evolving and highly competitive market in which we operate. We have incurred net
losses in each quarter since our incorporation in 1995. Since then, we have
derived substantially all of our revenues from installation and subscription
fees for Bess, our Internet filtering service.
We incurred net losses of $827,000 for 1996, $881,000 for 1997 and $1.9 million
for 1998. From inception through March 31, 1999, we had incurred operating
losses of $5.3 million. We anticipate that we will continue to incur net losses
for the foreseeable future.
WE INTEND TO SUBSTANTIALLY INCREASE OUR OPERATING EXPENSES, AND OUR FUTURE
OPERATING RESULTS ARE UNCERTAIN.
We intend to substantially increase our operating expenses in 1999 and beyond as
we:
- increase our sales and marketing activities, including expanding our direct
sales force and further developing our advertising sales force, indirect
sales channels and international sales presence,
- increase our research and development activities, primarily through the
hiring of additional engineers and other technical staff,
- implement new and upgraded operational and financial systems, procedures and
controls and hire additional personnel,
- assume the responsibilities of being a public company and
- expand our customer support and service operations.
As a result, we will need to significantly increase our revenues to achieve and
maintain profitability. Although our revenues have grown in recent quarters, we
may not be able to continue this growth or achieve or maintain profitability,
particularly because we will incur increased operating expenses before we
receive any revenues from these expenses. If we fail to achieve and maintain
profitability, our business, financial condition and results of operations would
be seriously harmed.
WE PLAN TO OFFER SCHOOLS ALTERNATE FEE STRUCTURES, AND OUR FUTURE REVENUES FROM
THESE FEES ARE UNCERTAIN.
We plan to offer our school customers alternate fee structures that reduce or
eliminate subscription fees in exchange for allowing us to display selected
advertising on computers connected to networks using our filtering services. We
have had insignificant advertising revenues to date, and we cannot assure you
that customers will accept our alternate fee structures. Even if they accept the
alternate fee structures, we cannot assure you that we will receive enough
advertising revenues to make up for lost subscription fees. At present we do not
have any contracts in place directly with advertisers.
7
<PAGE> 10
Up to now, we have derived substantially all of our revenues through a
combination of subscription and installation fees for our filtering services.
Our subscription revenues were $26,000 for 1996, $548,000 for 1997 and $1.7
million for 1998 and our installation revenues were $82,000 for 1996, $570,000
for 1997 and $1.4 million for 1998. As a percentage of total revenues,
subscription revenues represented 24% for 1996, 49% for 1997 and 56% for 1998.
THE MARKET FOR INTERNET ADVERTISING IS UNCERTAIN, AND WE ARE UNABLE TO PREDICT
OUR ADVERTISING REVENUES.
We expect to obtain a substantial amount of our revenues from Internet
advertising for the foreseeable future, but the demand and market acceptance for
Internet advertising are uncertain. We have received insignificant advertising
revenues to date. No accepted standard currently exists to measure the
effectiveness of Internet advertising, and standard measurements may need to be
developed to support and promote the Internet as a significant advertising
medium. Also, a number of different pricing methods are used to sell advertising
on the Internet. We cannot predict which of those pricing methods, if any, will
emerge as the industry standard. Our business will be seriously harmed if the
market for Internet advertising develops more slowly than expected or we are
unable to adapt to new forms of Internet advertising.
Internet advertising is now typically conducted through the use of
"click-through" advertising banners, where users can access more information
about an advertised product or service by clicking on the banner. Contracts for
banner advertising are typically short-term in nature, and revenues are based
upon the number of page views, referred to as user impressions, which makes it
difficult to forecast revenues payable under this type of contract. We plan to
address this uncertainty by entering into long-term "sponsorship" arrangements
with advertisers that would call for a fixed fee for a specified time period. We
cannot be sure, however, that we will be successful in entering into any such
arrangements. In addition, we would expect that payment under these long-term
contracts would require a specified minimum number of user impressions. If we
fail to deliver these minimum levels of user impressions, we would expect these
agreements to provide for reductions in the fees we would receive. In addition,
sponsors may not renew agreements at the end of their terms or they may only
renew at lower rates.
We expect our Internet advertising revenues will fluctuate significantly in the
future as a result of a variety of factors, many of which are outside our
control. If we fail to obtain advertising or sponsorship contracts, or if our
contracts are canceled or renewed at lower rates, our business, financial
condition and operating results will be seriously harmed. These factors include:
- our ability to provide content attractive to our target audiences,
- the development of our brand,
- the level of Internet use,
- demand for Internet advertising,
- our ability to attract and retain advertisers,
- the level of user traffic on Searchopolis,
- the mix of types of advertising we sell and
- the timing of initial set-up, engineering or development fees that may be
paid in connection with larger advertising arrangements.
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ADVERTISING IN SCHOOLS IS CONTROVERSIAL.
Advertising in schools is controversial, and we and our sponsors may receive
negative publicity because of advertising on Searchopolis. Some parents,
teachers and public officials believe that advertisements in schools compromise
the integrity of the educational environment. They argue that advertisements
distract from learning and that classroom audiences are overly susceptible to
marketing and advertising campaigns.
Our alternate fee structure for schools is based upon offering schools the
choice between paying our current subscription fees or receiving our services at
reduced rates or without charge in exchange for allowing us to display
advertisements. It is possible that parents, teachers, students or the public at
large will object to Internet advertising on Searchopolis. If they do, the
resulting negative publicity could limit our ability to offer advertising-based
pricing in the future, which would seriously harm our business, financial
condition and results of operations.
OUR EXPANSION INTO THE INTERNET PORTAL MARKET INVOLVES A NUMBER OF RISKS.
Our future revenue growth is greatly dependent upon the success and market
acceptance of our current development efforts to enhance Searchopolis and our
ability to derive advertising or other revenue from Searchopolis. In addition,
we plan to market our enhanced version of Searchopolis to our existing and
potential filtering service customers. Existing and potential customers may not
use Searchopolis for a number of reasons, including an absence of desired
capabilities or content or the failure of Searchopolis to be competitive with
other Internet searching services. Also, we must overcome significant obstacles
in our expansion into the Internet portal market, including:
- competitors such as Yahoo! Inc., America Online, Inc., Netscape
Communications Corporation, Lycos, Inc., Excite, Inc., Wired Digital, Inc.
(HotBot), Infoseek Corporation and others that have more experience, better
name recognition and greater resources,
- the limited experience of our sales personnel in the Internet portal market
and
- our limited experience in obtaining revenues from developing and marketing
Internet filtering search technology.
OUR QUARTERLY FINANCIAL RESULTS FLUCTUATE AND MAY BE AFFECTED BY SEASONAL
VARIATIONS.
Our quarterly operating results have fluctuated significantly in the past and
will continue to fluctuate in the future. Operating results vary depending on a
number of factors, many of which are outside our control, including:
- our educational services customers typically budget and purchase goods and
services on a fiscal school year basis beginning in August of each year,
- user traffic on our school customer systems has historically been lower
during the summer and during year end vacation and holiday periods, and
advertising revenues may be less during these periods,
- we typically receive subscription payments in advance of the costs directly
associated with delivery of monthly services over the term of the 12 month
contract, making it difficult to associate costs with cash flows,
- quarterly cash flows from subscription payments are difficult to forecast
because the sales cycle, from initial evaluation to delivery of the services,
varies substantially between customers and
- as we expand our sales force, professional services personnel and research
and development staff, our operating expenses will continue to rise.
9
<PAGE> 12
Due to the combination of these and other factors, quarter to quarter
comparisons of operating results are not meaningful or indicative of future
performance. Further, it is possible that in some future quarter or quarters our
operating results will not meet or exceed the expectations of public market
analysts or investors. If that happens, or if adverse conditions prevail or are
perceived to prevail, either for our business or the market generally, the
market price of our common stock would be seriously harmed. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Selected Quarterly Operating Results."
OUR SUCCESS DEPENDS ON CONTINUED MARKET ACCEPTANCE AND OPERATION OF OUR INTERNET
FILTERING SERVICES.
We currently receive, and expect to continue to receive, a substantial portion
of our revenues from our Internet filtering service. If we are unable to
continue to solve our customers' Internet content filtering problems, our
business, financial condition and results of operations will be seriously
harmed.
Our future financial performance will depend, in part, upon the successful
development, introduction and customer acceptance of new and enhanced versions
of our Internet filtering services. We cannot assure you that we will be
successful in upgrading and continuing to sell our Internet filtering services
or that any new products or services that we may develop or acquire will achieve
market acceptance. Any failure to upgrade our services or products or to
maintain our market acceptance could seriously harm our business, financial
condition and results of operations.
OUR FILTERING CATEGORIZATIONS ARE SUBJECTIVE, AND WE MAY FAIL TO FILTER ALL
POTENTIALLY OBJECTIONABLE CONTENT.
We may not succeed in sufficiently filtering Internet content to meet our
customers' expectations. We rely upon a combination of automated filtering
technology and human review to categorize Website content. We are dependent upon
Inktomi Corporation to provide our Internet searching capabilities. Inktomi's
search engine may cover only a portion of the total number of Websites available
on the Internet. The total number of Websites and partial Websites is growing
rapidly. We rely upon our staff of reviewers to place Internet content into our
32 content categories. We cannot assure you that our filtering technologies will
successfully block all potentially objectionable Internet content. Our
categorized database also may not contain substantially all of the material
available on the Internet fitting into any one of our content categories. In
addition, our customers may not agree with our categorization determinations. If
we fail to effectively categorize and filter Internet content according to our
customers' expectations, we could receive negative publicity and our business,
financial condition and results of operations could be seriously harmed.
OUR ABILITY TO MANAGE GROWTH IS UNPROVEN.
Our growth is likely to continue to place a significant strain on our
managerial, operational, financial and other resources. We have grown from 38
part and full time employees as of March 31, 1997, to 76 as of March 31, 1998,
to 156 as of March 31, 1999. Our future success will depend, in part, upon the
ability of our senior management to manage growth effectively. This will require
us to:
- implement additional management information systems,
- develop further our operating, administrative, financial and accounting
systems and controls,
- hire additional personnel and
- locate additional office space in the United States and internationally.
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WE FACE INTENSE COMPETITION FROM INTERNET RELATED BUSINESSES.
The market for our services and products is intensely competitive and rapidly
changing. Many of our competitors are larger and have substantially greater
resources than us. Our primary competition comes from keyword, Universal
Resource Locator (URL) and packet filtering software applications. These
products are significantly less expensive than our filtering services and often
downloadable for free over the Internet.
We compete directly with a number of Internet content management firms,
including publishers and distributors of traditional media and general purpose
consumer online services such as America Online and Microsoft Network. Although
we believe the Internet provides opportunities for more than one provider of
content filtering services similar to ours, one or more of our competitors may
come to dominate the sector. Further, we have only recently begun to provide
these services, and competitors' products and services may achieve greater
market acceptance than ours.
We also compete for users and advertisers with virtually all Websites. Our
competitors for users and advertisers include:
- Web retrieval and other Web portal companies, such as Excite, Infoseek,
Lycos, Yahoo! and Netscape and
- Websites such as Disney.com, AOL.com and others that provide education and
family oriented content.
We also compete with television, radio, cable and print media for a share of
total advertising budgets.
Increased competition could result in price reductions, reduced profitability,
or loss of market share, any of which would seriously harm our business,
financial condition and results of operations.
WE WILL NEED TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS.
We depend on strategic relationships to offer services and products to a larger
customer base than can be reached through our direct sales efforts. We have a
strategic relationship with Inktomi for operating our filtering search
technology. We also have other strategic content and marketing relationships
with companies, including Looksmart Ltd., WinStar Communications, Inc., Fortres
Grand Corporation and Netwave Technologies, Inc. Our plans for developing our
foreign business rely on additional strategic relationships. We cannot assure
you that we will be able to maintain and expand our strategic relationships or
enter into new strategic relationships or that these new relationships will be
on commercially reasonable terms.
If we are unable to maintain and expand our existing strategic relationships or
enter into new strategic relationships, we will need to use substantially more
resources to develop, distribute, sell and market our services and products than
planned. We would also lose the customer introductions and co-marketing benefits
that we anticipate from such strategic relationships. Our success will depend
both on the success of the other parties to these relationships and on their
ability to market our services and products successfully. Most of these
companies have multiple strategic relationships, and we cannot assure you that
they will regard their relationships with us as significant for their own
businesses. If any of these firms fail to effectively promote our services or
products, our business, financial condition and results of operations will be
seriously harmed.
WE ARE DEPENDENT ON OUR KEY EMPLOYEES AND OUR ABILITY TO ATTRACT AND RETAIN
QUALIFIED PERSONNEL.
Our success depends on the performance of our senior management, particularly
Peter H. Nickerson, our President, Chief Executive Officer and Chairman of the
Board, and Kevin E. Fink, Chief Technology Officer. On May 10, 1999, we entered
into employment agreements with Mr. Nickerson, Mr. Fink, and
11
<PAGE> 14
other members of senior management. The term of Mr. Nickerson's agreement is two
years and Mr. Fink's agreement is for an 18 month term. Both are renewable
indefinitely. See "Management -- Employment Agreements." Mr. Nickerson is also a
principal of Nickerson & Associates, an econometric and data management
consulting company and he performs consulting services for that firm that could
impose conflicting demands on his time.
While our employment agreements with members of senior management impose
nondisclosure and noncompetition restrictions on those individuals, if any
member of our senior management or any key employee were to resign, particularly
to join or form a competitor, the loss of such individuals and any resulting
loss of existing or potential customers or the unauthorized disclosure or use of
our technical knowledge, practices, procedures or customer lists would seriously
harm our business, financial condition and results of operations. We cannot
assure you that in such an event we would be able to recruit personnel to
replace our senior management in a timely manner and on acceptable terms.
Our success also depends on our ability to attract and retain qualified,
experienced employees. We expect there will continue to be competition for
experienced engineering, sales and consulting personnel, particularly in the
Internet market. Many of the companies we compete against for experienced
personnel have greater resources than us. Competition in the Seattle area for
these personnel is particularly intense, and we cannot assure you that we will
be successful in attracting and retaining qualified personnel. As a result, our
growth could be limited due to our lack of capacity to provide our services, or
we could experience deterioration in service levels or decreased customer
satisfaction, any of which would seriously harm our business, financial
condition and results of operations.
EXPANDING OUR INTERNATIONAL OPERATIONS EXPOSES US TO A NUMBER OF RISKS.
We currently have very limited international operations. Our installation and
subscription revenues from customers outside the United States, primarily in
Canada and Germany, represented approximately $84,000 in the fiscal year ended
September 30, 1998, and $144,000 for the six months ended March 31, 1999. As a
key component of our business strategy, we intend to expand our international
sales and support operations. Our ability to expand our international operations
is subject to a number of risks, including:
- our ability to customize services for local markets and foreign languages,
- laws and business practices favoring local competitors,
- our dependence on local vendors,
- compliance with multiple, conflicting and changing governmental laws and
regulations, including tax laws and regulations,
- longer sales cycles,
- possible delays or greater difficulty in accounts receivable collection,
- import and export restrictions and tariffs,
- difficulties in staffing and managing foreign operations,
- uncertainties regarding transactions in foreign currencies and
- political and economic instability.
If we are unable to successfully manage the risks associated with our
international operations, our international sales growth will be limited and our
profitability will be seriously harmed.
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<PAGE> 15
OUR SERVICES MAY HAVE LIMITED INTEROPERABILITY AND MAY NOT KEEP PACE WITH RAPID
TECHNOLOGICAL CHANGES.
Our Internet services are designed to operate with a variety of hardware and
software used by our customers. We must continuously modify and enhance our
services to keep pace with changes in hardware, software, communication, browser
and database technology. As a result, uncertainties about the timing and nature
of vendors' new product announcements or their introduction or modification of
operating systems, browsers and other Internet related applications or the
failure of our services to operate effectively across existing and future
versions of hardware and software used by customers would seriously harm our
business, financial condition and results of operations.
WE HAVE LIMITED PROTECTION OF OUR INTELLECTUAL PROPERTY AND PROPRIETARY
TECHNOLOGY, AND WE ARE SUBJECT TO RISKS OF INFRINGEMENT.
Intellectual property is critical to our success, and we rely upon trademark,
copyright and trade secret laws in the United States and other jurisdictions to
protect our proprietary technology and brands. N2H2 and Bess are registered
United States trademarks. We have also applied to register Searchopolis and
Virtual Locker as trademarks. These trademark applications may not be granted.
In addition, any of our trademarks may be challenged by others or invalidated
through administrative process or litigation. Our proprietary search technology
is protected by United States trade secret and copyright laws. We own and
operate the servers that provide our filtering services. We protect our
proprietary rights through the use of intellectual property agreements with
employees and consultants covering confidentiality, nondisclosure and assignment
of invention matters. Some of our former employees and consultants who may have
had access to our proprietary information have not entered into these
intellectual property agreements, although we believe that all intellectual
property that is material to our business is covered by signed agreements. If we
are wrong in this assessment, our business could be seriously harmed.
Trademark, copyright and trade secret protection may not be available to us in
every country in which our services are available. The laws of some foreign
countries may not be as protective of intellectual property rights as United
States laws, and mechanisms for enforcement of intellectual property rights may
be inadequate. Despite our efforts to protect our proprietary rights,
unauthorized parties may obtain, copy and use our proprietary technology. We
expect that it will become more difficult to monitor use of our services as we
increase our international presence. We cannot assure you that our means of
protecting our proprietary technology and brands will be adequate or that our
competitors will not independently develop similar technology. In addition, we
cannot assure you that third parties will not claim infringement by us with
respect to our current or future services and products. Any such claims could
seriously harm our business, financial condition and results of operations.
THE YEAR 2000 MAY RESULT IN UNEXPECTED COMPUTER PROBLEMS.
We may face exposure and risk if the systems on which we depend to conduct our
operations are not year 2000 compliant. Beginning in the year 2000, the date
fields coded in some software products and computer systems will need to accept
four digit entries in order to distinguish 21st century dates from 20th century
dates.
We believe that we have identified and reviewed the internally and externally
developed software that supports the development and delivery of our services
and products or is necessary to maintain our administration, sales and
accounting functions. We have completed our assessment of this software and have
made most of the changes we consider necessary. We expect to complete both our
internal and external year 2000 compliance assessment by June 1, 1999. To date,
we have spent an immaterial amount on year 2000 compliance. We do not believe
the cost of preparing for year 2000 compliance will exceed $50,000. If we are
wrong, we could face additional unexpected expenses to fix any year 2000
problems.
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<PAGE> 16
We use third party equipment and software that may not be year 2000 compliant.
We have reviewed our externally purchased network elements, including switches,
routers, proxy servers and network control points and do not believe they will
be affected by year 2000 concerns. We have identified our fax server software as
noncompliant and are currently in the process of upgrading to a compliant
version. We are also reviewing other systems that are important to our business
such as telecommunications, energy and environmental management and so far have
not identified any significant problems associated with year 2000 issues in
these systems. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- The Year 2000."
OUR SERVICES CREATE RISKS OF LEGAL LIABILITY.
Because customers rely on our services for providing a content safe Internet
environment, any significant defects or errors in our services or products may
result in legal claims that could seriously harm our business, financial
condition and results of operations. Although our agreements with customers
typically contain provisions designed to limit our exposure to potential legal
liability, these limitation of liability provisions may not be completely
effective. We have not experienced any liability claims to date, but we cannot
assure you that we will not face this type of claim in the future. We maintain
errors and omissions insurance, but we cannot assure you that this insurance
coverage will adequately cover us for any claims.
OUR SYSTEMS MAY BE VULNERABLE TO SECURITY RISKS OR SERVICE DISRUPTIONS THAT
COULD HARM OUR BUSINESS.
Our servers are vulnerable to physical or electronic break-ins and service
disruptions, which could lead to interruptions, delays, loss of data or the
inability to process user requests. Such events could be very expensive to
remedy and could damage our reputation, discouraging existing and potential
customers from using our services. In the past we have experienced unsuccessful
attempts at electronic break-ins but we may experience break-ins in the future.
Any such events could substantially harm our business, financial condition and
results of operations.
In August 1998, we entered into an Internet hosting agreement with Exodus
Communications, Inc., which will maintain most of our servers through August
1999, with automatic one year renewals. Our operations depend on Exodus's
ability to protect our systems against damage from fire, earthquake, power loss,
flood, telecommunications failures, vandalism and other malicious acts and
similar unexpected adverse events. Any major disruption in our services could
seriously harm our business, financial condition and results of operations.
OUR SERVICES ARE SUBJECT TO UNITED STATES EXPORT LAWS.
The encryption technology contained in our services and products is subject to
United States export controls. Such export controls limit our ability to
distribute certain encrypted services and products outside of the United States.
While we take precautions against unlawful exportation, such exportation
inadvertently may have occurred in the past or may occur from time to time in
the future, subjecting us to potential liability. Future legislation or
regulation may further limit the use of encryption technology that we can
include in our services and products. In addition, foreign governments have
import and domestic use laws and regulations that restrict the types of
permitted encryption software distributed in their countries. Such regulations
could alter the design, production, distribution and use of our services and
products.
THE FUTURE ROLE OF THE INTERNET IN EDUCATION IS UNCERTAIN.
The success of our services and products will depend, in large part, on the
continued broad use and acceptance of the Internet as a source of information.
Schools, teachers and parents may cease to consider the Internet a viable
research tool due to concerns over the potential exposure of students to
unsuitable
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<PAGE> 17
material, even with filtering services such as ours, or because of inadequate
development of telecommunications and networking systems. The Internet could
lose its viability due to delays in the development or adoption of new standards
and protocols to handle increased levels of Internet activity or due to
increased governmental regulation. Cutbacks in technology funding could also
limit use of the Internet in schools. If the necessary Internet infrastructure
and complementary products are not developed on a timely basis, or if school use
of the Internet experiences a significant decline, our business, financial
condition and results of operations will be seriously harmed.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS TO
DOING BUSINESS ON THE INTERNET.
Currently, few laws or regulations specifically govern communications or
commerce on the Internet. Laws and regulations may be adopted in the future
regarding user privacy, pricing and the characteristics and quality of products
and services. For example, the Telecommunications Act of 1996 sought to prohibit
transmitting various types of information and content over the Internet. Several
telecommunications companies have petitioned the Federal Communications
Commission to regulate ISPs and online service providers in a manner similar to
long distance telephone carriers and to impose access fees on those companies.
This could increase the cost of transmitting data over the Internet.
WE MAY BE SUED FOR INFORMATION RETRIEVED FROM THE WEB.
We may be subject to claims relating to information available on our Website.
These types of claims have been brought, sometimes successfully, against online
services. We could also be subject to claims based upon the content that is
accessible from our Websites through links to other Websites or through content
and materials that may be posted by members in chat rooms or bulletin boards. We
also offer e-mail services, which may subject us to liabilities resulting from
unsolicited e-mail, lost or misdirected messages, illegal or fraudulent use of
e-mail or interruptions or delays in e-mail service. Our general commercial
liability insurance may not adequately protect us against these types of
potential claims.
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND WE EXPECT THAT
ITS PRICE WILL BE VOLATILE.
Prior to this offering, there has been no public market for our common stock,
and we cannot assure you that an active public market for our common stock will
develop or be sustained after this offering. The initial public offering price
of our common stock will be determined by negotiation among us and the
representatives of the several underwriters based upon a number of factors and
may not be indicative of the market price of our common stock following the
offering. The market price of our common stock is likely to be highly volatile
and could be subject to wide fluctuations in response to:
- quarterly variations in operating results,
- announcements of technological innovations or new services or products by us
or our competitors,
- changes in financial estimates by securities analysts,
- our failure to meet or exceed analyst estimates and
- other events or factors, many of which are beyond our control.
In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices of equity
securities of many Internet companies and that often have been unrelated or
disproportionate to the operating performance of these companies. A number of
publicly traded technology companies have current market prices below their
initial public offering price. Market fluctuations such as these may seriously
harm the market price of our common stock. In the past, following periods of
volatility in the marketplace for a company's securities, securities class
action litigation
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<PAGE> 18
often has been instituted. We would incur substantial costs and a diversion of
management attention and resources resulting from such litigation, which would
seriously harm our business, financial condition and results of operations.
AFTER THIS OFFERING, OUR OFFICERS, DIRECTORS AND SIGNIFICANT SHAREHOLDERS WILL
STILL HAVE VOTING CONTROL.
Upon completion of this offering, % of our outstanding common stock will be
beneficially owned by our directors, executive officers and each person or group
that we know owns more than 5% of our common stock, together with the
individuals or entities affiliated with them, assuming no exercise of
outstanding warrants or stock options. These shareholders, if acting together,
would be able to control substantially all matters requiring approval by our
shareholders, including the election of all directors and approval of
significant corporate transactions.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price per share will significantly exceed the net
tangible book value per share of our common stock. Accordingly, if you purchase
shares of our common stock in this offering, you will suffer immediate and
substantial dilution. See "Dilution."
OUR MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING.
Although we intend to use the net proceeds of this offering for working capital
and general corporate purposes, our management can spend the proceeds in ways
with which our shareholders may not agree. We expect to increase sales and
marketing, research and development and capital expenditures made in the
ordinary course of business. We may also use a portion of the net proceeds for
acquisitions of businesses, products and technologies or the establishment of
joint ventures that are complementary to our current and future business.
Although we have not identified any specific businesses, products or
technologies that we may acquire, and there are no current agreements or
understandings with respect to any such transactions, we do from time to time
evaluate such opportunities. Pending such uses, the net proceeds of this
offering will be invested in short term, investment grade, interest bearing
securities. See "Use of Proceeds."
OUR FUTURE CAPITAL NEEDS ARE UNCERTAIN.
We expect the net proceeds from this offering, cash from operations and
borrowings available under our credit facility will be sufficient to meet our
working capital and capital expenditure needs for at least the next 12 months.
After that, we may need to raise additional funds, and additional financing may
not be available on favorable terms, if at all. Further, if we issue additional
equity securities, shareholders may experience dilution, and the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If we cannot raise funds on acceptable
terms, we may not be able to develop or enhance our services, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements. This may seriously harm our business and results of operations.
See "Use of Proceeds," "Dilution" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS.
Some provisions of our restated articles of incorporation and amended bylaws, as
well as provisions of Washington law, make it more difficult for a third party
to acquire us, even if doing so would be beneficial to our shareholders. See
"Description of Capital Stock -- Anti-takeover Effects of Provisions of Our
Restated Articles, Amended Bylaws and Washington Law."
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<PAGE> 19
SUBSTANTIAL SALES OF SHARES MAY IMPACT THE MARKET PRICE OF OUR COMMON STOCK.
Sales of a substantial number of shares of common stock after the offering could
cause the market price of our common stock to decline and could impair our
ability to raise capital through the sale of additional equity securities. Upon
completion of this offering we will have shares of common stock
outstanding or subject to currently exercisable options or warrants or
shares if we issue shares upon exercise of the underwriters' over-allotment
option. The shares sold in the offering, or shares if the
underwriters' over-allotment option is fully exercised, will be freely tradable
without restriction or further registration under federal securities laws unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. The remaining shares of common stock outstanding upon
completion of the offering will be "restricted securities" as that term is
defined in Rule 144.
Most of our shareholders, option holders and warrant holders are limited by
lock-up agreements restricting their ability to sell their N2H2 common stock.
These security holders cannot sell or otherwise dispose of shares of our common
stock for a period of 180 days after the date of this prospectus without the
written consent of CIBC World Markets Corp. When the lock-up agreements expire,
the outstanding shares and the shares underlying the options and warrants will
be eligible for sale, in some cases only by complying with the volume, manner
and notice of sale requirements of Rule 144.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy."
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<PAGE> 20
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking statements
within the meaning of the federal securities laws. These statements include,
among others, the following:
- use of proceeds,
- our alternate fee structures,
- projected advertising revenues,
- projected increases in sales and marketing, research and development and
capital expenditures,
- liquidity,
- our expansion strategy into the home, corporate and international markets,
- our enhancements of the Searchopolis portal and
- our development of strategic relationships.
Forward-looking statements typically are identified by the use of such terms as
"may," "will," "expect," "believe," "anticipate," "estimate," "plan" and similar
words, although some forward-looking statements are expressed differently. You
should be aware that N2H2's actual growth and results could differ materially
from those contained in the forward-looking statements due to a number of
factors, including our inability to attract sufficient customers in the home,
corporate or international markets, lack of acceptance of our alternate fee
structures by our customers and other factors. You should also consider
carefully the statements under "Risk Factors" and other sections of this
prospectus, which address additional factors that could cause N2H2's actual
results to differ from those set forth in the forward-looking statements.
In addition, this prospectus includes market data relating to us and the school,
home and corporate Internet markets. Some of this data was obtained from
industry publications and reports, such as reports by International Data
Corporation and The Annenberg Public Policy Center. These reports assume certain
events, trends and activities will occur and they project information on those
assumptions. We have not independently verified this data. Also, we have not
sought the consent of these organizations to refer to their reports in this
prospectus.
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<PAGE> 21
USE OF PROCEEDS
Our net proceeds from the sale of the shares of common stock offered by
us are estimated to be approximately $ million based on an assumed
initial public offering price of $ and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us. If the underwriters exercise the over-allotment option in full, our net
proceeds are estimated to be $ . See "Underwriting." We will not
receive any proceeds from the sale of common stock by the selling shareholders.
We plan to use the net proceeds of this offering for working capital and general
corporate purposes. These will include, but may not be limited to, increased
domestic and international sales and marketing expenditures, increased research
and development expenditures and capital expenditures made in the ordinary
course of business. We may also use a portion of the net proceeds for
acquisitions of businesses, products and technologies or the establishment of
joint ventures that are complementary to our current and future business.
Although we have not identified any specific businesses, products or
technologies that we may acquire, and there are no current agreements or
understandings with respect to any such transactions, we do from time to time
evaluate such opportunities.
This represents our current intentions regarding use of the net proceeds from
this offering. Future events, as well as changes in economic, regulatory or
competitive conditions in our business may result in our making changes in the
use of these proceeds. Our management has broad discretion as to the allocation
of the net proceeds of this offering.
Until we use the net proceeds of the offering, we will invest the funds in
short-term, investment grade, interest bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and do
not expect to do so in the foreseeable future. We anticipate that we will retain
any future earnings to develop and expand our business. Any future determination
with respect to the payment of dividends will be at the discretion of our board
of directors and will depend upon, among other things, our operating results,
financial condition and capital requirements, the terms of then-existing
indebtedness, general business conditions and other factors our board of
directors deems relevant. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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<PAGE> 22
CAPITALIZATION
The following table shows, as of March 31, 1999:
- our actual capitalization,
- our pro forma capitalization after giving effect to the private sale of
additional common stock in May 1999, and the elimination of certain long-term
debt that will be repaid from the proceeds of that sale and
- our pro forma capitalization as adjusted to reflect the sale of the
shares of common stock offered by us in this offering at an
assumed initial public offering price of $ per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.
The capitalization information in the table set forth below is qualified by, and
should be read in conjunction with, our more detailed financial statements and
notes to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
PRO FORMA AS
ACTUAL(1) PRO FORMA ADJUSTED
--------- --------- ------------
(dollars in thousands, unaudited)
<S> <C> <C> <C>
Short-term debt, including current portion(2)............... $ 2,620 $ 674 $
======= ======= =======
Long-term debt, less current portion(2)..................... 775 775
------- ------- -------
Shareholders' equity (deficit)
Preferred stock, no par value, 10,000,000 shares
authorized(3), none issued and outstanding actual; no
shares issued and outstanding pro forma and pro forma
as adjusted............................................ --
Common stock, no par value, 20,000,000 shares
authorized(3);
5,062,773 shares issued and outstanding actual;
6,145,038 shares issued and outstanding pro forma;
shares issued and outstanding pro forma as
adjusted(1)............................................ 3,905 13,705
Deferred stock option compensation expense.................. (376) (376)
Accumulated equity (deficit)................................ (5,310) (5,364) ()
------- ------- -------
Total shareholders' deficit....................... (1,781) 7,965 ()
======= ======= =======
Total capitalization............................ $(1,006) $ 8,740 $ ()
======= ======= =======
</TABLE>
- ---------------------------
(1) Based on shares outstanding and excluding:
- 736,332 shares subject to options outstanding, with an average exercise price
of $0.93 per share,
- 186,000 shares that could be issued upon exercise of warrants outstanding,
with an exercise price of $7.84 per share and
- 37,200 shares of common stock that could be issued upon exercise of warrants,
with an exercise price of $0.01 per share, which will be canceled upon the
completion of this offering.
(2) Includes capital lease obligations.
(3) On May 10, 1999, our board approved an increase in the authorized number of
shares to 50,000,000 shares of Preferred Stock and 250,000,000 shares of
Common Stock, subject only to shareholder approval.
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DILUTION
N2H2's net tangible book value on March 31, 1999 was approximately $(1,781,000)
or $(0.35) per share. "Net tangible book value" is total assets minus the sum of
liabilities and intangible assets. "Net tangible book value per share" is net
tangible book value divided by the total number of shares outstanding before the
offering.
After giving effect to certain adjustments relating to the private sale on May
11, 1999 of 1,082,265 shares of additional common stock resulting in net
proceeds to the Company of $9.8 million, our pro forma net tangible book value
was $7,965,129 or $1.30 per share.
Our net tangible book value, on a proforma basis as further adjusted for the
sale of shares of common stock offered by us in this offering after
deducting underwriting discounts, commissions, and other estimated offering
expenses would have been approximately $ per share.
The following table illustrates the pro forma as adjusted increase in net
tangible book value of $ per share and the dilution (the difference between
the offering price per share and net tangible book value per share) to new
investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $
------
Pro forma net tangible book value per share before the
offering.................................................. $1.30
Increase in net tangible book value per share attributable
to the offering...........................................
-----
Pro forma as adjusted net tangible book value per share
after giving effect to the offering.......................
------
Dilution per share to new investors in the offering......... $
======
</TABLE>
The following table shows the difference between existing shareholders and new
investors with respect to the number of shares purchased from us, the total
consideration paid and the average price per share. The table assumes that the
initial public offering price will be $ per share.
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders................... 6,145,038 % $12,784,434 % $2.08
New investors...........................
--------- ----- ----------- ------ -----
Total......................... 100.0% $100.0%
========= ===== =========== ======
</TABLE>
- ---------------
The foregoing discussion and tables assume no exercise of the underwriters'
over-allotment option or of any outstanding stock options or warrants after
March 31, 1999. As of March 31, 1999, there were outstanding options to purchase
736,332 shares of common stock at an average exercise price per share of $0.93
and warrants to purchase an aggregate of 223,200 shares at an average exercise
price per share of $6.54. You will suffer further dilution to the extent any of
these options or these warrants are exercised.
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<PAGE> 24
SELECTED FINANCIAL DATA
This section presents selected historical financial data of N2H2. You should
read carefully the financial statements included in this prospectus, including
the notes to the financial statements. The selected data in this section is not
intended to replace the financial statements.
We derived the statement of operations data for the fiscal years ended September
30, 1996, 1997 and 1998 and balance sheet data as of September 30, 1997 and
1998, from the audited financial statements in this prospectus. The selected
balance sheet data set forth below for us as of September 30, 1996 is derived
from our audited financial statements not included in this prospectus. Those
financial statements were audited by PricewaterhouseCoopers LLP, independent
accountants. We derived the statements of operations data for the six months
ended March 31, 1998 and 1999 and balance sheet data as of March 31, 1998 and
1999 from the unaudited financial statements included in this prospectus. We
believe that the unaudited historical statements contain all adjustments needed
to present the information included in those statements and that the adjustments
made consist only of normal recurring adjustments. The historical results are
not necessarily indicative of results to be expected for any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share dat(unaudited)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 108 $ 1,118 $ 3,078 $ 1,298 $ 2,605
Cost of revenues..................... 78 302 1,153 453 1,254
---------- ---------- ---------- ---------- ----------
Gross profit......................... 30 816 1,925 845 1,351
Operating expenses:
Sales and marketing................ 263 605 1,752 679 1,535
Research and development........... 91 371 614 252 394
General and administrative......... 493 602 1,157 483 954
---------- ---------- ---------- ---------- ----------
Total operating expenses... 847 1,578 3,523 1,414 2,883
---------- ---------- ---------- ---------- ----------
Operating loss....................... (817) (762) (1,598) (569) (1,532)
Interest income (expense), net....... (10) (119) (287) (110) (146)
---------- ---------- ---------- ---------- ----------
Net loss............................. $ (827) $ (881) $ (1,885) $ (679) $ (1,678)
========== ========== ========== ========== ==========
Basic and diluted net loss per
share(1)........................... $ (0.28) $ (0.26) $ (0.54) $ (0.20) $ (0.39)
========== ========== ========== ========== ==========
Basic and diluted weighted average
shares outstanding(1).............. 2,926,743 3,355,951 3,474,974 3,474,564 4,303,202
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................. $ 128 $ 71 $ 121 $ 88 $ 1,384
Working capital (deficit)............ 27 (829) (2,179) (910) (2,996)
Property and equipment, net.......... 163 453 1,271 772 2,045
Total assets......................... 400 784 1,848 1,034 4,285
Long-term obligations, excluding
current portion(2)................. 544 826 1,942 1,781 775
Total shareholders' deficit.......... (352) (1,201) (2,849) (1,880) (1,781)
</TABLE>
- ---------------------------
(1) See Note 10 of the Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing the share data.
(2) Includes capital lease obligations.
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this section together with the financial statements and other
financial information included in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those indicated in these forward-looking
statements.
OVERVIEW
N2H2 is a leading provider of Internet content filtering services to schools. We
are now extending the availability of our filtering services into increasing
numbers of homes, through approximately 190 ISPs, and to corporations and other
organizations. We were the first company to offer a server-based Internet
filtering solution for a customer's computer network. With Bess, our flagship
product, we currently provide filtering services to approximately 4.5 million
students in more than 6,000 schools in the United States and Canada. To
capitalize on our existing base of school customers, we introduced our education
oriented Internet portal called Searchopolis, which is designed to appeal to
K-12 students. Searchopolis incorporates our award winning filtering search
technology and is available at www.searchopolis.com to any Internet user who
wants access to a safe, educationally enriched Internet portal.
We were incorporated in June 1995 and introduced the industry's first proxy
server based Internet filter in September 1995. As of March 31, 1999, we had
accomplished the following:
- individually reviewed and categorized over 2.2 million Websites and partial
Websites,
- created a database of 32 categories of Internet content that can be selected
for filtering by the customer,
- installed our Internet filtering services in schools with approximately 4.5
million students,
- had users access over 339 million Web pages through our services in the month
of March 1999,
- installed 725 Internet filtering proxy servers in the United States, Canada,
Australia, United Kingdom, Germany, Chile, Mexico, India and Bermuda,
- introduced our education portal, Searchopolis.com, in October 1998,
- provided our services to approximately 150,000 homes through approximately
190 ISPs,
- entered into strategic corporate relationships with Inktomi, Looksmart and
others and
- grown to 156 employees, including 80 full time and 76 part time employees.
Since inception, we have derived substantially all of our revenues through a
combination of subscription and installation fees from our Internet filtering
services. Customers pay a one-time installation fee and enter into a
subscription contract, which is typically 12 months in duration. We recognize
installation revenues upon shipment of our servers and subscription revenues on
a straight line basis over the life of the subscription contract term.
We plan to offer alternate fee structures to our school customers that will give
them the choice of paying our recurring subscription fees or receiving our
filtering services at reduced rates or without charge in exchange for allowing
us to sell sponsorship rights to advertisers and to make Searchopolis the
default search engine on their networks. To the extent our customers do choose
to accept advertising from our sponsors, we will lose some or all of our
subscription revenues from those customers. Our customers may not accept our
alternate fee structures, and the impact on our revenues is unpredictable.
24
<PAGE> 27
We are expanding our services to the education and other markets with
Searchopolis. We expect Searchopolis to generate additional advertising revenues
as well as revenues from offering specialized communication features including
access-controlled, filtered e-mail, an easy-to-use calendar, Virtual Locker,
access to monitored chat rooms and various teacher tools including GradeChecker.
To date, we have derived only limited Internet advertising revenues from
indirect sales of advertisements on Searchopolis by our advertising partner,
24/7 Media, Inc. In the future, we expect to obtain a greater proportion of our
revenues from the direct and indirect sale of Internet advertising. We expect
that these sales will be made to companies that advertise their products and
services over the Internet to our target market of K-12 students. We currently
offer advertisers various sizes and types of advertising on Searchopolis through
24/7 Media. In the future, we expect to offer additional advertising as part of
our marketing of our Internet filtering services and advanced communication
tools. We recognize advertising revenues, net of any commissions paid to an
advertising agency, in the period that the advertisement is displayed. We intend
to continue to increase the number and scope of our relationships with
advertising partners, such as 24/7 Media, as well as to significantly increase
the size of our internal advertising sales organization.
We have a limited operating history and our prospects are subject to the risks,
expenses and difficulties encountered by companies in the new and rapidly
evolving Internet market. We have incurred significant net losses and negative
cash flows from operations since inception and, as of March 31, 1999, had
incurred operating losses of approximately $5.3 million. These losses have been
funded primarily through the issuance of common stock and debt. We intend to
continue to invest heavily in sales and marketing, technology and our operating
infrastructure. As a result, we expect to incur substantial net losses for the
foreseeable future.
In view of the rapidly changing nature of our business and our limited operating
history, we believe that period-to-period comparisons of revenues and operating
results are not necessarily meaningful. You should not rely upon this
information as an indication of future performance.
Revenues. We generate our revenues from installation, subscription and
advertising fees. While installation revenues are typically higher in the summer
months, we expect advertising revenues to be significantly affected by the
reduction of Internet use by schools and K-12 students during the summer months.
User traffic on our school customer systems has historically been lower during
the summer and during year-end vacation and holiday periods, and advertising
revenues will likely be less during these periods.
Cost of revenues. Cost of revenues consists of the costs of Website review,
server depreciation, search processing and hosting fees, technical installation
and support and telecommunications costs.
Sales and marketing. Sales expenses consist primarily of salaries, commissions
and bonuses. Marketing expenses consist primarily of salaries, marketing
brochures, trade shows, direct mailing programs, advertising, public relations
and travel. We believe that a significant increase in sales and marketing
efforts is essential for us to continue to improve our market position.
Accordingly, we anticipate increasing our investments in sales and marketing for
the foreseeable future.
Research and development. Research and development expenses consist primarily of
salaries and benefits for software developers, consulting fees, facilities costs
and equipment depreciation. In the development of new products and enhancement
of existing products, the technological feasibility of the service is not
established until substantially all product development is complete.
Accordingly, development costs and all costs related to internal research and
development have been expensed as incurred.
General and administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for our executive, finance,
human resources and administrative personnel, third party professional service
fees and allocation of our facilities and depreciation expenses. We expect to
incur additional costs related to managing the financial, legal and
administrative aspects of our business. We also
25
<PAGE> 28
expect general and administrative expenses to increase in the future, reflecting
growth in our operations and the costs associated with being a public company.
Income Taxes. Prior to May 1999 we were an S corporation for tax purposes. S
corporations are generally not liable for income tax at the corporate level
because the income, loss and credits flow through to the shareholders, who are
subject to tax on their individual returns. Accordingly, operating losses that
we have incurred since we began operations have not resulted in net operating
loss carryforwards available to offset future corporate income.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
------------------------ --------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues......................................... 100% 100% 100% 100% 100%
Cost of revenues................................. 72 27 37 35 48
---- --- --- --- ---
Gross profit..................................... 28 73 63 65 52
---- --- --- --- ---
Operating expenses:
Sales and marketing............................ 244 54 57 52 59
Research and development....................... 84 33 20 20 15
General and administrative..................... 457 54 38 37 37
---- --- --- --- ---
Total operating expenses......................... 785 141 115 109 111
---- --- --- --- ---
Operating loss................................... (757) (68) (52) (44) (59)
Interest income (expense), net................... (9) (11) (9) (8) (6)
---- --- --- --- ---
Net loss......................................... (766)% (79)% (61)% (52)% (65)%
==== === === === ===
</TABLE>
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO SIX MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
Revenues. Our revenues increased by $1.3 million, or 101%, to $2.6 million for
the six months ended March 31, 1999, from $1.3 million for the six months ended
March 31, 1998. This increase was due primarily to increased sales of filtering
and caching services. Revenues from installations increased by $410,000, or 75%,
to $960,000 for the six months ended March 31, 1999, from $550,000 for the six
months ended March 31, 1998. Subscription revenues increased by $877,000, or
117%, to $1.6 million for the six months ended March 31, 1999, from $748,000 for
the six months ended March 31, 1998. We began recognizing advertising revenues
of approximately $21,000 in the six months ended March 31, 1999. As our revenue
base increases, we do not believe we can sustain our historical percentage
growth rates of revenue.
Cost of revenues. Our cost of revenues increased by $801,000, or 177%, to $1.3
million for the six months ended March 31, 1999, from $453,000 for the six
months ended March 31, 1998. Cost of revenues as a percentage of total revenues
increased to 48% for the six months ended March 31, 1999, from 35% for the six
months ended March 31, 1998. These increases were due primarily to increases in
search processing and hosting costs, and personnel and related overhead costs.
We expect that our cost of revenues will vary from period to period and may
increase as a percentage of revenues in future quarters as we expand our
operations and offer alternate fee structures to our school customers.
26
<PAGE> 29
Sales and marketing. Sales and marketing expenses increased by $856,000, or
126%, to $1.5 million for the six months ended March 31, 1999, from $679,000 for
the six months ended March 31, 1998. This increase was primarily due to the
hiring of additional sales and marketing personnel and increased marketing
expenses. Sales and marketing expenses as a percentage of revenues increased to
59% for the six months ended March 31, 1999, from 52% for the six months ended
March 31, 1998.
Research and development. Research and development expenses increased by
$142,000, or 56%, to $394,000 for the six months ended March 31, 1999, from
$252,000 for the six months ended March 31, 1998. Research and development
expenses for the six months ended March 31, 1999, were related primarily to the
continued development of our filtering and Searchopolis services. In future
quarters, we expect research and development expenses to increase in amount and
to vary as a percentage of revenues. Research and development expenses as a
percentage of revenues decreased to 15% for the six months ended March 31, 1999,
from 20% for the six months ended March 31, 1998.
General and administrative. General and administrative expenses increased by
$471,000, or 98%, to $954,000 for the six months ended March 31, 1999, from
$483,000 for the six months ended March 31, 1998. This increase was primarily
due to increased personnel and related overhead costs, costs related to our
expansion into new facilities and professional fees associated with equity and
debt financings we completed in December 1998 and January 1999. General and
administrative expenses as a percentage of revenues was 37% for the six months
ended March 31, 1999 and 1998.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1997
Revenues. Our revenues increased by $2.0 million, or 175%, to $3.1 million for
the fiscal year ended September 30, 1998, from $1.1 million for the fiscal year
ended September 30, 1997. Installation and subscription revenues accounted for
substantially all the revenues for the fiscal year ended September 30, 1998.
Installation revenues increased $784,000, or 138%, to $1.4 million for the
fiscal year ended September 30, 1998, from $570,000 for the fiscal year ended
September 30, 1997. Installation revenues accounted for 44% of total revenues
for the fiscal year ended September 30, 1998, compared to 51% for the fiscal
year ended September 30, 1997. Subscription revenues increased by $1.2 million,
or 215%, to $1.7 million for the fiscal year ended September 30, 1998, from
$548,000 for the fiscal year ended September 30, 1997. Subscription revenues as
a percentage of total revenues increased to 56% for the fiscal year ended
September 30, 1998, compared to 49% for the fiscal year ended September 30,
1997.
Cost of revenues. Cost of revenues increased by $851,000, or 282%, to $1.2
million for the fiscal year ended September 30, 1998, from $302,000 for the
fiscal year ended September 30, 1997. Cost of revenues as a percentage of total
revenues increased to 37% for the fiscal year ended September 30, 1998, compared
to 27% for the fiscal year ended September 30, 1997. The increase was due
primarily to increases in search processing fees and personnel and related
overhead costs.
Sales and marketing. Sales and marketing expenses increased by $1.2 million, or
190%, to $1.8 million for the fiscal year ended September 30, 1998, from
$605,000 for the fiscal year ended September 30, 1997. This increase was
primarily due to the hiring of additional sales and marketing personnel and
trade show expenses. Sales and marketing expenses represented 57% of our total
revenues for the fiscal year ended September 30, 1998 and 54% of our total
revenues for the fiscal year ended September 30, 1997.
Research and development. Research and development expenses increased by
$243,000, or 66%, to $614,000 for the fiscal year ended September 30, 1998, from
$371,000 for the fiscal year ended September 30, 1997. This increase was
primarily due to an increase in the number of software developers and technical
personnel supporting development of our filtering and Searchopolis services. Our
research and development expenses as a percentage of revenues decreased to 20%
for the fiscal year ended September 30, 1998, from 33% for the fiscal year ended
September 30, 1997. This decrease was due primarily to increased revenues.
27
<PAGE> 30
General and administrative. General and administrative expenses increased by
$555,000, or 92%, to $1.2 million for the fiscal year ended September 30, 1998,
from $602,000 for the fiscal year ended September 30, 1997. This increase was
primarily due to the addition of personnel to support the growth of our business
and non-cash deferred stock compensation costs associated with warrants and
options granted during the period. General and administrative expenses as a
percentage of revenues decreased to 38% in the fiscal year ended September 30,
1998, from 54% in the fiscal year ended September 30, 1997. This decrease was
due primarily to increased revenues. We expect that our general and
administrative expenses will continue to increase in amount in the future as we
continue to build our administrative staff and operating infrastructure.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996
Revenues. Our revenues increased by $1.0 million, or 936%, to $1.1 million for
the fiscal year ended September 30, 1997, from $108,000 for the fiscal year
ended September 30, 1996. This increase reflects both the effects of the
increasing number of servers installed and subscription renewals. Installation
and subscription revenues accounted for substantially all the revenues for the
fiscal year ended September 30, 1997. Installation revenues increased by
$488,000, or 595%, to $570,000 for the fiscal year ended September 30, 1997,
from $82,000 for the fiscal year ended September 30, 1996. Installation revenues
accounted for 51% of total revenues for the fiscal year ended September 30,
1997, compared to 76% for the fiscal year ended September 30, 1996. Subscription
services revenues increased by $522,000, or 2,008%, to $548,000 for the fiscal
year ended September 30, 1997, from $26,000 for the fiscal year ended September
30, 1996. Subscription revenues as a percentage of total revenues increased to
49% for the fiscal year ended September 30, 1997, compared to 24% for the fiscal
year ended September 30, 1996.
Cost of revenues. Cost of revenues increased by $224,000, or 289%, to $302,000
for the fiscal year ended September 30, 1997, from $78,000 for the fiscal year
ended September 30, 1996. This increase was primarily due to increased
telecommunications costs and an increase in the number of Website reviewers.
Cost of revenues as a percentage of total revenues decreased to 27% for the
fiscal year ended September 30, 1997, compared to 72% for the fiscal year ended
September 30, 1996. This decrease was primarily due to increased revenues.
Sales and marketing. Sales and marketing expenses increased by $342,000, or
130%, to $605,000, for the fiscal year ended September 30, 1997, from $263,000
for the fiscal year ended September 30, 1996. This increase was primarily due to
the hiring of additional sales and marketing personnel and trade show and direct
mailing expenses. Sales and marketing expenses as a percentage of total revenues
decreased to 54% for the fiscal year ended September 30, 1997, compared to 244%
for the fiscal year ended September 30, 1996, primarily due to increased
revenues.
Research and development. Research and development expenses increased by
$280,000, or 307%, to $371,000 for the fiscal year ended September 30, 1997,
from $91,000 for the fiscal year ended September 30, 1996. The increase was
primarily due to an increase in the number of software developers and technical
personnel supporting development of our filtering services. Our research and
development expenses as a percentage of total revenues decreased to 33% for the
fiscal year ended September 30, 1997, compared to 84% for the fiscal year ended
September 30, 1996.
General and administrative. General and administrative expenses increased by
$109,000, or 22%, to $602,000 for the fiscal year ended September 30, 1997, from
$493,000 for the fiscal year ended September 30, 1996. This increase was
primarily due to increases in consulting fees paid. General and administrative
expenses as a percentage of total revenues decreased to 54% for the fiscal year
ended September 30, 1997, compared to 457% for the fiscal year ended September
30, 1996, primarily because of the growth in revenues.
28
<PAGE> 31
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth unaudited quarterly statement of operations data
for the six quarters ended March 31, 1999, as well as the percentage of our
revenues represented by each item. This data has been derived from unaudited
financial statements that have been prepared on the same basis as our audited
financial statements and, in our opinion, includes all adjustments, consisting
of normal recurring adjustments, that we consider necessary for a fair
presentation of such information when read in conjunction with our audited
financial statements and the notes to those statements included elsewhere in
this prospectus.
We have incurred operating losses since inception and we cannot be certain that
we will achieve profitability on a quarterly or annual basis in the future. We
believe that future operating results will be subject to quarterly fluctuations,
and, as a result, we believe that results of operations for interim periods
should not be relied upon as any indication of the results to be expected in any
future period. See "Risk Factors -- Our Quarterly Financial Results Fluctuate
and May Be Affected by Seasonal Variations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1998 1998 1998 1998 1999
------------ --------- -------- ------------- ------------ ---------
(DOLLARS IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 604 $ 694 $ 675 $1,105 $1,189 $ 1,416
Cost of revenues............... 201 252 317 383 532 722
----- ----- ----- ------ ------ -------
Gross profit................... 403 442 358 722 657 694
Operating expenses:
Sales and marketing.......... 286 393 481 592 638 897
Research and development..... 116 136 175 187 186 208
General and administrative... 244 239 316 358 328 626
----- ----- ----- ------ ------ -------
Total operating expense........ 646 768 972 1,137 1,152 1,731
Operating loss................. (243) (326) (614) (415) (495) (1,037)
Interest income (expense),
net.......................... (50) (61) (54) (122) (155) 9
----- ----- ----- ------ ------ -------
Net loss....................... $(293) $(387) $(668) $ (537) $ (650) $(1,028)
===== ===== ===== ====== ====== =======
PERCENTAGE OF REVENUES
Revenues....................... 100% 100% 100% 100% 100% 100%
Cost of revenues............... 33 36 47 35 45 51
----- ----- ----- ------ ------ -------
Gross profit................... 67 64 53 65 55 49
Operating expenses:
Sales and marketing.......... 47 57 71 54 54 63
Research and development..... 19 20 26 17 16 15
General and administrative... 41 34 47 32 27 44
----- ----- ----- ------ ------ -------
Total operating expense........ 107 111 144 103 97 122
Operating loss................. (40) (47) (91) (38) (42) (73)
Interest income (expense),
net.......................... (8) (9) (8) (11) (13) 1
----- ----- ----- ------ ------ -------
Net loss....................... (48)% (56)% (99)% (49)% (55)% (72)%
===== ===== ===== ====== ====== =======
</TABLE>
29
<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through private sales
of equity securities, the use of short-term and long-term debt and capital
leases. As of March 31, 1999, we had cash and cash equivalents of $1.4 million.
Our operating activities resulted in net cash outflows of $304,000 in 1996 and
$427,000 in 1997 and a net cash inflow of $286,000 in 1998. For the six months
ended March 31, 1999, our operating activities resulted in a net cash outflow of
$1.4 million. The operating cash outflows in 1996, 1997 and the six months ended
March 31, 1999 resulted from net operating losses and increases in accounts
receivable due to increased sales. The operating cash inflow in 1998 resulted
primarily from increases in prepayment of subscription fees, accounts payable
and accrued liabilities.
Capital expenditures, excluding those under capital leases, totaled $121,000,
$230,000 and $383,000 in 1996, 1997 and 1998 and $416,000 in the six months
ended March 31, 1999. We anticipate that we will continue to experience an
increase in capital expenditures consistent with our anticipated growth in
installations of new proxy servers and purchases of equipment in support of our
increasing operations, administrative infrastructure and personnel.
Our financing activities provided $545,000 in 1996, $600,000 in 1997 and
$147,000 in 1998 and $3.1 million in the six months ended March 31, 1999. For
1996, cash provided by financing activities consisted primarily of $275,000
received in connection with the sale of common stock and $285,000 in proceeds
from long-term borrowings, reduced by $15,000 in payments on capital lease
obligations. For 1997, cash provided by financing activities consisted primarily
of $631,000 in proceeds from long-term borrowings, reduced by $31,000 in
payments on capital lease obligations. For 1998, cash provided by financing
activities consisted primarily of $210,000 in proceeds from long-term
borrowings, reduced by $51,000 in payments on capital lease obligations and
repayments of notes payable. For the six months ended March 31, 1999, cash
provided by financing activities consisted primarily of $2.0 million received in
connection with the sale of common stock and warrants and $2.0 million in
proceeds from long-term debt borrowings, less $201,000 of payments under capital
lease obligations and $669,000 of repayments on notes payable.
On April 30, 1999, we entered into a term loan and revolving line of credit
agreement with Imperial Bank. The term loan is secured by a first priority claim
against all of our unpledged assets. The term loan provides for maximum
borrowings of $2.0 million if certain conditions are met. The revolving line of
credit provides for draws of 80% of accounts receivable assigned as security up
to a maximum short-term borrowing of $2.0 million if certain conditions are met.
As of May 12, 1999, the amount available for borrowing under the term loan and
revolving line of credit totaled $1.8 million.
On May 11, 1999, we completed a private equity financing in which we raised
$10.0 million through the sale of 1,082,265 shares of common stock at a price
per share of $9.24. This private financing was conducted to retire $2.0 million
in outstanding long-term debt and to ensure our ability to fund increased
marketing and installation activities at the beginning of the 1999 academic
summer recess, a crucial marketing period for us.
We intend to substantially increase our operating expenses in 1999 and beyond as
we:
- enter new markets with our services,
- introduce an enhanced version of Searchopolis with new communication tools,
- increase our sales and marketing activities,
- hire additional software development, sales and marketing, and general and
administrative personnel and
- implement new and upgraded information and financial systems.
30
<PAGE> 33
These increased operating expenses will consume a significant amount of our cash
resources, including a portion of the net proceeds of this offering. We believe
that the net proceeds of this offering, together with our existing cash and cash
equivalents, will be sufficient to meet our anticipated cash needs for at least
the next 12 months. If cash generated from operations is insufficient to satisfy
our liquidity requirements, we may seek to sell additional equity or debt
securities or to obtain a larger credit facility. The sale of additional equity
or convertible debt securities would result in additional dilution to our
shareholders. The incurring of indebtedness would result in increased fixed
obligations and could result in covenants that would restrict our operations. We
have not made arrangements to obtain additional financing and we cannot assure
you that financing will be available in amounts or on terms acceptable to us, if
at all. See "Risk Factors -- Our Future Capital Needs Are Uncertain."
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" issued
February 1997, requires presentation of earnings per share on a basic and
diluted earnings per share basis. Our earnings per share for all periods
presented have been stated to reflect the adoption of SFAS No. 128. Under the
provisions of SFAS No. 128, basic earnings per share is calculated as income
available to common shareholders divided by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period, including options and warrants computed using the treasury stock method.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1
provides guidance for an enterprise on accounting for the costs of computer
software developed or obtained for internal use. SOP 98-1 is effective for our
fiscal year 1999. We anticipate that accounting for transactions under SOP 98-1
will not have a material impact on our financial condition or results of
operations.
THE YEAR 2000
Background of year 2000 issues. Many currently installed computer systems and
software products are unable to distinguish between 20th century dates and 21st
century dates because such systems were developed using two digits rather than
four to determine the applicable year. For example, computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This error could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced to comply with "year 2000"
requirements.
State of readiness. Our business is dependent on the operation of numerous
systems that could potentially be affected by year 2000 related problems. Those
systems include, among others, hardware and software systems used by us to
deliver products and services to our customers, communications networks such as
the Internet and private intranets, the internal systems of our customers and
suppliers, software portions of products licensed to customers, the hardware and
software systems used internally by us in the management of our business and
non-information technology systems and services used by us in the management of
our business, such as power, telephone systems and building systems.
Our network is critical to providing top quality, reliable service to our
customers. Our goal is to maintain this quality and provide uninterrupted
service through the turn of the century. Our year 2000 program is
enterprise-wide and is focused on the following interrelated categories, which
include both software and hardware critical to maintaining uninterrupted service
to our customers:
- our own computer networks and proxy server equipment,
- applications, products and services we have developed,
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- external interfaces of our networks and applications,
- our customers' information technology platforms that support our
applications,
- other information and computer systems which are essential to conduct
business but that do not affect our ability to provide services and products
to customers and
- our non-information technology infrastructure.
The key milestones to our year 2000 program common to each of these categories
are internal assessment, testing and repair.
We believe that we have identified and reviewed the internally and externally
developed software that supports the development and delivery of our services
and products or is necessary to maintain our administration, sales and
accounting functions. We have completed our assessment of this software and have
made most of the changes we consider necessary. We expect to complete both our
internal and external year 2000 compliance assessment by June 1, 1999. To date,
we have spent an immaterial amount on year 2000 compliance. We do not believe
the cost of preparing for year 2000 compliance for this software will exceed
$50,000. If we are wrong, we could face additional unexpected expenses to fix
any year 2000 problems.
We use third party equipment and software that may not be year 2000 compliant.
We have reviewed our externally purchased network elements, including switches,
routers, proxy servers and network control points and do not believe they will
be affected by year 2000 concerns. We have identified our fax server software as
noncompliant and are currently in the process of upgrading to a compliant
version. We are also reviewing other systems that are important to our business
such as telecommunications, energy and environmental management and so far have
not identified any significant problems associated with year 2000 issues in
these systems.
In conjunction with our efforts to assess, test and repair our information
technology elements, we are reviewing other systems that are critical to our
business. These other systems include energy and environmental management
systems critical to various computer systems, as well as the fundamental need to
assure continuing safety, security and operations. To date, we have not
identified any significant problems associated with year 2000 issues.
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BUSINESS
INTRODUCTION
N2H2 is a leading provider of Internet content filtering services to schools. We
are now extending the availability of our filtering services into increasing
numbers of homes, through approximately 190 ISPs, and to corporations and other
organizations. We were the first company to offer a server-based Internet
filtering solution for a customer's computer network. With Bess, our flagship
product, we currently provide filtering services to approximately 4.5 million
students in more than 6,000 schools in the United States and Canada. To
capitalize on our existing base of school customers, we introduced our education
oriented Internet portal called Searchopolis, which is designed to appeal to
K-12 students. Searchopolis incorporates our award winning filtering search
technology and is available at www.searchopolis.com to any Internet user who
wants access to a safe, educationally enriched Internet portal.
Our filtering services enable our school and other customers to limit access to
the Internet by allowing them to select from among 32 content categories,
including pornography, profanity, hate crime advocacy, drugs, violence, weapons
instruction and other potentially unsuitable material. Customer control over the
selection of filtering criteria for Internet content is one of the key features
of our filtering solutions. Our customers include:
- the statewide networks serving most of the public schools in
- Ohio,
- Tennessee,
- Maine,
- Oklahoma and
- Wisconsin, and
- school systems in areas such as
- Los Angeles County,
- Baltimore,
- Boston,
- Calgary,
- Seattle,
- Stockton and
- Tampa.
In March 1999, students and teachers accessed approximately 339 million Web
pages through Bess. We believe the number of users accessing the Internet
through our filtering services presents a significant opportunity for us to sell
advertising to sponsors who wish to reach K-12 students.
We intend to promote Searchopolis as the premier education oriented portal,
capitalizing on our existing base of school customers using Bess to filter
Internet content. Searchopolis improves the educational potential of the
Internet by assembling educational content in one place and providing safe
access to the Web through our filtering search technology. We are developing and
plan to integrate additional specialized communication services into
Searchopolis to enhance its capability to serve as the portal of choice for the
community of students, teachers, parents and administrators. These features will
include: access-controlled, filtered e-mail, an easy-to-use calendar linking
schools, students and teachers, a "Virtual Locker" to store students' favorite
Internet sites, classroom material and homework for access from the home,
library or other locations outside the classroom, and GradeChecker, which will
provide students, teachers and parents with Internet access to grades and other
classroom information.
We believe that Bess's strong reputation among teachers and parents, combined
with the growing use of the Internet at home by students, will increase the
demand for our filtering services in the residential
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market. We also develop, market and support Internet filtering solutions that
enable businesses to increase productivity by limiting the content that
employees can access on the Internet without blocking material that is
appropriate and useful for their jobs. In addition to filtering pornography and
other potentially unsuitable materials, our services enable customers to limit
access to chat, sports, gambling, free e-mail and other selected categories of
sites. We are pursuing marketing alliances with companies in the United States
and overseas to increase our penetration of the corporate market. We recently
entered into an agreement with Computer Sciences Corporation to provide company
wide filtering of employee Internet use. We also have a marketing alliance with
GTE Interactive to provide Internet filtering for hotel guest rooms.
Our complete filtering solutions offer the following key benefits:
- automated identification of Websites backed by human review to accurately
place Internet content into a database of 32 categories,
- customer choice of filtering categories with password-based override for
authorized users,
- ability to restrict access to Websites soliciting personal information from
users,
- minimal customer effort required for installation and maintenance,
- server-based filtering that is difficult to bypass and
- daily electronic updating of the database requiring no customer input.
INDUSTRY BACKGROUND
Growth of the Internet
The Internet has emerged as a critical global communications medium, enabling
millions of people to access and share information and conduct business
electronically. Industry analyst International Data Corporation estimates that
the number of Web users will grow from approximately 97 million worldwide in
1998 to approximately 320 million by the end of 2002. The rapidly increasing
volume of information available over the Internet has contributed to the
phenomenal growth in the number of users and hours spent online. The Internet
has become an invaluable tool for those who would otherwise not have access to
the rich data mine of information contained in libraries, databases and Websites
around the world. As a result, schools, libraries, homes, corporations and
affinity groups, such as churches or associations, increasingly are connecting
to, and encouraging their users to access, the Internet.
In the United States, there are approximately 47 million public school K-12
students within 13,000 school districts and approximately 5 million private
school K-12 students. Estimates set the number of Canadian and European students
to be roughly equal to the number of students in the United States. Schools in
the United States are rapidly expanding their computer networks and adding
Internet access with the help of a four year, $9 billion matching funds program
implemented by the Federal Communications Commission in January 1998. Both the
Clinton Administration and the National Education Association have announced
long-term goals to provide Internet access to all students in the nation's
public schools. The National Education Association has recommended a target of
one computer workstation for every five students, up from one for about every 20
students currently.
We believe the home and business Internet markets, both domestic and
international, present us with significant opportunities. The Annenberg Public
Policy Center estimates that 60% of United States households with children aged
8 to 17 have computers and 61% of those are connected to the Internet.
International Data Corporation estimates that medium and large businesses will
account for 49 million Internet users worldwide by the year 2000.
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The Need for Filtering
The introduction and expanded use of the Internet as an educational tool in the
classroom has prompted school board members, superintendents and teachers to
focus on protecting students from unsuitable Internet content. Parents have also
become increasingly concerned about children's access to various types of
content, ranging from pornography to bomb making instruction, among others.
Without an effective Internet content filtering system in place, educators and
parents have had to choose between undesirable alternatives: prohibiting
Internet access altogether or closely supervising each student's use of the
Internet. Prohibiting Internet access deprives students of the wealth of
beneficial information available on the Internet, while supervision can waste an
enormous amount of teacher or parent time.
Corporations also face issues associated with unrestricted on-the-job access to
the Internet, including productivity losses caused by employees spending large
amounts of time during the workday surfing the Internet for personal reasons. In
addition, there are many potential liability issues relating to the misuse of
and unlawful distribution of Internet-based content.
The Need for an Education Oriented Portal
The Internet has the potential to be a rich educational resource for K-12
students. However, most existing Internet portals are targeted to the needs of
an older audience and do not address the requirements of the growing school and
student Internet communities. In addition, current search engines and portals
are not formatted to meet the specific educational needs and interests of these
communities. This makes it difficult and inefficient for students, parents and
teachers to incorporate the Internet into the classroom and home.
The Development of Filtering
Early Internet filtering products were based on the use of certain keywords,
often four-letter or slang expressions for sex or body parts. These products
scan the text of a Website and if designated keywords or phrases exist, access
to the particular Website or partial Website is blocked. Keyword blocking has
significant limitations in its ability to differentiate between acceptable and
potentially objectionable content, as it works on text only and relies on
scanning content without regard for context. For example, blocking anything with
"sex" in it blocks "Middlesex." It is impossible for a keyword blocking system
to block out all inappropriate content without simultaneously blocking a large
amount of useful information. In addition, much of the objectionable content on
the Internet consists of graphics, some of which have no text to scan for
keywords.
In addition, most of the keyword filter products on the market are client-based
software products. Because the software must be installed and maintained on each
individual workstation that requires filtering, these systems have several
significant limitations:
- users can more easily circumvent the filtering programs,
- product installation and maintenance can be time consuming and expensive and
- database updates require user input.
Many server-based filtering solutions suffer from some of the same deficiencies
as client-based software products. Some have limited databases that may not be
updated frequently, some are keyword based, some require extensive
administrative oversight and some are not easy to adapt to larger network
environments.
In addition to keyword filtering, access to Websites can be blocked through URL
lists and packet filtering. URL blocking involves creating lists of Web
addresses in a database, often categorized as "allowed sites" or "blocked
sites." Lists of blocked URLs allow targeted content management by blocking only
selected portions of a given Website, but require frequent updating to ensure
the list remains current. By comparison, packet filtering blocks access to
entire Internet servers, many of which contain multiple
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Websites with both valuable and inappropriate material. The potential benefits
of packet filtering in terms of speed and simplicity may be outweighed by its
lack of precision.
THE N2H2 SOLUTION
N2H2 is a leading provider of Internet content filtering, serving schools, homes
and businesses. We develop, market and support technology services that make the
Internet a safe and educational resource for K-12 students at school and at
home. Our server-based Internet filtering solutions also enable businesses to
increase employee productivity by limiting the content employees can access on
the Internet. By using automated search technology backed by human review to
scan the Internet for potentially unsuitable material, we are able to offer our
customers a significant improvement over other Internet filtering products. In
addition, we offer Searchopolis, which addresses the need for a content
filtered, education focused Web portal that is easy to navigate and provides
communication tools to students, teachers and parents.
Our Filtering Solution
In 1995, we introduced Bess, the first proxy server-based Internet filtering
solution. We believe our system provides our customers the following key
benefits:
- Thorough and accurate content analysis. Our proprietary Internet search
technology continuously scans the Internet for content that fits into one or
more of 32 categories. Our staff of more than 10 full time and 70 part time
employees then reviews this content and places it in the appropriate
categories. Use of human review avoids overfiltering, often a disadvantage of
fully automated systems.
- Customer choice. We believe our proprietary search technology combined with
human review to categorize content enables our customers to effectively
tailor and control the Websites and pages they make available to their users.
Our system requires minimal customer oversight by a system administrator,
teacher or parent, while allowing our customers the flexibility to override
specific Website filtering, customize filtered categories, select time
schedules for various levels of filtering and grant password-based override
for authorized users.
- Protection of personal information. Our filtering solutions allow our
customers to protect students and children from inappropriate solicitations
of personal information. By identifying and categorizing Websites that seek
access to confidential or personal information about students and children or
their parents or families, we are able to address this growing concern about
Internet access.
- Ease of installation and maintenance. Our proxy server-based filtering
solutions minimize customer need to support installation and maintenance of
equipment and software. Since our filtering product is network-based, there
is no need to install or maintain equipment or software at each user's
desktop. In addition, we provide full technical support to our customers for
our services.
- Difficult to bypass. Located on a customer's central network or at an ISP,
our server-based filtering is an integral part of each Internet access
request. It is virtually impossible for the user to circumvent our filtering
system.
- Continuous updating and caching. Our centrally managed system provides our
customers with a daily electronic update of our database of categorized
sites. As a result, our clients' filtering is kept current, reflecting
changes to sites on the Internet on a near real-time basis. Our proxy servers
are also equipped with caching capabilities that can significantly speed
classroom access and save our customers critical telecommunication capacity
and expense.
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Searchopolis: Our Education Portal to the Internet
Searchopolis combines the following key features:
- Safe search. Searchopolis includes our pioneering, proprietary filtering
technology operated in conjunction with Inktomi's search technology.
Searchopolis enables the user to find educational resources quickly and
navigate safely through the Internet.
- Focused educational content. Teachers and students have limited class time to
access and use the Internet. Searchopolis enables instant access to thousands
of Websites provided by our partner, Looksmart. These are organized by
subjects such as history, math and science and are supplemented with learning
tools such as a dictionary and news, sports and weather reports provided by
our partner, InfoSpace. By assembling educational content in one place,
making searches fast and relevant and avoiding the need for supervision, we
believe Searchopolis provides a level of effectiveness unmatched by any other
educational Web portal.
- Communication tools. We are developing enhanced features for Searchopolis to
provide specialized communication tools for teachers, students and parents,
including:
-- access-controlled, filtered e-mail,
-- an easy-to-use calendar linking schools, teachers, students and parents in
local communities,
-- a Virtual Locker to store students' favorite Internet sites, classroom
material and homework for access from the home, library or other locations
outside the classroom,
-- access to monitored chat rooms,
-- GradeChecker to provide parents, teachers and students Internet access to
grades and other classroom information and
-- teacher tools, including a teacher calendar.
N2H2'S STRATEGY
Our goal is to expand our presence in the school, home and corporate markets and
to make Searchopolis the leading education oriented Web portal for K-12
students. We plan to achieve this goal through the following steps:
Aggressively expand our presence in schools. We plan to expand our education
user audience by building upon our reputation in the school market for
high-quality, effective Internet content filtering. Part of our strategy for
doing this will be to make it easier for schools to purchase our services.
Today, schools are faced with many competing demands on their budgets, and we
believe they are open to proposals to assist them in meeting their educational
goals within their budgets. To more rapidly expand our filtering services and to
take advantage of advertising opportunities, we intend to offer alternate fee
structures to schools that allow us to sell sponsorship rights to advertisers
and to make Searchopolis the default search engine on these schools' networks.
Enhance content and communication features on Searchopolis. We plan to launch an
enhanced Searchopolis portal in June 1999 featuring specialized communication
tools customized for education, including access-controlled, filtered e-mail,
Virtual Locker, access to monitored chat rooms, GradeChecker and a calendar.
This new version of Searchopolis will also feature a directory of useful
Websites classified by educational topic and easier access to reference tools,
curriculum materials and other useful information. We plan to continue adding
content and communication features to Searchopolis in the future and to build
upon our existing agreements with Inktomi, Looksmart, InfoSpace and
Merriam-Webster, Incorporated.
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Create advertising opportunities to reach the student market. We believe our
presence and continued growth in the education market will create a sizable
audience for advertisers trying to reach the 52 million K-12 students in the
United States. We expect to create the potential for high-value advertising that
will appeal to advertisers by differentiating students according to school
levels and geographic location.
Increase penetration of the home market. We believe parents familiar with Bess
and Searchopolis trust and value our services, because we offer the content
filtering and search services used by their children's schools. We are expanding
the availability of our services to homes by making them available through ISPs.
We have approximately 190 ISP partners providing our services to over 150,000
homes in the United States and are seeking additional relationships with ISPs
throughout the United States and abroad. ISPs may choose to either include our
services in their customers' basic monthly Internet access charge or bill for it
separately as an additional feature. We also target the home market through
affinity groups, such as churches and associations. These groups are
increasingly interested in filtered content tailored to their group's particular
needs. For example, the Church of Jesus Christ of Latter Day Saints (the Mormon
Church), which has ten million members, uses our filtering and our filtering
search technology is used on its Website.
Expand our presence in the corporate and international markets. We are pursuing
marketing alliances with companies in the United States and overseas to increase
our penetration of the corporate market. We are also increasing our direct sales
efforts in the corporate marketplace and we recently entered into an agreement
with Computer Sciences Corporation to provide company wide filtering of employee
Internet use. In addition, we recently entered into a marketing alliance with
GTE Interactive to provide Internet filtering for hotel guest rooms.
Increase sales and marketing efforts and build brand awareness. We plan to
substantially increase our direct sales activities and our marketing
expenditures to penetrate the school, home, international and business filtering
markets and increase the use of Searchopolis. We also plan to devote substantial
resources and continue to work with our advertising sales partner 24/7 Media to
increase our advertising sales volume. In addition, we have begun to implement a
major brand awareness and marketing campaign designed to deliver a focused
message to each of our targeted market segments.
Pursue additional strategic relationships. We intend to aggressively pursue
additional strategic relationships to expand our business in both the corporate
and international markets. We have customers in Canada, Australia, the United
Kingdom, Germany, Mexico, Chile, India and Bermuda and intend to expand
internationally by entering into additional overseas marketing relationships.
Where appropriate, we will consider the acquisition of businesses that can help
us provide specialized content or advanced service features.
SERVICES AND TECHNOLOGY
The N2H2 Filtering Service
We provide a complete filtering solution. Our filtering services enable our
school, library and other customers to limit access to offensive or otherwise
undesirable information on the Internet. Our on-site proxy servers are shipped
to customers ready to install into their networks. We configure, monitor and
maintain all the software and hardware components necessary to meet our
customers' filtering needs remotely from our Seattle, Washington network
facility. Once a customer notifies us that it has installed our proxy server, we
can put it in service in less than two hours. Our filtering solutions are
comprised of three main components:
- a proxy server infrastructure,
- our advanced Internet content categorization system and
- tools for filter control and reporting.
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Proxy server infrastructure: configurations and caching. Rather than installing
a filter on every workstation as is necessary with client-based products, our
solution uses a proxy server that is usually installed on the customer's
network. Every networked workstation uses our filtering solution to access the
Internet.
Proxy server-based systems are secure and difficult to bypass because the proxy
server is installed directly in the network, thus making it impossible for users
to access the Internet without passing through this server. From a customer's
point of view, a proxy-based system is easy and economical to operate because it
can be managed by us from one central site. Our customers' systems are
monitored, maintained and kept updated primarily from our headquarters in
Seattle. The parameters that our clients use to control the filtering of their
Internet content are stored by the proxy server located on their networks and
are based on information received from our central database of categorized
Websites. This information is updated and sent to our customers' proxy servers
daily. In addition, we also send system upgrades and enhancements to our
customers' proxy servers via the Internet.
We provide two proxy server configurations to our clients:
- On-site configuration. In most cases, we install our proxy server on the
customer's network. Internet requests are routed directly through these
servers for filtering. In larger networks, we may deploy multiple filtering
servers to assure adequate capacity, redundancy and backup. Our proxy server
can also be configured to include a caching feature that can significantly
increase Internet access performance. The caching feature increases
performance of most networks by 30% or more. Our on-site configuration is
most often used by medium to large sized schools, school districts and state
school systems. It is also used by ISPs and corporations, which are then able
to provide filtered Internet services to their individual users, business
customers or employees.
- Remote or redirect configuration. For smaller networks, we offer a "redirect"
service that enables multiple customers to share one regionally located proxy
server. All of the customer's Internet requests are routed via the Internet
to an off-site proxy server where the content is filtered and then returned
to the customer. Smaller schools and libraries have been the primary
customers of our redirect service. While this configuration is more
cost-effective for smaller networks, it does not operate at the same speed as
our on-site configuration because it requires multiple routing steps and
lacks caching.
Advanced Internet Content Categorization System
Our clients' filtering criteria are based on our listing of Internet content
categories. We believe we have created the most extensive and accurate database
and range of Website categories of any Internet filtering company. In our
Website categorization process we employ a multi-step procedure using automated
search technology backed by human review to place Internet content into 32
distinct categories. Automated search is used to scan the Internet on a
continuous basis to quickly identify Websites that potentially fit into these
categories. We employ a wide variety of techniques for this part of our
automated categorization process including keyword search and site associations
and linkages. Many of the techniques we use in our automated search are
proprietary and were developed by us. Once a Website has been identified as
fitting into one or more of our 32 categories, it is stored in a database and
prioritized for human review. Our categories and the material they cover are
summarized below:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------
CATEGORY MATERIAL
- -------------------------------------
Adults Only Material labeled by its author or publisher as being
strictly for adults, such as, "Adults only" or "You must be
18 to visit this site."
- -------------------------------------
Alcohol Advocates or promotes recreational use of alcohol.
- -------------------------------------
Chat Chat sites or services that allow short messages to be sent
to others in real time.
- -------------------------------------
</TABLE>
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<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------
CATEGORY MATERIAL
- -------------------------------------
Drugs Advocates or promotes recreational use of any controlled
substances. (See Illegal.)
- -------------------------------------
Employment Search Job-hunting and related employment resources.
- -------------------------------------
Free Mail Sites that offer free Web e-mail accounts that can expose
users to unsuitable content delivered via e-mail file
attachments.
- -------------------------------------
Free Home Pages Sites where home page space is offered for free. Individual
pages that have been reviewed by N2H2 on such sites are
removed from this category but filed under other categories
as appropriate.
- -------------------------------------
Gambling Gambling services or information relevant to gambling.
- -------------------------------------
Games Computer games and related information.
- -------------------------------------
Hate/Discrimination Advocates discrimination against others based on race,
religion, gender, nationality or sexual orientation.
- -------------------------------------
Illegal Advocates or promotes illegal activities such as bomb
making, fraud and computer hacking.
- -------------------------------------
Jokes Jokes and humor.
- -------------------------------------
Lingerie Models in lingerie, except those classified as Nudity.
- -------------------------------------
Message/Bulletin Boards Sites that permit semi-permanent messages to be posted and
read by others.
- -------------------------------------
Murder/Suicide Information on committing murder or suicide and crime scene
photos.
- -------------------------------------
News News and current events.
- ---------------------------------------------------------------------------------------------------
Nudity Naked or visible genitalia, buttocks, female breasts, etc.
- -------------------------------------
Personal Information Sites that gather personal information, including name,
address and credit card number.
- -------------------------------------
Personals Personal advertisements, including "mail order brides."
- -------------------------------------
Pornography Material intended to be sexually arousing or erotic.
- -------------------------------------
Profanity Crude, vulgar or obscene language or gestures.
- -------------------------------------
Recreation/Entertainment Recreation and entertainment information other than games,
jokes or sports.
- -------------------------------------
School Cheating Information Any site that promotes plagiarism or similar cheating among
students.
- -------------------------------------
Sex Images or descriptions of sexual activity, sexual
merchandise or sexual fetishism.
- -------------------------------------
Sports Sports information, especially professional sports.
- -------------------------------------
Stocks Stock trading, stock quotes and stock market information.
- -------------------------------------
</TABLE>
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<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------
CATEGORY MATERIAL
- -------------------------------------
Swimsuits Models in swimwear including fashion swimwear photos.
- -------------------------------------
Tasteless/Gross Bodily functions, tasteless humor, graphic medical photos
and others.
- -------------------------------------
Tobacco Advocating or promoting recreational use of tobacco.
- -------------------------------------
Violence Graphic images or written descriptions of wanton violence or
grave injury, including graphically violent games.
- -------------------------------------
Weapons Information on use of weapons, weapon collecting or weapon
making.
- -------------------------------------
Not Categorized Material reviewed but not otherwise categorized.
- -------------------------------------
</TABLE>
In addition to these 32 categories, we allow for exceptions to our
categorizations to permit access to useful content that would otherwise be
filtered under another category including:
- educational material such as sex education and public health information that
may contain sex, nudity or violence,
- historically significant material that may contain sex or violence and
- medical information that may contain nudity.
Our customers have the flexibility to select which, if any, of the exceptions to
these categories they wish to enable.
Categorized sites are stored in a proprietary database located at our
headquarters. The contents of this database are continuously updated using both
human and automated review and reflect the introduction of new sites on the
Internet and changes to sites we previously categorized. Each day, our customers
receive electronically an encrypted copy of the Website categorization
information stored in this database.
Tools for Filter Control and Reporting. We provide our clients with a broad
range of tools that they can use to control and modify their own filtering
criteria as well as to monitor the filtering activity on their networks. These
tools are accessed through a simple Web-based interface called the control
center. The control center is password protected and currently includes the
following features:
- Statistics reporting. Enables the system administrator to configure filtering
reports in single day, multiple day and historical formats. Summary data can
be displayed on Web pages, distributed by e-mail and exported to Excel
spreadsheets.
- Authorized users. Used to create special accounts for specific users that
need to temporarily turn off filtering at their workstations.
- Local URL customization. Allows the system administrator to block specific
URLs that are not categorized by our system or to allow access to URLs that
we have categorized.
- Request site review. Web based e-mail form that customers can submit to us to
request review of a site for blocking or unblocking.
- Cache administration. Allows the user to control the storage criteria for
content in the proxy server cache.
- Cache-on-demand. Enables the administrator to set caching parameters.
Information preloaded in the proxy server cache can be retrieved
significantly faster, particularly when the customer's network is under heavy
use.
- Filter schedules. Used to schedule the time of day that certain filtering
rules will be put into effect. For example, filter schedules can be preset to
block game sites only during school hours.
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- Filter builder. Customers use this feature to set up their own filtering
rules. They can begin this process by starting with one of our predefined
sets of rules or templates such as "Bess for Schools" or "Bess for Libraries"
and then make modifications as necessary.
- IP control. Enables the customer to define which workstations on their
network will have access to the proxy server for filtered Internet service.
In addition, in the home and ISP market, parents have a password-based override
allowing them unfiltered Internet access at any time.
Searchopolis: Our Education Portal to the Internet
Searchopolis is our comprehensive education portal, which includes our
pioneering filtering search technology. It incorporates what we believe to be
the most valuable educational resources found on the Internet and combines with
them a number of other features that are important and interesting to middle and
high school students. The Internet represents a huge educational resource, but
it is disorganized and a user must often invest extensive time to locate
relevant material. By assembling educational content in one place, making
searches fast and relevant and minimizing the need for adult supervision,
Searchopolis makes the Internet a more effective educational resource. We intend
to make Searchopolis attractive to middle and high school students, their
teachers and parents by providing extensive content and content arrangement
features as well as specialized communication services. We believe that as
students grow accustomed to using Searchopolis at school, they will also use it
more frequently at home and increasingly appreciate its many useful features.
Content and content management features. We have developed Searchopolis in
conjunction with several partners that provide us with their proprietary content
or content management services under advertising revenue sharing agreements.
Educational content directory links. Searchopolis contains links to thousands of
sites categorized by class subject, including math, history, science,
literature, civics, health and business, among others. Numerous subcategories
allow the users to focus their research quickly. These links are organized and
provided by Looksmart.
Filtered search. Our filtering search technology is operated in conjunction with
Inktomi. This search tool uses our database of categorized sites and prohibits
the user from accessing those sites that fall into categories designated by the
customer to be filtered. It also prevents references to such sites, which often
contain lurid descriptive words designed to attract searches, from appearing on
search result lists. Other search engines include such references on search
result lists even if access to the underlying site is blocked by another
filtering product or source.
Reference tools. Our reference tools include a dictionary provided by
Merriam-Webster, a calculator, a thesaurus, a spell checker, maps and yellow and
white page directories.
News, sports and weather. Up-to-date news, sports and weather information is
provided by InfoSpace.
General interest categories. Searchopolis also provides users with organized
links to sites in numerous general categories of interest to K-12 students.
These include such categories as automotive, finance, computers and Internet,
home and family, sports and recreation, travel and vacation, shopping, hobbies
and entertainment. Searchopolis also provides daily features such as "today's
TV," "today's birthday" and "site of the day."
Tools to promote communication and community. We are enhancing Searchopolis to
provide specialized tools that promote communication for teachers, students and
parents including:
- Access-controlled filtered e-mail. Our proprietary e-mail service for K-12
students will provide a number of special features important to the school
environment. For instance, this service allows group
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sign-ups for all students in a class or school, while providing filtering of
content for profanity and permitting the restriction of e-mail transmissions
to specified recipients. This service will give schools the ability to
provide varying levels of e-mail service to students of different ages. For
example, a school district might permit second graders to exchange e-mail
only with other second graders at the same school. Sixth graders might be
allowed to exchange e-mail with anyone at their school. Eleventh graders
might be allowed to send e-mail to anyone, including non-students.
- School calendar. Our easy-to-use proprietary calendar will link schools,
teachers, students and parents in local communities. The Web-based calendar
service provides students with their own calendar and also provides school
and class calendars that can be accessed by all school or class members.
Teachers and schools can maintain their own calendars and have selected items
automatically inserted into their students' calendars.
- Monitored chat rooms. Searchopolis will include access to monitored chat
rooms that provide students and children a safe environment to communicate
with friends and family.
- Virtual Locker. Students will be provided with their own Web-based Virtual
Locker in which they can store their favorite Internet sites and homework for
later access from home, the library or other locations outside the classroom.
In many technologically advanced schools, students currently use as many as
four or five different computers per day. Our proprietary Virtual Locker
service will provide them with the ability to easily work on a variety of
different projects during the day without having to transfer files from one
computer to another.
- GradeChecker. GradeChecker will serve as our Web-based service allowing
parents, teachers and students direct and timely Internet access to a
student's grades and other classroom information.
Searchopolis is available on the Internet to anyone at www.searchopolis.com. We
recently began receiving sponsorship and advertising-based revenue through our
advertising partner, 24/7 Media. Our objective is to make Searchopolis the most
used Internet portal for students and teachers. Although still under
development, Searchopolis generated approximately 1.8 million page views in
March 1999. As we implement our alternate fee structures, we believe
Searchopolis will come to account for the majority of the search traffic
processed by our servers. Given the large potential volume of Internet traffic
associated with K-12 students, we believe Searchopolis could generate
significant revenues from advertisers. We expect our education portal to be a
targeted, premium rate Internet channel, which we will use to attract major
corporate advertisers.
SERVICE FEES
Our customers generally sign a 12-month subscription contract for our Bess
service that enables them to receive daily downloads of our categorized database
and to use our filtering and caching services. Our service delivery model is
similar for schools, ISPs, libraries, businesses and other customers. We also
charge our customers an initial set-up or installation fee. Both the set-up fee
and the subscription rate depend upon the size and complexity of the system
installed and the expected volume of use. Subscriptions have generally been
renewed by our customers at the same price as the original monthly subscription,
without the installation charge. We believe we have a high degree of customer
satisfaction, which has resulted in an almost 100% subscription renewal rate by
our school customers during the several years that we have offered Bess.
We plan to begin offering schools and libraries an important choice of alternate
fee structures effective for fall 1999, including an advertising-based
alternative with reduced rates or at no charge. Since schools and libraries have
limited budgets, our advertising-based fee structures will enable schools to use
their limited funding to rapidly increase the number of computer workstations in
their classrooms. At the time of subscription or renewal, customers may choose
to continue to pay our subscription fees or, alternatively, to pay reduced or no
subscription fees for our Bess filtering service in exchange for allowing
advertising and for using Searchopolis as their default search technology. We
believe many schools will choose to lower
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their subscription fees, which we expect to result in accelerated market
adoption of our filtering services. We anticipate, but cannot guarantee, a
substantial increase in new customers and revenues from installations.
While our subscription revenues can be expected to decrease significantly, we
anticipate that they will be replaced, if not exceeded, by advertising revenues.
Historically, percentage increases in our subscription revenues have not kept
pace with the increased use of our systems. Our current fees are proportional to
the number of workstations on the customer network, not the volume of Internet
traffic generated through those workstations. Our alternate fee structures, if
adopted by our customers, will allow our revenues to grow at a rate that
corresponds with the increased use of our services. We believe the combination
of our new services, our alternate fee structures, continuation of federal
matching funds programs and the increasing use of Internet-based curriculum will
drive increased use of our Internet filtering services in schools.
OPERATING INFRASTRUCTURE AND SECURITY
N2H2's operating infrastructure has been designed and implemented to support the
control and maintenance of thousands of servers handling millions of user
requests per day. Our systems can be easily configured and expanded to
accommodate a wide range of bandwidth and other performance requirements. For
example, our systems are currently used by a number of small organizations with
less than 100 Internet users as well as large state or county school systems.
Our proxy servers use standard hardware that is easily obtained from commercial
sources and equipped with our proprietary software. Our proxy servers are
compatible with a broad range of network platforms including Microsoft, Sun,
IBM, Apple, Macintosh and Novell. Our filtering servers run on the Linux
operating system and use custom-developed filtering proxy server software.
Internal servers run on Linux, Sun Solaris and Microsoft NT operating systems
and use custom-developed software in addition to Apache, Microsoft SQL Server
and Sybase Adaptive Server Enterprise.
Key attributes of our operating infrastructure include the ability to support
customer growth and performance, security and service requirements. We maintain
most of our proxy servers on our customers' premises. We also maintain some
proxy servers in our Seattle data center, and Exodus, maintains additional
servers for us at their location. We house all of our critical infrastructure
servers in our Seattle data center. Our operations are dependent upon each
location's ability to protect its systems against damage from fire, earthquake,
power loss, telecommunications failure or physical break-ins. Exodus provides
comprehensive facilities management services for some of our centralized
servers, including human and technical monitoring of proxy servers 24 hours per
day, seven days per week. Exodus' facility is powered by multiple
uninterruptible power supplies. Any disruption in the Internet access provided
by Exodus could seriously harm our business, results of operations and financial
condition.
All of the information required to duplicate a customer's filtering server is
stored in a database in our Seattle data center. We back up on a daily basis any
information in this database that may change on a server in the field. This
process allows us to reconstruct any data that is lost by a server in the event
of catastrophic failure or other disaster.
Our internal servers are protected behind firewalls for security purposes and do
not allow outside access at the operating system level except via special secure
channels. Access to the server and database is restricted. Except in the case of
our network administrator, access to the network requires a connection
originating from one of two servers in our data center which must be accompanied
by a 1024 bit encryption key. Our servers use a highly secure operating system
that is difficult to override or bypass. Our security personnel follow CERT,
BugTraq and other security-related forums closely to ensure that any new threats
are identified and dealt with immediately. However, we cannot assure you that
our operating infrastructure will not be affected by computer viruses,
electronic break-ins or other similar disruptions.
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CUSTOMERS
We provide filtering services to a customer base that includes the following:
Schools. Our school customers range from single schools to statewide systems.
Customers with thousands of workstations and multiple N2H2 servers include
Macomb School District in Michigan, Merrimack Education Center in the Boston
area, statewide networks for Ohio, Tennessee, Maine, Oklahoma and Wisconsin,
plus Calgary and the Dufferin-Peel Roman Catholic school systems in Canada. Over
4.5 million students in 6,000 schools now use Bess. Our customers are located in
47 states, Canada, Australia, United Kingdom, Germany, Chile, Mexico, India and
Bermuda. In March 1999, these organizations used our filtering servers to
receive approximately 339 million Internet page views.
Homes. We currently provide our filtering services to homes through
approximately 190 ISPs. To date, over 150,000 residential customers have elected
to use our services. We recently entered the home market and we believe our
services will be used in more homes in the future. The charge for our filtering
service is typically added to the customer's monthly bill from its ISP. ISPs may
also serve as re-sellers of our services to small businesses and schools.
Affinity Groups. We provide our core technology for filtering, filtered search
and portal development to affinity groups, including the Mormon Church. Affinity
groups purchase our filtering services for their own members. They also purchase
from us filtered search services to include on their own affinity group portal.
Corporate and International. Corporate and international customers are a small
but growing part of our customer base. We provide services to customers in
Canada, Australia, the United Kingdom, Germany, Chile, India and Mexico. As
corporate managers become increasingly concerned about productivity and
liability issues related to employee Internet usage, we believe the corporate
market will present us with significant opportunities.
SALES AND MARKETING
Sales to Customers
Our sales division consists of 18 sales representatives and support staff,
organized into four direct sales teams, a post-sale customer support group and
an administrative support team. Each direct sales team is dedicated to one of
our four main sales channels.
- Direct education channel. The direct education sales group is our largest and
is divided into three areas, each focusing on customers of particular sizes
and needs.
-- Our "key accounts" group focuses on sales of all our services to the
large Educational Service Districts (ESDs) or statewide school
networks.
-- Our mid-tier education sales group sells our filtering and caching
proxy servers, rating list subscriptions and search services to
larger schools and ESDs that operate their own networks, generally
serving between 200 and 10,000 workstations.
-- Finally, our small customer sales team sells our cache, filter and
search services on a redirect basis to smaller schools, ESDs and
libraries that have anywhere from one to 200 workstations.
- ISP channel. We often gain regional ISP business due to local ISP activity
within the education channel. As such, our education sales team manages the
smaller to mid-size regional ISPs as part of its educational sales territory.
Our ISP sales team concentrates on selling our filtering and caching proxy
servers, rating list subscriptions and filtering search technology to
regional and larger ISPs throughout the world. We have two senior sales
managers dedicated to developing relationships with key national and
international ISPs.
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- Corporate and international markets. We have two sales representatives
dedicated to developing sales in the corporate and international markets. We
anticipate increased demand for our services and products as we expand our
strategic alliances both domestically and abroad.
- Reseller program. In addition to our direct sales groups, we have a group of
technical sales professionals dedicated to expanding sales of our caching
proxy servers and filtering services through a growing list of third-party
resellers. We currently have ten resellers domestically as well as four
located in the United Kingdom and Australia. Our target reseller customer is
an established ISP with a large existing education customer base.
Advertising Sales
Although we have only recently begun receiving advertising revenues, we are
aggressively pursuing relationships with advertisers trying to reach K-12
students, particularly those in the 10-year to 18-year age group. This group,
which constitutes the younger part of what is known in the advertising industry
as "Generation Y" (10 to 24 year olds), has become the subject of increasing
focus among advertisers. It has been estimated that Generation Y represents more
than $275 billion in disposable income in the United States annually. In
addition, a higher percentage of people in this age group have been introduced
to computers at an earlier age than any previous generation.
We intend to use part of the proceeds of this offering to retain marketing
consultants with substantial advertising industry experience, as well as to
expand our relationship with 24/7 Media to increase our visibility in the
advertising and corporate communities and to help us gain access to those
individuals at major corporations with decision-making authority over
advertising expenditures. We are currently targeting advertisers in the
following industries:
- food and beverage,
- apparel,
- sporting goods,
- entertainment,
- consumer electronics and
- automotive.
We believe that companies in each of these industries are looking for new ways
to reach the Generation Y audience.
We intend to pursue sponsorship arrangements that would differ from the typical
Internet banner advertising deals to support broad marketing objectives,
including brand awareness, product introductions and online research.
Marketing
Our marketing department currently consists of eight people. We are seeking to
expand the size of this group. We also plan to add a full-time trade show
manager, as participation in trade shows is an important element of our
marketing strategy.
We advertise and market our services through a variety of activities, including:
- Trade shows. We have increased our visibility at major educational technology
events in 1999, including those held in Orlando, Austin, Seattle and
Baltimore. Trade shows have historically generated significant sales leads.
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- Print advertising. We will continue to maintain a steady presence in key
education technology journals, including eSchool News, Curriculum
Administrator and Technology & Learning. We believe that these publications
are regularly reviewed nationwide by education administrators responsible for
technology budgets and spending decisions.
- Direct mail. We regularly contact school administrators through direct mail.
In the current school year, we have twice sent over 13,000 product brochures
to education technology specialists throughout the country.
- Online marketing. Our Website, www.n2h2.com, provides information about our
services, facilitates communication with our current and potential customers
and will provide links to Websites of our strategic partners.
STRATEGIC RELATIONSHIPS
We have developed and intend to continue to develop strategic relationships to
offer services and products to a larger customer base than can be reached
through our direct sales efforts. We have a strategic relationship with Inktomi
for the operation of our filtering search technology. Under a Search Engine
Services Agreement dated January 19, 1998, Inktomi provides us with search
engine services that, combined with our filtering technology and database of
categorized Websites, form the basis of our filtering search technology. This
agreement has a three-year term and is terminable only upon a material breach of
either party which is not uncured within thirty days or in the event either
party becomes insolvent or bankrupt.
In addition, we also have strategic content and marketing relationships with
other companies, including Looksmart, WinStar Communications, Fortres Grand and
Netwave Technologies. Our agreements with Looksmart and InfoSpace have been
instrumental in assisting us in the assembly and presentation of educational
content through Searchopolis. We collaborate with a number of companies, such as
WinStar Communications and Fortres Grand Corporation, to make our Internet
filtering services available to an expanding customer base through redirect
arrangements. In other relationships, we provide filtering and caching services
to Internet browsers, such as NetWave's children's browser. Our plans for
increasing our corporate and international presence depend on our success in
establishing additional strategic relationships.
CUSTOMER SERVICE AND SUPPORT
We believe our high customer retention rate is evidence of our excellent
reputation for customer service. We respond to approximately 1,200 e-mails each
business day from our customers through a staff of eight reviewers dedicated
solely to that purpose. Many are from wishful students with requests such as
"Please unblock Playboy.com!" Others provide useful feedback that helps us
refine the accuracy and relevance of our categorization determinations.
COMPETITION
We face a large number of competitors in the Internet filtering industry. Some
of the competing products, including NetNanny, SurfWatch and CyberPatrol, are
primarily client-based products that are sold directly to the end user. While we
believe that our comprehensive filtering services provide a solution superior to
these products, these products have generated significant name recognition among
parents and represent a significant competitive force in the residential
marketplace.
In addition, we have competitors that feature proxy server-based filtering
solutions using technology similar to ours, such as NetPartners Internet
Solutions, Inc.'s WebSENSE, Logon Data Corporation's X-Stop and
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Unified Research Laboratories, Inc.'s I-Gear. We believe, however, that none of
these products is backed with the same level of customer support and services as
ours and that their filtering is accomplished with less precision than ours.
Searchopolis, we believe, will represent the first widely available integrated
educational Internet portal targeting K-12 students, and our alternate fee
structures will give schools the choice of paying our recurring subscriber fees
or receiving our subscription based service at reduced rates or without charge
in exchange for allowing us to sell sponsorship rights to advertisers. We
believe these alternate fee structures should give us a significant competitive
advantage. However, a competitor with greater financial and human resources than
ours could introduce a competing product to the same market fairly quickly.
Accordingly, a significant component of our strategy will be to penetrate this
market rapidly, before competing products are able to gain significant market
share, name recognition or credibility. In particular, our potential competitors
include Web retrieval and other Web portal companies such as Excite, Infoseek,
Lycos, Yahoo! and Netscape, as well as Websites targeted to educational and
family-oriented interests such as Disney.com and AOL.com.
INTELLECTUAL PROPERTY
Intellectual property is critical to our success, and we rely upon trademark,
copyright and trade secret laws in the United States and other jurisdictions to
protect our proprietary technology and brands. N2H2 and Bess are registered
United States trademarks. We have also applied to register Searchopolis and
Virtual Locker as trademarks. These trademark applications may not be granted.
In addition, any of our trademarks may be challenged by others or invalidated
through administrative process or litigation. Our proprietary search technology
is protected by United States trade secret and copyright law. We own and operate
the servers that provide our filtering services. We protect our proprietary
rights through the use of intellectual property agreements with employees and
consultants which cover confidentiality, nondisclosure and assignment of
invention matters. Some of our former employees and consultants who may have had
access to our proprietary information have not entered into these intellectual
property agreements, although we believe that all intellectual property that is
material to our business is covered by signed agreements. If we are wrong in
this assessment, our business could be seriously harmed.
Trademark, copyright and trade secret protection may not be available to us in
every country in which our services are available. The laws of some foreign
countries may not be as protective of intellectual property rights as United
States laws, and mechanisms for enforcement of intellectual property rights may
be inadequate. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to obtain, copy and use our proprietary
technology.
REGULATORY AND LEGISLATIVE ISSUES
As use of the Internet has become more prevalent and various negative issues
associated with the Internet have received increasing amounts of publicity,
there has been a correspondingly greater amount of governmental attention
directed to the Internet, in the United States Congress and elsewhere. While
various pieces of legislation regulating different aspects of the Internet and
Internet-related activity have been proposed, to date there has been no
legislation enacted which places any direct and substantial regulatory burden on
N2H2. Nonetheless, we anticipate further attempts to regulate Internet-related
activity, some of which may impose substantial burdens on our ability to do
business.
We have never been party to a lawsuit regarding users acquiring inappropriate
content through our system. Management believes this is unlikely in the future,
partly because of the protections provided under Section 509 of the
Telecommunications Act of 1996 for organizations that provide filtering tools or
employ them. Our customer contracts do not provide for a guaranteed level of
filtering performance, and we do not intend to offer guarantees in the future.
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The United States Congress recently enacted the Children's Online Privacy
Protection Act of 1998. The principal provisions of the law become effective on
the later of (1) April 21, 2000, and (2) the date on which the Federal Trade
Commission issues a first ruling on applications for safe harbor treatment under
the Act if the Commission does not rule on the first such application by October
21, 1999, but in no case later than April 21, 2001. This act generally:
- makes it unlawful for an operator of a Website or online service directed to
children under age 13, and any operator that has actual knowledge that it is
collecting personal information from such a child, to collect personal
information from the child without having obtained verifiable parental
consent and
- prohibits conditioning the participation of a child under age 13 in a game,
the offering of a prize or another activity on the child disclosing more
personal information than is reasonably necessary to participate in such
activity.
We do not believe that this Act will have a significant impact on our business.
LEGAL MATTERS
On May 3, 1999, NextGen Development Corporation filed a complaint in the
Superior Court of California, Orange County, against us, Hammock Consulting
Services, Inc. and others. The complaint alleges that the calendar product we
hired Hammock to develop uses proprietary information belonging to NextGen. On
May 4, 1999 we moved the litigation to federal court. The complaint seeks, among
other things, a preliminary injunction prohibiting us from marketing our portal,
Searchopolis, because it allegedly includes the calendar product in question as
one of its screen tools. We do not believe our calendar product uses any
proprietary information of NextGen, and we intend to defend ourselves vigorously
in this lawsuit. If NextGen is successful in obtaining a preliminary injunction,
we believe we will be able to continue marketing Searchopolis without a calendar
or with an alternate calendar product.
EMPLOYEES
As of March 31, 1999, we had 156 full-time and part-time employees, including 30
in sales and marketing, 12 in technology and product development, 17 in
operations and 12 in management, finance and administration. In addition, we had
12 full-time and 73 part-time Website reviewers. As necessary, we supplement our
regular employees with temporary and contract personnel.
FACILITIES
Our principal place of business is located in Seattle, Washington, where we
currently lease approximately 17,000 square feet of office space. Beginning
November 1, 1999, we intend to increase our total leased space to approximately
30,000 square feet at the same location. Our new lease expires in November 2004
and includes during the term a right of first refusal on an additional
approximately 13,000 square feet of space at market rates. We believe our
facilities, including this increased space available under the right of first
refusal, will be adequate for the next twelve months.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table gives some information regarding our executive officers,
directors and certain key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Peter H. Nickerson......................... 46 President, Chief Executive Officer and
Chairman of the Board of Directors
John F. Duncan............................. 56 Vice President -- Chief Financial Officer,
Secretary and Treasurer
Kevin E. Fink.............................. 28 Vice President -- Chief Technology Officer
B. Patrick Murphy.......................... 39 Vice President -- Sales
Peter H. Keane............................. 42 Vice President -- Advertising
James J. O'Halloran........................ 41 Vice President -- Marketing
Hollis R. Hill............................. 49 Director
Mark A. Segale............................. 39 Director
</TABLE>
Peter H. Nickerson has served as President and Chairman of the board of
directors since founding N2H2 in 1995. Since 1986, Mr. Nickerson has been a
principal of Nickerson & Associates, an econometric and data management
consulting company. He holds a Ph.D. in Economics from the University of
Washington and prior to forming N2H2 in 1995 he was a professor of economics in
the Albers School of Business at Seattle University. Mr. Nickerson is married to
Ms. Hill.
John F. Duncan joined N2H2 in April 1997 and serves as our Vice
President -- Chief Financial Officer. He also serves as our corporate Secretary
and Treasurer. From July 1996 to March 1997, Mr. Duncan was employed as a
finance and business strategy consultant to various Internet related companies.
Mr. Duncan served as President and CEO of Stream Line, Inc. a manufacturer of
fly fishing equipment from 1991 to 1996. From 1986 to 1991, he served as Chief
Financial Officer of Tom Software, a developer of fourth generation languages
and accounting applications. He has also served as CFO for The Myers Group from
1984 to 1986. He has an M.B.A. in finance from the Wharton School of the
University of Pennsylvania.
Kevin E. Fink co-founded N2H2 in 1995 and serves as our Vice President -- Chief
Technology Officer. Mr. Fink has been the primary technology architect of our
services and products. Mr. Fink was the sole proprietor of KF Consulting from
September 1995 to December 1995. From February 1995 to September 1995, Mr. Fink
was director of management information services at Virtual Broadcast Networks.
He received an M.S. in Electrical Engineering from the University of Washington
in 1994 and a B.S. in Engineering from Harvey Mudd College.
B. Patrick Murphy joined N2H2 in April 1998 serves as our Vice
President -- Sales. Mr. Murphy and is responsible for managing all sales
programs. From 1996 to 1997, Mr. Murphy was a Divisional Director for AEI Music
Network and managed a network of 200 sales and service partners for this
Seattle-based commercial music provider. His experience includes 13 years in the
application software and systems integration field, including nine years as
Sales Manager, Vice President and Partner with Benchmark Systems, Inc. from 1987
to 1996. Mr. Murphy holds a B.A. in Economics and an M.B.A. in finance from
Washington State University.
Peter H. Keane joined N2H2 in May 1998 and serves as our Vice
President -- Advertising. Mr. Keane is responsible for developing the
advertising sales strategy for our Internet filtering services. He served as
Vice President of Corporate Development for Hyperbole Studios from 1996 to 1998
and as the Director of
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Advertising Revenue for Kidstar from 1993 to 1996. Prior to that he held various
advertising sales and management positions with the Hearst Corporation. Mr.
Keane has a B.A. in pre-law studies from Arizona State University where he also
completed M.B.A. coursework.
James J. O'Halloran joined N2H2 in June 1998 and serves as our Vice
President -- Marketing. Mr. O'Halloran has 20 years of sales and marketing
experience with various firms including technology companies. He was Director of
Education Marketing at Edmark Corporation from 1997 to 1998. He was Vice
President of Sales and Marketing for Videodiscovery from 1994 to 1997. Mr.
O'Halloran holds a B.S. in business administration from Pennsylvania State
University and an M.B.A from the University of Washington.
Hollis R. Hill has served as a director of ours since October 1997. Ms. Hill, an
attorney, was of counsel with the firm of Frank & Rosen from 1992 to 1997 and is
presently self-employed as a trial advocacy teacher for the National Institute
of Trial Advocacy. Ms. Hill is also an adjunct faculty member at the University
of Washington School of Law. Ms. Hill received her J.D. from the Northwestern
School of Law in Chicago and her B.A. in Independent Studies from Vassar
College. Ms. Hill is married to Mr. Nickerson.
Mark A. Segale has served as a director of ours since December 1998. Mr. Segale
has served as Vice President of MAS Resources, Inc. since 1984 and as President
of Seattle Tractor Parts and Equipment, Inc. from 1979 to the present. Mr.
Segale received his B.A. in business administration from Seattle University in
1981.
BOARD COMPOSITION
In order to be approved for listing on the Nasdaq National Market, we are
required to have two independent outside directors. We intend to retain a
minimum of two additional independent directors prior to completion of this
offering. Our board presently consists of three directors under our amended
bylaws and may be increased or decreased by board or shareholder action. At some
time after completion of this offering, we intend to increase the number of
directors on our board to five.
Effective with the first annual meeting of shareholders following this offering,
our restated articles of incorporation will provide for the division of our
board of directors into three classes, as nearly equal in number as possible,
with the directors in each class serving for a three-year term and one class
being elected each year by our shareholders. Directors may be removed only for
cause. Because this system of electing and removing directors generally makes it
more difficult for shareholders to replace a majority of the board of directors,
it may tend to discourage a third party from making a tender offer or otherwise
attempting to gain control of N2H2 and may maintain the incumbency of the board
of directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Our compensation committee will consist of two outside directors who we
anticipate will be appointed before completion of this offering. Our
compensation committee will review and approve the compensation and benefits for
our executive officers and grants of stock options under our stock option plans
and will make recommendations to the board of directors regarding such matters.
Our audit committee will consist of two outside directors who we anticipate will
be appointed before completion of this offering. Our audit committee will make
recommendations to the board of directors regarding the selection of independent
auditors, will review the results and scope of the audit and other services
provided by our independent auditors and will review and evaluate our audit and
accounting control functions.
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DIRECTOR COMPENSATION
We intend to pay each of our nonemployee directors $1,000 for each board of
directors meeting attended in person, $500 for each board meeting attended
telephonically, $500 for each committee meeting attended in person and $250 for
each committee meeting attended telephonically. We also intend to reimburse our
nonemployee directors for reasonable expenses they incur in attending meetings
of the board and its committees. Our nonemployee directors are also eligible to
receive stock options under the 1999 Nonemployee Director Stock Option Plan. See
"Management -- 1999 Nonemployee Director Stock Option Plan."
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The restated articles of incorporation include a provision that limits the
liability of directors to the fullest extent permitted by the Washington
Business Corporation Act (the "WBCA") as it currently exists or as it may be
amended in the future. Consequently, subject to the WBCA, no director will be
personally liable to us or our shareholders for monetary damages resulting from
his or her conduct as a director of ours, except liability for (a) acts or
omissions involving intentional misconduct or knowing violations of law, (b)
unlawful distributions or (c) transactions from which the director personally
receives a benefit in money, property or services to which the director is not
legally entitled.
The restated articles of incorporation also provide that we will indemnify any
individual made a party to a proceeding because that individual is or was a
director of ours and will advance or reimburse reasonable expenses incurred by
that individual prior to the final disposition of the proceeding to the fullest
extent permitted by applicable law. No repeal of the restated articles of
incorporation or modification of them will adversely affect any right of a
director of ours who is or was a director at the time of the repeal or
modification. To the extent the provisions of the restated articles of
incorporation provide for indemnification of directors for liabilities arising
under the Securities Act of 1933, those provisions are, in the opinion of the
Securities and Exchange Commission, against public policy as expressed in the
Securities Act and unenforceable. We have purchased and maintain director and
officer liability insurance coverage under which our directors and officers may
be indemnified against any liability they may incur for serving as our directors
and officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee will consist of two outside directors. We anticipate
that no interlocking relationship will exist between the compensation committee
and the board of directors or compensation committee of any other company, nor
will any such relationship have existed in the past.
EXECUTIVE COMPENSATION
The following table provides information on the compensation awarded to, earned
by or paid for services rendered to us in all capacities during the fiscal year
ended September 30, 1998 by our chief executive officer and the other most
highly compensated executive officers who were serving as executive officers as
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of September 30, 1998 and whose compensation was in excess of $100,000 in the
fiscal year ended September 30, 1998, collectively, our named executive
officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)
--------------------------- --------- --------
<S> <C> <C>
Peter H. Nickerson, President, Chief Executive Officer and
Chairman of the Board of Directors........................ $132,500 $13,898
John F. Duncan, Vice President -- Chief Financial Officer,
Secretary and Treasurer................................... 84,542 29,858
Kevin E. Fink, Vice President -- Chief Technology Officer... 88,333 40,000
</TABLE>
AGGREGATED OPTION EXERCISES IN THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 AND
FISCAL YEAR END OPTION VALUES
The following table contains information concerning the options exercised by the
named executive officers in the fiscal year ended September 30, 1998, and the
year end number and value of unexercised options with respect to each of the
named executive officers. There were no stock appreciation rights granted or
exercised during 1998, and none were outstanding as of September 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES VALUE YEAR END(#) FISCAL YEAR END($)(1)
ACQUIRED REALIZED --------------------------- ---------------------------
NAME ON EXERCISE ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter H. Nickerson............ 149,625 $26,505 -- -- -- --
John F. Duncan................ -- -- 59,850 89,775 $146,214 $219,320
Kevin E. Fink................. -- -- -- -- -- --
</TABLE>
- ---------------------------
(1) Represents the difference between the fair market value per share as of
September 30, 1998, less the corresponding exercise price of the options,
multiplied by the number of shares underlying the options.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with several of our officers.
Following is a summary of the material terms and conditions of these agreements.
The summary is subject to the detailed provisions of the agreements attached as
exhibits to this registration statement.
Peter H. Nickerson, John F. Duncan and Kevin E. Fink, each of whom is referred
to as an officer, entered into employment agreements with us on May 10, 1999.
Mr. Nickerson's employment agreement provides for an initial two year term, and
the agreements with Messrs. Duncan and Fink provide for 18 month terms. All
three agreements are renewable indefinitely subject to the termination
provisions described below. The compensation for each officer is as follows:
- Mr. Nickerson will be paid an annual base salary of $225,000,
- Mr. Duncan will be paid an annual base salary of $150,000 and
- Mr. Fink will be paid an annual base salary of $150,000.
The officers' base salaries will increase October 1 of each year by 10% if we
achieved a 100% increase in revenues for the preceding year. Messrs. Nickerson,
Duncan and Fink will receive quarterly bonuses as a percentage of revenues equal
to 2.25%, 1.5% and 1.5%, respectively, of the growth in our total quarterly
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<PAGE> 56
revenues compared to the same quarter in the prior year, with a maximum each
fiscal year equal to 70% of the officer's base salary. In addition, each officer
is entitled to reimbursement for reasonable and documented business expenses.
Each officer's employment agreement terminates on the officer's death or
disability or for cause, where cause means:
- a failure or refusal to perform specific duties under the employment
agreement which remains uncured,
- willful misappropriation of funds,
- excessive drug or alcohol use,
- conviction of a felony or
- any willful or intentional act in disregard of our interests.
If an officer's employment agreement is terminated due to death or disability,
we will continue to pay the officer's base salary for a minimum of 12 months.
Upon termination for cause or voluntarily by the officer without good reason, we
will pay the officer's base salary and bonus, if any, only through the date of
termination.
Mr. Nickerson's employment agreement provides for a two year severance period,
while the agreements with Messrs. Duncan and Fink provide for 18 month severance
periods. If we terminate an officer's employment without cause or the officer
resigns for good reason, we will pay the officer's base salary and bonus, if
any, for the applicable severance period and also unvested stock options which
are scheduled to vest during the severance period will vest immediately. Upon
termination following any change in control, defined to include any
recapitalization, merger or sale of substantially all of our assets, we will
also pay the officer's base salary and bonus, if any, for the applicable
severance period and all unvested stock options will vest immediately.
Each employment agreement contains a noncompetition covenant, which has a 24
month duration in the case of Mr. Nickerson and 18 month duration in the cases
of Mr. Duncan and Mr. Fink. The agreements also contain confidentiality,
nondisclosure and assignment of invention provisions.
1997 AND 1999 STOCK OPTION PLANS
N2H2's stock option plans include the 1997 Stock Option Plan, as amended, and
the 1999 Stock Option Plan. The Nonemployee Director Stock Option Plan is
described separately below. Our board of directors adopted our 1997 Plan on
September 30, 1997, and our shareholders approved it on October 21, 1997. The
board adopted our 1999 Plan on March 19, 1999, and our shareholders approved it
on April 2, 1999. The plans provide for grants of incentive stock options that
qualify under Section 422 of the Internal Revenue Code to employees, including
officers, of N2H2 or any affiliate of N2H2, and nonstatutory stock options to
employees, including officers or directors of and consultants to N2H2 or any
affiliate of N2H2. The board of directors or a committee appointed by the board
administers the plans. References to the board in this description of the plans
include any such committee. Our board of directors has the authority to
determine which recipients and what types of awards are to be granted, including
the exercise price, number of shares subject to the award and conditions of
exercise.
The term of a stock option granted under the plans generally may not exceed 10
years. The board of directors determines the exercise price of options granted
under the plans. In the case of an incentive stock option, the exercise price
cannot be less than 100% of the fair market value of our common stock on the
date of grant. Options granted under the plans vest at the rate specified in the
option agreement. An optionee may not transfer options other than by will or the
laws of descent or distribution.
No incentive stock option may be granted to any person who, at the time of the
grant, owns or is deemed to own, stock that has more than 10% of the total
combined voting power of N2H2 or any affiliate of N2H2, unless the option
exercise price is at least 110% of the fair market value of the stock subject to
the
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<PAGE> 57
option on the date of grant and the term of the option does not exceed five
years from the date of grant. In addition, $100,000 is the maximum amount
permitted for the aggregate fair market value, determined at the time of grant,
of the shares of our common stock covered by incentive stock options exercisable
for the first time by an optionee during any calendar year under the stock
option plans of N2H2 and its affiliates. The options or portions of options that
exceed this limit are treated as nonstatutory options.
Shares subject to stock awards that have lapsed or terminated, without having
been exercised in full, may again become available for the grant of awards under
the plans unless the plan under which the option was granted has been
terminated.
Options granted under the 1997 Plan vest over a three year schedule, with annual
vesting on the first, second and third anniversaries of employment. Options that
have been granted to date under the 1999 Plan vest on a similar basis but over a
four year period. The Plans provide for the vesting of options granted before
September 1998 to accelerate and become fully vested in the event of a change of
control of N2H2. The form of Incentive Stock Option Agreement under the 1999
Plan provides that in the event of a change of control of N2H2, any options
granted under an Incentive Stock Option Agreement that are scheduled to vest
within 15 months after the date of the change of control will immediately vest,
and any options scheduled to vest beyond 15 months after the date of the change
of control will terminate.
As of May 13, 1999, options to purchase 605,832 shares were outstanding and
3,800 shares were available for future grant under our 1997 Plan. As of the same
date, 531,850 shares were authorized, options to purchase 527,900 shares had
been granted and 3,950 shares were available for future grant under our 1999
Plan. Our 1997 Plan and our 1999 Plan will terminate on September 30, 2007, and
on March 19, 2009, respectively, unless terminated sooner by the board.
1999 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN. The 1999 Nonemployee Director
Stock Option Plan was adopted by our board on May 10, 1999, subject to approval
by our shareholders. We have reserved 35,000 shares of common stock for issuance
under the 1999 Nonemployee Director Stock Option Plan. Pursuant to the 1999
Nonemployee Director Stock Option Plan, each of our nonemployee directors is
granted an option to purchase 1,500 shares of common stock upon becoming a
member of our board, and an option to purchase 1,500 shares of common stock
immediately following each of our annual shareholder meetings. The exercise
price of options to be granted under the 1999 Nonemployee Director Stock Option
Plan will equal the fair market value of our common stock on the date of grant.
Options granted under the 1999 Nonemployee Director Stock Option Plan will be
fully exercisable beginning six months after the date of grant for a 10 year
period from the date of grant. As of the date of this prospectus, no options
have been granted under the 1999 Nonemployee Director Stock Option Plan.
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<PAGE> 58
PRINCIPAL AND SELLING SHAREHOLDERS
The following table summarizes certain information regarding the beneficial
ownership of our outstanding common stock as of May 12, 1999 for:
- each of the selling shareholders,
- each person or group that we know owns more than 5% of our common stock,
- each of our directors,
- our chief executive officer,
- the officers whose compensation exceeded $100,000 and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with rules of the Securities
and Exchange Commission and includes shares over which the indicated beneficial
owner exercises voting and/or investment power. Shares of common stock subject
to options currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding the
options, but are not deemed outstanding for computing the percentage ownership
of any other person. Except as otherwise indicated, we believe the beneficial
owners of the common stock listed below, based on information furnished by them,
have sole voting and investment power with respect to the number of shares
listed opposite their names.
Unless otherwise indicated, the following officers, directors and shareholders
can be reached at our principal offices. The address for Mark A. Segale, Lisa M.
Atkins, Tina A. Covey, Nita S. Johnson, Ann J. Nichols and Donna A. Segale is
18000 Andover Park West, Suite 200, Tukwila, Washington 98188.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING
SELLING SHAREHOLDERS, DIRECTORS, ----------------------- SHARES ----------------------
OFFICERS AND 5% SHAREHOLDERS NUMBER PERCENT(1) OFFERED NUMBER PERCENT(1)
-------------------------------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Peter H. Nickerson(2)..................... 2,584,777 41.4% -- 2,584,777 %
Hollis R. Hill(3)......................... 1,962,777 31.5 -- 1,962,777
Kevin E. Fink(4).......................... 289,333 4.6 -- 289,333
John F. Duncan(5)......................... 75,174 1.2 -- 75,174
Robert S. London
809 Presidio Avenue, Suite B,
Santa Barbara, CA 93101(6).............. 639,408 10.3 -- 639,408
Mark A. Segale(7)(8)...................... 714,527 11.5
Lisa M. Atkins(8)(9)...................... 185,647 3.0
Tina A. Covey(8)(10)...................... 185,647 3.0
Nita S. Johnson(8)(11).................... 92,628 1.5
Ann J. Nichols(8)(12)..................... 37,155 *
Donna A. Segale(8)(13).................... 46,379 *
All current executive officers and
directors as a group (5 persons)........ 3,663,811 57.8% %
</TABLE>
- ---------------------------
* Less than one percent.
(1) The percentage of ownership is based on 6,241,888 shares of our common
stock outstanding prior to the offering and shares outstanding
after the offering. Shares of common stock issuable for options outstanding
and exercisable within 60 days after the date of this prospectus are deemed
to be outstanding for purposes of computing the percentages of ownership
for the option holders but not for other listed shareholders.
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<PAGE> 59
(2) Includes 149,625 shares of our common stock held by Mr. Nickerson,
1,813,152 shares of our common stock held jointly with his wife, Hollis
Hill, 560,000 shares of our common stock held by him as custodian under the
Uniform Transfers to Minors Act for the benefit of their children, and
62,000 shares for which he exercises sole voting power under an irrevocable
proxy granted by Jennifer Perenchio.
(3) Includes 1,813,152 shares of our common stock held by Ms. Hill jointly with
her husband, Mr. Nickerson, and 149,625 shares of our common stock held as
community property by her husband, Mr. Nickerson. Excludes 560,000 shares
of our common stock held by her husband as custodian under the Uniform
Transfers to Minors Act for the benefit of their children.
(4) Includes 280,000 shares of common stock held Mr. Fink and 9,333 options to
purchase common stock currently outstanding and exercisable held by his
wife, Jessica Lyman.
(5) Consists of 75,174 options to purchase common stock held by Mr. Duncan and
currently outstanding and exercisable.
(6) Includes 583,044 shares of common stock and warrants to purchase 56,364
shares of common stock held by Mr. London that are currently exercisable.
(7) The number of shares held by Mr. Segale prior to the offering includes
694,066.557 shares of our common stock and a warrant to purchase 20,460
shares of our common stock which will be cancelled upon the sale of shares
of common stock under this offering by Mr. Segale and the other Segale
Group shareholders.
(8) Mr. Segale, Lisa M. Atkins, Tina A. Covey, Nita S. Johnson, Ann J. Nichols
and Donna A. Segale, collectively the Segale Group shareholders, are
parties to a Registration Rights Agreement among the same shareholders and
us, which provide that Mr. Segale has various powers related to the shares
held by the other Segale Group shareholders. The number of shares offered
by these shareholders Segale is estimated based upon the midpoint of the
price range set forth on the cover of this prospectus.
(9) Includes 180,331 shares of common stock and warrants to purchase 5,316
shares of our common stock held by Ms. Atkins, which are currently
exercisable and which will be canceled upon her sale of shares
under this offering. The number of shares being sold are estimated based on
the midpoint of the price range set forth on the cover of this prospectus.
The actual number of shares will be calculated as described above.
(10) Includes 180,331 shares of common stock and warrants to purchase 5,316
shares of our common stock held by Ms. Covey, which are currently
exercisable and which will be canceled upon her sale of shares
under this offering. The number of shares being sold are estimated based on
the midpoint of the price range set forth on the cover of this prospectus.
The actual number of shares will be calculated as described above.
(11) Includes 89,976 shares of common stock and warrants to purchase 2,652
shares of our common stock held by Ms. Johnson, which are currently
exercisable and which will be canceled upon her sale of shares
under this offering. The number of shares being sold are estimated based on
the midpoint of the price range set forth on the cover of this prospectus.
The actual number of shares will be calculated as described above.
(12) Includes 36,091 shares of common stock and warrants to purchase 1,064
shares of our common stock held by Ms. Nichols, which are currently
exercisable and which will be canceled upon her sale of shares
under this offering. The number of shares being sold are estimated based on
the midpoint of the price range set forth on the cover of this prospectus.
The actual number of shares will be calculated as described above.
(13) Includes 45,051 shares of common stock and warrants to purchase 1,328
shares of our common stock held by Ms. Segale, which are currently
exercisable and which will be canceled upon her sale of shares
under this offering. The number of shares being sold are estimated based on
the midpoint of the price range set forth on the cover of this prospectus.
The actual number of shares will be calculated as described above.
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<PAGE> 60
CERTAIN TRANSACTIONS
We believe that each of the transactions described below was carried out on
terms that were no less favorable to us than those that would have been obtained
from unaffiliated third parties. Any future transactions between us and any of
our directors, officers or principal shareholders will be on terms no less
favorable to us than could be obtained from unaffiliated third parties and will
be approved by a majority of the independent and disinterested members of the
board of directors.
COMMON STOCK ISSUANCES
Since October 1, 1997, we have issued and sold securities to the following
persons who are our executive officers and directors:
- Peter H. Nickerson and Hollis R. Hill: On January 28, 1999, Mr. Nickerson
and Ms. Hill purchased 375 shares of our common stock at a price per share of
$2.96, or an aggregate of $1,110. On December 31, 1998, and in conjunction
with our contemplated transition from an S corporation to a C corporation, we
redeemed 200,000 shares of common stock held by Mr. Nickerson and Ms. Hill at
a price per share of $2.96 or an aggregate of $592,000. Mr. Nickerson and Ms.
Hill in turn purchased 200,000 shares of common stock from us on December 31,
1998, at a price per share of $2.96 or an aggregate of $592,000. On December
31, 1998, we issued and sold 20,777 shares of common stock to Mr. Nickerson
and Ms. Hill, a marital community, at a price per share of $2.96, or an
aggregate of $61,500. Mr. Nickerson currently serves as President, Chief
Executive Officer and Chairman of the board of N2H2. Ms. Hill serves as a
director of ours. Mr. Nickerson and Ms. Hill are married.
- John F. Duncan: On March 17, 1999, Mr. Duncan exercised options to purchase
29,560 shares of common stock at a price per share of $0.46 for an aggregate
of $13,509. Mr. Duncan subsequently made a gift of these shares to his adult
children and sister. Mr. Duncan currently serves as our Vice
President -- Chief Financial Officer, Secretary and Treasurer.
- Mark A. Segale: In conjunction with this offering, Mr. Segale will sell
shares of common stock under a Registration Rights Agreement
dated effective as of December 31, 1998, among Mr. Segale, some of our other
shareholders and us. In connection with this sale, warrants to purchase
20,460 shares of common stock held by Mr. Segale will be cancelled. Effective
as of December 31, 1998, we issued to Mr. Segale, for the community of him
and Keri D. Segale, 85,127.457 shares of common stock together with warrants
to purchase 20,460 shares of common stock in connection with the satisfaction
of a $500,000 obligation under a Loan and Stock Option Agreement dated July
31, 1996.
THE SEGALE GROUP
On July 31, 1996, we entered into a Loan and Stock Option Agreement with The
Segale Group, a Washington general partnership, of which Mr. Segale, currently a
director and 5% shareholder of ours, was managing partner. That agreement
provided for maximum borrowings of $500,000 in $100,000 increments drawn at our
option. The outstanding principal bore interest at 12.0% per annum and was to be
payable on July 31, 1999. In connection with that loan, we issued warrant
equivalents to purchase 2.2% of our outstanding common stock for each $100,000
of outstanding debt. The warrant equivalents, in the aggregate, represented
11.0% of our outstanding common stock. The agreement also included an anti-
dilution provision that allowed The Segale Group to maintain an aggregate 25%
ownership interest in N2H2 including the 490,000 shares of common stock already
owned by them.
As of December 31, 1998, the outstanding loan balance under the Loan and Stock
Option Agreement was $500,000. Pursuant to a Loan Conversion Agreement dated
April 8, 1999, and dated effective as of December 31, 1998, we issued 653,000
shares of common stock and warrants to purchase 37,200 shares of common stock at
a price per share of $0.01 per share to Mr. Segale, Lisa M. Atkins, Tina A.
Covey,
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<PAGE> 61
Nita S. Johnson, Ann J. Nichols, Donna A. Segale and Samir J. Tuma, all partners
in The Segale Group. These warrants, which expire on the earlier of (a) December
31, 2003, or (b) an initial public offering of our common stock where partners
of The Segale Group are allowed to sell shares of our common stock at an
aggregate offering price of $500,000, net of underwriting discounts, are
exercisable at an adjusted price per share of $0.01. We have included the Segale
Group partners' offer to sell shares of common stock at an aggregate offering
price of $500,000 net of underwriting discounts under this prospectus, and
therefore these warrants will be cancelled upon conclusion of this offering.
Under a Registration Rights Agreement dated effective as of December 31, 1998,
the Segale Group partners have rights to require us to register their 1,261,939
shares of common stock and the 37,200 shares of common stock subject to warrants
to purchase common stock held by them.
Seattle Tractor Parts and Equipment, Inc., loaned $400,000 to us on April 11,
1997, represented by a promissory note secured by a pledge of shares of common
stock from Mr. Nickerson and Ms. Hill. Mr. Segale is the president of Seattle
Tractor Parts and Equipment, Inc. In connection with the April 8, 1999 Loan
Conversion Agreement, we repaid all outstanding principal and accrued interest
on that loan.
DEBT AND EQUITY FINANCINGS
In a series of related transactions under a Securities Purchase Agreement, as
amended, dated December 31, 1998, and January 26, 1999, we issued to a group of
18 investors: (a) 674,846 shares of common stock at a price per share of $2.90,
net of any commissions, (b) warrants to purchase a total of 186,000 shares of
our common stock at a price per share of $7.84 and (c) promissory notes in an
aggregate amount of $2.0 million. The investor group included Robert London, a
holder of more than 5% of our common stock. The note payable to Mr. London was
in the amount of $606,060, plus interest at 11.5% per annum. The warrants expire
on December 30, 2003. The warrants may be exercised either by paying cash or
surrendering the warrants in exchange for a number of shares equal to: (1) the
difference in value between the exercise price of the surrendered warrants and
the fair market value of our common stock as reported on an organized stock
exchange at the close of business the day before exercise, (2) the market price
multiplied by the number of shares represented by the warrants and (3) divided
by the market price.
Under a Registration Rights Agreement dated effective as of December 31, 1998,
the investors under those agreements have rights to require us to register their
674,846 shares of common stock and 186,000 shares of common stock subject to
warrants to purchase common stock held by them.
The Securities Purchase Agreement, as amended, provides that we will pay
Cruttenden Roth Bridge Fund, LLC, a commission and a private placement fee. To
date, we have paid $362,944 to Cruttenden Roth in commission and placement fees,
together with $30,000 in attorneys' fees associated with the transactions. Mr.
London is a managing director of Cruttenden Roth Inc.
On May 11, 1999, we completed a private equity financing in which we sold
1,082,265 shares of common stock to investors at a price per share of $9.24 for
an aggregate of $10,000,129. In connection with this financing, Mr. London's
$606,060 promissory note, plus accrued interest of $2,126, was satisfied and
exchanged for 65,821 shares of common stock. We also paid Cruttenden Roth Inc.
$200,000 in placement agent fees associated with closing of this private
financing.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with several of our key employees,
including Peter H. Nickerson, John E. Duncan and Kevin Fink. These agreements,
which include provisions requiring severance payments if a change of control
occurs, are described in "Management -- Employment Agreements."
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<PAGE> 62
DEFERRED EMPLOYEE COMPENSATION
In a letter agreement with Mr. Nickerson dated April 15, 1997, we agreed to pay
Mr. Nickerson $185,000 in employment compensation the payment of which had been
deferred. In December 1998, we paid Mr. Nickerson the full amount of that
obligation.
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
Our restated articles of incorporation authorize us to issue, subject to
shareholder approval, up to 250,000,000 shares of common stock, no par value per
share and 50,000,000 shares of preferred stock, no par value per share. The
following summary of certain provisions of the common stock and preferred stock
is not complete and may not contain all the information you should consider
before investing in the common stock. You should read carefully our restated
articles of incorporation, which are included as an exhibit to the registration
statement, of which this prospectus is a part.
COMMON STOCK
As of May 13, 1999 there were 6,241,888 shares of common stock outstanding held
of record by 106 shareholders. 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). The
holders of common stock are entitled to one vote per share on all matters to be
voted on by the shareholders. 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
the payment of dividends. We have not paid any cash dividends since our
inception. See "Dividend Policy." If N2H2 is liquidated, dissolved or wound up,
the holders of common stock are entitled to share pro rata all assets remaining
after payment of 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 following this offering will be fully paid
and nonassessable.
PREFERRED STOCK
The board of directors, without shareholder 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 in
control of N2H2 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 currently have no plans to issue any preferred stock.
REGISTRATION RIGHTS
In connection with several transactions, we have entered into registration
rights agreements with certain shareholders covering an aggregate of 4,643,946
shares of our common stock, together with 223,200 warrants to purchase our
common stock. Under the registration rights agreements, these shareholders are
entitled to certain rights with respect to the registration of their shares
under the Securities Act. 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, the shareholders holding registration rights are entitled to
notice of such registration and have rights to include their shares of common
stock in such registration at our expense. Additionally, these shareholders may
require us to file additional registration statements on Form S-3 at our
expense. All of these registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration. However, in the absence of
the underwriters giving approval for the inclusion of shares in this offering,
the registration rights agreements require the holders to execute 180 day
lock-up agreements. Under the lock up agreements, the shareholders agree not to
sell, enter agreements to sell or hypothecate the shares covered by registration
rights agreements for a period of 180 days following this offering.
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WARRANTS
As of December 31, 1998, we issued warrants to purchase 37,200 shares of common
stock at a per share price of $0.01 to Mark A. Segale, Lisa M. Atkins, Tina A.
Covey, Nita S. Johnson, Ann J. Nichols, Donna A. Segale and Samir J. Tuma (the
"Segale Holders"). These warrants expire on the earlier of (a) December 31,
2003, or (b) an initial public offering of our common stock where the Segale
Holders are allowed to sell shares of our common stock at a net valuation of
$500,000, as selling shareholders. We have included the Segale Holders' offer to
sell shares of common stock having a net valuation of $500,000 under this
prospectus and therefore these warrants will be cancelled upon conclusion of
this offering.
In connection with a series of transactions dated December 31, 1998 and January
26, 1999, we issued warrants to purchase 186,000 shares of our common stock at a
per share price of $7.84 to a group of 17 investors, including Robert London, a
holder of more than 5% of our common stock. The warrants may be exercised either
by paying cash or surrendering the warrants in exchange for a number of shares
equal to: (a) the difference in value between the exercise price of the
surrendered warrants and the fair market value of our common stock as reported
on an organized stock exchange at the close of business the day before exercise,
(b) the market price multiplied by the number of shares represented by the
warrants and (c) divided by the market price.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR RESTATED ARTICLES, AMENDED BYLAWS AND
WASHINGTON LAW
As noted above, our board of directors, without shareholder approval, has the
authority under our restated articles 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 in control of N2H2 or make removal of management more
difficult.
Washington law imposes restrictions on certain transactions between a
corporation and certain significant shareholders. Chapter 23B.19 of the WBCA
prohibits a "target corporation," with certain exceptions, from engaging in
certain significant business transactions with a person or group of persons that
beneficially owns 10% or more of the voting securities of the target corporation
(an "Acquiring Person") for a period of five years after such acquisition,
unless the transaction or acquisition of shares is approved by a majority of the
members of the target corporation's board of directors prior to the time of
acquisition. Such prohibited transactions include, among other things,
- a merger or consolidation with, disposition of assets to or issuance or
redemption of stock to or from, the Acquiring Person,
- termination of 5% or more of the employees of the target corporation as a
result of the Acquiring Person's acquisition of 10% or more of the shares or
- allowing the Acquiring Person to receive any disproportionate benefit as a
shareholder.
After the five-year period, a "significant business transaction" may occur, as
long as it complies with certain "fair price" provisions of the statute. A
corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of N2H2.
Election and removal of directors
Effective with the first annual meeting of shareholders following this offering,
our restated articles of incorporation provide for the division of our board of
directors into three classes, as nearly as equal in number as possible, with the
directors in each class serving for a three-year term and one class being
elected each year by our shareholders. Directors may be removed, prior to the
expiration of their terms, only for cause. Because this system of electing and
removing directors generally makes it more difficult for shareholders to replace
a majority of the board of directors, it may tend to discourage a third party
from
62
<PAGE> 65
making a tender offer or otherwise attempting to gain control of N2H2 and may
maintain the incumbency of the board of directors.
Shareholder meetings
Under our restated articles of incorporation and amended bylaws, our
shareholders may call a special meeting only upon the request of holders of at
least 25% of the outstanding shares. Additionally, the board of directors and
the president may call special meetings of shareholders. Upon our becoming a
public company, a special meeting of shareholders may be called only by the
president or a majority of the board of directors.
Requirements for advance notification of shareholder nominations and proposals
Our amended bylaws establish advance notice procedures with respect to
shareholder 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 thereof.
63
<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect the market price of the common stock.
Upon completion of this offering, we will have shares of common
stock outstanding, assuming the issuance of shares of common
stock offered hereby, conversion of all shares of preferred stock and no
exercise of options or warrants after May 12, 1999. Of these shares, the
shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act; provided, however,
that if shares are purchased by "affiliates," as that term is defined in Rule
144 under the Securities Act, their sales of shares would be subject to certain
limitations and restrictions that are described below.
The remaining shares of common stock held by existing
shareholders as of May 12, 1999 were issued and sold by us in reliance on
exemptions from the registration requirements of the Securities Act. Of these
shares, shares will be subject to lock-up agreements described
below on the effective date of the offering. Upon expiration of the lock-up
agreements 180 days after the effective date of this prospectus,
shares will become eligible for sale, subject in most cases to the limitations
of Rule 144. In addition, holders of stock options and warrants could exercise
their options and warrants and sell the shares issued upon exercise as described
below.
<TABLE>
<CAPTION>
DAYS AFTER DATE OF SHARES ELIGIBLE
THIS PROSPECTUS FOR SALE COMMENT
------------------ --------------- ---------------------------------------
<S> <C> <C>
Upon effectiveness..................... Shares sold in the offering
90 days................................ Shares saleable under Rule 144 that are
not subject to the lock-up
180 days............................... Lock-up released: shares saleable under
Rules 144 and 701
</TABLE>
As of May 13, 1999, there were a total of 223,200 shares of common stock that
could be issued upon exercise of outstanding warrants. All of these shares are
subject to lock-up agreements. As of May 13, 1999, there were a total of
1,133,732 shares of common stock subject to outstanding options under our stock
plans, 272,696 shares of which were vested. Some of these shares are also
subject to lock-up agreements. Promptly upon the completion of this offering, we
intend to file registration statements on Form S-8 under the Securities Act to
register all of the shares of common stock issued or reserved for future
issuance under our stock plans. After the effective dates of the registration
statements on Form S-8, shares purchased upon exercise of options granted
pursuant to our 1997 Stock Option Plan and 1999 Stock Option Plan and 1999
Nonemployee Director Stock Option Plan generally would be available for resale
in the public market.
Our officers, directors and certain shareholders have agreed not to sell or
otherwise dispose of any of their shares for a period of 180 days after the date
of this prospectus. CIBC World Markets Corp., however, may in its sole
discretion, at any time and in most cases without notice, release all or any
portion of the shares subject to lock-up agreements.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any three
month period, a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will equal
approximately shares immediately after the effective date of
this offering or
64
<PAGE> 67
- the average weekly trading volume of the common stock on the Nasdaq National
Market during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to such sale.
Sales under Rule 144 are also subject to other requirements regarding the manner
of sale, notice filing and the availability of current public information about
us.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of the offering are entitled to resell such shares 90 days after
the effective date of this prospectus in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.
The Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
exercise of such options, including exercises after the date of the prospectus.
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above may be sold, beginning 90 days
after the date of this prospectus, by persons other than affiliates subject only
to the manner of sale provisions of Rule 144 and by affiliates under Rule 144
without compliance with its one year minimum holding period requirement.
In addition, following this offering, the holders of 4,643,946 shares of common
stock and of warrants exercisable for 223,200 shares of common stock will, under
certain circumstances, have rights to require us to register their shares for
future sale.
LOCK-UP AGREEMENTS
All executive officers and directors and certain holders of common stock or
securities convertible into common stock and options and warrants to purchase
common stock have signed lock-up agreements stating that they will not offer,
sell, contract to sell, pledge, grant any option to sell, or otherwise dispose
of, directly or indirectly, any shares of common stock, securities convertible
or exchangeable for common stock, warrants or other rights to purchase common
stock for a period of 180 days after the date of this prospectus, without the
prior written consent of CIBC World Markets Corp.
65
<PAGE> 68
UNDERWRITING
N2H2, Inc. and the selling shareholders have entered into an underwriting
agreement with the underwriters named below. CIBC World Markets Corp. and U.S.
Bancorp Piper Jaffray Inc. are acting as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
CIBC World Markets Corp.....................................
U.S. Bancorp Piper Jaffray Inc. ............................
----------------
Total.......................................................
================
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus, if any are
purchased, other than those covered by the over-allotment option described
below.
The representatives have advised us and the selling shareholders that the
underwriters propose to offer the shares directly to the public at the public
offering price that appears on the cover page of this prospectus. In addition,
the representatives may offer some of the shares to certain securities dealers
at such price less a concession of $ per share. The underwriters may also
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the shares are released for sale to the
public, the representatives may change the offering price and other selling
terms at various times.
We have granted the underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of additional shares from us
to cover over-allotments. If the underwriters exercise all or part of this
option, they will purchase shares covered by the option at the initial public
offering price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the total price to
public will be $ and the total proceeds to us will be $ and
the total proceeds to the selling shareholders will be $ . The
underwriters have severally agreed that, to the extent the over-allotment option
is exercised, they will each purchase a number of additional shares
proportionate to the underwriter's initial amount reflected in the table above.
The following table provides information regarding the amount of the discount to
be paid to the underwriters by N2H2 and the selling shareholders.
<TABLE>
<CAPTION>
TOTAL WITH FULL
EXERCISE OF
TOTAL WITHOUT EXERCISE OF OVER-ALLOTMENT
PER SHARE OVER-ALLOTMENT OPTION OPTION
--------- ------------------------- ---------------
<S> <C> <C> <C>
N2H2, Inc..................................... $ $ $
Selling shareholders.......................... $ $ $
Total.................................... $ $ $
</TABLE>
66
<PAGE> 69
Together with the selling shareholders, we have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
N2H2, its officers and directors and certain other shareholders have agreed to a
180 day "lock up" with respect to shares of common stock and
certain other N2H2 securities that they beneficially own, including options to
purchase shares of common stock. This means that, for a period of 180 days
following the date of this prospectus, N2H2 and other such persons may not
offer, sell, pledge or otherwise dispose of our securities without the prior
written consent of CIBC World Markets Corp.
The representatives have informed us that they do not expect discretionary sales
by the underwriters to exceed five percent of the shares offered by this
prospectus.
There is no established trading market for shares of our common stock. The
offering price for the shares of our common stock has been determined by us and
the underwriters, based on the following factors:
- negotiations among us and the underwriters,
- prevailing market and economic conditions,
- certain of our financial information,
- our history and the prospects,
- N2H2 and the industry in which we compete,
- an assessment of our management, its past and present operations, the
prospects for and timing of, our future revenues and
- the present stage of our development and the above factors in relation to the
market values and various valuation measures of other companies engaged in
activities similar to ours.
The initial public offering price set forth on the cover page of this prospectus
should not, however, be considered an indication of the actual value of our
common stock. Such price is subject to change as a result of market conditions
and other factors. There can be no assurance that an active trading market will
develop for our common stock or that our common stock will trade in the public
market subsequent to this offering at or above its initial offering price.
The underwriters may engage in the following activities in accordance with the
rules of the Securities and Exchange Commission:
- Stabilizing transactions: the underwriters may make bids or purchases for the
purpose of pegging, fixing or maintaining the price of the shares, so long as
stabilizing bids do not exceed a specified maximum.
- Over-allotments and syndicate covering transactions: the underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created in
connection with this offering, the underwriters may engage in syndicate
covering transactions by purchasing shares in the open market. The
underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option.
- Penalty bids: If the underwriters purchase shares in the open market in a
stabilizing transaction or syndicate covering transaction, they may reclaim a
selling concession from members of the underwriters syndicate who sold shares
as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares. Neither we nor the underwriters make
any representation or prediction as to the effect that the transactions
described above may have on the price of
67
<PAGE> 70
the shares. These transactions may occur on the Nasdaq National Market or
otherwise. If such transactions are commenced, they may be discontinued without
notice at any time.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by
Lane Powell Spears Lubersky LLP, Seattle, Washington. Members of that firm
beneficially owned 20,355 shares of our common stock as of April 30, 1999.
Certain legal matters will be passed upon for the underwriters by Cooley Godward
LLP, Kirkland, Washington.
EXPERTS
The financial statements of N2H2 as of September 30, 1997 and 1998 and for each
of the three years in the period ended September 30, 1998, included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement on Form S-1. This
prospectus, which forms a part of the registration statement, does not contain
all the information included in the registration statement. Certain information
is omitted and you should refer to the registration statement and its exhibits
and schedules. With respect to references made in this prospectus to any
contract or other document of ours, such references are not necessarily complete
and you should refer to the exhibits attached to the registration statement for
copies of the actual contract or document. You may review a copy of the
registration statement, including exhibits and schedules filed therewith, at the
Commission'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
Commission located at Seven 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 such materials from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, such as us,
that file electronically with the Commission.
In addition, this prospectus includes market data relating to us and the school,
home and corporate Internet markets. Some of this data was obtained from
industry publications and reports, such as reports by International Data
Corporation and The Annenberg Public Policy Center. These reports assume certain
events, trends and activities will occur and they project information on those
assumptions. We have not independently verified this data. Also, we have not
sought the consent of these organizations to refer to their reports in this
prospectus.
68
<PAGE> 71
N2H2, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of September 30, 1997 and 1998; March 31,
1999 (Unaudited).......................................... F-3
Statements of Operations for the Fiscal Years Ended
September 30, 1996, 1997 and 1998
and the Six Months Ended March 31, 1998 and 1999
(Unaudited)............................................... F-4
Statements of Changes in Shareholders' Deficit for the
Fiscal Years Ended September 30, 1996, 1997 and 1998 and
the Six Months Ended March 31, 1999 (Unaudited)........... F-5
Statements of Cash Flows for the Fiscal Years Ended
September 30, 1996, 1997 and
1998 and the Six Months Ended March 31, 1998 and 1999
(Unaudited)............................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
N2H2, Inc.
In our opinion, the financial statements listed in the accompanying index on
page F-1 present fairly, in all material respects, the financial position of
N2H2, Inc. at September 30, 1997 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Seattle, Washington
March 17, 1999, except as to the third
through fifth paragraphs of Note 12,
which are as of May 11, 1999
F-2
<PAGE> 73
N2H2, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
----------------- 1999
1997 1998 (UNAUDITED)
------- ------ -----------
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
<S> <C> <C> <C>
Current assets
Cash...................................................... $ 71 $ 121 $1,384
Accounts receivable (net of $0, $8 and $38 allowance in
1997, 1998 and 1999, respectively)..................... 259 321 735
Prepaid expenses and other assets......................... 37 3
------- ------ ------
Total current assets.............................. 330 479 2,122
Property and equipment, net................................. 453 1,271 2,045
Other assets................................................ 1 98 118
------- ------ ------
Total assets...................................... $ 784 $1,848 $4,285
======= ====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable.......................................... $ 79 $ 451 $ 652
Royalties payable......................................... 150 125
Accrued liabilities....................................... 97 406 566
Deferred revenue.......................................... 404 1,237 1,155
Current portion of long-term debt and notes payable....... 509 30 1,946
Current portion of capital lease obligations.............. 70 384 674
------- ------ ------
Total current liabilities......................... 1,159 2,658 5,118
Deferred revenue............................................ 97 173
Capital lease obligations................................... 132 524 688
Long-term debt and notes payable............................ 694 1,418 87
------- ------ ------
Total liabilities................................. 1,985 4,697 6,066
------- ------ ------
Commitments and contingencies (Notes 9 and 11)
Shareholders' deficit
Preferred stock, no par value; 10,000,000 shares
authorized, no shares issued and outstanding
Common stock, no par value; 20,000,000 shares authorized;
3,474,564, 3,624,189 and 5,062,773 issued and
outstanding in 1997, 1998 and 1999..................... 546 783 3,905
Deferred stock option compensation expense................ (376)
Accumulated deficit....................................... (1,747) (3,632) (5,310)
------- ------ ------
Total shareholders' deficit....................... (1,201) (2,849) (1,781)
------- ------ ------
Total liabilities and shareholders' deficit....... $ 784 $1,848 $4,285
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 74
N2H2, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues......................... $ 108 $ 1,118 $ 3,078 $ 1,298 $ 2,605
---------- ---------- ---------- ---------- ----------
Cost of revenues................. 78 302 1,153 453 1,254
---------- ---------- ---------- ---------- ----------
Gross profit..................... 30 816 1,925 845 1,351
---------- ---------- ---------- ---------- ----------
Operating expenses
Sales and marketing............ 263 605 1,752 679 1,535
Research and development....... 91 371 614 252 394
General and administrative..... 493 602 1,157 483 954
---------- ---------- ---------- ---------- ----------
847 1,578 3,523 1,414 2,883
---------- ---------- ---------- ---------- ----------
Operating loss................... (817) (762) (1,598) (569) (1,532)
Interest income (expense), net... (10) (119) (287) (110) (146)
---------- ---------- ---------- ---------- ----------
Net loss......................... $ (827) $ (881) $ (1,885) $ (679) $ (1,678)
========== ========== ========== ========== ==========
Basic and diluted net loss per
common share................... $ (.28) $ (.26) $ (.54) $ (.20) $ (.39)
========== ========== ========== ========== ==========
Basic and diluted weighted
average shares outstanding..... 2,926,743 3,355,951 3,474,974 3,474,564 4,303,202
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 75
N2H2, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DEFERRED
COMMON STOCK STOCK OPTION
------------------ COMPENSATION ACCUMULATED
SHARES AMOUNT EXPENSE DEFICIT TOTAL
--------- ------ ------------ ----------- -------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995............ 2,800,000 $ 32 $ -- $ (39) $ (7)
Issuance of common stock................. 555,625 275 275
Issuance of warrants..................... 41 41
Compensation expense recognized on
issuance of common stock............... 166 166
Net loss................................. (827) (827)
--------- ------ ----- ------- -------
Balance at September 30, 1996............ 3,355,625 514 -- (866) (352)
Issuance of common stock................. 118,939 --
Issuance of warrants..................... 32 32
Net loss................................. (881) (881)
--------- ------ ----- ------- -------
Balance at September 30, 1997............ 3,474,564 546 -- (1,747) (1,201)
Exercise of stock options................ 149,625 75 75
Compensation expense recognized on
issuance of stock options and
warrants............................... 162 162
Net loss................................. (1,885) (1,885)
--------- ------ ----- ------- -------
Balance at September 30, 1998............ 3,624,189 783 -- (3,632) (2,849)
Issuance of common stock, net of issuance
costs of $243 (unaudited).............. 695,221 1,957 1,957
Issuance of warrants (unaudited)......... 77 77
Conversion of notes payable into common
stock (unaudited)...................... 694,470 623 623
Exercise of stock options (unaudited).... 48,893 19 19
Deferred compensation expense relating to
issuance of stock options
(unaudited)............................ 446 (446) --
Amortization of deferred stock option
compensation expense (unaudited)....... 70 70
Net loss (unaudited)..................... (1,678) (1,678)
--------- ------ ----- ------- -------
Balance at March 31, 1999 (unaudited).... 5,062,773 $3,905 $(376) $(5,310) $(1,781)
========= ====== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 76
N2H2, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
------------------------- ----------------
1996 1997 1998 1998 1999
----- ----- ------- ----- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................... $(827) $(881) $(1,885) $(679) $(1,678)
Adjustments to reconcile net loss to net
cash (used by) provided by operating
activities
Depreciation and amortization............ 43 147 346 110 352
Gain on extinguishment of debt........... (101)
Amortization of deferred stock
compensation expense................... 70
Compensation expense on stock and stock
options................................ 166 162
Notes payable issued for services........ 208 65 98 79
Change in certain assets and liabilities
Accounts receivable.................... (79) (152) (62) 123 (414)
Prepaid expenses and other assets...... (1) (134) (37) 14
Accounts payable....................... 51 29 372 59 201
Royalties payable...................... 150 (25)
Accrued liabilities.................... 31 66 309 187 160
Deferred revenue....................... 104 299 930 152 (6)
----- ----- ------- ----- -------
Net cash (used by) provided by
operating activities.............. (304) (427) 286 (6) (1,427)
----- ----- ------- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment......... (121) (230) (383) (101) (416)
----- ----- ------- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................... 275 1,957
Exercise of stock options................... 19
Payments under capital lease obligations.... (15) (31) (51) (26) (201)
Borrowings under notes payable.............. 285 631 210 153 2,000
Repayments of notes payable................. (12) (4) (669)
----- ----- ------- ----- -------
Net cash provided by financing
activities........................ 545 600 147 123 3,106
----- ----- ------- ----- -------
Net increase (decrease) in cash............... 120 (57) 50 16 1,263
Cash, beginning of period..................... 8 128 71 71 121
----- ----- ------- ----- -------
Cash, end of period........................... $ 128 $ 71 $ 121 $ 87 $ 1,384
===== ===== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 77
N2H2, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1997 AND 1998 AND MARCH 31, 1998 AND 1999
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
N2H2, Inc. (the Company) was incorporated on June 13, 1995 as an S Corporation
in the State of Washington. The Company develops and provides internet filtering
services which screen for undesired content as specified by the end user. The
Company contracts its technology primarily to internet service providers, school
districts, libraries and local and state government agencies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Subscription and installation revenues are recognized when earned. Subscription
revenues are recognized over the life of the subscription contract and
installation revenues are recognized when the server is shipped to an end user
or a reseller, which approximates the installation date, and when the criteria
for revenue recognition under Statement of Position No. 97-2, Software Revenue
Recognition, are satisfied. The criteria include, but are not limited to, the
existence of vendor-specific objective evidence, delivery of the service to a
customer, the Company's lack of significant obligations to the customer and a
determination that collectibility of the amount due is probable. Subscription
payments received in advance of revenue recognition are recorded as deferred
revenue. Advertising revenues are recorded on a per impression basis, net of
commissions, over the term of the advertising contract.
TRANSFER OF FINANCIAL INSTRUMENTS
The Company factors certain customer receivables with full recourse to a bank.
The transfer of accounts receivable is recorded by the Company as a sales
transaction under the provisions of Statement of Financial Accounting Standards
(SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The receivables are sold at a discount which is
recorded upon sale, and monthly finance charges are incurred based upon average
monthly balances outstanding with the factor. These monthly fees are recorded in
the period incurred. Customer accounts repurchased from the factor are included
in accounts receivable. In fiscal 1999, the Company terminated its factoring
agreement with the bank.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk include primarily cash and cash equivalents and accounts receivable.
The Company places its cash deposits and certain short-term investments in bank
deposits and money market funds with high credit quality financial institutions.
Domestic accounts receivable consists of account balances due from customers
evenly dispersed across the United States with industry concentrations in public
institutions such as federal and local governments and school districts.
International accounts receivable represent 0% and 3% of total accounts
receivable at September 30, 1997 and 1998, respectively, and are denominated
primarily in United States dollars. The Company performs ongoing credit
evaluations of its customer's financial condition and generally requires no
collateral from its customers.
No customer accounted for 10% or more of the Company's revenues in any year.
F-7
<PAGE> 78
N2H2, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997 AND 1998 AND MARCH 31, 1998 AND 1999
(UNAUDITED)
FAIR VALUE DISCLOSURES
Recorded amounts of cash and cash equivalents, receivables, prepaid expenses and
other current assets, capital lease obligations, accounts payable and other
amounts included in current liabilities meeting the definition of financial
instruments approximate fair value. The carrying value of long term debt is
based on interest rates currently available to the Company.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent funds on deposit with banks or invested in a
variety of highly liquid short-term instruments with original maturities of less
than three months.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost for purchased assets. Depreciation
and amortization are recognized using the straight-line method over the
estimated useful lives of such assets. The useful lives are estimated at three
years. Leasehold improvements are amortized over the lesser of the lease term or
estimated useful life.
The cost of normal maintenance and repairs are charged to expense as incurred
and expenditures for major improvements are capitalized, at cost. Gains or
losses on the disposition of assets in the normal course of business are
reflected in the results of operations at the time of disposal.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for financial impairment and
continues to evaluate them as events or changes in circumstances indicate that
the carrying amount of such assets may not be fully recoverable. The Company
evaluates the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with these assets. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying value of such assets, the assets are adjusted to their
fair values.
ROYALTIES PAYABLE
Royalties payable represent amounts payable to an independent provider of
internet search content under a service agreement. Amortization is based on the
greater of amounts determined by the contractual royalty rates or amounts
computed on a straight-line basis over the terms of the agreement.
RESEARCH AND DEVELOPMENT COSTS
Research and development expenses consist principally of payroll and related
expenses for design and development of the Company's technologies. Research and
development costs related to these activities are expensed until technological
feasibility has been achieved. There were no capitalized software development
costs as of September 30, 1997 and 1998.
F-8
<PAGE> 79
N2H2, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997 AND 1998 AND MARCH 31, 1998 AND 1999
(UNAUDITED)
FEDERAL INCOME TAXES
The shareholders of the Company have elected, under Subchapter S of the Internal
Revenue Code, to be taxed on the earnings of the Company on the shareholders'
personal income tax returns. Therefore, no provision for income taxes has been
provided for by the Company.
ADVERTISING EXPENSES
All costs related to marketing and advertising the Company's products are
expensed in the periods incurred. Advertising expenses were $37,000, $80,000,
and $120,000 for 1996, 1997 and 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK OPTION PLAN AND STOCK PURCHASE WARRANTS
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 for transactions with
employees and provide pro forma disclosures for employee stock option grants as
if the fair value-based method defined in SFAS No. 123 had been applied to these
transactions. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 to these transactions and provide the pro forma disclosure
provisions of SFAS No. 123. Stock purchase warrants granted to non-employees are
recorded at fair value in accordance with SFAS No. 123.
NET LOSS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS)
No. 128, issued February 1997, requires presentation of earnings per share on a
basic and diluted earnings per share basis. Earnings per share for all periods
presented have been stated to reflect the adoption of SFAS No. 128.
Under the provisions of SFAS No. 128, basic earnings per share is calculated as
income available to common shareholders divided by the weighted-average number
of common shares outstanding during the periods. Diluted earnings per share is
based on the weighted-average number of shares of common stock and common stock
equivalents outstanding during the periods, including options and warrants
computed using the treasury stock method.
COMPREHENSIVE INCOME
There are no differences between comprehensive income and net income as reported
in the Company's statements of operations.
F-9
<PAGE> 80
N2H2, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997 AND 1998 AND MARCH 31, 1998 AND 1999
(UNAUDITED)
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of the Company's management, the March 31, 1998 and 1999
unaudited interim financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the financial
statements. All references hereinafter to March 31, 1998 and 1999 amounts are
based on unaudited information.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures About Segments of an Enterprise and Related Information. This
statement supersedes Statement of Financial Accounting Standards No. 14,
Financial Reporting for Segments of a Business Enterprise. This statement
includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
statement will be effective for fiscal years beginning after December 15, 1997.
Reclassification for earlier periods is required, unless impracticable, for
comparative purposes. The Company is currently evaluating the impact this
statement will have on its financial statements; however, because the statement
requires only additional disclosure, the Company does not expect the statement
to have a material impact on its reported financial position or results of
operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1
provides guidance for an enterprise on accounting for the costs of computer
software developed or obtained for internal use. SOP 98-1 is effective for the
Company in fiscal 1999. The Company anticipates that accounting for transactions
under SOP 98-1 will not have a material impact on the Company's financial
position or results of operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- MARCH 31,
1997 1998 1999
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.............................. $606,000 $1,637,000 $2,402,000
Furniture and fixtures.......................... 14,000 42,000 163,000
Leasehold improvements.......................... 61,000 61,000
Software........................................ 185,000
-------- ---------- ----------
620,000 1,740,000 2,811,000
Less: Accumulated depreciation and
amortization.................................. (167,000) (469,000) (766,000)
-------- ---------- ----------
$453,000 $1,271,000 $2,045,000
======== ========== ==========
</TABLE>
Depreciation expense was approximately $42,000, $125,000 and $322,000 for the
years ended September 30, 1996, 1997 and 1998. Depreciation expense was
approximately $98,000 and $297,000 for the six months ended March 31, 1998 and
1999 (unaudited).
F-10
<PAGE> 81
N2H2, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997 AND 1998 AND MARCH 31, 1998 AND 1999
(UNAUDITED)
4. RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE FROM RELATED PARTIES
In September 1998, the Company converted trade accounts receivable of $30,000
from a related party into a note receivable bearing interest at 10.5% per annum.
The note matures in October 1999; however, in the event the note is prepaid
prior to December 31, 1998, the amount due will be equal to 90% of the initial
balance.
5. LONG-TERM DEBT AND NOTES PAYABLE
In 1996, the Company entered into a loan and stock purchase warrant agreement
with a shareholder providing for maximum borrowings of $500,000. The authorized
principal bears interest at 12% per annum payable on October 31, 1999. In
connection with this loan, the Company issued an option to purchase increments
of 2.2% of the Company's authorized common stock for each $100,000 of debt
outstanding. The options, in the aggregate, represent 11% of the Company's
common stock outstanding and are exercisable immediately. The agreement also
includes anti-dilution provisions which provide the shareholder a 25% ownership
interest in the Company. The warrants and the debt were recorded at their fair
market values of $73,000 and $427,000, respectively. The original issue discount
is amortized annually through the maturity date of the debt on a basis which
approximates the interest method. These warrants were equivalent to 290,933 and
513,332 and 513,332 shares of the Company's common stock at September 30, 1996,
1997 and 1998, respectively. Principal and accrued interest under this
obligation amounted to $594,000, net of original issue discount of $26,000 at
September 30, 1998.
In April 1997, the Company entered into a notes payable agreement with a
shareholder for $400,000 which bears compounded interest at 12% per annum and is
collateralized by the Company's common stock. Principal and accrued interest
under this obligation amounted to $472,000 as of September 30, 1998, and the
note is payable in full on October 31, 1999. The principal and interest on the
note was repaid in full with the proceeds from the Company's debt and equity
financing obtained subsequent to year-end.
The Company issued a promissory note payable to a third party in the amount of
$28,000 which bears interest at 8.5%. The note was issued for consulting
services and is due in monthly installments through October 31, 1999.
In January 1998, the Company issued $100,000 in notes to certain shareholders
which are repayable in either shares of common stock worth $100,000 or cash. The
notes were convertible into shares of common stock if the Company had obtained
additional equity capital of at least $2,000,000 by October 31, 1999. If the
additional equity capital is not obtained, the notes are due with interest of 2%
per month on or before December 31, 1999. Subsequent to year-end, the notes and
accrued interest were converted into 41,470 shares of common stock at $2.90 per
share.
The Company issued a non-interest bearing promissory note payable to a third
party in the amount of $69,000. The note was issued to obtain office space and
is due in monthly installments through October 31, 2000.
Notes payable to shareholder in the amount of $185,000 consists of salary unpaid
at September 30, 1998 due to the shareholder who is also a senior executive. The
note bears interest at 5% and is payable on October 31, 2000 or upon obtaining
an additional equity investment of $2,000,000 or more. The note was paid in full
with proceeds from the Company's debt and equity financing obtained subsequent
to year-end.
F-11
<PAGE> 82
N2H2, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997 AND 1998 AND MARCH 31, 1998 AND 1999
(UNAUDITED)
Long term debt and notes payable consist of the following at September 30, 1998:
<TABLE>
<S> <C>
Convertible note to shareholder, due October 31, 1999....... $ 620,000
Promissory note to related parties, due October 31, 1999.... 472,000
Promissory note, due October 31, 1999....................... 28,000
Convertible note to shareholders, due December 31, 1999..... 100,000
Promissory note, due October 31, 2000....................... 69,000
Promissory note to shareholder, due October 31, 2000........ 185,000
----------
1,474,000
Less: Original issue discount............................... (26,000)
Less: Current portion....................................... (30,000)
----------
$1,418,000
==========
</TABLE>
Future maturities on long-term debt and notes payable to related parties and
third parties, excluding the original issue discount, are as follows:
<TABLE>
<CAPTION>
NOTES
DUE TO RELATED NOTES
YEARS ENDED SEPTEMBER 30, SHAREHOLDERS PARTIES PAYABLE TOTAL
- ------------------------- ------------ -------- ------- ----------
<S> <C> <C> <C> <C>
1999................... $30,000 $ 30,000
2000................... $720,000 $472,000 64,000 1,256,000
2001................... 185,000 3,000 188,000
-------- -------- ------- ----------
$905,000 $472,000 $97,000 $1,474,000
======== ======== ======= ==========
</TABLE>
6. FACTORING AGREEMENT
Pursuant to a factoring agreement entered into in September 1997 and amended
July 14, 1998, the Company's bank acts as its factor for the majority of its
receivables, assigned on a pre-approved, full recourse basis, up to $1,000,000.
The Company sells its eligible receivables at a .3% discount to face value and
is charged 1.6% of uncollected assigned balances per month. Pursuant to the
agreement, the Company repurchases any assigned receivables outstanding 90 days
after the invoice date. Total interest paid on factored receivables was $2,000
and $86,000 during 1997 and 1998. In fiscal 1999, the Company terminated its
factoring agreement with the bank.
7. STOCK OPTION PLAN AND STOCK PURCHASE WARRANTS
Pursuant to a management services agreement dated December 29, 1997, the Company
issued a warrant to allow the purchase of 2.5% of the Company's outstanding
common stock and equivalents for $250,000 through December 31, 2004. As of the
grant date, this warrant was the equivalent of 89,091 shares. The warrant vests
monthly over the first year of the agreement, and is exercisable sooner in
connection with certain significant corporate events. The fair market value of
these warrants on the date of grant was $12,000, which is being amortized as
management service expense in the accompanying financial statements over the
vesting period of the warrants. On March 11, 1999, the Company redeemed the
outstanding warrant for 20,000 shares of its common stock.
F-12
<PAGE> 83
N2H2, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997 AND 1998 AND MARCH 31, 1998 AND 1999
(UNAUDITED)
Non-employees were issued 291,933, 222,399 and 89,091 warrants during 1996, 1997
and 1998. The Company recorded compensation expense of $41,000, $32,000 and
$12,000, respectively, relating to these warrants.
Subsequent to year-end, the Company offered to settle a lawsuit with a former
employee terminated in fiscal 1998. In connection with the offer, the Company
extended the exercise period for stock options previously granted to the
employee. The Company recorded compensation expense of $150,000 related to this
transaction in the September 30, 1998 financial statements.
Effective September 30, 1997, the Company adopted the 1997 Stock Option Plan
(the 1997 Plan) for employees, directors, consultants or independent contractors
under which 875,000 shares of common stock are reserved for stock option grants.
Pursuant to the Plan, the Board of Directors may grant nonqualified and
incentive stock options. The vesting period, exercise price and expiration
period of options are established at the discretion of the Board of Directors,
except that the exercise price of incentive stock options must equal the fair
market value of the underlying common stock on the date of the grant.
Additionally, in no event shall the term of any incentive stock option exceed
ten years.
The following summarizes the activity under the Company's 1997 and 1999 Stock
Option Plans:
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE FAIR VALUE
OPTIONS OPTIONS EXERCISE OF OPTIONS
AVAILABLE OUTSTANDING PRICE GRANTED
--------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Options available........................... 875,000
Options granted at fair value............... (730,975) 730,975 $ .47 $ .11
-------- --------
Balances at September 30, 1997................ 144,025 730,975 .46 .11
Options granted at fair value............... (278,600) 278,600 .63 .12
Options exercised........................... (149,625) .50
Options canceled............................ 186,375 (186,375) .46
-------- --------
Balance at September 30, 1998................. 51,800 673,575 .53 .11
Options granted at less than fair value
(unaudited).............................. (135,650) 135,650 2.65 4.84
Options exercised (unaudited)............... (48,893) .46
Options canceled (unaudited)................ 24,000 (24,000) .46
-------- --------
Balance at March 31, 1999 (unaudited)......... (59,850) 736,332 $ .93 $ .21
======== ========
</TABLE>
The following table summarizes information about stock options outstanding under
the 1997 Plan at September 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED-
EXERCISE OPTIONS REMAINING OPTIONS AVERAGE
PRICE OUTSTANDING CONTRACT LIFE VESTED FAIR VALUE
-------- ----------- ------------- ------- ----------
<S> <C> <C> <C> <C>
$ .46 456,575 9.0 237,580 $ .11
$ .68 217,000 10.0 $ .12
------- -------
673,575 9.3 237,580 $ .11
======= =======
</TABLE>
Option grants to date generally vest over a three-year period, and expire ten
years from the date of grant.
F-13
<PAGE> 84
N2H2, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997 AND 1998 AND MARCH 31, 1998 AND 1999
(UNAUDITED)
The per share weighted average fair value of stock options granted during 1997
and 1998 was $.11 and $.12, respectively, on the date of grant using the minimum
value pricing model with the following weighted average assumptions: expected
dividend yield of zero; risk-free interest rate of 5.9% and 4.8% for 1997 and
1998, respectively, and an expected life of five years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, compensation cost has been recognized for its stock options in the
financial statements only to the extent that the exercise price of the option is
less than the fair value of the underlying stock on the date of the grant. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net loss for the
years ended September 30, 1997 and 1998 would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Net loss
As reported...................................... $(881,000) $(1,885,000)
Pro forma........................................ $(881,000) $(1,911,000)
Loss per share
As reported...................................... $ (.26) $ (.54)
Pro forma........................................ $ (.26) $ (.55)
</TABLE>
Pro forma net loss reflects the compensation expense related to options granted
in 1997 and 1998. The full impact of compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net loss amount presented above
because compensation cost is amortized over the options' vesting period of three
years.
8. COMMON STOCK
As of September 30, 1998, the Company amended its Articles of Incorporation to
authorize the issuance of 10,000,000 shares of preferred stock and 20,000,000
shares of common stock at no par value. The terms of the preferred shares are to
be set by the Board of Directors.
On September 30, 1997 and September 30, 1998, the Board of Directors declared a
one hundred twenty five to one and a seven to one stock split, respectively, on
the Company's common stock effected in the form of a stock dividend to holders
of record on these dates. Common stock issued and stock option information in
these financial statements have been restated to reflect these splits.
9. LEASE COMMITMENTS
The Company's property held under capital leases, which is included in property
and equipment on the balance sheet at September 30, 1997 and 1998, consists
primarily of computer equipment in the gross amount of $64,000, $249,000 and
$1,006,000, respectively. Related accumulated amortization for those assets is
$17,000, $43,000 and $189,000 for the years then ended. The Company is also
committed under operating leases for its headquarter facilities. Rent expense
for the years ended September 30, 1996, 1997 and 1998 was $28,000, $46,000 and
$188,000, respectively.
F-14
<PAGE> 85
N2H2, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997 AND 1998 AND MARCH 31, 1998 AND 1999
(UNAUDITED)
Minimum annual rental commitments on all leases at September 30, 1998 are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEARS ENDING SEPTEMBER 30, LEASE LEASES
-------------------------- --------- ----------
<S> <C> <C>
1999.......................................... $238,000 $ 384,000
2000.......................................... 232,000 439,000
2001.......................................... 16,000 194,000
2002.......................................... 48,000
2003.......................................... 37,000
-------- ----------
Total minimum lease payments......................... $486,000 1,102,000
========
Less: Amount representing interest................... (194,000)
----------
Present value of capital lease obligation............ 908,000
Less: Current portion................................ (384,000)
----------
Long-term obligations at September 30, 1998.......... $ 524,000
==========
</TABLE>
10. NET LOSS PER SHARE
Statement of Financial Accounting Standards No.128, "Earnings Per Share" (SFAS)
No. 128, issued in February 1997, requires presentation of earnings per share on
a basic and diluted earnings per share basis. Earnings per share for prior
periods presented have been stated to reflect the adoption of SFAS No. 128. A
reconciliation of the basic and diluted earnings per share to the shares used is
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss....................... $ (827,000) $ (881,000) $(1,885,000) $ (679,000) $(1,678,000)
Weighted-average shares
outstanding-basic............ 2,926,743 3,355,951 3,474,974 3,474,564 4,303,202
Weighted-effect of dilutive
options and warrants.........
---------- ---------- ----------- ---------- -----------
Weighted-average shares
outstanding-diluted.......... 2,926,743 3,355,951 3,474,974 3,474,564 4,303,202
========== ========== =========== ========== ===========
Basic and diluted net loss per
share........................ $ (.28) $ (.26) $ (.54) $ (.20) $ (.39)
---------- ---------- ----------- ---------- -----------
</TABLE>
The Company's outstanding options and warrants have not been considered in
calculating diluted earnings per share because their effect is anti-dilutive.
11. COMMITMENTS AND CONTINGENCIES
The Company is from time to time involved in various claims and legal
proceedings of a nature considered by Company management to be routine and
incidental to its business. In the opinion of Company management, after
consultation with outside legal counsel, the ultimate disposition of such
matters is not expected to have a material adverse effect on the Company's
financial position, results of operations or liquidity.
F-15
<PAGE> 86
N2H2, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997 AND 1998 AND MARCH 31, 1998 AND 1999
(UNAUDITED)
12. SUBSEQUENT EVENTS
On December 31, 1998, the Company received proceeds from a financing arrangement
in the amount of $4,200,000 in exchange for the issuance of subordinated debt
and common stock. The Company issued $2,000,000 of 11.5% subordinated debentures
maturing on the earlier of October 15, 1999, a change in control of the Company,
or upon an initial public offering. In conjunction with the notes, the Company
issued warrants to purchase up to 186,000 shares of common stock at an exercise
price of $7.84 per share. The debt and the warrants have been recorded at their
fair market values of $1,923,000 and $77,000, respectively. The original issue
discount is amortized through the maturity date of the debt on a basis which
approximates the interest method. Additionally, the Company issued 674,846
shares of common stock at $2.90 per share, net of offering costs of $.36 per
share. The total proceeds will be used to fund current operations and research
and development projects, and extinguish debt.
As of September 30, 1998, the Company had a $500,000 long term note payable that
had attached the purchase of warrants for up to 11% of the Company's authorized
common stock outstanding with a shareholder. Effective December 31, 1998, the
Company converted the note principal and warrant into 653,000 shares of common
stock with an additional warrant to purchase up to 37,200 shares of the
Company's common stock at an exercise price of $.01 per share. The warrant is
subject to cancellation upon an initial public offering.
Effective April 2, 1999, the Company adopted the 1999 Stock Option Plan (the
1999 Plan) for employees, directors, consultants or independent contractors
under which 531,850 shares of common stock are reserved for stock option grants.
The new plan terms are comparable to those under the 1997 Plan. As of March 31,
1999, the Company had granted 60,150 options under the 1999 Plan pending
shareholder approval of the plan on April 2, 1999.
On May 10, 1999 the Company amended its Articles of Incorporation to authorize
the issuance of 50,000,000 shares of preferred stock and 250,000,000 shares of
common stock at no par value, subject to shareholder approval. The terms of the
preferred stock are to be set by the Board of Directors.
As of May 11, 1999, the Company became a C corporation for income tax reporting
purposes. Previously, it was organized as an S Corporation and as such, the tax
effects were passed directly to the shareholders.
13. SUBSEQUENT EVENTS (UNAUDITED)
On April 2, 1999, the Company settled a lawsuit with an employee terminated in
fiscal 1998 for cash and stock with an aggregate value of $285,000. The Company
recorded compensation expense of $230,000 relating to the 30,000 shares issued
as a part of this settlement. This charge is included in the Company's financial
statements for the third quarter ended June 30, 1999.
On May 7, 1999, the Company was released from the terms of a management services
agreement dated May 8, 1998 for a fee of $130,000. This fee is recorded in the
Company's financial statements for the third quarter ended June 30, 1999.
F-16
<PAGE> 87
N2H2, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1997 AND 1998 AND MARCH 31, 1998 AND 1999
(UNAUDITED)
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is summarized below for the
years ended September 30, 1996, 1997 and 1998, and for the six months ended
March 31, 1998 and 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
----------------------------- -------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Noncash investing and financing
activities:
Equipment obtained through capital
lease............................... $44,000 $185,000 $757,000 $315,000 $655,000
Value ascribed to warrants issued with
note payable........................ 41,000 32,000 77,000
Conversion of notes payable to common
stock............................... 623,000
Notes payable surrendered for the
exercise price of stock options..... 75,000
Cash paid for interest................. 10,000 36,000 178,000 57,000 315,000
</TABLE>
F-17
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Other expenses in connection with the issuance and distribution of the
securities registered by this prospectus, which will be paid by us, will be
substantially as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
---- --------
<S> <C>
Commission Registration Fee................................. $ 13,900
Nasdaq National Market Fee..................................
NASD Filing Fee............................................. 5,500
Blue Sky Fees and Expenses (Including Legal Fees)........... 5,000
Accounting Fees and Expenses................................
Legal Fees and Expenses.....................................
Printing and Engraving......................................
Registrar and Transfer Agent Fees........................... 2,500
Miscellaneous Expenses......................................
--------
Total.................................................. $
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business Corporation
Act (the "WBCA") authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). The directors and officers of the registrant also may be
indemnified against liability they may incur for serving in those capacities
pursuant to director and officer insurance coverage maintained by us for that
purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a director's
liability to the corporation or its shareholders for monetary damages for acts
or omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Article 12 of our restated articles of incorporation (Exhibit 3.1
hereto) contains provisions implementing, to the fullest extent permitted by
Washington law, these limitations on a director's liability to the registrant
and its shareholders.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification by
the underwriters of the registrant and its executive officers and directors and
by the registrant of the underwriters, for various liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the underwriters for inclusion in this
registration statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three year period up to May 11, 1999, we have issued and sold
unregistered securities as follows:
On July 31, 1996, we entered into a Loan and Stock Option Agreement with The
Segale Group, a Washington general partnership, of which Mr. Segale, currently a
director and 5% shareholder of ours, was managing partner. As of December 31,
1998, the outstanding loan balance under the Loan and Stock Option Agreement was
$500,000. Pursuant to a Loan Conversion Agreement dated April 8, 1999, and dated
effective as of December 31, 1998, we issued 653,000 shares of common stock and
warrants to
II-1
<PAGE> 89
purchase 37,200 shares of common stock at a price per share of $0.01 per share
to Mr. Segale, Lisa M. Atkins, Tina A. Covey, Nita S. Johnson, Ann J. Nichols,
Donna A. Segale and Samir J. Tuma, all partners in The Segale Group. We have
included the Segale partners' offer to sell shares of common stock having a net
valuation of $500,000 under this prospectus, and therefore these warrants will
be cancelled upon completion of this offering.
On December 28, 1997, we issued warrants to purchase 89,091 shares of our common
stock at $2.81 per share to Madrona Group, LLP. On March 11, 1999, we redeemed
and canceled the warrants in exchange for 20,000 shares of common stock issued
to Madrona Group, LLP, which issuance was ratified on May 10, 1999.
In January 1998, Eileen Johnston, John Narver, and Peter Nickerson and Hollis
Hill loaned $25,000, $25,000 and $50,000, respectively, to us, represented by
convertible promissory notes. On December 31, 1998, we converted these notes,
plus accrued interest, into shares of common stock at per share price of $2.96
as follows: (a) 10,335 shares of common stock to Ms. Johnston for an aggregate
of $30,671, (b) 10,338 shares of common stock to Mr. Narver for an aggregate of
$30,621 and (c) 20,777 shares of common stock to Mr. Nickerson and Ms. Hill for
an aggregate of $61,540.
On December 31, 1998, we issued and sold an aggregate of 200,000 shares of
common stock to Peter Nickerson and Hollis Hill, a marital community, at a
purchase price of $2.96 per share, or an aggregate of $592,000.
On December 31, 1998, we entered into a Securities Purchase Agreement under
which we issued and sold an aggregate of 463,190 shares of common stock to six
investors, James Stearns, Glen Powers, the Dann Angeloff TTEE FBO Angekoff
Family Trust, the Dann Angeloff TTEE UTD Trust, The Cruttenden Roth Bridge Fund,
LLC and Robert London, at a purchase price of $2.90 per share, net of
commissions paid by us, or an aggregate of $343,251. In addition, we issued
warrants to purchase 156,834 shares of common stock at a per share price of
$7.84 per share to these investors. These investors also loaned us $1,686,364
represented by convertible promissory notes.
On January 28, 1999, under an Amendment No. 1 to the Securities Purchase
Agreement dated December 31, 1997, we issued and sold an aggregate of 211,656
shares of common stock to 12 investors, Shelly Singhal, Joel Slutzky, Alan
Slutzky, Gregory Miner, Michael Erickson, William Foley, Frank Willey, Gary
Nelson, Thomas Rakow, John Narver, Phillip Dinapoli Jr. and Gary Cremo at a
purchase price of $2.90 per share, net of commissions paid by us, or an
aggregate of $613,802. In addition, we issued warrants to purchase 29,166 shares
of common stock at a per share price of $7.84 per share to these investors.
These investors also loaned us $313,636 represented by convertible promissory
notes.
On January 28, 1999, we issued and sold 375 shares of common stock to Peter
Nickerson at a purchase price of $2.96 per share, or an aggregate of $1,110.
On April 12, 1999, we issued 30,000 shares of our common stock to Jennifer
Perenchio pursuant at a Settlement Agreement and General Release.
On April 2, 1999, we issued 59,850 shares of our common stock to Sid Swartz
pursuant to a Settlement Agreement and Release.
On April 23, 1999, under a Rescission and Sale Agreement by and among Thomas
Rakow, Monte Brem and us, Mr. Rakow rescinded the purchase of (a) 1,022 shares
of common stock out of the 3,067 he had purchased on January 28, 1999 and(b)
warrants to purchase 140 shares of common stock out of the warrants to purchase
420 shares of common stock he had purchased on January 28, 1999. We paid Mr.
Rakow an aggregate of $5,000 for the rescinded shares of common stock and
warrants to purchase common stock. Under the same agreement, Monte Brem
purchased 1,022 shares of common stock and warrants to purchase 140 shares of
common stock from us for an aggregate of $5,000.
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<PAGE> 90
On May 11, 1999, we completed a private equity financing in which we sold
1,082,265 shares of common stock to investors at a purchase price of $9.24 per
share for an aggregate of $10,000,129. Among the investors was Robert London, an
owner of over 5% of our common stock, who purchased 174,046 shares of common
stock for an aggregate of $1,608,185.
From September 1997, date of the first issuance of options under our 1997 Stock
Option Plan, through March 1999, we granted stock options to purchase an
aggregate 1,145,225 shares of common stock, with exercise prices ranging from
$0.46 to $2.90 per share, to employees, consultants and directors pursuant to
our 1997 and 1999 Stock Option Plans. Of these options, options for an aggregate
of 198,518 shares have been exercised, options for an aggregate of 226,998
shares have vested and are outstanding, options for an aggregate of 210,375 have
been cancelled, and options for an aggregate of 736,332 shares remain
outstanding. Pursuant to our 1999 Stock Option Plan, we have granted stock
options to purchase 527,900 shares of common stock, with exercise prices ranging
from $7.65 to $9.24 per share to employees, consultants and directors. The sales
and issuances of these securities were exempt from registration under the
Securities Act pursuant to Rule 701 promulgated thereunder on the basis that
these options were offered and sold either pursuant to a written compensatory
benefit plan or pursuant to written contracts relating to consideration, as
provided by Rule 701.
All references to common stock in this Item 15 reflect a 125-to-1 common stock
split which occurred on September 30, 1997, and a 7-to-1 common stock split
which occurred on September 30, 1998.
Unless otherwise indicated, the issuances and sales of common stock and warrants
described above were exempt under the Securities Act in reliance upon Section
4(2) of the Securities Act or Regulation D promulgated thereunder. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates issued in such transactions. All recipients had
adequate access to information about us.
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<PAGE> 91
ITEM 16A. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
1.1* Underwriting Agreement.
3.1* Restated Articles of Incorporation of the registrant.
3.2 Amended Bylaws of the registrant.
5.1* Opinion of Lane Powell Spears Lubersky LLP regarding
legality of the shares.
10.1 Bank of California Center Lease dated August 31, 1995,
between Continental Seattle Partners Limited Partnership and
Toll-Free Cellular Inc.
10.2 Assignment of Lease dated March 13, 1998, between
Continental Seattle Partners Limited. Partnership, Toll-Free
Cellular Inc. and the registrant
10.3 Union Bank of California Center Office Lease dated March 12,
1999, between Walton Seattle Investors I, L.L.C. and the
registrant.
10.4 Loan and Security Agreement dated April 30, 1999, between
Imperial Bank and the registrant, together with exhibits
thereto.
10.5 1997 Stock Option Plan, as amended.
10.6 1999 Stock Option Plan.
10.7 1999 Nonemployee Director Stock Option Plan.
10.8 Search Engine Services Agreement dated January 19, 1998,
between Inktomi Corporation and the registrant (Information
has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities
and Exchange Commission).
10.9 Employment Agreement of Peter H. Nickerson dated May 10,
1999.
10.10 Employment Agreement of John F. Duncan dated May 10, 1999.
10.11 Employment Agreement of Kevin E. Fink dated May 10, 1999.
10.12 Registration Rights Agreement dated effective as of December
31, 1998.
10.13 Warrant to Purchase Common Stock issued to Mark A. Segale,
for the community of him and Keri D. Segale, on December 31,
1998.
23.1 Consent of PricewaterhouseCoopers, LLP, Independent
Accountants.
23.2* Consent of Lane Powell Spears Lubersky LLP (contained in the
opinion filed as Exhibit 5.1 hereto).
24.1 Power of Attorney (contained on signature page).
</TABLE>
- ---------------------------
* To be filed by amendment
ITEM 16B. FINANCIAL STATEMENT SCHEDULE.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or not material, or the information
called for thereby is otherwise included in the financial statements and
therefore has been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions or otherwise, the registrant has been
advised that in the opinion of the commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
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<PAGE> 92
being registered in the offering, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act an will be
governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriters at
the closing in the Underwriting Agreement certificates in such denomination 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 the purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rules
424(b)(1) or (4) or 497(h) under the Securities Act, shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purposes of determining any liability under the Securities Act,
each post effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
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<PAGE> 93
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, on the 12th day of May, 1999.
N2H2, Inc.
By /s/ PETER H. NICKERSON
------------------------------------
Peter H. Nickerson,
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Peter H. Nickerson and John F. Duncan, and each of them, with full
power of substitution and resubstitution and full power to act without the
other, as his or her true and lawful attorney-in-fact and agent to act in his
name, place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file, any and all
amendments to this registration statement, including any and all post-effective
amendments and amendments thereto and any registration statement relating to the
same offering as this registration statement that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in fact and agents, and each of them, full power and authority to do
and perform each and every act and thing, ratifying and confirming all that said
attorneys-in-fact and agents or any of them or their or his substitute or
substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to
the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed by the following persons in the capacities indicated
below on the 12th day of May 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ PETER H. NICKERSON President, Chief Executive Officer and
- --------------------------------------------- Chairman of the Board of Directors
Peter H. Nickerson
/s/ JOHN F. DUNCAN Vice President -- Chief Financial Officer
- ---------------------------------------------
John F. Duncan
/s/ HOLLIS R. HILL Director
- ---------------------------------------------
Hollis R. Hill
/s/ MARK A. SEGALE Director
- ---------------------------------------------
Mark A. Segale
</TABLE>
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<PAGE> 1
EXHIBIT 3.2
AMENDED BYLAWS
OF
N2H2, INC.
(As amended and restated on May 10, 1999)
ARTICLE 1
Registered Office and Registered Agent
The registered office of the corporation shall be located in the state
of Washington at such place as may be fixed from time to time by the Board of
Directors upon filing of such notices as may be required by law, and the
registered agent shall have a business office identical with such registered
office. Any change in the registered agent or registered office shall be
effective upon filing such change with the office of the Secretary of State of
the state of Washington.
ARTICLE 2
Shareholders' Meetings
2.1 Annual Meetings. The annual meeting of the shareholders of the
corporation shall be held at the registered office of the corporation, or such
other place as may be designated by the notice of the meeting, during the month
of June each year, for the purpose of election of Directors and for such other
business as may properly come before the meeting.
2.2 Special Meetings. The President of the corporation or a majority of
the Board of Directors may call special meetings of the shareholders for any
purpose. A special meeting of the shareholders 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 the proposed special meeting have
delivered to the Secretary of the corporation one or more signed and dated
written demands for such meeting, describing the purpose or purposes for which
the meeting is to be held; provided that upon qualification of the Corporation
as a "public company" under the Washington Business Corporation Act, a special
meeting of the shareholders may be called only by the President of the
Corporation or a majority of the Board of Directors. No business shall be
transacted at any special meeting of shareholders except as is specified in the
notice calling for said meeting. The Board of Directors may designate any place
as the place of any special meeting called by the president or the Board of
Directors, and special meetings called at the request of shareholders shall be
held at such place as may be determined by the Board of Directors and placed in
the notice of such meetings.
2.3 Notice of Meetings. Written notice of annual or special meetings of
shareholders 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,
shall be given by the secretary or persons authorized to call the meeting to
each shareholder of record entitled to vote at the meeting. Such notice
<PAGE> 2
shall be given not less than ten (10) nor more than sixty (60) days prior to the
date of the meeting, except that notice of a meeting to act on (i) an amendment
to the Articles of Incorporation, (ii) a plan of merger or share exchange, (iii)
a proposed sale, lease, exchange or other disposition of substantially all of
the assets of the corporation other than in the usual or regular course of
business, or (iv) the dissolution of the corporation shall be given no fewer
than twenty (20) days nor more than sixty (60) days before the meeting date.
Notice may be transmitted by mail, private carrier or personal delivery;
telegraph or teletype; or telephone, wire or wireless equipment which transmits
a facsimile of the notice. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail addressed to the shareholder
at the shareholder's address as it appears on the stock transfer books of the
corporation.
2.4 Business for Shareholders' Meetings.
(a) Business at Annual Meetings. In addition to the election of
Directors, other proper business may be transacted at an annual meeting of
shareholders, provided that such business is properly brought before such
meeting. To be properly brought before an annual meeting, business must be (i)
brought by or at the direction of the President or the Board of Directors, or
(ii) brought before the meeting by a shareholder pursuant to written notice
thereof, in accordance with Subsection 2.4(c) hereof, and received by the
Secretary not fewer than 90 nor more than 120 days prior to the anniversary date
of the prior -year's annual meeting. Any such shareholder notice shall set forth
(A) the name and address of the shareholder proposing such business; (B) a
representation that the shareholder is entitled to vote at such meeting and a
statement of the number of shares of the corporation which are beneficially
owned by the shareholder; (C) a representation that the shareholder intends to
appear in person or by proxy at the meeting to propose such business; and (D) as
to each matter the shareholder 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 shareholder in such
business. No business shall be conducted at any annual meeting of shareholders
except in accordance with this Subsection 2.4(a). If the facts warrant, the
Board of Directors may determine and declare (x) that a proposal does not
constitute proper business to be transacted at the meeting or (y) that business
was not properly brought before the meeting in accordance with the provisions of
this Subsection 2.4(a) and, if, in either case, it is so determined, any such
business shall not be transacted. In addition to the procedures set forth in
this Subsection 2.4(a), shareholders desiring to include a proposal in the
corporation's proxy statement must also comply with the requirements set forth
in Rule 14a-8 under Section 14 of the Securities Exchange Act of 1934, as
amended, or any successor provision.
(b) Business At Special Meetings. At any special meeting of the
shareholders, 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(a), shall come before such meeting.
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<PAGE> 3
(c) Notice to Corporation. Any written notice required to be
delivered by a shareholder to the corporation pursuant to these Bylaws 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 in
the State of Washington.
2.5 Waiver of Notice. Notice of the time, place, and purpose of any
meeting may be waived in writing (either before or after such meeting) and will
be waived by any shareholder by the shareholder's attendance at the meeting in
person or by proxy, unless the shareholder at the beginning of the meeting
objects to holding the meeting or transacting business at the meeting. Any
shareholder so waiving shall be bound by the proceedings of any such meeting in
all respects as if due notice thereof had been given.
2.6 Quorum and Adjourned Meetings. A majority of the outstanding shares
of the corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. A majority of the shares
represented at a meeting, even if less than a quorum, may adjourn the meeting
from time to time without further notice. At such reconvened meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified. The
shareholders present at a duly organized meeting may continue to transact
business at such meeting and at any adjournment of such meeting (unless a new
record date is or must be set for the adjourned meeting), notwithstanding the
withdrawal of enough shareholders from either meeting to leave less than a
quorum.
2.7 Proxies. At all meetings of shareholders, a shareholder may vote by
proxy executed in writing by the shareholder or by the shareholder's duly
authorized attorney in fact. Such proxy shall be filed with the secretary of the
corporation before or at the time of the meeting. No proxy shall be valid after
eleven (11) months from the date of its execution, unless otherwise provided in
the proxy.
2.8 Voting Record. After fixing a record date for a shareholders'
meeting, the corporation shall prepare an alphabetical list of the names of all
shareholders on the record date who are entitled to notice of the shareholders'
meeting. The list shall be arranged by voting group, and within each voting
group by class or series of shares, and show the address of and number of shares
held by each shareholder. A shareholder, shareholder's agent, or a shareholder's
attorney may inspect the shareholder's list, beginning ten days prior to the
shareholders' meeting and continuing through the meeting, at the corporation's
principal office or at a place identified in the meeting notice in the city
where the meeting will be held during regular business hours and at the
shareholder's expense. The shareholders' list shall be kept open for inspection
during such meeting or any adjournment.
2.9 Voting of Shares. Except as otherwise provided in the Articles of
Incorporation or in these Bylaws, every shareholder of record shall have the
right at every shareholders' meeting to one vote for every share standing in the
shareholder's name on the books of the
3
<PAGE> 4
corporation. If a quorum exists, action on a matter, other than election of
Directors, is approved by a voting group of shareholders if the votes cast
within the voting group favoring the action exceed the votes cast within the
voting group opposing the action, unless the Articles of Incorporation or the
Washington Business Corporation Act require a greater number of affirmative
votes.
2.10 Record Date. For the purpose of determining shareholders entitled
to notice of or to vote at any meeting of shareholders, or any adjournment
thereof, or entitled to receive payment of any dividend, the Board of Directors
may fix in advance a record date for any such determination of shareholders,
such date to be not more than seventy (70) days prior to the date on which the
particular action requiring such determination of shareholders is to be taken.
If no record date is fixed for the determination of shareholders entitled to
notice of or to vote at a meeting of shareholders, or shareholders entitled to
receive payment of a dividend, the day before the date on which notice of the
meeting is mailed or the date on which the resolution of the Board of Directors
declaring such dividend is adopted, as the case may be, shall be the record date
for such determination of shareholders. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as provided in
this Section 2.10, such determination shall apply to any adjournment thereof,
unless the Board of Directors fixes a new record date, which it must do if the
meeting is adjourned more than one hundred twenty (120) days after the date
fixed for the original meeting.
ARTICLE 3
Directors
3.1 General Powers. All corporate powers shall be exercised by or under
the authority of, and the business and affairs of the corporation shall be
managed under the direction of, the Board of Directors except as otherwise
provided by the laws of the state of Washington or in the Articles of
Incorporation.
3.2 Number. The number of Directors of the corporation shall be three
(3). The number of Directors can be increased or decreased from time to time by
the vote of the Directors or shareholders to amend this Section 3.2, provided
that the number of Directors shall be not less than one, and provided further
that no decrease shall shorten the term of any incumbent Director.
3.3 Tenure and Qualifications. At the first annual meeting of
shareholders and at each annual meeting thereafter, the shareholders of the
corporation shall elect Directors. All Directors shall hold office until their
successors are elected and qualified, or until their earlier death, resignation,
disqualification or removal. Directors need not be residents of the state of
Washington or shareholders of the corporation.
3.4 Election. The Directors shall be elected by the shareholders at
their annual meeting each year; and if, for any cause, the Directors shall not
have been elected at an annual
4
<PAGE> 5
meeting, they may be elected at a special meeting of shareholders called for
that purpose in the manner provided by these Bylaws. The Directors shall be
classified with respect to the time for which they shall severally hold office
by dividing them into three classes, Class I, Class II and Class III, each
consisting as nearly as possible of one-third of the whole number of the Board
of Directors. At the first election of Directors following adoption of this
provision, Class I Directors shall be elected for a term of one year; Class II
Directors shall be elected for a term of two years; and Class III Directors
shall be elected for a term of three years; and at each annual shareholders'
meeting thereafter, successors to the Directors whose terms shall expire that
year shall be elected to hold office for a term of three years, so that the term
of office of one class of Directors shall expire in each year.
3.5 Vacancies. Any vacancy on the Board of Directors that results from
an increase in the number of Directors may be filled by the affirmative vote of
a majority of the Directors then in office, and any other vacancy on the Board
of Directors may be filled by the affirmative vote of a majority of the
Directors then in office, although less than a quorum, or by a sole remaining
Director. Any Director elected to fill a vacancy not resulting from an increase
in the number of Directors shall serve for a term equivalent to the remaining
unserved portion of the term of such newly elected Director's predecessor.
3.6 Directors Elected by Holders of Preferred Stock. Notwithstanding
anything to the contrary in these Bylaws, whenever the holders of any one or
more classes or series of preferred stock issued by the corporation shall have
the right, voting separately by class or series, to elect Directors at an annual
or special meeting of shareholders, the election, term of office, filling of
vacancies and other features of such Directorships shall be governed by the
terms of the Articles of Incorporation, Bylaws or resolutions applicable
thereto, and such Directors shall not be divided into classes pursuant to
Section 3.5 unless expressly provided by such terms.
3.7 Resignation. Any Director may resign at any time by delivering
written notice to the Board of Directors, its chairperson, the president or the
secretary of the corporation. A resignation shall be effective when the notice
is delivered unless the notice specifies a later effective date.
3.8 Removal of Directors. A Director may be removed from office only for
"cause" at a special meeting of shareholders called for that purpose, by the
affirmative vote of the holders of not less than two-thirds of the shares
entitled to elect the Director or Directors whose removal is being sought. The
vacancy created by the removal of any Director under this Section 8.2 shall be
filled only by the affirmative vote of the holders of at least two-thirds of the
shares entitled to elect the Director who was removed. As used herein, "cause"
shall mean (a) willful and continued material failure, refusal or inability to
perform the Director's duties to the corporation or the willful engaging in
gross misconduct that is materially and demonstrably damaging to the
corporation; or (b) conviction for any crime involving moral turpitude or any
other illegal act that materially and adversely reflects upon the business,
affairs or reputation of the corporation or on the Director's ability to perform
the Director's duties to the corporation.
5
<PAGE> 6
3.9 Meetings.
(a) The annual meeting of the Board of Directors shall be held
immediately after the annual shareholders' meeting at the same place as the
annual shareholders' meeting or at such other place and at such time as may be
determined by the Directors. No notice of the annual meeting of the Board of
Directors shall be necessary.
(b) Special meetings may be called at any time and place upon the
call of the president, secretary, or any Director. Notice of the time and place
of each special meeting shall be given by the secretary or the persons calling
the meeting, by mail, private carrier, radio, telegraph, telegram, facsimile
transmission, personal communication by telephone or otherwise at least two (2)
days in advance of the time of the meeting. The purpose of the meeting-need not
be given in the notice. Notice of any special meeting may be waived in writing
or by telegram (either before or after such meeting) and will be waived by any
Director by attendance thereat.
(c) Regular meetings of the Board of Directors shall be held at
such place and on such day and hour as shall from time to time be fixed by
resolution of the Board of Directors. No notice of regular meetings of the Board
of Directors shall be necessary.
(d) At any meeting of the Board of Directors, any business may be
transacted, and the Board may exercise all of its powers.
3.10 Quorum and Voting.
(a) A majority of the Directors shall constitute a quorum, but a
lesser number may adjourn any meeting from time to time until a quorum is
obtained, and no further notice thereof need be given.
(b) If a quorum is present when a vote is taken, the affirmative
vote of a majority of the Directors present at the meeting is the act of the
Board of Directors.
3.11 Compensation. By resolution of the Board of Directors, the
Directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or a stated salary as Director. No such
payment shall preclude any Director from serving the corporation in any other
capacity and receiving compensation therefor.
3.12 Presumption of Assent.
(a) A Director of the corporation who is present at a meeting of
the Board of Directors at which action on any corporate matter is taken shall be
presumed to have assented to the action taken unless:
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(i) The Director objects at the beginning of the meeting,
or promptly upon the Director's arrival, to holding it or transacting business
at the meeting;
(ii) The Director's dissent or abstention from the action
taken is entered in the minutes of the meeting; or
(iii) The Director delivers written notice of the
Director's dissent or abstention to the presiding officer of the meeting before
its adjournment or to the corporation within a reasonable time after adjournment
of the meeting.
(b) The right of dissent or abstention is not available to a
Director who votes in favor of the action taken.
3.13 Committees. The Board of Directors, by resolution adopted by a
majority of the full Board of Directors, may designate one or more committees
and, to the extent provided in such resolution, shall have and may exercise all
the authority of the Board of Directors, except that no such committee shall
have the authority to: authorize or approve a distribution except according to a
general formula or method prescribed by the Board of Directors; approve or
propose to shareholders action that the Washington Business Corporation Act
requires to be approved by shareholders; fill vacancies on the Board of
Directors or on any of its committees; amend any Articles of Incorporation
requiring shareholder approval; adopt, amend or repeal Bylaws; approve a plan of
merger requiring shareholder approval; or authorize or approve the issuance or
sale or contract for sale of shares, or determine the designation and relative
rights, preferences and limitations of a class or series of shares, except that
the Board of Directors may authorize a committee, or a senior executive officer
of the corporation, to do so within limits specifically prescribed by the Board
of Directors.
ARTICLE 4
Special Measures for Corporate Action
4.1 Actions by Written Consent. Any corporate action required or
permitted by the Articles of Incorporation, Bylaws, or the laws under which the
corporation is formed, to be voted upon or approved at a duly called meeting of
the Directors, committee of Directors, or shareholders may be accomplished
without a meeting if one or more unanimous written consents of the respective
Directors or shareholders, setting forth the actions so taken, shall be signed,
either before or after the action taken, by all the Directors, committee
members, or shareholders, as the case may be. Action taken by unanimous written
consent is effective when the last Director or committee member signs the
consent, unless the consent specifies a later effective date. Action taken by
unanimous written consent of the shareholders is effective when all consents are
in possession of the corporation, unless the consent specifies a later effective
date.
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4.2 Meetings Telephone. Members of the Board of Directors, members of a
committee of Directors, or shareholders may participate in their respective
meetings by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other
at the same time; participation in a meeting by such means shall constitute
presence in person at such meeting.
ARTICLE 5
Officers
5.1 Officers Designated.
(a) The officers of the corporation shall be a president, a
secretary and a treasurer, each of whom shall be elected by the Board of
Directors. Such other officers and assistant officers as may be deemed necessary
may be elected or appointed by the Board of Directors. Any two or more offices
may be held by the same person.
(b) The Board of Directors may, in its discretion, elect a
chairperson and one or more vice-chairpersons of the Board of Directors; and, if
a chairperson has been elected, the chairperson shall, when present, preside at
all meetings of the Board of Directors and the shareholders and shall have such
other powers as the Board may prescribe.
5.2 Election Qualification and Term of Office.. Each of the officers
shall be elected by the Board of Directors. None of said officers need be a
Director. The officers shall be elected by the Board of Directors at each annual
meeting of the Board of Directors. Except as hereinafter provided, each of said
officers shall hold office from the date of his or her election until the next
annual meeting of the Board of Directors and until his or her successor shall
have been duly elected and qualified.
5.3 Powers and Duties.
(a) President. The president shall be the chief executive officer
of the corporation and, subject to the direction and control of the Board of
Directors, shall have general charge and supervision over its property,
business, and affairs.
(b) Secretary. The secretary shall: (i) keep the minutes of the
shareholders' and of the Board of Directors' meetings in one or more books
provided for that purpose; (ii) see that all notices are duly given in
accordance with the provisions of these Bylaws or as required by law; (iii) be
custodian of the corporate records and of the seal of the corporation and affix
the seal of the corporation to all documents as may be required; (iv) keep a
register of the post office address of each shareholder which shall be furnished
to the secretary by such shareholder; (v) sign with the president, or a vice
president, certificates for shares of the corporation, the issuance of which
shall have been authorized by resolution of the Board of Directors; (vi) have
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general charge of the stock transfer books of the corporation; and (vii) in
general perform 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 by
the Board of Directors.
(c) Treasurer. Subject to the direction and control of the Board
of Directors, the treasurer shall have the custody, control, and disposition of
the funds and securities of the corporation and shall account for the same; and,
at the expiration of his or her term of office, he or she shall turn over to his
or her successor all property of the corporation in his or her possession.
5.4 Assistant Secretaries and Assistant Treasurers. The assistant
secretaries, when authorized by the Board of Directors, may sign with the
president, or a vice president, certificates for shares of the corporation, the
issuance of which shall have been authorized by resolution of the Board of
Directors. The assistant treasurers shall, respectively, if required by the
Board of Directors, give bonds for the faithful discharge of their duties in
such sums and with such sureties as the Board of Directors shall determine. The
assistant secretaries and assistant treasurers, in general, shall perform such
duties as shall be assigned to them by the secretary or the treasurer,
respectively, or by the president or the Board of Directors.
5.5 Removal. The Board of Directors shall have the right to remove any
officer whenever in its judgment the best interests of the corporation will be
served thereby.
5.6 Vacancies. The Board of Directors shall fill any office which
becomes vacant with a successor who shall hold office for the unexpired term and
until his or her successor shall have been duly elected and qualified.
5.7 Salaries. The salaries of all officers of the corporation shall be
fixed by the Board of Directors.
ARTICLE 6
Share Certificates
6.1 Issuance, Form and Execution of Certificates. No shares of the
corporation shall be issued unless authorized by the Board. Such authorization
shall include the maximum number of shares to be issued, the consideration to be
received for each share, the value of noncash consideration, and a statement
that the Board has determined that such consideration is adequate. No fractional
shares shall be issued. In lieu of fractional shares, the corporation will
refund or pay the cash value of any fractional shares otherwise issuable.
Certificates for shares of the corporation shall be in such form as is
consistent with the provisions of the Washington Business Corporation Act and
shall state:
(a) The name of the corporation and that the corporation is
organized under
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the laws of this state;
(b) The name of the person to whom issued; and
(c) The number and class of shares and the designation of the
series, if any, which such certificate represents. They shall be signed by two
officers of the corporation, and the seal of the corporation may be affixed
thereto. No certificate shall be issued for any share until the consideration
established for its issuance has been paid.
6.2 Transfers. Shares may be transferred by delivery of the certificate
therefor, accompanied either by an assignment in writing on the back of the
certificate, written assignment separate from certificate, or written power of
attorney to assign and transfer the same, signed by the record holder of the
certificate. The Board of Directors may, by resolution, provide that beneficial
owners of shares shall be deemed holders of record for certain specified
purposes. Except as otherwise specifically provided in these Bylaws, no shares
shall be transferred on the books of the corporation until the outstanding
certificate therefor has been surrendered to the corporation.
6.3 Loss or Destruction of Certificates. In case of loss or destruction
of any certificate of shares, another may be issued in its place upon proof of
such loss or destruction and upon the giving of a satisfactory indemnity bond to
the corporation. A new certificate may be issued without requiring any bond when
in the judgment of the Board of Directors it is proper to do so.
ARTICLE 7
Books and Records
7.1 Books of Account, Minutes and Share Register. The corporation shall
keep as permanent records minutes of all meetings of its shareholders and Board
of Directors, a record of all actions taken by the shareholders or Board of
Directors without a meeting, and a record of all actions taken by a committee of
the Board of Directors exercising the authority of the Board of Directors on
behalf of the corporation. The corporation shall maintain appropriate accounting
records. The corporation or its agent shall maintain a record of its
shareholders, in a form that permits preparation of a list of the names and
addresses of all shareholders, in alphabetical order by class of shares showing
the number and class of shares held by each. The corporation shall keep a copy
of the following records at its principal office: the Articles or Restated
Articles of Incorporation and all amendments to them currently in effect; the
Bylaws or Restated Bylaws and all amendments to them currently in effect; the
minutes of all shareholders' meetings, and records of all actions taken by
shareholders without a meeting, for the past three years; its financial
statements for the past three years, including balance sheets showing in
reasonable detail the financial condition of the corporation as of the close of
each fiscal year, and an income statement showing the results of its operations
during each fiscal year prepared on the basis of
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generally accepted accounting principles or, if not, prepared on a basis
explained therein; all written communications to shareholders generally within
the past three years; a list of the names and business addresses of its current
Directors and officers; and its most recent annual report delivered to the
Secretary of State of the state of Washington.
7.2 Copies of Resolutions. Any person dealing with the corporation may
rely upon a copy of any of the records of the proceedings, resolutions, or votes
of the Board of Directors or shareholders, when certified by the president or
secretary.
ARTICLE 8
Amendment of Bylaws
The Board of Directors shall have the power to adopt, amend or repeal
the Bylaws or adopt new Bylaws; provided, however, that the Board of Directors
may not repeal or amend any bylaw that the shareholders have expressly provided
may not be amended or repealed by the Board of Directors. The shareholders shall
also have the power to adopt, amend or repeal the Bylaws of this corporation by
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 of Directors authorizing the issuance of a
class or series of Common Stock or Preferred Stock, by 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 voting group.
I hereby certify the foregoing to be the Bylaws of N2H2, Inc., which
were adopted on May 10, 1999.
/s/ John F. Duncan
------------------------------
John F. Duncan, Secretary
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<PAGE> 1
EXHIBIT 10.1
BANK OF CALIFORNIA CENTER
LEASE INDEX
<TABLE>
<CAPTION>
SECTION NO. PAGE NO.
<S> <C> <C>
1. Lease Data and Exhibits...............................
2. Leased Premises.......................................
3. Term..................................................
4. Rent..................................................
5. Security Deposit......................................
6. Uses..................................................
7. Services and Utilities................................
8. Cost of Service and Utilities.........................
9. Property Taxes........................................
10. Tax on Rentals........................................
11. Possession............................................
12. Care of Leased Premises...............................
13. Acceptance of Leased Premises.........................
14. Leasehold Improvements................................
15. Access................................................
16. Damage or Destruction.................................
17. Waiver of Subrogation.................................
18. Indemnification ......................................
19. Assignment and Subletting.............................
20. Advertising...........................................
21. Liens and Insolvency..................................
22. Defaults..............................................
23. Priority..............................................
24. Removal of Property...................................
25. Non-Waiver............................................
26. Surrender of Possession...............................
27. Holdover..............................................
28. Condemnation..........................................
29. Notices...............................................
30. Cost and Attorneys' Fees..............................
31. Landlord's Liability..................................
32. Captions and Construction.............................
33. Landlord's Consent....................................
34. Successors............................................
35. General...............................................
</TABLE>
Exhibit A Floor Plan
Exhibit B Rules and Regulations
Exhibit C Additional Terms and Provisions
Exhibit D Legal Description
Exhibit E Janitorial Specifications
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LEASE
THIS LEASE made this 31st day of August, 1995 between Continental Seattle
Partners Limited Partnership, A Washington Limited Partnership, herein called,
"Landlord," and Toll-Free Cellular Inc., a Washington Corporation herein called
"Tenant."
WITNESSETH:
1. LEASE DATA AND EXHIBITS:
(a) LEASED PREMISES: The leased premises consist of SUITE 3400 AS OUTLINED
IN RED AND MARKED BY CROSS-HATCHING ON ATTACHED EXHIBIT A on the 34TH
floor(s) of the building located at 900 Fourth Avenue, Seattle, King
County, Washington (the "Building"), and situated on a portion of Block
22, C.D. Boren's Addition to the City of Seattle, in King County,
Washington, including the vacated alley therein (herein called the
"land"). Such premises are hereinafter called the "leased premises." SEE
EXHIBIT D, LEGAL DESCRIPTION.
(b) FLOOR AREAS: The agreed floor area of the leased premises is 11,978
rentable square feet, and the gross square footage of the Building is
474,592 square feet.
(c) LEASE TERM: SEE EXHIBIT C, ADDITIONAL TERMS AND PROVISIONS.
(d) RENT: SEE EXHIBIT C, ADDITIONAL TERMS AND PROVISIONS.
(e) SECURITY DEPOSIT: SEE EXHIBIT C, ADDITIONAL TERMS AND PROVISIONS.
(f) USE: The leased premises shall be used only for a BUSINESS OFFICE AND
RELATED USES.
(g) EXHIBITS: The following exhibits or riders are made a part of this
lease:
EXHIBIT A FLOOR PLAN
EXHIBIT B RULES AND REGULATIONS
EXHIBIT C ADDITIONAL TERMS AND PROVISIONS
EXHIBIT D LEGAL DESCRIPTION
EXHIBIT E JANITORIAL SPECIFICATIONS
2. LEASED PREMISES: Landlord does hereby lease to Tenant, and Tenant does
hereby lease from Landlord, upon the terms and conditions herein set
forth, those certain premises described in Section 1(a) hereof.
3. TERM: The lease term shall be for the period stated in Section 1(c)
hereof.
4. RENT: Tenant shall pay Landlord the monthly rental stated in Section
1(d) hereof, payable in lawful money of the Untied States in advance on
or before the day specific in Section 1(d) to Landlord at the building
rental office at 1600 Bank of California Building, Seattle, Washington
98164, or to such other party or at such other place as Landlord may
hereafter from time to time designate in writing.
5. SECURITY DEPOSIT: As partial consideration for the execution of this
lease Tenant shall pay to Landlord the sum specific in EXHIBIT C
ADDITIONAL TERMS AND PROVISIONS, COLLATERAL/SECURITY DEPOSIT, hereof,
the receipt of which is hereby acknowledge. 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. If Tenant shall have fully complied with all of the covenants
and conditions of this lease, but not otherwise, such sum shall be
repaid to Tenant within thirty (30) days after the expiration or sooner
termination of this lease.
6. USES: The leased premises are to be used only for the uses specified in
Section 1(f) hereof, and for no other business or purpose without the
written consent of Landlord. No act shall be done in or about the
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leased 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 leased premises or any public or private
nuisance or other act or thing which disturbs the quiet enjoyment of any
other tenant in the Building. The Tenant shall not, without the written
consent of Landlord, use any apparatus, machinery or device in or about
the leased 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 leased 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 leased premises or
the Building, and for the preservation of good order therein.
7. SERVICES AND UTILITIES: As long as tenant is not in default BEYOND THE
CURE PERIOD under any of the provisions of this lease, Landlord shall
maintain the leased premises and the public and common areas of the
Building, such as lobbies, stairs, corridors and restrooms, in
reasonably good order and condition AND IN ACCORDANCE WITH FIRST CLASS
STANDARDS FOR BUILDINGS OF THE SAME generation, 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 leased premises with electricity for lighting
and the operation of low power usage office machinery, heat and normal
air conditioning, and elevator service, during the ordinary business
hours of the Building. ORDINARY BUSINESS HOURS ARE 8:00 AM TO 6:00 PM,
MONDAY THROUGH FRIDAY, (EXCEPT HOLIDAYS), AND 8:00 AM TO 1:00 PM ON
SATURDAYS. Landlord shall also provide light replacement service for
Landlord furnished building standard 2' x 4' florescent lighting
fixtures, toilet room supplies, perimeter window washing at reasonable
intervals, and customary building janitor service. Landlord shall not be
liable to Tenant for any loss or damage caused by or resulting from any
variation, interruption, or failure of such services due to any cause
whatsoever, EXCEPT IN THE CASE OF LANDLORD'S GROSS NEGLIGENCE. 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 leased 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 on undue burden on the air
conditioning system for the Building. TENANT HAS ADVISED LANDLORD THAT
IT WILL HAVE A COMPUTER WITH MONITOR ON EACH DESK. TENANT SHALL ALSO
INSTALL ITS OWN BACKUP POWER SUPPLY ("UPS") IF IT DEEMS NECESSARY.
If Tenant uses any high power usage equipment in the Premises or uses a
supplementary HVAC system to provide cooling for its computers or other
equipment, Tenant shall in advance, on the first day of each month
during the Lease Term, pay Landlord as additional rent the reasonable
amount estimated by Landlord as the cost of furnishing electricity for
the operation of such equipment or supplementary HVAC system. The base
Rent stated in Section 1(d) of this Lease does not include any amount to
cover the cost of furnishing electricity for such purpose, Tenant shall
not install a supplementary HVAC system without Landlord's written
consent, which consent shall not be unreasonably withheld, CONDITIONED
OR DELAYED. Tenant shall pay all costs for the installation, operation
and maintenance of its supplementary air conditioning system.
8. COST OF SERVICES AND UTILITIES: Tenant shall pay to Landlord, as
additional rent, the amounts determined as hereinafter provided to
compensate Landlord for any increases in the cost of the services and
utilities provided by Landlord. The base cost of such services and
utilities shall be deemed to be $ 7.89 per square foot of the leased
premises per year, of which $ 2.80 thereof shall be deemed attributable
to janitorial maintenance and $ 5.09 thereof to other services and
utilities provided by Landlord.
The base scale for janitorial maintenance shall be the average union
scale, on July 1 of the calendar year in which the lease term commences,
for union janitors, all classifications, in the building and maintenance
trade in Seattle (including all applicable taxes and fringe benefits
payable by employers). The ratio that such union scale on each July 1
during the lease term bears to the base scale will be reduced by 1.00
and
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then multiplied by $ 2.80 times the floor area of the leased premises,
Commencing each such July 1, one-twelfth (1/12th) of the amount so
determined shall be paid by Tenant to Landlord on the first day of each
month during the ensuing one year period (or for the balance of the
lease term if it is then less than one year).
The base for other services and utilities provided by Landlord shall be
the Consumer Price Index (CPI) for United States (All Cities) of the
U.S. Department of Labor, Bureau of Labor Statistics, all items for
April of the calendar year in which the lease term commences. If the
published index is revised or changed, as for example by taking the
average index for a different year as the base figure of 100, the base
index will be adjusted accordingly. The ratio that such CPI for each
April during the lease term bears to the base CPI will be reduced by
1.00 and then multiplied by $ 5.09 times the floor area of the leased
premises. Commencing on the July 1 following each such April,
one-twelfth (1/12th) of the amount so determined shall be paid by Tenant
to Landlord on the first day of each month during the ensuing one year
period (or for the balance of the lease term if it is then less than one
year). BASE YEAR SHALL BE 1995.
9. PROPERTY TAXES: If the amount of real property taxes on the land and the
Building payable in a calendar year during the lease term exceeds the
amount of such taxes payable in the calendar year the lease term
commences (or, if a real property tax assessment of the land and the
Building as completed has not been made for said year, then the first
subsequent calendar year for which such assessment has been made), then
Tenant shall reimburse Landlord for Tenant's proportionate share of such
excess. Said share shall be an amount that bears the same ratio to such
excess that the floor area of the leased premises bears to the floor
area of the Building as stated in Section 1(b) hereof. Commencing July 1
of each such calendar year, one-twelfth (1/12th) of the amount so
determined shall be paid by Tenant to Landlord as additional rent on the
first day of each month during the ensuing one-year period (or for the
balance of the lease term if it is then less than one (1) year). Tenant
shall pay prior to delinquency all personal property taxes payable with
respect to all property of Tenant located on the premises or in the
Building and shall provide promptly upon request of Landlord written
proof of such payment.
10. TAX ON RENTALS: If any governmental authority shall in any manner levy a
tax on rentals payable under this lease or rentals accruing from use of
property or a tax in any form against Landlord measured by income
derived from the leasing or rental of the Building, such tax shall be
paid by Tenant either directly or through Landlord; provided, however,
that Tenant shall not be liable to pay any net income tax imposed on
Landlord.
11. POSSESSION: In the event of the inability of Landlord to deliver
possession of the leased premises or any portion thereof, at the time of
the commencement of the term of this lease, Landlord shall not be liable
for any damage caused thereby, nor shall this lease thereby become void
or voidable, nor shall the term herein specified be in any way extended,
but in such event, Tenant shall not be liable for payment of any rent
until such time as Landlord can deliver possession. TENANT SHALL BE
ENTITLED TO TWO (2) DAYS OF BASE RENT ABATEMENT FOR EACH DAY OF DELAYED
DELIVERY AND POSSESSION BEYOND NOVEMBER 1, 1995, EXCEPT WHEN SUCH DELAY
IS CAUSED BY THE TENANT AND NOT BY THE LANDLORD. If Landlord shall
deliver possession of the leased premises to Tenant prior to the
commencement date of this lease and Tenant agrees to accept the same at
such time, both Landlord and Tenant agree to be bound by all provisions
and obligations of this lease during the prior period, including the
payment of rent at the same monthly rate, prorated for the prior period.
12. CARE OF LEASED PREMISES: Tenant shall take good care of the leased
premises.
Tenant shall, at the expiration or termination of this lease, surrender
and deliver up the leased 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 CONDEMNATION AND fire or other
casualty excepted.
Tenant shall not make any alterations, additions or improvements in or
to the leased 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 WHOSE CONSENT SHALL NOT BE
UNREASONABLY WITHHELD OR DELAYED. All damage or injury done to the
leased premises by Tenant or by any persons who may be in or upon the
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leased premises 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 caused by Tenant's
misuse of the leased premises or the appurtenances thereto. Tenant shall
not put any curtains, draperies or other hangings on or beside the
windows in the leased premises without first obtaining Landlord's
consent. All normal repairs necessary to maintain the leased premises in
a GOOD condition shall be done by or under the direction of Landlord and
at Landlord's expense except as otherwise provided herein.
13. ACCEPTANCE OF LEASED PREMISES: If this lease shall be entered into prior
to the completion of construction of the Building, or the portion of the
Building to be occupied by Tenant, the acceptance of the leased 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 thirty (30) days after the giving of such notice
make such inspection of the leased 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 leased
premises in their then condition.
14. LEASEHOLD IMPROVEMENTS: EXCEPT FOR THE IMPROVEMENTS NAMED IN EXHIBITS C,
Tenant shall reimburse Landlord for Landlord's costs of making all
leasehold 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 leasehold improvements made
without a written request therefor by Tenant to Landlord. Upon
expiration or sooner termination of this lease, all improvements and
additions to the premises including wall to wall carpeting, become the
property of Landlord, except Tenant's trade fixtures.
15. ACCESS: Tenant will permit Landlord and its agents to enter into and
upon the leased premises at all reasonable times for the purpose of
inspecting the same or for the purpose of cleaning, repairing, altering
or improving the leased premises or the Building. Nothing contained in
this Section 15 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 relieve Tenant from the duty of observing and performing any
of the provisions of this lease. Landlord shall have the right to enter
the leased premises for the purpose of showing the leased premises to
prospective Tenants within the period of 180 days prior to the
expiration or sooner termination of the lease term.
16. DAMAGE OR DESTRUCTION: If the leased 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 leased
premises to their previous condition, and in the meantime the monthly
rent shall be abated in the same proportion as the untenantable portion
of the leased premise bears to the whole thereof, but unless Landlord
within thirty (30) days after the happening of any such casualty, shall
notify Tenant of its election to so restore the leased premises.
HOWEVER, IF LANDLORD CANNOT REPAIR THE SPACE WITHIN 60 DAYS FROM THE
DATE OF NOTICE, this lease shall thereupon terminate and end.
If the Building shall be destroyed or damaged by fire of other casualty
insured against under Landlord's fire and extended coverage insurance
policy to the extent that more than fifty percent (50%) thereof is
rendered untenantable, or in case the Building shall be materially
destroyed or damaged by any other casualty other than those covered by
such insurance policy, notwithstanding that the leased premises may be
unaffected directly by such destruction or damage, Landlord may, at its
election, by prior written consent of any first mortgagee and the
Landlord under the Ground Lease, if any, terminate this lease by notice
in writing to Tenant within sixty (60) days after such destruction or
damage. Such notice shall be effective thirty (30) days after receipt
thereof by Tenant.
17. 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 herewith and hereby release
and relieve the other 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
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Building itself, arising out of or incident to the occurrence of any of
the perils which are covered by their respective fire and lightning
insurance policies, with extended coverage endorsements, or (ii) loss
resulting from business interruption at the leased premises or loss of
rental income from the Building, arising out of or incident to the
occurrence of any of the perils which are covered by the business
interruption insurance policy and by the loss of rental income insurance
policy held by Landlord or Tenant. Each party shall cause its insurance
carriers to consent to such waiver and to waive all rights of
subrogation against the other party.
18. 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 the officers, contractors, licensees, agents,
servants, employees, guests, invitees, or visitors of Tenant in or about
the leased premises, or arising from any accident, injury, or damage,
howsoever and by whomsoever caused, to any person or property, occurring
in or about the leased premises; provided that the foregoing provision
shall not be construed to make Tenant responsible for loss damage,
liability or expense resulting from injuries to third parties caused by
the negligence of Landlord, or of any officer, contractor, licensee,
agent, servant employee, guest, invitee or visitor of Landlord. THE
LANDLORD SHALL PROVIDE THE SAME DEFENSE AND INDEMNIFICATION AND HOLD THE
TENANT HARMLESS.
Tenant shall, at its own expense, keep and maintain in full force and
effect during the term of this Lease, a policy of comprehensive public
liability insurance OF NOT LESS THAN ONE MILLION DOLLARS, 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 in amounts satisfactory to Landlord. Tenant shall furnish to
Landlord upon the Lease Commencement Date and from time to time
thereafter certificates of insurance maintained by Tenant pursuant to
this Section 18 if requested by Landlord. The foregoing provisions shall
not be construed to make Tenant responsible for loss, damage, liability
or expense resulting from injuries to third parties, OR LOSS OR DAMAGE
CAUSED BY THE WILLFUL MISCONDUCT OR BREACH OF THIS LEASE, OR negligence
of Landlord, or its officers, contractors, licensee, agents, employees,
or invitees; provided, however, that in no event shall Landlord be
liable to Tenant for damage to the premises or for any loss, damage or
injury to any property therein or therein 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 wash stands, or other similar cause
in, above, upon or about the premises or the Building, EXCEPT IF ARISING
FROM LANDLORD OR ITS AGENTS OR EMPLOYEES' GROSS NEGLIGENCE. Tenant
agrees to insure its property, including special improvements paid for
by Tenant, against any perils as are normally covered in an all-risk
insurance policy.
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 of any other person, or by any other cause of whatsoever
nature, unless caused by the negligence of Landlord.
19. ASSIGNMENT AND SUBLETTING: Tenant shall not assign this lease nor sublet
the whole or any part of the leased premises without first obtaining
Landlord's written consent. No such assignment or subletting shall
relieve Tenant of any liability under the lease. Consent, WHICH SHALL
NOT BE UNREASONABLY withheld, 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 purposes of this section, UNLESS THE
ASSIGNEE HAS A TANGIBLE NET WORTH, DETERMINED IN ACCORDANCE WITH
ACCEPTED ACCOUNTING STANDARDS, AT LEAST EQUAL TO THE TANGIBLE PRESENT
NET WORTH OF THE TENANT AS OF THE DATE OF THIS LEASE.
20. 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
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leased premises or the Building at places visible (either directly or
indirectly as an outline or shadow on a glass pane) from anywhere
outside the leased premises without first obtaining Landlord's written
consent thereto. Any such consent by Landlord shall be upon the
understanding and conditioning Tenant will remove the same at the
expiration or sooner termination of this lease and Tenant shall repair
any damage to the leased premises or the Building caused thereby.
NOTWITHSTANDING THE ABOVE, TENANT MAY IDENTIFY ITS PRESENCE ON THE FLOOR
WITH CORPORATE SIGNAGE.
21. LIENS AND INSOLVENCY: Tenant shall keep the leased 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 right of possession under
this lease at Landlord's option.
22. DEFAULTS: Time is 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 TEN (10) days (or, if no default in the
rental is involved, within TWENTY (20) days) 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 re-enter the leased 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
leased premises. Notwithstanding any such re-entry, the liability of
Tenant for the full rental provided for herein shall not be extinguished
for the balance of the term of this lease, and Tenant shall make good to
Landlord any deficiency arising from a reletting of the leased premises
at a lesser rental, plus the REASONABLE AND NECESSARY costs and expenses
of renovating or altering the leased premises. Tenant shall pay any such
deficiency each month as the amount thereof is ascertained by Landlord.
23. PRIORITY: Tenant agrees that this lease shall be subordinate to any
first mortgages or deeds of trust that may hereafter be placed upon the
leased premises or the Building containing the same, and to any and all
advances to be made thereunder, and to the interest thereon, and all
renewals, replacements and extensions thereof, provided the mortgagee or
beneficiary named in said mortgages or deeds of trust shall agree to
recognize this lease in the event of foreclosure if Tenant is not in
default thereunder BEYOND APPLICABLE CARE PERIODS. Within fifteen (15)
days after written request from Landlord, Tenant shall execute any
documents that may be necessary or desirable to effectuate the
subordination of this lease to any such mortgages or deeds of trust and
shall execute estoppel certificates as requested by Landlord from time
to time in the standard form of any such mortgage or beneficiary.
This lease is technically a sublease in that the land is subject to a
Ground Lease, dated as of September 15, 1971 (the "Ground Lease"),
between the Bank of California, N.A. ("Bank") and Landlord, for a basic
term of sixty (60) years. The interest of such Bank in the land and in
the Ground Lease has been transferred and conveyed to Metropolitan Life
Insurance Company ("Metropolitan"), or its successor. This lease shall
not terminate or be terminable by Tenant by reason of any termination of
the Ground Lease by summary proceedings or otherwise, or foreclosure of
a leasehold mortgage. If requested by Metropolitan under the Ground
Lease, Tenant shall enter into a new lease with Metropolitan for the
balance of the term of this lease upon the same terms and conditions set
forth herein, or shall attorn to Metropolitan provided Metropolitan
agrees to recognize this lease as long as Tenant shall not be in default
hereunder beyond the period for occurring the same. Tenant hereby waives
the provisions of any statute or rule of law now or hereafter in effect
which may give or purport to give Tenant any right of election to
terminate this lease or to surrender possession of the leased premises
in the event the Ground Lease is terminated.
Tenant shall take no steps to terminate this lease without giving
written notice to Metropolitan and a reasonable opportunity to cure any
default on the part of Landlord.
24. REMOVAL OF PROPERTY: If Tenant shall fail to remove any of its property
of any nature whatsoever from the leased 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
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<PAGE> 8
cost of storing any such property after it has been stored for a period
of thirty (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
side, 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 attorneys' 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.
25. NON-WAIVER: Waiver by EITHER PARTY 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.
26. 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 lease premises to Landlord.
27. HOLDOVER: 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 rate of rental as set forth herein, unless a different rate shall
be agreed upon, and to be bound by all of the terms, covenants and
conditions herein specified, so far as applicable.
28. CONDEMNATION: If all of the leased premises or such portions of the
Building as may be required for the reasonable use of the leased
premises, are taken by eminent domain, this lease shall automatically
terminate as of the date Tenant is required to vacate the leased
premises and all rentals shall be paid to that date. In case of a taking
of a part of the leased premises, or a portion of the Building not
required by the reasonable use of the leased 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
leased 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 leased
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, that such damages may be claimed only if
they are awarded separately in the eminent domain proceeding and not as
part of the damages recoverable by Landlord.
29. NOTICES: All notices under this lease shall be in writing and delivered
in person or sent by registered or certified mail to Landlord at the
same place rent payments are made, and to Tenant as the leased premises,
or such addresses as may hereafter be designated by either party in
writing. Notices mailed as aforesaid shall be deemed given on the date
THREE BUSINESS DAYS AFTER SUCH MAILING, OR ON THE DATE OF RECEIPT,
WHICHEVER IS EARLIER.
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 leased 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
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covenants, undertakings and agreements or for the purpose of binding
Landlord personally or the assets of Landlord except for Landlord's
interest in the premises and Building, but are made and intended for the
purpose of binding only the Landlord's interest in the premise and
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. CAPTIONS AND CONSTRUCTION: 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 thereof. This lease shall be construed and
governed by the laws of the State of Washington.
33. LANDLORD'S CONSENT: Whether Landlord's consent is required under the
terms of hereof, such consent shall not be unreasonably withheld,
CONDITIONED OR DELAYED.
34. SUCCESSORS: 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.
35. GENERAL:
(a) Tenant AND LANDLORD represents and warrants to EACH OTHER that THEY HAVE
not engaged any broker, finder or other person, OTHER THAN CUSHMAN &
WAKEFIELD OF WASHINGTON, Inc., who would be entitled to any commission
or fees in respect of the negotiations execution or delivery of this
lease and shall indemnify EACH OTHER against any loss, cost, liability
or expense incurred by EITHER PARTY as a result of any claim asserted by
any such broker, finder or other person on the basis of any arrangements
made or alleged to have been made by or on behalf of EITHER PARTY.
(b) 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. Any provision hereof
and the remaining provisions hereof shall nevertheless remain in full
force and effect.
(c) Any rent, additional rental or other sums payable by Tenant to Landlord
which shall not be paid upon the due date thereof, shall bear interest
at 12% PER ANNUM and calculated from the date of delinquency to the date
of payments.
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IN WITNESS WHEREOF, this lease has been executed the day and year first
above set forth.
CONTINENTAL SEATTLE PARTNERS LIMITED
PARTNERSHIP,
a Washington Limited Partnership.
BY CONTINENTAL SEATTLE REALTY CORP.,
General Partner
By /s/ GAYLE E. BOOTH
--------------------------------------
Attest PRESIDENT 8-31-95
-----------------------------------
Landlord
TOLL-FREE CELLULAR, INC., a Washington
corporation
By /s/ MARK A. LAZAN
--------------------------------------
Its CEO
--------------------------------------
Tenant
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STATE OF Washington )
) ss.
COUNTY OF King )
On this 31st day of August, 1995, before me personally appeared Mark A. Lazan,
of Toll Free Cellular, Inc., the corporation that 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
mentioned, and on oath stated that they were authorized to execute the said
instrument and that the seal affixed, if any, is the corporate seal of said
corporation.
IN WITNESS, WHEREOF, I have hereunto set my hand an affixed my official seal the
day and year first above written.
Print Name: /s/ Duane Minaret
NOTARY PUBLIC in and for the State of Washington
Seattle, residing at
My appointment Expires: 03/15/98
STATE OF New York )
) ss.
COUNTY OF New York )
On this 31st day of August, 1995, before me, the undersigned, a Notary Public
in and for the State of New York, duly commissioned and sworn, personally
appeared Gayle Booth to me known to be the President of CONTINENTAL SEATTLE
REALTY CORPORATION (the "Corporation"), a Washington corporation, the
corporation that executed the within and foregoing instrument as the general
partner of CONTINENTAL SEATTLE PARTNERS LIMITED PARTNERSHIP (the "Partnership"),
a Washington limited partnership, and on oath stated that she was duly elected,
qualified and acting as said officer of the Corporation, and that said she was
authorized to execute the said instrument on behalf of the Corporation, and
that said instrument was the free and voluntary act and deed of the Corporation
for the uses and purposes therein mentioned, and that the Corporation was
authorized to execute the said instrument on behalf of the Partnership, and
that said instrument was the free and voluntary act and deed of the Partnership
for the uses and purposes therein mentioned.
WITNESS my hand and official seal hereto affixed the day and year in this
certificate above written.
Print Name: /s/ Gloria R. Giese
NOTARY PUBLIC in and for the State of New York,
residing at 300 E. 46th Street
My appointment Expires: 3-29-97
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[graphic to be inserted here]
Exhibit A: 34th Floor Plan
Toll-Free Cellular Inc.
Suite 3400
11,978 Rentable Square Feet
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EXHIBIT B
Exhibit B to the lease dated the 31st day of August, 1995, between Continental
Seattle Partners Limited Partnership and Toll Free Cellular, Inc.
RULES AND REGULATIONS
1. The sidewalks, halls, passages, elevators, stairways, exits and
entrances of the Building shall not be obstructed by Tenant or used by
it for any purpose other than for ingress and egress from the Premises.
The halls, passages, exits, entrances, elevators, lobbies, and stairways
are not for the use of the general public, and Landlord shall in all
cases retain the right to control and prevent access thereto of all
persons whose presence in the judgment of Landlord would be prejudicial
to the safety, character, reputation and interests of the Building and
its tenants provided that nothing herein contained shall be construed to
prevent such access to persons with whom tenant normally deals in the
ordinary course of its business, unless such persons are engaged in
illegal activities.
2. The Premises shall not be used for lodging or sleeping, and unless
ancillary to a restaurant or other food service use specifically
authorized in Tenant's lease, no cooking shall be done or permitted by
Tenant on the Premises, except that the preparation of hot beverages and
use of microwave ovens for Tenant and its employees shall be permitted.
3. Landlord shall clean the leased Premises as provided in its routine
janitorial schedule, and except with the written consent of Landlord, no
person or persons other than those approved by Landlord will be
permitted to enter the Premises for such purpose. Tenant shall have the
right to have an employee on the Premises for special and/or
extraordinary cleaning such as maintenance of hardwood floors, carpet
cleaning, furniture cleaning and other such services not provided by
Landlord but as desired by Tenant, and at Tenant's sole expense. Tenant
shall not cause unnecessary labor by reason of Tenant's carelessness and
indifference in the preservation of good order and cleanliness.
4. Cleaning of interior glass relights or entry glass relights shall be at
Tenant's expense. If Tenant's leased premises contains a sink,
refrigerator, ice-maker, waste disposal, dishwasher, or other such
fixtures such items shall be maintained and repaired by the Tenant at
the Tenant's sole costs and expense. Costs related to pest control for
kitchen areas, fixtures, plants, etc. shall also be the Tenant's.
5. Tenants shall not alter any lock or install a new or additional lock or
any bolt on any door of the leased Premises without furnishing Landlord
with a key for any such lock and obtaining prior permission. Tenant,
upon the termination of its tenancy shall deliver to Landlord all keys
and/or security cards to doors in the Building and the Premises that
shall have been furnished to Tenant and in the event of loss of any keys
and/or security cards so furnished, shall pay Landlord therefor.
6. At Tenant's expense, chair pads shall be required under roller casters
to preserve carpet appearance, prevent accelerated wear, and act as a
deterrent toward carpet delamination.
7. The freight elevator shall be available for use by Tenant, subject to
such reasonable scheduling as Landlord shall deem appropriate. The
persons employed by Tenant to move equipment or other items in or out of
the Building must be acceptable to Landlord. Landlord shall have the
right to prescribe the weight, size and position of all equipment,
materials, supplies, furniture or other property brought into the
Building. No safes or other objects larger or heavier than the freight
elevator of the Building is limited to carry shall be brought into or
installed on the leased premises without Landlord's prior written
consent. Heavy objects shall, if considered necessary by Landlord, stand
on wood strips of such thickness as is necessary to properly distribute
the weight of such objects. Landlord will not be responsible for loss of
or damage to any such property from any cause, and all damage done to
the building by moving or maintaining Tenant's property shall be
repaired at the expense of Tenant. The moving of heavy objects shall
occur only between such hours as may be designated by and only upon
written notice to Landlord and the persons employed to move heavy
objects in or out of the Building must be acceptable to Landlord.
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8. At Tenant's sole costs and expense, Tenant shall install and maintain
within the demised premises, an adequate, visibly marked, at all time
properly operational ABC rated fire extinguisher next to any duplicating
or photocopying machine or similar heat producing equipment.
9. Tenant shall not use or keep in the Premises or in the Building any
kerosene, gasoline or flammable or combustible fluid or materials or use
any method of heating or air conditioning other than that supplied by
Landlord. Tenant shall not sweep or throw or permit to be swept or
thrown from the leased Premises any debris or other substance into any
of the corridors, halls, or lobbies or out of the doors or windows or
into the stairway of the Building and Tenant shall not use, keep or
permit or suffer the Premises to be occupied or used in a manner
offensive or objectionable to Landlord or other occupants of the
Building by reason of noise, odors and/or vibrations, or interfere in
any way with other tenants or those having business in the Building.
10. No animal or bird of any kind shall be brought into or kept in or about
the demised premises or the building. Fish aquariums are acceptable,
however Landlord assumes no responsibility or liability whatsoever for
the maintenance, operation or safety of the aquariums and their
contents.
11. Tenant shall not alter the settings of any non-adjustable thermostat nor
tamper with any electrical, mechanical, or HVAC systems or equipment.
12. During non-business hours and on holidays, access to the Building or to
the halls, corridors or stairways in the Building, or to the leased
Premises, may be refused unless the person seeking access is known to
the Building and has a pass or is properly identified. Landlord shall in
no case be liable for damages for the admission to or exclusion from the
Building of any person whom Landlord has the right to exclude under Rule
1 above. In case of invasion, mob, riot, public excitement or other
circumstances rendering such action advisable in Landlord's opinion,
Landlord reserves the right to prevent access to the Building during the
continuance of same by such action as Landlord may deem appropriate,
including closing entrances to the Building.
13. Tenant shall see that the doors of the Premises are closed and securely
locked at such time as Tenant's employees leave the Premises.
14. The toilet rooms, toilets, urinals, wash bowls and other apparatus, as
well as any sinks located within Tenant's leased premises, shall not be
used for any purpose other than that for which they were construed. No
foreign substance of any kind whatsoever, including coffee grounds,
shall be deposited therein, and any damages resulting to same from
Tenant's misuse shall be paid for by Tenant.
15. Except with the prior written consent of Landlord, Tenant shall not
sell, or permit the sale of newspapers, magazines, periodicals, theater
tickets or any other goods, merchandise or service from the Premises,
nor shall Tenant carry on, or permit or allow any employee or other
person to carry on business in or from the Premises for the service or
accommodation of occupants of any other portion of the Building, nor
shall the Premises be used for manufacturing of any kind, or for any
business or activity other than that specifically provided for in
Tenant's lease or otherwise approved by Landlord. No Tenant shall obtain
for use upon the leased premises, ice, towel and other similar services,
or accept barbering or shoe polishing services in the leased premises,
except from persons authorized by Landlord and at hours and under
regulations fixed by Landlord.
16. Tenant shall not install any radio or television antenna, loudspeaker or
other device on the roof or exterior walls of the Building.
17. Tenant shall not use in any space, or in the common areas of the
building, any handtrucks except those equipped with rubber tires and
side guards or such other material handling equipment as Landlord may
approve. No other vehicles of any kind shall be brought by Tenant into
the Building or kept in or about the Premises.
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BANK OF CALIFORNIA CENTER
LEASE INDEX
18. No sign, advertisement or notice visible from the exterior of the leased
Premises shall be inscribed, painted or affixed by Tenant on any part of
the Building or leased premises without the written consent of the
Landlord. If Landlord shall have given consent at any time, whether
before or after the execution of this Lease, such consent shall in no
way operate as a waiver or release of any of the provisions hereof or of
this Lease, and shall be deemed to relate only to the particular sign,
advertisement or notice so consented to by Landlord and shall not be
construed as dispensing with the necessity of obtaining the specific
written consent of Landlord with respect to each and every such sign,
advertisement or notice other than the particular sign, advertisement or
notice, as the case may be, so consented to by Landlord.
19. The sashes, sash doors, windows, glass lights, and any lights or
skylights that reflect or admit light into the halls or other places of
the Building shall not be covered or obstructed and, there shall be no
hanging plants or other similar objects in the immediate vicinity of the
windows or placed upon the window sills or hung from the window heads.
20. No tenant shall lay linoleum or other similar floor covering so that the
same shall be affixed to the floor of the leased Premises in any manner
except by a paste, or other material which may easily be removed with
water, the use of cement or other similar adhesive materials being
expressly prohibited. The method of affixing any such linoleum or other
similar floor covering to the floor, as well as the method of affixing
carpets or rugs to the leased Premises, shall be subject to approval by
Landlord. The expenses of repairing any damage resulting from a
violation of this rule shall be borne by the Tenant by whom, or by whose
agents, clerks, employees or visitors, the damage shall have been
caused.
21. All loading and unloading of merchandise, supplies, materials and
furniture and delivery of same to the Premises shall be made between
such reasonable hours in such entryway and elevators as Landlord shall
designate. In its use of the loading areas on the first basement floor,
Tenant shall not obstruct or permit the obstruction of said loading
areas, and at no time shall Tenant park vehicles therein except for
loading and unloading.
22. Tenant, Tenant's agents, servants, employees, contractors, licensees or
visitors shall not park any vehicles in any driveways, service
entrances, or areas posted "No Parking."
23. Canvassing, soliciting, peddling or distribution of handbills or any
other written material in the Building is prohibited and Tenant shall
cooperate to prevent same.
24. Tenant shall not permit the use or the operation of any coin operated
machines on the Premises, including, without limitation, vending
machines, video games pinball machines, or pay telephones without the
prior written consent of Landlord.
25. Landlord may direct the use of all pest extermination and scavenger
contractors at such intervals as Landlord may require.
26. If Tenant desires telephone or telegraph connections, Landlord will
direct service technicians as to where and how the wires are to be
introduced. No boring or cutting for wires or otherwise shall be made
without directions from Landlord.
27. Replacement of ceiling lamps other than building standard 2x4
fluorescent fixtures (i.e., incandescent lights, wall washers, track
light, etc.) shall be at Tenant's expense.
28. Tenant shall immediately upon request from Landlord (which request need
not be in writing), reduce its lighting in the premises for temporary
periods designated by Landlord, when required in Landlord's judgment to
prevent overloads of mechanical or electrical systems of the building.
29. Tenant, or Tenant's guests who ride bicycles shall use the building's
designated bicycle racks. Bikes shall not be allowed in the building
lobbies, elevator cars, or tenant suites, and Tenant shall assist the
Landlord in the enforcement of this stipulation, should any of Tenant's
employees violate this rule.
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30. Landlord reserves the right to select the name of the Building and the
buildings therein and to make such change or changes of name as it may
deem appropriate from time to time, and Tenant shall not refer to the
Building and buildings therein by any name other than: (i) the names as
selected by Landlord (as same may be changed from time to time), or (ii)
the postal address, approved by the United States Post Office. Tenant
shall not use the name of the Building and the buildings therein in any
respect other than as an address of its operation of the Building
without the prior consent of Landlord.
31. The requirements of Tenant will be attended to only upon application of
telephone or in person at the office of the Building. Employees of
Landlord shall not perform any work or do anything outside of their
regular duties unless under special instruction from Landlord.
32. Landlord may waive any one or more of the Rules and Regulations for the
benefit of any particular tenant or tenants, but no such waiver by
Landlord shall be construed as a waiver of the Rules and Regulations
against any or all of the tenants in the Building.
33. Wherever the word "Tenant" occurs in these Rules and Regulations, it is
understood and agreed that it shall mean Tenant's associates, agents,
clerks, employees and visitors. Wherever the word "Landlord" occurs in
these Rules and Regulations, it is understood and agreed that it shall
mean Landlord's assigns, agents, clerks, employees, and visitors.
34. These Rules and Regulations are in addition to, and shall not be
construed in any way to modify, alter or amend, in whole or part, the
terms, covenants, agreements and conditions of any lease of premises in
the Building.
35. Landlord reserves the right to make such other and reasonable rule and
regulations as in its judgments may from time to time be needed for the
safety care and cleanliness of the Building, and for the preservation of
good order therein.
16
<PAGE> 17
EXHIBIT C TO LEASE DATED AUGUST 31, 1995 BETWEEN CONTINENTAL SEATTLE PARTNERS
LIMITED PARTNERSHIP AND TOLL-FREE CELLULAR INC.
ADDITIONAL TERMS AND PROVISIONS
1. FLOOR AREA:
11,978 square feet
2. SPACE POCKET:
For the first 12 months of the initial 60-month lease term, the Landlord
agrees to charge base monthly rent on designated portions of the space
as follows:
<TABLE>
<CAPTION>
Months Pay Rent On Space Pocket
------ ----------- ------------
<S> <C> <C>
1-6 6,000 s.f. 5,978 s.f.
7-8 8,000 s.f. 3,978 s.f.
9-12 9,000 s.f. 2,978 s.f.
13-60 11,978 s.f. 0 s.f.
</TABLE>
A "space pocket" is defined as an area within the Tenant's lease
premises which is totally unused. As long as the designated areas remain
unused during the initial twelve-month period, the base rent remains as
set forth in Exhibit C, Base Monthly Rent. If, however, some or all of
the pocket space is used during this twelve-month period, the additional
square footage shall be measured then multiplied by the base annual rate
(plus escalation rate, if any) set forth on the rental schedule for that
period of time that the pocket space is being taken. The amount shall be
divided by twelve and shall be added to the Tenant's then current base
monthly rent. By way of example, Tenant takes 481 square feet multiplied
by $15.00 = $7,215.00 per annum divided by 12 = $601.25. The amount of
$601.25 shall be added to the tenant's then current rent.
3. INITIAL LEASE TERM:
The initial lease term shall be five (5) years, commencing no earlier
than September 1, 1995, but no later than November 1, 1995 or upon
substantial completion of the improvements, whichever is first. Upon
Tenant's possession of the space, Landlord and Tenant shall execute an
amendment to the Lease which shall set forth the exact commencement and
expiration dates. See paragraph 11, POSSESSION.
4. RENEWAL OPTION:
So long as Tenant is not in default of any provision or condition of
this Lease, Tenant shall have the option to extend the initial 60-month
term of this Lease for one additional period of 60 months on the same
terms, covenants and conditions of this Lease, except that the monthly
rent shall be the fair market rent for premises on the expiration date
of the initial term. If Landlord and Tenant are unable to agree upon the
fair market rent prior to the expiration date, the question will be
submitted to final, non-appealable arbitration according to the American
Arbitration Association rules then in effect. Tenant shall exercise its
option by giving Landlord written notice at least 180 days prior to the
expiration of the initial term of this Lease. In no event shall the fair
market rental value of the premises for the option period be less than
the provided during the initial term.
5. BASE MONTHLY RENT:
<TABLE>
<CAPTION>
Base Base
S.F. Monthly Annual
Months Area Rent Rate
------ ---- ---- ----
<S> <C> <C> <C>
1 - 6 6,000 $ 7,500.00 $ 15.00
7 - 8 8,000 $10,333.33 $ 15.50
9 - 12 9,000 $11,625.00 $ 15.50
13 - 60 11,978 $15,471.58 $ 15.50
</TABLE>
Rent shall be payable on or before the first day of each month.
17
<PAGE> 18
6. LEASEHOLD IMPROVEMENTS:
THE LANDLORD SHALL PROVIDE THE TENANT WITH A MAXIMUM LEASEHOLD
IMPROVEMENT ALLOWANCE OF $7.00 PER SQUARE FOOT, OR $83,846.00. THE
SELECTION OF IMPROVEMENTS SHALL BE AT TENANT'S DISCRETION, AND APPROVED
BY THE LANDLORD. DELIVERY OF SUCH IMPROVEMENTS SHALL BE ACCEPTABLE TO
THE TENANT. LANDLORD SHALL SUPERVISE AND COORDINATE ALL ACTIVITIES
RELATED TO THE CONSTRUCTION INCLUDING THE HIRING OF SUBCONTRACTORS.
7. SPACE PLANNING:
Landlord shall pay Tenant's planner, Burgess Design, for one schematic
plan, plus one revision, and a final set of construction drawings.
8. BUILDING PLANNING:
In the event Landlord requires the Premises for use in conjunction with
another suite or for other reasons, upon notifying Tenant in writing,
Landlord shall have the right at Landlord's expense to move Tenant to
other space in the building and the terms and conditions of the original
Lease shall remain in full force and effect. An amendment which exhibits
the location and square footage of the new space shall become part of
this Lease. The Amendment shall further state all current data related
to the new premises.
9. RIGHT OF FIRST OPPORTUNITY TO LEASE (EXPANSION SPACE):
Provided that as of the date of exercise there has been no event of
default on the part of the Tenant, Tenant shall have the right of first
opportunity to lease space on the 33rd floor which becomes vacant and
available for lease ("Expansion Space"). Landlord agrees that, prior to
entering into commitment with a third party for the leasing of the
Expansion Space, Tenant shall be given written notice thereof
("Notice"). The notice shall contain an offer by Landlord to lease the
Expansion Space at a price and upon terms that Landlord has negotiated
with THE third party. Tenant shall have the right to lease the Expansion
Space by agreeing within five (5) business days to match the terms
agreed upon between the Landlord and THE third party.
Tenant may elect to lease the expansion space by giving written notice
thereof to Landlord within five (5) business days after receipt of
notice. If Tenant fails to timely give notice of its election, or if
Tenant notifies Landlord that it declines to elect to lease the
Expansion Space, or if a lease for such Expansion Space is not executed
within thirty (30) days of the date of such Notice DUE TO TENANT'S
UNEXCUSED DELAY, Landlord shall have the right to lease the Expansion
Space to any third party at any price and upon any other terms and
conditions as Landlord shall in its sole discretion determine.
10. TENANT'S RIGHT TO EARLY TERMINATION:
Tenant shall have the right to terminate the Lease under the following
circumstances: (1) the Landlord cannot TIMELY accommodate the Tenant's
expansion of 3,000 square feet or more AT A MARKET RATE in the same
elevator bank in the Building; or (2) there is a bona fide sale of
Tenant to another company and the new owner closes the Tenant's Seattle
office. THE TERMINATION SHALL BE VOID IF the office DOES NOT remain
closed of more than one year.
If Tenant elects to terminate the Lease pursuant to this paragraph seven
(7) months prior to the effective date of termination, TENANT SHALL
provide the Landlord with written notice of its intent to terminate the
Lease.
If Tenant exercises its right to terminate the Lease pursuant to this
paragraph, it may elect to terminate the Lease effective either October
31, 1998 or October 31, 1999. If Tenant terminates the Lease effective
October 31, 1998, it shall pay Landlord an additional fee equal to three
(3) months of Rent. If Tenant terminates the Lease effective October 31,
1999, it shall pay Landlord an additional fee equal of two (2) months of
Rent. Tenant shall also pay to Landlord the STRAIGHT-LINE unamortized
portion, as of the effective date of cancellation, of the following
costs, plus interest at the rate of ten percent (10%):
1. Architectural fees (PAID TO BURGESS DESIGN)
2. Tenant Improvement costs
3. Broker fees (PAID TO CUSHMAN & WAKEFIELD)
18
<PAGE> 19
11. COLLATERAL/SECURITY DEPOSIT:
Within five (5) business days of the full execution of this Lease,
Tenant shall deposit with Landlord the sum of $179,670 as collateral in
the event of Tenant's material default in its obligations under the
Lease. Landlord shall deposit the funds with the Bank of Tokyo, Ltd.
(the "Bank") in an interest bearing account in the name of Landlord in
trust for Tenant. Commencing on the commencement date of the Lease and
thereafter on the first business day of each calendar month, the Bank
shall be instructed to disburse to Landlord an amount equal to Tenant's
rent obligation for such calendar month under the Lease, as such rent
obligation may increase if Tenant occupies its space pockets under the
Lease prior to the scheduled takedown date.
In establishing the collateral account the Bank shall be instructed that
any disbursements to Landlord in excess of Tenant's scheduled monthly
rent obligation will require Tenant's written consent or a court order
after due notice to Tenant. To obtain a better interest yield on the
funds deposited in the collateral account, Landlord shall be permitted
to transfer all or part of the funds in the collateral account to one or
more certificates of deposit in the name of Landlord in trust for
Tenant. Landlord shall be solely responsible for insuring that the
maturity dates of the certificates of deposit will provide adequate
funds in the collateral account for the monthly base rent disbursements
required above.
When the collateral account balance plus the balance of any certificates
of deposit in which Tenant's prepaid funds have been transferred equals
$20,000, inclusive of accrued interest, Landlord's right to monthly
disbursements shall terminate and such $20,000 shall be considered
Tenant's security deposit under the Lease. Thereafter, Tenant shall pay
directly to Landlord the monthly base rent due each month pursuant to
the Lease. All interest accruing on the security deposit shall be part
of the security deposit.
In the event Tenant materially defaults in its obligations under the
Lease beyond applicable cure periods, then in addition to any other
available remedy Landlord may have, Landlord shall be entitled to
receive all funds remaining in the collateral account or in the
certificates of deposit.
If the Lease terminates for any reason other than Tenant's material
default during any period when there are funds remaining in the
collateral account or in certificates of deposit, all funds remaining in
the collateral account shall be disbursed to Tenant and all certificates
of deposits transferred to Tenant's sole ownership.
12. PARKING:
Landlord shall provide, during the term of this Lease and any additional
term, the opportunity to lease one (1) covered parking stall per 1,000
square feet of leased space, (twelve) within the garage. The cost for
the parking space shall be at the Landlord's prevailing rate charged
other monthly parkers.
Tenant shall have the right to increase its allocation of parking spaces
by notifying the Landlord. Landlord will provide additional parking
spaces, on a month-to-month basis, to Tenant on a priority basis which
means that Tenant will have priority to lease additional spaces over any
non-tenant persons using the parking garage.
13. ASBESTOS-CONTAINING MATERIALS ("ACM"):
During the initial term of the Lease, Landlord agrees to pay for
ACM-related costs (such as monitoring, containment, etc.) and any other
incremental costs associated with Tenant improvement construction and
related cabling, if, in its sole judgment, such ACM-related work is
necessary.
14. AMERICANS WITH DISABILITIES ACT ("ADA"):
Landlord agrees to continue to bear the costs of ADA-related
improvements for its common areas, including restrooms, and to comply
with laws related to the ADA. However, if Tenant hires a physically
disabled person, then the Tenant shall take responsibility to improve
its Lease Premises (with the exception of lock-sets which shall be a
Landlord expense), at its sole cost, to meet the needs of its
employee(s).
19
<PAGE> 20
15. BROKER:
WITHIN FIVE (5) BUSINESS DAYS OF LANDLORD'S RECEIPT OF TENANT'S
COLLATERAL/SECURITY DEPOSIT, Landlord shall pay Cushman & Wakefield a
broker's commission of $41,923.00, or $3.50 per square foot, only for
the initial Premises measuring 11,978 rentable square feet on the 34th
floor.
16. EXECUTORY SIGNATURES:
THIS LEASE MAY BE SIGNED IN COUNTERPARTS AND SIGNATURES TRANSMITTED BY
FACSIMILE WILL BE DEEMED EQUIVALENT TO ORIGINAL SIGNATURES.
17. BANKRUPTCY COURT APPROVAL:
TENANT MAY TERMINATE THIS LEASE, AT TENANT'S SOLE OPTION, UNLESS
LANDLORD OBTAINS AND DELIVERS TO TENANT BY NO LATER THAN SEPTEMBER 10,
1995, AN ORDER BY THE BANKRUPTCY COURT APPROVING THE LEASE.
18. SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE AGREEMENT:
WITHIN TEN (10) BUSINESS DAYS FROM THE MUTUAL EXECUTION OF THIS LEASE,
LANDLORD SHALL DELIVER TO TENANT A SIGNED SUBORDINATION, ATTORNMENT AND
NON-DISTURBANCE AGREEMENT SIGNED BY AN OFFICER OF THE BANK OF TOKYO,
LTD.
IF LANDLORD DOES NOT DELIVER THE SUBORDINATION ATTORNMENT AND
NON-DISTURBANCE AGREEMENT TO TENANT WITHIN SUCH TEN (10) BUSINESS DAY
PERIOD, TENANT, AT ITS SOLE OPTION, MAY CANCEL THE LEASE.
19. CORRECTION TO LESSEE'S CORPORATE NAME:
ALL REFERENCES IN THIS LEASE TO TOLL-FREE CELLULAR, INC. ARE HEREBY
CHANGED TO TOLL FREE CELLULAR INC.
20
<PAGE> 21
EXHIBIT D
LEGAL DESCRIPTION OF THE LAND
All of Block 22, Addition to the Town of Seattle, as laid out on the claims of
C.D. Boren and A.A. Denny and H.L. Yesler commonly known as C.D. Boren's
Addition to the City of Seattle, according to the plat thereof recorded in
Volume I of Plats, page 25, in King County, Washington;
TOGETHER WITH the vacated alley in said Block 22, which would attach thereto by
operation of law;
EXCEPT the southwesterly 9 feet of said Block 22, as condemned in King County
Superior Court Cause No. 50320 for Fourth Avenue as provided by Ordinance No.
13074 of the City of Seattle.
21
<PAGE> 22
JANITORIAL SERVICES
NIGHTLY (SUNDAY THROUGH THURSDAY):
Empty ashtrays
Empty wastebaskets
Remove boxes, waste, etc. from the suite
Light dusting of those desks and stations which have been cleared of papers
Vacuum reception areas and heavily trafficked hallways Wipe clean all smudged
bright work, including sinks, brass work and kickplates Spot clean carpets and
floors as required All light turned off (unless tenants are still working) Lock
entry doors
WEEKLY (IN ADDITION TO NIGHTLY SERVICES):
Dust coatracks, shelves, credenzas, ledges, sills, door louvers Complete
vacuuming of full office suite including under desks
MONTHLY (IN ADDITION TO NIGHTLY AND WEEKLY SERVICES):
Dust all "high-reach" areas, i.e., tops of door jambs, furniture ledges, air
conditioning diffusers, picture frames
Highspeed buff and wax all vinyl flooring
Edge all carpeted area
Dust venetian blinds
QUARTERLY (IN ADDITION TO NIGHTLY, WEEKLY AND MONTHLY SERVICES):
Vacuum upholstered furniture
Scrub and rewax vinyl floors as needed
SEMI-ANNUALLY (IN ADDITION TO NIGHTLY, WEEKLY, MONTHLY, AND QUARTERLY SERVICES):
Dust light fixtures
THE JANITORIAL contract does not include the following services without
pre-arrangement; and without extra charges:
Wash dishes
Clean refrigerators
Hardwood floor refinishing
Carpet shampooing or extraction
Upholstered furniture cleaning
Wash interior glass relights
Replacement of incandescent light bulbs, bulbs for desk lamps, or any other
non-standard lighting.
EXHIBIT E TO THE LEASE BETWEEN
CONTINENTAL SEATTLE PARTNERS L.P. AND TOLL-FREE CELLULAR, INC.
JANITORIAL SPECIFICATIONS
22
<PAGE> 1
EXHIBIT 10.2
ASSIGNMENT OF LEASE
This Assignment of Lease (this "Assignment") is made as of March 13,
1998, by and among the following parties:
Continental Seattle Partners Limited Partnership, a Washington limited
partnership ("Landlord"), whose notice address is 900 Fourth Avenue,
Suite 1660, Seattle, WA 98164.
Toll Free Cellular Inc., a Washington corporation ("Assignor"), whose
notice address is c/o Armand J. Kornfeld, Bush Strout & Kornfeld, Two
Union Square, Suite 5500, 601 Union Street, Seattle, WA 98101.
N2H2, Inc. a Washington corporation ("Assignee"), whose notice
address is 900 Fourth Avenue, Suite 3400, Seattle, WA 98164.
1. Recitals. This Assignment is made with reference to the following
facts and objectives:
a. Landlord and Assignor, as tenant, entered into that certain
Lease, dated August 31, 1995 (the "Lease"), in which Landlord leased to Assignor
and Assignor leased from Landlord certain premises (designated in the Lease as
Suite 3400) located on the 34th floor of the building commonly known as the Bank
of California Building, located at 900 Fourth Avenue, Seattle, King County,
Washington.
b. Assignor desires to assign and delegate all its right, title,
interest, duties and obligations in and under the Lease to Assignee; and
Assignee desires to assume all of Assignor's right, title, interest, duties and
obligations in and under the Lease. Assignee hereby acknowledges its receipt of
a copy of the Lease.
c. Landlord desires to consent to the assignment and assumption
contemplated by this Assignment.
2. Effective Date of Assignment. The assignment and assumption
contemplated by this Assignment shall take effect on March 13, 1998 (the
"Effective Date"), and Assignor shall give possession of the premises subject to
the Lease to Assignee on the Effective Date in a broom clean condition AS IS,
with all defects and reasonable wear and tear. Assignee shall cause March, 1998
rent due under the Lease to be paid concurrent with the execution of this
Assignment by all parties.
3. Assignment and Assumption. As of the Effective Date, Assignor
assigns, delegates and transfers to Assignee all its right, title, interest,
duties and obligations in and under the Lease, and Assignee accepts the
assignment, assumes all of Assignor's right, title, interest, duties and
obligations in and under the Lease and agrees to perform, commencing on the
Effective Date, as a direct obligation to Landlord, all of the provisions of the
Lease.
<PAGE> 2
4. Landlord's Consent. Landlord hereby consents to the assignment and
assumption set forth herein without waiver of the restriction concerning further
assignment.
5. Assignor's Liability. Landlord and Assignor warrant and represent
that (i) Landlord has completed its performance of its obligations under
Sections 6 and 7 of the Additional Terms and Provisions to the Lease (which are
attached to the Lease as Exhibit C); and (ii) based on Landlord's current actual
knowledge, there exists no uncured default under the Lease by Landlord or
Assignor as of the date hereof, except for Assignor's failure to timely pay
March, 1998 rent. Assignor warrants that as of the Effective Date, there shall
be no uncured default under the Lease by Assignor. Assignor shall remain liable
for the performance of the provisions of the Lease, and shall have the right to
cure any monetary default by Assignee under the Lease by payment to Landlord of
the amount due. Nothing in this Section 5 shall be construed as granting
Assignor a right to retake possession of the Premises or to void this
Assignment.
6. Indemnification. If Assignee defaults under the Lease on or after the
Effective Date, Assignee shall indemnify and hold harmless Assignor from all
costs, liabilities and damages resulting from the default. If Assignee defaults
in its obligations under the Lease and Assignor pays rent to Landlord or
fulfills any of Assignee's other obligations in order to prevent Assignee from
being in default under the Lease, Assignee shall immediately reimburse Assignor
for the amount of rent or costs incurred by Assignor in connection with the
foregoing, together with interest accruing on those sums at the lower of twelve
percent (12%) per annum or the highest legal rate.
7. Default of Lease: Notice to Assignor.
a. Notice to Assignor. Landlord agrees to send to Assignor any
notice of default that Landlord sends to Assignee.
8. Amendment of Lease. Landlord and Assignee may enter into any
agreement that amends the Lease or extends the term of the Lease without
Assignor's prior written consent, but any such amendment or extension shall not
be binding on Assignor.
9. Security Deposit. Upon the full execution of this Assignment by
Landlord, Assignee and Assignor, (a) Landlord shall return all of the deposit
then held by Landlord pursuant to Section 5 of the Lease and Section 11 of the
Additional Terms and Provisions to the Lease to Assignor; and (b) Assignee shall
deposit with Landlord Twenty Thousand Dollars ($20,000) as a security deposit to
be held and applied subject to the provisions of Section 5 of the Lease, Section
11 of the Additional Terms and Provisions to the Lease and other applicable
provisions of the Lease.
10. Consideration for Assignment. In partial consideration of Assignor's
agreements and covenants contained herein, Assignee shall execute and deliver to
the Assignor concurrently
2
<PAGE> 3
with Landlord's approval of this Assignment a promissory note in the principal
amount of $81,000 on the terms stated in and in the form of the Promissory Note
attached hereto as Attachment A. Failure by Assignee to pay all or any portion
of the Promissory Note shall not in any way effect the validity of this
Assignment.
11. Extension Option. Assignee covenants that it will not exercise any
right granted the Tenant under the Lease to extend the Lease term and all such
extension rights are hereby terminated.
12. Miscellaneous.
a. Attorneys' Fees. If any party commences an action against any
of the other parties arising out of or in connection with this Assignment, the
prevailing party or parties shall be entitled to recover from the losing party
or parties reasonable attorneys' fees and cost of suit.
b. Notices. Any notice or communication that any party desires or
is required to give to any of the other parties hereunder or under the Lease
shall be in writing and either (i) served personally, (ii) sent by reputable
courier service providing proof of delivery; or (iii) sent by return receipt
requested, prepaid, first class registered or certified mail, addressed to the
other party at the address set forth in the introductory paragraph of this
Assignment. Any party may change its address by notifying the other parties of
the change of address. Notice shall be deemed received upon delivery evidenced
by proof of delivery or return receipt.
c. Broker Fees. Each of Assignor and Assignee represents and
warrants to the other and Landlord that it has had no dealings with any real
estate broker or agents in connection with this Assignment, other than (i)
Washington Partners, Inc. ("Assignee's Agent"), which represented Assignee, and
(ii) Cushman & Wakefield of Washington, Inc./Garth Q. Olsen ("Assignor's
Agent"), which represented Assignor. Assignor and Assignee hereby agree and
acknowledge that Assignor shall be solely responsible for paying all commissions
and other compensations owed to Assignor's Agent; and Assignee shall be solely
responsible for paying all commissions and other compensations owed to
Assignee's Agent, in connection with the transactions contemplated by this
Assignment.
d. Successors. This Assignment shall be binding on and inure to
the benefit of the parties and their successors and assigns.
e. Entire Agreement. This Assignment contains all of the terms of
the agreements among Landlord, Assignor and Assignee with respect to the subject
matter of this Assignment, and supersedes all prior discussions and agreements
among Landlord, Assignor and Assignee, including without limitation the
non-binding letter of intent dated February 12, 1998, signed by Assignor and
Assignee. Except as specifically modified pursuant to this Assignment, all of
the terms and conditions of the Lease shall remain in full force and effect.
3
<PAGE> 4
f. Counterparts. This Assignment may be executed in two or more
counterparts, each of which will be deemed to be an original, but all of which
together shall constitute one and the same instruments.
LANDLORD
CONTINENTAL SEATTLE PARTNERS LIMITED
PARTNERSHIP, a Washington limited partnership
By: The Norman Company, Manager
By: /s/ DAVID RAY
-----------------------------
Name: David Ray
------------------------
Title: COO
-----------------------
ASSIGNOR
TOLL FREE CELLULAR INC, a Washington
corporation
By: /s/ MARK LAZAR
-----------------------------
Name: Mark Lazar
------------------------
Title: CEO
-----------------------
ASSIGNEE
N2H2, INC., a Washington corporation
By: /s/ JOHN DUNCAN
-----------------------------
Name: John Duncan
------------------------
Title: COO
-----------------------
Attachment: Promissory Note
4
<PAGE> 5
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that John Duncan is
the person who appeared before me, and said person acknowledged that he signed
this instrument, on oath stated that he is authorized to execute the instrument
and acknowledged it as the COO of N2H2 Inc., a Washington corporation, to be the
free and voluntary act of such partnership for the uses and purposes mentioned
in the instrument.
DATED: March 13, 1998 /s/ Patricia E. Baker
-----------------------------------------
Print Name: Patricia E. Baker
------------------------------
NOTARY PUBLIC for the State of Washington,
residing at
Seattle
-----------------------------------------
My appointment expires: 9/9/00
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that David Ray who
appeared before me, and said person acknowledged that he signed this instrument,
on oath stated that he was authorized to execute the instrument and acknowledged
it as the COO of The Norman Company, in its capacity as the Manager of
Continental Seattle Partners Limited Partnership, a Washington limited
partnership, to be the free and voluntary act of such party for the uses and
purposes mentioned in the instrument.
DATED: March 17, 1998 /s/ Sharon L. Overman
-----------------------------------------
Print Name: _____________________________
NOTARY PUBLIC for the State of Washington,
residing at
Bellevue
-----------------------------------------
My appointment expires: 9-23-99
5
<PAGE> 6
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Mark Lazar is
the person who appeared before me, and said person acknowledged that he signed
this instrument, on oath stated that he is authorized to execute the instrument
and acknowledged it as the Chief Executive Officer of Toll Free Cellular Inc., a
Washington corporation, to be the free and voluntary act of such party for the
uses and purposes mentioned in the instrument.
DATED: March 13, 1998 /s/ Patricia E. Baker
-----------------------------------------
Print Name: Patricia E. Baker
------------------------------
NOTARY PUBLIC for the State of Washington,
residing at
Seattle
-----------------------------------------
My appointment expires: 9/9/00
6
<PAGE> 7
ADDENDUM TO ASSIGNMENT OF LEASE
THIS ADDENDUM TO THE ASSIGNMENT OF LEASE is made and entered into this 13th day
of March, 1998, by and between NORMAN REALTY SERVICES, INC., a Washington
corporation, in its capacity as Liquidating Agent for Continental Seattle
Partners, Limited Partnership, as Landlord, and TOLL FREE CELLULAR INC., a
Washington corporation, as Assignor, and N(2)H(2), INC., a Washington
corporation, as Assignee.
ADDITIONAL TERMS AND CONDITIONS
1. Additional Security. Assignee shall deposit with Landlord $15,500.00 to
be held as additional security deposit ("Additional Security Deposit")
which shall be paid to Landlord in four equal monthly installments of
$3,875.00. The Additional Security Deposit shall be paid at the time of
Tenant's regular monthly rental payment beginning on May 1, 1998.
2. Release of Additional Security Deposit. Provided that Tenant has not
been in default at any time during the preceding twenty-four months and
upon written notice from Tenant between one (1) and three (3) months
prior to March 1, 2000, Landlord shall apply the Additional Security
Deposit to the rent owing on March 1, 2000.
DATED: This 16th day of March, 1998.
LANDLORD: NORMAN REALTY SERVICE, INC., a ASSIGNOR: TOLL FREE CELLULAR,
Washington corporation, as Liquidating Agent INC., a Washington corporation
for Continental Seattle Partners, Limited
Partnership
By /s/ Mark Lazar
By /s/ David Ray ----------------------------
------------------------------------------ Mark Lazar, C.E.O.
David Ray, President
ASSIGNEE: N2H2, Inc.,
a Washington corporation
By /s/ John Duncan
----------------------------
John Duncan, C.O.O.
<PAGE> 1
EXHIBIT 10.3
UNION BANK OF CALIFORNIA CENTER
OFFICE LEASE
BETWEEN
WALTON SEATTLE INVESTORS I, L.L.C.,
A DELAWARE LIMITED LIABILITY COMPANY
LANDLORD
AND
N2H2, INC.,
A WASHINGTON CORPORATION
TENANT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Basic Lease Terms........................................................................................1
a) REFERENCE DATE OF LEASE.........................................................................1
b) TENANT..........................................................................................1
c) LANDLORD........................................................................................1
d) TENANT'S USE OF PREMISES........................................................................1
e) BUILDING........................................................................................1
f) PREMISES........................................................................................1
g) PREMISES AREA...................................................................................1
h) PROPERTY AREA...................................................................................1
i) TENANT'S PRO RATA SHARE.........................................................................1
j) TERM OF LEASE...................................................................................1
k) COMMENCEMENT DATE...............................................................................1
l) BASE RENT.......................................................................................2
m) BASE TAX YEAR...................................................................................2
n) BASE EXPENSE YEAR...............................................................................2
o) PREPAID RENT....................................................................................2
p) TOTAL SECURITY DEPOSIT..........................................................................2
q) PARKING.........................................................................................2
r) BROKER(S).......................................................................................2
s) GUARANTOR(S)....................................................................................2
2. Definitions..............................................................................................2
3. Premises.................................................................................................4
4. Term.....................................................................................................4
5. Base Rent................................................................................................4
6. Additional Rent..........................................................................................4
7. Condition of Premises....................................................................................8
8. Use and Rules............................................................................................9
9. Services and Utilities...................................................................................9
10. Alterations and Liens...................................................................................11
11. Repairs.................................................................................................12
12. Casualty Damage.........................................................................................13
</TABLE>
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<TABLE>
<S> <C> <C>
13. Insurance, Subrogation, and Waiver of Claims............................................................13
14. Condemnation............................................................................................14
15. Return of Possession....................................................................................15
16. Holding Over............................................................................................15
17. No Waiver...............................................................................................15
18. Attorneys' Fees and Jury Trial..........................................................................16
19. Personal Property Taxes, Rent Taxes and Other Taxes.....................................................16
20. Subordination, Attornment,. Estoppel and Holder Protection..............................................16
21. Assignment and Subletting...............................................................................17
22. Rights Reserved By Landlord.............................................................................19
23. Tenant's Default........................................................................................20
24. Landlord's Remedies.....................................................................................21
25. Landlord's Right to Cure................................................................................23
26. Conveyance by Landlord and Liability....................................................................23
27. Indemnification.........................................................................................24
28. Safety and Security Devices, Services and Programs......................................................25
29. Communications and Computer Lines.......................................................................25
30. Hazardous Materials.....................................................................................27
31. Notices.................................................................................................28
32. Real Estate Brokers.....................................................................................28
33. Security Deposit........................................................................................28
34. Entire Agreement........................................................................................29
35. Parking.................................................................................................29
36. Miscellaneous...........................................................................................29
</TABLE>
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<PAGE> 4
OFFICE LEASE
THIS LEASE is made between WALTON SEATTLE INVESTORS I, L.L.C., a
Delaware limited liability company ("Landlord") and N2H2, INC., a Washington
corporation ("Tenant").
1. BASIC LEASE TERMS.
<TABLE>
<S> <C>
a) REFERENCE DATE OF LEASE: March 12, 1999
b) TENANT: N2H2, INC.
i) Address (leased Premises) Suite 3400 900 Fourth Avenue
Seattle, WA 98164
c) LANDLORD: WALTON SEATTLE INVESTORS I, L.L.C.
i) (Address for Notices) c/o Trammell Crow Company
Suite 1750, Union Bank of California Center
Seattle, WA 98164
Attn.: Lita Johnson, Building Manager
Copy to: Walton Seattle Investors I, L.L.C.
c/o Walton Street Capital, L.L.C.
900 N. Michigan Avenue, 19th Floor
Chicago, IL 60611
Attn.: Luke Massar
d) TENANT'S USE OF PREMISES: General Office Use.
e) BUILDING: Union Bank of California Center ("Building")
900 Fourth Avenue
Seattle, WA 98164
as legally described on Exhibit A-1, subject to the
provisions herein contained.
</TABLE>
f) PREMISES: the Premises shall be defined as that certain space
on the 34th floor, 35th floor and a portion of the 33rd floor
of the Building, known as Suite 3400 ("Premises"), as
illustrated on Exhibit A-2.
g) PREMISES AREA: the parties agree that the Rentable Area of the
Premises is 30,071 square feet.
h) PROPERTY AREA: the parties agree that the Rentable Area of the
Building is 536,356 square feet.
i) TENANT'S PRO RATA SHARE: 5.61%.
j) TERM OF LEASE: the term of this Lease shall be for sixty-eight
(68) months
k) COMMENCEMENT DATE: the commencement date for floor 33 and 34
shall mean that date which is the earlier of (i) Substantial
Completion of the Tenant Improvements described in the Work
Letter Agreement attached hereto as Exhibit B, if any, and the
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<PAGE> 5
tender of possession of the Premises to Tenant; (ii) the date
that Tenant opens for business on the 33rd floor; or (iii)
April 1, 1999 ("Commencement Date").
The commencement date for floor 35 shall mean the date which
is the earlier (i) Substantial Completion of the Tenant
Improvements described in the Work Letter Agreement attached
hereto as Exhibit B, if any, and the tender of possession of
the Premises to Tenant; (ii) the date that Tenant opens for
business on the 35th floor, or (iii) November 1, 1999.
l) BASE RENT:
4/1/99 through 10/31/99: $25,933.46 per month.
11/1/99 through 12/31/99: $56,159.69 per month.
1/1/00 through 10/31/00: $56,770.22 per month.
11/1/00 through 12/31/00: $70,482.50 per month.
1/1/01 through 12/31/01: $71,912.75 per month.
1/1/02 through 12/31/02: $74,418.67 per month.
1/1/03 through 12/31/O3: $76,924.58 per month.
1/1/04 through 11/30/04: $79,430.50 per month.
m) BASE TAX YEAR: 1999.
n) BASE EXPENSE YEAR: 1999.
o) PREPAID RENT: N/A.
p) TOTAL SECURITY DEPOSIT: See Exhibit C, Section 3.
q) PARKING: Fifteen (15) stalls upon Commencement increasing on
November 1, 1999 to twenty-four (24) stalls if floor 33
terminated and twenty-seven (27) stalls if floor 33 retained.
r) BROKER(S):
i) Landlord: Raymond Attisha, Trammell Crow Company
ii) Tenant: Clay Nielsen, Washington Partners, Inc.
s) GUARANTOR(S): N/A.
Section 1 represents a summary of the basic terms of this
Lease. In the event of any inconsistency between the terms
contained in Section 1 and any specific clause of this Lease,
the terms of the more specific Cause shall prevail.
2. DEFINITIONS. Unless otherwise defined herein, the following terms shall
have the following meanings.
a) "Business Hours" shall mean Monday through Friday, 8:00 a.m.
to 6:00 p.m. and 8:00 a.m. to 12:00 p.m. on Saturdays
(excluding Holidays) or as may be amended in writing by
Landlord from time to time during the Term of this Lease.
b) "Common Areas" shall mean the Building's common entrances,
lobbies, restrooms, elevators, stairways and access-ways,
loading docks, ramps, drives and platforms and any passageways
and service-ways thereto, and the common pipes, conduits,
wires and appurtenant equipment serving the Premises; and
loading and unloading areas, trash areas, parking areas,
roadways, sidewalks, walkways, parkways, driveways and
landscaped areas and similar areas and facilities appurtenant
to the Building.
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<PAGE> 6
c) "Default Rate" shall mean fifteen percent (15%) per annum, or
the highest rate permitted by applicable Law, whichever shall
be less.
d) "Holder" shall mean the holder of any Mortgage at the time in
question, and where such Mortgage is a ground lease, such term
shall refer to the ground lessor.
e) "Holiday" shall mean New Years Day, Presidents Day, Memorial
Day, Independence Day, Labor Day, Veterans' Day, Thanksgiving
Day, Christmas Day.
f) "Landlord" and "Tenant" shall be applicable to one or more
Persons as the case may be, and the singular shall include the
plural, and the neuter shall include the masculine and
feminine; and if there be more than one, the obligations
thereof shall be joint and several. For purposes of any
provisions indemnifying or limiting the liability of Landlord,
the term "Landlord" shall include Landlord's present and
future partners, beneficiaries, trustees, officers, directors,
employees, shareholders, principals, agents, affiliates,
successors and assigns.
g) "Law" shall mean all federal, state, county and local
governmental and municipal laws, statutes, ordinances, rules,
regulations, codes, decrees, orders and other such
requirements, applicable equitable remedies and decisions by
courts in cases where such decisions are considered binding
precedents in the state in which the Property is located, and
decisions of federal courts applying the Laws of such State.
h) "Mortgage" shall mean all mortgages, deeds of trust, security
deeds, ground or underlying leases, and other such security
instruments or encumbrances now or hereafter placed upon the
Property or Building, or any part thereof, and all renewals,
modifications, consolidations, spreaders, replacements or
extensions thereof, and all indebtedness now or hereafter
secured thereby and all interest thereon.
i) "Person" shall mean an individual, trust, partnership, joint
venture, association, corporation, limited liability company
and any other entity.
j) "Prime Rate" shall mean the prime rate (or base rate) reported
in the Money Rates column or section of the Wall Street
Journal as being the base rate on corporate loans at large
U.S. money center commercial banks (whether or not such rate
has actually been charged by any such bank) on the first day
on which the Wall Street Journal is published in the month
preceding the month in which the subject costs are incurred.
k) "Property" shall mean the Building, and any common or pubic
areas or facilities, easements, corridors, lobbies, sidewalks,
loading areas, driveways, landscaped areas, sky-walks, parking
garages and lots, and any and all other structures or
facilities operated or maintained in connection with or for
the benefit of the Building, and all parcels or tracts of land
on which all or any portion of the Building or any of the
other foregoing items are located, and any fixtures,
machinery, equipment, apparatus, Systems and Equipment,
furniture and other personal property located thereon or
therein and used in connection therewith, whether title is
held by Landlord or its affiliates. Possession of areas
necessary for utilities, services, safety and operation of the
Property, including the Systems and Equipment, fire stairways,
perimeter walls, space between the finished ceiling of the
Premises and the slab of the floor or roof of the Property
there above, and the use thereof together with the right to
install, maintain, operate, repair and replace the Systems and
Equipment, including any of the same in, through, under or
above the Premises In locations that will not materially
interfere with Tenant's use of the Premises, are hereby
excepted and reserved by Landlord, and not demised to Tenant.
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<PAGE> 7
l) "Systems and Equipment" shall mean any plant, machinery,
transformers, duct work, cable, wires for Landlord use, and
other equipment, facilities, and systems designed to supply
heat, ventilation, air conditioning and humidity or any other
services or utilities, or comprising or serving as any
component or portion of the electrical, gas, steam, plumbing,
sprinkler, Landlord communications, alarm, security, or
fire/life/safety systems or equipment, or any other
mechanical, electrical, electronic, computer or other systems
or equipment for the Property.
3. PREMISES. Commencing on and continuing throughout the Term of this
Lease, Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the Premises as defined in Section 1.g). The Premises shall be
improved as set forth in Work Letter, if at all, attached hereto and
made a part hereof as Exhibit B, as more fully described below.
4. TERM. The term of this Lease shall be for the period designated in
Section 1.j), commencing on the Commencement Date, and ending on the
expiration of such period, unless the term shall be sooner terminated
as hereinafter provided ("Term").
a) The Commencement Date shall not be extended or delayed on
account of any delays caused or contributed to by any acts or
omissions of Tenant. Rent shall be abated to the extent that
Landlord fails: (i) to substantially complete any improvements
to the Premises required to be performed by Landlord under any
separate agreement signed by both parties, or (ii) to deliver
possession of the Premises for any other reason, including but
not limited to holding over by prior occupants, except to the
extent that Tenant, its contractors, agents or employees in
any way contribute to either such failures. Except as
otherwise provided herein, this Lease shall not be voided or
voidable on account of any such delays.
b) If the Commencement Date is delayed, the Expiration Date shall
not be similarly extended, unless Landlord shall so elect (in
which case, the parties shall confirm the same in writing).
During any period that Tenant shall be permitted to enter the
Premises prior to the Commencement Date other than to occupy
the same (e.g., to perform alterations or improvements),
Tenant shall comply with all terms and provisions of this
Lease, except those provisions requiring the payment of Rent.
5. BASE RENT. The Base Rent for the Term of this Lease shall be as set
forth in Section 1.l) above, payable in advance on or before the first
day of each calendar month during the Term without offset or demand. If
the Term commences on a day other than the first day of a calendar
month, or ends on a day other than the last day of a calendar month,
then the Base Rent for such month shall be prorated on the basis of
1/30th of the monthly Base Rent for each day of such month.
6. ADDITIONAL RENT.
a) TAXES. Tenant shall, in addition to all other sums due under
this Lease, pay Landlord an amount equal to Tenant's Pro rata
Share of Taxes, as defined below, in excess of the amount of
Taxes paid by Landlord during the base tax year set forth in
Section 1.m) ("Base Tax Year").
i) "Taxes" shall mean all federal, state, county, or
local governmental or municipal taxes, fees, charges
or other impositions of every kind and nature,
whether general, special, ordinary or extraordinary,
including without limitation, real estate taxes,
general and special assessments, transit taxes, water
and sewer rents taxes based upon the receipt of rent
including gross receipts or sales taxes applicable to
the receipt of rent or service or value added taxes
(unless required to be paid by Tenant under Section
19, personal property taxes imposed upon the
fixtures, machinery, equipment, apparatus, Systems
and Equipment, appurtenances, furniture and other
personal property used in connection with the
4
<PAGE> 8
Property which Landlord shall pay during any calendar
year, any portion of which occurs during the Term
(without regard to any different fiscal year used by
such government or municipal authority) because of or
in connection with the ownership, leasing and
operation of the Property. Notwithstanding the
foregoing, there shall be excluded from Taxes all
excess profits taxes, franchise taxes, gift taxes,
capital stock taxes, inheritance and succession
taxes, estate taxes, federal and state income taxes,
and other taxes to the extent applicable to
Landlord's general or net income (as opposed to
rents, receipts or income attributable to operations
at the Property) and any fees, penalties or interest
added to any tax because of late payment, non-payment
or otherwise. If the method of taxation of real
estate prevailing at the time of execution hereof
shall be, or has been altered, so as to cause the
whole or any part of the taxes now, hereafter or
heretofore levied, assessed or imposed on real estate
to be levied, assessed or imposed on Landlord, wholly
or partially, as a capital levy or otherwise, or on
or measured by the rents received therefrom, then
such new or altered taxes attributable to the
Property shall be included within the term "Taxes"
except that the same shall not include any
enhancement of said tax attributable to other income
of Landlord. Any expenses incurred by Landlord in
attempting to protest, reduce or minimize Taxes shall
be included in Taxes in the calendar year such
expenses are paid. Tax refunds shall be deducted from
Taxes in the year they are received by Landlord. If
Taxes for the Base Tax Year are reduced as the result
of protest, or by means of agreement, or as the
result of legal proceedings or otherwise, Landlord
may adjust Tenant's obligations for Taxes in all
years following the Tax Base Year, and Tenant shall
pay Landlord within thirty (30) days after notice any
additional amount required by such adjustment for any
such years or portions thereof that have theretofore
occurred. If Taxes for any period during the Term or
any extension thereof, shall be increased after
payment thereof by Landlord, for any reason,
including without limitation error or reassessment by
applicable governmental or municipal authorities,
Tenant shall pay Landlord upon demand Tenant's Pro
rata Share of such increased Taxes. Tenant shall pay
increased Taxes whether Taxes are increased as a
result of increases in the assessments or valuation
of the Property (whether based on a sale, change or
refinancing of the Property or otherwise), increases
in the tax rates, reduction or elimination of any
rollbacks or other deductions available under current
law, scheduled reductions of any tax abatement, as a
result of the elimination, invalidity or withdrawal
of any tax abatement, or for any other cause
whatsoever. Notwithstanding the foregoing, if any
Taxes shall be paid based on assessments or bills by
a governmental or municipal authority using a fiscal
year other than a calendar year, Landlord may elect
to average the assessments or bills for the subject
calendar year, based on the number of months of such
calendar year included in each such assessment or
bill.
b) OPERATING EXPENSES. Tenant shall, in addition to all other
sums due under this Lease, pay Landlord an amount equal to
Tenant's Pro rata Share of Operating Expenses, as defined
below, in excess of the amount of Operating Expenses paid by
Landlord during the base expense year set forth in Section
1.n) ("Base Expense Year").
i) "Operating Expenses" shall mean all costs of
operation and maintenance attributable to the
Property ("Operating Expenses") as determined by
standard accounting practices, including, without
limitation, the following costs by way of
illustration: Common Area operation and maintenance
charges; water and sewer charges; the cost of
insurance (including any deductible amount) which
Landlord elects to maintain with respect to the
Property including the parking facilities therein,
and/or the operation thereof, including, without
limitation, rental income insurance and all other
forms of insurance; utilities; janitorial services;
security; labor; utilities surcharges; all
amortization of the costs, including financing costs
5
<PAGE> 9
for capital expenditures, prorated on a monthly
basis, (i) required by a governmental entity for
energy conservation, life safety or other purposes,
or (ii) made by Landlord to reduce Operating
Expenses, shall be amortized over the useful life of
such improvements in accordance with such reasonable
life and amortization schedules as shall be
determined by Landlord in accordance with generally
accepted accounting principles, with interest on the
unamortized amount at one percent (1%) in excess of
the Prime Rate, or such higher rate as may have been
paid by Landlord on borrowed funds; costs incurred in
the management of the Property, if any; the fair
market rental value of any onsite building management
office, management fees for independent contractors
performing management services, wages and salaries of
employees used in the management, operation and
maintenance of the Property, payroll taxes and
similar governmental charges with respect thereto and
administrative fees; legal and accounting fees
incurred in connection with the operation,
maintenance and administration of the Property which
are acceptable under generally accepted accounting
principles; air conditioning; waste disposal;
heating; ventilating; elevator maintenance; supplies;
materials; equipment; tools; and maintenance costs
and upkeep of all Common Areas, including, without
limitation, the cost and expense of maintenance,
repair operations and upkeep of the parking
facilities in the Property (to the extent that costs
of such maintenance, repair operations and upkeep is
not paid by any operator of the parking facilities
pursuant to a parking management contract with
Landlord). Operating Expenses shall not include (i)
the initial construction costs of the Property, the
costs of providing the Tenant Improvements to Tenant
or any other tenant, or the depreciation of such
costs; (ii) debt service (including, without
limitation, interest, principal and any impound
payments) required to be made on any Mortgage
recorded with respect to all or any part of the
Property other than financing costs for capital
expenditures set forth in the immediately preceding
sentence; (iii) any rent payable under any ground
lease now or hereafter affecting the Property; (iv)
capital expenditures except as specifically included
in the immediately preceding sentence; and (v)
specific costs incurred for the account of specific
tenants of the Property. Notwithstanding the
foregoing definitions, as to each specific category
for which one or more tenants of the Property either
pays directly to third parties or specifically
reimburses Landlord (e.g., separately metered
utilities, separately contracted janitorial service,
property taxes directly reimbursed to Landlord,
etc.), such tenant's payments with respect thereto
shall not be included in Operating Expenses for
purposes of this definition and, for each such
specific category of Operating Expenses, Tenant's
Percentage shall be adjusted by excluding from the
calculation thereof the rentable area of all tenants
paying such category of Operating Expenses directly
to third parties or reimbursing the same directly to
Landlord. Operating Costs should exclude: advertising
and promotional costs: leasing commissions; space
planning costs; costs incurred in leasing,
negotiating, resolving lease disputes with tenants,
enforcing leases; costs of obtaining permits and
constructing tenant improvements; asbestos removal;
costs associated with Building fire code violations;
property manager office space greater than 5,000
usable square feet; fines, penalties or interest
charges.
c) TENANT'S PRO RATA SHARE. "Tenant's Pro rata Share" of Taxes
and Operating Expenses shall be the rentable area of the
Premises divided by the rentable area of the Property on the
last day of the calendar year for which Taxes or Operating
Expenses are being determined. Except as provided expressly to
the contrary herein, the Rentable area of the Property" shall
include all rentable area of all space leased or available for
lease at the Property, which Landlord may reasonably
re-determine from time to time, to reflect re-configurations,
additions or modifications to the Property. If the Property or
any development of which is it a part, shall contain
non-office uses, Landlord shall have the right to determine in
accordance with sound accounting and management principles,
6
<PAGE> 10
Tenant's Pro rata Share of Taxes and Operating Expenses for
only the office portion of the Property or of such
development, in which event, Tenant's Pro rata Share shall be
based on the ratio of the rentable area of the Premises to the
rentable area of such office portion. Similarly, if the
Property shall contain tenants who do not participate in all
or certain categories of Taxes or Operating Expenses on a pro
rata basis, Landlord may exclude the amount of Taxes or
Operating Expenses, or such categories of the same, as the
case may be, attributable to such tenants, and exclude the
rentable area of their premises, in computing Tenant's Pro
rata Share.
d) MANNER OF PAYMENT. Taxes and Operating Expenses shall be paid
in the following manner:
i) Landlord may reasonably estimate in advance the
amounts Tenant shall owe for Taxes and Operating
Expenses for any full or partial calendar year of the
Term. In such event, Tenant shall pay such estimated
amounts, on a monthly basis, on or before the first
day of each calendar month, together with Tenant's
payment of Base Rent. Such estimate may be reasonably
adjusted from time to time by Landlord.
ii) Within one hundred twenty days (120) days after the
end of each calendar year, or as soon thereafter as
practicable, Landlord shall provide a statement (the
"Statements") to Tenant showing: (a) the amount of
actual Taxes and Operating Expenses for such calendar
year, with a listing of amounts for major categories
of Operating Expenses, and such amounts for the Base
Years, (b) any amount paid by Tenant towards Taxes
and Operating Expenses during such calendar year on
an estimated basis, and (c) any revised estimate of
Tenants obligations for Taxes and Operating Expenses
for the current calendar year.
iii) If the Statement shows that Tenant's estimated
payments were less than Tenant's actual obligations
for Taxes and Operating Expenses for such year,
Tenant shall pay the difference. If the Statement
shows an increase in Tenant's estimated payments for
the current calendar year, Tenant shall pay the
difference between the new and former estimates, for
the period from January 1 of the current calendar
year through the month in which the Statement is
sent. Tenant shall make such payment within thirty
(30) days after Landlord sends the Statement.
iv) If the Statement shows that Tenant's estimated
payments exceeded Tenant's actual obligations for
Taxes and Operating Expenses, Tenant shall receive a
credit for the difference against payments of Rent
next due. If the Term shall have expired and no
further Rent shall be due, Tenant shall receive a
refund of such difference, within thirty (30) days
after Landlord sends the Statement to tenants last
known address.
v) So long as Tenants obligations hereunder are not
materially adversely affected thereby, Landlord
reserves the right to reasonably change, from time to
time, the manner or timing of the foregoing payments.
In lieu of providing one Statement covering Taxes and
Operating Expenses, Landlord may provide separate
statements, at the same or different times. No delay
by Landlord in providing the Statement (or separate
statements) shall be deemed a default by Landlord or
a waiver of Landlord's right to require payment of
Tenant's obligations for actual or estimated Taxes or
Operating Expenses. In no event shall a decrease in
Taxes or Operating Expenses below the Base Year
amounts, ever decrease the monthly Base Rent, or give
rise to a credit in favor of Tenant.
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<PAGE> 11
e) PRORATION. If the Term commences other than on January 1, or
ends other than on December 31, Tenant's obligations to pay
estimated and actual amounts towards Taxes and Operating
Expenses for such first or final calendar years shall be
prorated to reflect the portion of such years included in the
Term. Such proration shall be made by multiplying the total
estimated or actual (as the case may be) Taxes and Operating
Expenses, for such calendar years, as well as the Base Year
amounts, by a fraction, the numerator of which shall be the
number of days of the Term during such calendar year, and the
denominator of which shall be 365.
f) BASE YEAR ADJUSTMENTS. If Taxes for the Base Tax Year are
reduced as the result of protest, or by means of agreement, or
as the result of legal proceedings or otherwise, Landlord may
adjust Tenant's obligations for Taxes in all years following
the Base Tax Year, and Tenant shall pay Landlord within thirty
(30) days after notice any additional amount required by such
adjustment for any such years or portions thereof that have
theretofore occurred. Landlord may exclude from the Base
Expense Year, any non-recurring items, including capital
expenditures otherwise permitted as Operating Expenses of the
Lease (and shall only include the amortization of such
expenditures in subsequent year Operating Expenses, including
any remaining amortization of permitted capital expenditures
made prior to or after the Commencement Date). If Landlord
eliminates from any subsequent year's Operating Expenses a
recurring category of expenses previously included in the Base
Expense Year, Landlord may subtract such category from the
Base Expense Year commencing with such subsequent year.
g) RENT AND OTHER CHARGES. Base Rent, Taxes, Operating Expenses,
and any other amounts which Tenant is or becomes obligated to
pay Landlord under this Lease or other agreement entered in
connection herewith, are sometimes herein referred to
collectively as "Rent," and all remedies applicable to the
non-payment of Rent shall be applicable thereto. Rent shall be
paid at any office maintained by Landlord or its agent at the
Property, or at such other place as Landlord may designate.
All Rent, and all other amounts payable to Landlord by Tenant
pursuant to the provisions of this Lease, shall be paid to
Landlord, without notice, demand, abatement, deduction or
offset, in lawful money of the United States at Landlord's
office in the Property or to such other person or at such
other place as Landlord may designate from time to time by
written notice given to Tenant. No payment by Tenant or
receipt by Landlord of a lesser amount than the correct Rent
due hereunder shall be deemed to be other than a payment on
account; nor shall any endorsement or statement or any check
or any letter accompanying any check or payment be deemed to
effect or evidence an accord and satisfaction; and Landlord
may accept such check or payment without prejudice to
Landlords right to recover the balance or pursue any other
remedy in this Lease or at law or in equity provided.
h) LATE CHARGE; INTEREST. Tenant acknowledges that the late
payment of Rent or any portion thereof or any other amounts
payable by Tenant to Landlord hereunder may cause Landlord to
incur administrative costs and other damages, the exact amount
of which would be impracticable or extremely difficult to
ascertain. Landlord and Tenant agree that if Landlord does not
receive any payment of any such Rent or portion thereof on or
before ten (10) business days after the date the payment is
due, Tenant shall pay to Landlord, as additional rent, (a) a
late charge equal to one and a half of the overdue amount to
cover such additional administrative costs; and (b) interest
on the delinquent amounts at the Default Rate from the date
due to the date paid.
7. CONDITION OF PREMISES. Tenant acknowledges that Landlord has not made
any representation or warranty with respect to the condition of the
Premises or the Property or with respect to the suitability or fitness
of either for the conduct of Tenant's permitted use or for any other
purpose. Tenant represents and warrants that Tenant has walked through
and inspected the Property and the Premises and, except only for any
work to be performed by Landlord as expressly set forth herein, it has
accepted the Premises in its as-is where-is condition. Tenant
acknowledges and
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agrees that the Property was constructed at a time when asbestos was
commonly used in construction, asbestos-containing materials ("ACM")
may be present at the Property, and that airborne asbestos fibers may
involve a potential health hazard unless proper procedures are
followed. In such cases, before commencing any work in the Premises,
Tenant and its contractor shall consult with Landlord and Landlord's
asbestos consultant concerning appropriate procedures to be followed.
Landlord shall, at Tenant's expense, undertake any necessary initial
asbestos-related work, before Tenant commences such work. During
performance of such work, Tenant shall require that its contractor
comply with all laws, rules, regulations and other governmental
requirements, as well as all directives of Landlord's asbestos
consultant, respecting ACM. Tenant hereby irrevocably appoints Landlord
and Landlord's asbestos consultant as Tenants attorney-in-fact for
purposes of supervising and directing any asbestos-related aspects of
the work (but such appointment shall not relieve Tenant from its
obligations hereunder, nor impose any affirmative requirement on
Landlord to provide such supervision of direction). Landlord shall have
the right to stop Tenants work if Tenant's work has not been approved
in writing by Landlord or Tenant has deviated from the plans approved
by Landlord.
-------------------------- ---------------------------
Landlord's Initials Tenant's Initials
8. USE AND RULES. Tenant shall use the Premises for general office
purposes and no other purpose whatsoever, in compliance with all
applicable Laws, and without disturbing or interfering with any other
tenant or occupant of the Property. Tenant shall not use the Premises
in any manner so as to cause a cancellation of Landlord's insurance
policies, or an increase in the premiums thereunder. Tenant shall
comply with all rules set forth in Exhibit D attached hereto (the
"Rules"). Landlord shall have the right to reasonably amend such Rules
and supplement the same with other reasonable Rules (not expressly
inconsistent with this Lease) relating to the Property, or the
promotion of safety, care, cleanliness or good order therein, and all
such amendment or new Rules shall be binding upon Tenant after five (5)
days notice thereof to Tenant. Nothing herein shall be construed to
give Tenant or any other Person any claim, demand or cause of action
against Landlord arising out of the violation of such Rules by any
other tenant, occupant, or visitor of the Property, or out of the
enforcement or waiver of the Rules by Landlord in any particular
instance.
9. SERVICES AND UTILITIES. As long as Tenant is not in default under this
Lease, Landlord agrees to furnish or cause to be furnished to the
Premises the following utilities and services, subject to the
conditions and standards set forth herein. Any amounts which Tenant is
required to pay to Landlord pursuant to this Section shall be payable
upon demand by Landlord and shall constitute additional rent.
a) ACCESS. Tenant shall have access to the public areas of the
Building and the Premises twenty-four (24) hours per day seven
(7) days per week subject to Landlord's security, maintenance
and emergency restrictions. 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 relieve Tenant from the
duty of observing and performing any of the provisions of this
Lease.
b) ELEVATOR SERVICE. Landlord shall provide non-attended
automatic service for passengers and freight elevator service
during Business Hours. Such normal elevator service, passenger
or freight, if furnished at other times, shall be provided on
a restricted basis subject to the access control requirements
at Landlord's sole discretion for safety, maintenance and/or
security reasons.
c) HVAC. During Business Hours, such air conditioning, heating
and ventilation as, in reasonable Landlord's judgment, are
required for the comfortable use and occupancy of the
Premises; provided, however, that if Tenant shall require
heating, ventilation or air conditioning in excess of that
which Landlord shall be required to provide hereunder,
Landlord may provide such additional heating, ventilation or
air conditioning at such rates
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and upon such additional conditions as shall be determined by
Landlord from time to time.
d) ELECTRIC SERVICE. At all reasonable times, electric current as
required for building standard lighting and fractional
horsepower office machines from a Building standard 42 circuit
200 amp panel, with transformer if necessary, on each full
floor occupied by Tenant, with the express exception of the
34th floor, provided, however, that: (i) without Landlord's
consent, Tenant shall not install, or permit the installation,
in the Premises of any computers, word processors, electronic
data processing equipment or other type of equipment or
machines which will increase Tenants use of electric current
in excess of that which Landlord is obligated to provide
hereunder (provided, however, that the foregoing shall not
preclude the use of personal computers or similar office
equipment); (ii) if Tenant shall require electric current
which may disrupt the provision of electrical service to other
tenants, Landlord may refuse to grant its consent and (iii) if
Tenants increased electrical requirements will materially
affect the temperature level in the Premises or the Property,
Landlord's consent may be conditioned upon Tenant's
requirement to pay such amounts as will be incurred by
Landlord to install and operate any machinery or equipment
necessary to restore the temperature level to that otherwise
required to be provided by Landlord, including but not limited
to the cost of modifications to the air conditioning system.
Tenant shall purchase all non-standard light bulbs,
fluorescent tubes, ballasts, or starters used in the Premises
from Landlord. Landlord shall not, in any way be liable or
responsible to Tenant for any loss or damage or expense which
Tenant may incur or sustain if, for any reasons beyond
Landlord's control, either the quantity or character of
electric service is changed or is no longer available or
suitable for Tenant's requirements. Any riser or risers (and
all other equipment proper or necessary in connection
therewith) required after the commencement of the Lease Term
to supply Tenants electrical requirement will, upon Tenants
written request (and at its sole expense as additional rent),
be installed by Landlord if, in Landlord's sole judgment, the
same is necessary and will not cause permanent damage or
injury to or adversely affect the appearance of the Property
or Premises or create a dangerous or hazardous condition or
entail excessive or unreasonable alterations, repairs, or
expense or interfere with or disturb other tenants or
occupants. Tenant covenants that at all times its use of
electric current shall never exceed the capacity of the
feeders, risers or electrical installations of the Property.
If any tax is imposed upon Landlord's receipt from the sale or
resale of electrical energy or gas or telephone service to
Tenant by any governmental authority, Tenant covenants that,
where permitted by law, Tenants Pro rata Share of such taxes
shall be paid by Tenant to Landlord.
e) WATER. Water for drinking and rest room purposes.
f) JANITORIAL. Customary janitorial, trash removal and cleaning
services Monday through Friday or Sunday through Thursday in
and about the Premises, provided that the Premises are used
exclusively for office purposes and are kept reasonably in
order by Tenant.
g) INTERRUPTION OF SERVICES. Landlord shall not be liable for any
failure to furnish, stoppage of, or interruption in furnishing
any of the services or utilities described herein, when such
failure is caused by accident, breakage, repairs, strikes,
lockout, labor disputes, labor disturbances, governmental
regulation, civil disturbances, acts of war, moratorium or
other governmental action, or computer software weaknesses not
under the control of Landlord, or any other cause beyond
Landlord's control, and, in such event, Tenant shall not be
entitled to any, damages nor shall any failure or interruption
abate or suspend Tenant's obligation to pay Rent and
additional rental required under this Lease or constitute or
be construed as a constructive or other eviction of Tenant.
Further, in the event any governmental authority or public
utility promulgates or revises any law, ordinance, rule or
regulation, or issues mandatory controls or voluntary controls
relating
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to the use or conservation of energy, water, gas, light or
electricity, the reduction of automobile or other emissions,
or the provision of any other utility or service, Landlord may
take reasonably appropriate action to comply with such law,
ordinance, rule, regulation, mandatory control or voluntary
guideline without affecting Tenant's obligations hereunder.
Landlord shall not be responsible for, and Tenant waives any
rights with respect to, providing security or other protection
for Tenant or its employees, invitees or property in or about
the Premises or the Property.
h) MONITORING EXCESS USE. If the Landlord shall determine, in the
exercise of Landlord's good faith review, that the Tenants use
of utilities is in excess of that normally used by a tenant
occupying similar office space for similar office purposes,
then Tenant shall pay Landlord upon demand as additional rent,
the cost of such excess utility usage in addition to any other
rent or charge due from Tenant under this Lease. In addition,
Landlord may install and operate meters or any other
reasonable system for monitoring or estimating any services or
utilities used by Tenant in excess of those required to be
provided by Landlord under this Section (including a system
for Landlord's engineer to reasonably estimate any such excess
usage). If such system indicates such excess services or
utilities, Tenant shall pay Landlord's charges for installing
and operating such system and any supplementary
air-conditioning, ventilation, heat electrical or other
systems or equipment (or adjustment or modifications to the
existing Systems and Equipment), and Landlord's charges for
such amount of excess services or utilities used by Tenant.
10. ALTERATIONS AND LIENS.
a) ALTERATIONS. Tenant shall make no additions, changes,
alterations or improvement (the "Work") to the Premises or the
Systems and Equipment pertaining to the Premises without the
prior written consent of Landlord which shall not be
unreasonably withheld Landlord may impose as a condition of
such consent such requirement as Landlord in its sole
discretion deems necessary or desirable including, without
limitation, the submission of plans and specifications for
Landlord's prior written approval, obtaining necessary
permits, posting bonds, obtaining insurance, prior approval of
contractors, subcontractors and suppliers, prior receipt of
copies of all contracts and subcontracts, contractor and
subcontractor lien waivers, affidavits listing all
contractors, subcontractors and suppliers, use of union labor
(if Landlord uses union labor), affidavits from engineers
acceptable to Landlord stating that the Work will not
adversely affect the Systems and Equipment or the structure of
the Property, and requirement as to the manner and times in
which such Work shall be done. All Work shall be performed in
a good and workmanlike manner and all materials used shall be
of a quality comparable to or better than those in the
Premises and Property and shall be in accordance with plans
and specifications approved by Landlord, and Landlord may
require that all such Work be performed under Landlord's
supervision. In all cases, Tenant shall pay Landlord a fee of
Five percent (5%) of the total cost of any Work exceeding Ten
Thousand dollars ($10,000.00) to cover Landlord's overhead in
reviewing Tenant's plans and specifications and performing any
supervision of the Work. If Landlord consents or supervises,
the same shall not be deemed a warranty as to the adequacy of
the design, workmanship or quality of materials, and Landlord
hereby expressly disclaims any responsibility or liability for
the same. Landlord shall under no circumstances have any
obligation to repair, maintain or replace any portion of the
Work.
b) LIENS. Tenant shall keep the Property and Premises free from
any mechanic's, materialman's or similar liens or other such
encumbrances in connection with any Work on or respecting the
Premises not performed by or at the request of Landlord, and
shall indemnify and hold Landlord harmless from and against
any claims, liabilities, judgment, or costs (including
attorneys fees) arising out of the same or in connection
therewith. Tenant shall give Landlord notice at least twenty
(20) days prior to the commencement of any Work on the
Premises (or such additional time as may be necessary under
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applicable Laws), to afford Landlord the opportunity of
posting and recording appropriate notices of
non-responsibility. Tenant shall remove any such lien or
encumbrance by bond or otherwise within thirty (30) days after
written notice by Landlord, and if Tenant shall fail to do so,
Landlord may pay the amount necessary to remove such lien or
encumbrance, without being responsible for investigating the
validity thereof. The amount so paid shall be deemed
additional Rent under this Lease payable upon demand, without
limitation as to other remedies available to Landlord under
this Lease. Nothing contained in this Lease shall authorize
Tenant to do any act which shall subject Landlord's title to
the Property or Premises to any liens or encumbrances whether
claimed by operation of law or express or implied contract.
Any claim to a lien or encumbrance upon the Property or
Premises arising in connection with any Work on or respecting
the Premises not performed by or at the request of Landlord
shall be null and void, or at Landlord's option shall attach
only against Tenants interest in the Premises and shall in all
respects be subordinate to Landlord's title to the Property
and Premises.
c) LEASE TERMINATION. Except as provided elsewhere herein, upon
expiration or earlier termination of this Lease Tenant shall
surrender the Premises to Landlord in the same condition as
when received, subject to reasonable wear and tear. All Work
shall become a part of the Premises and shall become the
property of Landlord upon the expiration or earlier
termination of this Lease, unless Landlord shall, by written
notice given to Tenant, require Tenant to remove some or all
of Tenant's Work, in which event Tenant shall promptly remove
the designated Work and shall promptly repair any resulting
damage, all at Tenant's sole expense and in accordance with
this Section. However, Tenant may request in writing, at the
time it requests Landlord's approval of the work, that
Landlord provide a written determination as to the removal of
any of the Work. All business and trade fixtures, machinery
and equipment, furniture, movable partitions and items of
personal property owned by Tenant or installed by Tenant at
its expense in the Premises shall be and remain the property
of Tenant; upon the expiration or earlier termination of this
Lease. Tenant shall, at its sole expense remove all such items
and repair any damage to the Premises or the Property caused
by such removal. If Tenant fails to remove any such items or
repair such damage promptly after the expiration or earlier
termination of the Lease Landlord may but need not do so with
no liability to Tenant and Tenant shall pay Landlord the cost
thereof upon demand.
11. REPAIRS. Except for customary cleaning and trash removal provided by
Landlord under Section 9 and damage covered under Section 12, Tenant
shall keep the Premises in good and sanitary condition working order
and repair (including without limitation carpet, wall-covering doors
plumbing and other fixtures, equipment alterations and improvements
whether installed by Landlord or Tenant). In the event that any repairs
maintenance or replacements are required Tenant shall promptly arrange
for the same either through Landlord for such reasonable charges as
Landlord may from time to time establish or such contractors as
Landlord generally uses at the Property or such other contractors as
Landlord shall first approve in writing, and in a first class
workmanlike manner approved by Landlord in advance in writing. If
Tenant does not promptly make such arrangements, Landlord may, but need
not, make such repairs, maintenance and replacements, and the costs
paid or incurred by Landlord therefor shall be reimbursed by Tenant
promptly after request by Landlord. Landlord and its contractors shall
have the right at all reasonable times to enter upon the Premises to
make any repairs to the Premises or the Property reasonably required or
deemed reasonably necessary by Landlord and to erect such equipment
including scaffolding, as is reasonably necessary to effect such
repairs. Tenant shall indemnify Landlord and pay for any repairs,
maintenance and replacements to areas of the Property outside the
Premises, caused in whole or in part as a result of moving any
furniture, fixtures or other property to or from the Premises, or by
Tenant or its employees, agents, contractors, or visitors
(notwithstanding anything to the contrary contained in this Lease).
Notwithstanding the above, Tenant shall not be required to maintain and
repair fire-doors, HVAC, or Building system items relating to
mechanical, structural, and fire or life-safety within the Premises.
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12. CASUALTY DAMAGE. If the Premises or any Common Areas of the Property
providing access thereto shall be damaged by fire or other casualty
Landlord shall use available insurance proceeds to restore the same.
Such restoration shall be to substantially the condition prior to the
casualty except for modifications required by zoning and building codes
and other Laws or by any Holder, any other modifications to the Common
Areas deemed desirable by Landlord (provided access to the Premises is
not materially impaired), and except that Landlord shall not be
required to repair or replace any of Tenant's furniture, furnishings,
fixtures or equipment. Landlord shall not be liable for any
inconvenience or annoyance to Tenant or its visitors, or injury to
Tenant's business resulting in any way from such damage or the repair
thereof. However Landlord shall allow Tenant a proportionate abatement
of Rent during the time and to the extent the Premises are unfit for
occupancy for the purposes permitted under this Lease and not occupied
by Tenant as a result thereof (unless Tenant or its employees or agents
caused the damage). Notwithstanding the foregoing to the contrary
Landlord may elect to terminate this Lease by notifying Tenant in
writing of such termination within sixty (60) days after the date of
damage (such termination notice to include a termination date providing
at least ninety (90) days for Tenant to vacate the Premises) if the
Property shall be materially damaged by Tenant or its employees or
agents or if the Property shall be damaged by fire or other casualty or
cause such that: (a) repairs to the Premises and access thereto cannot
reasonably be completed within 120 days after the casualty without the
payment of overtime or other premiums (b) more than 25% of the Premises
is affected by the damage and fewer than 24 months remain in the Term
or any material damage occurs to the Premises during the last 12 months
of the Term (c) any Holder shall require that the insurance proceeds or
any portion thereof be used to retire the Mortgage debt (or shall
terminate the ground lease as the case may be) or the damage is not
fully covered by Landlord's insurance policies or (d) the cost of the
repairs alterations restoration or improvement work would exceed 25% of
the replacement value of the Property or the nature of such work would
make termination of this Lease necessary or convenient. Tenant agrees
that Landlord's obligation to restore and the abatement of Rent
provided herein shall be Tenants sole recourse in the event of such
damage and waives any other rights Tenant may have under any applicable
Law to terminate the Lease by reason of damage to the Premises or
Property. Tenant acknowledges that this Section represents the entire
agreement between the parties respecting damage to the Premises or
Property.
13. INSURANCE, SUBROGATION, AND WAIVER OF CLAIMS.
a) TENANT INSURANCE. Tenant shall maintain during the Term
comprehensive (or commercial) general liability insurance with
limits of not less than $2,000,000.00 combined single limit
for personal injury, bodily injury or death or property damage
or destruction (including loss of use thereof) for any one
occurrence. Tenant shall also maintain during the Term worker
compensation insurance as required by statute and primary
noncontributory "all-risk" property damage insurance covering
Tenant's possessions, any tenant improvements, fixtures,
personal property, furniture, equipment and inventory,
business records, for damage or other loss caused by fire or
other casualty or cause including, but not limited to,
vandalism and malicious mischief, theft, water damage of any
type, including sprinkler leakage, bursting or stoppage of
pipes, explosion, business interruption, and other insurable
risks in amounts not less than the full insurable replacement
value of such property and full insurable value of such other
interests of Tenant (subject to reasonable deductible
amounts). Landlord will not carry insurance on Tenant's
possessions, fixtures, equipment, furniture or inventory and
will not be responsible for any loss or damage thereto or for
any of Tenant's lost earnings or profits attributable to
Tenant's inability to fully use or obtain access to the
Premises or Property.
i) Tenant shall provide Landlord with certificates
evidencing such coverage (and, with respect to
liability coverage), showing Landlord and such other
parties as Landlord shall designate from time to time
as additional insureds) prior to the Commencement
Date, which shall state that such insurance coverage
may not
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be changed or canceled without at least twenty (20)
days prior written notice to Landlord, and shall
provide renewal certificates to Landlord at least
twenty (20) days prior to expiration of such
policies. All Insurance required to be maintained by
Tenant shall be issued by insurance companies
authorized to do insurance business in the State of
Washington and rated not less than A-VII in Best's
Insurance Guide. Landlord may periodically, but not
more often than every five years, require that Tenant
reasonably increase the aforementioned coverage.
Except as provided to the contrary herein, any
insurance carried by Landlord or Tenant shall be for
the sole benefit of the party carrying such
insurance. Any insurance policies hereunder may be
"blanket policies." All insurance required hereunder
shall be provided by responsible insurers and
Tenant's insurer shall be reasonably acceptable to
Landlord.
b) LANDLORD INSURANCE. Landlord shall, as part of Operating
Expenses, maintain during the Term comprehensive (or
commercial) general liability Insurance, with limits of not
less than $3,000,000.00 combined single limit for personal
injury, bodily Injury or death, or property damage or
destruction (including loss of use thereof) for any one
occurrence. Landlord may, as part of Operating Expenses,
maintain during the Term worker compensation insurance as
required by statute, and primary, non-contributory, extended
coverage or "all-risk" property damage insurance, in an amount
equal to at least ninety percent (90%) of the full insurable
replacement value of the Property (exclusive of the costs of
excavation, foundations and footings, and such risks required
to be covered by Tenant's insurance, and subject to reasonable
deductible amounts), or such other amount necessary to prevent
Landlord from being a co-insured, and such other coverage as
Landlord shall deem appropriate or that may be required by any
Holder.
c) WAIVER OF SUBROGATION. By this Section, Landlord and Tenant
intend that their respective property loss risks shall be
borne by responsible insurance carriers to the extent above
provided, and Landlord and Tenant hereby agree to look solely
to, and seek recovery only from, their respective insurance
carriers in the event of a property loss to the extent that
such coverage is agreed to be provided hereunder. The parties
each hereby waive all rights and claims against each other for
such losses, and waive all rights of subrogation of their
respective insurers, provided such waiver of subrogation shall
not affect the right of the insured to recover thereunder. The
parties agree that their respective insurance policies are
now, or shall be, endorsed such that said waiver of
subrogation shall not affect the right of the insured to
recover thereunder, so long as no material additional premium
is charged therefor.
14. CONDEMNATION. If the whole or any material part of the Premises or
Property shall be taken by power of eminent domain or condemned by any
competent authority for any public or quasi-public use or purpose, or
if any adjacent property or street shall be so taken or condemned, or
reconfigured or vacated by such authority in such manner as to require
the use, reconstruction or remodeling of any part of the Premises or
Property, or if Landlord shall grant a deed or other instrument in lieu
of such taking by eminent domain or condemnation, Landlord shall have
the option to terminate this Lease upon ninety (90) days notice,
provided such notice is given no later than one hundred eighty (180)
days after the date of such taking, condemnation, reconfiguration,
vacation, deed or other instrument. Tenant shall have reciprocal
termination rights if the whole or any material part of the Premises is
permanently taken, or if access to the Premises is permanently
materially impaired. Landlord shall be entitled to receive the entire
award or payment in connection therewith, except that Tenant shall have
the right to file any separate claim available to Tenant for any taking
of Tenant's personal property and fixtures belonging to Tenant and
removable by Tenant upon expiration of the Term, and for moving
expenses (so long as such claim does not diminish the award available
to Landlord or any Holder, and such claim is payable separately to
Tenant). All Rent shall be apportioned as of the date of such
termination, or the date of such taking, whichever shall first occur.
If any part of the Premises shall be taken, and this Lease shall not be
so terminated, the Rent shall be proportionately abated.
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15. RETURN OF POSSESSION. At the expiration or earlier termination of this
Lease or Tenant's right of possession, Tenant shall surrender
possession of the Premises in the condition required under Section
10.c, ordinary wear and tear excepted, and shall surrender all keys,
any key cards, and any parking stickers or cards, to Landlord, and
advise Landlord as to the combination of any locks or vaults then
remaining in the Premises, and shall remove all trade fixtures and
personal property. All improvement, fixtures and other items in or upon
the Premises (except trade fixtures and personal property belonging to
Tenant), whether installed by Tenant or Landlord, shall be Landlord's
property and shall remain upon the Premises, all without compensation,
allowance or credit to Tenant. However, if prior to such termination or
within ten (10) days thereafter Landlord so directs by notice, Tenant
shall promptly remove such of the foregoing items as are designated in
such notice and restore the Premises to the condition prior to the
installation of such items; provided, Landlord shall not require
removal of customary office improvements installed pursuant to any
separate agreement signed by both parties in connection with entering
this Lease (except as expressly provided to the contrary therein), or
installed by Tenant with Landlord's written approval (except as
expressly required by Landlord in connection with granting such
approval). If Tenant shall fail to perform any repairs or restoration,
or fail to remove any items from the Premises required hereunder,
Landlord may do so, and Tenant shall pay Landlord the cost thereof upon
demand. All property removed from the Premises by Landlord pursuant to
any provisions of this Lease or any Law may be handled or stored by
Landlord at Tenant's expense, and Landlord shall in no event be
responsible for the value, preservation or safekeeping thereof. All
property not removed from the Premises or retaken from storage by
Tenant within thirty (30) days after expiration or earlier termination
of this Lease or Tenant's right to possession, shall at Landlord's
option be conclusively deemed to have been conveyed by Tenant to
Landlord as if by bill of sale without payment by Landlord. Unless
prohibited by applicable Law, Landlord shall have a lien against such
property for the costs incurred in removing and storing the same.
16. HOLDING OVER. Unless Landlord expressly agrees otherwise in writing,
Tenant shall pay Landlord 150% of the amount of Rent then applicable
(or the highest amount permitted by Law, whichever shall be less)
prorated on per diem basis for each day Tenant shall retain possession
of the Premises or any part thereof after expiration or earlier
termination of this Lease, together with all damages sustained by
Landlord on account thereof. The foregoing provisions shall not serve
as permission for Tenant to hold-over, nor serve to extend the Term
(although Tenant shall remain bound to comply with all provisions of
this Lease until Tenant vacates the Premises, and shall be subject to
the provisions of Section 13). Notwithstanding the foregoing to the
contrary, at any time before or after expiration or earlier termination
of the Lease, Landlord may serve notice advising Tenant of the amount
of Rent and other terms required, should Tenant desire to enter a
month-to-month tenancy (and if Tenant shall hold over more than one (1)
full calendar month after such notice, Tenant shall thereafter be
deemed a month-to-month tenant, on the terms and provisions pensions of
this Lease then in effect, as modified by Landlord's notice, and except
that Tenant shall not be entitled to any renewal or expansion rights
contained in this Lease or any amendments hereto). In addition, Tenant
shall indemnify and hold Landlord harmless from any and all costs,
expenses, liabilities or damages, including any consequential or
incidental damages, Landlord may incur as a result of Tenant holding
over.
17. NO WAIVER. No provision of this Lease will be deemed waived by either
party unless expressly waived in writing signed by the waiving party.
No waiver shall be implied by delay or any other act or omission of
either party. No waiver by either party of any provision of this Lease
shall be deemed a waiver of such provision with respect to any
subsequent matter relating to such provision, and Landlord's consent or
approval respecting any action by Tenant shall not constitute a waiver
of the requirement for obtaining Landlord's consent or approval
respecting any subsequent action. Acceptance of Rent by Landlord shall
not constitute a waiver of any breach by Tenant of any term or
provision of this Lease. The acceptance of Rent or of the performance
of any other term or provision from any Person other than Tenant,
including any Transferee, shall not constitute a waiver of Landlord's
fight to approve any Transfer.
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18. ATTORNEYS' FEES AND JURY TRIAL. In the event of any litigation between
the parties, the prevailing party shall be entitled to obtain, as part
of the judgment, all reasonable attorneys fees, costs and expenses
incurred in connection with such litigation, except as may be limited
by applicable Law. In the interest of obtaining a speedier and less
costly hearing of any dispute, the parties hereby each irrevocably
waive the right to trial by Jury.
19. PERSONAL PROPERTY TAXES, RENT TAXES AND OTHER TAXES. Tenant shall pay
prior to delinquency all taxes, charges or other governmental
impositions assessed against or levied upon Tenant's fixtures,
furnishings, equipment and personal property located in the Premises,
and any Work to the Premises under Section 10. Whenever possible,
Tenant shall cause all such items to be assessed and billed separately
from the property of Landlord. In the event any such items shall be
assessed and billed with the property of Landlord, Tenant shall pay
Landlord its share of such taxes, charges or other governmental
impositions within thirty (30) days after Landlord delivers a statement
and a copy of the assessment or other documentation showing the amount
of such impositions applicable to Tenant's property. Tenant shall pay
any rent tax or sales tax, service tax, transfer tax or value added
tax, or any other applicable tax on the Rent or services herein or
otherwise respecting this Lease.
20. SUBORDINATION, ATTORNMENT,. ESTOPPEL AND HOLDER PROTECTION.
a) SUBORDINATION.
i) This lease is subject and subordinate to all
Mortgages. This clause shall be self-operative and no
further instrument of subordination shall be required
by any ground or underlying lessor or any Holder. In
confirmation of such subordination, Tenant shall
execute promptly any certificate that Landlord may
request.
ii) Notwithstanding the foregoing, Tenant agrees that a
Holder or other purchaser at foreclosure may elect to
treat this Lease as superior to the lien of the
Mortgage in any foreclosure of the Mortgage, in which
case Tenant shall attorn to the Holder or other
purchaser at foreclosure. All present and figure
Holders are intended to be, and may enforce this
covenant as, third party beneficiaries.
b) ESTOPPEL CERTIFICATE. Tenant, at any time, and from time to
time, within ten (10) days of written request by Landlord or
any Holder, shall execute, acknowledge and deliver to Landlord
or any Holder, and/or to any other person specified by
Landlord, or any Holder, a statement certifying that this
Lease is unmodified and in full force and effect (or, if there
have been modifications, that the same is in full force and
effect as modified and stating the modifications), stating the
dates to which the rent and additional rent have been paid,
stating whether or not there exists any default by Landlord or
Tenant under this Lease, and if so, specifying each such
default, stating whether Tenant has any rights to offsets or
abatement of rent, stating whether Tenant has prepaid any rent
for more than one month in advance, and certifying as to such
other matters as Landlord or any Holder may reasonably
request. Such statement may be relied upon by Landlord or any
Holders, or other person specified by Landlord or any
Mortgages, and their respective successors and/or assigns.
Breach of the foregoing will constitute Tenant's
acknowledgment which may be relied on by any person holding or
proposing to acquire an interest in the Property, this Lease
or any Mortgage, that this Lease is unmodified and in full
force and effect and will constitute, as to any such person, a
waiver of any defaults on Landlord's part which may exist
prior to the date of such notice. The foregoing shall not
limit any other rights and remedies available to Landlord for
breach of this Section.
c) HOLDER'S RIGHTS. Tenant agrees that if Landlord has notified
Tenant in writing of the name and address of any Holder on the
Property or the real property of which the Property is a part,
the following rights and benefits shall inure to the benefit
of each such Holder until satisfaction of its Mortgage or
expiration of this Lease:
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i) If (i) Landlord defaults in the performance of any of
its obligations under this Lease and fails to cure
the default and (ii) as a consequence, Tenant would
have the right to an abatement or offset against the
payment of rent or the right to terminate this Lease,
Tenant shall not exercise any such right without
first giving notice and an opportunity to cure as
described in below to the Holder(s);
ii) Tenant shall not agree to a modification, termination
or surrender of this Lease without the written
consent of the Holder(s); and
iii) Tenant shall send to the Holder(s) copies of any
default notices sent to the Landlord.
iv) If Landlord's default (i) can be cured by the payment
of money, the Holder(s) shall have fifteen (15) days
in the aggregate to cure the default; (ii) cannot be
cured by the payment of money but is curable within
thirty (30) days, the Holder(s) shall have thirty
(30) days in the aggregate to cure the default; and
(iii) cannot be cured by the payment of money and
cannot be cured within thirty (30) days, the
Holder(s) shall have such period of time as is
necessary to cure the default provided that (x) the
Holder shall notify Tenant of its intention to cure
the default, (y) the Holder commences action to cure
the default within twenty (20) days and (z) the
Holder thereafter proceeds diligently at all times to
cure the default. Notwithstanding the foregoing, in
no event shall any Holder have a lesser period of
time to cure a default than is granted to Landlord
under this Lease.
d) ATTORNMENT. If any Holder or designee of Holder succeeds to
Landlord's interest in the Property in which the Premises are
located, then, at the request of such Holder or designee,
Tenant shall attorn to such Holder or designee but such Holder
or designee (i) shall not be liable for any act or omission of
Landlord under this Lease occurring prior to the conveyance of
title to the Holder or its designee, (ii) shall not be subject
to any offset, defense or counterclaim accruing prior to such
conveyance, (iii) shall not be bound by any payment prior to
such conveyance of rent for more than one month in advance
(except prepayments in the nature of security for the
performance by Tenant of its obligations hereunder which
security is actually transferred to the Holder or its
designee), (iv) shall not be bound by an amendment or
modification of this Lease made (1) after notice to Tenant of
the execution of the underlying Mortgage in question and (2)
without the consent of such Holder, where required, (v) shall
not be bound by any covenant to perform (including, without
limitation, any covenant to complete) any renovation or
construction in the Premises or to pay any sums to Tenant in
connection therewith, in either case arising or accruing prior
to the date of such conveyance of Landlord's interest, (vi)
shall be liable for the performance of the other obligations
of Landlord under this Lease only during the period such
Mortgages or designee shall hold such interest in the Property
and (vii) shall not be required to account for any security
deposit unless the same is actually delivered to Holder or its
designee.
e) THIRD PARTY BENEFICIARY. All present and future Holders are
intended to be, and may enforce the provisions of this
Section, as third party beneficiaries, before or after
foreclosure of the Mortgage(s) held by it.
21. ASSIGNMENT AND SUBLETTING.
a) TRANSFERS. Tenant shall not, without the prior written consent
of Landlord which consent shall not be unreasonably withheld
or delayed but which may be reasonably conditioned, as further
described below: (i) assign, mortgage. pledge, hypothecate,
encumber, or permit any lien to attach to, or otherwise
transfer, this Lease or any interest hereunder, by
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operation of law or otherwise (notwithstanding the foregoing,
the following shall not be deemed a Transfer: (i) a transfer
of ownership and control of Tenant's voting stock in
connection with an investment in or financing of Tenant
business, or (ii) a sale or transfer of Tenant's capital stock
through any public exchange including the process of the
initial offering of shares to the general public, or (iii) a
redemption or issuance of additional capital stock of Tenant
of any class. Tenant shall provide written notification to
Landlord of any such event 30 days prior to any filing or
sale.), (ii) sublet the Premises or any part thereof, or (iii)
permit the use of the Premises by any Persons other than
Tenant and its employees (all of the foregoing are hereinafter
sometimes referred to collectively as "Transfers" and any
Person to whom any Transfer is made or sought to be made is
hereinafter sometimes referred to as a "Transferee").
Notwithstanding the foregoing Tenant may sublease the Premises
or assign this Lease to any party which directly or
indirectly: (i) wholly owns or controls Tenant, (ii) is wholly
owned or controlled by Tenant, (iii) is under common ownership
or control with Tenant, or (iv) into which Tenant or any of
the foregoing parties is merged, consolidated or reorganized.
or to which all or substantially all of Tenant's assets or any
such other party's assets are sold, without Landlord's
consent, provided: (a) Landlord shall receive a copy of the
executed transfer document promptly after the execution, (b)
Tenant shall remain liable under this Lease and (c) the
transferee shall expressly assume Tenant's obligations under
this Lease. If Tenant shall desire Landlord's consent to any
Transfer, Tenant shall notify Landlord in writing, which
notice shall include: (a) the proposed effective date (which
shall not be less than 30 nor more than 180 days after
Tenant's notice), (b) the portion of the Premises to be
Transferred (herein called the "Subject Space"), (c) the terms
of the proposed Transfer and the consideration therefor, the
name and address of the proposed Transferee, and a copy of all
documentation pertaining to the proposed Transfer, and (d)
current financial statements of the proposed Transferee
certified by an officer, partner or owner thereof, and any
other information to enable Landlord to determine the
financial responsibility, character, and reputation of the
proposed Transferee, nature of such Transferee's business and
proposed use of the Subject Space, and such other information
as Landlord may reasonably require. Any Transfer made without
complying with this Section shall, at Landlord's option, be
null, void and of no effect, or shall constitute a Default
under this Lease. Whether or not Landlord shall grant consent,
Tenant shall pay $300.00 towards Landlord's review and
processing expenses, as well as any reasonable legal fees
incurred by Landlord, within thirty (30) days after written
request by Landlord.
b) TRANSFER PREMIUM. If Landlord consents to a Transfer, and as a
condition thereto which the parties hereby agree is
reasonable, Tenant shall pay Landlord 50% of any Transfer
Premium derived by Tenant from such Transfer. "Transfer
Premium" shall mean all rent, additional rent or other
consideration paid by such Transferee in excess of the Rent
payable by Tenant under this Lease (on a monthly basis during
the Term, and on a per rentable square foot basis, if less
than all of the Premises is transferred), after deducting the
reasonable expenses incurred by Tenant for any changes,
alterations and improvements to the Premises, any other
economic concessions or services provided to the Transferee,
and any customary brokerage commissions paid in connection
with the Transfer. If part of the consideration for such
Transfer shall be payable other than in cash, Landlord's share
of such non-cash consideration shall be In such form as is
reasonably satisfactory to Landlord. The percentage of the
Transfer Premium due Landlord hereunder shall be paid within
ten (10) days after Tenant receives any Transfer Premium from
the Transferee.
c) RECAPTURE. Notwithstanding anything to the contrary contained
in this Section, Landlord shall have the option, by giving
written notice to Tenant within twenty (20) days after receipt
of Tenant's notice of any proposed Transfer, to recapture the
Subject Space. Such recapture notice shall cancel and
terminate this Lease with respect to the Subject Space as of
the date stated in Tenant's notice as the effective date of
the proposed
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Transfer(or at Landlord's option, shall cause the Transfer to
be made to Landlord or its agent, in which case the parties
shall execute the Transfer documentation promptly thereafter).
If this Lease shall be canceled with respect to less than the
entire Premises, the Rent reserved herein shall be prorated on
the basis of the number of rentable square feet retained by
Tenant in proportion to the number of rentable square feet
contained in the Premises, this Lease as so amended shall
continue thereafter in full force and effect, and upon request
of either party, the parties shall execute whiten confirmation
of the same.
d) TERMS OF CONSENT. If Landlord consents to a Transfer: (a) the
terms and conditions of this Lease, including among other
things, Tenant's liability for the Premises, shall in no way
be deemed to have been waived or modified, (b) such consent
shall not be deemed consent to any further Transfer by either
Tenant or a Transferee, (c) no Transferee shall succeed to any
rights provided in this Lease or any amendment hereto to
extend the Term of this Lease, expand the Premises, or lease
additional space, any such rights being deemed personal to
Tenant, (d) Tenant shall deliver to Landlord promptly after
execution, an original executed copy of all documentation
pertaining to the Transfer in form reasonably acceptable to
Landlord, and (e) Tenant shall furnish upon Landlord's request
a complete statement, certified by an independent certified
public accountant, or Tenant's chief financial officer,
setting forth in detail the computation of any Transfer
Premium Tenant has derived and shall derive from such
Transfer. Landlord or its authorized representatives shall
have the right at all reasonable to audit the books, records
and papers of Tenant relating to any Transfer, and shall have
the right to make copies thereof. If the Transfer Premium
respecting any Transfer shall be found understated, Tenant
shall within thirty (30) days after demand pay the deficiency,
and if understated by more than 2%, Tenant shall pay
Landlord's costs of such audit. Any sublease hereunder shall
be subordinate and subject to the provisions of this Lease,
and if this Lease shall be terminated during the term of any
sublease, Landlord shall have the right to: (i) treat such
sublease as canceled and repossess the Subject Space by any
lawful means, or (ii) require that such subtenant attorn to
and recognize Landlord is its landlord under any such
sublease. If Tenant shall Default and fail to cure within the
time permitted for cure under Section 23, Landlord is hereby
irrevocably authorized, as Tenant's agent and
attorney-in-fact, to direct any Transferee to make all
payments under or in connection with the Transfer directly to
Landlord (which Landlord shall apply towards Tenant's
obligations under this Lease) until such Default is cured.
e) CERTAIN TRANSFERS. For purposes of this Lease, the term
"Transfer" shall also include (a) if Tenant is a partnership,
the withdrawal or change, voluntary, involuntary or by
operation of law, of a majority of the partners, or a transfer
of a majority of partnership interests, within a twelve month
period, or the dissolution of the partnership.
22. RIGHTS RESERVED BY LANDLORD. Except to the extent expressly limited
herein, Landlord reserves full rights to control the Property (which
rights may be exercised without subjecting Landlord to claims for
constructive eviction, abatement of Rent, damages or other claims of
any kind), including more particularly, but without limitation, the
following rights:
a) CHANGE NAME OF PROPERTY. To change the name or street address
of the Property; install and maintain signs on the exterior
and interior of the Property; retain at all times, and use in
appropriate instances, keys to all doors within and into the
Premises; grant to any Person the right to conduct any
business or render any service at the Property, whether or not
it is the same or similar to the use permitted Tenant by this
Lease; and have access for Landlord and other tenants of the
Property to any mail chutes located on the Premises according
to the rules of the United States Postal Service.
b) ENTER PREMISES. To enter the Premises at reasonable hours for
reasonable purposes including inspection and supplying
cleaning service or other services to be provided
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Tenant hereunder, to show the Premises to current and
prospective mortgage lenders, ground lessors, insurers, and
prospective purchasers, tenants and brokers, at reasonable
hours, and if Tenant shall abandon the Premises at any time,
or shall vacate the same during the last 3 months of the Term,
to decorate, remodel, repair, or alter the Premises.
c) ACCESS LIMITATIONS. To limit or prevent access to the
Property, shut down elevator service, activate elevator
emergency controls, or otherwise take such action or
preventative measures deemed necessary by Landlord for the
safety of tenants or other occupants of the Property or the
protection of the Property and other property located thereon
or therein, in case of fire, invasion, insurrection, riot,
civil disorder, public excitement or other dangerous
condition, or threat thereof.
d) ALTERATIONS. To decorate and to make alterations, additions
and improvements, structural or otherwise, in or to the
Property or any part thereof, and any adjacent property,
structure, parking facility, land, street or alley (including
without limitation changes and reductions in corridors,
lobbies, parking facilities and other public areas and the
installation of kiosks, planters, sculptures, displays,
escalators, mezzanines, and other structures, facilities,
amenities and features therein, and changes for the purpose of
connection with or entrance into or use of the Property in
conjunction with any adjoining or adjacent building or
buildings, now existing or hereafter constructed). In
connection with such matters, or with any other repairs,
maintenance, improvements or alterations, in or about the
Property, Landlord may erect scaffolding and other structures
reasonably required, and during such operations may enter upon
the Premises and take into and upon or through the Premises,
all materials required to make such repairs, maintenance,
alterations or improvements, and may close public entry ways,
other public areas, restrooms, stairways or corridors.
Inconvenience caused by alterations, repairs, maintenance,
etc., shall not constitute or justify abatement of rent.
In connection with entering the Premises to exercise any of
the foregoing rights, Landlord shall: (a) provide reasonable
advance written or oral notice (which need not be more than
twenty-four hours) to Tenant's on-site manager or other
appropriate person (except in emergencies, or for routine
cleaning or other routine makers), and (b) take reasonable
steps to minimize any interference with Tenant's business.
23. TENANT'S DEFAULT. The occurrence of any one or more of the following
events shall constitute a "Default" by Tenant which if not cured within
any applicable time permitted for cure below, shall give rise to
Landlord's remedies set forth in Section 24: (i) failure by Tenant to
make when due any payment of Rent; (ii) failure by Tenant to observe or
perform any of the terms or conditions of this Lease to be observed or
performed by Tenant other than the payment of Rent, or as provided
below, unless such failure is cured within thirty (30) days after
notice, or such shorter period expressly provided elsewhere in this
Lease (provided, if the nature of Tenant's failure is such that more
time is reasonably required in order to cure, Tenant shall not be in
Default if Tenant commences to cure within such period and thereafter
reasonably seeks to cure such failure to completion); (iii) failure by
Tenant to comply with the Rules, unless such failure is cured within
five (5) days after notice (provided, if the nature of Tenant's failure
is such that more than five (5) days time is reasonably required in
order to cure, Tenant shall not be in Default if Tenant commences to
cure within such period and thereafter reasonably seeks to cure such
failure to completion); (iv) vacation of all or a substantial portion
of the Premises for more than thirty (30) consecutive days, or the
failure to take possession of the Premises within sixty (60) days after
the Commencement Date; (v) (a) making by Tenant or any guarantor of
this Lease ("Guarantor") of any general assignment for the benefit of
creditors, (b) filing by or against Tenant or any Guarantor of a
petition to have Tenant or such Guarantor adjudged a bankrupt or a
petition for reorganization or arrangement under any Law relating to
bankruptcy (unless, in the case of a petition filed against Tenant or
such Guarantor, the same Is dismissed within sixty (60) days), (c)
appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located on the Premises or of
Tenants interest in this Lease, where possession is not restored to
Tenant within
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thirty (30) days, (d) attachment, execution or other judicial seizure
of substantially all of Tenant's assets located on the Premises or of
Tenant's interest in this Lease, (e) Tenants or any Guarantor's
convening of a meeting of as creditors or any class thereof for the
purpose of effecting a moratorium upon or composition of its debts, or
(f) Tenant's or any Guarantor's insolvency or admission of an inability
to pay its debts as they mature; (vi) any material misrepresentation
herein, or material misrepresentation or omission in any financial
statements or other materials provided by Tenant or any Guarantor in
connection with negotiating or entering this Lease or in connection
with any Transfer under Section 21; (vii) cancellation of any guaranty
of this Lease by any Guarantor, (viii) failure by Tenant to cure within
any applicable times permitted thereunder any default under any other
lease for space at the Property or any other buildings owned or managed
by Landlord or its affiliates, now or hereafter entered by Tenant (and
any Default hereunder not cured within the times permitted for cure
herein shall, at Landlord's election, constitute a default under any
such other lease or leases). Failure by Tenant to comply with the same
term or condition of this Lease on three occasions during any twelve
month period shall cause any failure to comply with such term or
condition during the succeeding twelve month period, at Landlord's
option, to constitute an incurable Default, if Landlord has given
Tenant notice of each such failure within ten (10) days after each such
failure occurs. The notice and cure periods provided herein are in lieu
of, and not in addition to, any notice and cure periods provided by
Law.
24. LANDLORD'S REMEDIES. If a Default occurs and is not cured within any
applicable time permitted under Section 23, Landlord shall have the
rights and remedies hereinafter set forth:
a) TERMINATE LEASE. Terminate Tenant's right to possession of the
Premises by any lawful means, in which case this Lease shall
terminate and Tenant shall immediately surrender possession of
the Premises to Landlord. In such event Landlord shall be
entitled to recover from the Tenant all past due Rent and
other charges; the expenses of reletting the Premises,
including necessary renovation and alteration of the Premises,
reasonable attorneys' fees and costs; the worth at the time of
award by the court having jurisdiction thereof of the amount
by which the unpaid Rent called for herein for the balance of
the Lease Term after the time of such award exceeds the amount
of such loss for the same period that Tenant proves could be
reasonably avoided; and that portion of any leasing commission
paid by Landlord and applicable to the unexpired Lease Term of
this Lease. Unpaid installments of rent or other sums shall
bear interest from the date due at the rate of ten percent
(10%) per annum; or,
b) CONTINUE THE LEASE. Maintain Tenant's right to possession, in
which case this Lease shall continue in effect whether or not
Tenant shall have abandoned or vacated the Premises. In such
event Landlord shall be entitled to enforce all Landlord's
right and remedies under this Lease, including the right to
recover past due Rent and other charges, the Rent and any
other charges as may become due hereunder, and at Landlord's
option, to recover the worth at the time of the award by the
court having jurisdiction thereof of the amount by which the
unpaid Rent called for herein for the balance of the Lease
Term after the time of such award exceeds the amount of such
loss for the same period that Tenant proves could be
reasonably avoided.
c) RELETTING FOR TENANT'S ACCOUNT. Landlord may re-enter and
attempt to relet without terminating this Lease and remove all
persons and property from the Premises (which property may be
removed and stored in a public warehouse or elsewhere at the
cost and risk of, and for the account of, Tenant), all without
service of notice or resort to legal process and without being
deemed guilty of trespass, or any liability of Landlord for
any loss or damage which may be occasioned thereby. If
Landlord, without terminating this Lease, either (1) elects to
re-enter the Premises and attempt to relet, or (2) takes
possession of the Premises pursuant to legal proceedings, or
(3) takes possession of the Premises pursuant to any notice
provided by law, then Landlord may, from time to time, make
such alterations and repairs as may be necessary in order to
relet the Premises or
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any part thereof for such term or terms (which may be for a
term extending beyond the term of this Lease) and at such rent
and other terms as Landlord in its reasonable discretion deems
advisable. Upon such reletting, all Rents received by Landlord
from such reletting shall be applied, first, to the payment of
any indebtedness of Tenant (other than any rents due
hereunder) to Landlord; second, to the payment of any costs
and expenses of obtaining possession and any such reletting,
including expense of alterations and repairs, brokerage fees
and attorneys fees; third, to the payment of any rents due and
unpaid hereunder. If such rents and any other amounts received
from such reletting during any month be less than that to be
paid during that month by Tenant, Tenant shall immediately pay
such deficiency to Landlord. No such re-entry or taking
possession of the Premises by Landlord shall be construed as
an election by Landlord to terminate this Lease unless a
notice of such intention be given to Tenant. Notwithstanding
any such reletting without termination, Landlord may at any
time thereafter elect to terminate this Lease for such
previous breach. Should Landlord at any time terminate this
Lease for any breach, in addition to any other remedies it may
have, Landlord may recover from Tenant all damages it may
incur by reason of such breach, including the cost of
recovering the Premises, reimbursement of any brokerage fees
incurred by Landlord in connection with Tenant's Lease and all
rent (accrued or to accrue during the term of the Lease)
which, at Landlord's election, shall be accelerated and be due
in full on demand.
d) OTHER REMEDIES. Pursue any other remedy now or hereafter
available to Landlord under the laws or judicial decisions of
the State in which the Premises are located, including but not
limbed to the right to assess against Tenant an amount equal
to the attorneys' fees incurred by Landlord in collecting any
rent or other payment due hereunder, which amount shall be due
in full within ten (10) days of Tenants receipt of the
assessment by Landlord.
e) REMEDIES CUMULATIVE-WAIVER. It is understood and agreed that
the Landlord's remedies hereunder are cumulative and the
Landlord's exercise of any right or remedy due to a default or
breach by Tenant shall not be deemed a waiver of, or to alter,
affect or prejudice any right or remedy which Landlord may
have under this Lease or by law or in equity. The acceptance
of Rent or any other acts or omission of Landlord at any time
or times after the happening of any event authorizing the
cancellation or forfeiture of this Lease, shall not operate as
a waiver of any past or future violation, breach or failure to
keep or perform any covenant, agreement, term or condition
hereof or to deprive Landlord of its right to cancel or
terminate this Lease, upon the written notice provided for
herein, at any time that cause for cancellation or termination
may exist, or be construed so as at any time to stop Landlord
from promptly exercising any other option, right or remedy
that it may have under any term or provision of this Lease, at
law or in equity.
f) ACCEPTANCE OF PAYMENT. It is specifically understood and
agreed that the Landlord's acceptance of any sum, whether as
Base Rent, Operating Expense or otherwise, which is less than
the amount claimed as due by the Landlord, shall not act as,
or be deemed to be, a waiver of such claimed amount or a
compromise or accord and satisfaction of the amount claimed as
due by Landlord.
g) WAIVER OF RIGHT OF REDEMPTION. Tenant hereby expressly waives
any and all rights of redemption granted by or under any
present or future laws in the event of Tenant being evicted or
dispossessed for any cause, or in the event of Landlord
obtaining possession of the Premises, by reason of the
violation by Tenant of any of the covenants or conditions of
this Lease, or otherwise.
h) OTHER MATTERS. No re-entry or repossession, repairs, changes,
alterations and additions, reletting, acceptance of keys from
Tenant, or any other action or omission by Landlord shall be
construed as an election by Landlord to terminate this Lease
or Tenant's right to
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possession, or accept a surrender of the Premises, nor shall
the same operate to release the Tenant in whole or in part
from any of Tenant's obligations hereunder, unless express
written notice of such intention is sent by Landlord or its
agent to Tenant. To the fullest extent permitted by Law, all
rent and other consideration paid by any Replacement Tenants
shall be applied: first, to the costs of reletting, second, to
the payment of any Rent theretofore accrued, and the residue,
if any, shall be held by Landlord and applied to the payment
of other obligations of Tenant to Landlord as the same become
due (with any remaining residue to be retained by Landlord).
Rent shall be paid without any prior demand or notice therefor
(except as expressly provided herein) and without any
deduction, set-off or counterclaim, or relief from any
valuation or appraisement laws. Landlord may apply payments
received from Tenant to any obligations of Tenant then
accrued, without regard to such obligations as may be
designated by Tenant. Landlord shall be under no obligation to
observe or perform any provision of this Lease on its part to
be observed or performed which accrues after the date of any
Default by Tenant hereunder not cured within the times
permitted hereunder. The times set forth herein for the curing
of Defaults by Tenant are of the essence of this Lease. Tenant
hereby irrevocably waives any right otherwise available under
any Law to redeem or reinstate this Lease.
25. LANDLORD'S RIGHT TO CURE. If Landlord shall fail to perform any term or
provision under this Lease required to be performed by Landlord,
Landlord shall not be deemed to be in default hereunder nor subject to
any claims for damages of any kind, unless such failure shall have
continued for a period of thirty (30) days after written notice thereof
by Tenant; provided, if the nature of Landlord's failure is such that
more than thirty (30) days are reasonably required in order to cure,
Landlord shall not be in default if Landlord commences to cure such
failure within such thirty (30) day period, and thereafter reasonably
seeks to cure such failure to completion. The aforementioned periods of
time permitted for Landlord to cure shall be extended for any period of
time during which Landlord is delayed in, or prevented from, curing due
to fire or other casualty, strikes, lock-outs or other labor troubles,
shortages of equipment or materials, governmental requirements, power
shortages or outages, acts or omissions by Tenant or other Persons, and
other causes beyond Landlord's reasonable control. If Landlord shall
fail to cure within the times permitted for cure herein, Landlord shall
be subject to such remedies as may be available to Tenant (subject to
the other provisions of this Lease); provided, in recognition that
Landlord must receive timely payments of Rent and operate the Property,
Tenant shall have no right of self-help to perform repairs or any other
obligation of Landlord, and shall have no right to withhold, set-off,
or abate Rent.
26. CONVEYANCE BY LANDLORD AND LIABILITY. In case Landlord or any successor
owner of the Property shall convey or otherwise dispose of any portion
thereof in which the Premises are located, to another Person (and
nothing herein shall be construed to restrict or prevent such
conveyance or disposition), such other Person shall thereupon be and
become landlord hereunder and shall be deemed to have fully assumed and
be liable for all obligations of this Lease to be performed by Landlord
which first arise after the date of conveyance, including the return of
any Security Deposit, and Tenant shall attorn to such other Person, and
Landlord or such successor owner shall, from and after the date of
conveyance, be free of all liabilities and obligations hereunder not
then incurred. The liability of Landlord to Tenant for any default by
Landlord under this Lease or arising in connection herewith or with
Landlord's operation, management leasing, repair, renovation,
alteration, or any other matter relating to the Property or the
Premises shall be limited to the interest of Landlord in the Property
(and the rental proceeds thereof). Tenant agrees to look solely to
Landlord's interest in the Property (and the rental proceeds thereof)
for the recovery of any judgment against Landlord, and Landlord shall
not be personally liable for any such judgment or deficiency after
execution thereon. The limitations of liability contained in this
Section shall apply equally and inure to the benefit of Landlord's
present and future partners, beneficiaries, officers, directors,
trustees, shareholders, agents and employees, and their respective
partners, heirs, successors and assigns. Under no circumstances shall
any present or future general or limited partner of Landlord (if
Landlord is a
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<PAGE> 27
partnership), or trustee or beneficiary (if Landlord or any partner of
Landlord is a trust) have any liability for the performance of
Landlord's obligations under this Lease. Notwithstanding the foregoing
to the contrary, Landlord shall have personal liability for insured
claims, beyond Landlord's interest In the Property (and rental proceeds
thereof), to the extent of Landlord's liability insurance coverage
available for such claims.
27. INDEMNIFICATION.
a) TENANT INDEMNIFICATION. Tenant will save and hold Landlord,
and Landlord's members, officers, directors and/or partners
and the management company (and its employees) employed by
Landlord for the management of the Property, if any, harmless
from and against all loss, damage, liability or expense
(including attorneys' fees) resulting from, claimed by or
against or incurred by Landlord;
i) Arising from any injury to any person or loss of or
damage to any property caused by or resulting from
any act or omission of Tenant or any officer, agent,
contractor, employee, guest, invitee, licensee or
visitor of Tenant in or about the Premises or
Property or from any and all claims, liability,
obligation, cost or expense (including attorneys'
fees) incurred or arising from or by reason of the
use of the Premises by Tenant, Tenant's subtenants or
others or the conduct of the business thereon or from
any activity, work, or thing done, permitted or
suffered by the Tenant, or Tenant's subtenants or
others in or about the Premises.
ii) Arising from or incurred by reason of any breach or
default in the performance of any obligation on
Tenant's part to be performed under the terms of this
Lease.
iii) Arising from (i) the handling of any Tenant's
Hazardous Materials, as defined in Section 30; or
(ii) the breach of any of the provisions of this
Lease. For the purpose of this Lease, "environmental
damages" shall mean (a) all claims, judgments,
damages, penalties, fines, costs, liabilities, and
losses (including without limitation, diminution in
the value of the Premises or any portion of the
Property, damages for the loss of or restriction on
use of rentable or usable space or of any amenity of
the Premises or any portion of the Property, and from
any adverse impact of Landlord's marketing of space);
(b) all reasonable sums paid for settlement of
claims, reasonable attorneys' fees, consultants' fees
and experts' fees; and (c) all costs incurred by
Landlord in connection with investigation or
remediation relating to the Handling of Tenant's
Hazardous Materials, whether or not required by
Environmental Laws, necessary for Landlord to make
full economic use of the Premises or any portion of
the Property, or otherwise required under this Lease.
To the extent that Landlord is held strictly liable
by a court or other governmental agency of competent
jurisdiction under any Environmental Laws, Tenant's
obligation to Landlord and the other indemnities
under the foregoing indemnification shall likewise be
without regard to fault on Tenant's part with respect
to the violation of any Environmental Law which
results in liability to the indemnitee.
b) CONCURRENT NEGLIGENCE. Notwithstanding the foregoing, in the
event of the concurrent negligence of the Tenant, its agents,
employees, sublessees, invitees, licensees, or contractors on
the one hand and that of Landlord, its partners, directors,
officers, agents employees or contractors on the other hand,
which concurrent negligence results in injury or damage to
persons or property and relates to the construction,
alteration, repair, addition to, subtraction from, improvement
to or maintenance of the Premises, Common Areas or Property,
Tenants obligation to indemnify Landlord as set forth in this
Section shall be limited to the extent of Tenant's negligence,
and that of its agents, employees, sublessees, invitees,
licensees or contractors, including Tenant's proportional
share of
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<PAGE> 28
costs, attorneys' fees, and expenses incurred in connection
with any claim, action or proceeding brought with respect to
such injury or damage.
c) WORKER'S COMPENSATION. Landlord and Tenant specifically agree
that the provisions of this Section also apply to any claim of
injury or damage to the persons or property of the Tenant's
employees, and Tenant acknowledges and agrees that as to such
claims, Tenant, with respect to Landlord, does hereby waive
any right of immunity which Tenant may have under industrial
insurance (Title 51 RCW as amended and under any substitute or
replacement statute). This waiver and agreement was
specifically negotiated by Landlord and Tenant and is solely
for the benefit of Landlord and Tenant and their successors
and assigns and is not intended as a waiver of tenant's rights
of immunity under said industrial insurance for any other
purpose.
-------------------------- ---------------------------
Landlord's Initials Tenant's Initials
d) SURVIVAL. The obligations of Tenant under this Section arising
by reason of any occurrence taking place during the term of
this Lease shall survive the expiration or earlier termination
of this Lease.
e) EXCULPATION. Neither Landlord nor the management company (or
its employees) employed by Landlord shall be liable for any
loss or damage to person or property sustained by Tenant, or
other persons, which may be caused by the Premises or the
Property, or any appurtenances thereto, being out of repair,
or by the bursting or leakage of any water, gas, sewer, or
steam pipes, or by theft or by any act or neglect or omission
of any tenant or occupant of the Property, or of any other
person, or by any other cause of whatsoever nature, unless
caused by the gross negligence of Landlord or the management
company (or its employees) employed by Landlord.
28. SAFETY AND SECURITY DEVICES, SERVICES AND PROGRAMS. The parties
acknowledge that safety and security devices, services and programs
provided by Landlord, if any, while intended to deter crime and ensure
safety, may not in given instances prevent theft or other criminal
acts, or ensure safety of persons or property. The risk that any safety
or security device, service or program may not be effective, or may
malfunction, or be circumvented by a criminal, is assumed by Tenant
with respect to Tenant's property and interests, and Tenant shall
obtain Insurance coverage to the extent Tenant desires protection
against such criminal acts and other losses. Tenant agrees to cooperate
in any reasonable safety or security program developed by Landlord or
required by Law.
29. COMMUNICATIONS AND COMPUTER LINES.
a) TENANT'S LINES. Tenant may install, maintain, replace, remove
or use any communications or computer wires, cables and
related devices (collectively the "Lines") at the Property in
or serving the Premises, provided: (a) Tenant shall obtain
Landlord's prior written consent, use an experienced and
qualified contracts approved in writing by Landlord, and
comply with all of the other provisions of Section 10, (b) any
such installation, maintenance, replacement, removal or use
shall comply with all Laws applicable thereto and good work
practices, and shall not interfere with the use of any then
existing Lines at the Property, (c) an acceptable number of
spare Lines and space for additional Lines shall be maintained
for existing and future occupants of the Property, as
determined in Landlord's opinion, (d) if Tenant at any time
uses any equipment that may create an electromagnetic field
exceeding the normal insulation ratings of ordinary twisted
pair riser cable or cause radiation higher than normal
background radiation, the Lines therefor (including riser
cables) shall be appropriately insulated to prevent such
excessive electromagnetic fields or radiation, (e) as a
condition to permitting the installation of new Lines,
Landlord may require that Tenant remove existing Lines located
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<PAGE> 29
in or serving the Premises, (f) Tenant's rights shall be
subject to the rights of any regulated telephone company, and
(g) Tenant shall pay all costs in connection therewith.
Landlord reserves the right to require that Tenant remove any
Lines located in or serving the Premises which are installed
in violation of these provisions, or which are at any time in
violation of any Laws or represent a dangerous or potentially
dangerous condition (whether such Lines were installed by
Tenant or any other party), within three (3) days after
written notice.
i) Notwithstanding anything to the contrary contained in
Section 15 of the Lease, unless Tenant receives a
written waiver from Landlord, Tenant shall remove any
or all Lines installed by or for Tenant within or
serving the Premises upon termination of the Lease.
Any Lines not required to be removed pursuant to this
Paragraph shall, at Landlord's option, become
property of Landlord (without payment by Landlord).
If Tenant fails to remove such Lines as required by
Landlord, or violates any other provision of this
Section, Landlord may, after twenty (20) days written
notice to Tenant, remove such Lines or remedy such
other violation, at Tenant's expense (without
limiting Landlord's other remedies available under
this Lease or applicable Law). Tenant shall not,
without the prior written consent of Landlord in each
instance, grant to any third party a security
interest or lien in or on the Lines, and any such
security interest or lien granted without Landlord's
written consent shall be null and void. Except to the
extent arising from the intentional or negligent acts
of Landlord or Landlord's agents or employees,
Landlord shall have no liability for damages arising
from, and Landlord does not warrant that the Tenant's
use of any Lines will be free from the following
(collectively called "Line Problems"): (x) any
eavesdropping or wire-tapping by unauthorized
parties, (y) any failure of any Lines to satisfy
Tenant's requirements, or (z) any shortages,
failures, variations, interruptions, disconnections,
loss or damage caused by the installation,
maintenance, replacement, use or removal of Lines by
or for other tenants or occupants at the Property, by
any failure of the environmental conditions or the
power supply for the Property to conform to any
requirements for the Lines or any associated
equipment, or any other problems associated with any
Lines by any other cause. Under no circumstances
shall any Line Problems be deemed an actual or
constructive eviction of Tenant, render Landlord
liable to Tenant for abatement of Rent, or relieve
Tenant from performance of Tenants obligations under
this Lease. Landlord in no event shall be liable for
damages by reason of loss of profits, business
interruption or other consequential damage arising
from any Line Problems.
b) LANDLORD'S LINES. Landlord may (but shall not have the
obligation to): (i) install new Lines at the Property (ii)
create additional space for Lines at the Property, and (iii)
reasonably direct, monitor and/or supervise the installation,
maintenance, replacement and removal of, the allocation and
periodic re-allocation of available space (if any) for, and
the allocation of excess capacity (if any) on, any Lines now
or hereafter installed at the Property by Landlord, Tenant or
any other party (but Landlord shall have no right to monitor
or control the information transmitted through such Lines).
Such rights shall not be in Imitation of other rights that may
be available to Landlord by Law or otherwise. If Landlord
exercises any such rights, Landlord may charge Tenant for the
costs attributable to Tenant, or may include those costs and
all other costs in Operating Expenses (including without
limitation, costs for acquiring and installing Lines and
risers to accommodate new Lines and spare Lines, any
associated computerized system and software for maintaining
records of Line connections, and the fees of any consulting
engineers and other experts); provided, any capital
expenditures included in Operating Expenses hereunder shall be
amortized (together with reasonable finance charges) over the
period of time prescribed by Section 6.b).
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<PAGE> 30
30. HAZARDOUS MATERIALS. Tenant shall not transport, use, store, maintain,
generate, manufacture, handle, dispose, release or discharge any
"Hazardous Material" (as defined below) upon or about the Property, or
permit Tenant's employees, agents, contractors, and other occupants of
the Premises to engage in such activities upon or about the Property.
However, the foregoing provisions shall not prohibit the transportation
to and from, and use, storage, maintenance and handling within, the
Premises of substances customarily used in offices (or such other
business or activity expressly permitted to be undertaken in the
Premises), provided: (a) such substances shall be used and maintained
only in such quantities as are reasonably necessary for such permitted
use of the Premises, strictly in accordance with applicable Law and the
manufacturers' instructions therefor, (b) such substances shall not be
disposed of, released or discharged on the Property, and shall be
transported to and from the Premises in compliance with all applicable
Laws, and as Landlord shall reasonably require, (c) if any applicable
Law or Landlord's trash removal contractor requires that any such
substances be disposed of separately from ordinary trash, Tenant shall
make arrangements at Tenants expense for such disposal directly with a
qualified and licensed disposal company at a lawful disposal site
(subject to scheduling and approval by Landlord), and shall ensure that
disposal occurs frequently enough to prevent unnecessary storage of
such substances in the Premises, and (d) any remaining such substances
shall be completely, properly and lawfully removed from the Property
upon expiration or earlier termination of this Lease.
a) NOTIFICATION BY TENANT. Tenant shall promptly notify Landlord
of: (i) any enforcement, cleanup or other regulatory action
taken or threatened by any governmental or regulatory
authority with respect to the presence of any Hazardous
Material on the Premises or the migration thereof from or to
other property, (ii) any demands or claims made or threatened
by any party against Tenant or the Premises relating to any
loss or injury resulting from any Hazardous Material, (iii)
any release, discharge or non-routine, improper or unlawful
disposal or transportation of any Hazardous Material on or
from the Premises, and (iv) any matters where Tenant is
required by Law to give a notice to any governmental or
regulatory authority respecting any Hazardous Material on the
Premises. Landlord shall have the right (but not the
obligation) to join and participate as a party in any legal
proceedings or actions affecting the Premises initiated in
connection with any environmental, health or safety Law. At
such times as Landlord may reasonably request, Tenant shall
provide Landlord with a written list identifying any Hazardous
Material then used, stored, or maintained upon the Premises,
the use and approximate quantity of each such material, a copy
of any material safety data sheet ("MSDS") issued by the
manufacturer therefor, written information concerning the
removal, transportation and disposal of the same, and such
other information as Landlord may reasonably require or as may
be required by Law. The term "Hazardous Material" for purposes
hereof shall mean any chemical, substance, material or waste
or component thereof which is now or hereafter listed, defined
or regulated as a hazardous or toxic chemical, substance,
material or waste or component thereof by any federal, state
or local governing or regulatory body having jurisdiction, or
which would trigger any employee or community "right-to-know"
requirements adopted by any such body, or for which any such
body has adopted any requirements for the preparation or
distribution of an MSDS.
b) RELEASE OF HAZARDOUS MATERIALS. If any Hazardous Material is
released, discharged or disposed of by Tenant or any other
occupant of the Premises, or their employees, agents or
contractors, on or about the Property in violation of the
foregoing provisions, Tenant shall immediately, properly and
in compliance with applicable Laws clean up and remove the
Hazardous Material from the Property and any other affected
property and clean or replace any affected personal property
(whether or not owned by Landlord), at Tenant's expense. Such
clean up and removal work shall be subject to Landlord's prior
written approval (except in emergencies), and shall include,
without limitation, any testing, investigation, and the
preparation and implementation of any remedial action plan
required by any governmental body having jurisdiction or
reasonably required by Landlord. If Tenant shall fail to
comply with the provisions of this Section within five (5)
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<PAGE> 31
days after written notice by Landlord, or such shorter time as
may be required by Law or in order to minimize any hazard to
Persons or property, Landlord may (but shall not be obligated
to) arrange for such compliance directly or as Tenant's agent
through contractors or other parties selected by Landlord, at
Tenant's expense (without limiting Landlord's other remedies
under this Lease or applicable Law). If any Hazardous Material
is released, discharged or disposed of on or about the
Property and such release, discharge or disposal is not caused
by Tenant or other occupants of the Premises, or their
employees, agents or contractors, such release, discharge or
disposal shall be deemed casualty damage under Section 12 to
the extent that the Premises or Common Areas serving the
Premises are affected thereby; in such case, Landlord and
Tenant shall have the obligations and rights respecting such
casualty damage provided under Section 12.
c) EXISTENCE OF HAZARDOUS SUBSTANCES. Tenant acknowledges that
the Premises may contain Hazardous Substances, and Tenant
accepts the Premises and the Property notwithstanding such
Hazardous Substances. If Landlord is required by any law to
take any action or 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, provided
the Landlord shall proceed in such a manner as to minimize
interference with Tenant's use of the premises.
31. NOTICES. Except as expressly provided to the contrary in this Lease,
every notice or other communication to be given by either party to the
other with respect hereto or to the Premises or Property, shall be in
writing and shall not be effective for any purpose unless the same
shall be served personally or by national air courier service, or
United States certified mail, return receipt requested, postage
prepaid, addressed, if to Tenant, at Suite 3400, 900 Fourth Avenue,
Seattle, WA 98164, and if to Landlord, at the addresses stated in
Section 1.c), or such ocher address or addresses as Landlord and Tenant
may from time to time designate by notice given as above provided.
Every notice or other communication hereunder shall be deemed to have
been given as of the third business day following the date of such
mailing (or as of any earlier date evidenced by a receipt from such
national air courier service or the United States Postal Service) or
immediately if personally delivered. Notices not sent in accordance
with the foregoing shall be of no force or effect until received by the
foregoing parties at such addresses required herein.
32. REAL ESTATE BROKERS. Tenant represents and warrants that it has had no
dealings with any real estate broker or agent in connection with the
negotiation of this Lease, except for those certain brokers whose names
are set forth in Section 1.r) (whose commission, if any, shall be paid
by Landlord pursuant to separate agreement) and that it knows of no
other real estate broker or agent who is or might be entitled to a
commission in connection with this Lease. If Tenant has dealt with any
other person or real estate broker with respect to leasing or renting
space in the Property, Tenant shall be solely responsible for the
payment of any fee due said person or firm and Tenant shall hold
Landlord free and harmless against any liability in respect thereto,
including attorneys' fees and costs. At the signing of this Lease, the
broker identified in 1.r) put space ii). represented Tenant. Each party
signing this document confirms that the prior oral and/or written
disclosure of agency was provided to him/her in this transaction. (As
required by WAC 308-124D-040).
33. SECURITY DEPOSIT. Tenant shall deposit with Landlord the amount set
forth in Section 1.p) ("Security Deposit"), upon Tenant's execution and
submission of this Lease. The Security Deposit shall serve as security
for the prompt, full and faithful performance by Tenant of the terms
and provisions of this Lease. In the event that Tenant is in Default
hereunder and fails to cure within any applicable time permitted under
this Lease, or in the event that Tenant owes any amounts to Landlord
upon the expiration of this Lease, Landlord may use or apply the whole
or
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<PAGE> 32
any part of the Security Deposit for the payment of Tenant's
obligations hereunder. The use or application of the Security Deposit
or any portion thereof shall not prevent Landlord from exercising any
other right or remedy provided hereunder or under any Law and shall not
be construed as liquidated damages or a cure or waiver of any default
by Tenant. In the event the Security Deposit is reduced by such use or
application, Tenant shall deposit with Landlord within ten (10) days
after written notice, an amount sufficient to restore the full amount
of the Security Deposit. Landlord shall not be required to keep the
Security Deposit separate from Landlord's general funds or pay interest
on the Security Deposit. Any remaining portion of the Security Deposit
shall be returned to Tenant within forty-five (45) days after Tenant
has vacated the Premises in accordance with Section 14. If the Premises
shall be expanded at any time, or if the Term shall be extended at an
increased rate of Rent, at Landlord's option, the Security Deposit
shall thereupon be proportionately increased. If Landlord disposes of
its interest in the Property. Landlord shall deliver or credit the
Security Deposit to Landlord's successor in interest in the Property
and thereupon be relieved of further responsibility to Tenant with
respect to the Security Deposit.
34. ENTIRE AGREEMENT. This Lease, together with Exhibits A through D (which
collectively are hereby incorporated where referred to herein and made
a part hereof as though fully set forth), contains all the terms and
provisions between Landlord and Tenant relating to the matters set
forth herein and no prior or contemporaneous agreement or understanding
pertaining to the same shall be of any force or effect, except any such
contemporaneous agreement specifically referring to and modifying this
Lease, signed by both parties. Without limitation as to the generality
of the foregoing, Tenant hereby acknowledges and agrees that Landlords
leasing agents and field personnel are only authorized to show the
Premises and negotiate terms and conditions for leases subject to
Landlord's final approval, and are not authorized to make any
agreements, representations, understandings or obligations, binding
upon Landlord, respecting the condition of the Premises or Property,
suitability of the same for Tenant's business, or any other matter, and
no such agreements, representations, understandings or obligations not
expressly contained herein or in such contemporaneous agreement shall
be of any force or effect. Neither this Lease, nor any Riders or
Exhibits referred to above may be modified, except in writing signed by
both parties.
35. PARKING. Tenant shall have the right to lease the number of spaces
indicated in Section 1.q) on an unreserved basis. All such spaces shall
be available at the same rates as established from time to time by
Landlord for other spaces in the same location. The use by Tenant, its
employees and invitees, of the parking facilities of the Project shall
be on the terms and conditions established by Landlord or Landlord's
agent from time to time, and shall be subject to such other agreement
between Landlord and Tenant as may hereinafter be established. Tenant
shall not permit or allow any vehicles that belong to or are controlled
by Tenant or Tenants employees suppliers, shippers, customers or
invitees to be loaded, unloaded or parked in areas other than those
designated by Landlord for such activities. If Tenant permits or allows
any of the prohibited activities, then Landlord shall have the right,
without notice, in addition to such other rights and remedies that it
may have, to remove or tow away the vehicle involved and charge the
cost to Tenant, which cost shall be immediately payable upon demand by
Landlord.
36. MISCELLANEOUS.
a) AMENDMENTS. This Lease shall not be amended, changed or
modified in any way unless in writing executed by Landlord and
Tenant. Landlord shall not have waived or released any of its
rights hereunder unless in writing and executed by the
Landlord.
b) SUCCESSORS. Except as expressly provided herein, this Lease
and the obligations of Landlord and Tenant contained herein
shall bind and benefit the successors and assigns of the
parties hereto.
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<PAGE> 33
c) FORCE MAJEURE. Landlord shall incur no liability to Tenant
with respect to, and shall not be responsible for any failure
to perform, any of Landlord's obligations hereunder if such
failure is caused by any reason beyond the control of Landlord
including, but not limited to strike, labor trouble,
governmental rule, regulations, ordinance, statute or
interpretation, or by fire, earthquake, civil commotion, or
failure or disruption of utility services. The amount of time
for Landlord to perform any of Landlord's obligations shall be
extended by the amount of time Landlord is delayed in
performing such obligation by reason of any force majeure
occurrence whether similar to or different from the foregoing
types of occurrences.
d) SURVIVAL OF OBLIGATIONS. Any obligations of Tenant accruing
prior to the expiration of the Lease shall survive the
termination of the Lease, and Tenant shall promptly perform
all such obligations whether or not this Lease has expired.
e) LIGHT AND AIR. No diminution or shutting off of any light, air
or view by any structure now or hereafter erected shall in any
manner affect this Lease or the obligations of Tenant
hereunder, or increase any of the obligations of Landlord
hereunder.
f) GOVERNING LAW. This Lease shall be governed by, and construed
in accordance with, the internal laws of the State of
Washington.
g) SEVERABILITY. In the event any provision of this Lease is
found to be unenforceable, the remainder of this Lease shall
not be affected, and any provision found to be invalid shall
be enforceable to the extent permitted by law. The parties
agree that in the event two different interpretations may be
given to any provision hereunder, one of which will render the
provision unenforceable, and one of which will render the
provisions enforceable, the interpretation rendering the
provision enforceable shall be adopted.
h) CAPTIONS. All captions, headings, titles, numerical references
and computer highlighting are for convenience only and shall
have no effect on the interpretation of this Lease.
i) VOLUNTARY PROGRAMS. It is understood and agreed that from time
to time the Landlord may institute certain programs for the
Property which the Landlord believes will be in the best
interest of the Property and the tenants. Such programs shall
include, but shall not be limited to a recycling program or a
ride sharing or car pooling program. Tenant agrees to promptly
comply with and carry out its obligations under such programs
as the same may exist from time to time.
j) INTERPRETATION. Tenant acknowledges that it has read and
reviewed this Lease and that it has had the opportunity to
confer with counsel in the negotiation of this Lease.
Accordingly, this Lease shall be construed neither for nor
against Landlord or Tenant, but shall be given a fair and
reasonable interpretation in accordance with the meaning, of
its terms and the intent of the parties.
k) INDEPENDENT COVENANTS. Each covenant, agreement, obligation or
other provision of this Lease to be performed by Tenant are
separate and independent covenants of Tenant, and not
dependent on any ocher provision of the Lease.
l) NUMBER AND GENDER. All terms and words used in this Lease,
regardless of the number or gender in which they are used,
shall be deemed to include the appropriate number and gender,
as the context may require.
m) TIME IS OF THE ESSENCE. Time is of the essence of this Lease
and the performance of all obligations hereunder.
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<PAGE> 34
n) JOINT AND SEVERAL LIABILITY. If Tenant comprises more than one
Person, or if this Lease is guaranteed by any party, all such
persons shall be jointly and severally liable for payment of
rents and the performance of Tenant's obligations hereunder.
o) CHOICE OF LAWS. Tenant hereby submits to local jurisdiction in
the State of Washington and agrees that any action by Tenant
against Landlord shall be instituted in the State of
Washington and that Landlord shall have personal jurisdiction
over Tenant for any action brought by Landlord against Tenant.
Each of the terms and provisions of this Lease shall be
binding upon and inure to the benefit of the parties hereto,
their respective heirs, executors, administrators, guardians,
custodians, successors and assigns, subject to the provisions
of Section 21 respecting Transfers.
p) RECORDING. Neither this Lease nor any memorandum of lease or
short form lease shall be recorded by Tenant.
q) SURVIVAL. All obligations or rights of either party arising
during or attributable to the period ending upon expiration or
earlier termination of this Lease shall survive such
expiration or earlier termination.
r) AIR AND VIEW RIGHTS. This Lease does not grant any legal
rights to "light and air" outside the Premises nor any
particular view or city-scape visible from the Premises.
IN WITNESS WHEREOF, the Landlord and Tenant have executed this Lease on the date
and year first above written.
<TABLE>
<CAPTION>
LANDLORD: TENANT:
<S> <C>
WALTON SEATTLE INVESTORS I, L.L.C., N2H2, Inc.,
a Delaware limited liability company A Washington corporation
By: Walton Street Real Estate Fund I, L.P.,
a Delaware limited partnership, Manager
By: Walton Street Managers I, L.P.,
a Delaware limited partnership, General
Partner
By: WSC Managers I, Inc.,
a Delaware corporation, General Partner
By: /s/ Douglas J. Welker By: /s/ John Duncan
------------------------------- ---------------------------------
Douglas J. Welker, John Duncan, COO/CFO
Vice-President
</TABLE>
31
<PAGE> 35
NOTARY PAGE
STATE OF Illinois )
----------------)
) ss.
COUNTY OF Cook )
---------------)
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgment is the person whose true
signature appears on this document.
On this ____ day of March, 1999, before me personally appeared DOUGLAS
J. WELKER, to me known to be the VICE PRESIDENT of WSC MANAGERS I, INC., a
Delaware corporation, the corporation that executed the within and foregoing
instrument as GENERAL PARTNER OF WALTON STREET MANAGERS I, L.P., a Delaware
limited partnership, the GENERAL PARTNER OF WALTON STREET REAL ESTATE FUND I,
L.P., a Delaware limited partnership, the MANAGER OF WALTON SEATTLE INVESTORS I,
L.L.C., a Delaware limited liability company, the company joint venture that
executed the within and foregoing instrument, and acknowledged the said
instrument to be the free and voluntary act and deed of said joint venture, for
the uses and purposes therein mentioned, and on oath stated that he/she was
authorized to execute said instrument.
WITNESS my hand and seal hereto affixed the day and year first above
written.
/s/ Christina Walsh
---------------------------------------------------
Christina Walsh
---------------------------------------------------
Type or print name
Notary Public in and for the State of Illinois
-------------
Residing at
----------------------------------------
My commission expires: 9/27/00
-----------------------------
STATE OF Washington )
----------------)
) ss.
COUNTY OF King )
---------------)
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgment is the person whose true
signature appears on this document.
On this 12th day of March, 1999, before me personally appeared JOHN
DUNCAN to me known to be the COO/CFO of N2H2, INC., the corporation that
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 mentioned, and on oath stated that he/she was
authorized to execute said instrument and that the seal affixed, if any, is the
corporate seal of said corporation.
WITNESS my hand and seal hereto affixed the day and year first above
written.
/s/ Ruth M. Alford
---------------------------------------------------
Ruth M. Alford
---------------------------------------------------
Type or print name
Notary Public in and for the State of Washington
-------------
Residing at Seattle
----------------------------------------
My commission expires: 5/29/02
-----------------------------
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EXHIBIT A-1
LEGAL DESCRIPTION
That certain building located at 900 Fourth Avenue, Seattle, King
County, Washington and situated on a portion of Block 22, C.D. Boren's
Addition to the City of Seattle, in King County, Washington, including
the vacated alley therein.
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EXHIBIT A-2
PREMISES
[ADD GRAPHIC]
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<PAGE> 38
EXHIBIT B
WORK LETTER AGREEMENT
THIS WORK LETTER AGREEMENT is entered into as of the 12th day of March,
1999, by and between WALTON SEATTLE INVESTORS I, L.L.C., a Delaware limited
liability company ("Landlord") and N2H2, INC., a Washington corporation
("Tenant").
RECITALS:
A. Concurrently with the execution of this Work Letter Agreement,
Landlord and Tenant have entered into a lease (the "Lease") covering certain
premises (the "Premises") more particularly described in Exhibit A-2 attached to
the Lease.
B. In order to induce Tenant to enter into the Lease (which is
hereby incorporated by reference to the extent that the provisions of this Work
Letter Agreement may apply thereto) and in consideration of the mutual covenants
hereinafter contained, Landlord and Tenant hereby agree as follows:
1. TENANT IMPROVEMENTS. Reference herein to "Tenant Improvements" shall
include all work to be done in the Premises pursuant to the Tenant
Improvement Plans described in Section 3. and 4. below, including, but
not limited to, partitioning, doors, ceilings, floor coverings, wall
finishes (including paint and wall covering), electrical (including
lighting, switching, outlets, etc.), telephones, plumbing, heating,
ventilation and air conditioning, fire protection, glazing and relites,
cabinets and other millwork.
2. COMPLETION SCHEDULE. Within ten (10) days after the space planning
meeting for the 35th floor set out below, Landlord shall deliver to
Tenant, for Tenant's review and approval, a schedule (the "Work
Schedule") setting forth a timetable for the planning and completion of
the installation of the Tenant Improvements to be constructed in the
Premises, and the Commencement Date for the term of the Lease. The Work
Schedule shall set forth each of the various items of work to be done
by or approval to be given by Landlord and Tenant in connection with
the completion of the Tenant Improvements. Such Work Schedule shall be
submitted to Tenant for its approval and, upon approval by both
Landlord and Tenant, such Work Schedule shall become the basis for
completing the Tenant Improvement work. If Tenant shall fail to approve
the Work Schedule, as it may be modified after discussion between
Landlord and Tenant, within fifteen (15) working days after the date
such Work Schedule is first received by Tenant, and such failure leads
to a delay in the Substantial Completion of the Tenant Improvements
beyond the Commencement Date determined in the Section 1.k) of the
Lease, the rent obligation for the 35th floor shall commence on the
Commencement Date as determined in Section 1.k) of the Lease,
regardless of the delay.
3. 33RD FLOOR TENANT IMPROVEMENT PLANS. The construction documents have
been completed and approved by Tenant
4. 35TH FLOOR TENANT IMPROVEMENT PLANS. As soon as is practical after
April 1, 1999, Tenant agrees to meet with Landlord's architect and/or
space planner for the purpose of preparing a space plan for the layout
of the 35th floor. Based on such space plan, Landlord's architect shall
prepare final working drawings and specifications for the Tenant
Improvements. Such final working drawings and specifications may be
referred to herein as the "Tenant Improvement Plans." The Tenant
Improvement Plans must be consistent with Landlord's standard
specifications (the "Standards") for tenant improvements for the
Building, as the same may be changed from time to time by Landlord.
Tenant shall be solely responsible for the suitability of the design
and function of the Tenant Improvements for Tenant's needs and
business.
5. NON-STANDARD TENANT IMPROVEMENTS. Landlord shall permit Tenant to
deviate from the Standards for the Tenant Improvements; provided that
(a) the deviations shall not be of a lesser
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quality than the Standards; (b) the total lighting for the Premises
shall not exceed 1.20 watts per rentable square foot; (c) the
deviations conform to applicable governmental regulations and necessary
governmental permits and approvals have been secured; (d) the
deviations do not require building service beyond the level normally
provided to other tenants in the Property and do not overload the
floors; and (e) Landlord has determined in its sole discretion that the
deviations are of a nature and quality that are consistent with the
overall objectives of the Landlord for the Property.
6. FINAL PRICING AND DRAWING SCHEDULE. After the preparation of the space
plan and after Tenant's written approval thereof, in accordance with
the Work Schedule, Landlord shall cause its architect to prepare and
submit to Tenant the final working drawings and specifications referred
to in Section 3. hereof. Such working drawings shall be approved by
Landlord and Tenant in accordance with the Work Schedule and shall
thereafter be submitted to the appropriate governmental body by
Landlord's architect for plan checking and the issuance of a building
permit. Landlord, with Tenant's cooperation, shall cause to be made any
changes in the plans and specifications necessary to obtain the
building permit. Concurrent with the plan checking, Landlord shall have
prepared a final pricing for Tenant's approval, in accordance with the
Work Schedule, taking into account any modifications which may be
required to reflect changes in the plans and specifications required by
the City or County in which the Premises are located. After final
approval of the working drawings, no further changes to the Tenant
Improvement Plans may be made without the prior written approval from
both Landlord and Tenant, and then only after agreement by Tenant to
pay any excess costs resulting from the design and/or construction of
such changes. Tenant hereby acknowledges that any such changes shall be
subject to the terms of Section 7. hereof.
7. CONSTRUCTION OF TENANT IMPROVEMENTS. After the Tenant Improvement Plans
have been prepared and approved, the final pricing has been approved
and a building permit for the Tenant Improvements has been issued,
Landlord shall enter into a construction contract with its contractor
for the installation of the Tenant Improvements in accordance with the
Tenant Improvement Plans. Landlord shall supervise the completion of
such work and shall use its best efforts to secure substantial
completion of the work in accordance with the Work Schedule. The cost
of such work shall be paid as provided in Section 7. hereof. Landlord
shall not be liable for any direct or indirect damages as a result of
delays in construction beyond Landlord's reasonable control, including,
but not limited to, acts of God, inability to secure governmental
approvals or permits, governmental restrictions, strikes, availability
of materials or labor or delays by Tenant (or its architect or anyone
performing services on behalf of Tenant).
8. PAYMENT OF COST OF THE TENANT IMPROVEMENTS.
a) Landlord hereby grants to Tenant a "Tenant Allowance" of up to
Forty-two Thousand Five Hundred Ninety Dollars ($42,590.00)
towards improvements on the 33rd Floor and Two Hundred
Eighty-three Thousand Nine Hundred Seventy-six Dollars
($283,976.00) towards improvements on the 35th Floor (as
defined below). Such Tenant Allowance shall be used only for:
i) Payment of the cost of preparing the space plan and
the final working drawings and specifications,
including mechanical, electrical, plumbing and
structural drawings and of all other aspects of the
Tenant Improvement Plans. The Tenant Allowance will
not be used for the payment of extraordinary design
work not included within the scope of Landlord's
building standard improvements or for payments to any
other consultants, designers or architects other than
Landlord's architect and/or space planner.
ii) The payment of plan check, permit and license fees
relating to construction of all Tenant Improvements.
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<PAGE> 40
iii) Except as provided in Section 9. below, construction
of the Tenant Improvements, including, without
limitation, the following:
a) Demolition of any existing improvements in
the Premises as may be required by the
Tenant Improvement Plans.
b) Installation within all Premises of all
partitioning, doors, floor coverings,
ceilings, wall coverings and painting,
millwork and similar items.
c) All electrical wiring, lighting fixtures,
outlets and switches, and other electrical
work to be installed within the Premises.
d) The finishing and installation of all duct
work, terminal boxes, diffusers and
accessories required for the completion of
the heating, ventilation and air
conditioning systems within the Premises,
including the cost of meter and key control
for after-hour air conditioning.
e) Any additional Tenant requirements
including, but not limited to, odor control,
special heating, ventilation and air
conditioning, noise or vibration control or
other special systems.
f) All fire and like safety control systems
such as fire walls, sprinklers, halon, fire
alarms, including piping, wiring and
accessories installed within the Premises.
g) All plumbing, fixtures, pipes and
accessories to be installed within the
Premises.
h) Testing and inspection costs.
i) Contractor's fees, including but not limited
to any fees based on general conditions.
j) Demolition of any existing build-out
inconsistent with the Tenant Improvement
Plans.
k) Construction Management Fee of Five percent
(5%) of the total cost of the Tenant
Improvements.
b) All other costs to be expended by Landlord in the construction
of the Tenant Improvements, including those costs incurred by
Landlord for construction of elements of the Tenant
Improvements in the Premises, which construction was performed
by Landlord prior to the execution of this Lease by Landlord
and Tenant (i.e., during or after the construction of the base
Building) and which construction is for the benefit of tenants
and is customarily performed by Landlord prior to the
execution of leases for such space in the Property for reasons
of economics (examples of such construction would include the
extension of mechanical [including heating, ventilating and
air conditioning systems] and electrical distribution systems
outside of the core of the Building, wall construction, column
enclosures and painting outside of the core of the Building,
ceiling hanger wires and window treatment).
c) The cost of each shall be charged against the Tenant
Allowance. In the event that the cost of installing the Tenant
Improvements, as established by Landlord's final pricing
schedule, shall exceed the Tenant Allowance, or if any of the
Tenant Improvements are not to be paid out of the Tenant
Allowance as provided in
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Section 8.a) above, the excess shall be paid by Tenant to
Landlord prior to the commencement of construction of the
Tenant Improvements. Notwithstanding the foregoing, the Tenant
Allowance overages anticipated for the 33rd floor will be
deducted from the Tenant Allowance for the 35th floor. The
final amount to be so deducted shall be finalized within
ninety (90) days of Tenant's occupancy of the 33rd floor. If,
and only if, Tenant elects to continue to occupy the 33rd
floor space, at Tenant's option. Landlord shall amortize the
amount previously so deducted over five (5) years at 12% per
annum and provide the full Tenant Allowance for the 35th floor
detailed above.
i) In the event that, after the Tenant Improvement Plans
have been prepared and a price therefore established
by Landlord, Tenant shall require any changes or
substitutions to the Tenant Improvement Plans, any
additional costs thereof shall be paid by Tenant to
Landlord prior to the commencement of such work.
Landlord shall have the right to decline Tenant's
request for a change to the Tenant Improvement Plans
if such changes are inconsistent with Sections 3. and
4. above, or if the change would, in Landlord's
opinion, unreasonably delay construct/on of the
Tenant Improvements.
ii) In the event that the cost of the Tenant Improvements
increases as set forth in Landlord's final pricing
due to the requirements of any governmental agency,
Tenant shall pay Landlord the amount of such increase
within five (5) days of Landlord's written notice;
provided, however, that Landlord shall first apply
toward such increase any remaining balance in the
Tenant Allowance.
9. SHELL AND CORE CONDITIONS. Landlord shall pay for any initial expenses
due to asbestos-containing materials ("ACM") in the fireproofing.
Subsequent to Tenant's occupancy of the Premises and commencement of
this Lease, Tenant shall be solely responsible for any future costs
related to ACM that arise in conjunction with Tenant's modifications of
the Premises. If, however, asbestos work is required but is not due to
any Tenant initiated modification of the Premises, with the exception
of work required of Tenant by law or statute, the Landlord shall bear
sole responsibility for any such costs. Any ACM related costs
associated with the removal of Tenants Work in Section 10.c) or
Tenant's Lines in Section 29.a) i) shall be paid by Landlord.
10. BASE BUILDING IMPROVEMENTS. Landlord, at its sole expense, on both the
33rd and 35th floors, shall demolish the existing ceiling grid and
install a Building-standard sprinkler system and a new 2' x 2'
Building-standard grid. Landlord shall purchase and prepare for
installation deep cell parabolic light fixtures (up to 45 for floor 33
and 144 for floor 35) and new Building-standard diffusers (up to 37 for
floor 33 and 119 for floor 35). It shall be Tenant's responsibility to
install the ceiling tiles, light fixtures and diffusers in the ceiling
grid.
Additionally, Landlord, at its own expense, shall demolish the existing
buildout on the 35th floor as required by the 35th floor space Plan and
install a Building-standard sprinkler system.
11. PERSONAL PROPERTY. Tenant shall be solely responsible for procuring or
installing in the Premises any trade fixtures, equipment, furniture,
furnishings, telephone equipment, computer cabling or other personal
property (collectively, "Personal Property") to be used in the Premises
by Tenant, and the cost of such Personal Property shall be paid by
Tenant. Tenant shall conform to the Building's wiring standards in
installing any telephone and computer equipment and shall be subject to
any and all rules of the site during construction of the Tenant
Improvements.
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IN WITNESS WHEREOF, this Work Lease Agreement is executed as of the date first
above written.
<TABLE>
<CAPTION>
LANDLORD: TENANT:
<S> <C>
WALTON SEATTLE INVESTORS I, L.L.C. N2H2, INC.,
a Delaware limited liability company a Washington corporation
By:
Walton Street Real Estate Fund I, L.P., a Delaware
limited partnership, Manager
By:
Walton Street Managers I, L.P., a Delaware
limited partnership, General Partner
By: WSC Managers I, Inc., a Delaware
corporation, General Partner
By: /s/ Douglas J. Walker By: /s/ John Duncan
-------------------------------- --------------------------------
Douglas J. Welker, John Duncan,
Vice President COO/CFO
</TABLE>
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EXHIBIT C
ADDITIONAL TERMS AND CONDITIONS
1. OPTION TO TERMINATE. Subject to the following provisions, Tenant shall
have an option to terminate the lease on the 33rd floor space ("Option
to Terminate") as defined in Exhibit C-1, effective as of October 31,
1999 (the "Termination Date"). The Option to Terminate is granted
subject to the following terms and conditions:
a) TERMS. Tenant occupies the entire 35th floor of the Building
per this Lease.
b) NOTICE. Tenant gives Landlord a written notice of Tenant's
election to exercise the Option to Terminate, which notice is
to be given no later than 5:00 p.m., July 30, 1999; and,
c) NO DEFAULT. Tenant is not in default under the Lease either on
the date that Tenant exercises the Option to Terminate, or
unless waived in writing by Landlord, on the Termination Date;
and,
d) CONDITION. This Option to Terminate is granted only subject to
the Terms specified above. Under no circumstances shall the
Option to Terminate be used to negotiate a rental reduction
with Landlord. The Option to Terminate is not intended to
permit Tenant to move its operations to other leased premises
within the city limits of Seattle or Bellevue at a lesser
rental.
e) 33RD FLOOR LINES REMOVAL. The requirement to remove the Lines
from the 33rd floor space upon termination shall be delayed
until the new tenant for the 33rd Floor space makes a decision
whether to re-use the Lines or not. If the new tenant so
declines, Tenant shall immediately remove the Lines pursuant
to Section 29.a)i) of the Lease. If the new tenant elects to
re-use the existing Lines, the requirement to remove the Lines
shall be waived.
2. RIGHT OF FIRST REFUSAL. Provided that as of the date of exercise there
has been no event of default on the part of Tenant, Tenant shall have
the right of first refusal to lease space on the 36th floor which
becomes vacant and available for lease ("First Refusal Space").
(Landlord agrees that, prior to entering into a commitment with a third
party for the leasing of all or a portion of the First Refusal Space,
Tenant shall be given written notice thereof ("Notice"). The notice
shall contain an offer by Landlord to lease the First Refusal Space at
a price and upon terms that Landlord has negotiated with a third party
with the Term for the existing Premises being extended beyond the
expiration date at those corresponding rates per square foot so as to
be coterminous. Tenant shall have the right to lease the First Refusal
Space by agreeing in writing within three (3) business days to match
the terms agreed upon between the Landlord and a third party. Tenant
may elect to lease the First Refusal Space by giving written notice
thereof to Landlord within three (3) business days after receipt of
notice. If Tenant fails to timely give notice of its election, or if
Tenant notifies Landlord that it declines to elect to lease the First
Refusal Space, or if an amendment incorporating such First Refusal
Space is not executed by Tenant within thirty (30) days of the date
Tenant receives such amendment, Landlord shall have the right to lease
the First Refusal Space to any third party at any price and upon any
other terms and conditions as Landlord shall in its sole discretion
determine.
3. SECURITY DEPOSIT. As material consideration for Landlord to enter into
this Lease. Tenant shall provide upon Lease execution an additional
$5,000.00 for a total of $45,000.00 which shall be increased no later
than July 30, 1999 to $80,000.00.
4. LETTER OF CREDIT. As material consideration for Landlord to enter into
this Lease, Tenant shall provide, by July 30, 1999, an irrevocable
Standby Letter of Credit equal to $315,000.00 issued in
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favor of Landlord by a U.S. commercial bank acceptable to Landlord in
Landlord's reasonable discretion as security for Tenant's performance
of its monetary obligations under the Terms of this Lease ("Letter of
Credit"). The Letter of Credit shall be in a form acceptable to
Landlord for a term of five (5) years but Landlord shall allow an
annual release of funds from the Letter of Credit such that the total
amount remaining at each subsequent anniversary is equal to the
following: as of August 1, 2000: $252,000.00; as of August 1, 2001:
$189,000.00; as of August 1, 2002: $126,000.00; as of August 1, 2003:
$63,000.00. Landlord shall be entitled to draw on such Letter of Credit
as often as necessary to cure any of Tenant's monetary defaults under
the Lease. The use or application of the Letter of Credit or any
portion thereof shall not prevent Landlord from exercising any other
right or remedy provided hereunder or under any Law including the right
to evict the Tenant pursuant to RCW 59.12., and shall not be construed
as liquidated damages or a cure or waiver of any default by Tenant. In
the event the Letter of Credit is reduced by such use or application,
Tenant shall deposit with the above bank issuing the Letter of Credit
within ten (10) days after written notice, an amount sufficient to
restore the full amount of the Letter of Credit.
5. TENANT DELAY. Landlord shall be under no obligation to commence
construction of the Tenant Improvements on the 35th Floor until the
Security Deposit and Letter of Credit are received by Landlord and are
in full force and effect. Any delay in providing these security
instruments shall constitute a tenant delay and rent will commence in
accordance with Paragraph 1.k. of the Lease.
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EXHIBIT C-1
RULES
FLOOR 33
[INSERT GRAPHIC OF "PREMISES"]
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EXHIBIT D
RULES
1. On Saturdays, Sundays and Holidays, and on other days between the hours
of 6:00 P.M. and 8:00 A M. the following day, or such other hours as
Landlord shall determine from time to time, access to the Property
and/or to the passageways, entrances, exits, shipping areas, halls,
corridors, elevators or stairways and other areas in the Property may
be restricted and access gained by use of a key to the outside doors of
the Property, or pursuant to such security procedures Landlord may from
time to time impose. All such areas, and all roofs, are not for use of
the general public and Landlord shall in all cases retain the right to
control and prevent access thereto by all persons whose presence in the
judgment of Landlord shall be prejudicial to the safety, character,
reputation and interests of the Property and its tenants provided,
however, that nothing herein contained shall be construed to prevent
such access to persons with whom Tenant deals in the normal course of
Tenant's business unless such persons are engaged in activities which
are illegal or violate these Rules. No Tenant and no employee or
invitees of Tenant shall enter into areas reserved for the exclusive
use of Landlord, its employees or invitees. Tenant shall keep doors to
corridors and lobbies closed except when persons are entering or
leaving.
2. Tenant shall not paint, display, inscribe, maintain or affix any sign,
placard, picture, advertisement, name, notice, lettering or direction
on any part of the outside or inside of the Property, or on any part of
the inside of the Premises which can be seen from the outside of the
Premises, without the prior consent of Landlord, and then only such
name or names or matter and in such color, size, style, character and
material as may be first approved by Landlord in writing. Landlord
shall prescribe the suite number and identification sign for the
Premises (which shall be prepared and installed by Landlord at Tenant's
expense). Landlord reserves the right to remove at Tenant's expense all
matter not so installed or approved without notice to Tenant.
3. Tenant shall not in any manner use the name of the Property for any
purpose other than that of the business address of the Tenant, or use
any picture or likeness of the Property, in any letterheads, envelopes,
circulars, notices, advertisements, containers or wrapping material
without Landlord's express consent in writing.
4. Tenant shall not place anything or allow anything to be placed in the
Premises near the glass of any door, partition, wall or window which
may be unsightly from outside the Premises, and Tenant shall not place
or permit to be placed any article of any kind on any window ledge or
on the exterior walls. Blinds, shades, awnings or other forms of inside
or outside window ventilators or similar devices, shall not be placed
in or about the outside windows of the Premises except to the extent,
if any, that the character, shape, color, material and make thereof is
first approved by the Landlord.
5. Furniture, freight and other large or heavy articles, and all other
deliveries may be brought into the Property only at times and in the
manner designated by Landlord, and always at the Tenant's sole
responsibility and risk. All damage done to the Property by moving or
maintaining such furniture, freight or articles shall be repaired by
Landlord at Tenant's expense. Landlord may inspect items brought into
the Property or Premises with respect to weight or dangerous nature.
Landlord may require that all furniture, equipment, cartons and similar
articles removed from the Premises or the Property be listed and a
removal permit therefor first be obtained from Landlord. Tenant shall
not take or permit to be taken in or out of other entrances or
elevators of the Property, any item normally taken, or which Landlord
otherwise reasonably requires to be taken, in or out through service
doors or on freight elevators. Tenant shall not allow anything to
remain in or obstruct in any way, any lobby, corridor, sidewalk,
passageway, entrance, exit, hall, stairway, shipping area, or other
such area. Tenant shall move all supplies, furniture and equipment as
soon as received directly to the Premises, and shall move all such
items and waste (other than waste customarily removed by Property
employees) that are at any time being taken
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from the Premises directly to the areas designated for disposal. Any
hand-carts used at the Property shall have rubber wheels.
6. Tenant shall not overload any floor or part thereof in the Premises, or
Property, including any public corridors or elevators therein bringing
in or removing any large or heavy articles, and Landlord may direct and
control the location of safes and all other heavy articles and require
supplementary supports at Tenant's expense of such material and
dimensions as Landlord may deem necessary to properly distribute the
weight.
7. Tenant shall not attach or permit to be attached additional locks or
similar devices to any door or window, change existing locks or the
mechanism thereof, or make or permit to be made any keys for any door
other than those provided by Landlord. If more than two keys for one
lock are desired, Landlord will provide them upon payment therefor by
Tenant. Tenant, upon termination of its tenancy, shall deliver to the
Landlord all keys of offices, rooms and toilet rooms which have been
furnished Tenant or which the Tenant shall have had made, and in the
event of loss of any keys so furnished shall pay Landlord therefor.
8. If Tenant desires signal, communication, alarm or other utility or
similar service connections installed or changed, Tenant shall not
install or change the same without the prior approval of Landlord, and
then only under Landlord's direction at Tenant's expense. Tenant shall
not install in the Premises any equipment which requires more electric
current than Landlord is required to provide under this Lease, without
Landlord's prior approval and Tenant shall ascertain from Landlord the
maximum amount of load or demand for or use of electrical current which
can safely be permitted in the Premises, taking into account the
capacity of electric wiring in the Property and the Premises and the
needs of tenants of the Property, and shall not in any event connect a
greater load than such safe capacity.
9. Tenant shall not obtain for use upon the Premises ice, drinking water,
towel, janitor and other similar services, except from Persons approved
by the Landlord. Any Person engaged by Tenant to provide janitor or
other services shall be subject to direction by the manager or security
personnel of the Property.
10. The toilet rooms, urinals, wash bowls and other such apparatus shall
not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be
thrown therein and the expense of any breakage, stoppage or damage
resulting from the violation of this Rule shall be borne by the Tenant
who, or whose employees or invitees shall have caused it.
11. The janitorial closets, utility closets, telephone closets, broom
closets, electrical closets, storage closets, and other such closets,
rooms and areas shall be used only for the purposes and in the manner
designated by Landlord, and may not be used by tenants, or their
contractors, agents, employees, or other parties without Landlord's
prior written consent.
12. Landlord reserves the right to exclude or expel from the Property any
person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in
violation of any of these Rules. Tenant shall not at any time
manufacture, sell, use or give away, any spirituous, fermented,
intoxicating or alcoholic liquors on the Premises, nor permit any of
the same to occur (except in connection with occasional social or
business events conducted in the Premises which do not violate any Laws
or bother or annoy any other tenants). Tenant shall not at any time
sell, purchase or give away, food in any form by or to any of Tenant's
agents or employees or any other parties on the Premises, nor permit
any of the same to occur (other than in lunch rooms or kitchens for
employees as may be permitted or installed by Landlord, which does not
violate any Laws or bother or annoy any other tenant).
13. Tenant shall not make any room-to-room canvass to solicit business or
information or to distribute any article or material to or from other
tenants or occupants of the Property and shall not exhibit,
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sell or offer to sell, use, rent or exchange any products or services
in or from the Premises unless ordinarily embraced within the Tenant's
use of the Premises specified in the Lease.
14. Tenant shall not waste electricity, water, heat or air conditioning or
other utilities or services, and agrees to cooperate fully with
Landlord to assure the most effective and energy efficient operation of
the Property and shall not allow the adjustment (except by Landlord's
authorized Property personnel) of any controls. Tenant shall keep
corridor doors closed and shall not open any windows, except that if
the air circulation shall not be in operation, windows which are
openable may be opened with Landlord's consent. As a condition to
claiming any deficiency in the air-conditioning or ventilation services
provided by Landlord, Tenant shall close any blinds or drapes in the
Premises to prevent or minimize direct sunlight. Space heaters or other
air conditioning appliances are strictly prohibited.
15. Tenant shall conduct no auction, fire or "going out of business sale"
or bankruptcy sale in or from the Premises, and such prohibition shall
apply to Tenant's creditors.
16. Tenant shall cooperate and comply with any reasonable safety or
security programs, including fire drills and air raid drills, and the
appointment of "fire wardens" developed by Landlord for the Property,
or required by Law. Before leaving the Premises unattended, Tenant
shall close and securely lock all doors or other means of entry to the
Premises and shut off all lights and water faucets in the Premises
(except heat to the extent necessary to prevent the freezing or
bursting of pipes).
17. Tenant will comply with all municipal, county, state, federal or other
government laws, statutes, codes, regulations and other requirements,
including without limitation, environmental, health, safety and police
requirements and regulations respecting the Premises, now or
hereinafter in force, at its sole cost, and will not use the Premises
for any immoral purposes.
18. Tenant shall not (i) carry on any business, activity or service except
those ordinarily embraced within the permitted use of the Premises
specified in the Lease and more particularly, but without limiting the
generality of the foregoing, shall not (ii) install or operate any
internal combustion engine, boiler, machinery, refrigerating, heating
or air conditioning equipment in or about the Premises, (iii) use the
Premises for housing, lodging or sleeping purposes or for the washing
of clothes, (iv) place any radio or television antennae other than
inside of the Premises, (v) operate or permit to be operated any
musical or sound producing instrument or device which may be heard
outside the Premises, (vi) use any source of power other than
electricity, (vii) operate any electrical or other device from which
may emanate electrical or other waves which may interfere with or
impair radio, television, microwave, or other broadcasting or reception
from or in the Property or elsewhere, (viii) bring or permit any
bicycle or other vehicle, or dog (except in the company of a blind
person or except where specifically permitted) or other animal or bird
in the Property, (ix) make or permit objectionable noise or odor to
emanate from the Premises, (x) do anything in or about the Premises
tending to create or maintain a nuisance or do any act tending to
injure the reputation of the Property, (xi) throw or permit to be
thrown or dropped any article from any window or other opening of the
Property, (xii) use or permit upon the Premises anything that will
invalidate or increase the rate of insurance on any policies of
insurance now or hereafter carried on the Property or violate the
certificates of occupancy issued for the premises or the Property,
(xiii) use the Premises for any purpose, or permit upon the Premises
anything, that may be dangerous to persons or property (including but
not limited to flammable oils, fluids, paints, chemicals, firearms or
any explosive articles or materials) nor (xiv) do or permit anything to
be done upon the Premises in any way tending to disturb any other
tenant at the Property or the occupants of neighboring property.
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<PAGE> 49
19. If the Property shall now or hereafter contain a building parking
structure or outer parking area or facility, the following Rules shall
apply in such areas or facilities:
a) Parking shall be available in areas designated generally for
tenant parking, for such daily or monthly charges as Landlord
may establish from time to time, or as may be provided in any
Parking Agreement attached hereto (which, when signed by both
parties as provided therein, shall thereupon become
effective). In all cases, parking for Tenant and its employees
and visitors shall be on a "first come, first served,"
unassigned basis, with Landlord and other tenants at the
Property, and their employees and visitors, and other Persons
to whom Landlord shall grant the right or who shall otherwise
have the right to use the same, all subject to these Rules, as
the same may be amended or supplemented, and applied on a
non-discriminatory basis, all as further described in Section
7 of the Lease. Notwithstanding the foregoing to the contrary,
Landlord reserves the right to assign specific spaces, and to
reserve spaces for visitors, small cars, handicapped
individuals, and other tenants, visitors of tenants or other
Persons, and Tenant and its employees and visitors shall not
park in any such assigned or reserved spaces. Landlord may
restrict or prohibit full size vans and other large vehicles.
b) In case of any violation of these provisions, Landlord may
refuse to permit the violator to park, and may remove the
vehicle owned or driven by the violator from the Property
without liability whatsoever, at such violator's risk and
expense. Landlord reserves the right to close all or a portion
of the parking areas or facilities in order to make repairs or
perform maintenance services, or to alter, modify, re-stripe
or renovate the same, or if required by casualty, strike,
condemnation, act of God, Law or governmental requirement, or
any other reason beyond Landlord's reasonable control. In the
event access is denied for any reason, any monthly parking
charges shall be abated to the extent access is denied, as
Tenant's sole recourse. Tenant acknowledges that such parking
areas or facilities may be operated by an independent
contractor not affiliated with Landlord, and Tenant
acknowledges that in such event, Landlord shall have no
liability for claims arising through acts or omissions of such
independent contractor, if such contractor is reputable.
c) Hours shall be 6:00 A.M. to 8:00 P.M., Monday through Friday,
and 10:00 A.M. to 1:00 P.M. on Saturdays excluding Holidays,
or such other hours as may be reasonably established by
Landlord or its parking operator from time to time; cars must
be parked entirely within the stall lines, and only small cars
may be parked in areas reserved for small cars; all
directional signs and arrows must be observed; the speed limit
shall be 5 miles per hour, spaces reserved for handicapped
parking must be used only by vehicles properly designated;
every parker is required to park and lock his own car;
washing, waxing, cleaning or servicing of any vehicle is
prohibited; parking spaces may be used only for parking
automobiles; parking is prohibited in areas: (a) not striped
or designated for parking, (b) aisles, (c) where "no parking"
signs are posted, (d) on ramps, and (e) loading areas and
other specially designated areas. Delivery trucks and vehicles
shall use only those areas designated therefor.
46
<PAGE> 1
EXHIBIT 10.4
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N2H2, INC.
LOAN AND SECURITY AGREEMENT
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<PAGE> 2
This LOAN AND SECURITY AGREEMENT is entered into as of April 30, 1999,
by and between IMPERIAL BANK ("Bank") and N2H2, INC. ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.
"Advance" or "Advances" means a cash advance under the
Revolving Facility.
"Affiliate" means, with respect to any Person, any
Person that owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person, and
each of such Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; reasonable Collateral audit fees; and Bank's reasonable attorneys'
fees and expenses incurred in amending, enforcing or defending the Loan
Documents (including fees and expenses of appeal), incurred before, during and
after an Insolvency Proceeding, whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and
records including: ledgers; records concerning Borrower's assets or liabilities,
the Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" means an amount equal to eighty percent
(80%) of Eligible Accounts, as determined by Bank with reference to the most
recent Borrowing Base Certificate delivered by Borrower.
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California or Washington are
authorized or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A
attached hereto.
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<PAGE> 3
"Committed Revolving Line" means a credit extension of
up to Two Million Dollars ($2,000,000).
"Contingent Obligation" means, as applied to any Person,
any direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Copyrights" means any and all copyright rights,
copyright applications, copyright registrations and like protections in each
work or authorship and derivative work thereof, whether published or unpublished
and whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Credit Extension" means each Advance, Equipment
Advance, or any other extension of credit by Bank for the benefit of Borrower
hereunder.
"Current Assets" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current assets on
the consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date,
all amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its Subsidiaries,
as at such date, plus, to the extent not already included therein, all
outstanding Advances made under this Agreement, including all Indebtedness that
is payable upon demand or within one year from the date of determination thereof
unless such Indebtedness is renewable or extendible at the option of Borrower or
any Subsidiary to a date more than one year from the date of determination, less
deferred revenue and Subordinated Debt.
"Daily Balance" means the amount of the Obligations owed
at the end of a given day.
"Debt Service Coverage" means, as of any date of
determination, a ratio of (a) the sum of (i) earnings after tax annualized for
the preceding three (3) months plus interest and non-cash (i.e., depreciation
and amortization) expenses, annualized for the preceding (3) three months to (b)
the sum of (i) current portion of long term debt and capitalized leases plus
(ii) interest expense, annualized for the preceding three months.
"Eligible Accounts" means those Accounts that arise in
the ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided, that
standards of eligibility may be fixed and revised from time to time by Bank as a
consequence of any Collateral audits done pursuant to Section 6.3 in Bank's
reasonable judgment and upon notification thereof to Borrower in accordance with
the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts
shall not include the following:
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<PAGE> 4
(a) Accounts that the account debtor has failed
to pay within ninety (90) days of invoice date; provided, however, that up to
$150,000 of Accounts that the account debtor has failed to pay within one
hundred twenty (120) days of invoice date will be allowed;
(b) Accounts with respect to an account debtor,
twenty-five percent (25%) of whose Accounts the account debtor has failed to pay
within ninety (90) days of invoice date;
(c) Accounts with respect to which the account
debtor is an officer, employee, or agent of Borrower;
(d) Accounts with respect to which goods are
placed on consignment, guaranteed sale, sale or return, sale on approval, bill
and hold, or other terms by reason of which the payment by the account debtor
may be conditional;
(e) Accounts with respect to which the account
debtor is an Affiliate of Borrower;
(f) Accounts with respect to which the account
debtor does not have its principal place of business in the United States,
except for Eligible Foreign Accounts;
(g) Accounts with respect to which the account
debtor is the United States or any department, agency, or instrumentality of the
United States of whose Accounts the account debtor has failed to pay within
ninety (90) days of invoice date;
(h) Accounts with respect to which Borrower is
liable to the account debtor for goods sold or services rendered by the account
debtor to Borrower, but only to the extent of any amounts owing to the account
debtor against amounts owed to Borrower;
(i) Accounts with respect to an account debtor,
including Subsidiaries and Affiliates, whose total obligations to Borrower
exceed twenty-five percent (25%) of all Accounts, to the extent such obligations
exceed the aforementioned percentage, except as approved in writing by Bank;
(j) Accounts with respect to which the account
debtor disputes liability or makes any claim with respect thereto as to which
Bank believes, in its sole discretion, that there may be a basis for dispute
(but only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business;
(k) Accounts with respect to an account debtor
of whose Accounts the account debtor has failed to pay within one hundred twenty
(120) days of invoice date, except to the extent such Accounts do not exceed
$150,000 in the aggregate; and
(l) Accounts the collection of which Bank
reasonably determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect
to which the account debtor does not have its principal place of business in the
United States and (i) that are supported by one or more letters of credit in an
amount and of a tenor, and issued by a financial institution, acceptable to
Bank; (ii) that do not exceed $200,000 of the Accounts of British Telecom; or
(iii) that Bank approves on a case-by-case basis.
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"Equipment Advance" has the meaning set forth in Section
2.1.4.
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<PAGE> 5
"Equipment Line" means a credit extension of up to Two
Million Dollars ($2,000,000).
"Equipment Maturity Date" means April 29, 2003.
"Equity Event" means the sale or issuance by Borrower of
its equity securities or Subordinated Debt in which Borrower receives cash
proceeds of not less than Five Million Dollars ($5,000,000) from investors
acceptable to Bank.
"ERISA" means the Employee Retirement Income Security
Act of 1974, as amended, and the regulations thereunder.
"Event of Default" has the meaning assigned in Article
8.
"GAAP" means generally accepted accounting principles as
in effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed
money or the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced
by or against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.
"Intellectual Property Collateral" means:
(a) Copyrights, Trademarks and Patents;
(b) Any and all trade secrets, and any and all
intellectual property rights in computer software and computer software products
now or hereafter existing, created, acquired or held;
(c) Any and all design rights which may be
available to Borrower now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of
past, present and future infringement of any of the rights included above, with
the right, but not the obligation, to sue for and collect such damages for said
use or infringement of the intellectual property rights identified above;
(e) All licenses or other rights to use any of
the Copyrights, Patents or Trademarks, and all license fees and royalties
arising from such use to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of
any of the Copyrights, Trademarks or Patents; and
(g) All proceeds and products of the foregoing,
including without limitation all payments under insurance or any indemnity or
warranty payable in respect of any of the foregoing.
"Interest Period" means for each LIBOR Rate Advance, a
period of approximately one, two, three or six months as Borrower may elect,
provided that the last day of an Interest Period for a LIBOR Rate Advance shall
be determined in accordance with the practices, of the LIBOR interbank market as
from time to time in effect, provided, further, in all cases such period shall
expire not later than the applicable Equipment Maturity Date.
4
<PAGE> 6
"Inventory" means all present and future inventory in
which Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of
(including stock, partnership interest or other securities) any Person, or any
loan, advance or capital contribution to any Person.
"IPO/Equity Infusion" means the first bona fide offering
by Borrower pursuant to a registration statement under the Securities Act of
1933 of the sale of its equity securities in which the net cash proceeds to
Borrower are not less than Ten Million Dollars ($10,000,000), or the sale or
issuance by Borrower of its equity securities or Subordinated Debt in which
Borrower receives cash proceeds of not less than Ten Million Dollars
($10,000,000) from investors acceptable to Bank.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"LIBOR Base Rate" means, for any Interest Period for a
LIBOR Rate Advance, the rate of interest per annum determined by Bank to be the
per annum rate of interest at which deposits in United States Dollars are
offered to Bank in the London interbank market in which Bank customarily
participates at 11:00 a.m. (local time in such interbank market) three (3)
Business Days before the first day of such Interest Period for a period
approximately equal to such Interest Period and in an amount approximately equal
to the amount of such Advance.
"LIBOR Rate" shall mean, for any Interest Period for a
LIBOR Rate Advance, a rate per annum (rounded upwards, if necessary, to the
nearest 1/16 of 1%) equal to (i) the LIBOR Base Rate for such Interest Period
divided by (ii) 1 minus the Reserve Requirement for such Interest Period.
"LIBOR Rate Advances" means any Advances made or a
portion thereof on which interest is payable based on the LIBOR Rate in
accordance with the terms hereof.
"Lien" means any mortgage, lien, deed of trust, charge,
pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement,
any note or notes executed by Borrower, and any other agreement entered into
between Borrower and Bank in connection with this Agreement, all as amended or
extended from time to time.
"Material Adverse Effect" means a material adverse
effect on (i) the business operations or condition (financial or otherwise) of
Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower
to repay the Obligations or otherwise perform its obligations under the Loan
Documents.
"Negotiable Collateral" means all of Borrower's present
and future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement
or any other agreement, whether absolute or contingent, due or to become due,
now existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
5
<PAGE> 7
"Patents" means all patents, patent applications and
like protections including without limitation improvements, divisions,
continuations, renewals, reissues, extensions and continuations-in-part of the
same.
"Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay to
Bank pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank
arising under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date
and disclosed in the Schedule;
(c) Indebtedness secured by a lien described in
clause (c) of the defined term "Permitted Liens," provided (i) such Indebtedness
does not exceed the lesser of the cost or fair market value of the equipment
financed with such Indebtedness and (ii) such Indebtedness shall not exceed
$500,000 for the purchase of equipment acquired by Borrower that is not located
at the Borrower's customers' locations;
(d) Subordinated Debt;
(e) Indebtedness at any time outstanding in an
amount not to exceed $100,000; and
(f) Indebtedness to trade creditors incurred in
the ordinary course of business.
"Permitted Investment" means:
(a) Investments existing on the Closing Date
disclosed in the Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having rating of at least A-2 or P-2 from either
Standard & Poor's Corporation or Moody's Investors Service, (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank and (iv) Bank's money market accounts.
"Permitted Liens" means the following:
6
<PAGE> 8
(a) Any Liens existing on the Closing Date and
disclosed in the Schedule or arising under this Agreement or the other Loan
Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings, provided the same have no priority over any of
Bank's security interests;
(c) Liens (i) upon or in any equipment acquired
or held by Borrower or any of its Subsidiaries to secure the purchase price of
such equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clauses (a) through (c) above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness being extended,
renewed or refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per
annum, most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the amount
thereof shall be determined, the unrestricted cash and cash-equivalents,
accounts receivable and investments with maturities not to exceed 90 days, of
Borrower determined in accordance with GAAP.
"Reserve Requirement" means, for any Interest Period,
the average maximum rate at which reserves (including any marginal, supplemental
or emergency reserves) are required to be maintained during such Interest Period
under Regulation D against "Eurocurrency liabilities" (as such term is used in
Regulation D) by member banks of the Federal Reserve System. Without limiting
the effect of the foregoing, the Reserve Requirement shall reflect any other
reserves required to be maintained by Bank by reason of any regulatory change
against (i) any category of liabilities which includes deposits by reference to
which the LIBOR Rate is to be determined as provided in the definition of "LIBOR
Base Rate" or (ii) any category of extensions of credit or other assets which
include Advances.
"Responsible Officer" means each of the Chief Executive
Officer, the Chief Operating Officer, the Chief Financial Officer and the
Controller of Borrower.
"Revolving Maturity Date" means April 29, 2000.
"Revolving Facility" means the facility under which
Borrower may request Bank to issue Advances, as specified in Section 2.1.1
hereof.
"Schedule" means the schedule of exceptions attached
hereto, if any.
"Subordinated Debt" means any debt incurred by Borrower
that is subordinated to the debt owing by Borrower to Bank on terms reasonably
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in
which (i) any general partnership interest or (ii) more than 50% of the stock of
which by the terms thereof ordinary voting power to elect the Board of
Directors, managers or trustees of the entity shall, at the time as of which any
determination is being made, is owned by Borrower, either directly or through an
Affiliate.
7
<PAGE> 9
"Tangible Net Worth" means at any date as of which the
amount thereof shall be determined, the sum of the capital stock and additional
paid-in capital plus retained earnings (or minus accumulated deficit) of
Borrower and its Subsidiaries minus intangible assets, plus Subordinated Debt,
on a consolidated basis determined in accordance with GAAP.
"Total Liabilities" means at any date as of which the
amount thereof shall be determined, all obligations that should, in accordance
with GAAP be classified as liabilities on the consolidated balance sheet of
Borrower, including in any event all Indebtedness.
"Trademarks" means any trademark and servicemark rights,
whether registered or not, applications to register and registrations of the
same and like protections, and the entire goodwill of the business of Borrower
connected with and symbolized by such trademarks.
1.2 Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
made hereunder shall be made in accordance with GAAP. When used herein, the
terms "financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT.
2.1 Credit Extensions. Borrower promises to pay to the order of
Bank, in lawful money of the United States of America, the aggregate unpaid
principal amount of all Credit Extensions made by Bank to Borrower hereunder.
Borrower shall also pay interest on the unpaid principal amount of such Credit
Extensions at rates in accordance with the terms hereof.
2.1.1 Revolving Advances.
(a) Subject to and upon the terms and conditions
of this Agreement, Borrower may request Advances in an aggregate outstanding
amount not to exceed the lesser of (i) One Million Three Hundred Thousand
Dollars ($1,300,000) or (ii) the Borrowing Base; provided, however, that after
an Equity Event, Borrower may request Advances in an aggregate outstanding
amount not to exceed the lesser of (i) One Million Five Hundred Thousand Dollars
($1,500,000) or (ii) the Borrowing Base; provided, further, that after an
IPO/Equity Infusion, Borrower may request Advances in an aggregate outstanding
amount not to exceed the lesser of (i) the Committed Revolving Line or (ii) the
Borrowing Base. Subject to the terms and conditions of this Agreement, amounts
borrowed pursuant to this Section 2.1.1 may be repaid and reborrowed at any time
prior to the Revolving Maturity Date, at which time all Advances under this
Section 2.1.1 shall be immediately due and payable. Borrower may prepay any
Advances without penalty or premium.
(b) Whenever Borrower desires an Advance,
Borrower will notify Bank by facsimile transmission or telephone no later than
3:00 p.m. Pacific time, on the Business Day that the Advance is to be made. Each
such notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit B-1 hereto. Bank is authorized to make
Advances under this Agreement, based upon instructions received from a
Responsible Officer or a designee of a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer or a designee thereof, and Borrower shall indemnify and
hold Bank harmless for any damages or loss suffered by Bank as a result of such
reliance. Bank will credit the amount of Advances made under this Section 2.1.1
to Borrower's deposit account.
2.1.2 Letters of Credit.
(a) Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued letters of credit (each a
"Letter of Credit," collectively, the "Letters of Credit") for the account of
Borrower in an aggregate face amount not to exceed the lesser of (i) Committed
Line or (ii) the Borrowing Base minus the outstanding Advances and the face
amount of outstanding Letters of Credit. Each such Letter of Credit shall have
an expiry date no later than the Revolving Maturity Date. All such Letters of
Credit shall be, in form and substance, acceptable to Bank in its sole
discretion and shall be subject to the terms and conditions of Bank's form of
application and letter of credit agreement. Borrower shall pay Bank a fee equal
to two percent (2.00%) of the face amount of each Letter of Credit on the date
such Letter of Credit is issued. All amounts actually paid by Bank in
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respect of a Letter of Credit shall, when paid, constitute an Advance under this
Agreement. Aggregate outstanding Letters of Credit shall at no time exceed Three
Hundred Twenty Thousand Dollars ($320,000).
(b) The obligation of Borrower to immediately
reimburse Bank for drawings made under Letters of Credit shall be absolute,
unconditional and irrevocable, and shall be performed strictly in accordance
with the terms of this Agreement and such Letters of Credit, under all
circumstances whatsoever. Borrower shall indemnify, defend and hold Bank
harmless from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection with any
Letters of Credit, other than losses resulting from the Bank's negligence.
2.1.3 Credit Card Sublimit. Subject to the terms and
conditions of this Agreement, Borrower may request Advances in an aggregate
amount not to exceed Fifty Thousand Dollars ($50,000) to be used to secure debt
outstanding under credit cards issued by Bank to Borrower and/or its employees,
provided that the sum of the aggregate outstanding Advances does not exceed the
lesser of (i) the Committed Revolving Line or (ii) the Borrowing Base minus the
outstanding Advances and the face amount of outstanding Letters of Credit. The
terms and conditions (including repayment) of such credit cards shall be the
equivalent of that offered by Bank to its other customers.
2.1.4 Equipment Advances.
(a) Subject to and upon the terms and conditions
of this Agreement, at any time from the date hereof through the Revolving
Maturity Date, Bank agrees to make advances (each an "Equipment Advance" and,
collectively, the "Equipment Advances") to Borrower in an aggregate outstanding
amount not to exceed $500,000; provided, however, that after an Equity Event,
Borrower may request Equipment Advances in an aggregate outstanding amount not
to exceed $750,000; provided, further, that after an IPO/Equity Infusion,
Borrower may request Equipment Advances in an aggregate outstanding amount not
to exceed the Equipment Line. Each Equipment Advance shall not exceed one
hundred percent (100%) of the invoice amount of equipment, software (which
Borrower shall, in any case, have purchased within 90 days of the date of the
corresponding Equipment Advance), excluding taxes, shipping, warranty charges,
freight discounts and installation expense; provided, however, that the initial
Equipment Advance shall not exceed eighty (80%) of the invoice amount of
equipment, software (which Borrower has purchased within 90 days prior to the
Closing Date) excluding taxes, shipping, warranty charges, freight discounts and
installation expense. Up to Four Hundred Thousand Dollars ($400,000) of the
Equipment Line may be used by Borrower for software purchases.
(b) Interest shall accrue from the date of each
Equipment Advance at the rate specified in Section 2.3(a), and shall be payable
monthly on the 29th day of each month through April 29, 2000. Any Equipment
Advances that are outstanding on April 29, 2000 shall be payable in thirty-six
(36) equal monthly installments of principal, plus all accrued interest,
beginning on May 29, 2000, and continuing on the same day of each month
thereafter through the Equipment Maturity Date, at which time all amounts due
under this Section 2.1.4 and any other amounts due under this Agreement shall be
immediately due and payable. Equipment Advances, once repaid, may not be
reborrowed. Borrower may prepay any Equipment Advances without penalty or
premium.
(c) When Borrower desires to obtain an Equipment
Advance, Borrower shall notify Bank (which notice shall be irrevocable) by
facsimile transmission to be received no later than 3:00 p.m. Pacific time one
(1) Business Day before the day on which the Equipment Advance is to be made.
Such notice shall be substantially in the form of Exhibit B-1. The notice shall
be signed by a Responsible Officer or its designee and include a copy of the
invoice for any Equipment to be financed. Notwithstanding the foregoing, after
an IPO/Equity Infusion, Borrower shall request Equipment Advances in accordance
with Section 2.5 below.
2.2 Overadvances. If any Advances hereunder exceed the lesser of
the Borrowing Base or the Committed Revolving Line, Borrower shall immediately
pay to Bank, in cash, the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rates.
(i) Advances. Except as set forth in Section
2.3(b), the Advances shall bear interest, on the outstanding daily balance
thereof, at a rate equal to one percent (1.0%) above the Prime Rate; provided,
however, that
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after an IPO/Equity Infusion, Advances shall bear interest, on the outstanding
daily balance thereof, at a rate equal to one-half of one percent (0.5%) above
the Prime Rate.
(ii) Equipment Advances. Except as set forth
in Section 2.3(b), the Equipment Advances shall bear interest, on the
outstanding daily balance thereof, at a rate equal to one and one-half percent
(1.5%) above the Prime Rate; provided, however, that after an IPO/Equity
Infusion, Advances shall bear interest, on the outstanding daily balance
thereof, as provided in Section 2.5 below.
(b) Late Fee; Default Rate. If any payment is
not made within ten (10) days after the date such payment is due, Borrower shall
pay Bank a late fee equal to the lesser of (i) five percent (5%) of the amount
of such unpaid amount or (ii) the maximum amount permitted to be charged under
applicable law. All Obligations shall bear interest, from and after the
occurrence and during the continuance of an Event of Default, at a rate equal to
five (5) percentage points above the interest rate applicable immediately prior
to the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due
and payable on the twenty-ninth (29th) calendar day of each month during the
term hereof. Bank shall, at its option, charge such interest, all Bank Expenses,
and all Periodic Payments against any of Borrower's deposit accounts or against
the Committed Revolving Line, in which case those amounts shall thereafter
accrue interest at the rate then applicable hereunder. Any interest not paid
when due shall be compounded by becoming a part of the Obligations, and such
interest shall thereafter accrue interest at the rate then applicable hereunder.
Bank shall deliver to Borrower statements of account in the ordinary course of
business reflecting charges made hereunder.
(d) Computation. In the event the Prime Rate is
changed from time to time hereafter, the applicable rate of interest hereunder
shall be increased or decreased effective as of the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon Pacific time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Libor/Prime Rate Advances. After an IPO/Equity Infusion,
whenever Borrower desires an Equipment Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 11:00 a.m. Pacific time, on
the Business Day that a Prime Advance is to be made, and noon Pacific time on
the Business Day that is three (3) Business Days prior to the Business Day on
which a LIBOR Rate Advance is made. Each such notification shall be promptly
confirmed by a Payment/Advance Form in substantially the form of Exhibit B-2
hereto. Bank is authorized to make Advances under this Agreement, based upon
instructions received from a Responsible Officer, or a designee of a Responsible
Officer designated in writing and signed by such Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer or a designee thereof, and Borrower shall indemnify and
hold Bank harmless for any damages or loss suffered by Bank as a result of such
reliance. Bank will credit the amount of Advances made under this Section 2.1 to
a Borrower's deposit account, as specified by such Borrower.
Each such notice shall specify:
(i) the date such Advance is to be made,
which shall be a Business Day;
(ii) the amount of such Advance;
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(iii) whether such Advance is to be a Prime
Rate Advance or a LIBOR Rate Advance; and
(iv) if the Advance is to be a LIBOR Rate
Advance, the Interest Period for such Advance;
Each written request for an Advance, and each
confirmation of a telephone request for such an Advance, shall be in
substantially the form of Exhibit B-2 hereto executed by Borrower.
2.5.1 Prime Rate Advances. Each Prime Rate Advance shall
be in an amount of not less than Twenty-Five Thousand Dollars ($25,000). The
outstanding principal balance of each Prime Rate Advance shall bear interest
until principal is due (computed daily on the basis of a 360 day year and actual
days elapsed), at a rate per annum equal to one percent (1.0%) above the Prime
Rate. Prime Rate Advances under the Equipment Line shall be payable as provided
in Section 2.1.4(b).
2.5.2 LIBOR Rate Advances. Each LIBOR Rate Advance shall
be in an amount of not less than Five Hundred Thousand Dollars ($500,000). The
outstanding principal balance of each LIBOR Rate Advance shall bear interest
until principal is due (computed daily on the basis of a 360 day year and actual
days elapsed) at a rate per annum equal to the LIBOR Rate plus 400 basis points
for such LIBOR Rate Advance. The entire outstanding principal amount of each
LIBOR Rate Advance shall be due and payable on the earlier of (i) the last day
of the LIBOR Rate Interest Period for such LIBOR Rate Advance, and (ii)
Equipment Maturity Date.
2.5.3 Prepayment of the Advances. Borrower may at any
time prepay any Prime Rate Advance or any LIBOR Rate Advance, in full or in
part. Each partial prepayment for a LIBOR Rate Advance shall be in an amount not
less than Twenty-Five Thousand Dollars ($25,000). Each prepayment shall be made
upon the irrevocable written or telephone notice of Borrower received by Bank
not later than 10:00 a.m. California time on the date of the prepayment of a
Prime Rate Advance, and not less than three (3) Business Days prior to the date
of the prepayment of a LIBOR Rate Advance. The notice of prepayment shall
specify the date of the prepayment, the amount of the prepayment, and the
Advance or Advances prepaid. Each prepayment of a LIBOR Rate Advance shall be
accompanied by the payment of accrued interest on the amount prepaid and any
amount required by Section 2.8.
2.6 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee.
(i) Committed Revolving Line. On the Closing
Date, a Facility Fee equal to $4,875, which shall be non-refundable; provided,
however, that upon the occurrence of an Equity Event, Borrower shall pay to Bank
an additional Facility Fee equal to $500, which shall be non-refundable;
provided, further, that upon the occurrence of an IPO/Equity Infusion, Borrower
shall pay to Bank an additional Facility Fee equal to $2,625.
(ii) Equipment Line. On the Closing Date, a
Facility Fee equal to $2,500, which shall be non-refundable; provided, however,
that upon the occurrence of an Equity Event, Borrower shall pay to Bank an
additional Facility Fee equal to $500, which shall be non-refundable; provided,
further, that upon the occurrence of an IPO/Equity Infusion, Borrower shall pay
to Bank an additional Facility Fee equal to $7,500.
(b) Bank Expenses. On the Closing Date, all Bank
Expenses incurred through the Closing Date, including reasonable attorneys' fees
and expenses and, after the Closing Date, all Bank Expenses, including
reasonable attorneys' fees and expenses, as and when they become due.
2.7 Conversion/Continuation of Advances.
2.7.1 A Borrower may from time to time submit in writing
a request that Prime Rate Advances be converted to LIBOR Rate Advances or that
any existing LIBOR Rate Advances continue for an additional Interest Period.
Such request shall specify the amount of the Prime Rate Advances which will
constitute LIBOR Rate Advances (subject to the limits set forth below) and the
Interest Period to be applicable to such LIBOR Rate Advances. Each written
request for a conversion to a
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LIBOR Rate Advance or a continuation of a LIBOR Rate Advance shall be
substantially in the form of a Libor Rate Conversion/Continuation Certificate as
set forth on Exhibit B-3, which shall be duly executed by a Responsible Officer.
Subject to the terms and conditions contained herein, three (3) Business Days
after Bank's receipt of such a request from Borrower, such Prime Rate Advances
shall be converted to LIBOR Rate Advances or such LIBOR Rate Advances shall
continue, as the case may be provided that:
(i) no Event of Default or event which with
notice or passage of time or both would constitute an Event of Default exists;
(ii) no party hereto shall have sent any
notice of termination of the Agreement;
(iii) Borrower shall have complied with such
customary procedures as Bank has established from time to time for Borrower's
requests for LIBOR Rate Advances;
(iv) the amount of a LIBOR Rate Advance
shall be $500,000 or such greater amount which is an integral multiple of
$50,000; and
(v) Bank shall have determined that the
Interest Period or LIBOR Rate is available to Bank as of the date of the request
for such LIBOR Rate Advance.
Any request by Borrower to convert Prime Rate Advances to LIBOR Rate
Advances or continue any existing LIBOR Rate Advances shall be irrevocable.
Notwithstanding anything to the contrary contained herein, Bank shall not be
required to purchase United States Dollar deposits in the London interbank
market or other applicable LIBOR Rate market to fund any LIBOR Rate Advances,
but the provisions hereof shall be deemed to apply as if Bank had purchased such
deposits to fund the LIBOR Rate Advances.
2.7.2 Any LIBOR Rate Advances shall automatically
convert to Prime Rate Advances upon the last day of the applicable Interest
Period, unless Bank has received and approved a complete and proper request to
continue such LIBOR Rate Advance at least three (3) Business Days prior to such
last day in accordance with the terms hereof. Any LIBOR Rate Advances shall, at
Bank's option, convert to Prime Rate Advances in the event that an Event of
Default shall exist. Borrower shall pay to Bank, upon demand by Bank any amounts
required to compensate Bank for any loss (including loss of anticipated
profits), cost or expense incurred by such person, as a result of the conversion
of LIBOR Rate Advances to Prime Rate Advances pursuant to any of the foregoing.
2.8 Additional Requirements/Provisions Regarding LIBOR Rate
Advances.
2.8.1 If for any reason (including voluntary or
mandatory prepayment or acceleration, other than under section (2.8.5), Bank
receives all or part of the principal amount of a LIBOR Rate Advance prior to
the last day of the Interest Period for such LIBOR Rate Advance, Borrower shall
on demand by Bank, pay Bank the amount (if any) by which (i) the additional
interest which would have been payable on the amount so received had it not been
received until the last day of such Interest Period or term exceeds (ii) the
interest which would have been recoverable by Bank by placing the amount so
received on deposit in the certificate of deposit markets or the offshore
currency interbank markets or United States Treasury investment products, as the
case may be, for a period starting on the date on which it was so received and
ending on the last day of such Interest Period or term at the interest rate
determined by Bank. Bank's determination as to such amount shall be presumptive
evidence of such additional costs and binding for all purposes if made
reasonably and in good faith.
2.8.2 Borrower shall pay to Bank, upon demand by Bank,
from time to time such amounts as Bank may reasonably determine to be necessary
to compensate it for any costs incurred by Bank that Bank determines are
attributable to its making or maintaining of any amount receivable by Bank
hereunder in respect of any Advances relating thereto (such increases in costs
and reductions in amounts receivable being herein called "Additional Costs"), in
each case resulting from any regulatory change that:
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(i) changes the basis of taxation of any
amounts payable to Bank under this Agreement in respect of any Advances (other
than changes which affect taxes measured by or imposed on the overall net income
of Bank by the jurisdiction in which Bank has its principal office); or
(ii) imposes or modifies any reserve,
special deposit or similar requirements relating to any extensions of credit or
other assets of, or any deposits with or other liabilities of Bank (including
any Advances or any deposits referred to in the definition of "LIBOR Base
Rate"); or
(iii) imposes any other material condition
affecting this Agreement (or any of such extensions of credit or liabilities).
Bank will notify Borrower of any event occurring after the date of the Agreement
which will entitle Bank to compensation pursuant to this section as promptly as
practicable after it obtains knowledge thereof and determines to request such
compensation. Bank will furnish Borrower with a statement setting forth the
basis and amount of each request by Bank for compensation under this Section
2.8. Determinations and allocations by Bank for purposes of this Section 2.8 of
the effect of any regulatory change on its costs of maintaining its obligations
to make Advances or of making or maintaining Advances or on amounts receivable
by it in respect of Advances, and of the additional amounts required to
compensate Bank in respect of any Additional Costs, shall be conclusive absent
manifest error.
2.8.3 Borrower shall pay to Bank, upon the request of
Bank, such amount or amounts as shall be sufficient (in the sole good faith
opinion of Bank) to compensate it for any reasonable loss, costs or expense
incurred by it as a result of any failure by Borrower to borrow a LIBOR Rate
Advance on the date for such borrowing specified in the relevant notice of
borrowing hereunder.
2.8.4 If Bank shall determine that the adoption or
implementation of any applicable law, rule, regulation or treaty regarding
capital adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by Bank (or its applicable lending office) with any respect or directive
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on capital of Bank or any person or entity
controlling Bank (a "Parent") as a consequence of its obligations hereunder to a
level below that which Bank (or its Parent) could have achieved but for such
adoption, change or compliance (taking into consideration its policies with
respect to capital adequacy) by an amount deemed by Bank to be material, then
from time to time, within 15 days after demand by Bank, Borrower shall pay to
Bank such additional amount or amounts as will compensate Bank for such
reduction. A statement of Bank claiming compensation under this Section and
setting forth the additional amount or amounts to be paid to it hereunder shall
be presumptive evidence of such additional costs and binding for all purposes if
made reasonably and in good faith.
2.8.5 If at any time Bank, in its sole and absolute
discretion, determines that: (i) the amount of the LIBOR Rate Advances for
periods equal to the corresponding Interest Periods or any other period are not
available to Bank in the offshore currency interbank markets, or (ii) the LIBOR
Rate does not accurately reflect the cost to Bank of lending the LIBOR Rate
Advance, then Bank shall promptly give notice thereof to Borrower, and upon the
giving of such notice Bank's obligation to make the LIBOR Rate Advances shall
terminate, unless Bank and Borrower agree in writing to a different interest
rate applicable to LIBOR Rate Advances. If it shall become unlawful for Bank to
continue to fund or maintain any Advances, or to perform its obligations
hereunder, upon demand by Bank, Borrower shall prepay the Advances in full with
accrued interest thereon and all other amounts payable by Borrower hereunder.
2.9 Term. This Agreement shall become effective on the Closing
Date and, subject to Section 12.7, shall continue in full force and effect for a
term ending on the Equipment Maturity Date. Notwithstanding the foregoing, Bank
shall have the right to terminate its obligation to make Credit Extensions under
this Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default. Notwithstanding termination, Bank's Lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding.
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3. CONDITIONS OF LOANS.
3.1 Conditions Precedent to Initial Credit Extension. The
obligation of Bank to make the initial Credit Extension is subject to the
condition precedent that Bank shall have received, in form and substance
satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower
with respect to incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(c) a financing statement (Form UCC-1);
(d) an intellectual property security agreement;
(e) a subordination agreement from each
subordinating creditor;
(f) an audit of the Collateral, the results of
which shall be satisfactory to Bank; and
(g) such other documents, and completion of such
other matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The
obligation of Bank to make each Credit Extension, including the initial Credit
Extension, is further subject to the following conditions:
(a) timely receipt by Bank of the
Payment/Advance Form as provided in Section 2.1; and
(b) the representations and warranties contained
in Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form and on the effective date of each Credit
Extension as though made at and as of each such date, and no Event of Default
shall have occurred and be continuing, or would result from such Credit
Extension (provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date). The making of each Credit Extension shall be
deemed to be a representation and warranty by Borrower on the date of such
Credit Extension as to the accuracy of the facts referred to in this Section
3.2(b).
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
4.2 Delivery of Additional Documentation Required. Borrower
shall from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours but no more than once a year
(unless an Event of Default has occurred and is continuing), to inspect
Borrower's Books and to make copies thereof and to check, test, and appraise the
Collateral in order to verify Borrower's financial condition or the amount,
condition of, or any other matter relating to, the Collateral.
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5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each
Subsidiary is a corporation duly existing under the laws of its state of
incorporation and qualified and licensed to do business in any state in which
the conduct of its business or its ownership of property requires that it be so
qualified.
5.2 Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona
fide existing obligations. The property giving rise to such Eligible Accounts
has been delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all material
respects of good and marketable quality, free from all material defects, except
for Inventory for which adequate reserves have been made.
5.6 Intellectual Property Collateral. Borrower is the sole owner
of the Intellectual Property Collateral, except for non-exclusive licenses
granted by Borrower to its customers in the ordinary course of business. Each of
the Patents is valid and enforceable, and no part of the Intellectual Property
Collateral has been judged invalid or unenforceable, in whole or in part, and no
claim has been made that any part of the Intellectual Property Collateral
violates the rights of any third party.
5.7 Name; Location of Chief Executive Office. Except as
disclosed in the Schedule, Borrower has not done business under any name other
than that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.8 Litigation. Except as set forth in the Schedule, there are
no actions or proceedings pending by or against Borrower or any Subsidiary
before any court or administrative agency in which an adverse decision could
have a Material Adverse Effect or a material adverse effect on Borrower's
interest or Bank's security interest in the Collateral.
5.9 No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary that
are delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.10 Solvency, Payment of Debts. Borrower is solvent and able to
pay its debts (including trade debts) as they mature.
5.11 Regulatory Compliance. Borrower and each Subsidiary have
met the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from Borrower's
failure to comply with ERISA that is reasonably likely to result in Borrower's
incurring any liability that could have a Material Adverse Effect. Borrower is
not an "investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940. Borrower is not
engaged principally, or as one of the important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulations T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act.
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Borrower has not violated any statutes, laws, ordinances or rules applicable to
it, violation of which could have a Material Adverse Effect.
5.12 Environmental Condition. Except as disclosed in the
Schedule, none of Borrower's or any Subsidiary's properties or assets has ever
been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge,
by previous owners or operators, in the disposal of, or to produce, store,
handle, treat, release, or transport, any hazardous waste or hazardous substance
other than in accordance with applicable law; to the best of Borrower's
knowledge, none of Borrower's properties or assets has ever been designated or
identified in any manner pursuant to any environmental protection statute as a
hazardous waste or hazardous substance disposal site, or a candidate for closure
pursuant to any environmental protection statute; no lien arising under any
environmental protection statute has attached to any revenues or to any real or
personal property owned by Borrower or any Subsidiary; and neither Borrower nor
any Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.
5.13 Taxes. Borrower and each Subsidiary has filed or caused to
be filed all tax returns required to be filed, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein.
5.14 Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.15 Government Consents. Borrower and each Subsidiary has
obtained all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted, the failure to obtain which could have a Material Adverse Effect.
5.16 Year 2000. Borrower and its Subsidiaries have reviewed the
areas within their operations and business which could be adversely affected by,
and have developed or are developing a program to address on a timely basis, the
Year 2000 Problem and have made related appropriate inquiry of material
suppliers and vendors, and based on such review and program, the Year 2000
Problem will not have a Material Adverse Effect upon its financial condition,
operations or business as now conducted. "Year 2000 Problem" means the
possibility that any computer applications or equipment used by Borrower may be
unable to recognize and properly perform date sensitive functions involving
certain dates prior to and any dates on or after December 31, 1999.
5.17 Full Disclosure. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence in its jurisdiction of incorporation and
maintain qualification in each jurisdiction in which the failure to so qualify
could have a Material Adverse Effect. Borrower shall maintain, and shall cause
each of its Subsidiaries to maintain in force all licenses, approvals and
agreements, the loss of which could have a Material Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause
each Subsidiary to meet, the minimum funding requirements of ERISA with respect
to any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within thirty (30)
days after the end of each calendar month, a company prepared consolidated
balance sheet and income statement covering Borrower's consolidated operations
during such period, in a form acceptable to Bank and certified by a
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Responsible Officer; (b) as soon as available, but in any event within ninety
(90) days after the end of Borrower's fiscal year, audited consolidated
financial statements of Borrower prepared in accordance with GAAP, consistently
applied, together with an unqualified opinion on such financial statements of an
independent certified public accounting firm reasonably acceptable to Bank; (c)
if applicable, within five (5) days of filing with the Securities and Exchange
Commission, copies of all statements, reports and notices sent or made available
generally by Borrower to its security holders or to any holders of Subordinated
Debt and all reports on Form 10-K and 10-Q filed with the Securities and
Exchange Commission; (d) promptly upon receipt of notice thereof, a report of
any legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of One Hundred
Thousand Dollars ($100,000) or more; (e) within thirty (30) days after
Borrrower's fiscal year end, operating budgets, annual budgets, and forecasts of
Borrower; and (f) other financial information as Bank may reasonably request
from time to time generally prepared by Borrower in the ordinary course of
business.
Within twenty (20) days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged listings of
accounts receivable and accounts payable.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit D hereto.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts and appraise Collateral at Borrower's expense, provided that such
audits will be conducted no more often than every twelve (12) months unless an
Event of Default has occurred and is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in
good and marketable condition, free from all material defects except for
Inventory for which adequate reserves have been made. Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary
to make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion, sprinklers,
and all other hazards and risks, and in such amounts, as ordinarily insured
against by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the Collateral in
amounts and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in
such form, with such companies, and in such amounts as reasonably satisfactory
to Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
the Bank as an additional insured, and shall specify that the insurer must give
at least twenty (20) days notice to Bank before canceling its policy for any
reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of
such policies of insurance and evidence of the payments of all premiums
therefor. All proceeds payable under any such policy shall, at the option of
Bank, be payable to Bank to be applied on account of the Obligations.
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6.7 Year 2000 Compliance. Borrower shall perform all acts
reasonably necessary to ensure that (a) Borrower and any business in which
Borrower holds a substantial interest, and (b) all customers, suppliers and
vendors that are material to Borrower's business, become Year 2000 Compliant in
a timely manner. Such acts shall include, without limitation, performing a
comprehensive review and assessment of all Borrower's systems and adopting a
detailed plan, with itemized budget, for the remediation, monitoring and testing
of such systems. As used in this paragraph, "Year 2000 Compliant" shall mean, in
regard to any entity, that all software, hardware, firmware, equipment, goods or
systems utilized by or material to the business operations or financial
condition of such entity, will properly perform date sensitive functions before,
during and after the year 2000. Borrower shall immediately upon request, provide
to Bank such certifications or other evidence of Borrower's compliance with the
terms of this paragraph as Bank may from time to time require.
6.8 Principal Depository. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.9 Adjusted Quick Ratio. Borrower shall maintain, as of the
last day of each calendar month, a ratio of Quick Assets to Current Liabilities
of at least 1.25 to 1.00. Upon the occurrence of and subsequent to an IPO/Equity
Infusion, Borrower shall maintain, as of the last day of each calendar month, a
ratio of Quick Assets to Current Liabilities of at least 1.50 to 1.00.
6.10 Tangible Net Worth. Upon the occurrence of and subsequent
to an IPO/Equity Infusion, Borrower shall maintain, as of the last day of each
calendar month, a Tangible Net Worth of not less than Seven Million Dollars
($7,000,000).
6.11 Minimum Liquidity. Borrower shall maintain a minimum
Liquidity that is one and one-half (1.5) times the outstanding balance of
Equipment Advances. Upon the occurrence of and subsequent to an IPO/Equity
Infusion, Borrower shall maintain a minimum Liquidity that is one and
three-quarters (1.75) times the outstanding balance of Equipment Advances. For
the purposes of this Section, "Liquidity" shall mean cash and cash equivalents
of Borrower plus eighty percent (80%) of Eligible Accounts, minus the
outstanding Advances under the Committed Revolving Line. Notwithstanding the
foregoing, after Borrower has maintained a Debt Service Coverage of at least
1.50 to 1.00 for six consecutive months, Borrower thereafter shall maintain such
Debt Service Coverage of at least 1.50 to 1.00 as of the last day of each month
in lieu of the liquidity covenant.
6.12 IPO/Equity Infusion. Borrower shall close an IPO/Equity
Infusion no later than September 30, 1999.
6.13 Profitability/Losses. Borrower may suffer quarterly losses
not to exceed the following amounts for the following periods: $1,850,000 for
the fiscal quarter ending March 31, 1999; $1,250,000 for the fiscal quarter
ending June 30, 1999; $500,000 for the fiscal quarter ending September 30, 1999;
and $2,700,000 for the fiscal quarter ending December 31, 1999. Thereafter,
Borrower shall have a net profit of at least $1.00 as of the end of each fiscal
quarter. All net loss covenants above shall exclude (i) non-recurring charges
related to merger and acquisition activities, including fees and expenses
associated with such activities, (ii) fees and expenses associated with an
IPO/Equity Infusion, and (iii) any charges relating to "cheap stock" issues with
the Securities and Exchange Commission. Capitalized software development costs
shall be included in the quarterly loss calculation above.
6.14 Registration of Intellectual Property Rights.
(a) Borrower shall register or cause to be
registered (to the extent they are registerable) on an expedited basis (to the
extent not already registered) with the United States Patent and Trademark
Office or the United States Copyright Office, as applicable, those intellectual
property rights listed on Exhibits A, B and C to the Intellectual Property
Security Agreement delivered to Bank by Borrower in connection with this
Agreement within forty-five (45) days of the date of this Agreement. Borrower
shall register or cause to be registered (to the extent they are registerable)
with the United States Patent and Trademark Office or the United States
Copyright Office, as applicable, and notify Bank of 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, including without limitation major revisions or additions to
the intellectual property rights listed on such Exhibits A, B and C.
(b) Borrower shall execute and deliver such
additional instruments and documents from time to time as Bank shall reasonably
request to perfect Bank's security interest in the Intellectual Property
Collateral.
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(c) Borrower shall (i) protect, defend and
maintain the validity and enforceability of the Trademarks, Patents and
Copyrights, (ii) use its best efforts to detect infringements of the Trademarks,
Patents and Copyrights and promptly advise Bank in writing of material
infringements detected and (iii) not allow any material Trademarks, Patents or
Copyrights to be abandoned, forfeited or dedicated to the public without the
written consent of Bank, which shall not be unreasonably withheld.
(d) Bank may audit Borrower's Intellectual
Property Collateral to confirm compliance with this Section 6.15, provided such
audit may not occur more often than once per year, unless an Event of Default
has occurred and is continuing. Bank shall have the right, but not the
obligation, to take, at Borrower's sole expense, any actions that Borrower is
required under this Section 6.15 to take but which Borrower fails to take, after
fifteen (15) days' notice to Borrower. Borrower shall reimburse and indemnify
Bank for all reasonable costs and reasonable expenses incurred in the reasonable
exercise of its rights under this Section 6.15.
6.15 Further Assurances. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Credit
Extensions, Borrower will not do any of the following without the prior written
consent of Bank:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than: (i) Transfers
of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of surplus, worn-out or obsolete Equipment.
7.2 Change in Business. Engage in any business, or permit any of
its Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto). Borrower will not, without thirty (30) days prior
written notification to Bank, relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any
of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person, except for
(i) non-cash transactions not resulting in a change in control of Borrower or in
which the Borrower is the surviving entity, (ii) transactions in which Borrower
transfers not more than $2,000,000 in cash and an IPO/Equity Infusion has
occurred, and (iii) transactions in which Borrower transfers not more than
$5,000,000 in cash and Borrower has made a first bona fide offering pursuant to
a registration statement under the Securities Act of 1933 of the sale of its
equity securities in which the net cash proceeds to Borrower are not less than
Fifteen Million Dollars ($15,000,000).
7.4 Indebtedness. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock, except that Borrower may (i) repurchase the stock of
former employees pursuant to stock repurchase agreements as long as an Event of
Default does not exist prior to such repurchase or would not exist after giving
effect to such repurchase and (ii) prior to an IPO/Equity Infusion, pay cash
dividends relating to federal and state income taxes associated with an S
corporation incurred by its shareholders as a result of Borrower's operations.
7.7 Investments. Directly or indirectly acquire or own, or make
any Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments, or as otherwise permitted under Section 7.3.
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7.8 Transactions with Affiliates. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 Inventory. Store the Inventory with a bailee, warehouseman,
or similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory; provided, however, that Borrower may deposit software
code in escrow for customers in the ordinary course of business. Except for
Inventory sold in the ordinary course of business and except for such other
locations as Bank may approve in writing, Borrower shall keep the Inventory only
at the location set forth in Section 10 hereof and such other locations of which
Borrower gives Bank prior written notice and as to which Borrower signs and
files a financing statement where needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company" or be controlled
by an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Credit Extension for such
purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of
the Obligations;
8.2 Covenant Default. If Borrower fails to perform any
obligation under Article 6 or violates any of the covenants contained in Article
7 of this Agreement, or fails or neglects to perform, keep, or observe any other
material term, provision, condition, covenant, or agreement contained in this
Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10) days after Borrower receives notice thereof or
any officer of Borrower becomes aware thereof; provided, however, that if the
default cannot by its nature be cured within the ten (10) day period or cannot
after diligent attempts by Borrower be cured within such ten (10) day period,
and such default is likely to be cured within a reasonable time, then Borrower
shall have an additional reasonable period (which shall not in any case exceed
thirty (30) days) to attempt to cure such default, and within such reasonable
time period the failure to have cured such default shall not be deemed an Event
of Default (provided that no Credit Extensions will be required to be made
during such cure period);
8.3 Material Adverse Change. If there occurs a material adverse
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;
8.4 Attachment. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
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8.5 Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within thirty (30)
days (provided that no Credit Extensions will be made prior to the dismissal of
such Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account
of Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least One Hundred
Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no Credit
Extensions will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced
by this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
(b) Cease advancing money or extending credit to
or for the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Settle or adjust disputes and claims
directly with account debtors for amounts, upon terms and in whatever order that
Bank reasonably considers advisable;
(d) Make such payments and do such acts as Bank
considers necessary or reasonable to protect its security interest in the
Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and
to make the Collateral available to Bank as Bank may designate. Borrower
authorizes Bank to enter the premises where the Collateral is located, to take
and maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith. With respect to any of
Borrower's owned premises, Borrower hereby grants Bank a license to enter into
possession of such premises and to occupy the same, without charge, in order to
exercise any of Bank's rights or remedies provided herein, at law, in equity, or
otherwise;
(e) Set off and apply to the Obligations any and
all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at
any time owing to or for the credit or the account of Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Collateral. Bank is hereby granted a license or other
right, solely pursuant to the provisions of this Section 9.1, to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
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(g) Sell the Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions, for cash
or on terms, in such manner and at such places (including Borrower's premises)
as Bank determines is commercially reasonable, and apply any proceeds to the
Obligations in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any
public sale; and
(i) Any deficiency that exists after disposition
of the Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse Borrower's name on any checks or other forms of payment or security
that may come into Bank's possession; (C) sign 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) dispose of any Collateral; (e) make, settle, and adjust all
claims under and decisions with respect to Borrower's policies of insurance; and
(f) settle and adjust disputes and claims respecting the accounts directly with
account debtors, for amounts and upon terms which Bank determines to be
reasonable; provided Bank may exercise such power of attorney to sign the name
of Borrower on any of the documents described in Section 4.2 regardless of
whether an Event of Default has occurred. The appointment of Bank as Borrower's
attorney in fact, and each and every one of Bank's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully repaid and performed and Bank's obligation to provide advances hereunder
is terminated.
9.3 Accounts Collection. At any time during the term of this
Agreement, Bank may notify any Person owing funds to Borrower of Bank's security
interest in such funds and verify the amount of such Account. Borrower shall
collect all amounts owing to Borrower for Bank, receive in trust all payments as
Bank's trustee, and immediately deliver such payments to Bank in their original
form as received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following after reasonable notice to Borrower: (a) make payment of the same or
any part thereof; (b) set up such reserves under the Revolving Facility as Bank
deems necessary to protect Bank from the exposure created by such failure; or
(C) obtain and maintain insurance policies of the type discussed in Section 6.6
of this Agreement, and take any action with respect to such policies as Bank
deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies
with reasonable banking practices, Bank shall not in any way or manner be liable
or responsible for: (a) the safekeeping of the Collateral; (b) any loss or
damage thereto occurring or arising in any manner or fashion from any cause; (c)
any diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
22
<PAGE> 24
10. NOTICES.
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower: N2H2, INC.
900 4th Avenue, Suite 3400
Seattle, WA 98164
Attn: Mr. John Duncan
Fax: (206) 336-1556
If to Bank: Imperial Bank
226 Airport Parkway
San Jose, CA 95110-1024
Attn: Corporate Banking Center
FAX: (408) 451-8523
with a copy to: Imperial Bank
777 108th Avenue NE, Suite 1670
Bellevue, WA 98004
Attn: Mr. J.P. Michael
FAX: (425) 454-6224
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the nonexclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS.
12.1 Successors and Assigns. This Agreement shall bind and inure
to the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a
23
<PAGE> 25
result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance
of all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot
be amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties
made in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
13. JUDICIAL REFERENCE.
(a) Other than (i) nonjudicial foreclosure and
all matters in connection therewith regarding security interests in real or
personal property; or (ii) the appointment of a receiver, or the exercise of
other provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which a party subject to this Agreement gives written notice to all
other parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the provisions of Section
638 et seq. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the settlement
of any controversy, dispute or claim concerning this Agreement, including
whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court of Santa Clara County (the "Court"). The referee
shall be a retired Judge of the Court selected by mutual agreement of the
parties, and if they cannot so agree within forty-five (45) days after the Claim
Date, the referee shall be promptly selected by the Presiding Judge of the Court
(or his representative). The referee shall be appointed to sit as a temporary
judge, with all of the powers for a temporary judge, as authorized by law, and
upon selection should take and subscribe to the oath of office as provided for
in Rule 244 of the California Rules of the Court (or any subsequently enacted
Rule). Each party shall have one peremptory challenge pursuant to CCP Section
170.6. The referee shall (a) be requested to set the matter for hearing within
sixty (60) days after the date of selection of the referee and (b) try any and
all issues of law or fact and report a statement of decision upon them, if
possible, within ninety (90) days of the Claim Date. Any decision rendered by
the referee will be final, binding and conclusive and judgment shall be entered
pursuant to CCP Section 644 in any court in the State of California having
jurisdiction. Any party may apply for a reference proceeding at any time after
thirty (30) days following notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or trial.
All discovery permitted by this Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by the referee. The
referee may extend such period in the event of a party's refusal to provide
requested discovery or unavailability of a witness due to absence or illness. No
party shall be entitled to "priority" in conducting discovery. Depositions may
be taken by either party upon seven (7) days written notice, and request for
production or inspection of documents which cannot be resolved by the parties
shall be submitted to the referee as provided herein. The Superior Court is
empowered to issue temporary and/or provisions remedies, as appropriate.
(b) Except as expressly set forth in this
Agreement, the referee shall determine the manner in which the reference
proceeding is conducted including the time and place of all hearings, the order
of presentation of evidence, and all other questions that arise with respect to
the course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be
24
<PAGE> 26
used at any hearing conducted before the referee. The party making such a
request shall have the obligation to arrange for and pay for the court reporter.
The costs of the court reporter at the trial shall be borne equally by the
parties.
(c) The referee shall be required to determine
all issues in accordance with existing case law and the statutory laws of the
State of California. The rules of evidence applicable to proceedings at law in
the State of California will be applicable to the reference proceeding. The
referee shall be empowered to enter equitable as well as legal relief, to
provide all temporary and/or provisional remedies and to enter equitable orders
that will be binding upon the parties. The referee shall issue a single judgment
at the close of the reference proceeding which shall dispose of all of the
claims of the parties that are the subject of the reference. The parties hereto
expressly reserve the right to contest or appeal from the final judgment or any
appealable order or appealable judgment entered by the referee. The parties
hereto expressly reserve the right to findings of fact, conclusions of laws, a
written statement of decision, and the right to move for a new trial or a
different judgment, which new trial, if granted, is also to be a reference
proceeding under this provisions.
(d) In the event that the enabling legislation
which provides for appointment of a referee is repealed (and no successor
statute is enacted), any dispute between the parties that would otherwise be
determined by the reference procedure herein described will be resolved and
determined by arbitration. The arbitration will be conducted by a retired judge
of the Court, in accordance with the California Arbitration Act, Section 1280
through Section 1294.2 of the CCP as amended from time to time. The limitations
with respect to discovery as set forth hereinabove shall apply to any such
arbitration proceeding.
25
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
N2H2, INC.
By: /s/ John Duncan
---------------------------------
Title: CFO
------------------------------
IMPERIAL BANK
By: /s/ JP Michael
---------------------------------
Title: VP
------------------------------
26
<PAGE> 28
EXHIBIT A
COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT
All personal property of Borrower (herein referred to as "Borrower" or
"Debtor") whether presently existing or hereafter created, written, produced or
acquired, including, but not limited to:
(i) all accounts receivable, accounts,
chattel paper, contract rights (including, without limitation, royalty
agreements, license agreements and distribution agreements), documents,
instruments, money, deposit accounts and general intangibles, including, without
limitation, returns, repossessions, books and records relating thereto, and
equipment containing said books and records, all investment property, including
securities and securities entitlements;
(ii) all software, computer source codes and
other computer programs (collectively, the "Software Products"), and all common
law and statutory copyrights and copyright registrations, applications for
registration, now existing or hereafter arising, United States of America and
foreign, obtained or to be obtained on or in connection with the Software
Products, or any parts thereof or any underlying or component elements of the
Software Products together with the right to copyright and all rights to renew
or extend such copyrights and the right (but not the obligation) of Bank (herein
referred to as "Bank" or "Secured Party") to sue in its own name and/or the name
of the Debtor for past, present and future infringements of copyright;
(iii) all goods, including, without
limitation, equipment and inventory (including, without limitation, all export
inventory);
(iv) all guarantees and other security
therefor;
(v) all trademarks, service marks, trade
names and service names and the goodwill associated therewith;
(vi) (a) all patents and patent applications
filed in the United States Patent and Trademark Office or any similar office of
any foreign jurisdiction, and interests under patent license agreements,
including, without limitation, the inventions and improvements described and
claimed therein, (b) licenses pertaining to any patent whether Debtor is
licensor or licensee, (C) all income, royalties, damages, payments, accounts and
accounts receivable now or hereafter due and/or payable under and with respect
thereto, including, without limitation, damages and payments for past, present
or future infringements thereof, (d) the right (but not the obligation) to sue
for past, present and future infringements thereof, (e) all rights corresponding
thereto throughout the world in all jurisdictions in which such patents have
been issued or applied for, and (f) the reissues, divisions, continuations,
renewals, extensions and continuations-in-part with any of the foregoing (all of
the foregoing patents and applications and interests under patent license
agreements, together with the items described in clauses (a) through (f) in this
paragraph are sometimes herein individually and collectively referred to as the
"Patents"); and
(vii) all products and proceeds, including,
without limitation, insurance proceeds, of any of the foregoing.
27
<PAGE> 29
EXHIBIT B-1
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., Pacific Time
TO: Emerging Growth Industries DATE:_______________________
FAX#: (425) 454-6224 TIME:_______________________
FROM: __________________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY:___________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:___________________________________________________________
PHONE NUMBER:___________________________________________________________________
FROM ACCOUNT # _________________________ TO ACCOUNT #________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $___________________________________
PRINCIPAL PAYMENT (ONLY) $___________________________________
INTEREST PAYMENT (ONLY) $___________________________________
PRINCIPAL AND INTEREST (PAYMENT) $___________________________________
OTHER INSTRUCTIONS:_____________________________________________________________
________________________________________________________________________________
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
_______________________________________ ____________________
Authorized Requester Phone #
_______________________________________ ____________________
Authorized Requester Phone #
__________________________________________________
Authorized Signature (Bank)
<PAGE> 30
EXHIBIT B-2
ADVANCE REQUEST FORM
The undersigned hereby certifies as follows:
I, ________________ , am the duly elected and acting _________________
of _______________.
This Advance Request Form is delivered on behalf of Borrower to Imperial
Bank, pursuant to that certain Loan and Security Agreement among Borrower and
Imperial Bank dated March , 1999 (the "Agreement"). The terms used herein which
are defined in the Agreement have the same meaning herein as ascribed to them
therein.
Borrower hereby requests on _______________, 19___ an Advance (the
"Advance") as follows:
(a) The date on which the Advance is to be made is __________ ,
19___ .
(b) The amount of the Advance is to be ______________ ($_____),
in the form of a Prime Rate Advance of $_____ ; and/or a LIBOR Rate Advance of
$_____ for an Interest Period of ___ months.
All representations and warranties of Borrower stated in the Agreement
are true, correct and complete in all material respects as of the date of this
request for an Advance; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
IN WITNESS WHEREOF, this Advance Request Form is executed by the
undersigned as of this _____________ day of __________________ , 19___ .
By:_________________________________
Title:______________________________
<PAGE> 31
EXHIBIT B-3
LIBOR RATE CONVERSION/CONTINUATION CERTIFICATE
The undersigned hereby certifies as follows:
I, ____________________, am the duly elected and acting
____________________ of ______________________ ("Borrower").
This certificate is delivered on behalf of Borrower to Bank, pursuant to
Section 2 of that certain Loan and Security Agreement among Borrower and Bank
(the "Agreement"). The terms used in this LIBOR Rate Conversion/Continuation
Certificate which are defined in the Agreement have the same meaning herein as
ascribed to them therein.
Borrower hereby requests on ____________________________, 19____ a LIBOR
Rate Advance (the "Advance") as follows:
(a) (i) A rate conversion of an existing Prime Rate Advance from a
Prime Rate Advance to a LIBOR Rate Advance; or
(ii) A continuation of an existing LIBOR Rate Advance as a LIBOR
Rate Advance.
[Check (i) or (ii) above]
(b) The date on which the Advance is to be made is __________________,
19____
(c) The amount of the Advance is to be ___________________
($____________), for an Interest Period of ____________ month(s).
All representations and warranties of Borrower stated in the Agreement
are true, correct and complete in all material respects as of the date of this
request for a loan; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
IN WITNESS WHEREOF, this LIBOR Rate Conversion/Continuation Certificate
is executed by the undersigned as of this _____________ day of
____________________, 19_________.
____________________________________
By:_________________________________
Title:______________________________
FOR INTERNAL BANK USE ONLY
<TABLE>
<CAPTION>
LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date
========================= ====================== ======================= ======================
<S> <C> <C> <C>
___%
========================= ====================== ======================= ======================
</TABLE>
<PAGE> 32
EXHIBIT C
BORROWING BASE CERTIFICATE
- --------------------------------------------------------------------------------
Borrower: N2H2, INC. Lender: Imperial Bank
Commitment Amount: up to $2,000,000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of _______ $__________________
2. Additions (please explain on reverse) $__________________
3. TOTAL ACCOUNTS RECEIVABLE $__________________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $__________________
5. Balance of 25% over 90 day accounts $__________________
6. Concentration Limits $__________________
7. Foreign Accounts $__________________
8. Governmental Accounts (over 90 day accounts) $__________________
9. Contra Accounts $__________________
10. Demo Accounts $__________________
11. Intercompany/Employee Accounts $__________________
12. Other (less than 120 days exceeding $150,000, or
please explain on reverse) $__________________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $__________________
14. Eligible Accounts (#3 minus #13) $__________________
15. LOAN VALUE OF ACCOUNTS (80% of #14) $__________________
BALANCES
16. Maximum Loan Amount $ 2,000,000
=========
17. Total Funds Available [Lesser of #15 or #16] $__________________
18. Present balance owing on Line of Credit $__________________
19. Outstanding under Sublimits ( ) $__________________
20. RESERVE POSITION (#17 minus #18 and #19) $__________________
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Imperial Bank.
N2H2, INC.
By:_______________________________
Authorized Signer
<PAGE> 33
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: IMPERIAL BANK
FROM: N2H2, INC.
The undersigned authorized officer of N2H2, INC. hereby certifies that
in accordance with the terms and conditions of the Loan and Security Agreement
between Borrower and Bank (the "Agreement"), (i) Borrower is in complete
compliance for the period ending ______________ with all required covenants
except as noted below and (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct in all material respects as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
Please indicate compliance status by circling Yes/No under "Complies"
column.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C> <C>
Monthly financial statements Monthly within 30 days Yes No
Operating Budgets, annual budgets, FYE within 30 days Yes No
and forecasts
Annual (CPA Audited) FYE within 90 days Yes No
10K and 10Q Within 5 days of SEC filing Yes No
(as applicable)
A/R & A/P Agings Monthly within 20 days Yes No
A/R Audit Initial and Annual Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Maintain on a Monthly Basis:
Adjusted Quick Ratio 1 1.25:1.00 _____:1.00 Yes No
Minimum Tangible Net Worth 2 $7,000,000 $_____ Yes No
Minimum Liquidity 3 or 1.50:1.00 or _____:1.00 Yes No
Debt Service Coverage 4 1.50:1.00
Maintain on a Quarterly Basis:
Profitability/Loss 5 > $1.00 $_____ Yes No
</TABLE>
1 Increasing to 1.50:1.00 subsequent to an IPO/Equity Infusion.
2 Measured only subsequent to an IPO/Equity Infusion.
3 Increasing to 1.75:1.00 subsequent to an IPO/Equity Infusion.
4 Notwithstanding the foregoing, after Borrower has maintained a Debt
Service Coverage of at least 1.50 to 1.00 for six consecutive months,
Borrower thereafter shall maintain such Debt Service Coverage of at
least 1.50 to 1.00 as of the last day of each month in lieu of the
liquidity covenant.
5 Quarterly losses allowed as follows: $1,850,000 for quarter ending
03/31/99; $1,250,000 for quarter ending 06/30/99; $500,000 for quarter
ending 09/30/99; $2,700,000 for quarter ending 12/31/99. Profitability
of at least $1.00 required thereafter.
<TABLE>
<S> <C>
Comments Regarding Exceptions: See BANK USE ONLY
Attached. Sincerely,
Received by:___________________________
__________________________________ AUTHORIZED SIGNER
Signature Date:__________________________________
__________________________________ Verified:______________________________
Title AUTHORIZED SIGNER
Date:__________________________________
__________________________________
Date Compliance Status: Yes No
</TABLE>
<PAGE> 34
SCHEDULE OF EXCEPTIONS
Permitted Indebtedness (Section 1.1)
<TABLE>
<S> <C>
CAPITAL LEASES
Account # - Description Mar 31, '99
25004- AT&T Lease #680619/Pac #4 21,997.11
25005- First Sierra - Balboa #2 10,858.31
25006- BanCorp Financial/Pacifica #1 32,265.27
25007- Colonial Pacific (Pacifica #5) 66,632.35
25008- Dolsen Software 11,105.92
25009- First Sierra - Balboa #1 32,366.17
25010- GF Funding IV #1/Prolease 22,233.60
25011- GF Funding IV #2/Prolease 25,487.59
25012- Green Tree FinancialPacifica #2 28,660.58
25013- Interwest #1 22,733.99
25014- Interwest #2 26,603.63
25015- JLA Credit/Pacifica #3 32,662.85
25016- Leasetec #1 L603500 35,549.57
25017- Leasetec #2 L603501 17,697.33
25018- Leasetec #3 L603502 16,990.18
25019- Leasetec #4 L603503 33,504.73
25022- Summit 66,591.06
25023- Dolsen Cubicles 10,274.93
25024- Source Capital/Vista 30,468.80
25025- Leasetec #5 L603506 56,837.61
25026- Leasetec #6 L603504 34,286.16
25027- Saddleback 49,426.15
25028- Rockford Ind./Cisco Eq 3,858.02
25029- Rave #3 92,827.04
25030- Rave #4 229,356.64
25031- Rave #5 104,045.64
------------
1,115,321.23
============
NOTES PAYABLE
Washington Partners 29,522.53
Toll Free Cellular 57,000.00
============
86,522.53
============
</TABLE>
<PAGE> 35
SCHEDULE OF EXCEPTIONS (cont.)
Permitted Investments (Section 1.1)
Fred Meyer Commercial Paper
Seafirst Pacific Horizon Account
Permitted Liens (Section 1.1): Please see schedule of Permitted Indebtedness.
Prior Names (Section 5.7)
Litigation (Section 5.8):
The Company entered into a letter agreement dated May 8, 1998 with Carpediem
Capital, Inc. ("Carpediem") under which Carpediem was engaged as the Company's
exclusive agent until January 31, 1999 in connection with arranging a preferred
equity or common equity investment in the Company (a "Transaction"). The Company
terminated the letter agreement as of August 8, 1998. Carpediem has claimed that
if a Transaction closes within 24 months following termination, Carpediem is
entitled to a warrant to purchase 3% of the post-transaction shares of the
Company and to receive a "success fee" based on the following schedule:
<TABLE>
<S> <C>
6.0% of first 7.5 million
4.0% of next $5.0 million
3.0% of next $5.0 million
2.0% of next $5.0 million
1.0% of all monies thereafter
</TABLE>
<PAGE> 36
CORPORATE RESOLUTIONS TO BORROW
- --------------------------------------------------------------------------------
BORROWER: N2H2, INC.
- --------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of N2H2, INC. (the
"Corporation"), HEREBY CERTIFY that the Corporation is organized and existing
under and by virtue of the laws of the State of Washington.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Articles of Incorporation, as amended and the
Restated Bylaws of the Corporation, each of which is in full force and effect on
the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation,
duly called and held, at which a quorum was present and voting (or by other duly
authorized corporate action in lieu of a meeting), the following resolutions
were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
<S> <C> <C>
- ------------------------------ ------------------------------ ------------------------------
John Duncan CFO /s/ John Duncan
- ------------------------------ ------------------------------ ------------------------------
Ben Eggerton Controller /s/ Ben Eggerton
- ------------------------------ ------------------------------ ------------------------------
- ------------------------------ ------------------------------ ------------------------------
- ------------------------------ ------------------------------ ------------------------------
</TABLE>
acting for an on behalf of this Corporation and as its act and deed be,
and they hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Imperial Bank ("Bank"),
on such terms as may be agreed upon between the officers, employees, or agents
and Bank, such sum or sums of money as in their judgment should be borrowed,
without limitation, including such sums as are specified in that certain Loan
and Security Agreement dated as of April 30, 1999 (the "Loan Agreement").
EXECUTE LOAN AGREEMENT. To execute and deliver to Bank the Loan
Agreement, and also to execute and deliver to Bank one or more renewals,
extensions, modifications, refinancings, consolidations, or substitutions for
one or more of the notes, or any portion of the notes.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements as
they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
1
<PAGE> 37
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set forth opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that the Resolutions are in full force and effect and have not been modified
or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on April 30, 1999 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X /s/ John Duncan
-----------------------------------
- --------------------------------------------------------------------------------
2
<PAGE> 38
IMPERIAL BANK
MEMBER FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
(REVOLVER)
Name(s): N2H2, Inc. Date: April 30, 1999
<TABLE>
<S> <C> <C>
$ paid to you directly by Cashiers Check No.
$2,000,000.00 credited to deposit account No. 36002360 when Advances are requested or
by cashiers check or wire.
$ amounts paid to Bank for
Amounts paid to others on your behalf:
$0.00 to Imperial Bank for Loan Fee
$0.00 to Imperial Bank for Document Fee
$ to Imperial Bank for accounts receivable audit (estimate)
$ to Bank counsel fees and expenses
$ To
$ To
$2,000,000.00 TOTAL (AMOUNT FINANCED)
</TABLE>
Upon consummation of this transaction, this document will also serve as
the authorization for Imperial Bank to disburse the loan proceeds as stated
above.
/s/ John Duncan
- ----------------------------------- -----------------------------------
Signature Signature
<PAGE> 39
IMPERIAL BANK
MEMBER FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
(TERM LOAN)
Name(s): N2H2, Inc. Date: April 30, 1999
<TABLE>
<S> <C> <C>
$ paid to you directly by Cashiers Check No.
$2,000,000.00 credited to deposit account No. 36002360 when Advances are requested
$ amounts paid to Bank for
Amounts paid to others on your behalf:
$0.00 to Imperial Bank for Loan Fee
$0.00 to Imperial Bank for Document Fee
$ to Imperial Bank for accounts receivable
audit (estimate)
$ to Bank counsel fees and expenses
$ to
$ to
$2,000,000.00 TOTAL (AMOUNT FINANCED)
</TABLE>
Upon consummation of this transaction, this document will also serve as
the authorization for Imperial Bank to disburse the loan proceeds as stated
above.
/s/ John Duncan
- ----------------------------------- -----------------------------------
Signature Signature
<PAGE> 40
AGREEMENT TO PROVIDE INSURANCE
TO: IMPERIAL BANK Date: April 30, 1999
9920 S. La Cienega, Ste. 628 Borrower: N2 H2, INC.
Inglewood, CA 90301
In consideration of a loan in an amount of up to $4,000,000,
secured by all tangible personal property including inventory and equipment.
I/We agree to obtain adequate insurance coverage to remain in
force during the term of the loan.
I/We also agree to advise the below named agent to add Imperial
Bank as lender's loss payable on the new or existing insurance policy, and to
furnish Bank at above address with a copy of said policy/endorsements and any
subsequent renewal policies.
I/We understand that the policy must contain:
1. Fire and extended coverage in an amount sufficient to cover:
(a) The amount of the loan, OR
(b) All existing encumbrances, whichever is greater,
But not in excess of the replacement value of the improvements on the
real property.
2. Lender's "Loss Payable" Endorsement Form 438 BFU in favor of Imperial
Bank, or any other form acceptable to Bank.
INSURANCE INFORMATION
Insurance Co./Agent: J&H/MARSH MCLENNAN Telephone No.: (206) 613-2200
Agent's Address: 1215 4TH AVENUE, SUITE 2300, SEATTLE WA 98161
Signature of Obligor: /S/ John Duncan
----------------------------------------
Signature of Obligor:
----------------------------------------
- --------------------------------------------------------------------------------
FOR BANK USE ONLY
INSURANCE VERIFICATION: Date:_______________________
Person Spoken to:____________________________________
Policy Number:_______________________________________
Effective Form:______ To:_________________________
Verified By:_________________________________________
<PAGE> 41
IMPERIAL BANK
CALIFORNIA'S BUSINESS BANKS AUTOMATIC DEBIT AUTHORIZATION
MEMBER FDIC
To: IMPERIAL BANK
Re: LOAN # ___________________________________ (Term Loan)
You are hereby authorized and instructed to charge account No. 36002360 in the
name of N2 H2, INC.
for principal and interest payments due on above referenced loan as set forth
below and credit the loan referenced above.
[X] Debit each interest payment as it becomes due according to the terms of the
note and any renewals or amendments thereof.
[X] Debit each principal payment is at becomes due
according to the terms of the note and any renewals or amendments thereof.
This
Authorization is to remain in full force and effect until revoked in writing.
<TABLE>
<CAPTION>
Borrower Signature Date
<S> <C>
/s/ John Duncan 4-30-99
- ---------------------------------------------------- -----------------
- ---------------------------------------------------- -----------------
- ---------------------------------------------------- -----------------
</TABLE>
<PAGE> 42
IMPERIAL BANK
CALIFORNIA'S BUSINESS BANKS AUTOMATIC DEBIT AUTHORIZATION
MEMBER FDIC
To: IMPERIAL BANK
Re: LOAN # ___________________________________ (Revolver)
You are hereby authorized and instructed to charge account No. 36002360 in the
name of N2 H2, INC
for principal and interest payments due on above referenced loan
as set forth below and credit the loan referenced above.
[X] Debit each interest payment as it becomes due according to the terms
of the note and any renewals or amendments thereof.
[X] Debit each principal payment is at becomes due according to the
terms of the note and any renewals or amendments thereof.
This Authorization is to remain in full force and effect until revoked in
writing.
<TABLE>
<CAPTION>
Borrower Signature Date
<S> <C>
/s/ John Duncan 4-30-99
- ---------------------------------------------------- -----------------
- ---------------------------------------------------- -----------------
- ---------------------------------------------------- -----------------
</TABLE>
<PAGE> 43
Debtor: N2 H2, INC.
EXHIBIT A
COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT
All personal property of Borrower (herein referred to as "Borrower" or
"Debtor") whether presently existing or hereafter created, written, produced or
acquired, including, but not limited to:
(i) all accounts receivable, accounts, chattel paper, contract
rights (including, without limitation, royalty agreements, license agreements
and distribution agreements), documents, instruments, money, deposit accounts
and general intangibles, including, without limitation, returns, repossessions,
books and records relating thereto, and equipment containing said books and
records, all investment property, including securities and securities
entitlements;
(ii) all software, computer source codes and other computer
programs (collectively, the "Software Products"), and all common law and
statutory copyrights and copyright registrations, applications for registration,
now existing or hereafter arising, United States of America and foreign,
obtained or to be obtained on or in connection with the Software Products, or
any parts thereof or any underlying or component elements of the Software
Products together with the right to copyright and all rights to renew or extend
such copyrights and the right (but not the obligation) of Bank (herein referred
to as "Bank" or "Secured Party") to sue in its own name and/or the name of the
Debtor for past, present and future infringements of copyright;
(iii) all goods, including, without limitation, equipment and
inventory (including, without limitation, all export inventory);
(iv) all guarantees and other security therefor;
(v) all trademarks, service marks, trade names and service names
and the goodwill associated therewith;
(vi) (a) all patents and patent applications filed in the United
States Patent and Trademark Office or any similar office of any foreign
jurisdiction, and interests under patent license agreements, including, without
limitation, the inventions and improvements described and claimed therein, (b)
licenses pertaining to any patent whether Debtor is licensor or licensee, (c)
all income, royalties, damages, payments, accounts and accounts receivable now
or hereafter due and/or payable under and with respect thereto, including,
without limitation, damages and payments for past, present or future
infringements thereof, (d) the right (but not the obligation) to sue for past,
present and future infringements thereof, (e) all rights corresponding thereto
throughout the world in all jurisdictions in which such patents have been issued
or applied for, and (f) the reissues, divisions, continuations, renewals,
extensions and continuations-in-part with any of the foregoing (all of the
foregoing patents and applications and interests under patent license
agreements, together with the items described in clauses (a) through (f) in this
paragraph are sometimes herein individually and collectively referred to as the
"Patents"); and
(vii) all products and proceeds, including, without limitation,
insurance proceeds, of any of the foregoing.
<PAGE> 44
Debtor: N2 H2, INC.
EXHIBIT A
COLLATERAL DESCRIPTION ATTACHMENT
TO UCC 1 FINANCING STATEMENT
All personal property of Borrower (herein referred to as "Borrower" or
"Debtor") whether presently existing or hereafter created, written, produced or
acquired, including, but not limited to:
(viii) all accounts receivable, accounts, chattel paper,
contract rights (including, without limitation, royalty agreements, license
agreements and distribution agreements), documents, instruments, money, deposit
accounts and general intangibles, including, without limitation, returns,
repossessions, books and records relating thereto, and equipment containing said
books and records, all investment property, including securities and securities
entitlements;
(ix) all software, computer source codes and other computer
programs (collectively, the "Software Products"), and all common law and
statutory copyrights and copyright registrations, applications for registration,
now existing or hereafter arising, United States of America and foreign,
obtained or to be obtained on or in connection with the Software Products, or
any parts thereof or any underlying or component elements of the Software
Products together with the right to copyright and all rights to renew or extend
such copyrights and the right (but not the obligation) of Bank (herein referred
to as "Bank" or "Secured Party") to sue in its own name and/or the name of the
Debtor for past, present and future infringements of copyright;
(x) all goods, including, without limitation, equipment and
inventory (including, without limitation, all export inventory);
(xi) all guarantees and other security therefor;
(xii) all trademarks, service marks, trade names and service
names and the goodwill associated therewith;
(xiii) (a) all patents and patent applications filed in the
United States Patent and Trademark Office or any similar office of any foreign
jurisdiction, and interests under patent license agreements, including, without
limitation, the inventions and improvements described and claimed therein, (b)
licenses pertaining to any patent whether Debtor is licensor or licensee, (c)
all income, royalties, damages, payments, accounts and accounts receivable now
or hereafter due and/or payable under and with respect thereto, including,
without limitation, damages and payments for past, present or future
infringements thereof, (d) the right (but not the obligation) to sue for past,
present and future infringements thereof, (e) all rights corresponding thereto
throughout the world in all jurisdictions in which such patents have been issued
or applied for, and (f) the reissues, divisions, continuations, renewals,
extensions and continuations-in-part with any of the foregoing (all of the
foregoing patents and applications and interests under patent license
agreements, together with the items described in clauses (a) through (f) in this
paragraph are sometimes herein individually and collectively referred to as the
"Patents"); and
(xiv) all products and proceeds, including, without limitation,
insurance proceeds, of any of the foregoing.
By: __________________________
N2 H2, INC.
<PAGE> 45
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This Intellectual Property Security Agreement is entered into as of
April 30, 1999 by and between IMPERIAL BANK, a California chartered bank
("Bank") and N2H2, INC., a Washington corporation ("Grantor").
RECITALS
A. Bank has agreed to make certain advances of money and to extend
certain financial accommodation to Grantor (the "Loans") in the amounts and
manner set forth in that certain Loan and Security Agreement by and between Bank
and Grantor dated of even date herewith (as the same may be amended, modified or
supplemented from time to time, the "Loan Agreement"; capitalized terms used
herein are used as defined in the Loan Agreement). Bank is willing to make the
Loans to Grantor, but only upon the condition, among others, that Grantor shall
grant to Bank a security interest in certain Copyrights, Trademarks and Patents
to secure the obligations of Grantor under the Loan Agreement.
B. Pursuant to the terms of the Loan Agreement, Grantor has granted to
Bank a security interest in all of Grantor's right, title and interest, whether
presently existing or hereafter acquired, in, to and under all of the
Collateral.
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, and intending to be legally bound, as collateral security
for the prompt and complete payment when due of its obligations under the Loan
Agreement, Grantor hereby represents, warrants, covenants and agrees as follows:
AGREEMENT
To secure its obligations under the Loan Agreement, Grantor grants and
pledges to Bank a security interest in all of Grantor's right, title and
interest in, to and under its Intellectual Property Collateral (including
without limitation those Trademarks listed on Schedule C hereto), and including
without limitation all proceeds thereof (such as, by way of example but not by
way of limitation, license royalties and proceeds of infringement suits), the
right to sue for past, present and future infringements, all rights
corresponding thereto throughout the world and all re-issues, divisions
continuations, renewals, extensions and continuations-in-part thereof.
This security interest is granted in conjunction with the security
interest granted to Bank under the Loan Agreement. The rights and remedies of
Bank with respect to the security interest granted hereby are in addition to
those set forth in the Loan Agreement and the other Loan Documents, and those
which are now or hereafter available to Bank as a matter of law or equity. Each
right, power and remedy of Bank provided for herein or in the Loan Agreement or
any of the Loan Documents, or now or hereafter existing at law or in equity
shall be cumulative and concurrent and shall be in addition to every right,
power or remedy provided for herein and the exercise by Bank of any one or more
of the rights, powers or remedies provided for in this Intellectual Property
Security Agreement, the Loan Agreement or any of the other Loan Documents, or
now or hereafter existing at law or in equity, shall not preclude the
simultaneous or later exercise by any person, including Bank, of any or all
other rights, powers or remedies.
1
<PAGE> 46
IN WITNESS WHEREOF, the parties have cause this Intellectual Property
Security Agreement to be duly executed by its officers thereunto duly authorized
as of the first date written above.
GRANTOR:
Address of Grantor: N2H2, INC.
900 4th Avenue, Suite 3400 By: /s/ John Duncan
Seattle, WA 9816494110 ---------------------------------
Title: CFO
Attn: Mr. John Duncan ------------------------------
BANK:
IMPERIAL BANK
Address of Bank:
226 Airport Parkway By: /s/ J.P. Michael
San Jose, CA 95110 ---------------------------------
Title: Vice President
Attn: Corporate Banking Center ------------------------------
2
<PAGE> 47
EXHIBIT A
Copyrights
NONE
<PAGE> 48
EXHIBIT B
Patents
NONE
<PAGE> 49
EXHIBIT C
Trademarks
<TABLE>
<CAPTION>
Registration/ Registration/
Application Application
Description Number Date
- ----------- ------ ----
<S> <C> <C>
Searchopolis 75/978,097 09/21/98
Virtual Locker 75/628,830 01/27/99
Searchopolis 75/556,090 09/21/98
Bess 2,150,399 04/14/98
N2H2 2,150,398 04/14/98
</TABLE>
<PAGE> 1
EXHIBIT 10.5
N2H2, INC
STOCK OPTION PLAN
As amended
1. Purpose of the Plan. The purpose of this Stock Option Plan (the "Plan")
is to promote the long-term success of N2H2, Inc. (the "Company") by
creating a long-term mutuality of interests between the shareholders of
the Company and the participants under this plan.
2. Definitions. As used herein, the following definitions shall apply:
a. "Plan" shall mean this Stock Option Plan, as the same may be
amended from time to time.
b. "Board" shall mean the Board of Directors of the Company.
c. "Taxable Year" shall mean the fiscal year of the Company.
d. "Common Stock" shall mean the common stock of the Company.
e. "Company" shall mean N2H2, Inc., a Washington corporation.
"Parent" shall mean any parent corporation or other form of
business association that is treated as a corporation for tax
purposes owning, directly or indirectly, 50% or more of the
voting power of the shares of the corporation so as to qualify
as a "parent" within the meaning of Section 424 (e) of the Code.
"Subsidiary" shall mean any subsidiary defined as any
corporation or other form of business treated as a corporation
for tax purposes if 50% or more of the voting power of the
shares of such entity are owned, directly or indirectly, by the
Company so as to qualify as a "subsidiary" corporation within
the meaning of Section 424 (f) of the Code.
f. "Committee" shall mean the Stock Option Committee appointed by
the Board in accordance with Section 4(a) of the Plan.
g. "Option" shall mean any stock option granted pursuant to the
Plan.
h. "Optioned Shares" shall mean stock subject to an Option granted
pursuant to this Plan.
i. "Participant" shall mean an individual who receives a Stock
Option.
j. "Share" shall mean the Common Stock of the Company.
k. "Fair Market Value" shall be determined by the Committee.
l. "Code" shall mean the Internal Revenue Code of 1986, as amended.
<PAGE> 2
3. Stock Subject to Options. Except as otherwise provided in Section 13,
the maximum aggregate number of Shares which may be optioned and sold
pursuant to the Plan is one hundred twenty-five thousand (125,000)
Shares, which will be authorized, but unissued.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unissued Shares which were
subject thereto shall become available for other Options under the Plan,
unless the Plan shall have been terminated.
Stock issued upon exercise of options granted under this Plan may be
subject to restrictions on transfer, repurchase rights, or other
restrictions as determined by the Committee.
4. Administration of the Plan.
a. Appointment of Committee. The Plan shall be administered by the
Board, or a Stock Option Committee consisting of one or more
members. Members of the Committee shall be appointed by the
Board and shall serve until their resignation or removal. The
Board may remove members, with or without cause, at any time,
and may also fill any vacancies. All references to the Committee
in this Plan shall relate to the Board if no Committee is
established.
b. Procedure. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at
any meeting at which a quorum is present shall be deemed the
action of the Committee. In addition, any decision or
determination reduced to writing and signed by all of the
members of the Committee shall be fully as effective as if it
has been made by a majority vote at a meeting duly called and
held. The Committee may appoint a Secretary to keep minutes of
its meetings and may make such rules and regulations for the
conduct of its business as it shall deem advisable.
c. Powers of the Committee. Subject to the provisions of the Plan,
the Committee shall have authority:
(1) To determine the exercise price or fair market value of
the Shares covered by an Option, the participants to
whom and the time or times at which Options shall be
granted, and the number of Shares to be represented by
each Option;
(2) To interpret the Plan;
(3) To prescribe, amend and rescind rules and regulations
relating to the Plan;
<PAGE> 3
(4) To determine the terms and provisions of each Option
granted under the Plan (which need not be identical),
and with the consent of the holder thereof, to modify or
amend each Option;
(5) To determine whether the Option price is payable in
money or in stock of the Company or other acceptable
form;
(6) To authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant
of an Option previously granted by the Committee;
(7) To make all other determinations deemed necessary or
advisable for the administration of the Plan.
d. Securities Exchange Act of 1934. At any time that the Company
has a class of securities registered pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Plan shall be administered by the Board of Directors
or the Committee in accordance with Rule 16b-3 adopted under the
Exchange Act, as such Rule may be amended from time to time.
e. Liability. No member of the Committee shall be personally liable
by reason of any contract or other instrument executed by him or
her on his or her behalf or in his or her capacity as a member
of the Committee or for any mistake of judgment made in good
faith, and the Company shall indemnify and hold harmless each
member of the Committee and each other officer, employee, or
director of the Company to whom any duty or power relating to
the administration or interpretation of the Plan has been
delegated, against any cost or expense (including counsel fees)
or liability (including any sum paid in settlement of a claim
with the approval of the Committee) arising out of any act or
omission to act in connection with the Plan unless arising out
of such person's own fraud or bad faith.
f. Effect of Committee's Decision. All decisions, determinations
and interpretations of the Committee shall be final and binding
on all Participants and any other holders of any Options granted
under this Plan.
5. Eligibility. The Committee may award options to any present or future
director, officer, employee or consultant of the Company or any Parent
or Subsidiary of the Company (sometimes hereinafter collectively
referred to as "Participants").
6. Grants, Awards and Sales.
a. Type of Security. The Committee may, from time to time, take the
following actions, separately or in combination, under this
Plan:
<PAGE> 4
(1) Grant Incentive Stock Options, as defined in Section 422
of the Code, to any employee of the Company or any
Parent or Subsidiary of the Company, as provided in
Section 6(b) of this Plan; and
(2) Grant options other than Incentive Stock Options
("Non-Qualified Stock Options") as provided in Section 6
(c) of this Plan.
The Committee shall select the Participants to whom awards shall
be made. The Committee shall specify the action taken with
respect to each person granted any option under this Plan and
shall specifically designate each option granted under this Plan
as an Incentive Stock Option or Non-Qualified Stock Option.
b. Incentive Stock Options. Incentive Stock Options shall be
subject to the following terms and conditions:
(1) Incentive Stock Options may be granted under this Plan
only to employees of the Company or any Parent or
Subsidiary of the Company, including employees who are
directors.
(2) No employees may be granted Incentive Stock Options
under this Plan to the extent that the aggregate fair
market value, on the date of grant, of the Stock with
respect to which Incentive Stock options are exercisable
for the first time by that employee during any calendar
year, under this Plan and under any other incentive
stock option plan (within the meaning of Section 422 of
the Code) of the Company or any Parent or Subsidiary of
the Company, exceeds $100,000.
(3) An Incentive Stock Option may be granted under this Plan
to an employee possessing more than 10% of the total
combined voting power of all classes of stock if the
option price is at least 110% of the fair market value
of the Stock subject to the option on the date the
option is granted, as described in Section 6(b) (vi) of
this Plan, and if the option by its terms is not
exercisable after the expiration of five years from the
date it is granted.
(4) Except as provided in Section 8 of this Plan, no
Incentive Stock Option granted under this Plan may be
exercised unless at the time of such exercise the
optionee is employed by the Company or any Parent or
Subsidiary of the Company and the optionee has been so
employed continuously since the date such option was
granted. Absence or leave or on account of illness or
disability under rules established by the Committee
shall not, however, be deemed an interruption of
employment for this purpose.
(5) Subject to Sections 6(b) (3) and 6(b) (4) of this Plan,
Incentive Stock Options granted under this Plan shall
continue in effect for the period fixed by the
Committee, except that no Incentive Stock Option shall
be exercisable after the expiration of 10 years from the
date it is granted.
<PAGE> 5
(6) The option price per share shall be determined by the
Committee at the time of grant. The option price shall
not be less than 100% of the fair market value of the
shares covered by the Incentive Stock Option at the
date the option is granted. The fair market value of
shares covered by an Incentive Stock Option shall be
determined by the Committee.
(7) The Committee shall designate any Incentive Stock Option
as such to distinguish it from a Non-Qualified Stock
Option.
c. Non-Qualified Stock Options. Non-Qualified Stock Options shall
be subject to the following terms and conditions:
(1) The option price per share shall be determined by the
Committee at the time of grant. The option price may be
more or less than or equal to the fair market value of
the shares covered by the Non-Qualified Stock Option on
the date the option is granted, and the option price may
fluctuate based on criteria determined by the Committee.
(2) The Committee shall designate any Non-Qualified Stock
Option as such to distinguish it from an Incentive Stock
Option.
(3) Unless otherwise established by the Committee, any
Non-Qualified Stock Option shall terminate 10 years
after the date it is granted.
7. Term of Plan. The Plan shall become effective upon its adoption by the
Board or its approval or ratification by vote of the holders of a
majority of the outstanding Shares entitled to vote on the adoption of
the Plan, whichever is earlier. It shall continue in effect for a term
of ten (10) years unless sooner terminated under Section 12 of the Plan.
8. Term of Option. The term of each Option granted under the Plan shall be
determined by the Committee, however, it shall not exceed ten (10) years
from the date of grant. In the case of an optionee who is an employee of
the Company or a Parent or Subsidiary of the Company, if the optionee's
employment is terminated by retirement or for any reason, voluntarily or
involuntarily, with or without cause, other than in the circumstances
specified in Section 9 below relating to death or disability, any option
held by such optionee may be exercised at any time prior to the earlier
of its expiration date or, if the option is an Incentive Stock Option,
the 30th day after the date of such termination of employment, or if the
option is a Non-Qualified Stock Option, the 90th day after the date of
such termination (or, if such is not a regular business day, on the last
preceding business day), but only if and to the extent the optionee was
entitled to exercise the option on the date of such termination. Subject
to such terms and conditions as the Committee may determine, the
Committee may extend the exercise period any length of time not later
than the expiration date of the option and may increase the portion of
the option that may be exercised on termination, provided that any
extension of the exercise period of an Incentive Stock Option shall be
subject to a written acknowledgment by the optionee that the extension
disqualifies the option as an Incentive Stock Option.
<PAGE> 6
9. Vesting of Option. The Option shall vest in accordance with a schedule
established by the Committee. The vested portion of an Option award
shall be exercisable at any time (but no later than the end of the
option period determined pursuant to Section 8 above), subject, however,
to all other terms of the Plan and of the Option granted to Participant.
An Option may not be exercised for fractional shares of the Company.
In the event the Company or the shareholders of the Company enter into
an agreement to dispose of all or substantially all of the assets or
Shares by means of a sale, reorganization, liquidation, or otherwise, or
if there is a change in more than 50% of the voting power of the Shares
or other ownership interest by means of a sale, merger, reorganization,
liquidation or otherwise, all Options granted before September 1, 1998
shall vest immediately and fully, and options granted after September 1,
1998 may vest as set forth in the option grant. All Options not
exercised prior to consummation of any such agreement shall terminate.
If a Participant dies or his or her employment is terminated due to his
or her permanent disability (as determined by the Committee) his or her
Optioned Shares shall become 100 percent vested, if not already so
vested, and the Committee may extend the exercise period any length of
time not later than the expiration date of the option, provided that any
extension of the exercise period of an Incentive Stock Option shall be
subject to a written acknowledgment by the optionee or the optionee's
personal representative that the extension may disqualify the option as
an Incentive Stock Option.
10. Exercise of Option.
Procedure for Exercise. An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in
accordance with the Option and full payment for the Shares with respect
to which the Option is exercised has been received by the Company in
such form as may be approved by the Committee. Until the issuance of the
stock certificates (as evidence by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company), no
right to vote or receive dividends or any other rights as a stockholder
shall exist with respect to Optioned Shares notwithstanding the exercise
of the Option. No adjustment will be made for a dividend or other rights
for which the record date is prior to the date of exercise of the Option
except as provided in Section 13 of the Plan.
Notwithstanding any provision to the contrary contained herein, Options
may with approval of the Committee be exercised by means of (i) an
exchange of Shares previously held by the Participant for the Optioned
Shares, or (ii) broker-assisted cashless exercise transactions involving
brokers with which the Company has a formal understanding regarding such
transactions. In addition, a Participant may with approval of the
Committee satisfy his or her requirement for federal income tax
withholding by means of (i) delivery to the Company of Shares previously
held by the Participant with a Fair Market Value equal
<PAGE> 7
to the Withholding obligation, or (ii) allowing the Company to withhold
Optioned Shares with a Fair Market Value equal to the withholding
obligation. Any Participant subject to Section 16(b) of the Securities
Exchange Act of 1934, as amended, who elects to exchange Shares to be
issued upon exercise of the Option for the Optioned Shares, or allows
the Company to withhold Optioned Shares with Fair Market Value equal to
the withholding obligation must do so either (i) during the periods
which begin on the third business day following the Company's regular
release of its quarterly and annual statements of sales and earnings and
ending on the 12th business day following such date, or (ii) pursuant to
an irrevocable election made by the Participant at least six months in
advance of the date the Option exercised becomes taxable. For purposes
of an exchange, a delivery, or withholding, Shares held by a Participant
and Optioned Shares shall be valued at their Fair Market Value as of the
date of delivery which value shall be credited on a dollar for dollar
basis toward payment of the Option price for the Optioned Shares or the
associated tax withholding obligation.
11. Nontransferability.
a. Options under the Plan may not be sold, pledged, assigned or
transferred in any manner other than by will or the laws of
descent and distribution and may be exercised during the
Participant's lifetime only by the Participant.
b. Stock issued upon exercise of an option under this Plan may
have, in addition to restrictions on transfer imposed by law,
any restrictions on transfer determined by the Committee.
12. Amendment or Termination of the Plan.
a. The Board may amend the Plan from time to time in such respects
as the Board deems advisable, and
b. The Board may at any time terminate the Plan, except that
c. No amendment or termination of the Plan shall diminish or
otherwise adversely affect the rights of a Participant with
respect to a previously granted Option.
13. Adjustment Upon Changes in Capitalization. The number and kind of Shares
of Company stock subject to an Option shall be appropriately adjusted
along with a corresponding adjustment in the Option price to reflect any
stock dividend, stock split, split-up or any combination or exchange of
Shares, however accomplished. An appropriate adjustment shall also be
made with respect to the aggregate number and kind of shares remaining
available to be optioned and sold under the Plan.
14. Agreement and Representations of Employee. As a condition to the
exercise of any portion of an Option, the Company may require the person
exercising such Option to represent and warrant at the time of exercise
that the Shares are being purchased or acquired only for investment and
without any present intention to resell or distribute the Shares if, in
the opinion of counsel for the Company, such a representation is
required under the Securities Act of 1933 or any other applicable
federal or state way, regulation or rule or any governmental agency.
Appropriate legends restricting
<PAGE> 8
the transfer of the Shares, unless such Shares are registered under
appropriate federal and state securities laws or unless exemptions are
available therefrom, will be placed on Share certificates issued
pursuant to this Plan.
15. Reservations of Shares of Common Stock. The Company, during the term of
this Plan, will at all times reserve and keep available, and will seek
or obtain from any regulatory body having jurisdiction any requisite
authority in order to issue and sell, such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the
Company to obtain from any regulatory body having jurisdiction the
authority deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of
any liability with respect to the non-issuance or sale of Shares as to
which such requisite authority shall not have been obtained.
16. General Limitations and Provisions. Nothing contained in the Plan shall
give any Employee the right to be retained in the employment of the
Company or affect the right of the Company to dismiss any Employee.
Whether or not any Options are to be granted hereunder shall be
exclusively within the discretion of the Committee, and nothing
contained herein shall be construed as giving any Employee any right to
participate hereunder. No Option shall be considered as compensation
under any other employee benefit plan of the Company except as otherwise
determined by the Committee.
<PAGE> 1
EXHIBIT 10.6
N2H2, INC
1999 STOCK OPTION PLAN
1. Purpose of the Plan. The purpose of this Stock Option Plan (the "Plan")
is to promote the long-term success of N2H2, Inc. (the "Company") by
creating a long-term mutuality of interests between the shareholders of
the Company and the participants under this plan.
2. Definitions. As used herein, the following definitions shall apply:
a. "Plan" shall mean this Stock Option Plan, as the same
may be amended from time to time.
b. "Board" shall mean the Board of Directors of the
Company.
c. "Taxable Year" shall mean the fiscal year of the
Company.
d. "Common Stock" shall mean the common stock of the
Company.
e. "Company" shall mean N2H2, Inc., a Washington
corporation. "Parent" shall mean any parent corporation
or other form of business association that is treated as
a corporation for tax purposes owning, directly or
indirectly, 50% or more of the voting power of the
shares of the corporation so as to qualify as a "parent"
within the meaning of Section 424 (e) of the Code.
"Subsidiary" shall mean any subsidiary defined as any
corporation or other form of business treated as a
corporation for tax purposes if 50% or more of the
voting power of the shares of such entity are owned,
directly or indirectly, by the Company so as to qualify
as a "subsidiary" corporation within the meaning of
Section 424 (f) of the Code.
f. "Committee" shall mean the Stock Option Committee
appointed by the Board in accordance with Section 4(a)
of the Plan.
g. "Option" shall mean any stock option granted pursuant to
the Plan.
h. "Optioned Shares" shall mean stock subject to an Option
granted pursuant to this Plan.
i. "Participant" shall mean an individual who receives a
Stock Option.
j. "Share" shall mean the Common Stock of the Company.
k. "Fair Market Value" shall be determined by the
Committee.
l. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
<PAGE> 2
3. Stock Subject to Options. Except as otherwise provided in Section 13,
the maximum aggregate number of Shares which may be optioned and sold
pursuant to the Plan is five hundred thirty-one thousand, eight hundred
fifty (531,850) Shares, which will be authorized, but unissued.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unissued Shares which were
subject thereto shall become available for other Options under the Plan,
unless the Plan shall have been terminated.
Stock issued upon exercise of options granted under this Plan may be
subject to restrictions on transfer, repurchase rights, or other
restrictions as determined by the Committee.
4. Administration of the Plan.
a. Appointment of Committee. The Plan shall be administered
by the Board, or a Stock Option Committee consisting of
one or more members. Members of the Committee shall be
appointed by the Board and shall serve until their
resignation or removal. The Board may remove members,
with or without cause, at any time, and may also fill
any vacancies. All references to the Committee in this
Plan shall relate to the Board if no Committee is
established.
b. Procedure. A majority of the entire Committee shall
constitute a quorum and the action of a majority of the
members present at any meeting at which a quorum is
present shall be deemed the action of the Committee. In
addition, any decision or determination reduced to
writing and signed by all of the members of the
Committee shall be fully as effective as if it has been
made by a majority vote at a meeting duly called and
held. The Committee may appoint a Secretary to keep
minutes of its meetings and may make such rules and
regulations for the conduct of its business as it shall
deem advisable.
c. Powers of the Committee. Subject to the provisions of
the Plan, the Committee shall have authority:
(1) To determine the exercise price or fair market
value of the Shares covered by an Option, the
participants to whom and the time or times at
which Options shall be granted, and the number
of Shares to be represented by each Option;
(2) To interpret the Plan;
(3) To prescribe, amend and rescind rules and
regulations relating to the Plan;
<PAGE> 3
(4) To determine the terms and provisions of each
Option granted under the Plan (which need not be
identical), and with the consent of the holder
thereof, to modify or amend each Option;
(5) To determine whether the Option price is payable
in money or in stock of the Company or other
acceptable form;
(6) To authorize any person to execute on behalf of
the Company any instrument required to
effectuate the grant of an Option previously
granted by the Committee;
(7) To make all other determinations deemed
necessary or advisable for the administration of
the Plan.
d. Securities Exchange Act of 1934. At any time that the
Company has a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Plan shall be
administered by the Board of Directors or the Committee
in accordance with Rule 16b-3 adopted under the Exchange
Act, as such Rule may be amended from time to time.
e. Liability. No member of the Committee shall be
personally liable by reason of any contract or other
instrument executed by him or her on his or her behalf
or in his or her capacity as a member of the Committee
or for any mistake of judgment made in good faith, and
the Company shall indemnify and hold harmless each
member of the Committee and each other officer,
employee, or director of the Company to whom any duty or
power relating to the administration or interpretation
of the Plan has been delegated, against any cost or
expense (including counsel fees) or liability (including
any sum paid in settlement of a claim with the approval
of the Committee) arising out of any act or omission to
act in connection with the Plan unless arising out of
such person's own fraud or bad faith.
f. Effect of Committee's Decision. All decisions,
determinations and interpretations of the Committee
shall be final and binding on all Participants and any
other holders of any Options granted under this Plan.
5. Eligibility. The Committee may award options to any present or future
director, officer, employee or consultant of the Company or any Parent
or Subsidiary of the Company (sometimes hereinafter collectively
referred to as "Participants").
6. Grants, Awards and Sales.
a. Type of Security. The Committee may, from time to time,
take the following actions, separately or in
combination, under this Plan:
<PAGE> 4
1. Grant Incentive Stock Options, as defined in
Section 422 of the Code, to any employee of the
Company or any Parent or Subsidiary of the
Company, as provided in Section 6(b) of this
Plan; and
2. Grant options other than Incentive Stock Options
("Non-Qualified Stock Options") as provided in
Section 6 (c) of this Plan.
The Committee shall select the Participants to whom
awards shall be made. The Committee shall specify the
action taken with respect to each person granted any
option under this Plan and shall specifically designate
each option granted under this Plan as an Incentive
Stock Option or Non-Qualified Stock Option.
b. Incentive Stock Options. Incentive Stock Options shall be
subject to the following terms and conditions:
1. Incentive Stock Options may be granted under
this Plan only to employees of the Company or
any Parent or Subsidiary of the Company,
including employees who are directors.
2. No employees may be granted Incentive Stock
Options under this Plan to the extent that the
aggregate fair market value, on the date of
grant, of the Stock with respect to which
Incentive Stock options are exercisable for the
first time by that employee during any calendar
year, under this Plan and under any other
incentive stock option plan (within the meaning
of Section 422 of the Code) of the Company or
any Parent or Subsidiary of the Company, exceeds
$100,000.
3. An Incentive Stock Option may be granted under
this Plan to an employee possessing more than
10% of the total combined voting power of all
classes of stock if the option price is at least
110% of the fair market value of the Stock
subject to the option on the date the option is
granted, as described in Section 6(b) (vi) of
this Plan, and if the option by its terms is not
exercisable after the expiration of five years
from the date it is granted.
4. Except as provided in Section 8 of this Plan, no
Incentive Stock Option granted under this Plan
may be exercised unless at the time of such
exercise the optionee is employed by the Company
or any Parent or Subsidiary of the Company and
the optionee has been so employed continuously
since the date such option was granted. Absence
or leave or on account of illness or disability
under rules established by the Committee shall
not, however, be deemed an interruption of
employment for this purpose.
5. Subject to Sections 6(b) (3) and 6(b) (4) of
this Plan, Incentive Stock Options granted under
this Plan shall continue in effect for the
period fixed by the Committee, except that no
Incentive Stock Option shall be exercisable
after the expiration of 10 years from the date
it is granted.
<PAGE> 5
6. The option price per share shall be determined
by the Committee at the time of grant. The
option price shall not be less than 100% of the
fair market value of the shares covered by the
Incentive Stock Option at the date the option is
granted. The fair market value of shares covered
by an Incentive Stock Option shall be determined
by the Committee.
7. The Committee shall designate any Incentive
Stock Option as such to distinguish it from a
Non-Qualified Stock Option.
c. Non-Qualified Stock Options. Non-Qualified Stock Options
shall be subject to the following terms and conditions:
1. The option price per share shall be determined
by the Committee at the time of grant. The
option price may be more or less than or equal
to the fair market value of the shares covered
by the Non-Qualified Stock Option on the date
the option is granted, and the option price may
fluctuate based on criteria determined by the
Committee.
2. The Committee shall designate any Non-Qualified
Stock Option as such to distinguish it from an
Incentive Stock Option.
3. Unless otherwise established by the Committee,
any Non-Qualified Stock Option shall terminate
10 years after the date it is granted.
7. Term of Plan. The Plan shall become effective upon its adoption by the
Board or its approval or ratification by vote of the holders of a
majority of the outstanding Shares entitled to vote on the adoption of
the Plan, whichever is earlier. It shall continue in effect for a term
of ten (10) years unless sooner terminated under Section 12 of the Plan.
8. Term of Option. The term of each Option granted under the Plan shall be
determined by the Committee, however, it shall not exceed ten (10) years
from the date of grant. In the case of an optionee who is an employee of
the Company or a Parent or Subsidiary of the Company, if the optionee's
employment is terminated by retirement or for any reason, voluntarily or
involuntarily, with or without cause, other than in the circumstances
specified in Section 9 below relating to death or disability, any option
held by such optionee may be exercised at any time prior to the earlier
of its expiration date or, if the option is an Incentive Stock Option,
the 30th day after the date of such termination of employment, or if the
option is a Non-Qualified Stock Option, the 90th day after the date of
such termination (or, if such is not a regular business day, on the last
preceding business day), but only if and to the extent the optionee was
entitled to exercise the option on the date of such termination. Subject
to such terms and conditions as the Committee may determine, the
Committee may extend the exercise period any length of time not later
than the expiration date of the option and may increase the portion of
the option that may be exercised on termination, provided that any
extension of the exercise period of an
<PAGE> 6
Incentive Stock Option shall be subject to a written acknowledgment by
the optionee that the extension disqualifies the option as an Incentive
Stock Option.
9. Vesting of Option. The Option shall vest in accordance with a schedule
established by the Committee. The vested portion of an Option award
shall be exercisable at any time (but no later than the end of the
option period determined pursuant to Section 8 above), subject, however,
to all other terms of the Plan and of the Option granted to Participant.
An Option may not be exercised for fractional shares of the Company.
In the event the Company or the shareholders of the Company enter into
an agreement to dispose of all or substantially all of the assets or
Shares by means of a sale, reorganization, liquidation, or otherwise, or
if there is a change in more than 50% of the voting power of the Shares
or other ownership interest by means of a sale, merger, reorganization,
liquidation or otherwise, all Options granted before September 1, 1998
shall vest immediately and fully, and options granted after September 1,
1998 may vest as set forth in the option grant. All Options not
exercised prior to consummation of any such agreement shall terminate.
If a Participant dies or his or her employment is terminated due to his
or her permanent disability (as determined by the Committee) his or her
Optioned Shares shall become 100 percent vested, if not already so
vested, and the Committee may extend the exercise period any length of
time not later than the expiration date of the option, provided that any
extension of the exercise period of an Incentive Stock Option shall be
subject to a written acknowledgment by the optionee or the optionee's
personal representative that the extension may disqualify the option as
an Incentive Stock Option.
10. Exercise of Option.
Procedure for Exercise. An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in
accordance with the Option and full payment for the Shares with respect
to which the Option is exercised has been received by the Company in
such form as may be approved by the Committee. Until the issuance of the
stock certificates (as evidence by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company), no
right to vote or receive dividends or any other rights as a stockholder
shall exist with respect to Optioned Shares notwithstanding the exercise
of the Option. No adjustment will be made for a dividend or other rights
for which the record date is prior to the date of exercise of the Option
except as provided in Section 13 of the Plan.
Notwithstanding any provision to the contrary contained herein, Options
may with approval of the Committee be exercised by means of (i) an
exchange of Shares previously held by the Participant for the Optioned
Shares, or (ii) broker-assisted cashless exercise transactions involving
brokers with which the Company has a formal understanding regarding such
transactions. In addition, a Participant may with approval of the
Committee satisfy his or her requirement for federal income tax
<PAGE> 7
withholding by means of (i) delivery to the Company of Shares previously
held by the Participant with a Fair Market Value equal to the
Withholding obligation, or (ii) allowing the Company to withhold
Optioned Shares with a Fair Market Value equal to the withholding
obligation. Any Participant subject to Section 16(b) of the Securities
Exchange Act of 1934, as amended, who elects to exchange Shares to be
issued upon exercise of the Option for the Optioned Shares, or allows
the Company to withhold Optioned Shares with Fair Market Value equal to
the withholding obligation must do so either (i) during the periods
which begin on the third business day following the Company's regular
release of its quarterly and annual statements of sales and earnings and
ending on the 12th business day following such date, or (ii) pursuant to
an irrevocable election made by the Participant at least six months in
advance of the date the Option exercised becomes taxable. For purposes
of an exchange, a delivery, or withholding, Shares held by a Participant
and Optioned Shares shall be valued at their Fair Market Value as of the
date of delivery which value shall be credited on a dollar for dollar
basis toward payment of the Option price for the Optioned Shares or the
associated tax withholding obligation.
11. Nontransferability.
a. Options under the Plan may not be sold, pledged,
assigned or transferred in any manner other than by will
or the laws of descent and distribution and may be
exercised during the Participant's lifetime only by the
Participant.
b. Stock issued upon exercise of an option under this Plan
may have, in addition to restrictions on transfer
imposed by law, any restrictions on transfer determined
by the Committee.
12. Amendment or Termination of the Plan.
a. The Board may amend the Plan from time to time in such
respects as the Board deems advisable, and
b. The Board may at any time terminate the Plan, except
that
c. No amendment or termination of the Plan shall diminish
or otherwise adversely affect the rights of a
Participant with respect to a previously granted Option.
13. Adjustment Upon Changes in Capitalization. The number and kind of Shares
of Company stock subject to an Option shall be appropriately adjusted
along with a corresponding adjustment in the Option price to reflect any
stock dividend, stock split, split-up or any combination or exchange of
Shares, however accomplished. An appropriate adjustment shall also be
made with respect to the aggregate number and kind of shares remaining
available to be optioned and sold under the Plan.
14. Agreement and Representations of Employee. As a condition to the
exercise of any portion of an Option, the Company may require the person
exercising such Option to represent and warrant at the time of exercise
that the Shares are being purchased or acquired only for investment and
without any present intention to resell or distribute
<PAGE> 8
the Shares if, in the opinion of counsel for the Company, such a
representation is required under the Securities Act of 1933 or any other
applicable federal or state way, regulation or rule or any governmental
agency. Appropriate legends restricting the transfer of the Shares,
unless such Shares are registered under appropriate federal and state
securities laws or unless exemptions are available therefrom, will be
placed on Share certificates issued pursuant to this Plan.
15. Reservations of Shares of Common Stock. The Company, during the term of
this Plan, will at all times reserve and keep available, and will seek
or obtain from any regulatory body having jurisdiction any requisite
authority in order to issue and sell, such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the
Company to obtain from any regulatory body having jurisdiction the
authority deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of
any liability with respect to the non-issuance or sale of Shares as to
which such requisite authority shall not have been obtained.
16. General Limitations and Provisions. Nothing contained in the Plan shall
give any Employee the right to be retained in the employment of the
Company or affect the right of the Company to dismiss any Employee.
Whether or not any Options are to be granted hereunder shall be
exclusively within the discretion of the Committee, and nothing
contained herein shall be construed as giving any Employee any right to
participate hereunder. No Option shall be considered as compensation
under any other employee benefit plan of the Company except as otherwise
determined by the Committee.
<PAGE> 1
EXHIBIT 10.7
N2H2, INC.
1999 NONEMPLOYEE DIRECTOR
STOCK OPTION PLAN
1. Purpose of the Plan. The purposes of this 1999 Nonemployee Director
Stock Option Plan (the "Plan") are to promote the long-term success of N2H2,
Inc. (the "Company") by creating a long-term mutuality of interests between the
Nonemployee directors and shareholders of the Company, to provide an additional
inducement for such directors to remain with the Company, and to provide a means
through which the Company may attract able persons to serve as directors of the
Company.
2. Administration.
a. The Plan shall be administered by the Compensation Committee
(the "Committee") of the Board of Directors of the Company (the "Board"). A
majority of the Committee shall constitute a quorum at any meeting, and the acts
of a majority of the members present at any meeting at which a quorum is
present, or acts approved in writing by all the members of the Committee, shall
be the acts of the Committee.
b. The Committee shall interpret the Plan and prescribe such
rules, regulations and procedures in connection with the operations of the Plan
as it shall deem to be necessary and advisable for the administration of the
Plan consistent with the purposes of the Plan. All questions of interpretation
and application of the Plan, or as to stock options granted under the Plan,
shall be subject to the determination of the Committee, which shall be final and
binding.
c. Notwithstanding the above, the selection of the directors to
whom stock options are to be granted, the timing of such grants, the number of
shares subject to any stock option, the exercise price of any stock option, the
periods during which any stock option may be exercised and the term of any stock
option shall be as hereinafter provided, and the Committee shall have no
discretion as to such matter.
3. Shares Available Under the Plan. The aggregate number of shares which
may be issued and as to which grants of stock options may be made under the Plan
is 35,000 shares of the common stock of the Company (without taking into effect
any split of such shares), having no par value (the "Common Stock"), subject to
adjustment and substitution as set forth in Section 6. If any stock option
granted under the Plan is canceled by mutual consent or terminates or expires
for any reason without having been exercised in full, the number of shares
subject to such option shall again be available for purposes of the Plan.
4. Grant of Stock Options. Each person upon becoming a member of the
Board who is not then an employee of the Company or any of its subsidiaries and
is not then an independent consultant (other than in his or her capacity as a
member of the Board) to the Company or any of its subsidiaries (collectively a
"Nonemployee Director") shall be granted, automatically and
<PAGE> 2
without further action by the Board or the Committee, a "nonstatutory stock
option" (i.e., a stock option which does not qualify under Section 422 or 423 of
the Internal Revenue Code of 1986 (the "Code")) to purchase 1,500 shares of
Common Stock, subject to adjustment and substitution as set forth in Section 6.
In addition, on the third business day following the day of each annual meeting
of the shareholders of the Company, each Nonemployee Director ") shall be
granted, automatically and without further action by the Board or the Committee,
a nonstatutory stock option to purchase 1,500 shares of Common Stock, subject to
adjustment and substitution as set forth in Section 6. If the number of shares
then remaining available for the grant of stock options under the Plan at any
time is not sufficient for each Nonemployee Director then eligible to be granted
an option for 1,500 shares (or the number of adjusted or substituted shares
pursuant to Section 6), then each such Nonemployee Director shall be granted an
option for a number of whole shares equal to the number of shares then remaining
available divided by the number of Nonemployee Directors then eligible for grant
of an option in accordance with this Section 4, disregarding any fractions of a
share.
5. Terms and Conditions of Stock Options. Stock options granted under
the Plan shall be subject to the following terms and conditions:
a. The purchase price at which each stock option may be exercised
(the "Option Price") shall be one hundred percent (100%) of the fair market
value of the shares of Common Stock covered by the stock option on the date of
grant, determined as provided in Section 5.g.
b. The Option Price shall be paid in full upon exercise, in cash
in United States dollars (including check, bank draft or money order); provided,
however, that in lieu of such cash the person exercising the stock option may
pay the Option Price in whole or in part by delivering to the Company shares of
the Common Stock having a fair market value on the date of exercise of the stock
option, determined as provided in Section 5.g, equal to the Option Price for the
shares being purchased; except that (i) any portion of the Option Price
representing a fraction of a share shall in any event be paid in cash, and (ii)
no shares of the Common Stock which have been held for less than six months may
be delivered in payment of the Option Price of a stock option. Delivery of
shares may also be accomplished through the effective transfer to the Company of
shares held by a broker or other agent. The Company will also cooperate with any
person exercising a stock option who participates in a cashless exercise program
of a broker or other agent under which all or part of the shares received upon
exercise of the stock option are sold through the broker or other agent or under
which the broker or other agent make a loan to such person. Notwithstanding the
foregoing, the exercise of the stock option shall not be deemed to occur and no
shares of Common Stock will be issued by the Company upon exercise of the stock
option until the Company has received payment of the Option Price in full. The
date of exercise of a stock option shall be determined under procedures
established by the Committee, and as of the date of exercise, the person
exercising the stock option shall be considered for all purposes to be the owner
of the shares of Common Stock with respect to which the stock option has been
exercised. Payment of the Option Price with shares shall not increase the number
of shares of the Common Stock which may be issued under the Plan as provided in
Section 3.
2
<PAGE> 3
c. No stock option shall be exercisable during the first six
months of its term except in case of death as provided in Section 5.e. Subject
to the preceding sentence and subject to Section 5.e, which provides for earlier
termination of a stock option under certain circumstances, each stock option
shall be exercisable for ten years from the date of grant and not thereafter. A
stock option to the extent exercisable at any time may be exercised in whole or
in part.
d. No stock option shall be transferable by the grantee otherwise
than by will, or if the grantee dies intestate, by the laws of descent and
distribution of the state of domicile of the grantee at the time of death. All
stock options shall be exercisable during the lifetime of the grantee only by
the grantee or the grantee's guardian or legal representative.
e. If a grantee ceases to be a director of the Company for any
reason, any outstanding stock options held by the grantee shall be exercisable
according to the following provisions:
(i) If a grantee ceases to be a director of the Company for any
reason other than death, any outstanding stock option held by such
grantee shall be exercisable by the grantee (but only if exercisable by
the grantee immediately prior to ceasing to be director) at any time
prior to the expiration date of such stock option or within three months
after the date the grantee ceases to be a director, whichever is the
shorter period; and
(ii) Following the death of a grantee during his or service as a
director of the Company, any outstanding stock option held by the
grantee at the time of death (whether or not exercisable by the grantee
immediately prior to death) shall be exercisable by the person entitled
to do so under the will of the grantee, or, if the grantee shall fail to
make testamentary disposition of the stock option or shall die
intestate, by the legal representative of the grantee at any time prior
to the expiration date of such stock option or within three years after
the date of death of the grantee, whichever is the shorter period.
A stock option held by a grantee who has ceased to be a director of the
Company shall terminate upon the expiration of the applicable exercise period,
if any, specified in this Section 5.e.
f. All stock options shall be confirmed by an agreement, or an
amendment thereto, which shall be executed on behalf of the Company by the Chief
Executive Officer (if other than the President), the President or any Vice
President and by the grantee.
g. Fair market value of the Common Stock shall be the mean
between the following prices, as applicable, for the date as of which fair
market value is to be determined, as quoted in The Wall Street Journal (or in
such other reliable publication as the Committee, in its discretion, may
determine to rely upon): (i) if the Common Stock is listed on the New York Stock
Exchange, the highest and lowest sales prices per share of the Common Stock as
quoted in the NYSE-Composite Transactions listing for such date, (ii) if the
Common Stock is not listed on
3
<PAGE> 4
such exchange, the highest and lowest sales prices per share of the Common Stock
for such date on (or on any composite index including) the principal United
States securities exchange registered under the 1934 Act on which the Common
Stock is listed, or (iii) if the Common Stock is not listed on any such
exchange, the highest and lowest sales prices per share of the Common Stock for
such date on the National Association of Securities Dealers Automated Quotations
System or any successor system then in use ("NASDAQ"). If there are no such sale
price quotations for the date as of which fair market value is to be determined
but there are such sale price quotations within a reasonable period both before
and after such date, then fair market value shall be determined by taking a
weighted average of the means between the highest and lowest sales prices per
share of the Common Stock as so quoted on the nearest date before and the
nearest date after the date as of which fair market value is to be determined.
The average should be weighted inversely by the respective numbers of trading
days between the selling dates and the date as of which fair market value is to
be determined. If there are no such sale price quotations on or within a
reasonable period both before and after the date as of which fair market value
is to be determined, then fair market value of the Common Stock shall be the
mean between the bona fide bid and asked prices per share of Common Stock as so
quoted for such date on NASDAQ, or if none, the weighted average of the means
between such bona fide bid and asked prices on the nearest trading date before
and the nearest trading date after the date as of which fair market value is to
be determined, if both such dates are within a reasonable period. The average is
to be determined in the manner described above in this Section 5.g. If the fair
market value of the Common Stock cannot be determined on the basis previously
set forth in this Section 5.g for the date as of which fair market value is to
be determined, the Committee shall in good faith determine the fair market value
of the Common Stock on such date. Fair market value shall be determined without
regard to any restriction other than a restriction which, by its terms, will
never lapse.
h. The obligation of the Company to issue shares of the Common
Stock under the Plan shall be subject to (i) the effectiveness of a registration
statement under the Securities Act of 1933, as amended, with respect to such
shares, if deemed necessary or appropriate by counsel for the Company, (ii) the
condition that the shares shall have been listed (or authorized for listing upon
official notice of issuance) upon each stock exchange, if any, on which the
Common Stock may then be listed and (iii) all other applicable laws,
regulations, rules and orders which may then be in effect.
Subject to the foregoing provision of this Section 5 and the other
provisions of the Plan, any stock option granted under the Plan shall be subject
to such restrictions and other terms and conditions, if any, as shall be
determined, in its discretion, by the Committee and set forth in the agreement
referred to in Section 5.f, or an amendment thereto.
6. Adjustment and Substitution of Shares. If a dividend or other
distribution shall be declared upon the Common Stock payable in shares of the
Common Stock, then (i) the number of shares of the Common Stock set forth in
Section 4, (ii) the number of shares of the Common Stock then subject to any
outstanding stock options, and (iii) the number of shares of the Common Stock
which may be issued under the Plan but are not then subject to outstanding stock
options on the date fixed for determining the shareholders entitled to receive
such stock dividend
4
<PAGE> 5
or distribution, shall be adjusted by adding thereto the number of shares of the
Common Stock which would have been distributable thereon if such shares had been
outstanding on such date.
If the outstanding shares of the Common Stock shall be changed into or
exchangeable for a different number or kind of shares of stock or other
securities of the Company or another Company, whether through reorganization,
reclassification, recapitalization, stock split up, combination of shares,
merger or consolidation, then there shall be substituted for each share of the
Common Stock set forth in Section 4, for each share of the Common Stock subject
to any then outstanding stock option and for each share of the Common Stock
which may be issued under the Plan but which is not then subject to any
outstanding stock option, the number and kind of shares of stock or other
securities into which each outstanding share of the Common Stock shall be so
changed or for which each such share shall be exchangeable.
In case of any adjustment or substitution as provided for in the first
two paragraphs of this Section 6, the aggregate Option Price for all shares
subject to each then outstanding stock option prior to such adjustment or
substitution shall be the aggregate Option Price for all shares of stock or
other securities (including any fraction) to which such shares shall have been
adjusted or which shall have been substituted for such shares. Any new Option
Price per share shall be carried to at least three decimal places with the last
decimal place rounded upwards to the nearest whole number.
If the outstanding of the Common Stock shall be changed in value by
reason of any spinoff, split off or split up, or dividend in partial
liquidation, dividend in property other than cash or extraordinary distribution
to holders of the Common Stock, the Committee shall make any adjustments to any
then outstanding stock option which it determines are equitably required to
prevent dilution or enlargement of the rights of grantees which would otherwise
result from any such transaction.
No adjustment or substitution provided for in this Section 6 shall
require the Company to issue or sell a fraction of a share or other security.
Accordingly, all fractional shares or other securities which result from any
such adjustment or substitution shall be eliminated and not carried forward to
any subsequent adjustment or substitution.
Except as provided in this Section 6, a grantee shall have no rights by
reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of shares
of stock of any class, the payment of any stock dividend or any other increase
or decrease in the number of shares of stock of any class.
7. Effect of the Plan on the Rights of Company and Shareholders. Nothing
in the Plan, in any stock option granted under the Plan, or in any stock option
agreement shall confer any right to any person to continue as a director of the
Company or interfere in any way with the rights of the shareholders of the
Company or the Board to elect and remove directors.
8. Amendment and Termination. The right to amend or to terminate the
Plan at any time are hereby specifically reserved to the Board; provided always
that no such termination shall terminate any outstanding stock options granted
under the Plan; and provided further that
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<PAGE> 6
no amendment of the Plan shall (i) be made without stockholder approval if
stockholder approval of the amendment is at the time required for stock options
by the rules of any stock exchange on which the Common Stock may then be listed,
or (ii) amend more than once every six months the provision of the Plan relating
to the selection of the directors to whom stock options are to be granted, the
timing of such grants, the number of shares subject to any stock option, the
exercise price of any stock option, the periods during which any stock option
may be exercised and the term of any stock option other than to comport with
changes in the Internal Revenue Code of 1986, as amended (the "Code") or the
rules and regulations thereunder. No amendment or termination of the Plan shall,
without the written consent of the holder of a stock option theretofore awarded
under the Plan, adversely affect the rights of such holder with respect thereto.
9. Effective Date and Duration of Plan. The Plan shall become effective
upon the closing of a firm commitment underwritten public offering of the
Company's equity securities pursuant to an effective registration statement
under the Securities Act of 1933, as amended. The Plan shall remain effective
until the earlier of: (i) 10 years from the effective date of the Plan, or (ii)
the date options to purchase all of the shares reserved for issuance under the
Plan shall have been granted.
6
<PAGE> 1
EXHIBIT 10.8
SEARCH ENGINE SERVICES AGREEMENT
This Search Engine Services Agreement ("Agreement") is entered into as
of January 19, 1998 (the "Effective Date"), by and between Inktomi Corporation,
a California corporation with its principal place of business at 1900 South
Norfolk Street, Suite 310, San Mateo, California, 94403 ("Inktomi") and N2H2,
Inc., a Washington corporation, with its principal place of business at 1301 5th
Avenue, Suite 1501, Seattle, Washington, 98101 ("N2H2").
RECITALS
A. Inktomi has developed and owns certain technology for searching and
indexing the Internet (the "Inktomi Search Engine," as more fully defined
below).
B. N2H2 has developed and owns certain technology and content for
filtering on the Internet, and wishes Inktomi to provide search engine services
using the Inktomi Search Engine in accordance with the terms and conditions of
this Agreement.
AGREEMENT
In consideration or the foregoing and the mutual promises contained
herein the parties agree as follows.
1. Definitions. For purposes of this Agreement, the following terms will
have the indicated meanings:
1.1 "Database" means Inktomi's full text index database of Web
pages accessible by the Site at any given time. The Database shall be tagged as
part of the Filtering Services to be provided by Inktomi as more fully set forth
on Exhibit A.
1.2 A "Hit" occurs each time an end-user of the Site is presented
with a results set consisting of between zero and ten records in response to a
search query.
1.3 "Initial Search Page" means each Web page, accessible on the
Site, (i) which enables an end-user to initiate and send search queries to the
Inktomi Search Engine or (ii) whose primary function is to promote or describe
the search services available through the Site.
1.4 "Inktomi Data Protocol" means the written specification on
how an Interface communicates and interacts with the Inktomi Search Engine.
1.5 "Inktomi Search Engine" means Inktomi's current Search Engine
as of the Effective Date, inclusive of the Database and Inktomi's porn filter
module, as the same may be upgraded, modified, changed, or enhanced by Inktomi
at its sole discretion. The Inktomi Search Engine does not and will not include
features, options and modules developed and customized
(*) = Information has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities Exchange
Commission.
<PAGE> 2
specifically for third parties and provided to such third parties on an
exclusive basis, or features, options, modules and future products which Inktomi
licenses or provides separately.
1.6 "Inktomi Technology" means the Inktomi Search Engine, the
Inktomi Data Protocol and all other computer software, technology and/or
documentation which is supplied by Inktomi for use in or in connection with
delivery of the Services, including without limitation all source code and
object code therefor and all Intellectual Property Rights therein.
1.7 "Intellectual Property Rights" means any and all rights
existing from time to time under patent law, copyright law, semiconductor chip
protection law, moral rights law, trade secret law, trademark law, unfair
competition law, publicity rights law, privacy rights law, and any and all other
proprietary rights, and any and all applications, renewals, extensions and
restorations thereof, now or hereafter in force and effect worldwide.
1.8 "Interface" means the editorial and graphical content and
design of the Web pages served to end-users of the Site, including without
limitation each Initial Search Page, all Results Pages, instruction pages,
frequently asked questions pages, and any Site end-user terms or guidelines.
1.9 "Interface Construction Tools" means all software tools, if
any, provided by Inktomi to assist N2H2 to build the Interface to the Inktomi
Search Engine, including without limitation Inktomi's application server
currently known as Forge.
1.10 "Launch Date" means the date upon which the search service
provided by N2H2 through the Site is first available for use by end-users
through public Internet access.
1.11 "Net Revenues" are gross advertising and sponsorship
revenues booked by N2H2 attributable to (i) the search service operated by N2H2
through the Site and (ii) all Initial Search Pages, all Results Pages and all
other Web pages on the Site that relate to the function of search provided by
Inktomi, including, without limitation save searches pages and Add URL pages
(collectively the "Search Related Pages"), less: (a) fees actually payable by
N2H2 to external third parties and direct internal sales expenses actually
incurred by N2H2 for and relating to the placement of advertisements and
sponsorships on the Search Related Pages (provided however that the external
third party expenses shall be capped at *% of gross revenue generated by N2H2
relating to the placement of advertisements and sponsorships on the Search
Related Pages and the direct internal sales expenses shall be capped at *% of
gross revenue generated by N2H2 relating to the placement of advertisements and
sponsorships on the Search Related Pages); (b) taxes actually payable by N2H2
and not re-billed or re-billable to a third party (other than taxes based on
N2H2's income), if any, attributable to the search services provided by N2H2
through the Site; (c) advertising and sponsorship frequency discounts actually
payable; and (d) * .
2
(*) = Information has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities Exchange
Commission.
<PAGE> 3
1.12 "N2H2 Filter List" means collectively the "white" list of
URLs and the "black" list of URLs submitted by N2H2 in connection with the
Services, as the same may be updated and amended from time to time.
1.13 "N2H2 Word List" means the list created by N2H2 containing
up to 1,000 words which N2H2 provides to Inktomi in connection with the
Services, as the same may be updated and amended from time to time.
1.14 "Results Pages" means all Web pages displaying search
results presented to end-users as a result of accessing the query mechanisms of
the Inktomi Search Engine.
1.15 "Search Engine" means computer software which crawls the
Internet, downloads and analyzes text and other data, sorts and organizes the
data, creates an index of accessible data, and, after receiving a particular
search request (in the form of a word query), locates material accessible in the
database, and presents the results of the search.
1.16 "Site" means one or more Web sites established and
maintained by N2H2 through which end users may access the Inktomi Search Engine
and run searches against the Database.
1.17 "Services" means the Internet search engine search services
to be provided by Inktomi under this Agreement, which services are divided into
"Filtering Services" and "Search Services," as more filly described on Exhibit
A.
1.18 "Term" shall have the meaning indicated in Section 10.
1.19 "Web" means the so-called World Wide Web, containing, inter
alia, pages written in hypertext markup language (HTML) and/or any similar
successor technology.
1.20 "Web page" means a document on the Web which may be viewed
in its entirety without leaving me applicable distinct URL address.
1.21 "Web site" means a collection of interrelated Web pages.
2. Provision of Services: Site Implementation.
2.1 Services and Site Implementation. Subject to the terms and
conditions of this Agreement, Inktomi shall provide the Services to N2H2 for use
in the Site, such services to be provided in accordance with the functionality
specifications and performance criteria specified on Exhibit A. Inktomi, at its
own expense, shall provide all data transmission capacity (bandwidth), disk
storage, server capacity and other hardware and software required to run the
Inktomi Search Engine and maintain the Database. N2H2, at its own expense, shall
create the Interface to the Inktomi Search Engine for the Site, and shall
provide all disk storage, server capacity and other hardware and software
required to run and maintain the Site and the Interface, and serve
advertisements and sponsorships on the Interface. Inktomi shall provide
reasonable assistance (through telephone, e-mail, World Wide Web, or fax) to
N2H2 during regular business hours regarding development of the Interface and
integration of the same with the Inktomi
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<PAGE> 4
Search Engine. N2H2, at its own expense, shall provide all data transmission
capacity (bandwidth) required to connect to and receive information from the
Inktomi Search Engine.
2.2 Inktomi Data Protocol. Promptly following execution of this
Agreement, Inktomi shall provide the Inktomi Data Protocol and the Interface
Construction Tools to N2H2. Inktomi grants to N2H2 a nontransferable,
nonexclusive license during the Term to use the Inktomi Data Protocol and the
Interface Construction Tools solely to create and maintain the Interface to the
Inktomi Search Engine for the Site.
2.3 Other Services and Support. Upon request, and provided that
N2H2 is current with service fees due under this Agreement, Inktomi may provide
additional services and support beyond the services and support set forth
herein. Any such service or support shall be provided at Inktomi's then
applicable consulting rates and charges.
2.4 Inktomi Technology. As between Inktomi and N2H2, N2H2
acknowledges that Inktomi owns all right, title and interest in and to the
Inktomi Technology (except for any software licensed by third parties to
Inktomi), and that N2H2 shall not acquire any right, title, or interest in or to
the Inktomi Technology, except as expressly set forth in this Agreement. N2H2
shall not modify, adapt, translate, prepare derivative works from, reverse
engineer, disassemble, decompile or otherwise attempt to derive source code from
any Inktomi software or documentation. N2H2 will not remove, obscure or alter
Inktomi's copyright notices, trademarks or other proprietary rights notices
affixed to or contained within any Inktomi software or documentation.
2.5 Interface. As between Inktomi and N2H2, Inktomi acknowledges
that N2H2 owns all right, title and interest. including without limitation all
Intellectual Property Rights, in and to the Interface (except for any software
licensed by third parties to N2H2 and except for editorial content regarding the
use and functionality of the Inktomi Search Engine provided by Inktomi to N2H2
for incorporation into the Site, which content shall be and remain Inktomi
Technology), and that Inktomi shall not acquire any right, title or interest in
or to the Interface, except as expressly set forth in this Agreement.
2.6 * Services. N2H2 understands that Inktomi will
provide the Services on * .
2.7 Notice. Inktomi shall provide N2H2 with notice in the * .
Inktomi will provide such notice (i) at least 14 days prior to public
announcement of any such service and (ii) at least 45 days prior to commercial
release of any such service by such third party.
4
(*) = Information has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities Exchange
Commission.
<PAGE> 5
3. Attribution: Trademark License; House Ads.
3.1 Attribution. Each Initial Search Page and all Results Pages
shall conspicuously display a phrase to be provided by Inktomi that indicates
that Inktomi technology is being used. Each Initial Search Page and all Results
Pages shall also conspicuously display the phrase "Powered by Inktomi" on an
icon measuring at least 50 x 160 pixels that provides a link to Inktomi's Web
site currently located at www. inktomi.com. Inktomi will provide N2H2 with
appropriate graphics for the Inktomi icon. Such phrasing and the Inktomi icon
shall be visible "above the fold" (that is, visible when the applicable Web page
is loaded by a browser displaying an active region of 650x320 pixels).
3.2 Trademark License. Inktomi hereby grants N2H2 a royalty-free,
nontransferable, nonexclusive license under Inktomi's trademarks during the Term
to display the Inktomi icon and to advertise the availability of Inktomi
software on the Site. N2H2 hereby grants to Inktomi a royalty-free,
nontransferable, nonexclusive license under N2H2's trademarks during the Term
to advertise that N2H2 is using Inktomi's technology. Each party will submit
advertising materials, containing the other party's trademarks to the other
party before implementation for inspection and such other party will have the
right to modify any such advertisements.
3.3 House Ads. To the extent there is unsold advertising
inventory on the Site during the Term, Inktomi may run advertisements on the
Site on a rotating basis (or, if available, based on key words), provided
however that Inktomi may not use more than ten percent (10%) of the unsold Site
inventory in any one month without N2H2's prior approval. Any such unpaid house
ads delivered to N2H2 on behalf of Inktomi shall be subject to N2H2's standard
online advertising terms and conditions, including the right to restrict content
only to that suitable for the education market in the reasonable judgment of
N2H2.
4. Warranties.
4.1 Inktomi Warranties. Inktomi warrants that (i) it has full
power and authority to enter into this Agreement and to grant the rights set
forth herein, (ii) it has not previously and will not grant any rights in the
Inktomi Technology to any third party that are inconsistent with the rights
granted to N2H2 hereunder, and (iii) the software comprising the Inktomi Search
Engine does not impermissibly include any trade secrets or copyrighted subject
matter owned by a third party. Inktomi does not warrant that the Services will
meet all of N2H2's requirements or that performance of the Services will be
uninterrupted or error free. INKTOMI MAKES NO OTHER WARRANTY OF ANY KIND,
WHETHER EXPRESS, IMPLIED STATUTORY OR OTHERWISE, INCLUDING WITHOUT LIMITATION
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR USE, AND
NONINFRINGEMENT.
4.2 N2H2 Warranties. N2H2 warrants that it has full power and
authority to enter into this Agreement and to grant the rights set forth herein.
5. Customer Services. N2H2, at its own expense shall provide first level
customer support services to end-users of the Site. Inktomi, at its own expense,
shall provide second level
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<PAGE> 6
technical support services to N2H2 regarding the operation of the Inktomi Search
Engine. Such support services will be provided via telephone, e-mail, World Wide
Web, or fax.
6. Payments.
6.1 Service Fees. N2H2 shall pay Inktomi monthly service fees
equal to the greater of (i) $ * multiplied by the number of Hits for such month
or (ii) * for such month. Notwithstanding the foregoing, N2H2 shall pay Inktomi
a minimum of $ * for each year under this Agreement (one-third attributable to
the Filtering Services and two-thirds attributable to the Search Services). For
the first year, this minimum shall be paid as follows: $ * shall be paid upon
execution of this Agreement, $ * shall be paid on or before January 31, 1998, $
* shall be paid on or before July 1, 1998, $ * shall be paid on or before
October 31, 1998, and $ * shall be paid on or before December 31, 1998. For
subsequent years, this minimum shall be paid in equal monthly installments of $
*. Two-thirds of all such minimum payments shall be credited against monthly
service fees paid or payable. Monthly service fees shall be paid in arrears
within thirty (30) calendar days following the end of each month.
6.2. Records. N2H2 shall keep complete and accurate records
pertaining to the revenue it generates in connection with the Site. Such records
shall be maintained for a two-year period following the year in which any
payments pertaining to such revenue were due. Inktomi shall have the right to
examine N2H2's records from time to time but no more than once every six (6)
months to determine the correctness of any payment made under this Agreement.
Such examination shall be conducted at reasonable times during N2H2's normal
business hours and upon at least ten (10) business days' advance notice and in a
manner so as not to interfere unreasonably with the conduct of N2H2's business.
If any such examination indicates that N2H2 has underpaid by more than five
percent (5%) of the aggregate payments due for the period subject to such
examination, N2H2 shall reimburse Inktomi for reasonable costs of such
examination.
6.3 Taxes. N2H2 shall be responsible for all sales and other
taxes imposed by any federal, state or local governmental entity on the
transactions contemplated by this Agreement, excluding taxes based upon
Inktomi's net income. When Inktomi has the legal obligation to pay or collect
such taxes, the appropriate amount shall be invoiced to and paid by N2H2 unless
N2H2 provides Inktomi with a valid tax exemption certificate authorized by the
appropriate taxing authority.
6.4 U.S. Dollars. All fees quoted and payments made hereunder
shall be in U.S. Dollars.
7. Confidentiality.
7.1 Definition of Confidential Information. All information and
documents disclosed or produced by either party in the course of this Agreement
which are disclosed in written form and identified by a marking thereon as
proprietary, or oral information which is defined at the time of disclosure and
confirmed in writing within ten (10) business days of its
6
(*) = Information has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities Exchange
Commission.
<PAGE> 7
disclosure, shall be deemed the "Confidential Information" of the disclosing
party. Notwithstanding the above, the parties agree that any information (in any
form, whether tangible or intangible) relating to the Inktomi Search Engine, the
Database, the Inktomi Technology, the Inktomi Data Protocol, the Interface
Construction Tools, the N2H2 Filter List, the N2H2 Word List or the distinctive
methods or procedures which Inktomi or N2H2 use in the design, development,
licensing, internal sales and marketing strategies, support, or maintenance of
software or hardware is considered Confidential Information.
7.2 Treatment of Confidential Information. Each party agrees to
protect the other party's Confidential Information in the same manner as such
party protects its own Confidential Information of substantially similar
proprietary value, but in no case less than reasonable care. Each party agrees
that it will use the Confidential Information of the other party only for the
purposes of this Agreement and that it will not divulge, transfer, sell,
license, lease, or otherwise disclose or release any such information or
documents to third parties, with the exception of (i) its employees or
subcontractors who require access to such for purposes of carrying out such
party's obligation hereunder, and (ii) persons who are employed as auditors by a
public accounting firm or by a federal or state agency. Each party will use
reasonable efforts to advise any person obtaining Confidential Information that
such information is proprietary and to obtain a written agreement obligating
such person to maintain the confidentiality of any Confidential Information
belonging to the party or its suppliers.
7.3 No Other Confidential Information. Neither party shall have
any obligation under this Section 7 for information of the other parry which the
receiving party can substantiate with documentary evidence that has been or is
(i) developed by the receiving party independently and without the benefit of
information disclosed hereunder by the disclosing party; (ii) lawfully obtained
by the receiving party from a third party without restriction and without breach
of this Agreement; (iii) publicly available without breach of this Agreement,
(iv) disclosed without restriction by the disclosing party to a third party; or
(v) known to the receiving party prior to its receipt from the disclosing party.
8. Indemnification.
8.1 Inktomi Indemnification. Inktomi shall defend and/or settle,
and pay damages including attorneys' fees and costs awarded pursuant to, any
third party claim brought against N2H2 which, if true, would constitute a breach
of any warranty, representation or covenant made by Inktomi under this
Agreement; provided that N2H2 promptly notifies Inktomi in writing of any such
claim and promptly tenders the control of the defense and settlement of any such
claim to Inktomi at Inktomi's expense and with Inktomi's choice of counsel. N2H2
shall cooperate with Inktomi, at Inktomi's expense, in defending or settling
such claim and N2H2 may join in defense with counsel of its choice at its own
expense. Inktomi shall not reimburse N2H2 for any expenses incurred by N2H2
without the prior written approval of Inktomi.
8.2 N2H2 Indemnification. N2H2 shall defend and/or settle, and
pay damages including attorneys' fees awarded pursuant to, any third party claim
brought against Inktomi which, if true, would constitute a breach of any
warranty, representation or covenant made by N2H2 under this Agreement; provided
that Inktomi promptly notifies N2H2 in writing of any such
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<PAGE> 8
claim and promptly tenders the control of the defense and settlement of any
such claim to N2H2 at N2H2's expense and with N2H2's choice of counsel. Inktomi
shall cooperate with N2H2, at N2H2's expense, in defending or settling such
claim and Inktomi may join in defense with counsel of its choice at its own
expense. N2H2 shall not reimburse Inktomi for any expenses incurred by Inktomi
without the prior written approval of N2H2.
9. Limitation of Liability. EXCEPT FOR DAMAGES RESULTING FROM A BREACH
OF CONFIDENTIALITY PROVISIONS OR SERVICE/LICENSE RESTRICTIONS HEREIN, NEITHER
PARTY WILL BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES (INCLUDING LOST PROFITS) REGARDLESS OF THE FORM OF ACTION, EVEN IF SUCH
PARTY HAD BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT FOR DAMAGES
RESULTING FROM A BREACH OF THE CONFIDENTIALITY PROVISIONS OR SERVICE/LICENSE
RESTRICTIONS HEREIN, NEITHER PARTY'S LIABILITY UNDER THIS AGREEMENT SHALL EXCEED
THE NET AMOUNT INKTOMI HAS RECEIVED FROM N2H2 UNDER THIS AGREEMENT.
10. Term and Termination.
10.1 Term. The term of this Agreement (the "Term") shall commence
on the Effective Date and shall continue in force for a period of three years
thereafter, unless earlier terminated as provided herein. The parties agree to
meet fifteen months following the Effective Date to review the status of the
search service provided through the Site and to discuss changes to this
Agreement which the parties may mutually agree to implement.
10.2 Termination for Breach. Either party may suspend performance
and/or terminate this Agreement if the other party materially breaches any term
or condition of this Agreement and fails to cure that breach within thirty (30)
days after receiving written notice of the breach.
10.3 Termination due to Insolvency. Either party may suspend
performance and/or terminate this Agreement if the other party becomes insolvent
or makes any assignment for the benefit of creditors or similar transfer
evidencing insolvency, or suffers or permits the commencement of any form of
insolvency or receivership proceeding, or has any petition under bankruptcy law
filed against it, which petition is not dismissed within sixty (60) days of such
filing, or has a trustee or receiver appointed for its business or assets or any
party thereof.
10.4 Effect of Termination. Upon the termination of this
Agreement for any reason (i) all license rights granted herein shall terminate,
(ii) N2H2 shall immediately pay to Inktomi all amounts due and outstanding as of
the date of such termination, (iii) Inktomi shall remove within two months all
tags and other information implemented on URLs contained in the Database as part
of the Services hereunder and shall discontinue using the N2H2 Filter List and
N2H2 Word List, and (iv) each party shall return to the other party, or destroy
and certify the destruction of, all Confidential Information of the other party.
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<PAGE> 9
10.5 Survival. In the event of any termination or expiration of
this Agreement for any reason, Sections 1, 2.4, 2.5, 4, 6, 7, 8, 9, 10 and 11
shall survive termination. Neither party shall be liable to the other party for
damages of any sort resulting solely from terminating this Agreement in
accordance with its terms.
10.6 Remedies. Each party acknowledges that its breach of
Sections 2.2, 2.6 or 7 would cause irreparable harm to the other party, the
extent of which would be difficult to ascertain. Accordingly, each party agrees
that, in addition to any other remedies to which the other party may be legally
entitled, such party shall have the right to obtain immediately injunctive
relief in the event of a breach of such sections by the other party or any of
its officers, employees, consultants or other agents.
11. Miscellaneous.
11.1 Capacity. Each party warrants that it has full power to
enter into and perform this Agreement, and the person signing this Agreement on
either party's behalf has been duly authorized and empowered to enter in such
agreement. Each party further acknowledges that it has read this Agreement,
understands it and agrees to be bound by it. Each party acknowledges that such
party has not been induced to enter into such agreements by any representations
or statements, oral or written, not expressly contained herein or expressly
incorporated by reference.
11.2 Notice. Any notice required for or permitted by this
Agreement shall be in writing and shall be delivered as follows with notice
deemed given as indicated: (i) by personal delivery when delivered personally,
(ii) by overnight courier upon written verification of receipt, (iii) by
telecopy or facsimile transmission when confirmed by telecopier or facsimile
transmission report, or (iv) by certified or registered mail, return receipt
requested, upon verification of receipt. All notices must be sent to the
addresses first described above or to such other address that the receiving
party may have provided for the purpose of notice in accordance with this
Section.
11.3 Assignment. Neither party may assign its rights or delegate
its obligations under this Agreement without the other party's prior written
consent, except to the surviving entity in a merger or consolidation in which it
participates or to a purchaser of all or substantially all of its assets, so
long as such surviving entity or purchaser shall expressly assume in writing the
performance of all of the terms of this Agreement.
11.4 No Third Party Beneficiaries. All rights and obligations of
the parties hereunder are personal to them. This Agreement is not intended to
benefit, nor shall it be deemed to give rise to, any rights in any third party.
11.5 Governing Law. This Agreement will be governed and
construed, to the extent applicable, in accordance with United States law, and
otherwise, in accordance with California law, without regard to conflict of law
principles. Any dispute or claim arising out of or in connection with this
Agreement shall be finally settled by binding arbitration in San Mateo County,
California under the Commercial Rules of the American Arbitration Association by
one
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<PAGE> 10
arbitrator appointed in accordance with said rules. Judgment on the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Notwithstanding the above, either party may apply to a court of
competent jurisdiction for injunctive or equitable relief.
11.6 Independent Contractors. The parties are independent
contractors. Neither party shall be deemed to be an employee, agent, partner or
legal representative of the other for any purpose and neither shall have any
right, power or authority to create any obligation or responsibility on behalf
of the other.
11.7 Force Majeure. Neither party shall be liable hereunder by
reason of any failure or delay in the performance of its obligations hereunder
(except for the payment of money) on account of strikes, shortages, riots,
insurrection, fires, flood, storm, explosions, earthquakes, acts of God, war,
governmental action, or any other cause which is beyond the reasonable control
of such party.
11.8 Compliance with Law. Each party shall be responsible for
compliance with all applicable laws, rules and regulations, if any, related to
the performance of its obligations under this Agreement.
11.9 Waiver. The failure of either party to require performance
by the other party of any provision shall not affect the full right to require
such performance at any time thereafter, nor shall the waiver by either party of
a breach of any provision hereof be taken or held to be a waiver of the
provision itself.
11.10 Severability. If any provision of this Agreement is held by
a court of competent jurisdiction to be contrary to law, such provision shall be
changed and interpreted so as to best accomplish the objectives of the original
provision to the fullest extent allowed by law and the remaining provisions of
this Agreement shall remain in full force and effect.
11.11 Headings. The section headings appearing in this Agreement
are inserted only as a matter of convenience and in no way define, limit,
construe or describe the scope or extent of such paragraph or in any way affect
such agreements.
11.12 Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, each of which will be considered an original, but
all of which together will constitute one and the same instrument.
11.13 Entire Agreement. This Agreement, and the Exhibits hereto,
constitute the entire agreement between the parties with respect to the subject
matter hereof. This Agreement supersedes, and the terms of this Agreement
govern, any other prior or collateral agreements with respect to the subject
matter hereof. Any amendments to this Agreement must be in writing and executed
by an officer of the parties
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IN WITNESS WHEREOF, the parties have caused this Information Services
Agreement to be signed by their duly authorized representatives.
N2H2, INC. INKTOMI CORPORATION
By: /s/ PETER H. NICKERSON By: /s/ JERRY KENNELLY
-------------------------------- --------------------------------
Name: Peter H. Nickerson Name: Jerry Kennelly
------------------------------ ------------------------------
Title: President Title: CFO
----------------------------- -----------------------------
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<PAGE> 12
EXHIBIT A
SERVICES
Filtering Services
The Filtering Services consist generally of data mining services and
Database tagging services.
The data mining services consist of the following: * .
The mechanics and process for accomplishing the Database tagging
activities consist of the following
[GRAPHIC]
* : * .
* : * .
12
(*) = Information has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities Exchange
Commission.
<PAGE> 13
* .
*: * .
*: * .
*: * .
*: * .
Inktomi's sole obligation and responsibility in connection with the
Filtering Services is to work with N2H2 as specified above to *.
The estimated schedule for the setting up the Database tagging process
described above is as follows:
13
(*) = Information has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities Exchange
Commission.
<PAGE> 14
Inktomi begins N2H2 development: Contract signing
Inktomi begins QA: One month following contract signing
Production process
and initial Database tagging: Two months following contract signing
Production Database is full tagged: Three months following contract signing
All information provided by Inktomi and N2H2 to one another in
connection with the Filtering Services described above will be provided
electronically through the ftp site or in another format mutually agreed to by
Inktomi and N2H2
Search Services
Inktomi shall use the Inktomi Search Engine to crawl the Internet,
download and analyze text and other data, sort and organize the data, create an
index of accessible data, and, after receiving a particular search request from
an end-user through the Site (in the form of a word query), locate material
accessible in the Database (as tagged in accordance with the Filtering
Services), and present the results of the search to the end user. The
functionality specifications and performance criteria applicable to such
services are as follows:
Functionality Specifications:
- - Minimum 60 million document searchable Web index
- - Ability to search by file type, including image, audio, shockwave, java,
acrobat, video, vrml, javascript, VB script
- - Ability to search by full text and phrase, and search with Boolean operators
- - Ability to construct a search query which search by second level domain
document title modification dates and document contents
- - Ability to selectively refine search query to limit or expand results
- - Porn filter
Performance Criteria
- - Size of Database Minimum 60 million documents
- - Database Freshness Object is minimum 17 updates per year
(approximately every 3 weeks may vary
depending on operational circumstances)
- - Uptime/Downtime Minimum 98% uptime (2% downtime) over monthly
windows. Downtime = any 1 minute period in
which Inktomi Technology processes no
requests.
- - Query/Response Speed Average speed <= 1 second ("sub-second"
response time)
Once a month, Inktomi will provide standard crawl and uptime reports to
N2H2.
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<PAGE> 1
EXHIBIT 10.9
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AND NONCOMPETITION AGREEMENT (this "Agreement"), dated
as of May 10, 1999, is entered into by and between N2H2, INC., a Washington
corporation (the "Company") and PETER H. NICKERSON, a resident of the State of
Washington (the "Executive").
WHEREAS, the Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Company as
President and Chief Executive Officer of the Company for said period; and
WHEREAS, Executive and the Company desire to mutually rescind any and
all employment agreements previously entered between Executive and the Company,
and to replace any such employment agreements with this Agreement in exchange
for valuable consideration; and
WHEREAS, the parties desire by this writing to set forth the terms and
conditions of the continuing employment relationship, the Company and Executive.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Employment. The Company hereby employs Executive, and Executive
agrees to accept such employment, upon the terms and conditions herein set
forth.
2. Employment Period. The initial term of employment hereunder shall
commence on the date hereof and continue for a period of two (2) years ending on
May 10, 2001 (the "Initial Term"), subject to earlier termination as provided
herein. If Executive's employment is not earlier terminated, following the
Initial Term, this Agreement and Executive's employment hereunder shall renew
indefinitely until terminated by either party in accordance with Section 5 below
(the "Employment Period").
3. Position and Duties. Executive hereby agrees to serve as an employee
of the Company as President and Chief Executive Officer. Executive shall report
to the Board of Directors of the Company (the "Board"). Executive shall be
primarily responsible for the overall performance of the Company, including
without limitation developing and implementing the Company's key business
strategies. Executive shall devote his best efforts and, subject to the next
sentence, his full business time and attention to the performance of services to
the Company in accordance with the terms hereof and as may reasonably be
requested by the Board. The Company hereby acknowledges that Executive is a
principal in Nickerson & Associates, a consulting
<PAGE> 2
company, and may devote reasonable amounts of time to that endeavor so long as
such activity does not interfere with Executive's duties hereunder.
4. Compensation and Other Terms of Employment.
(a) Compensation. In consideration of the performance of his
duties hereunder, during the Employment Period, the Company agrees to pay
Executive during the term of his employment at a base salary of Two Hundred
Twenty-Five Thousand and No/100 Dollars ($225,000.00) per annum (the "Base
Compensation"). All amounts payable to Executive under this Section 4(a) shall
be paid in accordance with the Company's regular payroll practices (e.g., timing
of payments and standard employee deductions, such as income tax, Social
Security and Medicare withholdings). Base Compensation shall increase by ten
percent (10%) during each twelve (12) month period beginning October 1, 2000 if
the Company's gross revenues reflected in its audited financial statements for
the fiscal year ending September 30, have increased by at least one hundred
percent (100%) over the gross revenues for the immediately preceding fiscal
year.
(b) Bonus. In addition to the Base Compensation described in
Section 4(a) above and any additional bonuses approved by the Board, Executive
shall receive a quarterly bonus in the amount equal to 2.25% of the increase, if
any, of the Company's gross revenues during such quarter over the gross revenues
for the same quarter during the immediately preceding year. For purposes of this
Section 4(b), gross revenues shall be computed in accordance with generally
accepted accounting principles consistently applied. Notwithstanding the
foregoing, the amount of bonus compensation pursuant to this Section 4(b) during
any Company fiscal year shall not exceed seventy percent (70%) of Executive's
Base Compensation during such fiscal year. Bonus compensation for any quarter
shall be payable on the 15th day of the month following the end of the quarter
and shall be subject to standard employee deductions.
(c) Business Expenses. During the Employment Period, upon
presentation of vouchers and similar receipts, Executive shall be entitled to
receive reimbursement in accordance with the policies and procedures of the
Company maintained from time to time for all reasonable business expenses
actually incurred in the performance of his duties hereunder.
(d) Vacation. During the Employment Period, Executive shall be
entitled to six (6) weeks paid annual vacation. Executive's vacation will be
scheduled at those times most convenient to the Company's business.
(e) Benefits. During the Employment Period, the Company shall
provide to Executive such other employment benefits as may from time to time, be
made generally available to executives of the Company, including, without
limitation, the opportunity to participate in a group health insurance plan and
other benefit plans, if any are in existence, in accordance with the terms of
such plans, which benefits are intended to be substantially similar to those
provided by the Company as of the date hereof (assuming availability at costs
consistent with and comparable to those currently paid by the Company);
provided, however, that the Company shall not be required to establish, continue
or maintain any benefit plans.
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(f) Additional Benefits. The Company shall provide Executive with
a Company-owned or leased automobile (including insurance) and shall reimburse
Executive on a monthly basis for reasonable parking, health club dues and high
speed Internet access at home.
5. Termination of Employment. Executive's employment shall be terminated
on any of the following occurrences:
(a) Executive's Permanent Disability. For purposes of this
Agreement, "Permanent Disability" means an illness, injury or other physical or
mental condition continuing for at least ninety (90) consecutive days, arising
at any time during the Employment Period, unless with reasonable accommodation
Executive could perform the essential functions of his position and making such
accommodation would not result in an undue hardship to the Company. If
Executive's employment is terminated because of Executive's Permanent
Disability, the Company shall continue to pay all Base Compensation and pro rata
bonus amounts accrued pursuant to Sections 4(a) and (b) for the longer of (i)
the remaining Initial Term of this Agreement or (ii) twelve (12) months.
(b) Executive's Death. If Executive's employment is terminated
because of Executive's death, the Company shall pay to Executive's personal
representative (on behalf of Executive's estate), within 60 days after the
Company receives written notice of such representative's appointment, all Base
Compensation and pro rata bonus amounts, if any, accrued pursuant to Sections
4(a) and 4(b) above through the date of termination, and shall continue to pay
all Base Compensation and pro rata bonus amounts, if any, accrued pursuant to
Sections 4(a) and (b) for the longer of (i) the remaining Initial Term of the
Agreement or (ii) twelve (12) months.
(c) For Cause. If Executive's employment is terminated with Cause
(as defined in Section 6(a) below), the Company shall pay to Executive all Base
Compensation accrued through the date of termination pursuant to Sections 4(a)
and 4(b) above, whereupon the Company shall have no further obligations to
Executive under this Agreement. Executive and his dependents, if any, shall also
be entitled to any continuation health insurance coverage rights available under
applicable law. Without waiving any rights the Company may have hereunder or
otherwise, the Company hereby expressly reserves its rights to proceed against
Executive for damages in connection with any claim or cause of action that the
Company may have arising out of or related to Executive's employment hereunder.
(d) Termination By The Company Without Cause or Voluntary
Termination By Executive With Good Reason. If Executive's employment with the
Company is terminated by the Company without Cause, or is Voluntarily Terminated
(as defined in Section 6(b) below) by Executive with Good Reason (as defined in
Section 6(c) below), the Company shall pay to Executive all Base Compensation
and pro rata bonus amounts, if any, accrued pursuant to Sections 4(a) and 4(b)
above through the date of such termination and shall continue to pay Executive's
Base Compensation and bonus for a period of two (2) years thereafter (the
"Severance Period"). Those unvested stock options which are scheduled to vest
between the date of termination and the end of the Severance Period shall be
deemed to vest immediately. Executive
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<PAGE> 4
and his dependents, if any, shall also be entitled to any continuation health
insurance coverage rights available under applicable law.
(e) Voluntary Termination By Executive Without Good Reason. If
Executive's employment with the Company is Voluntarily Terminated by Executive
without Good Reason, the Company shall pay to Executive all Base Compensation
and bonus accrued through the date of termination pursuant to Sections 4(a) and
4(b) above, whereupon the Company shall have no further obligations to Executive
under this Agreement. Executive and his dependents, if any, shall also be
entitled to any continuation health insurance coverage rights available under
applicable law. Without waiving any rights the Company may have hereunder or
otherwise, the Company hereby expressly reserves its rights to proceed against
Executive for damages in connection with any claim or cause of action that the
Company may have arising out of or related to Executive's employment hereunder.
(f) Voluntary Termination By Executive Following Change in
Control. If Executive's employment with the company is Voluntarily Terminated by
Executive within 30 days of a Change in Control (as defined in Section 6(d)
below), the Company shall pay to Executive all Base Compensation and bonus
amounts accrued pursuant to Sections 4(a) and 4(b) through a period equal to the
Severance Period. All unvested stock options shall be deemed to vest
immediately. Executive and his dependents, if any, shall also be entitled to any
continuation of health insurance coverage rights available under the applicable
law.
(g) Termination Obligations.
(i) Executive hereby acknowledges and agrees that all
personal property and equipment furnished to or prepared by Executive in the
course of or incident to his employment by the Company, belongs to the Company
and shall be promptly returned to the Company upon termination of the Employment
Period. "Personal property" includes, without limitation, all books, manuals,
records, reports, notes, contracts, lists, blueprints, and other documents, or
materials, or copies thereof (including computer files), and all other
proprietary information belonging, or relating to the business of, the Company
or any affiliate. Following termination, Executive will not retain any written
or other tangible materials containing any proprietary information of the
Company or any affiliate.
(ii) Upon termination of the Employment Period, Executive
shall be deemed to have resigned from all offices, directorships and similar
positions then held with the Company or any affiliate.
(iii) The representations and warranties contained herein
and Executive's obligations under Sections 9 and 10 shall survive termination of
the Employment Period and the expiration or termination of this Agreement. Any
provision hereof required to give meaning and effect to such surviving
provisions shall also survive the termination of the Employment Period and the
expiration or termination of this Agreement.
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<PAGE> 5
6. Definitions. For the purposes of this Agreement the following terms
and phrases shall have the following meanings:
(a) "Cause" shall mean a termination of Executive's employment by
the Company due to (i) Executive's failure or refusal to perform his duties,
responsibilities or obligations hereunder after at least fourteen (14) days'
prior written notice regarding any such failure or refusal, (ii) Executive's
breach of any noncompetition or confidentiality agreement with the Company;
(iii) the willful misappropriation of funds or property of the Company; (iv) use
of alcohol or drugs which interferes with performance of Executive's obligations
under this Agreement, continuing after at least thirty (30) days' prior written
notice; (v) conviction of a felony or of any crime involving moral turpitude,
fraud or misrepresentation; or (vi) the commission by Executive of any willful
or intentional act in disregard of the interests of the Company which could
reasonably be expected to materially injure the reputation, business or business
relationships of the Company, provided, however, that a good faith mistake in
the normal course of business shall not be considered "Cause" under this Section
6(a).
(b) "Voluntary Termination" shall mean the termination by
Executive of his employment by the Company by voluntary resignation or any other
means other than (i) death or Permanent Disability, (ii) simultaneous with
termination for Cause or (iii) simultaneous with or following an event which,
whether or not known to the Company at the time of such Voluntary Termination by
Executive, would constitute Cause.
(c) "Good Reason" shall mean, with respect to a Voluntary
Termination, (i) if (A) such Voluntary Termination occurs within the thirty (30)
day period immediately following a permanent material reduction of Executive's
duties and responsibilities or a permanent change in Executive's duties and
responsibilities such that Executive's duties and responsibilities are
inconsistent with the type of duties and responsibilities of Executive in effect
immediately prior to such reduction or change, (B) such Voluntary Termination
promptly follows a reduction in Executive's benefits, or (C) the President or
the Board otherwise determines that a Voluntary Termination by Executive is for
"Good Reason" under the circumstances then prevailing, and (ii) if Executive
provides written notice of such Good Reason to the Company and the Company does
not correct the circumstances giving rise to such Good Reason during the
following 30-day period. The Company's termination or material breach of this
Agreement without Cause shall constitute Good Reason.
(d) "Change In Control" means the occurrence of any one of the
following events:
(i) any recapitalization, consolidation or merger of the
Company in which the Company is not the continuing or surviving entity or which
contemplates that all or substantially all of the business and/or assets of the
Company shall be controlled by another person or entity other than the person or
entity which controlled the Company immediately prior to such recapitalization,
consolidation or merger;
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<PAGE> 6
(ii) any sale, lease, exchange or transfer (in one
transaction or series of related transactions) of all or substantially all of
the assets of the Company; or
(iii) approval by the members of the Company of any plan
or proposal for the liquidation or dissolution of the Company, unless such plan
or proposal is abandoned within 60 days following such approval.
7. Stock Options. Subject to the discretion of the Company's Board of
Directors Executive shall be entitled to participate in any Company stock option
or stock purchase plan.
8. Records and Confidential Information.
(a) Executive acknowledges that, in connection with the
performance of his duties during the term of this Agreement, the Company will
make available to Executive, or Executive will have access to, certain
Confidential Information (as defined below) and Trade Secrets (as defined by the
Uniform Trade Secrets Act) of the Company and its affiliates. Executive
acknowledges and agrees that any and all Confidential Information or Trade
Secrets of the Company learned or obtained by Executive during the course of his
employment by the Company or otherwise (including, without limitation,
information that Executive obtained through or in connection with his ownership
of and employment by the Company prior to the date hereof) whether developed by
Executive alone or in conjunction with others or otherwise, shall be and is the
property of the Company and its affiliates.
(b) Confidential Information and Trade Secrets of the Company
will be kept confidential by Executive, will not be used in any manner which is
detrimental to the Company, will not be used other than in connection with
Executive's discharge of his duties hereunder, and will be safeguarded by
Executive from unauthorized disclosure.
(c) Following Executive's termination hereunder, as soon as
possible after the Company's written request, Executive will return to the
Company all written Confidential Information and Trade Secrets of the Company
will have been provided to Executive, and Executive will destroy all copies of
any analyses, compilations, studies or other documents prepared by Executive or
for Executive's use containing or reflecting any Confidential Information or
Trade Secrets of the Company. Within 5 business days of the receipt of such
request by Executive, Executive shall, upon written request of the Company,
deliver to the Company a notarized document certifying that such written
Confidential Information and Trade Secrets of the Company have been returned or
destroyed in accordance with this Section.
(d) For the purposes of this Agreement, "Confidential
Information" shall mean all confidential and proprietary information to the
Company, and its affiliates, including, without limitation, the Company's
marketing strategies, pricing policies or characteristics, customers and
customer information, product or product specifications, designs, manufacturing
processes, manufacturing costs, cost of materials, customer lists, business or
business prospects, plans, proposals, codes, marketing studies, research,
reports, investigations, or other information of similar character. For purposes
of this Agreement, Confidential Information shall not include and
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<PAGE> 7
Executive's obligations under this Section shall not extend to (i) information
which is generally available to the public or within the industry, (ii)
information obtained by Executive from third persons not under agreement to
maintain the confidentiality of the same and (iii) information which is required
to be disclosed by law or legal process.
(e) This Section is not intended to, and does not, limit in any
way Executive's duties and obligations to the Company under statutory and common
law not to disclose or make personal use of any Confidential Information or
Trade Secrets of the Company.
9. Assignment of Inventions.
(a) Definition of Inventions. "Inventions" means discoveries,
developments, concepts, ideas, methods, designs, improvements, inventions,
formulas, processes, techniques, programs, know-how and data, whether or not
patentable or registerable under copyright or similar statutes, except any of
the foregoing that (i) is not related to the business of the Company or its
affiliates, or the Company's (and its affiliates') actual or demonstrable
research or development (ii) does not involve the use of any equipment,
supplies, facility or Confidential Information of the Company, (iii) was
developed entirely on Executive's own time, and (iv) does not result from any
work performed by Executive for the Company.
(b) Assignment. Executive agrees to and hereby does assign to the
Company, without further consideration, all of his right, title and interest in
any and all Inventions he may make during the term hereof.
(c) Duty to Disclose and Assist. Executive agrees to promptly
disclose in writing all Inventions to the Company, and to provide all assistance
reasonably requested by the Company in the preservation of the Company's
interests in the Inventions including obtaining patents in any country
throughout the world. Such services will be without additional compensation if
Executive is then employed by the Company and for reasonable compensation and
subject to his reasonable availability if he is not. If the Company cannot,
after reasonable effort, secure Executive's signature on any document or
documents needed to apply for or prosecute any patent, copyright, or other right
or protection relating to an Invention, whether because of his physical or
mental incapacity or for any other reason whatsoever, Executive hereby
irrevocably designates and appoints the Company and its duly authorized officers
and agents as his agent and attorney-in-fact, to act for and in his behalf and
in his name and stead for the purpose of executing and filing any such
application or applications and taking all other lawfully permitted actions to
further the prosecution and issuance of patents, copyrights, or similar
protections thereon, with the same legal force and effect as if executed by him.
(d) Ownership of Copyrights. Executive agrees that any work
prepared for the Company, which is eligible for copyright protection under the
laws of the United States or any other country, shall be a work made for hire
and ownership of all copyrights (including all renewals and extensions) therein
shall vest in the Company. If any such work is deemed not to be a work made for
hire for any reason, Executive hereby grants, transfers and assigns all right,
title and interest in such work and all copyrights in such work and all renewals
and extensions thereof to the
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Company, and agrees to provide all assistance reasonably requested by the
Company in the establishment, preservation and enforcement of the Company's
copyright in such work, such assistance to be provided at the Company's expense
but without any additional compensation to Executive. Executive hereby agrees to
and does hereby waive the enforcement of all moral rights with respect to the
work developed or produced hereunder, including without limitation any and all
rights of identification of authorship and any and all rights of approval,
restriction or limitation on use or subsequent modifications.
(e) Litigation. Executive agrees to render assistance and
cooperation to the Company at its request regarding any matter, dispute or
controversy with which the Company may become involved and of which Executive
has or may have reason to have knowledge, information or expertise. Such
services will be without additional compensation if Executive is then employed
by the Company and for reasonable compensation and subject to his reasonable
availability if he is not.
10. Covenants Not to Compete.
(a) Non-Interference with Customer Accounts. Executive covenants
and agrees that, during the Employment Period, and for a period of two (2) years
after the date of termination of Executive's employment with the Company,
Executive shall not, directly or indirectly, personally or on behalf of any
other person, business, corporation, or entity, contact or do business with any
customer of the Company with respect to any Internet filtering product or
service which is competitive with any product or service which was sold,
provided, or under development by the Company at any time during the
twelve-month period prior to the date of termination of Executive's employment
with the Company. This covenant applies to those customers and the related
entities of those customers to which the Company sold its Internet filtering
products or services at any time during the twelve-month period prior to the
date of termination of Executive's employment with the Company, and those
prospective customers with which the Company actively pursued sales or the
provision of services at any time during the twelve-month period prior to the
date of termination of Executive's employment with the Company.
(b) Noncompetition. Executive covenants and agrees that, during
the Employment Period, and for a period of two (2) years after the date of
termination of Executive's employment with the Company, Executive shall not,
directly or indirectly, own an interest in, operate, join, control, advise, work
for, serve as a director of, have a financial interest which provides any
control of, or participate in any corporation, partnership, proprietorship,
firm, association, person, or other entity (collectively, "Businesses")
producing, designing, providing, soliciting orders for, selling, distributing,
or marketing any Internet filtering products, goods, equipment, or services
which are similar to any Internet filtering products, goods, equipment or
services produced, sold or provided by the Company at any time during the
twelve-month period prior to the date of termination of Executive's employment
with the Company. THE PARTIES ACKNOWLEDGE THAT THE COMPANY PROVIDES SERVICES ON
A WORLD WIDE BASIS AND, ACCORDINGLY THAT IT IS NOT FAIR OR APPROPRIATE TO
RESTRICT THE FOREGOING COVENANT GEOGRAPHICALLY.
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(c) This covenant does not prohibit the mere ownership of less
than two percent (2%) of the outstanding stock of any publicly traded
corporation as long as Executive is not otherwise in violation of this covenant.
(d) Non-Diversion. During the Employment Period, and for a period
of two (2) years after the date of termination of Executive's employment with
the Company, Executive shall not divert or attempt to divert or take advantage
of or attempt to take advantage of any actual or potential business or
opportunities of the Company or its subsidiaries or affiliates which Executive
became aware of as the result of his employment with the Company.
(e) Non-Recruitment. Executive agrees that the Company has
invested substantial time and effort in assembling its present workforce.
Accordingly, Executive agrees that during the Employment Period and for a period
of two (2) years after the date of termination of Executive's employment with
the Company, Executive shall not (i) hire away any individuals who were employed
by the Company or its subsidiaries or affiliates during the twelve-month period
prior to the date of termination of Executive's employment with the Company or
(ii) directly or indirectly entice, solicit or seek to induce or influence any
such employees to leave their employment with the Company or its subsidiaries or
affiliates.
(f) Non-Disparagement. Executive and the Company mutually
covenant and agree that, during the Employment Period and for a period of two
(2) years after the date of termination of Executive's employment with the
Company, neither shall, directly or indirectly disparage the other.
(g) Remedies. Both parties acknowledge that should they
materially breach this Agreement, it will be difficult to determine the
resulting damages to the non-breaching party, and, in addition to any other
remedies the non-breaching party may have, the non-breaching party shall be
entitled to temporary injunctive relief without being required to post a bond
and to permanent injunctive relief without the necessity of proving actual
damage. In the event of any action or proceeding to interpret or enforce this
Agreement, the prevailing party shall be entitled to recover its reasonable
attorneys' fees and costs, whether or not litigation is actually commenced and
including litigation of any appeal. Failure of either party to seek any or all
remedies in one case does not restrict that party from seeking any remedies in
another situation, and no such action shall not constitute a waiver of any of
the party's rights.
(h) Severability and Modification of Any Unenforceable Covenant.
It is the parties' intent that each of the Covenants be read and interpreted
with every reasonable inference given to its enforceability. However, it is also
the parties' intent that if any term, provision or condition of the Covenants is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remainder of the provisions thereof shall remain in full force and effect
and shall in no way be affected, impaired or invalidated. Finally, it is also
the parties' intent that if a court should determine any of the Covenants are
unenforceable because of over breadth, then the court shall modify said covenant
so as to make it reasonable and enforceable under the prevailing circumstances.
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<PAGE> 10
(i) Tolling. In the event of the breach by Executive of any
Covenant the running of the period of restriction shall be automatically tolled
and suspended for the amount of time that the breach continues, and shall
automatically recommence when the breach is remedied so that the Company shall
receive the benefit of Executive's compliance with the Covenants.
11. No Assignment. This Agreement and the rights and duties hereunder
are personal to Executive and shall not be assigned, delegated, transferred,
pledged or sold by Executive without the prior written consent of the Company.
Executive hereby acknowledges and agrees that the Company may assign, delegate,
transfer, pledge or sell this Agreement and the rights and duties hereunder (a)
to an affiliate of the Company or (b) to any third party acquiring through
merger, consolidation or purchase all or substantially all of the business
and/or assets of the Company. This Agreement shall inure to the benefit of and
be enforceable by the parties hereto, and their respective heirs, personal
representatives, successors and assigns.
12. Miscellaneous Provisions.
(a) Payment of Taxes. To the extent that any taxes become payable
by Executive by virtue of any payments made or benefits conferred by the
Company, the Company shall not be liable to pay or obligated to reimburse
Executive for any such taxes or to make any adjustment under this Agreement. Any
payments otherwise due under this Agreement to Executive, including, but not
limited to, the Base Compensation and any bonus, shall be reduced by any
required withholding for federal, state and/or local taxes and other appropriate
payroll deductions.
(b) Insurance. The Company may, from time to time, apply for and
take out, in its own name and at its own expense, life, health, accident,
disability or other insurance on Executive in any sum or sums that it may deem
necessary to protect its interests, and Executive shall aid and cooperate in all
reasonable respects with the Company in procuring any and all such insurance,
including, without limitation, submitting to the usual and customary medical
examinations, and by filling out, executing and delivering such applications and
other instruments in writing as may be reasonably required by an insurance
company or companies to which an application or applications for such insurance
may be made by or for the Company. In order to induce the Company to enter into
this Agreement, Executive represents and warrants to the Company that, to his
knowledge, Executive is insurable at standard (non-rated) premiums.
(c) Deceased Executive. In the event that Executive shall die
while entitled to benefits hereunder, the payment which would otherwise be made
to Executive, shall be made to the estate, or other appropriate legal
representative, of Executive.
(d) Notices. All notices, offers or other communications required
or permitted to be given pursuant to this Agreement shall be in writing and
shall be considered as properly given or made if (i) delivered personally, (ii)
mailed from within the United States by certified mail, return receipt
requested, postage prepaid, (iii) sent by prepaid telegram or facsimile
transmission (with written confirmation of receipt) or (iv) sent by overnight
delivery service. All notices given or made pursuant hereto shall be so given or
made to the parties at the following addresses, or to
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any other address the addressee may have notified the sender beforehand
referring to this Agreement, and shall be deemed effective when so given or made
at such address whether or not the recipient still resides at that address or
actually receives the notice:
If to Executive:
Peter H. Nickerson
6523 - 132nd Avenue NE, Suite 98
Kirkland, Washington 98033-8628
If to the Company:
N2H2, Inc.
900 4th Avenue
Suite 3400
Seattle, Washington 98164
Attn: Chief Financial Officer
With a copy to:
Lane Powell Spears Lubersky LLP
1420 Fifth Avenue, Suite 4100
Seattle, Washington 98101-2338
Attn: Jim D. Johnston
Facsimile: (206) 223-7107
(e) Severability. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid, illegal or unenforceable, such
provision shall be severed and enforced to the extent possible or modified in
such a way as to make it enforceable, and the invalidity, illegality or
unenforceability thereof shall not affect the validity, legality or
enforceability of the remaining provisions of this Agreement.
(f) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Washington applicable to
contracts executed in and to be performed entirely within that state, except
with respect to matters of law concerning the internal corporate affairs of any
corporate entity which is a party to or the subject of this Agreement, and as to
those matters, the law of the jurisdiction under which the respective entity
derives its powers shall govern.
(g) Counterparts. This Agreement may be executed in counterparts,
each of which shall be an original, but all of which shall constitute one and
the same instrument.
(h) Entire Understanding. This Agreement, including all Recitals
hereto which are incorporated herein by this reference, together with the other
agreements and documents being executed and delivered concurrently herewith by
Executive, the Company and certain of its
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<PAGE> 12
affiliates, constitute the entire understanding among all of the parties hereto
and supersedes any prior understandings and agreements, written or oral, among
them respecting the subject matter within.
(i) Pronouns and Headings. As used herein, all pronouns shall
include the masculine, feminine, neuter, singular and plural thereof wherever
the context and facts require such construction. The headings, titles and
subtitles herein are inserted for convenience of reference only and are to be
ignored in any construction of the provisions hereof.
(j) Amendments. Except as specifically set forth herein, this
Agreement shall not be changed or amended unless in writing and signed by both
Executive and the President (or other officer of the Company designated by the
Board).
(k) Executive's Acknowledgment. Executive acknowledges (i) that
he has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and (ii) that he has read and understands this Agreement, is
fully aware of its legal effect, and has entered into it freely based on his own
judgment.
(l) Arbitration. It is understood and agreed between the parties
hereto that any claim of any nature whatsoever arising out of or connected with
Executive's employment with the Company, including but not limited to wrongful
termination, breach of contract, defamation, and claims of discrimination
(including age, disability, sex, religion, race, national origin, color, etc.)
or harassment, whether under federal, state or local laws, common law or in
equity, shall be decided by submission to final and binding arbitration. The
arbitrator shall be a retired or former superior court or appellate court judge.
This arbitration provision shall be governed by the Federal Arbitration Act the
arbitration shall be and pursuant to rules and procedures hereafter adopted by
the Company, and failing such adoption, the Federal Rules of Civil Procedure.
Any arbitration hereunder shall be conducted in Seattle, Washington. Judgment
shall be final upon the award rendered by the arbitrator and may be entered in
any court having jurisdiction thereof. It is further understood and agreed
between the parties hereto that actions seeking temporary injunctions are hereby
excluded from arbitration and, therefore, may be sought in a court of
appropriate jurisdiction without resort to arbitration, even though resolution
of the underlying claim must be submitted to arbitration. Provided: This Section
shall not govern any matter arising out of Executive's violation of, or
threatened violation of, the terms of the Employee Intellectual Property
Agreement attached hereto as Appendix A and incorporated herein by reference
("IP Agreement"), or Executive's violation of the covenants contained in
Sections 10 of this Agreement, in which event the Company shall be entitled to
seek injunctive or other equitable relief in any state or federal court located
in King County, Washington, and the parties agree to submit to the jurisdiction
of such court.
(m) Delivery by Facsimile. The parties agree that counterparts of this
Agreement may be executed and delivered by facsimile, followed by regular
mailing of original signed counterparts.
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IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first above written.
THE COMPANY:
N2H2, INC.
By /s/ John Duncan
---------------------------------------
Its Secretary
------------------------------------
THE EXECUTIVE:
/s/ Peter H. Nickerson
-----------------------------------------
Peter H. Nickerson
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<PAGE> 14
APPENDIX A
EMPLOYEE INTELLECTUAL PROPERTY AGREEMENT
BY and BETWEEN: N2H2, INC. (the "COMPANY"), a Washington corporation
and PETER H. NICKERSON ("EMPLOYEE").
In the course of employment with the Company, Employee has had and/or will have
access to information, products, processes, tools, know-how and other
intellectual properties that are confidential, proprietary or licensed to the
Company. There is currently an understanding and agreement between the Company
and Employee regarding these confidentiality and intellectual property matters,
which was documented in part by a certain N2H2 Employee Confidentiality and
Nondisclosure Agreement. As a condition of Employee's continuing employment, the
parties now wish to have this Agreement supersede and replace all previous
agreements of the parties on matters of confidentiality and intellectual
property rights.
NOW THEREFORE, in consideration of the employment relationship between the
parties, the parties agree, promise and covenant to each other as follows:
1. SCOPE OF AGREEMENT.
(a) The parties acknowledge and agree that this Agreement addresses only
certain issues relating to patent, copyright, trade secret and other
intellectual property rights. This Agreement is not a contract of employment and
does not address or modify any of the terms and conditions of employment,
including but not limited to duration of employment, compensation, non-compete
covenants, and other employment-related issues.
(b) Except for Executive Employment Agreement executed by the parties
contemporaneous herewith, the parties agree and acknowledge that this Agreement
shall replace and supersede the N2H2 Confidentiality and Nondisclosure Agreement
(and any previous agreement on intellectual property matters that may exist) by
and between Employee and the Company, which is hereby terminated. This Agreement
and Executive Employment Agreement constitute the entire agreement of the
parties with respect to the subject matter thereof, and may not be modified,
amended or waived except in a writing signed by both parties. In the event of
any inconsistency between this Agreement and Executive Employment Agreement, the
provisions of this Agreement will control. This Agreement shall be effective as
of the beginning of the employment relationship between the parties.
2. DEFINITIONS.
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For purposes of this Agreement, the capitalized terms set forth below
shall have the meanings assigned to them as follows:
(a) "Development" shall mean any information, product, process, invention,
discovery, technique, idea, design, work of authorship, improvement or
modification, in whatever form and whether or not patentable, copyrightable or
otherwise protectable under law, that is created, made, conceived, developed,
expressed in tangible form or reduced to practice by Employee (either alone or
with others).
(b) "Protected Development" shall mean any Development that:
(i) results from the use of equipment, supplies, facility, Protected Information
and any property or proprietary rights (whether tangible or intangible) that are
owned, leased or contracted for by the Company;
(ii) relates directly to the business of the Company, or to the Company's actual
or demonstrably anticipated research or development; or
(iii) results from any work or services performed by Employee for the Company.
In particular, Protected Development shall include, without limitation, any
computer design, programming and documentation; source code and object code for
software; database, model, documentation, and information to whose creation
Employee contributes during the course of Employee's employment by the Company.
(c) "Protected Information" shall mean all information, in whatever form or
format, that is identified by the Company or is reasonably understood as private
or confidential, or that qualifies for protection under law as a trade secret or
proprietary information of the Company, its affiliated companies, its suppliers
or its customers. Protected Information shall include, but is not limited to:
(i) inventions, discoveries, ideas, techniques, drawings, specifications,
models, database, software, documentation; (ii) customer-related information;
(iii) sales and marketing plans, projections and analysis; (iv) any and all
information related to the business operations of the Company, its affiliated
companies, its suppliers or its customers; and (v) any and all information
provided to the Company by third parties which the Company is obligated to keep
confidential.
Notwithstanding the foregoing, Protected Information does not include any
information that is or becomes part of the public domain through no act or
failure to act on the part of Employee.
3. ASSIGNMENT OF INTELLECTUAL RIGHTS TO THE COMPANY.
(a) Subject to the limitation of Subsection 3(b), Employee hereby grants,
transfers and assigns to the Company all of the Employee's right, title, and
interest in or to: (i) the Protected Developments; and (ii) any proprietary
rights therefrom. Employee agrees that any copyrightable Protected Development,
to the extent created by Employee within the scope of
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<PAGE> 16
Employee's employment with the Company, shall be deemed to be a "work made for
hire," pursuant to the United States Copyright Act (17 U.S.C. Section 101).
(b) In compliance with Washington state law (RCW 49.44.140), Employee hereby
acknowledges that Employee has been advised and notified by the Company via this
Agreement that the Agreement does not apply to an invention for which no
equipment, supplies, facility, or trade secret information of the Company was
used and which was developed entirely on Employee's own time, unless: (A) the
invention relates (i) directly to the business of the Company, or (ii) to the
Company's actual or demonstrably anticipated research or development; or (B) the
invention results from any work performed by Employee for the Company.
(c) Employee shall promptly disclose all Developments to the Company and keep
records relating to the conception, tangible expression and reduction to
practice of all such Developments. Employee acknowledges and agrees that this
disclosure obligation applies to all Developments, whether or not they qualify
as Protected Developments, for the purpose of determining rights of Employee and
the Company in such inventions. Any and all disclosure records, to the extent
related to a Protected Development, shall remain the sole and exclusive property
of the Company, and the Employee shall surrender possession of such records to
the Company upon request or upon any suspension or termination of the Employee's
employment with the Company.
(d) Employee shall render and provide the Company with all information,
documentation and assistance, and shall sign and deliver all such assignments,
affidavits, declarations and other documents that the Company may request to
perfect, enforce, or defend any proprietary rights in or based on the Protected
Developments. The Company shall pay reasonable compensation for such
information, documentation and assistance if they are provided by Employee after
any suspension or termination of Employee's employment.
(e) The Company, in its sole discretion, shall determine the extent of the
proprietary rights, if any, to be protected in any Protected Development.
4. NONDISCLOSURE OF PROTECTED INFORMATION.
(a) Unless otherwise specified in writing, Employee shall assume that any and
all information disclosed by the Company to Employee, in whatever form, is
Protected Information, whether or not designated as private or confidential.
(b) During the period of employment and thereafter, Employee shall hold in trust
and the strictest confidence any and all Protected Information. Employee shall
not disclose any Protected Information to others without the prior written
permission of the Company, or use any Protected Information for any purpose
other than for the performance of services for the Company. In addition,
Employee shall take all necessary precautions to prevent any person or entity
with whom Employee comes into contact from acquiring, disclosing or using such
Protected Information.
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<PAGE> 17
(c) Employee hereby acknowledges and agrees that the obligations with respect to
any particular Protected Information shall be in force and binding as long as
such information qualifies as Protected Information under this Agreement,
regardless of any suspension or termination of employment relationship between
the parties, and regardless of any termination of this Agreement for any reason.
(d) All Protected Information is the Company's sole and exclusive property. Upon
request or upon any suspension or termination of Employee's employment, Employee
shall promptly return and surrender to the Company all items and materials in
Employee's possession or control, in whatever form and medium and including any
and all copies, which contain or embody any Protected Information.
(e) Nothing contained in this Agreement shall be construed as granting to or
conferring on Employee any proprietary right or interest in any Protected
Information.
(f) Unless otherwise agreed in writing, the Company shall be free to use and to
disclose in any way it deems appropriate any information provided to the Company
by Employee. Employee agrees not to disclose to the Company any information
which is confidential or private to Employee or to any third party that Employee
does not want so used or disclosed.
5. MISCELLANEOUS PROVISIONS.
(a) Remedies. Employee acknowledges and agrees that any violation of this
Agreement will cause irreparable harm for which the Company may not be fully or
adequately compensated by recovery of monetary damages. Accordingly, in the
event of any such violation or threatened violation, the Company shall be
entitled to injunctive relief from a court of competent jurisdiction in addition
to any other remedy available at law or in equity.
(b) Attorney Fees. If any action at law or in equity is brought to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
recover, at trial and on appeal, in addition to any other relief that may be
granted, reasonable amounts of legal, accounting and other professional fees,
together with other allowable costs and expenses.
(c) Applicable Law and Jurisdiction. The parties agree that this Agreement will
be governed by the laws of the State of Washington, without regard to Washington
choice of law principles. Law suits relating to this Agreement shall be brought
in the appropriate court in the State of Washington, and the parties agree to
submit to the jurisdiction of such court.
(d) Amendment and Assignment. All modifications to this Agreement must be in
writing, signed by the parties hereto. Except by operation of law, neither party
shall assign or delegate its rights or duties under this Agreement without the
prior written consent of the other party.
(e) Independence of Provisions. Each provision herein shall be treated as a
separate and independent clause, and the invalidity or unenforceability of any
one clause shall in no way impair the validity or enforceability of any other
clauses herein.
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(f) Successors and Assigns. This Agreement shall be binding on Employee's heirs,
executors, estate administrators and legal representatives and shall be for the
benefit of the Company, its successors or assigns.
IN WITNESS THEREOF, the parties hereby execute this Agreement.
The undersigned has read and understood the foregoing and agrees to be bound
thereby.
EMPLOYEE:
Signed: /s/ Peter H. Nickerson
----------------------------------
Print Name: Peter H. Nickerson
Date: May 10 , 1999
------------------
The foregoing was executed by the Employee and accepted on behalf of the
Company.
N2H2, INC.:
Signed: /s/ John Duncan
----------------------------------
By: John Duncan
Title: Secretary
Date: May 10 , 1999
------------------
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<PAGE> 1
EXHIBIT 10.10
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AND NONCOMPETITION AGREEMENT (this "Agreement"), dated
as of May 10, 1999, is entered into by and between N2H2, INC., a Washington
corporation (the "Company") and JOHN F. DUNCAN, a resident of the State of
Washington (the "Executive").
WHEREAS, the Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Company as
Vice President - Chief Financial Officer, and corporate Secretary and Treasurer
of the Company for said period; and
WHEREAS, Executive and the Company desire to mutually rescind any and
all employment agreements previously entered between Executive and the Company,
and to replace any such employment agreements with this Agreement in exchange
for valuable consideration; and
WHEREAS, the parties desire by this writing to set forth the terms and
conditions of the continuing employment relationship, the Company and Executive.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Employment. The Company hereby employs Executive, and Executive
agrees to accept such employment, upon the terms and conditions herein set
forth.
2. Employment Period. The initial term of employment hereunder shall
commence on the date hereof and continue for a period of eighteen (18) months
ending on November 10, 2000 (the "Initial Term"), subject to earlier termination
as provided herein. If Executive's employment is not earlier terminated,
following the Initial Term, this Agreement and Executive's employment hereunder
shall renew indefinitely until terminated by either party in accordance with
Section 5 below (the "Employment Period").
3. Position and Duties. Executive hereby agrees to serve as an employee
of the Company as Vice President - Chief Financial Officer, and corporate
Secretary and Treasurer. Executive shall report to the President or such other
officer(s) as designated by the Board of Directors of the Company (the "Board").
Executive shall devote his best efforts and his full business time and attention
to the performance of services to the Company in accordance with the terms
hereof and as may reasonably be requested by the Board, the President or other
Board-designated officer of the Company.
<PAGE> 2
4. Compensation and Other Terms of Employment.
(a) Compensation. In consideration of the performance of his
duties hereunder, during the Employment Period, the Company agrees to pay
Executive during the term of his employment at a base salary of One Hundred
Fifty Thousand and No/100 Dollars ($150,000.00) per annum (the "Base
Compensation"). All amounts payable to Executive under this Section 4(a) shall
be paid in accordance with the Company's regular payroll practices (e.g., timing
of payments and standard employee deductions, such as income tax, Social
Security and Medicare withholdings). Base Compensation shall increase by ten
percent (10%) during each twelve (12) month period beginning October 1, 2000 if
the Company's gross revenues reflected in its audited financial statements for
the fiscal year ending September 30, have increased by at least one hundred
percent (100%) over the gross revenues for the immediately preceding fiscal
year.
(b) Bonus. In addition to the Base Compensation described in
Section 4(a) above and any additional bonuses approved by the Board, Executive
shall receive a quarterly bonus in the amount equal to 1.50% of the increase, if
any, of the Company's gross revenues during such quarter over the gross revenues
for the same quarter during the immediately preceding year. For purposes of this
Section 4(b), gross revenues shall be computed in accordance with generally
accepted accounting principles consistently applied. Notwithstanding the
foregoing, the amount of bonus compensation pursuant to this Section 4(b) during
any Company fiscal year shall not exceed seventy percent (70%) of Executive's
Base Compensation during such fiscal year. Bonus compensation for any quarter
shall be payable on the 15th day of the month following the end of the quarter
and shall be subject to standard employee deductions.
(c) Business Expenses. During the Employment Period, upon
presentation of vouchers and similar receipts, Executive shall be entitled to
receive reimbursement in accordance with the policies and procedures of the
Company maintained from time to time for all reasonable business expenses
actually incurred in the performance of his duties hereunder.
(d) Vacation. During the Employment Period, Executive shall be
entitled to four (4) weeks paid annual vacation. Executive's vacation will be
scheduled at those times most convenient to the Company's business.
(e) Benefits. During the Employment Period, the Company shall
provide to Executive such other employment benefits as may from time to time, be
made generally available to executives of the Company, including, without
limitation, the opportunity to participate in a group health insurance plan and
other benefit plans, if any are in existence, in accordance with the terms of
such plans, which benefits are intended to be substantially similar to those
provided by the Company as of the date hereof (assuming availability at costs
consistent with and comparable to those currently paid by the Company);
provided, however, that the Company shall not be required to establish, continue
or maintain any benefit plans.
(f) Additional Benefits. The Company shall reimburse Executive on
a monthly basis for reasonable commuting costs, parking health club dues and
high speed Internet access at home.
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<PAGE> 3
5. Termination of Employment. Executive's employment shall be terminated
on any of the following occurrences:
(a) Executive's Permanent Disability. For purposes of this
Agreement, "Permanent Disability" means an illness, injury or other physical or
mental condition continuing for at least ninety (90) consecutive days, arising
at any time during the Employment Period, unless with reasonable accommodation
Executive could perform the essential functions of his position and making such
accommodation would not result in an undue hardship to the Company. If
Executive's employment is terminated because of Executive's Permanent
Disability, the Company shall continue to pay all Base Compensation and pro rata
bonus amounts accrued pursuant to Sections 4(a) and (b) for the longer of (i)
the remaining Initial Term of this Agreement or (ii) twelve (12) months.
(b) Executive's Death. If Executive's employment is terminated
because of Executive's death, the Company shall pay to Executive's personal
representative (on behalf of Executive's estate), within 60 days after the
Company receives written notice of such representative's appointment, all Base
Compensation and pro rata bonus amounts, if any, accrued pursuant to Sections
4(a) and 4(b) above through the date of termination, and shall continue to pay
all Base Compensation and pro rata bonus amounts, if any, accrued pursuant to
Sections 4(a) and (b) for the longer of (i) the remaining Initial Term of the
Agreement or (ii) twelve (12) months.
(c) For Cause. If Executive's employment is terminated with Cause
(as defined in Section 6(a) below), the Company shall pay to Executive all Base
Compensation accrued through the date of termination pursuant to Sections 4(a)
and 4(b) above, whereupon the Company shall have no further obligations to
Executive under this Agreement. Executive and his dependents, if any, shall also
be entitled to any continuation health insurance coverage rights available under
applicable law. Without waiving any rights the Company may have hereunder or
otherwise, the Company hereby expressly reserves its rights to proceed against
Executive for damages in connection with any claim or cause of action that the
Company may have arising out of or related to Executive's employment hereunder.
(d) Termination By The Company Without Cause or Voluntary
Termination By Executive With Good Reason. If Executive's employment with the
Company is terminated by the Company without Cause, or is Voluntarily Terminated
(as defined in Section 6(b) below) by Executive with Good Reason (as defined in
Section 6(c) below), the Company shall pay to Executive all Base Compensation
and pro rata bonus amounts, if any, accrued pursuant to Sections 4(a) and 4(b)
above through the date of such termination and shall continue to pay Executive's
Base Compensation and bonus for a period of eighteen (18) months thereafter (the
"Severance Period"). Those unvested stock options which are scheduled to vest
between the date of termination and the end of the Severance Period shall be
deemed to vest immediately. Executive and his dependents, if any, shall also be
entitled to any continuation health insurance coverage rights available under
applicable law.
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<PAGE> 4
(e) Voluntary Termination By Executive Without Good Reason. If
Executive's employment with the Company is Voluntarily Terminated by Executive
without Good Reason, the Company shall pay to Executive all Base Compensation
and bonus accrued through the date of termination pursuant to Sections 4(a) and
4(b) above, whereupon the Company shall have no further obligations to Executive
under this Agreement. Executive and his dependents, if any, shall also be
entitled to any continuation health insurance coverage rights available under
applicable law. Without waiving any rights the Company may have hereunder or
otherwise, the Company hereby expressly reserves its rights to proceed against
Executive for damages in connection with any claim or cause of action that the
Company may have arising out of or related to Executive's employment hereunder.
(f) Voluntary Termination By Executive Following Change in
Control. If Executive's employment with the company is Voluntarily Terminated by
Executive within 30 days of a Change in Control (as defined in Section 6(d)
below), the Company shall pay to Executive all Base Compensation and bonus
amounts accrued pursuant to Sections 4(a) and 4(b) through a period equal to the
Severance Period. All unvested stock options shall be deemed to vest
immediately. Executive and his dependents, if any, shall also be entitled to any
continuation of health insurance coverage rights available under the applicable
law.
(g) Termination Obligations.
(i) Executive hereby acknowledges and agrees that all
personal property and equipment furnished to or prepared by Executive in the
course of or incident to his employment by the Company, belongs to the Company
and shall be promptly returned to the Company upon termination of the Employment
Period. "Personal property" includes, without limitation, all books, manuals,
records, reports, notes, contracts, lists, blueprints, and other documents, or
materials, or copies thereof (including computer files), and all other
proprietary information belonging, or relating to the business of, the Company
or any affiliate. Following termination, Executive will not retain any written
or other tangible materials containing any proprietary information of the
Company or any affiliate.
(ii) Upon termination of the Employment Period, Executive
shall be deemed to have resigned from all offices, directorships and similar
positions then held with the Company or any affiliate.
(iii) The representations and warranties contained herein
and Executive's obligations under Sections 9 and 10 shall survive termination of
the Employment Period and the expiration or termination of this Agreement. Any
provision hereof required to give meaning and effect to such surviving
provisions shall also survive the termination of the Employment Period and the
expiration or termination of this Agreement.
6. Definitions. For the purposes of this Agreement the following terms
and phrases shall have the following meanings:
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<PAGE> 5
(a) "Cause" shall mean a termination of Executive's employment by
the Company due to (i) Executive's failure or refusal to perform his duties,
responsibilities or obligations hereunder after at least fourteen (14) days'
prior written notice regarding any such failure or refusal, (ii) Executive's
breach of any noncompetition or confidentiality agreement with the Company;
(iii) the willful misappropriation of funds or property of the Company; (iv) use
of alcohol or drugs which interferes with performance of Executive's obligations
under this Agreement, continuing after at least thirty (30) days' prior written
notice; (v) conviction of a felony or of any crime involving moral turpitude,
fraud or misrepresentation; or (vi) the commission by Executive of any willful
or intentional act in disregard of the interests of the Company which could
reasonably be expected to materially injure the reputation, business or business
relationships of the Company, provided, however, that a good faith mistake in
the normal course of business shall not be considered "Cause" under this Section
6(a).
(b) "Voluntary Termination" shall mean the termination by
Executive of his employment by the Company by voluntary resignation or any other
means other than (i) death or Permanent Disability, (ii) simultaneous with
termination for Cause or (iii) simultaneous with or following an event which,
whether or not known to the Company at the time of such Voluntary Termination by
Executive, would constitute Cause.
(c) "Good Reason" shall mean, with respect to a Voluntary
Termination, (i) if (A) such Voluntary Termination occurs within the thirty (30)
day period immediately following a permanent material reduction of Executive's
duties and responsibilities or a permanent change in Executive's duties and
responsibilities such that Executive's duties and responsibilities are
inconsistent with the type of duties and responsibilities of Executive in effect
immediately prior to such reduction or change, (B) such Voluntary Termination
promptly follows a reduction in Executive's benefits, or (C) the President or
the Board otherwise determines that a Voluntary Termination by Executive is for
"Good Reason" under the circumstances then prevailing, and (ii) if Executive
provides written notice of such Good Reason to the Company and the Company does
not correct the circumstances giving rise to such Good Reason during the
following 30-day period. The Company's termination or material breach of this
Agreement without Cause shall constitute Good Reason.
(d) "Change In Control" means the occurrence of any one of the
following events:
(i) any recapitalization, consolidation or merger of the
Company in which the Company is not the continuing or surviving entity or which
contemplates that all or substantially all of the business and/or assets of the
Company shall be controlled by another person or entity other than the person or
entity which controlled the Company immediately prior to such recapitalization,
consolidation or merger;
(ii) any sale, lease, exchange or transfer (in one
transaction or series of related transactions) of all or substantially all of
the assets of the Company; or
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(iii) approval by the members of the Company of any plan
or proposal for the liquidation or dissolution of the Company, unless such plan
or proposal is abandoned within 60 days following such approval.
7. Stock Options. Subject to the discretion of the Company's Board of
Directors Executive shall be entitled to participate in any Company stock option
or stock purchase plan.
8. Records and Confidential Information.
(a) Executive acknowledges that, in connection with the
performance of his duties during the term of this Agreement, the Company will
make available to Executive, or Executive will have access to, certain
Confidential Information (as defined below) and Trade Secrets (as defined by the
Uniform Trade Secrets Act) of the Company and its affiliates. Executive
acknowledges and agrees that any and all Confidential Information or Trade
Secrets of the Company learned or obtained by Executive during the course of his
employment by the Company or otherwise (including, without limitation,
information that Executive obtained through or in connection with his ownership
of and employment by the Company prior to the date hereof) whether developed by
Executive alone or in conjunction with others or otherwise, shall be and is the
property of the Company and its affiliates.
(b) Confidential Information and Trade Secrets of the Company
will be kept confidential by Executive, will not be used in any manner which is
detrimental to the Company, will not be used other than in connection with
Executive's discharge of his duties hereunder, and will be safeguarded by
Executive from unauthorized disclosure.
(c) Following Executive's termination hereunder, as soon as
possible after the Company's written request, Executive will return to the
Company all written Confidential Information and Trade Secrets of the Company
will have been provided to Executive, and Executive will destroy all copies of
any analyses, compilations, studies or other documents prepared by Executive or
for Executive's use containing or reflecting any Confidential Information or
Trade Secrets of the Company. Within 5 business days of the receipt of such
request by Executive, Executive shall, upon written request of the Company,
deliver to the Company a notarized document certifying that such written
Confidential Information and Trade Secrets of the Company have been returned or
destroyed in accordance with this Section.
(d) For the purposes of this Agreement, "Confidential
Information" shall mean all confidential and proprietary information to the
Company, and its affiliates, including, without limitation, the Company's
marketing strategies, pricing policies or characteristics, customers and
customer information, product or product specifications, designs, manufacturing
processes, manufacturing costs, cost of materials, customer lists, business or
business prospects, plans, proposals, codes, marketing studies, research,
reports, investigations, or other information of similar character. For purposes
of this Agreement, Confidential Information shall not include and Executive's
obligations under this Section shall not extend to (i) information which is
generally available to the public or within the industry, (ii) information
obtained by Executive from third
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persons not under agreement to maintain the confidentiality of the same and
(iii) information which is required to be disclosed by law or legal process.
(e) This Section is not intended to, and does not, limit in any
way Executive's duties and obligations to the Company under statutory and common
law not to disclose or make personal use of any Confidential Information or
Trade Secrets of the Company.
9. Assignment of Inventions.
(a) Definition of Inventions. "Inventions" means discoveries,
developments, concepts, ideas, methods, designs, improvements, inventions,
formulas, processes, techniques, programs, know-how and data, whether or not
patentable or registerable under copyright or similar statutes, except any of
the foregoing that (i) is not related to the business of the Company or its
affiliates, or the Company's (and its affiliates') actual or demonstrable
research or development (ii) does not involve the use of any equipment,
supplies, facility or Confidential Information of the Company, (iii) was
developed entirely on Executive's own time, and (iv) does not result from any
work performed by Executive for the Company.
(b) Assignment. Executive agrees to and hereby does assign to the
Company, without further consideration, all of his right, title and interest in
any and all Inventions he may make during the term hereof.
(c) Duty to Disclose and Assist. Executive agrees to promptly
disclose in writing all Inventions to the Company, and to provide all assistance
reasonably requested by the Company in the preservation of the Company's
interests in the Inventions including obtaining patents in any country
throughout the world. Such services will be without additional compensation if
Executive is then employed by the Company and for reasonable compensation and
subject to his reasonable availability if he is not. If the Company cannot,
after reasonable effort, secure Executive's signature on any document or
documents needed to apply for or prosecute any patent, copyright, or other right
or protection relating to an Invention, whether because of his physical or
mental incapacity or for any other reason whatsoever, Executive hereby
irrevocably designates and appoints the Company and its duly authorized officers
and agents as his agent and attorney-in-fact, to act for and in his behalf and
in his name and stead for the purpose of executing and filing any such
application or applications and taking all other lawfully permitted actions to
further the prosecution and issuance of patents, copyrights, or similar
protections thereon, with the same legal force and effect as if executed by him.
(d) Ownership of Copyrights. Executive agrees that any work
prepared for the Company, which is eligible for copyright protection under the
laws of the United States or any other country, shall be a work made for hire
and ownership of all copyrights (including all renewals and extensions) therein
shall vest in the Company. If any such work is deemed not to be a work made for
hire for any reason, Executive hereby grants, transfers and assigns all right,
title and interest in such work and all copyrights in such work and all renewals
and extensions thereof to the Company, and agrees to provide all assistance
reasonably requested by the Company in the establishment, preservation and
enforcement of the Company's copyright in such work, such
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<PAGE> 8
assistance to be provided at the Company's expense but without any additional
compensation to Executive. Executive hereby agrees to and does hereby waive the
enforcement of all moral rights with respect to the work developed or produced
hereunder, including without limitation any and all rights of identification of
authorship and any and all rights of approval, restriction or limitation on use
or subsequent modifications.
(e) Litigation. Executive agrees to render assistance and
cooperation to the Company at its request regarding any matter, dispute or
controversy with which the Company may become involved and of which Executive
has or may have reason to have knowledge, information or expertise. Such
services will be without additional compensation if Executive is then employed
by the Company and for reasonable compensation and subject to his reasonable
availability if he is not.
10. Covenants Not to Compete.
(a) Non-Interference with Customer Accounts. Executive covenants
and agrees that, during the Employment Period, and for a period of eighteen (18)
months after the date of termination of Executive's employment with the Company,
Executive shall not, directly or indirectly, personally or on behalf of any
other person, business, corporation, or entity, contact or do business with any
customer of the Company with respect to any Internet filtering product or
service which is competitive with any product or service which was sold,
provided, or under development by the Company at any time during the
twelve-month period prior to the date of termination of Executive's employment
with the Company. This covenant applies to those customers and the related
entities of those customers to which the Company sold its Internet filtering
products or services at any time during the twelve-month period prior to the
date of termination of Executive's employment with the Company, and those
prospective customers with which the Company actively pursued sales or the
provision of services at any time during the twelve-month period prior to the
date of termination of Executive's employment with the Company.
(b) Noncompetition. Executive covenants and agrees that, during
the Employment Period, and for a period of eighteen (18) months after the date
of termination of Executive's employment with the Company, Executive shall not,
directly or indirectly, own an interest in, operate, join, control, advise, work
for, serve as a director of, have a financial interest which provides any
control of, or participate in any corporation, partnership, proprietorship,
firm, association, person, or other entity (collectively, "Businesses")
producing, designing, providing, soliciting orders for, selling, distributing,
or marketing any Internet filtering products, goods, equipment, or services
which are similar to any Internet filtering products, goods, equipment or
services produced, sold or provided by the Company at any time during the
twelve-month period prior to the date of termination of Executive's employment
with the Company. THE PARTIES ACKNOWLEDGE THAT THE COMPANY PROVIDES SERVICES ON
A WORLD WIDE BASIS AND, ACCORDINGLY THAT IT IS NOT FAIR OR APPROPRIATE TO
RESTRICT THE FOREGOING COVENANT GEOGRAPHICALLY.
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(c) This covenant does not prohibit the mere ownership of less
than two percent (2%) of the outstanding stock of any publicly traded
corporation as long as Executive is not otherwise in violation of this covenant.
(d) Non-Diversion. During the Employment Period, and for a period
of eighteen (18) months after the date of termination of Executive's employment
with the Company, Executive shall not divert or attempt to divert or take
advantage of or attempt to take advantage of any actual or potential business or
opportunities of the Company or its subsidiaries or affiliates which Executive
became aware of as the result of his employment with the Company.
(e) Non-Recruitment. Executive agrees that the Company has
invested substantial time and effort in assembling its present workforce.
Accordingly, Executive agrees that during the Employment Period and for a period
of eighteen (18) months after the date of termination of Executive's employment
with the Company, Executive shall not (i) hire away any individuals who were
employed by the Company or its subsidiaries or affiliates during the
twelve-month period prior to the date of termination of Executive's employment
with the Company or (ii) directly or indirectly entice, solicit or seek to
induce or influence any such employees to leave their employment with the
Company or its subsidiaries or affiliates.
(f) Non-Disparagement. Executive and the Company mutually
covenant and agree that, during the Employment Period and for a period of
eighteen (18) months after the date of termination of Executive's employment
with the Company, neither shall, directly or indirectly disparage the other.
(g) Remedies. Both parties acknowledge that should they
materially breach this Agreement, it will be difficult to determine the
resulting damages to the non-breaching party, and, in addition to any other
remedies the non-breaching party may have, the non-breaching party shall be
entitled to temporary injunctive relief without being required to post a bond
and to permanent injunctive relief without the necessity of proving actual
damage. In the event of any action or proceeding to interpret or enforce this
Agreement, the prevailing party shall be entitled to recover its reasonable
attorneys' fees and costs, whether or not litigation is actually commenced and
including litigation of any appeal. Failure of either party to seek any or all
remedies in one case does not restrict that party from seeking any remedies in
another situation, and no such action shall not constitute a waiver of any of
the party's rights.
(h) Severability and Modification of Any Unenforceable Covenant.
It is the parties' intent that each of the Covenants be read and interpreted
with every reasonable inference given to its enforceability. However, it is also
the parties' intent that if any term, provision or condition of the Covenants is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remainder of the provisions thereof shall remain in full force and effect
and shall in no way be affected, impaired or invalidated. Finally, it is also
the parties' intent that if a court should determine any of the Covenants are
unenforceable because of over breadth, then the court shall modify said covenant
so as to make it reasonable and enforceable under the prevailing circumstances.
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(i) Tolling. In the event of the breach by Executive of any
Covenant the running of the period of restriction shall be automatically tolled
and suspended for the amount of time that the breach continues, and shall
automatically recommence when the breach is remedied so that the Company shall
receive the benefit of Executive's compliance with the Covenants.
11. No Assignment. This Agreement and the rights and duties hereunder
are personal to Executive and shall not be assigned, delegated, transferred,
pledged or sold by Executive without the prior written consent of the Company.
Executive hereby acknowledges and agrees that the Company may assign, delegate,
transfer, pledge or sell this Agreement and the rights and duties hereunder (a)
to an affiliate of the Company or (b) to any third party acquiring through
merger, consolidation or purchase all or substantially all of the business
and/or assets of the Company. This Agreement shall inure to the benefit of and
be enforceable by the parties hereto, and their respective heirs, personal
representatives, successors and assigns.
12. Miscellaneous Provisions.
(a) Payment of Taxes. To the extent that any taxes become payable
by Executive by virtue of any payments made or benefits conferred by the
Company, the Company shall not be liable to pay or obligated to reimburse
Executive for any such taxes or to make any adjustment under this Agreement. Any
payments otherwise due under this Agreement to Executive, including, but not
limited to, the Base Compensation and any bonus, shall be reduced by any
required withholding for federal, state and/or local taxes and other appropriate
payroll deductions.
(b) Insurance. The Company may, from time to time, apply for and
take out, in its own name and at its own expense, life, health, accident,
disability or other insurance on Executive in any sum or sums that it may deem
necessary to protect its interests, and Executive shall aid and cooperate in all
reasonable respects with the Company in procuring any and all such insurance,
including, without limitation, submitting to the usual and customary medical
examinations, and by filling out, executing and delivering such applications and
other instruments in writing as may be reasonably required by an insurance
company or companies to which an application or applications for such insurance
may be made by or for the Company. In order to induce the Company to enter into
this Agreement, Executive represents and warrants to the Company that, to his
knowledge, Executive is insurable at standard (non-rated) premiums.
(c) Deceased Executive. In the event that Executive shall die
while entitled to benefits hereunder, the payment which would otherwise be made
to Executive, shall be made to the estate, or other appropriate legal
representative, of Executive.
(d) Notices. All notices, offers or other communications required
or permitted to be given pursuant to this Agreement shall be in writing and
shall be considered as properly given or made if (i) delivered personally, (ii)
mailed from within the United States by certified mail, return receipt
requested, postage prepaid, (iii) sent by prepaid telegram or facsimile
transmission (with written confirmation of receipt) or (iv) sent by overnight
delivery service. All notices given or made pursuant hereto shall be so given or
made to the parties at the following addresses, or to
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any other address the addressee may have notified the sender beforehand
referring to this Agreement, and shall be deemed effective when so given or made
at such address whether or not the recipient still resides at that address or
actually receives the notice:
If to Executive:
John F. Duncan
__________________________
__________________________
__________________________
__________________________
If to the Company:
N2H2, Inc.
900 4th Avenue
Suite 3400
Seattle, Washington 98164
Attn: Chief Financial Officer
With a copy to:
Lane Powell Spears Lubersky LLP
1420 Fifth Avenue, Suite 4100
Seattle, Washington 98101-2338
Attn: Jim D. Johnston
Facsimile: (206) 223-7107
(e) Severability. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid, illegal or unenforceable, such
provision shall be severed and enforced to the extent possible or modified in
such a way as to make it enforceable, and the invalidity, illegality or
unenforceability thereof shall not affect the validity, legality or
enforceability of the remaining provisions of this Agreement.
(f) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Washington applicable to
contracts executed in and to be performed entirely within that state, except
with respect to matters of law concerning the internal corporate affairs of any
corporate entity which is a party to or the subject of this Agreement, and as to
those matters, the law of the jurisdiction under which the respective entity
derives its powers shall govern.
(g) Counterparts. This Agreement may be executed in counterparts,
each of which shall be an original, but all of which shall constitute one and
the same instrument.
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(h) Entire Understanding. This Agreement, including all Recitals
hereto which are incorporated herein by this reference, together with the other
agreements and documents being executed and delivered concurrently herewith by
Executive, the Company and certain of its affiliates, constitute the entire
understanding among all of the parties hereto and supersedes any prior
understandings and agreements, written or oral, among them respecting the
subject matter within.
(i) Pronouns and Headings. As used herein, all pronouns shall
include the masculine, feminine, neuter, singular and plural thereof wherever
the context and facts require such construction. The headings, titles and
subtitles herein are inserted for convenience of reference only and are to be
ignored in any construction of the provisions hereof.
(j) Amendments. Except as specifically set forth herein, this
Agreement shall not be changed or amended unless in writing and signed by both
Executive and the President (or other officer of the Company designated by the
Board).
(k) Executive's Acknowledgment. Executive acknowledges (i) that
he has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and (ii) that he has read and understands this Agreement, is
fully aware of its legal effect, and has entered into it freely based on his own
judgment.
(l) Arbitration. It is understood and agreed between the parties
hereto that any claim of any nature whatsoever arising out of or connected with
Executive's employment with the Company, including but not limited to wrongful
termination, breach of contract, defamation, and claims of discrimination
(including age, disability, sex, religion, race, national origin, color, etc.)
or harassment, whether under federal, state or local laws, common law or in
equity, shall be decided by submission to final and binding arbitration. The
arbitrator shall be a retired or former superior court or appellate court judge.
This arbitration provision shall be governed by the Federal Arbitration Act the
arbitration shall be and pursuant to rules and procedures hereafter adopted by
the Company, and failing such adoption, the Federal Rules of Civil Procedure.
Any arbitration hereunder shall be conducted in Seattle, Washington. Judgment
shall be final upon the award rendered by the arbitrator and may be entered in
any court having jurisdiction thereof. It is further understood and agreed
between the parties hereto that actions seeking temporary injunctions are hereby
excluded from arbitration and, therefore, may be sought in a court of
appropriate jurisdiction without resort to arbitration, even though resolution
of the underlying claim must be submitted to arbitration. Provided: This Section
shall not govern any matter arising out of Executive's violation of, or
threatened violation of, the terms of the Employee Intellectual Property
Agreement attached hereto as Appendix A and incorporated herein by reference
("IP Agreement"), or Executive's violation of the covenants contained in
Sections 10 of this Agreement, in which event the Company shall be entitled to
seek injunctive or other equitable relief in any state or federal court located
in King County, Washington, and the parties agree to submit to the jurisdiction
of such court.
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(m) Delivery by Facsimile. The parties agree that counterparts of this
Agreement may be executed and delivered by facsimile, followed by regular
mailing of original signed counterparts.
IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first above written.
THE COMPANY:
N2H2, INC.
By /s/ Peter H. Nickerson
--------------------------------------
Its President
----------------------------------
THE EXECUTIVE:
/s/ John F. Duncan
----------------------------------------
John F. Duncan
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APPENDIX A
EMPLOYEE INTELLECTUAL PROPERTY AGREEMENT
BY and BETWEEN: N2H2, INC. (the "COMPANY"), a Washington corporation
and JOHN F. DUNCAN ("EMPLOYEE").
In the course of employment with the Company, Employee has had and/or will have
access to information, products, processes, tools, know-how and other
intellectual properties that are confidential, proprietary or licensed to the
Company. There is currently an understanding and agreement between the Company
and Employee regarding these confidentiality and intellectual property matters,
which was documented in part by a certain N2H2 Employee Confidentiality and
Nondisclosure Agreement. As a condition of Employee's continuing employment, the
parties now wish to have this Agreement supersede and replace all previous
agreements of the parties on matters of confidentiality and intellectual
property rights.
NOW THEREFORE, in consideration of the employment relationship between the
parties, the parties agree, promise and covenant to each other as follows:
1. SCOPE OF AGREEMENT.
(a) The parties acknowledge and agree that this Agreement addresses only
certain issues relating to patent, copyright, trade secret and other
intellectual property rights. This Agreement is not a contract of employment and
does not address or modify any of the terms and conditions of employment,
including but not limited to duration of employment, compensation, non-compete
covenants, and other employment-related issues.
(b) Except for Executive Employment Agreement executed by the parties
contemporaneous herewith, the parties agree and acknowledge that this Agreement
shall replace and supersede the N2H2 Confidentiality and Nondisclosure Agreement
(and any previous agreement on intellectual property matters that may exist) by
and between Employee and the Company, which is hereby terminated. This Agreement
and Executive Employment Agreement constitute the entire agreement of the
parties with respect to the subject matter thereof, and may not be modified,
amended or waived except in a writing signed by both parties. In the event of
any inconsistency between this Agreement and Executive Employment Agreement, the
provisions of this Agreement will control. This Agreement shall be effective as
of the beginning of the employment relationship between the parties.
2. DEFINITIONS.
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For purposes of this Agreement, the capitalized terms set forth below
shall have the meanings assigned to them as follows:
(a) "Development" shall mean any information, product, process, invention,
discovery, technique, idea, design, work of authorship, improvement or
modification, in whatever form and whether or not patentable, copyrightable or
otherwise protectable under law, that is created, made, conceived, developed,
expressed in tangible form or reduced to practice by Employee (either alone or
with others).
(b) "Protected Development" shall mean any Development that:
(i) results from the use of equipment, supplies, facility, Protected Information
and any property or proprietary rights (whether tangible or intangible) that are
owned, leased or contracted for by the Company;
(ii) relates directly to the business of the Company, or to the Company's actual
or demonstrably anticipated research or development; or
(iii) results from any work or services performed by Employee for the Company.
In particular, Protected Development shall include, without limitation, any
computer design, programming and documentation; source code and object code for
software; database, model, documentation, and information to whose creation
Employee contributes during the course of Employee's employment by the Company.
(c) "Protected Information" shall mean all information, in whatever form or
format, that is identified by the Company or is reasonably understood as private
or confidential, or that qualifies for protection under law as a trade secret or
proprietary information of the Company, its affiliated companies, its suppliers
or its customers. Protected Information shall include, but is not limited to:
(i) inventions, discoveries, ideas, techniques, drawings, specifications,
models, database, software, documentation; (ii) customer-related information;
(iii) sales and marketing plans, projections and analysis; (iv) any and all
information related to the business operations of the Company, its affiliated
companies, its suppliers or its customers; and (v) any and all information
provided to the Company by third parties which the Company is obligated to keep
confidential.
Notwithstanding the foregoing, Protected Information does not include any
information that is or becomes part of the public domain through no act or
failure to act on the part of Employee.
3. ASSIGNMENT OF INTELLECTUAL RIGHTS TO THE COMPANY.
(a) Subject to the limitation of Subsection 3(b), Employee hereby grants,
transfers and assigns to the Company all of the Employee's right, title, and
interest in or to: (i) the Protected Developments; and (ii) any proprietary
rights therefrom. Employee agrees that any copyrightable Protected Development,
to the extent created by Employee within the scope of
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Employee's employment with the Company, shall be deemed to be a "work made for
hire," pursuant to the United States Copyright Act (17 U.S.C. Section 101).
(b) In compliance with Washington state law (RCW 49.44.140), Employee hereby
acknowledges that Employee has been advised and notified by the Company via this
Agreement that the Agreement does not apply to an invention for which no
equipment, supplies, facility, or trade secret information of the Company was
used and which was developed entirely on Employee's own time, unless: (A) the
invention relates (i) directly to the business of the Company, or (ii) to the
Company's actual or demonstrably anticipated research or development; or (B) the
invention results from any work performed by Employee for the Company.
(c) Employee shall promptly disclose all Developments to the Company and keep
records relating to the conception, tangible expression and reduction to
practice of all such Developments. Employee acknowledges and agrees that this
disclosure obligation applies to all Developments, whether or not they qualify
as Protected Developments, for the purpose of determining rights of Employee and
the Company in such inventions. Any and all disclosure records, to the extent
related to a Protected Development, shall remain the sole and exclusive property
of the Company, and the Employee shall surrender possession of such records to
the Company upon request or upon any suspension or termination of the Employee's
employment with the Company.
(d) Employee shall render and provide the Company with all information,
documentation and assistance, and shall sign and deliver all such assignments,
affidavits, declarations and other documents that the Company may request to
perfect, enforce, or defend any proprietary rights in or based on the Protected
Developments. The Company shall pay reasonable compensation for such
information, documentation and assistance if they are provided by Employee after
any suspension or termination of Employee's employment.
(e) The Company, in its sole discretion, shall determine the extent of the
proprietary rights, if any, to be protected in any Protected Development.
4. NONDISCLOSURE OF PROTECTED INFORMATION.
(a) Unless otherwise specified in writing, Employee shall assume that any and
all information disclosed by the Company to Employee, in whatever form, is
Protected Information, whether or not designated as private or confidential.
(b) During the period of employment and thereafter, Employee shall hold in trust
and the strictest confidence any and all Protected Information. Employee shall
not disclose any Protected Information to others without the prior written
permission of the Company, or use any Protected Information for any purpose
other than for the performance of services for the Company. In addition,
Employee shall take all necessary precautions to prevent any person or entity
with whom Employee comes into contact from acquiring, disclosing or using such
Protected Information.
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(c) Employee hereby acknowledges and agrees that the obligations with respect to
any particular Protected Information shall be in force and binding as long as
such information qualifies as Protected Information under this Agreement,
regardless of any suspension or termination of employment relationship between
the parties, and regardless of any termination of this Agreement for any reason.
(d) All Protected Information is the Company's sole and exclusive property. Upon
request or upon any suspension or termination of Employee's employment, Employee
shall promptly return and surrender to the Company all items and materials in
Employee's possession or control, in whatever form and medium and including any
and all copies, which contain or embody any Protected Information.
(e) Nothing contained in this Agreement shall be construed as granting to or
conferring on Employee any proprietary right or interest in any Protected
Information.
(f) Unless otherwise agreed in writing, the Company shall be free to use and to
disclose in any way it deems appropriate any information provided to the Company
by Employee. Employee agrees not to disclose to the Company any information
which is confidential or private to Employee or to any third party that Employee
does not want so used or disclosed.
5. MISCELLANEOUS PROVISIONS.
(a) Remedies. Employee acknowledges and agrees that any violation of this
Agreement will cause irreparable harm for which the Company may not be fully or
adequately compensated by recovery of monetary damages. Accordingly, in the
event of any such violation or threatened violation, the Company shall be
entitled to injunctive relief from a court of competent jurisdiction in addition
to any other remedy available at law or in equity.
(b) Attorney Fees. If any action at law or in equity is brought to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
recover, at trial and on appeal, in addition to any other relief that may be
granted, reasonable amounts of legal, accounting and other professional fees,
together with other allowable costs and expenses.
(c) Applicable Law and Jurisdiction. The parties agree that this Agreement will
be governed by the laws of the State of Washington, without regard to Washington
choice of law principles. Law suits relating to this Agreement shall be brought
in the appropriate court in the State of Washington, and the parties agree to
submit to the jurisdiction of such court.
(d) Amendment and Assignment. All modifications to this Agreement must be in
writing, signed by the parties hereto. Except by operation of law, neither party
shall assign or delegate its rights or duties under this Agreement without the
prior written consent of the other party.
(e) Independence of Provisions. Each provision herein shall be treated as a
separate and independent clause, and the invalidity or unenforceability of any
one clause shall in no way impair the validity or enforceability of any other
clauses herein.
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(f) Successors and Assigns. This Agreement shall be binding on Employee's heirs,
executors, estate administrators and legal representatives and shall be for the
benefit of the Company, its successors or assigns.
IN WITNESS THEREOF, the parties hereby execute this Agreement.
The undersigned has read and understood the foregoing and agrees to be bound
thereby.
EMPLOYEE:
Signed: /s/ John F. Duncan
---------------------------------
Print Name: John F. Duncan
Date: May 10 , 1999
------------------
The foregoing was executed by the Employee and accepted on behalf of the
Company.
N2H2, INC.:
Signed: /s/ Peter H. Nickerson
---------------------------------
By:
Title: President
Date: May 10 , 1999
------------------
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<PAGE> 1
EXHIBIT 10.11
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AND NONCOMPETITION AGREEMENT (this "Agreement"), dated
as of May 10, 1999, is entered into by and between N2H2, INC., a Washington
corporation (the "Company"), and KEVIN E. FINK, a resident of the State of
Washington (the "Executive").
WHEREAS, the Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Company as
Vice President - Chief Technology Officer of the Company for said period; and
WHEREAS, Executive and the Company desire to mutually rescind any and
all employment agreements previously entered between Executive and the Company,
and to replace any such employment agreements with this Agreement in exchange
for valuable consideration; and
WHEREAS, the parties desire by this writing to set forth the terms and
conditions of the continuing employment relationship, the Company and Executive.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Employment. The Company hereby employs Executive, and Executive
agrees to accept such employment, upon the terms and conditions herein set
forth.
2. Employment Period. The initial term of employment hereunder shall
commence on the date hereof and continue for a period of eighteen (18) months
ending on November 10, 2000 (the "Initial Term"), subject to earlier termination
as provided herein. If Executive's employment is not earlier terminated,
following the Initial Term, this Agreement and Executive's employment hereunder
shall renew indefinitely until terminated by either party in accordance with
Section 5 below (the "Employment Period").
3. Position and Duties. Executive hereby agrees to serve as an employee
of the Company as Vice President - Chief Technology Officer. Executive shall
report to the President or such other officer(s) as designated by the Board of
Directors of the Company (the "Board"). Executive shall devote his best efforts
and his full business time and attention to the performance of services to the
Company in accordance with the terms hereof and as may reasonably be requested
by the Board, the President or other Board-designated officer of the Company.
Executive's duties shall be consistent with the duties of chief technology
officers of similar companies.
<PAGE> 2
4. Compensation and Other Terms of Employment.
(a) Compensation. In consideration of the performance of his
duties hereunder, during the Employment Period, the Company agrees to pay
Executive during the term of his employment at a base salary of One Hundred
Fifty Thousand and No/100 Dollars ($150,000.00) per annum (the "Base
Compensation"). All amounts payable to Executive under this Section 4(a) shall
be paid in accordance with the Company's regular payroll practices (e.g., timing
of payments and standard employee deductions, such as income tax, Social
Security and Medicare withholdings). Base Compensation shall increase by ten
percent (10%) during each twelve (12) month period beginning October 1, 2000 if
the Company's gross revenues reflected in its audited financial statements for
the fiscal year ending September 30, have increased by at least one hundred
percent (100%) over the gross revenues for the immediately preceding fiscal
year.
(b) Bonus. In addition to the Base Compensation described in
Section 4(a) above and any additional bonuses approved by the Board, Executive
shall receive a quarterly bonus in the amount equal to 1.50% of the increase, if
any, of the Company's gross revenues during such quarter over the gross revenues
for the same quarter during the immediately preceding year. For purposes of this
Section 4(b), gross revenues shall be computed in accordance with generally
accepted accounting principles consistently applied. Notwithstanding the
foregoing, the amount of bonus compensation pursuant to this Section 4(b) during
any Company fiscal year shall not exceed seventy percent (70%) of Executive's
Base Compensation during such fiscal year. Bonus compensation for any quarter
shall be payable on the 15th day of the month following the end of the quarter
and shall be subject to standard employee deductions.
(c) Business Expenses. During the Employment Period, upon
presentation of vouchers and similar receipts, Executive shall be entitled to
receive reimbursement in accordance with the policies and procedures of the
Company maintained from time to time for all reasonable business expenses
actually incurred in the performance of his duties hereunder.
(d) Vacation. During the Employment Period, Executive shall be
entitled to four (4) weeks paid annual vacation. Executive's vacation will be
scheduled at those times most convenient to the Company's business.
(e) Benefits. During the Employment Period, the Company shall
provide to Executive such other employment benefits as may from time to time, be
made generally available to executives of the Company, including, without
limitation, the opportunity to participate in a group health insurance plan and
other benefit plans, if any are in existence, in accordance with the terms of
such plans, which benefits are intended to be substantially similar to those
provided by the Company as of the date hereof (assuming availability at costs
consistent with and comparable to those currently paid by the Company);
provided, however, that the Company shall not be required to establish, continue
or maintain any benefit plans.
(f) Additional Benefits. The Company shall reimburse Executive on
a monthly basis for reasonable commuting costs, health club dues and high speed
Internet access at home.
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5. Termination of Employment. Executive's employment shall be terminated
on any of the following occurrences:
(a) Executive's Permanent Disability. For purposes of this
Agreement, "Permanent Disability" means an illness, injury or other physical or
mental condition continuing for at least ninety (90) consecutive days, arising
at any time during the Employment Period, unless with reasonable accommodation
Executive could perform the essential functions of his position and making such
accommodation would not result in an undue hardship to the Company. If
Executive's employment is terminated because of Executive's Permanent
Disability, the Company shall continue to pay all Base Compensation and pro rata
bonus amounts accrued pursuant to Sections 4(a) and (b) for the longer of (i)
the remaining Initial Term of this Agreement or (ii) twelve (12) months.
(b) Executive's Death. If Executive's employment is terminated
because of Executive's death, the Company shall pay to Executive's personal
representative (on behalf of Executive's estate), within 60 days after the
Company receives written notice of such representative's appointment, all Base
Compensation and pro rata bonus amounts, if any, accrued pursuant to Sections
4(a) and 4(b) above through the date of termination, and shall continue to pay
all Base Compensation and pro rata bonus amounts, if any, accrued pursuant to
Sections 4(a) and (b) for the longer of (i) the remaining Initial Term of the
Agreement or (ii) twelve (12) months.
(c) For Cause. If Executive's employment is terminated with Cause
(as defined in Section 6(a) below), the Company shall pay to Executive all Base
Compensation accrued through the date of termination pursuant to Sections 4(a)
and 4(b) above, whereupon the Company shall have no further obligations to
Executive under this Agreement. Executive and his dependents, if any, shall also
be entitled to any continuation health insurance coverage rights available under
applicable law. Without waiving any rights the Company may have hereunder or
otherwise, the Company hereby expressly reserves its rights to proceed against
Executive for damages in connection with any claim or cause of action that the
Company may have arising out of or related to Executive's employment hereunder.
(d) Termination By The Company Without Cause or Voluntary
Termination By Executive With Good Reason. If Executive's employment with the
Company is terminated by the Company without Cause, or is Voluntarily Terminated
(as defined in Section 6(b) below) by Executive with Good Reason (as defined in
Section 6(c) below), the Company shall pay to Executive all Base Compensation
and pro rata bonus amounts, if any, accrued pursuant to Sections 4(a) and 4(b)
above through the date of such termination and shall continue to pay Executive's
Base Compensation and bonus for a period of eighteen (18) months thereafter (the
"Severance Period"). Those unvested stock options which are scheduled to vest
between the date of termination and the end of the Severance Period shall be
deemed to vest immediately. Executive and his dependents, if any, shall also be
entitled to any continuation health insurance coverage rights available under
applicable law.
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<PAGE> 4
(e) Voluntary Termination By Executive Without Good Reason. If
Executive's employment with the Company is Voluntarily Terminated by Executive
without Good Reason, the Company shall pay to Executive all Base Compensation
and bonus accrued through the date of termination pursuant to Sections 4(a) and
4(b) above, whereupon the Company shall have no further obligations to Executive
under this Agreement. Executive and his dependents, if any, shall also be
entitled to any continuation health insurance coverage rights available under
applicable law. Without waiving any rights the Company may have hereunder or
otherwise, the Company hereby expressly reserves its rights to proceed against
Executive for damages in connection with any claim or cause of action that the
Company may have arising out of or related to Executive's employment hereunder.
(f) Voluntary Termination By Executive Following Change in
Control. If Executive's employment with the company is Voluntarily Terminated by
Executive within 30 days of a Change in Control (as defined in Section 6(d)
below), the Company shall pay to Executive all Base Compensation and bonus
amounts accrued pursuant to Sections 4(a) and 4(b) through a period equal to the
Severance Period. All unvested stock options shall be deemed to vest
immediately. Executive and his dependents, if any, shall also be entitled to any
continuation of heal insurance coverage rights available under the applicable
law.
(g) Termination Obligations.
(i) Executive hereby acknowledges and agrees that all
personal property and equipment furnished to or prepared by Executive in the
course of or incident to his employment by the Company, belongs to the Company
and shall be promptly returned to the Company upon termination of the Employment
Period. "Personal property" includes, without limitation, all books, manuals,
records, reports, notes, contracts, lists, blueprints, and other documents, or
materials, or copies thereof (including computer files), and all other
proprietary information belonging, or relating to the business of, the Company
or any affiliate. Following termination, Executive will not retain any written
or other tangible materials containing any proprietary information of the
Company or any affiliate.
(ii) Upon termination of the Employment Period, Executive
shall be deemed to have resigned from all offices, directorships and similar
positions then held with the Company or any affiliate.
(iii) The representations and warranties contained herein
and Executive's obligations under Sections 9 and 10 shall survive termination of
the Employment Period and the expiration or termination of this Agreement. Any
provision hereof required to give meaning and effect to such surviving
provisions shall also survive the termination of the Employment Period and the
expiration or termination of this Agreement.
6. Definitions. For the purposes of this Agreement the following terms
and phrases shall have the following meanings:
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<PAGE> 5
(a) "Cause" shall mean a termination of Executive's employment by
the Company due to (i) Executive's failure or refusal to perform his duties,
responsibilities or obligations hereunder after at least fourteen (14) days'
prior written notice regarding any such failure or refusal, (ii) Executive's
breach of any noncompetition or confidentiality agreement with the Company;
(iii) the willful misappropriation of funds or property of the Company; (iv) use
of alcohol or drugs which interferes with performance of Executive's obligations
under this Agreement, continuing after at least thirty (30) days' prior written
notice; (v) conviction of a felony or of any crime involving moral turpitude,
fraud or misrepresentation; or (vi) the commission by Executive of any willful
or intentional act in disregard of the interests of the Company which could
reasonably be expected to materially injure the reputation, business or business
relationships of the Company, provided, however, that a good faith mistake in
the normal course of business shall not be considered "Cause" under this Section
6(a).
(b) "Voluntary Termination" shall mean the termination by
Executive of his employment by the Company by voluntary resignation or any other
means other than (i) death or Permanent Disability, (ii) simultaneous with
termination for Cause or (iii) simultaneous with or following an event which,
whether or not known to the Company at the time of such Voluntary Termination by
Executive, would constitute Cause.
(c) "Good Reason" shall mean, with respect to a Voluntary
Termination, (i) if (A) such Voluntary Termination occurs within the thirty (30)
day period immediately following a permanent material reduction of Executive's
duties and responsibilities or a permanent change in Executive's duties and
responsibilities such that Executive's duties and responsibilities are
inconsistent with the type of duties and responsibilities of Executive in effect
immediately prior to such reduction or change, (B) such Voluntary Termination
promptly follows a reduction in Executive's benefits, or (C) the President or
the Board otherwise determines that a Voluntary Termination by Executive is for
"Good Reason" under the circumstances then prevailing, and (ii) if Executive
provides written notice of such Good Reason to the Company and the Company does
not correct the circumstances giving rise to such Good Reason during the
following 30-day period. The Company's termination or material breach of this
Agreement without Cause shall constitute Good Reason.
(d) "Change In Control" means the occurrence of any one of the
following events:
(i) any recapitalization, consolidation or merger of the
Company in which the Company is not the continuing or surviving entity or which
contemplates that all or substantially all of the business and/or assets of the
Company shall be controlled by another person or entity other than the person or
entity which controlled the Company immediately prior to such recapitalization,
consolidation or merger;
(ii) any sale, lease, exchange or transfer (in one
transaction or series of related transactions) of all or substantially all of
the assets of the Company;
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(iii) approval by the members of the Company of any plan
or proposal for the liquidation or dissolution of the Company, unless such plan
or proposal is abandoned within 60 days following such approval; or
(iv) sale or other disposition by Peter H. Nickerson of
all beneficial interest in the Company.
7. Stock Options. Subject to the discretion of the Company's Board of
Directors Executive shall be entitled to participate in any Company stock option
or stock purchase plan.
8. Records and Confidential Information.
(a) Executive acknowledges that, in connection with the
performance of his duties during the term of this Agreement, the Company will
make available to Executive, or Executive will have access to, certain
Confidential Information (as defined below) and Trade Secrets (as defined by the
Uniform Trade Secrets Act) of the Company and its affiliates. Executive
acknowledges and agrees that any and all Confidential Information or Trade
Secrets of the Company learned or obtained by Executive during the course of his
employment by the Company or otherwise (including, without limitation,
information that Executive obtained through or in connection with his ownership
of and employment by the Company prior to the date hereof) whether developed by
Executive alone or in conjunction with others or otherwise, shall be and is the
property of the Company and its affiliates.
(b) Confidential Information and Trade Secrets of the Company
will be kept confidential by Executive, will not be used in any manner which is
detrimental to the Company, will not be used other than in connection with
Executive's discharge of his duties hereunder, and will be safeguarded by
Executive from unauthorized disclosure.
(c) Following Executive's termination hereunder, as soon as
possible after the Company's written request, Executive will return to the
Company all written Confidential Information and Trade Secrets of the Company
will have been provided to Executive, and Executive will destroy all copies of
any analyses, compilations, studies or other documents prepared by Executive or
for Executive's use containing or reflecting any Confidential Information or
Trade Secrets of the Company. Within 5 business days of the receipt of such
request by Executive, Executive shall, upon written request of the Company,
deliver to the Company a notarized document certifying that such written
Confidential Information and Trade Secrets of the Company have been returned or
destroyed in accordance with this Section.
(d) For the purposes of this Agreement, "Confidential
Information" shall mean all confidential and proprietary information to the
Company, and its affiliates, including, without limitation, the Company's
marketing strategies, pricing policies or characteristics, customers and
customer information, product or product specifications, designs, manufacturing
processes, manufacturing costs, cost of materials, customer lists, business or
business prospects, plans, proposals, codes, marketing studies, research,
reports, investigations, or other information of similar character. For purposes
of this Agreement, Confidential Information shall not include and
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<PAGE> 7
Executive's obligations under this Section shall not extend to (i) information
which is generally available to the public or within the industry, (ii)
information obtained by Executive from third persons not under agreement to
maintain the confidentiality of the same and (iii) information which is required
to be disclosed by law or legal process.
(e) This Section is not intended to, and does not, limit in any
way Executive's duties and obligations to the Company under statutory and common
law not to disclose or make personal use of any Confidential Information or
Trade Secrets of the Company.
9. Assignment of Inventions.
(a) Definition of Inventions. "Inventions" means discoveries,
developments, concepts, ideas, methods, designs, improvements, inventions,
formulas, processes, techniques, programs, know-how and data, whether or not
patentable or registerable under copyright or similar statutes, except any of
the foregoing that (i) is not related to the business of the Company or its
affiliates, or the Company's (and its affiliates') actual or demonstrable
research or development (ii) does not involve the use of any equipment,
supplies, facility or Confidential Information of the Company, (iii) was
developed entirely on Executive's own time, and (iv) does not result from any
work performed by Executive for the Company.
(b) Assignment. Executive agrees to and hereby does assign to the
Company, without further consideration, all of his right, title and interest in
any and all Inventions he may make during the term hereof.
(c) Duty to Disclose and Assist. Executive agrees to promptly
disclose in writing all Inventions to the Company, and to provide all assistance
reasonably requested by the Company in the preservation of the Company's
interests in the Inventions including obtaining patents in any country
throughout the world. Such services will be without additional compensation if
Executive is then employed by the Company and for reasonable compensation and
subject to his reasonable availability if he is not. If the Company cannot,
after reasonable effort, secure Executive's signature on any document or
documents needed to apply for or prosecute any patent, copyright, or other right
or protection relating to an Invention, whether because of his physical or
mental incapacity or for any other reason whatsoever, Executive hereby
irrevocably designates and appoints the Company and its duly authorized officers
and agents as his agent and attorney-in-fact, to act for and in his behalf and
in his name and stead for the purpose of executing and filing any such
application or applications and taking all other lawfully permitted actions to
further the prosecution and issuance of patents, copyrights, or similar
protections thereon, with the same legal force and effect as if executed by him.
(d) Ownership of Copyrights. Executive agrees that any work
prepared for the Company, which is eligible for copyright protection under the
laws of the United States or any other country, shall be a work made for hire
and ownership of all copyrights (including all renewals and extensions) therein
shall vest in the Company. If any such work is deemed not to be a work made for
hire for any reason, Executive hereby grants, transfers and assigns all right,
title and interest in such work and all copyrights in such work and all renewals
and extensions thereof to the
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Company, and agrees to provide all assistance reasonably requested by the
Company in the establishment, preservation and enforcement of the Company's
copyright in such work, such assistance to be provided at the Company's expense
but without any additional compensation to Executive. Executive hereby agrees to
and does hereby waive the enforcement of all moral rights with respect to the
work developed or produced hereunder, including without limitation any and all
rights of identification of authorship and any and all rights of approval,
restriction or limitation on use or subsequent modifications.
(e) Litigation. Executive agrees to render assistance and
cooperation to the Company at its request regarding any matter, dispute or
controversy with which the Company may become involved and of which Executive
has or may have reason to have knowledge, information or expertise. Such
services will be without additional compensation if Executive is then employed
by the Company and for reasonable compensation and subject to his reasonable
availability if he is not.
10. Covenants Not to Compete.
(a) Non-Interference with Customer Accounts. Executive covenants
and agrees that, during the Employment Period, and for a period of eighteen (18)
months after the date of termination of Executive's employment with the Company,
Executive shall not, directly or indirectly, personally or on behalf of any
other person, business, corporation, or entity, contact or do business with any
customer of the Company with respect to any Internet filtering product or
service which is competitive with any product or service which was sold,
provided, or under development by the Company at any time during the
twelve-month period prior to the date of termination of Executive's employment
with the Company. This covenant applies to those customers and the related
entities of those customers to which the Company sold its Internet filtering
products or services at any time during the twelve-month period prior to the
date of termination of Executive's employment with the Company, and those
prospective customers with which the Company actively pursued sales or the
provision of services at any time during the twelve-month period prior to the
date of termination of Executive's employment with the Company.
(b) Noncompetition. Executive covenants and agrees that, during
the Employment Period, and for a period of eighteen (18) months after the date
of termination of Executive's employment with the Company, Executive shall not,
directly or indirectly, own an interest in, operate, join, control, advise, work
for, serve as a director of, have a financial interest which provides any
control of, or participate in any corporation, partnership, proprietorship,
firm, association, person, or other entity (collectively, "Businesses")
producing, designing, providing, soliciting orders for, selling, distributing,
or marketing any Internet filtering products, goods, equipment, or services
which are similar to any Internet filtering products, goods, equipment or
services produced, sold or provided by the Company at any time during the
twelve-month period prior to the date of termination of Executive's employment
with the Company. THE PARTIES ACKNOWLEDGE THAT THE COMPANY PROVIDES SERVICES ON
A WORLD WIDE BASIS AND, ACCORDINGLY THAT IT IS NOT FAIR OR APPROPRIATE TO
RESTRICT THE FOREGOING COVENANT GEOGRAPHICALLY.
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(c) This covenant does not prohibit the mere ownership of less
than two percent (2%) of the outstanding stock of any publicly traded
corporation as long as Executive is not otherwise in violation of this covenant.
(d) Non-Diversion. During the Employment Period, and for a period
of eighteen (18) months after the date of termination of Executive's employment
with the Company, Executive shall not divert or attempt to divert or take
advantage of or attempt to take advantage of any actual or potential business or
opportunities of the Company or its subsidiaries or affiliates which Executive
became aware of as the result of his employment with the Company.
(e) Non-Recruitment. Executive agrees that the Company has
invested substantial time and effort in assembling its present workforce.
Accordingly, Executive agrees that during the Employment Period and for a period
of eighteen (18) months after the date of termination of Executive's employment
with the Company, Executive shall not (i) hire away any individuals who were
employed by the Company or its subsidiaries or affiliates during the
twelve-month period prior to the date of termination of Executive's employment
with the Company or (ii) directly or indirectly entice, solicit or seek to
induce or influence any such employees to leave their employment with the
Company or its subsidiaries or affiliates.
(f) Non-Disparagement. Executive and the Company mutually
covenant and agree that, during the Employment Period and for a period of
eighteen (18) months after the date of termination of Executive's employment
with the Company, neither shall, directly or indirectly disparage the other.
(g) Remedies. Both parties acknowledge that should they
materially breach this Agreement, it will be difficult to determine the
resulting damages to the non-breaching party, and, in addition to any other
remedies the non-breaching party may have, the non-breaching party shall be
entitled to temporary injunctive relief without being required to post a bond
and to permanent injunctive relief without the necessity of proving actual
damage. In the event of any action or proceeding to interpret or enforce this
Agreement, the prevailing party shall be entitled to recover its reasonable
attorneys' fees and costs, whether or not litigation is actually commenced and
including litigation of any appeal. Failure of either party to seek any or all
remedies in one case does not restrict that party from seeking any remedies in
another situation, and no such action shall not constitute a waiver of any of
the party's rights.
(h) Severability and Modification of Any Unenforceable Covenant.
It is the parties' intent that each of the Covenants be read and interpreted
with every reasonable inference given to its enforceability. However, it is also
the parties' intent that if any term, provision or condition of the Covenants is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remainder of the provisions thereof shall remain in full force and effect
and shall in no way be affected, impaired or invalidated. Finally, it is also
the parties' intent that if a court should determine any of the Covenants are
unenforceable because of over breadth, then the court shall modify said covenant
so as to make it reasonable and enforceable under the prevailing circumstances.
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(i) Tolling. In the event of the breach by Executive of any
Covenant the running of the period of restriction shall be automatically tolled
and suspended for the amount of time that the breach continues, and shall
automatically recommence when the breach is remedied so that the Company shall
receive the benefit of Executive's compliance with the Covenants.
11. No Assignment. This Agreement and the rights and duties hereunder
are personal to Executive and shall not be assigned, delegated, transferred,
pledged or sold by Executive without the prior written consent of the Company.
Executive hereby acknowledges and agrees that the Company may assign, delegate,
transfer, pledge or sell this Agreement and the rights and duties hereunder to
any third party acquiring through merger, consolidation or purchase all or
substantially all of the business and/or assets of the Company. This Agreement
shall inure to the benefit of and be enforceable by the parties hereto, and
their respective heirs, personal representatives, successors and assigns.
12. Miscellaneous Provisions.
(a) Payment of Taxes. To the extent that any taxes become payable
by Executive by virtue of any payments made or benefits conferred by the
Company, the Company shall not be liable to pay or obligated to reimburse
Executive for any such taxes or to make any adjustment under this Agreement. Any
payments otherwise due under this Agreement to Executive, including, but not
limited to, the Base Compensation and any bonus, shall be reduced by any
required withholding for federal, state and/or local taxes and other appropriate
payroll deductions.
(b) Insurance. The Company may, from time to time, apply for and
take out, in its own name and at its own expense, life, health, accident,
disability or other insurance on Executive in any sum or sums that it may deem
necessary to protect its interests, and Executive shall aid and cooperate in all
reasonable respects with the Company in procuring any and all such insurance,
including, without limitation, submitting to the usual and customary medical
examinations, and by filling out, executing and delivering such applications and
other instruments in writing as may be reasonably required by an insurance
company or companies to which an application or applications for such insurance
may be made by or for the Company. In order to induce the Company to enter into
this Agreement, Executive represents and warrants to the Company that, to his
knowledge, Executive is insurable at standard (non-rated) premiums.
(c) Deceased Executive. In the event that Executive shall die
while entitled to benefits hereunder, the payment which would otherwise be made
to Executive, shall be made to the estate, or other appropriate legal
representative, of Executive.
(d) Notices. All notices, offers or other communications required
or permitted to be given pursuant to this Agreement shall be in writing and
shall be considered as properly given or made if (i) delivered personally, (ii)
mailed from within the United States by certified mail, return receipt
requested, postage prepaid, (iii) sent by prepaid telegram or facsimile
transmission (with written confirmation of receipt) or (iv) sent by overnight
delivery service. All notices given or made pursuant hereto shall be so given or
made to the parties at the following addresses, or to
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any other address the addressee may have notified the sender beforehand
referring to this Agreement, and shall be deemed effective when so given or made
at such address whether or not the recipient still resides at that address or
actually receives the notice (so long as such notice was actually delivered to
such address):
If to Executive:
Kevin E. Fink
103 NW 49th Street
Seattle, WA 98107
If to the Company:
N2H2, Inc.
900 4th Avenue
Suite 3400
Seattle, Washington 98164
Attn: Chief Financial Officer
With a copy to:
Lane Powell Spears Lubersky LLP
1420 Fifth Avenue, Suite 4100
Seattle, Washington 98101-2338
Attn: Jim D. Johnston
Facsimile: (206) 223-7107
(e) Severability. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid, illegal or unenforceable, such
provision shall be severed and enforced to the extent possible or modified in
such a way as to make it enforceable, and the invalidity, illegality or
unenforceability thereof shall not affect the validity, legality or
enforceability of the remaining provisions of this Agreement.
(f) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Washington applicable to
contracts executed in and to be performed entirely within that state, except
with respect to matters of law concerning the internal corporate affairs of any
corporate entity which is a party to or the subject of this Agreement, and as to
those matters, the law of the jurisdiction under which the respective entity
derives its powers shall govern.
(g) Counterparts. This Agreement may be executed in counterparts,
each of which shall be an original, but all of which shall constitute one and
the same instrument.
(h) Entire Understanding. This Agreement, including all Recitals
hereto which are incorporated herein by this reference, together with the other
agreements and documents being
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executed and delivered concurrently herewith by Executive, the Company and
certain of its affiliates, constitute the entire understanding among all of the
parties hereto and supersedes any prior understandings and agreements, written
or oral, among them respecting the subject matter within.
(i) Pronouns and Headings. As used herein, all pronouns shall
include the masculine, feminine, neuter, singular and plural thereof wherever
the context and facts require such construction. The headings, titles and
subtitles herein are inserted for convenience of reference only and are to be
ignored in any construction of the provisions hereof.
(j) Amendments. Except as specifically set forth herein, this
Agreement shall not be changed or amended unless in writing and signed by both
Executive and the President (or other officer of the Company designated by the
Board).
(k) Executive's Acknowledgment. Executive acknowledges (i) that
he has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and (ii) that he has read and understands this Agreement, is
fully aware of its legal effect, and has entered into it freely based on his own
judgment.
(l) Arbitration. It is understood and agreed between the parties
hereto that any claim of any nature whatsoever arising out of or connected with
Executive's employment with the Company, including but not limited to wrongful
termination, breach of contract, defamation, and claims of discrimination
(including age, disability, sex, religion, race, national origin, color, etc.)
or harassment, whether under federal, state or local laws, common law or in
equity, shall be decided by submission to final and binding arbitration. The
arbitrator shall be a retired or former superior court or appellate court judge.
This arbitration provision shall be governed by the Federal Arbitration Act the
arbitration shall be and pursuant to rules and procedures hereafter adopted by
the Company, and failing such adoption, the Federal Rules of Civil Procedure.
Any arbitration hereunder shall be conducted in Seattle, Washington. Judgment
shall be final upon the award rendered by the arbitrator and may be entered in
any court having jurisdiction thereof. It is further understood and agreed
between the parties hereto that actions seeking temporary injunctions are hereby
excluded from arbitration and, therefore, may be sought in a court of
appropriate jurisdiction without resort to arbitration, even though resolution
of the underlying claim must be submitted to arbitration. Provided: This Section
shall not govern any matter arising out of Executive's violation of, or
threatened violation of, the terms of the Employee Intellectual Property
Agreement attached hereto as Appendix A and incorporated herein by reference
("IP Agreement"), or Executive's violation of the covenants contained in
Sections 10 of this Agreement, in which event the Company shall be entitled to
seek injunctive or other equitable relief in any state or federal court located
in King County, Washington, and the parties agree to submit to the jurisdiction
of such court.
(m) Delivery by Facsimile. The parties agree that counterparts of this
Agreement may be executed and delivered by facsimile, followed by regular
mailing of original signed counterparts.
12
<PAGE> 13
IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first above written.
THE COMPANY:
N2H2, INC.
By /s/ Peter H. Nickerson
--------------------------------------
Its President
----------------------------------
THE EXECUTIVE:
/s/ Kevin Fink
----------------------------------------
Kevin E. Fink
13
<PAGE> 14
APPENDIX A
EMPLOYEE INTELLECTUAL PROPERTY AGREEMENT
BY and BETWEEN: N2H2, INC. (the "COMPANY"), a Washington corporation
and KEVIN E. FINK ("EMPLOYEE").
In the course of employment with the Company, Employee has had and/or will have
access to information, products, processes, tools, know-how and other
intellectual properties that are confidential, proprietary or licensed to the
Company. There is currently an understanding and agreement between the Company
and Employee regarding these confidentiality and intellectual property matters,
which was documented in part by a certain N2H2 Employee Confidentiality and
Nondisclosure Agreement. As a condition of Employee's continuing employment, the
parties now wish to have this Agreement supersede and replace all previous
agreements of the parties on matters of confidentiality and intellectual
property rights.
NOW THEREFORE, in consideration of the employment relationship between the
parties, the parties agree, promise and covenant to each other as follows:
1. SCOPE OF AGREEMENT.
(a) The parties acknowledge and agree that this Agreement addresses only
certain issues relating to patent, copyright, trade secret and other
intellectual property rights. This Agreement is not a contract of employment and
does not address or modify any of the terms and conditions of employment,
including but not limited to duration of employment, compensation, non-compete
covenants, and other employment-related issues.
(b) Except for Executive Employment Agreement executed by the parties
contemporaneous herewith, the parties agree and acknowledge that this Agreement
shall replace and supersede the N2H2 Confidentiality and Nondisclosure Agreement
(and any previous agreement on intellectual property matters that may exist) by
and between Employee and the Company, which is hereby terminated. This Agreement
and Executive Employment Agreement constitute the entire agreement of the
parties with respect to the subject matter thereof, and may not be modified,
amended or waived except in a writing signed by both parties. In the event of
any inconsistency between this Agreement and Executive Employment Agreement, the
provisions of this Agreement will control. This Agreement shall be effective as
of the beginning of the employment relationship between the parties.
2. DEFINITIONS.
14
<PAGE> 15
For purposes of this Agreement, the capitalized terms set forth below
shall have the meanings assigned to them as follows:
(a) "Development" shall mean any information, product, process, invention,
discovery, technique, idea, design, work of authorship, improvement or
modification, in whatever form and whether or not patentable, copyrightable or
otherwise protectable under law, that is created, made, conceived, developed,
expressed in tangible form or reduced to practice by Employee (either alone or
with others).
(b) "Protected Development" shall mean any Development that:
(i) results from the use of equipment, supplies, facility, Protected Information
and any property or proprietary rights (whether tangible or intangible) that are
owned, leased or contracted for by the Company;
(ii) relates directly to the business of the Company, or to the Company's actual
or demonstrably anticipated research or development; or
(iii) results from any work or services performed by Employee for the Company.
In particular, Protected Development shall include, without limitation, any
computer design, programming and documentation; source code and object code for
software; database, model, documentation, and information to whose creation
Employee contributes during the course of Employee's employment by the Company.
(c) "Protected Information" shall mean all information, in whatever form or
format, that is identified by the Company or is reasonably understood as private
or confidential, or that qualifies for protection under law as a trade secret or
proprietary information of the Company, its affiliated companies, its suppliers
or its customers. Protected Information shall include, but is not limited to:
(i) inventions, discoveries, ideas, techniques, drawings, specifications,
models, database, software, documentation; (ii) customer-related information;
(iii) sales and marketing plans, projections and analysis; (iv) any and all
information related to the business operations of the Company, its affiliated
companies, its suppliers or its customers; and (v) any and all information
provided to the Company by third parties which the Company is obligated to keep
confidential.
Notwithstanding the foregoing, Protected Information does not include any
information that is or becomes part of the public domain through no act or
failure to act on the part of Employee.
3. ASSIGNMENT OF INTELLECTUAL RIGHTS TO THE COMPANY.
(a) Subject to the limitation of Subsection 3(b), Employee hereby grants,
transfers and assigns to the Company all of the Employee's right, title, and
interest in or to: (i) the Protected Developments; and (ii) any proprietary
rights therefrom. Employee agrees that any copyrightable Protected Development,
to the extent created by Employee within the scope of
15
<PAGE> 16
Employee's employment with the Company, shall be deemed to be a "work made for
hire," pursuant to the United States Copyright Act (17 U.S.C. Section 101).
(b) In compliance with Washington state law (RCW 49.44.140), Employee hereby
acknowledges that Employee has been advised and notified by the Company via this
Agreement that the Agreement does not apply to an invention for which no
equipment, supplies, facility, or trade secret information of the Company was
used and which was developed entirely on Employee's own time, unless: (A) the
invention relates (i) directly to the business of the Company, or (ii) to the
Company's actual or demonstrably anticipated research or development; or (B) the
invention results from any work performed by Employee for the Company.
(c) Employee shall promptly disclose all Developments to the Company and keep
records relating to the conception, tangible expression and reduction to
practice of all such Developments. Employee acknowledges and agrees that this
disclosure obligation applies to all Developments, whether or not they qualify
as Protected Developments, for the purpose of determining rights of Employee and
the Company in such inventions. Any and all disclosure records, to the extent
related to a Protected Development, shall remain the sole and exclusive property
of the Company, and the Employee shall surrender possession of such records to
the Company upon request or upon any suspension or termination of the Employee's
employment with the Company.
(d) Employee shall render and provide the Company with all information,
documentation and assistance, and shall sign and deliver all such assignments,
affidavits, declarations and other documents that the Company may request to
perfect, enforce, or defend any proprietary rights in or based on the Protected
Developments. The Company shall pay reasonable compensation for such
information, documentation and assistance if they are provided by Employee after
any suspension or termination of Employee's employment.
(e) The Company, in its sole discretion, shall determine the extent of the
proprietary rights, if any, to be protected in any Protected Development.
4. NONDISCLOSURE OF PROTECTED INFORMATION.
(a) Unless otherwise specified in writing, Employee shall assume that any and
all information disclosed by the Company to Employee, in whatever form, is
Protected Information, whether or not designated as private or confidential.
(b) During the period of employment and thereafter, Employee shall hold in trust
and the strictest confidence any and all Protected Information. Employee shall
not disclose any Protected Information to others without the prior written
permission of the Company, or use any Protected Information for any purpose
other than for the performance of services for the Company. In addition,
Employee shall take all necessary precautions to prevent any person or entity
with whom Employee comes into contact from acquiring, disclosing or using such
Protected Information.
16
<PAGE> 17
(c) Employee hereby acknowledges and agrees that the obligations with respect to
any particular Protected Information shall be in force and binding as long as
such information qualifies as Protected Information under this Agreement,
regardless of any suspension or termination of employment relationship between
the parties, and regardless of any termination of this Agreement for any reason.
(d) All Protected Information is the Company's sole and exclusive property. Upon
request or upon any suspension or termination of Employee's employment, Employee
shall promptly return and surrender to the Company all items and materials in
Employee's possession or control, in whatever form and medium and including any
and all copies, which contain or embody any Protected Information.
(e) Nothing contained in this Agreement shall be construed as granting to or
conferring on Employee any proprietary right or interest in any Protected
Information.
(f) Unless otherwise agreed in writing, the Company shall be free to use and to
disclose in any way it deems appropriate any information provided to the Company
by Employee. Employee agrees not to disclose to the Company any information
which is confidential or private to Employee or to any third party that Employee
does not want so used or disclosed.
5. MISCELLANEOUS PROVISIONS.
(a) Remedies. Employee acknowledges and agrees that any violation of this
Agreement will cause irreparable harm for which the Company may not be fully or
adequately compensated by recovery of monetary damages. Accordingly, in the
event of any such violation or threatened violation, the Company shall be
entitled to injunctive relief from a court of competent jurisdiction in addition
to any other remedy available at law or in equity.
(b) Attorney Fees. If any action at law or in equity is brought to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
recover, at trial and on appeal, in addition to any other relief that may be
granted, reasonable amounts of legal, accounting and other professional fees,
together with other allowable costs and expenses.
(c) Applicable Law and Jurisdiction. The parties agree that this Agreement will
be governed by the laws of the State of Washington, without regard to Washington
choice of law principles. Law suits relating to this Agreement shall be brought
in the appropriate court in the State of Washington, and the parties agree to
submit to the jurisdiction of such court.
(d) Amendment and Assignment. All modifications to this Agreement must be in
writing, signed by the parties hereto. Except by operation of law, neither party
shall assign or delegate its rights or duties under this Agreement without the
prior written consent of the other party.
(e) Independence of Provisions. Each provision herein shall be treated as a
separate and independent clause, and the invalidity or unenforceability of any
one clause shall in no way impair the validity or enforceability of any other
clauses herein.
17
<PAGE> 18
(f) Successors and Assigns. This Agreement shall be binding on Employee's heirs,
executors, estate administrators and legal representatives and shall be for the
benefit of the Company, its successors or assigns.
IN WITNESS THEREOF, the parties hereby execute this Agreement.
The undersigned has read and understood the foregoing and agrees to be bound
thereby.
EMPLOYEE:
Signed: /s/ Kevin Fink
---------------------------------
Print Name: Kevin E. Fink
Date: 13 May , 1999
-----------------
The foregoing was executed by the Employee and accepted on behalf of the
Company.
N2H2, INC.:
Signed: /s/ Peter H. Nickerson
---------------------------------
By: Peter Nickerson
Title: President
Date: 13 May , 1999
-----------------
18
<PAGE> 1
N2H2, INC.
REGISTRATION RIGHTS AGREEMENT
DATED
AS OF
APRIL 8, 1999
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
1. Definitions .......................................... 1
2. Company Registration ................................. 2
4. Obligations of the Company ........................... 4
5. Furnish Information .................................. 5
6. Expenses of Registration ............................. 6
7. Underwriting Requirements ............................ 6
8. Delay of Registration ................................ 6
9. Indemnification ...................................... 7
10. Reports Under the Act ................................ 9
11. Assignment of Registration Rights .................... 10
12. Limitations on Subsequent Registration Rights ........ 10
13. "Market Standoff" Agreement .......................... 11
14. Termination of Registration Rights ................... 11
15. Miscellaneous ........................................ 12
15.1 Notices ......................................... 12
15.2 Amendments and Waivers .......................... 12
15.3 Governing Law; Jurisdiction; Venue .............. 12
15.4 Successors and Assigns .......................... 12
15.5 Severability .................................... 12
15.6 Entire Agreement; Counterparts .................. 13
</TABLE>
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<PAGE> 3
N2H2, INC.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") is made as of
April 8, 1999, and shall be effective as of December 31, 1998, by and among
N2H2, Inc., a Washington corporation (the "COMPANY"), and the persons listed on
the signature pages to this Agreement (collectively, the "SHAREHOLDERS" and
individually, a "SHAREHOLDER").
RECITALS
A. The Shareholders hold or are acquiring shares of common stock of the
Company (the "COMMON STOCK") pursuant to the terms of either (i) a Loan
Conversion Agreement dated April 8, 1999 by and among the Company, Peter H.
Nickerson, the Segale Group, a Washington general partnership (the "SEGALE
GROUP") and Seattle Tractor Parts and Equipment, Inc., a Washington corporation
(the "CONVERSION AGREEMENT") and a subsequent Assignment of Interest dated as
of April 8, 1999 between the Segale Group and the partners of the Segale Group
listed on the signature pages thereto (the "PARTNERS"), each of whom hereby
designates Mark A. Segale (or his successor) as his or her exclusive
representative with the power to act for and bind them and to receive any
notes or documents to be sent to them pursuant to this Agreement, or (ii) a
Securities Purchase Agreement dated as of December 31, 1998 by and among the
Company and the purchasers listed on Schedule A thereto (the "PURCHASE
AGREEMENT").
B. It is a condition to the obligations of the parties to the
Conversion Agreement and the Purchase Agreement that this Agreement be executed
by the Company and the Shareholders.
AGREEMENT
1. DEFINITIONS
For purposes of this Agreement, the following terms have the following
meanings:
<PAGE> 4
(a) "Form S-3" means such form under the Act as in effect on
the date hereof or any registration form under the Act subsequently adopted by
the Securities and Exchange Commission (the "SEC") that similarly permits
inclusion or incorporation of substantial information by reference to other
documents filed by the Company with the SEC.
(b) "Holder" means any person owning or having the right to
acquire Registrable Securities who is a party to this Agreement as of the date
hereof or who may be added as a party pursuant to the terms of this Agreement,
and any assignee thereof;
(c) "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Act"), and the declaration or order of effectiveness of such registration
statement or document;
(d) "Registrable Securities" means (i) Common Stock of the
Company held by the parties to this Agreement as of January 31, 1999, (ii) any
Common Stock of the Company issued or issuable pursuant to the terms of the
Purchase Agreement or the Conversion Agreement, and (iii) any Common Stock of
the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of Common
Stock, excluding in all cases, however, any Registrable Securities sold by a
person in a transaction in which its rights under this Agreement are not
assigned and any Common Stock which the holder thereof is entitled to sell into
the public market, together with all other Registrable Securities of the Company
beneficially owned by such holder (and all Registrable Securities as to which
such holder shares beneficial ownership) that is at the time of registration,
transferable by the holder thereof in a single brokerage transaction under the
provisions and within the volume limitations of Rule 144(e)(1) promulgated under
the Act or any successor to such Rule;
(e) "Registrable Securities then outstanding" means the number
of shares of Common Stock outstanding which are, and the number of shares of
Common Stock issuable pursuant to then exercisable or convertible securities
which are, Registrable Securities; and
(f) "SEC" means the Securities and Exchange Commission.
<PAGE> 5
2. COMPANY REGISTRATION
If the Company proposes to register (including for this purpose a
registration effected by the Company for shareholders other than the Holders)
any of its stock or other securities under the Act in connection with the
public offering of such securities solely for cash (other than a registration
relating solely to the sale of securities to participants in a Company stock
plan, or a registration on any form that does not include substantially the
same information as would be required to be included in a registration
statement covering the sale of Registrable Securities), the Company shall, at
each such time, give each Holder written notice of such registration at least
30 days prior to filing for registration. Upon the written request of each such
Holder given within 10 days after receipt of such notice by the Company, the
Company shall, subject to the provisions of Section 7, use commercially
reasonable efforts to cause to be registered under the Act all of the
Registrable Securities that each such Holder has requested to be registered. In
the event that the Company decides for any reason not to complete the
registration of shares of Common Stock other than Registrable Securities, the
Company shall have no obligation under this Section 2 to continue with the
registration of Registrable Securities. Any request pursuant to this Section 2
to register Registrable Securities as part of an underwritten public offering
of Common Stock shall specify that such Registrable Securities are to be
included in the underwriting on the same terms and conditions as the shares of
Common Stock otherwise being sold through underwriters under such registration.
3. FORM S-3 REGISTRATION
Notwithstanding any other provision of this Section 3, the registration
rights afforded by this Section 3 shall be available solely to the Partners and
their transferees and shall be administered as follows:
(a) If the Company shall receive a written request from one or more
Holders that the Company effect a registration on Form S-3, then the Company
shall, within 10 days after the receipt of such request, give written notice of
such request to all Holders and shall, subject to the limitations set forth
below, use commercially reasonable efforts to effect as soon as practicable the
registration under the Act of all Registrable Securities that the Holders
request to be registered in a written request to be given within 30 days of
receipt of such notice by the Company.
(b) Notwithstanding the foregoing, the Company shall not be obligated to
effect any such registration pursuant to this Section 3 if (i) Form S-3 is not
available for such offering by the Holders; (ii) the Holders, together with the
holders of any other securities of the Company entitled to inclusion in such
registration, propose to sell Registrable Securities and such other securities
(if any) at an aggregate price to
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<PAGE> 6
the public (before deduction of any underwriters' discounts or commissions) of
less than $250,000; (iii) the Company shall furnish to the Holders a
certificate signed by the Chief Executive Officer of the Company stating that,
in the good faith judgment of the Board of Directors of the Company, it would
be seriously detrimental to the Company and its shareholders for such Form S-3
registration to be effected at such time, in which event the Company shall have
the right to defer the filing of the Form S-3 registration statement for a
period of not more than 90 days after receipt of the request of the Holders
under this Section 3; provided, however, that the Company shall not use this
right more than once in any 12-month period; (iv) the Company has, within the
12-month period preceding the date of such request, already effected two such
registrations on Form S-3 for the Holders pursuant to this Section 3; or (v)
the Company within the 12-month period preceding the date of such request has
effected a registration of securities in which the Holders of Registrable
Securities requesting registration pursuant to this Section 3 were entitled to
participate to the fullest extent they desired pursuant to Section 2.
4. OBLIGATIONS OF THE COMPANY
Whenever required under this Agreement to effect the registration of any
Registrable Securities, the Company shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its commercially reasonable
efforts to cause such registration statement to become effective and, upon the
request of one or more Holders, keep such registration statement effective for
up to 90 days.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders of such copies of a prospectus, including
a preliminary prospectus, in conformity with the requirements of the Act, and
such other documents as they may reasonably request to facilitate the
disposition of all securities covered by such registration statement.
(d) Use commercially reasonable efforts to register and qualify the
securities covered by such registration statement under such other securities
or blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions.
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<PAGE> 7
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such offering. Each Holder
participating in such registration shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement, during the time when a prospectus is required to be
delivered under the Act, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
(g) At the request of any Holder selling Registrable Securities in
such registration, furnish on the date that such Registrable Securities are
delivered to the underwriters for sale in connection with such registration (i)
an opinion, dated such date, of legal counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given by
Company counsel to underwriters in an underwritten public offering, addressed
to the underwriters and to each selling Holder, and (ii) a letter, dated such
date, from the independent certified public accountants of the Company, in form
and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to
the underwriters and to each selling Holder.
(h) List the Registrable Securities being registered on any national
securities exchange on which a class of the Company's equity securities is
listed or qualify the Registrable Securities being registered for inclusion on
Nasdaq if the Company does not have a class of equity securities listed on a
national securities exchange.
(i) Provide a transfer agent and registrar for the securities being
registered and a CUSIP number, not later than the effective date of the
registration statement.
5. FURNISH INFORMATION
It shall be a condition precedent to the obligations of the Company to
take any action pursuant to this Agreement that the selling Holders shall
furnish to the Company such information regarding themselves, the Registrable
Securities held by them and the intended method of disposition of such
securities as shall be reasonably required to effect the registration of their
Registrable Securities and shall execute such
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<PAGE> 8
documents in connection with such registration as the Company may reasonably
request.
6. EXPENSES OF REGISTRATION
In connection with any registration pursuant to this Agreement, the
Company shall be responsible for the payment of all reasonable expenses of the
registration, with the exception of (a) underwriting discounts and commissions,
which shall be paid by the Company, the Holders and any other selling holders
of the Company's securities in proportion to the aggregate value of the
securities offered for sale by each of them, and (b) the fees and expenses of
more than one law firm acting as counsel to the selling Holders selected by a
majority in interest of the selling Holders, which additional counsel, if any,
shall be paid by the Holder or Holders that engage such counsel. The expenses
to be paid by the Company shall include, without limitation, all registration,
filing and qualification fees, printing and accounting fees, the fees and
disbursements of counsel for the Company and the fees and disbursements of one
counsel for the selling Holders.
7. UNDERWRITING REQUIREMENTS
The Company shall not be required under Section 2 to include any of the
Holders' securities in an underwritten offering of the Company's securities
unless such Holders accept the terms of the underwriting as agreed upon between
the Company and the underwriters selected by it. If the underwriters advise the
Company that marketing factors require a limitation on the number of shares to
be included in such offering, then the Company shall so advise all Holders that
have registered Registrable Securities to be included in the registration, and
the number of shares, including Registrable Securities, that may be included in
the registration shall be apportioned first to the Partners (until the Company
has registered $500,000 of net proceeds of its Registrable Securities in the
aggregate under all registrations effected on behalf of the Partners), then to
the Company, then pro rata among all of the selling Holders according to the
total amount of Registrable Securities held by such Holders at the time of
registration, then pro rata among any other selling shareholders according to
the total amount of securities otherwise entitled to be included therein owned
by each such other selling shareholder, or in such other proportions as shall
mutually be agreed to by such selling shareholders.
8. DELAY OF REGISTRATION
No Holder shall have any right to obtain or seek an injunction
restraining or otherwise delaying any registration of the Company as the result
of any controversy
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<PAGE> 9
that might arise with respect to the interpretation or implementation of this
Agreement.
9. INDEMNIFICATION
In the event any Registrable Securities are included in a registration
statement under this Agreement.
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the Securities Exchange Act of 1934, as amended (the
"1934 Act"), against any actual expenses (including legal fees and costs),
losses, claims, damages (including settlement amounts) or liabilities (joint or
several) (collectively, "LOSSES") to which they may become subject under the
Act, the 1934 Act or other federal or state law, insofar as such Losses arise
out of or are based upon any of the following statements, omissions or
violations (collectively, a "VIOLATION"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein, or
any amendments or supplements thereto, untrue in light of the circumstances
under which they were made, (ii) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or (iii) any violation or alleged violation by the Company of
the Act, the 1934 Act, any state securities law or any rule or regulation
promulgated under the Act, the 1934 Act or any state securities law. The Company
will reimburse (as incurred) each such Holder, underwriter or controlling person
for any Losses reasonably incurred by them in connection with investigating or
defending any Violations; provided, however, that the indemnity agreement
contained in this Section 9(a) shall not apply to amounts paid in settlement of
any claims for Violations if such settlement is made without the consent of the
Company, which consent shall not be unreasonably withheld, nor shall the Company
be liable in any such case for any Losses that arise out of or are based upon a
Violation that occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by,
or on behalf of, any such Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company and its officers, directors, agents and
employees, each underwriter and each other Holder selling securities in such
registration statement, and any person who controls any of the foregoing within
the meaning of the Act or the 1934 Act, against any Losses to which the Company
or such officer, director, agent, employee, or underwriter or other selling
Holder or controlling
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<PAGE> 10
person may become subject under the Act, the 1934 Act or other federal or state
law, insofar as such Losses arise out of or are based upon any Violation that
occurs in reliance upon and in conformity with written information furnished
by, or on behalf of, such Holder expressly for use in connection with such
registration, and each such Holder will reimburse (as incurred) any Losses
reasonably incurred by the Company or its officers, directors, agents,
employees, or underwriters or other selling Holders or controlling persons in
connection with investigating or defending any Violations; provided, however,
that (i) the indemnity agreement contained in this Section 9(b) shall not apply
to amounts paid in settlement of any claims for Violations if such settlement
is made without the consent of the Holder, which consent shall not be
unreasonably withheld and (ii) the obligations of such Holders shall be limited
to an amount equal to the net proceeds to each such Holder of Registrable
Securities sold as contemplated herein.
(c) Promptly after receipt of notice of the commencement of any action
(including any governmental action), an indemnified party will, if a claim is
to be made against any indemnifying party under this Section 9, deliver to the
indemnifying party a written notice of the commencement, and the indemnifying
party shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party
similarly notified, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if, in the opinion of counsel for the indemnifying
party, representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by
such counsel in the proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable period of time after notice of the
commencement of any such action shall relieve such indemnifying party of any
liability to the indemnified party under this Section 9 to the extent such
failure is prejudicial to its ability to defend such action, but the omission
to deliver written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Section 9.
(d) If the indemnification provided for in this Section 9 is held by a
court of competent jurisdiction to be unavailable to an indemnified party with
respect to any Losses, then the indemnifying party, in lieu of indemnifying
such indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such Losses in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and of the indemnified party on the other in connection with the
Violations that resulted in such Losses as well as any other
-8-
<PAGE> 11
relevant equitable considerations; provided, that, in no event shall any
contribution by a Holder under this Section 9(d) exceed the net proceeds to each
such Holder, except in the case of willful fraud by such Holder. The relative
fault of the indemnifying party and of the indemnified party shall be determined
by reference to, among other things, whether the Violation resulting in such
Losses relates to information supplied by the indemnifying party or by the
indemnified party and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such Violation.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this
Section 9 shall survive the completion of any offering of Registrable Securities
and the termination of Registration Rights pursuant to Section 14.
10. REPORTS UNDER THE ACT
With a view to making available to the Holders the benefits of SEC Rule
144 promulgated under the Act and any other rule or regulation of the SEC that
may at any time permit a Holder to sell securities of the Company to the public
without registration or pursuant to a registration on Form S-3, the Company
agrees to use commercially reasonable efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after 90 days from the
effective date of the first registration statement filed by the Company for the
offering of its securities to the general public;
(b) Take such action, including the voluntary registration of
its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company for the offering of
its securities to the general public is declared effective;
(c) File with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
-9-
<PAGE> 12
(d) Furnish to any Holder, so long as the Holder owns any
Registrable Securities, promptly upon request (i) a written statement by the
Company that it has complied with the reporting requirements of the 1934 Act
(at any time after 90 days from the date on which it becomes subject to such
reporting requirements), or that it qualifies as a registrant whose securities
may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a
copy of the most recent annual or quarterly report of the Company and such
other reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested in availing any Holder of any rule
or regulation of the SEC that permits the selling of any such securities
without registration or pursuant to such Form S-3.
11. ASSIGNMENT OF REGISTRATION RIGHTS
The rights to cause the Company to register Registrable Securities
pursuant to this Agreement may be assigned by a Holder to a transferee or
assignee of such securities who shall, upon such transfer or assignment, be
deemed a "Holder" under this Agreement; provided that the Company is, within a
reasonable period of time after such transfer not exceeding thirty (30) days,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights are
being assigned; provided, further, that such assignment shall be effective only
if immediately following such transfer the further disposition of such
securities by the transferee or assignee is restricted under the Act and that
if the transfer is of rights held by any of the Partners, such transferee or
assignee after the transfer or assignment holds at least 100,000 shares of the
Registrable Securities. The 100,000 share minimum holdings restriction shall
not apply if the transferee or assignee of a Partner is (a) a partner or
retired partner of the Segale Group or any assignee or transferee of the Segale
Group that is a partnership, (b) a member of the immediate family or a trust
for the benefit of the Segale Group or any assignee or transferee of the Segale
Group that is an individual, (c) an entity controlling, controlled by or under
common control with the Segale Group or any assignee or transferee of the
Segale Group that is not an individual, or (d) a constituent member of the
Segale Group or any assignee or transferee of the Segale Group that is a
limited liability company; provided in each event that the transferee or
assignee shall designate Mark A. Segale (or his successor) as his or her
exclusive representative with the power to act for and bind the transferee or
assignee pursuant to this Agreement.
12. LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS
From and after the date of this Agreement, the Company shall not, without
the written consent of Mark A. Segale, enter into any agreement with any holder
or prospective holder of any securities of the Company that would allow such
holder or
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<PAGE> 13
prospective holder to (a) include such securities in any registration filed
under Section 2 unless under the terms of such agreement such holder or
prospective holder may include such securities in any such registration only to
the extent that the inclusion of its securities will not reduce the amount of
the Registrable Securities of the Partners which the Partners have requested to
be included or (b) make a demand registration which could result in such
registration statement being declared effective prior to 180 days of the
effective date of any registration effected pursuant to Section 2.
13. "MARKET STANDOFF" AGREEMENT
The Holders hereby agree that they shall not, to the extent requested by
the Company and an underwriter of Common Stock (or other securities) of the
Company, sell or otherwise transfer or dispose (other than to donees who agree
to be similarly bound) of any Registrable Securities for a period not to exceed
180 days following the effective date of a registration statement of the Company
filed under the Act; provided, however, that all officers and directors of the
Company (whether or not pursuant to this Agreement) enter into similar
agreements and the Company has used all reasonable efforts to obtain similar
agreements from all holders of at least 1% of the Company's then outstanding
Common Stock. Any release from the obligations of this Section 13 shall be made
pro rata among the selling Holders according to the total amount of Registrable
Securities held by such Holders at the time of registration.
To enforce the foregoing covenant, the Company may impose stop-transfer
instructions with respect to the Registrable Securities of the Holders (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period.
14. TERMINATION OF REGISTRATION RIGHTS
The registration rights granted under Sections 2 and 3 of this Agreement
shall terminate as to all Holders on the earlier of the tenth anniversary of the
date of this Agreement or the fifth anniversary of the closing of the Company's
first public offering in which the aggregate proceeds to the Company before
deducting underwriting commissions and expenses are at least $10 million (the
"FIFTH ANNIVERSARY"); provided, however, such termination shall be postponed
until the later of (i) that number of days following such Fifth Anniversary
equal to the number of days, if any, between the date of such first public
offering and the Fifth Anniversary that the Common Stock of the Company is not
traded on a national stock exchange or the Nasdaq National Market (or any
successor organization) and (ii) if as of the Fifth Anniversary, the Company is
not so traded, then, one year following such date as the
<PAGE> 14
Company first resumes trading on a national stock exchange or the Nasdaq
National Market (or any successor organization).
15. MISCELLANEOUS
15.1 NOTICES
Any notice required or permitted under this Agreement shall be given in
writing and shall be deemed effectively given (a) upon personal delivery to the
party to be notified, (b) upon confirmation of receipt by fax by the party to
be notified, (c) one business day after deposit with a reputable overnight
courier, prepaid for overnight delivery and addressed as set forth in (d), or
(d) five days after deposit with the United States Post Office, postage
prepaid, registered or certified with return receipt requested and addressed to
the party to be notified at the address indicated for such party on the
signature page, or at such other address as such party may designate by 10
days' advance written notice to the other parties given in the foregoing manner.
15.2 AMENDMENTS AND WAIVERS
Any term of this Agreement may be amended and the observance of any term
may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the unanimous prior written consent
of the Company, the Partners and the Holders of a majority of the Registrable
Securities then outstanding.
15.3 GOVERNING LAW; JURISDICTION; VENUE
This Agreement shall be governed by and construed under the laws of the
state of Washington without regard to principles of conflict of laws. The
parties irrevocably consent to the jurisdiction and venue of the state and
federal courts located in King County, Washington in connection with any action
relating to this Agreement.
15.4 SUCCESSORS AND ASSIGNS
The terms and conditions of this Agreement shall inure to the benefit of
and be binding on the respective successors and assigns of the parties as
provided herein.
15.5 SEVERABILITY
If one or more provisions of this Agreement are held to be unenforceable
under applicable law, such provision shall be excluded from this Agreement, and
the balance of this Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
-12-
<PAGE> 15
15.6 ENTIRE AGREEMENT; COUNTERPARTS
This Agreement constitutes the entire agreement between the parties about
its subject and supersedes all prior agreements including any provisions
regarding the subject matter hereof contained in the Purchase Agreement. This
Agreement may be executed in two or more counterparts, which together shall
constitute one instrument.
[Signature pages follow]
-13-
<PAGE> 16
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
N2H2, INC.
By: /s/ Peter H. Nickerson
--------------------------------------------
Its President
--------------------------------------------
Address: 900 Fourth Avenue Seattle, WA 98164
--------------------------------------------
Fax: 206-336-1556
--------------------------------------------
Telephone:
--------------------------------------------
PETER H. NICKERSON:
/s/ Peter H. Nickerson
--------------------------------------------
Address: 13231 NE 50th St. Bellevue
--------------------------------------------
Fax:
--------------------------------------------
Telephone: 206-972-8086
--------------------------------------------
HOLLY HILL:
/s/ Hollis R. Hill
--------------------------------------------
Address:
--------------------------------------------
Fax:
--------------------------------------------
Telephone:
--------------------------------------------
CRUTTENDEN ROTH BRIDGE FUND, LLC
By: /s/ Shelly Singhal
--------------------------------------------
Its: Manager
--------------------------------------------
Address:
--------------------------------------------
Fax:
--------------------------------------------
Telephone:
--------------------------------------------
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<PAGE> 17
SHELLY SINGHAL
/s/ Shelly Singhal
--------------------------------------------
Address:
--------------------------------------------
Fax:
--------------------------------------------
Telephone:
--------------------------------------------
JAMES STEARNS
/s/ James Stearns
--------------------------------------------
Address:
--------------------------------------------
Fax:
--------------------------------------------
Telephone:
--------------------------------------------
GLENN POWERS
/s/ Glen Powers
--------------------------------------------
Address:
--------------------------------------------
Fax:
--------------------------------------------
Telephone:
--------------------------------------------
DANN V. ANGELOFF TTE FBO
Angeloff Family Trust
DTD 12/14/91
/s/ Dann V. Angeloff
--------------------------------------------
Address: 727 W. 77th St., LA, CA 90017
--------------------------------------------
Fax: (213) 488-1868
--------------------------------------------
Telephone: (213) 488-1700
--------------------------------------------
DANN V. ANGELOFF TTEE UTD
10/4/76 FBO The Angeloff Children
/s/ Dann V. Angeloff
--------------------------------------------
Address: 727 W. 77th St., LA, CA 90017
--------------------------------------------
Fax: (213) 488-1868
--------------------------------------------
Telephone: (213) 488-1700
--------------------------------------------
ROBERT LONDON
/s/ Robert London
--------------------------------------------
Address: 212 Aurora Dr; Montecito, CA 93108
--------------------------------------------
Fax: (805) 966-9302
--------------------------------------------
Telephone: (805) 565-3503
--------------------------------------------
JOEL SLUTZKY
/s/ Joel Slutzky
--------------------------------------------
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<PAGE> 18
Address: 424 Via Lido Nord, Newport Beach
--------------------------------------------
Fax: 714-780-7857
--------------------------------------------
Telephone: 714-788-7800
--------------------------------------------
ALAN SLUTZKY
/s/ Alan Slutzky
--------------------------------------------
Address: 31815 Camino Capistrano #19
--------------------------------------------
San Juan Capistrano, CA 92675
--------------------------------------------
Fax: 949-661-5501
--------------------------------------------
Telephone: 949-661-5500
--------------------------------------------
GREGORY MINER
/s/ Gregory Miner
--------------------------------------------
Address: 4152 Bouton Dr.
--------------------------------------------
Fax: 562-938-2891
--------------------------------------------
Telephone: 562-429-3006
--------------------------------------------
MICHAEL ERICKSON
/s/ Michael Erickson
--------------------------------------------
Address: 1505 Westlake Ave N.
--------------------------------------------
Seattle, WA 98109
--------------------------------------------
Fax: 206-281-9882
--------------------------------------------
Telephone: 206-281-9881
--------------------------------------------
WILLIAM P. FOLEY, II
/s/ William P. Foley
--------------------------------------------
Address: 3916 State Street, #300
--------------------------------------------
Santa Barbara, CA 93105
--------------------------------------------
Fax: 805-563-4141
--------------------------------------------
Telephone: 805-898-7136
--------------------------------------------
FRANK P. WILLEY
/s/ Frank Willey
--------------------------------------------
Address:
--------------------------------------------
Fax:
--------------------------------------------
Telephone:
--------------------------------------------
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<PAGE> 19
GARY R. NELSON
/s/ Gary R. Nelson
-----------------------------------------
Address:
-----------------------------------------
Fax:
-----------------------------------------
Telephone:
-----------------------------------------
THOMAS RAKOW
/S/ Thomas Rakow
-----------------------------------------
Address: 25791 Maple View
-----------------------------------------
Laguna, CA 92653
-----------------------------------------
Fax: 949-348-0980
-----------------------------------------
Telephone: 949-348-1773
-----------------------------------------
JOHN NARVER
/s/ John Narver
-----------------------------------------
Address: 2015 Federal Ave E.
-----------------------------------------
Fax: 206-685-9392
-----------------------------------------
Telephone: 206-323-6026
-----------------------------------------
PHILIP J. DINAPOLI, JR.
/s/ Philip J. Dinapoli, Jr.
-----------------------------------------
Address: 702 Jasmine Ave.
-----------------------------------------
Corona Del Mar, CA 92625
-----------------------------------------
Fax:
-----------------------------------------
Telephone:
-----------------------------------------
GARY CREMO
/s/ Gary Cremo
-----------------------------------------
Address: 1845 Port Seabourne NB 92660
-----------------------------------------
Fax: 949-852-9715
-----------------------------------------
Telephone: 949-720-7110
-----------------------------------------
17
<PAGE> 20
MARK A SEGALE
/s/ MARK A SEGALE
-----------------------------------------
Mark A. Segale, for the community of him
and Keri D. Segale
Address: P.O. Box 88028 Tukwila, WA 98138
--------------------------------
Fax: 206-575-1837
------------------------------------
Telephone: 206-575-2000
------------------------------
ANN J. NICHOLS
/s/ ANN J. NICHOLS
-----------------------------------------
Ann J. Nichols, as her separate property
Address: P.O. Box 88028 Tukwila, WA 98138
--------------------------------
Fax: 206-575-1837
------------------------------------
Telephone: 206-575-2000
------------------------------
LISA M. ATKINS
/s/ LISA M. ATKINS
-----------------------------------------
Lisa M. Atkins, for the community of her
and Robert L. Atkins
Address: P.O. Box 88028 Tukwila, WA 98138
--------------------------------
Fax: 206-575-1837
------------------------------------
Telephone: 206-575-2000
------------------------------
TINA A. COVEY
/s/ TINA A. COVEY
-----------------------------------------
Tina A. Covey, for the community of her
and Todd E. Covey
Address: P.O. Box 88028 Tukwila, WA 98138
--------------------------------
Fax: 206-575-1837
------------------------------------
Telephone: 206-575-2000
------------------------------
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<PAGE> 21
NITA S. JOHNSON
/s/ NITA S. JOHNSON
-----------------------------------------
Nita S. Johnson, for the community of her
and Brian E. Johnson
Address: P.O. Box 88028 Tukwila, WA 98138
--------------------------------
Fax: 206-575-1837
------------------------------------
Telephone: 206-575-2000
------------------------------
DONNA A. SEGALE
/s/ DONNA A. SEGALE
-----------------------------------------
Donna A. Segale, as her separate property
Address: P.O. Box 88028 Tukwila, WA 98138
--------------------------------
Fax: 206-575-1837
------------------------------------
Telephone: 206-575-2000
------------------------------
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<PAGE> 22
SAMIR J. TUMA
/s/ SAMIR J. TUMA
-----------------------------------------
Samir J. Tuma, as his separate property
Address: 1779 Alabama Street, SF CA 94110
--------------------------------
Fax:
------------------------------------
Telephone: 415-695-1987
------------------------------
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<PAGE> 1
EXHIBIT 10.13
THE SECURITIES EVIDENCED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED OR APPLICABLE STATE SECURITIES LAWS, AND NO
INTEREST 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, (B) THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE
HOLDER OF THE SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH
TRANSACTION IS EXEMPT FROM REGISTRATION, OR (C) THE COMPANY OTHERWISE SATISFIES
ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.
No. W - S1 WARRANT TO PURCHASE
ISSUED AS OF December 31, 1998 COMMON STOCK
VOID AFTER December 31, 2003
N2H2, INC.
WARRANT
THIS IS TO CERTIFY that, Mark A. Segale, for the community of him and Keri D.
Segale, or such person to whom this Warrant is transferred (the "HOLDER"), is
entitled to exercise this Warrant to purchase up to 20,460 fully paid and
nonassessable shares (the "WARRANT STOCK") of the Common Stock of N2H2,
Inc., a Washington corporation (the "COMPANY"), at an exercise price per share
of $.01 (the "EXERCISE PRICE") such number of shares, type of security and the
Exercise Price being subject to adjustment as provided below.
1. METHOD OF EXERCISE
1.1 EXERCISE PERIOD
This Warrant may be exercised by the Holder at any time after the
Trigger Point (as defined below) and before the End Point (as defined below). In
the event that the End Point shall precede the trigger point, this Warrant shall
terminate without ever becoming exercisable. The period of time during which
this Warrant is Exercisable is referred to herein as the "EXERCISE PERIOD."
The "TRIGGER POINT" shall occur upon the earlier of (a) the Company's
notifying the
<PAGE> 2
Holder of its intent to effect (i) any merger, consolidation or share exchange
in which the holders of a majority of the voting equity securities of the
surviving entity were not holders of a majority of the voting equity securities
of the Company before the transaction, (ii) any sale of all or substantially all
of the assets of the Company, or (iii) any dissolution, liquidation, winding up
or other distribution of all or substantially the assets of the Company to
holders of its equity securities and (b) the closing of an initial public
offering of the Company's equity securities in which the Segale Group or its
transferees is unable for whatever reason to sell in the aggregate at least
$500,000 of Common Stock of the Company, notwithstanding the provisions of that
certain Registration Rights Agreement (the "REGISTRATION RIGHTS AGREEMENT") of
even date herewith by and among the Company, the Segale Group and the other
parties named therein (collectively any such transaction referred to in clause
(a) or (b) is referred to herein as a "TRIGGERING EVENT"). The Company agrees to
provide the Holder with written notice of the Triggering Event and the
occurrence of a the Trigger Point, together with a reasonably detailed
description of the Triggering Event, including the anticipated closing date and
the price per share anticipated to be received by holders of Common Stock of the
Company, and reference to this Warrant no less than twenty days prior to the
closing of any Triggering Event.
The "END POINT" shall occur upon the earlier of (a) December 31, 2003
and (b) the closing of an initial public offering of the Company's equity
securities in which the Segale Group, or its transferees, are able to sell (at
their discretion) up to $500,000 of Common Stock of the Company held by it
pursuant to the provisions of the Registration Rights Agreement. To the extent
that the Segale Group, or its transferees, is provided the opportunity and
ability to sell a portion, but not the full $500,000, of Common Stock that it in
its discretion desires to sell in the Company's initial public offering, then
the End Point shall be deemed to have occurred (before the Trigger Point) as to
that portion of the Warrant equal to the portion of Common Stock sold by the
Segale Group or its transferee in the initial public offering bears to the
$500,000 of Common Stock that the Segale Group or its transferees are entitled
to sell under the terms of the Registration Rights Agreement. For example, if
$100,000 of Common Stock held by or through the Segale Group is sold in the
Company's initial public offering by virtue of being provided the opportunity
and ability to include only up to $100,000 of Common Stock, then the End Point
shall be deemed to have occurred with respect to one-fifth of the Warrant (7,440
shares of Warrant Stock) and the Warrant shall be deemed terminated and shall be
unexercisable as to those shares of Warrant Stock.
1.2 CASH EXERCISE RIGHT
This Warrant may be exercised during the Exercise Period, in whole or in
part, by delivering to the Company at 900 Fourth Avenue, Seattle, Washington
98164 (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company) (a) this Warrant certificate, (b) a check payable to the
Company, or canceled indebtedness of the Company to the Holder, in the amount of
the Exercise Price multiplied by the number of shares for which this
-2-
<PAGE> 3
Warrant is being exercised (the "PURCHASE PRICE"), and (c) the Notice of Cash
Exercise attached as EXHIBIT A duly completed and executed by the Holder. Upon
exercise, the Holder shall be entitled to receive from the Company a stock
certificate in proper form representing the number of shares of Warrant Stock
purchased.
1.3 NET ISSUANCE RIGHT
Notwithstanding the payment provisions set forth above, the Holder may
elect to convert this Warrant into shares of Warrant Stock by surrendering this
Warrant at the office of the Company at the address set forth in Section 1.2 and
delivering to the Company the Notice of Net Issuance Exercise attached as
EXHIBIT B duly completed and executed by the Holder, in which case the Company
shall issue to the Holder the number of shares of Warrant Stock of the Company
equal to the result obtained by (a) subtracting B from A, (b) multiplying the
difference by C, and (c) dividing the product by A as set forth in the following
equation:
X = (A - B) x C where:
-----------
A
X = the number of shares of Warrant Stock issuable upon net
issuance exercise pursuant to the provisions of this
Section 1.3.
A = the Fair Market Value (as defined below) of one share of
Warrant Stock on the date of net issuance exercise.
B = the Exercise Price for one share of Warrant Stock under
this Warrant.
C = the number of shares of Warrant Stock as to which this
Warrant is exercisable pursuant to the provisions of
Section 1.2.
If the foregoing calculation results in a negative number, then no
shares of Warrant Stock shall be issued upon net issuance exercise pursuant to
this Section 1.3.
"FAIR MARKET VALUE" of a share of Warrant Stock shall mean:
(a) if the net issuance exercise is in connection with a transaction
specified in Section 4.1, the value of the consideration (determined, in the
case of noncash consideration, in good faith by the Company's Board of
Directors) to be received pursuant to such transaction by the holder of one
share of Warrant Stock;
-3-
<PAGE> 4
(b) if the net issuance exercise is in connection with the initial
public offering of the Company's Common Stock, the initial public offering price
(before deducting commission, discounts or expenses) at which the Common Stock
is sold in such offering multiplied by the number of shares of Common Stock into
which such shares of Warrant Stock could be converted on the date of net
issuance exercise, if such Warrant Stock is then convertible into Common Stock;
(c) if the net issuance exercise is after the occurrence of the initial
public offering of the Company's Common Stock:
(i) if the Company's Common Stock is traded on an exchange or is
quoted on the Nasdaq National Market, the average of the closing or last
sale price reported for the 10 business days immediately preceding the
date of net issuance exercise multiplied by the number of shares of
Common Stock into which such shares of Warrant Stock could be converted
on the date of net issuance exercise, if such Warrant Stock is then
convertible into Common Stock;
(ii) if the Company's Common Stock is not traded on an exchange
or on the Nasdaq National Market, but is traded in the over-the-counter
market, the mean of the closing bid and asked prices reported for the 10
market days immediately preceding the date of net issuance exercise
multiplied by the number of shares of Common Stock into which such
shares of Warrant Stock could be converted on the date of net issuance
exercise, if such Warrant Stock is then convertible into Common Stock;
and
(d) In all other cases, the fair value as determined in good faith by
the Company's Board of Directors.
Upon net issuance exercise in accordance with this Section 1.3, the
Holder shall be entitled to receive from the Company a stock certificate to
proper form represented the number of shares of Warrant Stock determined in
accordance with the foregoing.
2. DELIVERY OF STOCK CERTIFICATES; NO FRACTIONAL SHARES
2.1 Within 10 days after the payment of the Purchase Price following the
exercise of this Warrant (in whole or in part) or after notice of net issuance
exercise and compliance with Section 1.3, the Company at its expense shall issue
in the name of and deliver to the Holder (a) a certificate or certificates for
the number of fully paid and nonassessable shares of Warrant Stock to which the
Holder shall be entitled upon such exercise, and (b) a new Warrant of like tenor
to purchase up to that number of shares of Warrant Stock, if any, as to which
this Warrant has not been exercised if this Warrant has not expired. The Holder
shall for all purposes be deemed to have become the holder of record of such
shares of Warrant Stock on the date this Warrant was exercised (the date the
Holder has fully complied with the
-4-
<PAGE> 5
requirements of Section 1.2 or 1.3), irrespective of the date of delivery of the
certificate or certificates representing the Warrant Stock; provided that, if
the date such exercise is made is a date when the stock transfer books of the
Company are closed, such person shall be deemed to have become the holder of
record of such shares of Warrant Stock at the close of business on the next
succeeding date on which the stock transfer books are open.
2.2 No fractional shares shall be issued upon the exercise of this
Warrant. In lieu of fractional shares, the Company shall pay the Holder a sum in
cash equal to the fair market value of the fractional shares (as determined by
the Company's Board of Directors) on the date of exercise.
3. COVENANTS AS TO WARRANT STOCK
The Company covenants that at all times during the Exercise Period there
shall be reserved for issuance and delivery upon exercise of this Warrant such
number of shares of Warrant Stock as is necessary for exercise in full of this
Warrant and, from time to time, it will take all steps necessary to amend its
Articles of Incorporation to provide sufficient reserves of shares of Warrant
Stock. All shares of Warrant Stock issued pursuant to the exercise of this
Warrant will, upon their issuance, be validly issued and outstanding, fully paid
and nonassessable, free and clear of all liens and other encumbrances or
restrictions on sale and free and clear of all preemptive rights, except
restrictions arising (a) under federal and state securities laws, (b) not by or
through the Company, or (c) by agreement between the Company and the Holder or
its successors.
4. ADJUSTMENTS
4.1 EFFECT OF REORGANIZATION
Upon a merger, consolidation, acquisition of all or substantially all of
the property or stock, liquidation or other reorganization of the Company
(collectively, a "REORGANIZATION") during period this Warrant is outstanding, as
a result of which the shareholders of the Company receive cash, stock or other
property in exchange for their shares of Warrant Stock, lawful provision shall
be made so that the Holder shall thereafter be entitled to receive, upon
exercise of this Warrant, the number of shares of securities of the successor
corporation resulting from such Reorganization (and cash and other property) to
which a holder of the Warrant Stock issuable upon exercise of this Warrant would
have been entitled in such Reorganization if this Warrant had been exercised
immediately prior to such Reorganization. In any such case, appropriate
adjustment (as determined in good faith by the Company's Board of Directors)
shall be made in the application of the provisions of this Warrant with respect
to the rights and interest of the Holder after the Reorganization to the end
that the provisions of this Warrant (including adjustments of the Exercise Price
and the number and type of securities purchasable pursuant to the terms of this
Warrant) shall be applicable after that event, as near as reasonably may be, in
relation to any shares deliverable after that event upon the exercise of this
Warrant.
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4.2 ADJUSTMENTS FOR STOCK SPLITS, DIVIDENDS
If the Company shall issue any shares of the same class as the Warrant
Stock as a stock dividend or subdivide the number of outstanding shares of such
class into a greater number of shares, then, in either such case, the Exercise
Price in effect before such dividend or subdivision shall be proportionately
reduced and the number of shares of Warrant Stock at that time issuable pursuant
to the exercise of this Warrant shall be proportionately increased; and,
conversely, if the Company shall contract the number of outstanding shares of
the same class as the Warrant Stock by combining such shares into a smaller
number of shares, then the Exercise Price in effect before such combination
shall be proportionately increased and the number of shares of Warrant Stock at
that time issuable pursuant to the exercise or conversion of this Warrant shall
be proportionately decreased. Each adjustment in the number of shares of Warrant
Stock issuable shall be rounded up to the nearest whole share.
4.3 CERTIFICATE AS TO ADJUSTMENTS
In the case of any adjustment in the Exercise Price or number and type
of securities issuable upon exercise of this Warrant, the Company will promptly
give written notice to the Holder in the form of a certificate, certified and
confirmed by an officer of the Company, setting forth the adjustment in
reasonable detail.
5. SECURITIES LAWS
5.1 SECURITIES LAWS RESTRICTIONS
This Warrant and the securities issuable upon exercise have not been
registered under the Securities Act of 1933, as amended or applicable state
securities laws, and no interest 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, (b) the Company receives an opinion of
legal counsel for the holder of the securities satisfactory to the Company
stating that such transaction is exempt from registration, or (c) the Company
otherwise satisfies itself that such transaction is exempt from registration.
5.2 SECURITIES LAWS LEGEND
A legend setting forth or referring to the above restrictions shall be
placed on this Warrant, any replacement and any certificate representing the
Warrant Stock, and a stop transfer order shall be placed on the books of the
Company and with any transfer agent until such securities may be legally sold or
otherwise transferred.
6. REGISTRATION RIGHTS
The Holder shall be entitled to registration of the Warrant Stock
pursuant to the terms
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and conditions of the Registration Rights Agreement.
7. EXCHANGE OF WARRANT; LOST OR DAMAGED WARRANT CERTIFICATE
This Warrant is exchangeable upon its surrender by the Holder at the
office of the Company. Upon receipt by the Company of satisfactory evidence of
the loss, theft, destruction or damage of this Warrant and either (in the case
of loss, theft or destruction) reasonable indemnification or (in the case of
damage) the surrender of this Warrant for cancellation, the Company will execute
and deliver to the Holder, without charge, a new Warrant of like denomination.
8. NOTICES OF RECORD DATE, ETC.
In the event of
(a) any taking by the Company of a record of the holders of Warrant
Stock for the purpose of determining the holders who are entitled to receive any
dividend or other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right;
(b) any reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, or any transfer of all or
substantially all the assets of the Company to, or consolidation or merger of,
the Company with or into any person;
(c) any voluntary or involuntary dissolution, liquidation or winding-up
of the Company;
(d) any proposed issue or grant by the Company to the holders of Warrant
Stock of any shares of stock of any class or any other securities, or any right
or warrant to subscribe for, purchase or otherwise acquire any shares of stock
of any class or any other securities;
(e) the initial public offering of the Company's Common Stock; or
(f) any other event as to which the Company is required to give notice
to any holders of Warrant Stock,
then and in each such event the Company will mail to the Holder a notice
specifying (i) the date on which any such record is to be taken, (ii) the date
on which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take place,
and the time, if any is to be fixed, as to which the holders of record of
Warrant Stock or securities into which the Warrant Stock is convertible shall be
entitled to exchange their shares for securities or other property deliverable
on such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up, (iii) the amount
and character of any stock or other securities, or
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rights or warrants, proposed to be issued or granted, the date of such proposed
issue or grant and the persons or class of persons to whom such proposed issue
or grant is to be offered or made, and (iv) in reasonable detail, the facts,
including the proposed date, concerning any other such event. Such notice shall
be delivered to the Holder at least 20 days prior to the date specified in the
notice.
9. INVESTMENT INTENT
By accepting this Warrant, the Holder represents that it is acquiring
this Warrant for investment and not with a view to, or for sale in connection
with, any distribution thereof.
10. MISCELLANEOUS
10.1 HOLDER AS OWNER
The Company may deem and treat the holder of record of this Warrant as
the absolute owner for all purposes regardless of any notice to the contrary.
10.2 NO SHAREHOLDER RIGHTS
This Warrant shall not entitle the Holder to any voting rights or any
other rights as a shareholder of the Company or to any other rights except the
rights stated herein; and no dividend or interest shall be payable or shall
accrue in respect of this Warrant or the Warrant Stock, until this Warrant is
exercised.
10.3 NOTICES
Unless otherwise provided, any notice under this Warrant shall be given
in writing and shall be deemed effectively given (a) upon personal delivery to
the party to be notified, (b) upon confirmation of receipt by fax by the party
to be notified, (c) one business day after deposit with a reputable overnight
courier, prepaid for overnight delivery and addressed as set forth in (d), or
(d) five days after deposit with the United States Post Office, postage prepaid,
registered or certified with return receipt requested and addressed to the party
to be notified at the address indicated below, or at such other address as such
party may designate by 10 days' advance written notice to the other party given
in the foregoing manner. If to the Holder:
The Segale Group
18000 Andover Park West, Suite 200
Post Office Box 88028
Tukwila, Washington 98188
Attention: Mark A. Segale
Telephone: (206) 575-2000
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Telecopy: (206) 575-1837
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With a copy to:
Perkins Coie LLP
1201 Third Avenue, 48th Floor
Seattle, Washington 98101
Attention: Gregory Gorder
Telephone: (206) 583-8888
Telecopy: (206) 583-8500
If to the Company:
N2H2, Inc.
900 Fourth Avenue
Seattle, Washington 98164
Attention: Peter Nickerson
Telephone: (206) 336-1501
Telecopy: (206) 336-1556
With a copy to:
Lane Powell Spears Lubersky LLP
1420 Fifth Avenue, Suite 4100
Seattle, Washington 98101
Attention: Jim D. Johnson
Telephone: (206) 223-7000
Telecopy: (206) 223-7107
10.4 AMENDMENTS AND WAIVERS
Any term of this Warrant may be amended and the observance of any term
may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the written consent of the Company and
the Holder. Any amendment or waiver effected in accordance with this Section
10.4 shall be binding on each future Holder and the Company.
10.5 GOVERNING LAW; JURISDICTION; VENUE
This Warrant shall be governed by and construed under the laws of the
state of Washington without regard to principles of conflict of laws. The
parties irrevocably consent to the jurisdiction and venue of the state and
federal courts located in King County, Washington in connection with any action
relating to this Warrant.
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10.6 SUCCESSORS AND ASSIGNS; TRANSFER
The terms and conditions of this Warrant shall inure to the benefit of
and be binding on the respective successors and assigns of the parties.
IN WITNESS WHEREOF, the Company has executed this Warrant on this 8th
day of April, 1999.
N2H2, Inc.
By /s/ Peter H. Nickerson
Peter Nickerson, Chief Executive Officer
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Exhibit A
NOTICE OF CASH EXERCISE
To : N2H2, Inc.
The undersigned hereby irrevocably elects to purchase ___________ shares of
Common Stock of N2H2, Inc. (the "COMPANY") issuable upon the exercise of the
attached Warrant and requests that certificates for such shares be issued in the
name of and delivered to the address of the undersigned, at the address stated
below and, if said number of shares shall not be all the shares that may be
purchased pursuant to the attached Warrant, that a new Warrant evidencing the
right to purchase the balance of such shares be registered in the name of, and
delivered to, the undersigned at the address stated below. The undersigned
agrees with and represents to the Company that said shares of the Common Stock
of the Company are acquired for the account of the undersigned for investment
and not with a view to, or for sale in connection with, any distribution or
public offering within the meaning of the Securities Act of 1933, as amended.
Payment enclosed in the amount of $___________.
Dated: ________________
Name of Holder of Warrant:
(please print)
Address:
Signature:
<PAGE> 13
Exhibit B
NOTICE OF NET ISSUANCE EXERCISE
To: N2H2, Inc.
The undersigned hereby irrevocably elects to convert the attached Warrant into
such number of shares of Common Stock of N2H2, Inc. (the "COMPANY") as is
determined pursuant to Section 1.3 of the attached Warrant. The undersigned
requests that certificates for such net issuance shares be issued in the name of
and delivered to the address of the undersigned, at the address stated below.
The undersigned agrees with and represents to the Company that said shares of
Common Stock of the Company are acquired for the account of the undersigned for
investment and not with a view to, or for sale in connection with, any
distribution or public offering within the meaning of the Securities Act of
1933, as amended.
Dated: ____________________
Name of Holder of Warrant:
(please print)
Address:
Signature:
<PAGE> 14
ASSIGNMENT
For value received the undersigned sells, assigns and transfers to the
transferee named below the attached Warrant, together with all right, title and
interest, and does irrevocably constitute and appoint the transfer agent of
N2H2, Inc. (the "COMPANY") as the undersigned's attorney, to transfer said
Warrant on the books of the Company, with full power of substitution in the
premises.
Dated: __________________________
Name of Holder of Warrant:
(please print)
Address:
Signature:
Name of transferee:
(please print)
Address of transferee:
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated March 17, 1999, except as to the third through fifth paragraphs of
Note 12, which are as of May 11, 1999, relating to the financial statements of
N2H2, Inc. which appears in such Registration Statement. We also consent to the
references to us under the headings "Experts" and "Selected Financial Data" in
such Prospectus. However, it should be noted that PricewaterhouseCoopers LLP has
not prepared or certified such "Selected Financial Data" in such Registration
Statement.
PricewaterhouseCoopers LLP
Seattle, Washington
May 13, 1999
