<PAGE>
As filed with the Securities and Exchange Commission on June 7, 1999
Registration No. 333-77039
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
DIGITAL ISLAND, INC.
(Exact Name of Registrant as Specified in its Certificate of Incorporation)
---------------
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 4813 68-0322824
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
353 Sacramento Street, Suite 1520
San Francisco, CA 94111
(415) 228-4100
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
the Registrant's Principal Executive Offices)
---------------
T.L. Thompson
Chief Financial Officer
DIGITAL ISLAND, INC.
353 Sacramento Street, Suite 1520
San Francisco, CA 94111
(415) 228-4100
(Name and Address, Including Zip Code, and Telephone Number, Including Area
Code, of Agent for Service)
---------------
Copies to:
<TABLE>
<S> <C>
Therese A. Mrozek, Esq. Gregory C. Smith, Esq.
Curtis L. Mo, Esq. Michael J. Cordero, Esq.
Andrew R. Hull, Esq. Christopher A. Rose, Esq.
Anthony S. Wang, Esq. Skadden, Arps, Slate, Meagher & Flom llp
Brobeck, Phleger & Harrison llp 525 University Avenue, Suite 220
Two Embarcadero Place Palo Alto, California 94301
2200 Geng Road (650) 470-4500
Palo Alto, California 94303-0913
(650) 424-0160
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, 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. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities Amount to be Offering Aggregate Registration
to be Registered Registered(1) Price Per Share Offering Price(2) Fee(3)
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par value.. 8,625,000 $12.00 $103,500,000 $28,773
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</TABLE>
(1) Includes 1,125,000 shares that the underwriters have the option to
purchase from Digital Island, Inc. solely to cover over-allotments, if
any.
(2) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3) Includes $20,850 previously paid in connection with the initial filing of
this Registration Statement on April 26, 1999 and $7,923 paid pursuant to
this Amendment No. 1.
---------------
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 that 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 such Section
8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 7, 1999
PRELIMINARY PROSPECTUS
7,500,000 Shares
Digital Island, Inc.
Common Stock
[DIGITAL ISLAND LOGO]
-----------
We are offering 7,500,000 shares of our common stock. This is our initial
public offering.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "ISLD." We estimate that the initial public offering price will be
between $10.00 and $12.00 per share.
See "Risk Factors" beginning on page 7 to read about certain risks that you
should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
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.
-----------
<TABLE>
<CAPTION>
Per
Share Total
------------ ------------
<S> <C> <C>
Public offering price................................ $ $
Underwriting discounts and commissions............... $ $
Proceeds, before expenses, to us..................... $ $
</TABLE>
-----------
The underwriters may purchase up to an additional 1,125,000 shares of common
stock from us at the initial public offering price less the underwriting
discount, solely to cover over-allotments.
The underwriters expect to deliver the shares against payment in New York, New
York on or about , 1999.
-----------
Bear, Stearns & Co. Inc.
Lehman Brothers
Thomas Weisel Partners LLC
The date of this prospectus is , 1999
<PAGE>
[Customer quotes, mission statements and map
depicting the Company's global network]
<PAGE>
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors" and our consolidated financial
statements and the notes thereto before making an investment decision. Our
fiscal year ends on September 30.
DIGITAL ISLAND, INC.
We offer a global network and related services for companies that are using
the Internet to deploy key business applications worldwide. Our services make
it easier for companies to globalize their operations and to provide a higher
quality of service and more functions than on the public Internet. We target
corporations that are increasingly relying on the Internet to conduct business
but are constrained by its unreliability, slow performance and limited range of
functions. Our global private network and services enable customers to
effectively deploy and manage global applications by combining the reliability,
performance and broad range of functions available in private intranets
operated by individual companies for their own users, with the global access of
the public Internet. Our customers, which include multinational corporations
such as Autodesk, Cisco Systems, E*TRADE Group and National Semiconductor, use
our services and proprietary technology to facilitate the deployment of a wide
variety of applications, including electronic commerce, online customer
service, software, document and multimedia distribution, sales management and
online training.
The public Internet infrastructure was designed for applications requiring
limited communications bandwidth capacity, and was not designed for core
business uses such as electronic commerce. For enterprises requiring global
solutions, the U.S.-centric nature of the public Internet results in poor
response times, particularly for applications requiring large file transfers,
instantaneous interaction between networked users, and country-to-country
transport. This occurs because data transmitted between countries must travel
through telecommunications lines in the U.S., where the Internet originated and
where most of its infrastructure is still located, and make a large number of
connections through various regional and national Internet service providers
before reaching a destination. Data packets often are lost in the transfer
process, resulting in additional delays for users.
Our global private network consists of a centralized high-speed network
which acts as a backbone connecting four strategically located data centers.
This core network architecture connects over dedicated lines directly to local
Internet service providers in 18 countries. This enables our customers to
transmit their international Internet traffic with dedicated capacity directly
to international users through local Internet service providers. We also help
our customers distribute content over the Internet by replicating and storing
their applications and Internet content in multiple locations close to their
end-users. This allows our customers to benefit from the lower overall cost of
data storage versus transport and to provide a better online experience for
their end-users.
We offer service level guarantees, customized billing, security services to
protect the integrity of data transmissions, network management and other high
quality services designed to improve the operation of the applications deployed
on our network. In addition, we operate Web sites and Internet applications,
manage computer servers and maintain networking equipment for our customers in
our state-of-the-art network data centers, and offer a range of data transport
options which allow customers to reserve network capacity on request consistent
with their expected network usage. These services are designed to allow
customers to outsource Internet activities to us, thereby transferring to us
the burden of attracting and retaining scarce technical staff and adopting
continuously changing technologies, while lowering their operating costs and
speeding deployment of applications over the Internet.
3
<PAGE>
Our objective is to be the leader in providing network services for
globalizing Internet business applications. In order to achieve this objective,
we intend to continue to:
. focus on leading corporations in targeted industries that utilize the
Internet for global business;
. continue to expand our customer base and provide additional services
and network usage to our existing customers;
. develop and implement new technologies and services that will allow
our customers to improve the deployment and operation of their
Internet applications globally;
. expand strategic relationships with potential partners such as
systems integrators who design and install systems, software vendors,
and some of our customers in targeted markets; and
. expand our sales capabilities in the U.S., Asia and Europe by hiring
more direct sales personnel and developing additional agents and
reseller channels.
----------------
We were incorporated in the State of California on February 10, 1994 and
changed our name to Digital Island, Inc. on August 15, 1996. Our principal
headquarters are located at 353 Sacramento Street, Suite 1520, San Francisco,
California 94111, and our telephone number is (415) 228-4100. Information
contained on our web site is not a part of this prospectus.
The Digital Island name and logo, Digital Island Intelligent Network,
Digital Island Global IP Applications Network, Digital Island Application
Hosting and Content Distribution, Globeport, Digital Island Local Content
Managers, TraceWare and the names of products and services offered by Digital
Island (including those referred to in "Business") are trademarks, registered
trademarks, service marks or registered service marks of Digital Island. This
prospectus also includes product names, trade names and trademarks of other
companies.
----------------
Unless we indicate otherwise, all information in this prospectus assumes:
. the reincorporation of Digital Island in Delaware at or prior to the
consummation of this offering;
. the conversion of each outstanding share of our convertible preferred
stock into common stock immediately prior to the consummation of this
offering;
. the exercise of outstanding warrants to purchase 95,000 shares of our
common stock at an exercise price of $0.10 per share upon the
consummation of this offering; and
. no exercise of the underwriters' over-allotment option.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock being offered.................... 7,500,000 shares
Common Stock outstanding after this offering.. 35,465,736 shares
Use of proceeds............................... We plan to use the net proceeds
from this offering for working
capital needs and up to $15
million of capital
expenditures.
Proposed Nasdaq National Market symbol........ ISLD
</TABLE>
The common stock outstanding after this offering is based on the number of
shares outstanding as of March 31, 1999, and excludes:
. 4,218,839 shares of common stock issuable upon exercise of
outstanding options with a weighted average exercise price of $2.13
per share;
. 7,544,000 shares reserved for future issuance under our 1999 stock
incentive plan; and
. 300,000 shares reserved for future issuance under our 1999 employee
stock purchase plan.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Six Months Ended
Years Ended March 31,
September 30, (unaudited)
---------------------- ----------------------
1997 1998 1998 1999
--------- ----------- --------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenue....................... $ 218 $ 2,343 $ 691 $ 3,795
Total costs and expenses...... (5,594) (18,971) (7,547) (18,410)
Loss from operations.......... (5,376) (16,629) (6,856) (14,615)
Net loss...................... (5,289) (16,277) (6,793) (14,360)
========= =========== ========= ===========
Basic and diluted net loss per
share........................ $ (3.53) $ (7.28) $ (3.07) $ (6.07)
========= =========== ========= ===========
Shares used in basic and
diluted net loss per share... 1,497,711 2,236,452 2,215,875 2,366,951
Basic and diluted pro forma
net loss per share........... $ (1.35) $ (0.78)
=========== ===========
Shares used in basic and
diluted pro forma net loss
per share.................... 12,042,539 18,353,258
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
-------------------
Pro Forma
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments........... $50,666 $126,401
Total assets................................................ 62,359 138,094
Long-term obligations, including current portion............ 4,039 4,039
Total stockholders' equity.................................. 49,149 124,884
</TABLE>
The above balance sheet data is shown:
. on an actual basis; and
. on a pro forma basis assuming the conversion of all outstanding
shares of convertible preferred stock into common stock and the
exercise of outstanding warrants to purchase 95,000 shares of common
stock at an exercise price of $0.10 per share upon the consummation
of this offering, and as adjusted to reflect the sale of 7,500,000
shares of common stock by Digital Island at an assumed initial public
offering price of $11.00 per share and after deducting the
underwriting discounts and commissions and estimated offering
expenses.
See notes 2 and 9 of the notes to our consolidated financial statements for
the determination of shares used in computing basic and diluted loss per share.
6
<PAGE>
RISK FACTORS
An investment in our shares is extremely risky. This section describes risks
involved in purchasing our common stock. You should consider carefully the
following risks, in addition to the other information presented in this
prospectus, in evaluating us and our business. Any of the following risks, as
well as any other risks that we have not yet identified or that we currently
believe are immaterial, could seriously harm our business and prospects and
cause the trading price of our common stock to decline, which in turn could
cause you to lose all or part of your investment.
Risks Related to Digital Island
We have a short operating history upon which to base your investment decision.
Our limited operating history makes it difficult for us to predict future
results of operations, and makes it difficult to evaluate us or our prospects.
We were incorporated in 1994, and began offering our global applications
network services in January 1997. Prior to such time, we were engaged in
activities unrelated to our current operations, and as a result, the results of
operations for such periods are not comparable to our results of operations for
1997 or any subsequent periods.
We have incurred operating losses since our inception and expect future
operation losses for the foreseeable future.
The revenue and income potential of our business and market is unproven.
From inception, we have experienced operating losses, negative cash flows from
operations and net losses in each quarterly and annual period. For the fiscal
year ended September 30, 1998, our operating loss, negative cash flow from
operations and net loss were $16.6 million, $15.7 million and $16.3 million,
respectively. For the six months ended March 31, 1999, our operating loss,
negative cash flow from operations and net loss was $14.6 million,
$10.4 million and $14.4 million, respectively. As of March 31, 1999, we had an
accumulated deficit of approximately $36.0 million.
Currently, we anticipate making significant investments in our network
infrastructure and product development as well as our sales and marketing
programs and personnel. Therefore, we believe that we will continue to
experience significant losses on a quarterly and annual basis for the
foreseeable future. You must consider us and our prospects in light of the
risks and difficulties encountered by companies in new and rapidly evolving
markets. Our ability to address these risks depends on a number of factors
which include our ability to:
. market our brand name effectively to companies in our target
markets;
. provide reliable and cost-effective services to attract and retain
our target customers;
. continue to grow our infrastructure to accommodate new Internet
developments and increased utilization of our network to maintain
and increase our ability to service new and existing customers; and
. expand our channels of distribution to increase our presence in our
target markets.
We may not be successful in meeting these challenges and addressing these
risks and uncertainties. If we are unable to do so, our business will not be
successful and the value of your investment in us will decline.
Although we have experienced growth in revenues in recent periods, this
growth rate may not be indicative of future operating results. We may never be
able to achieve or sustain profitability.
7
<PAGE>
Our operating results may fluctuate in future periods which may cause
volatility or a decline in the price of our stock.
Due to a variety of factors, we expect to experience significant
fluctuations in our future results of operations, and shortfalls in revenue may
cause significant variations in our operating results in any quarter. Such
fluctuations may cause the price of our stock to fall. Factors, many of which
are out of our control, that could cause our operating results to fluctuate and
our stock price to fall include:
. demand for and market acceptance of our products and services may
decline or fail to increase enough to offset our costs;
. introductions of new products and services or enhancements by us and
our competitors may increase our costs or make our existing products
or services obsolete;
. the prices we can charge our customers may decline due to price
competition with our competitors;
. utilization of our global network may increase beyond our capacity
and we may incur expenses to increase such capacity;
. continuity of our service and network availability could be
interrupted, reducing revenue;
. the availability and cost of bandwidth may reduce our ability to
increase bandwidth as necessary, reducing our revenue;
. the timing of customer installations and the timing of expansion of
our network infrastructure may vary from quarter to quarter;
. the mix of products and services we sell may change and the new mix
may generate less revenue;
. the timing and magnitude of our capital expenditures, including
costs relating to the expansion of operations may vary from quarter
to quarter;
. bandwidth used by customers may fluctuate from quarter to quarter
affecting our profits from such customers; and
. conditions specific to the Internet industry and other general
economic factors may affect the prices we can charge or the expenses
we incur.
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to telecommunications capacity,
depreciation, real estate and interest expenses and personnel, and therefore
our results of operations are particularly sensitive to fluctuations in
revenues. Due to the foregoing, we believe that period-to-period comparisons of
our operating results are not necessarily meaningful and that such comparisons
cannot be relied upon as indicators of future performance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quarterly Results of Operations."
We must offer services priced above the overall cost of bandwidth, and any
failure to do so would jeopardize our operating results.
If we do not obtain adequate bandwidth capacity on acceptable terms and
realize appropriate customer volume for such bandwidth, we will not achieve
positive gross profit, and our business and prospects will suffer. We purchase
our bandwidth capacity on a fixed-price basis in advance of the sale of our
services for such bandwidth. We sell our services, by contract, on the basis of
actual usage. Our bandwidth costs currently are exceeding our revenues from the
sale of services, which results in negative gross profit. In the future, we
must obtain enough bandwidth to meet our projected customer needs, and we must
realize adequate volume from our customers to support and justify such
bandwidth capacity and expense.
We expect that our cost to obtain bandwidth capacity for the transport of
data over our network will decline over time as a result of, among other
things, the large amount of capital currently being invested to
8
<PAGE>
build infrastructure providing additional bandwidth. We expect the prices we
charge for data transported over our network will also decline over time as a
result of, among other things, the lower cost of obtaining bandwidth and
existing and new competition in the markets we address. As a result, our
historical revenue rates are not indicative of future revenue based on
comparable traffic volumes. If we fail to accurately predict the decline in
costs of bandwidth or, in any event, if we are unable to sell our services at
acceptable prices relative to our bandwidth costs, or if we fail to offer
additional services from which we can derive additional revenues, our business
and prospects will suffer.
Our data replication (mirroring) and storage (caching) business is
attractive to customers primarily because these services eliminate a
significant portion of the cost of transporting data by deploying data in close
proximity to the end users. To the extent bandwidth costs decrease, the prices
we may charge for these services will decrease as well. If the cost of
bandwidth decreases in excess of our expectations, the value of these could be
substantially reduced, which would harm our business and prospects.
We must retain and expand our customer base or else we will continue to be
unprofitable.
We currently incur costs greater than our revenues, and need to increase
customer revenue in order to become profitable. We incur significant fixed
costs to purchase our bandwidth capacity and maintain our network. We also have
payroll and other working capital needs. If we are unable to retain or grow our
customer base, we will not be able to increase our sales and revenues or create
economies of scale to offset our fixed and other operating costs. Our ability
to attract new customers depends on a variety of factors, including:
. the willingness of businesses to outsource their Internet
operations;
. the reliability and cost-effectiveness of our services; and
. our ability to effectively market such services.
To attract new customers we intend to significantly increase our sales and
marketing expenditures. However, our efforts might not result in more sales as
a result of the following factors:
. we may be unsuccessful in implementing our marketing strategies;
. we may be unsuccessful in hiring a sufficient number of qualified
sales and marketing personnel; and
. any implemented strategies might not result in increased sales.
Any failure of our network infrastructure could lead to significant costs and
disruptions which could harm our business and prospects.
Our business is dependent on providing our customers with fast, efficient
and reliable network services. To meet these customer requirements we must
protect our network infrastructure against damage from:
. human error;
. fire;
. natural disasters;
. power loss;
. telecommunications failures; and
. similar events.
Despite precautions taken by us, the occurrence of a natural disaster or
other unanticipated problems at one or more of our data centers could result in
service interruptions or significant damage to equipment. We have experienced
temporary service interruptions in the past, and we could experience similar
interruptions in the future.
9
<PAGE>
Any failure of our telecommunications providers to provide required data
communications capacity to us could result in interruptions in our services.
Our operations are dependent upon data communications capacity provided by
third-party telecommunications providers. Any failure of such
telecommunications providers to provide the capacity we require may result in a
reduction in, or termination of, services to our customers. This could cause us
to lose customers or fees charged to such customers, and our business and
prospects could suffer.
Future customer warranty claims based on service failures could exceed our
insurance coverage.
Our customer contracts currently provide a limited service level warranty
related to the continuous availability of service on a 24 hours a day, seven
days per week basis, except for certain scheduled maintenance periods. This
warranty is generally limited to a credit consisting of free service for a
specified limited period of time for disruptions in Internet transmission
services. To date, we have had no material expense related to such service
level warranty. Should we incur significant obligations in connection with
system downtime, our liability insurance may not be adequate to cover such
expenses. Although our customer contracts typically provide for no recovery
with respect to incidental, punitive, indirect and consequential damages
resulting from damages to equipment or disruption of service, in the event of
such damages, we may be found liable, and, in such event, such damages may
exceed our liability insurance.
Our failure to make timely upgrades to increase the capacity of our network may
reduce demand for our services.
Due to the limited deployment of our services to date, the ability of our
network to connect and manage a substantially larger number of customers at
high transmission speeds is as yet unknown. Our network may not be able to be
scaled up to expected customer levels while maintaining superior performance or
that additional network capacity will be available from third-party suppliers
as it is needed by us. In addition, as customers' usage of bandwidth increases,
we will need to make additional investments in our infrastructure to maintain
adequate downstream data transmission speeds, the availability of which may be
limited or the cost of which may be significant. Upgrading our infrastructure
may cause delays or failures in our network. As a result, our network may be
unable to achieve or maintain a sufficiently high capacity of data transmission
as usage by our customers increases. Our failure to achieve or maintain high
capacity data transmission could significantly reduce demand for our services
and our business and prospects could suffer.
We cannot accurately predict the size of our market, and if our market does not
grow as we expect, our business prospects will suffer.
We are a new company engaging in a developing business with an unproven
market. Accordingly, we cannot accurately estimate the size of our market or
the potential demand for our services. If our customer base does not expand or
if there is not widespread acceptance of our products and our services, our
business and prospects will be harmed. For the six months ended March 31, 1999,
we had 48 billing customers, of which one, E*TRADE, accounted for approximately
16% of our revenues. We believe that our potential to grow and increase our
market acceptance depends principally on the following factors, some of which
are beyond our control:
. the effectiveness of our marketing strategy and efforts;
. our product and service differentiation and quality;
. the extent of our network coverage;
. our ability to provide timely, effective customer support;
. our distribution and pricing strategies as compared to our
competitors;
. our industry reputation; and
. general economic conditions such as downturns in the computer or
software markets.
10
<PAGE>
We will require significant additional capital, which we may not be able to
obtain.
We believe that our current capital resources, including the proceeds of
this offering, will be sufficient to meet our cash requirements for the next
twelve months. However, the expansion and development of our business will
require significant capital in the future to fund our operating losses, working
capital needs and capital expenditures. We may not be able to obtain future
equity or debt financing on satisfactory terms or at all. Our failure to
generate sufficient cash flows from sales of services or to raise sufficient
funds may require us to delay or abandon some or all of our development and
expansion plans or otherwise forego market opportunities. In addition, our
credit agreements contain covenants restricting our ability to incur further
indebtedness, and future borrowing instruments such as credit facilities and
lease agreements are likely to contain similar or more restrictive covenants
and will likely require us to pledge assets as security for borrowings
thereunder. Our inability to obtain additional capital on satisfactory terms
may delay or prevent the expansion of our business, which could cause our
business and prospects to suffer.
Our principal capital expenditures and lease payments include the purchase,
lease and installation of network equipment such as switches, routers, servers
and storage devices. Our working capital is primarily comprised of accounts
receivable, accounts payable and accrued expenses. The timing and amount of our
future capital requirements may vary significantly depending on numerous
factors, including regulatory, technological, competitive and other
developments in our industry. Due to the uncertainty of these factors, our
actual revenues and costs may vary from expected amounts, possibly to a
material degree, and such variations are likely to affect our future capital
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
Rapid growth in our business could strain our resources and harm our business
and prospects.
The planned expansion of our operations will place a significant strain on
our management, financial controls, operations systems, personnel and other
resources. We expect that our customers increasingly will demand additional
information and reports with respect to the services we provide. To handle
these demands and enable future traffic growth, we must develop and implement
an automated customer service system. In addition, if we are successful in
implementing our marketing strategy, we also expect the demands on our network
infrastructure and technical support resources to grow rapidly, and we may
experience difficulties responding to customer demand for our services and
providing technical support in accordance with our customers' expectations. We
expect that these demands will require not only the addition of new management
personnel, but also the development of additional expertise by existing
management personnel and the establishment of long-term relationships with
third-party service vendors. We may not be able to keep pace with any growth,
successfully implement and maintain our operational and financial systems or
successfully obtain, integrate and utilize the employees, facilities, third-
party vendors and equipment, or management, operational and financial resources
necessary to manage a developing and expanding business in our evolving and
increasingly competitive industry. If we are unable to manage growth
effectively, our business and prospects will suffer. See "Business--Business
Strategy."
We could lose customers and expose our company to liability if breaches of our
network security disrupt service to our customers or jeopardize the security of
confidential information stored in our computer systems.
Despite the implementation of network security measures, our network
infrastructure is vulnerable to computer viruses, break-ins and similar
disruptive problems caused by our customers or Internet users. Any of these
acts could lead to interruptions, delays or cessation in service to our
customers and subscribers. Furthermore, such inappropriate use of the network
by third parties could also potentially jeopardize the security of confidential
information stored in our computer systems and our customers computer systems,
which may result in liability to and may also deter potential customers.
Although we intend to continue to implement industry-standard security
measures, any measures we implement may be circumvented in the future. The
costs and resources required to eliminate computer viruses and alleviate other
security problems may result in interruptions or delays to our customers that
could cause our business and prospects to suffer.
11
<PAGE>
The integration of key new employees and officers into our management team has
and will continue to interfere with our operations.
We have recently hired a number of key employees and officers including our
Chief Financial Officer and Vice President of Sales, each of whom has been with
us for less than six months. To integrate into our company, such individuals
must spend a significant amount of time learning our business model and
management system, in addition to performing their regular duties. Accordingly,
the integration of new personnel has resulted and will continue to result in
some disruption to our ongoing operations. Our failure to complete this
integration in an efficient manner could harm our business and prospects.
We must retain and attract key employees or else we may not grow or be
successful.
We are highly dependent on key members of our management and engineering
staff, including, without limitation, our President and Chief Executive
Officer, Chief Technology Officer and Vice President of Marketing. The loss of
one or more of these officers might impede the achievement of our business
objectives. Furthermore, recruiting and retaining qualified technical personnel
to perform research, development and technical support work is critical to our
success. If our business grows, we will also need to recruit a significant
number of management, technical and other personnel for our business.
Competition for employees in our industry is intense. We may not be able to
continue to attract and retain skilled and experienced personnel on acceptable
terms. See "Business--Employees" and "Management."
We depend on a limited number of third party suppliers for key components of
our network infrastructure, and the loss of one or more suppliers may harm our
business.
We are dependent on other companies to supply key components of our
infrastructure, including bandwidth capacity leased from telecommunications
network providers and networking equipment that, in the quantities and quality
demanded by us, are available only from sole or limited sources. While we have
entered into various agreements for carrier line capacity, any failure to
obtain additional capacity, if required, would cause our business and prospects
to suffer. The routers and switches used in our infrastructure are currently
supplied primarily by Cisco Systems. We purchase these components pursuant to
purchase orders placed from time to time, we do not carry significant
inventories of these components and, we have no guaranteed supply arrangements
with this vendor. Any failure to obtain required products or services on a
timely basis and at an acceptable cost would cause our business and prospects
to suffer. In addition, any failure of our sole or limited source suppliers to
provide products or components that comply with evolving Internet and
telecommunications standards or that interoperate with other products or
components used by us in our communications infrastructure could cause our
business and prospects to suffer.
Our failure to adequately protect our proprietary rights may harm our
competitive position.
We rely on a combination of copyrights, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect proprietary
rights in our products and services. However, we will not be able to protect
our intellectual property if we are unable to enforce our rights or if we do
not detect unauthorized use of our intellectual property.
Although we have filed a patent application with respect to our TraceWare
technology with the United States Patent and Trademark Office, such application
is pending and we currently have no patented technology that would preclude or
inhibit competitors from entering our market. Moreover, none of our technology
is patented abroad, nor do we currently have any international patent
applications pending. We cannot be certain that any pending or future patent
applications will be granted, that any future patent will not be challenged,
invalidated or circumvented, or that rights granted under any patent that may
be issued will provide competitive advantages to us.
We have applied for trademarks and service marks on certain terms and
symbols that we believe are important for our business. In addition, we
generally enter into confidentiality or license agreements with our
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employees and consultant and with our customers and corporations with whom we
have strategic relationships, and we attempt to maintain control over access to
and distribution of our software documentation and other proprietary
information. However, the steps we have taken to protect our technology or
intellectual property may be inadequate. Our competitors may independently
develop technologies that are substantially equivalent or superior to ours.
Moreover, in other countries where we do business, there may not be effective
legal protection of patents and other proprietary rights that we believe are
important to our business. See "Business--Intellectual Property Rights."
If we are unable to license necessary technology, or are subject to
infringement claims by third parties, our business and prospects could suffer.
Our commercial success will also depend in part on our not infringing the
proprietary rights of others and not breaching technology licenses that cover
technology used in our products. It is uncertain whether any third party
patents will require us to develop alternative technology or to alter our
products or processes, obtain licenses or cease activities that infringe on
third party's intellectual property rights. If any such licenses are required,
we may not be able to obtain such licenses on commercially favorable terms, if
at all. Our failure to obtain a license to any technology that we may require
to commercialize our products and services could cause our business and
prospects to suffer. Litigation, which could result in substantial cost to us,
may also be necessary to enforce any patents issued or licensed to us or to
determine the scope and validity of third party proprietary rights. See
"Business--Intellectual Property Rights."
We are subject to risks associated with entering into joint ventures, including
inconsistent goals and exposure to unknown liabilities and unexpected
obligations.
Our strategy is to pursue international expansion through relationships and
joint ventures with local Internet service providers and telecommunications
carriers in other countries. We may not have a majority interest or control of
the governing body of any such local operating joint venture. In any such joint
venture in which we may participate, there will be a risk that the other joint
venture partner may at any time have economic, business or legal interests or
goals that are inconsistent with those of the joint venture or us. The risk
also will be present that a joint venture partner may be unable to meet its
economic or other obligations and that we may be required to fulfill those
obligations. In addition, in any joint venture in which we do not have a
majority interest, we may not have control over the operations or assets of
such joint venture. We may not be able to establish peering relationships or
joint ventures with local Internet service providers and telecommunications
carriers in other countries on favorable terms or at all. Our failure to
establish these relationships may cause our business and prospects to suffer.
Risks Related to Our Industry
We may not be able to compete effectively in our market since it is highly
competitive and has many more established competitors.
Our market is highly competitive and this competition could harm our ability
to sell our services and products on prices and terms favorable to us. There
are few substantial barriers to entry and we expect that we will face
additional competition from existing competitors and new market entrants in the
future. We compete against information technology and Internet outsourcing
firms, national and regional Internet service providers, and global, regional
and local telecommunications companies.
Our competitors include companies such as AboveNet Communications, Inc.,
AT&T Corp., Exodus Communications, Inc., GTE Corporation, MCI WorldCom, Inc.
and business units of Frontier GlobalCenter, Inc. Many of our competitors have
substantially greater financial, technical and marketing resources, larger
customer bases, longer operating histories, greater name recognition and more
established relationships in the industry than we do. Our larger competitors
may be able to provide customers with additional benefits in
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<PAGE>
connection with their Internet systems and network solutions, including reduced
communications costs. As a result, these companies may be able to price their
products and services more competitively than we can and respond more quickly
than us to new or emerging technologies and changes in customer requirements.
If we are unable to compete successfully against our current or future
competitors, we may lose market share, and our business and prospects would
suffer. See "Business--Competition."
Our market changes rapidly due to changing technology and evolving industry
standards. If we do not adapt to meet the sophisticated needs of our customers,
our business and prospects will suffer.
The market for our services is characterized by rapidly changing technology,
evolving industry standards and frequent new service introductions. Our future
success will depend to a substantial degree on our ability to offer services
that incorporate leading technology, address the increasingly sophisticated and
varied needs of our current and prospective customers and respond to
technological advances and emerging industry standards and practices on a
timely and cost-effective basis. You should be aware that:
. our technology or systems may become obsolete upon the introduction
of alternative technologies;
. we may not have sufficient resources to develop or acquire new
technologies or to introduce new services capable of competing with
future technologies or service offerings; and
. the price of the services provided by us is expected to decline as
rapidly as the cost of any competitive alternatives.
We may not be able to effectively respond to the technological requirements
of the changing market. To the extent we determine that new technologies and
equipment are required to remain competitive, the development, acquisition and
implementation of such technologies and equipment are likely to continue to
require significant capital investment by us. Sufficient capital may not be
available for this purpose in the future, and even if it is available,
investments in new technologies may not result in commercially viable
technological processes and there may not be commercial applications for such
technologies. However, if we do not develop and introduce new products and
services and achieve market acceptance in a timely manner, our business and
prospects may suffer.
Our business and prospects depend on demand for and market acceptance of the
Internet and its infrastructure development.
The increased use of the Internet for retrieving, sharing and transferring
information among businesses, consumers, suppliers and partners has only begun
to develop in recent years, and our success will depend in large part on
continued growth in the use of the Internet. Critical issues concerning the
commercial use of the Internet, including security, reliability, cost, ease of
access, quality of service, regulatory initiatives and necessary increases in
bandwidth availability, remain unresolved and are likely to affect the
development of the market for our services. The adoption of the Internet for
information retrieval and exchange, commerce and
communications generally will require the acceptance of a new medium of
conducting business and exchanging information. Demand for and market
acceptance of the Internet are subject to a high level of uncertainty and are
dependent on a number of factors, including:
. the growth in consumer access to and acceptance of new interactive
technologies;
. the development of technologies that facilitate interactive
communication between organizations; and
. increases in user bandwidth.
If the Internet as a commercial or business medium fails to develop or
develops more slowly than expected, our business and prospects would suffer.
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<PAGE>
Liability laws are unsettled in our industry and potential liability associated
with information disseminated through our network could harm our business and
prospects.
The law relating to the liability of online services companies and Internet
access providers for information carried on or disseminated through their
networks is currently unsettled. It is possible that claims could be made
against online services companies and Internet access providers under both
United States and foreign law for defamation, negligence, copyright or
trademark infringement, or other theories based on the nature of the data or
the content of the materials disseminated through their networks. Several
private lawsuits seeking to impose such liability upon online services
companies and Internet access providers are currently pending. In addition,
some countries, such as China, regulate or prohibit the transport of telephony
data in their territories. The imposition upon us and other Internet network
providers of potential liability for information carried on or disseminated
through their systems could require us to implement measures to reduce our
exposure to such liability, which may require the expenditure of substantial
resources, or to discontinue some of our service or product offerings. Our
ability to limit the types of data or content distributed through our network
is limited. Failure to comply with such regulation in a particular jurisdiction
could result in fines or penalties or the termination of our service in such
jurisdiction. The increased attention focused upon liability issues as a result
of these lawsuits and legislative proposals could impact the growth of Internet
use. Our professional liability insurance may not be adequate to compensate or
may not cover us in the event we become liable for information carried on or
disseminated through our networks. Any costs not covered by insurance incurred
as a result of such liability or asserted liability could harm our business and
prospects.
Risks associated with operating in international markets could restrict our
ability to expand globally and harm our business and prospects.
We market and sell our network services and products in the United States
and internationally. While we received no revenues from foreign sources in
fiscal year 1998, we are planning to establish additional operations and form
business partnerships in other parts of the world. However, we may not be able
to successfully market, sell, deliver and support our networking services and
products internationally. We presently conduct our international sales through
local subsidiaries in the United Kingdom and the Netherlands and through
distributor relationships with third parties in countries where have no
physical presence. Our failure to manage our international operations
effectively could limit the future growth of our business. There are certain
risks inherent in conducting business internationally, such as:
. changes in regulatory requirements;
. export restrictions, tariffs, differing regulatory regimes and other
trade barriers;
. challenges in staffing and managing foreign operations;
. differing technology standards;
. problems in collecting accounts receivable;
. political and economic instability;
. protectionist laws and business practices favoring local
competition; and
. potentially adverse tax consequences.
Any of these risks could harm our international operations. For example,
some European countries already have laws and regulations related to content
distributed on the Internet and technologies used on the Internet that are more
strict than those currently in force in the United States. Furthermore, there
is an on-going debate in Europe as to the regulation of certain technologies we
use, including caching and mirroring. The European Parliament has recently
adopted a directive relating to the reform of copyright in the European
Community which will, if made into law, restrict caching and mirroring. Any or
all of these factors could cause our business and prospects to suffer. In
addition, we may not be able to obtain the necessary telecommunications
infrastructure in a cost-effective manner or compete effectively in
international markets. See "Business--Business Strategy" and "--Government
Regulation."
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Our business may be adversely affected by foreign exchange fluctuations.
Although, to date, all of our customers have paid for our services in U.S.
dollars, we currently pay some of our suppliers in foreign currencies which
subjects us to currency fluctuation risks. For fiscal 1998 and the first six
months of fiscal 1999, costs denominated in foreign currencies were nominal and
we had no foreign currency losses during those periods. However, we believe
that in the future an increasing portion of our revenues and costs will be
denominated in foreign currencies. In particular, we expect that with the
introduction of the Euro, an increasing portion of our international sales may
be Euro-denominated. Fluctuations in the value of the Euro or other foreign
currencies may cause our business and prospects to suffer. We currently do not
engage in foreign exchange hedging activities and, although we have not yet
experienced any material losses due to foreign currency fluctuation, our
international revenues are currently subject to the risks of foreign currency
fluctuations and such risks will increase as our international revenues
increase.
Year 2000 computer complications could disrupt our operations and harm our
business.
Many currently installed computer systems are not able to distinguish 21st
century dates from 20th century dates. As a result, computer systems and
software that fail to recognize the proper date at the end of this year may
suffer major system failures or miscalculations. If we or our key third party
suppliers fail to achieve Year 2000 compliance, we may experience operating
difficulties, including impaired ability to transport data over our network and
impaired ability to bill for our services. We recognize the need to ensure that
our operations will not be adversely affected by Year 2000 software failures.
We are assessing the potential overall impact of the impending century change
on our business and prospects.
Based on our assessment to date, we believe the current versions of our
software products and services are Year 2000 compliant, that is, they are
capable of adequately distinguishing 21st century dates from 20th century
dates. However, our products are generally integrated into enterprise systems
involving sophisticated hardware and complex software products, which may not
be Year 2000 compliant. We may in the future be subject to claims based on Year
2000 problems in others' products, or issues arising from the integration of
multiple products within an overall system. Although we have not been a party
to any litigation or arbitration proceeding to date involving our products or
services and related to Year 2000 compliance issues, there can be no assurance
that we will not in the future be required to defend our products or services
in such proceedings, or to negotiate resolutions of claims based on Year 2000
issues. The costs of defending and resolving Year 2000-related disputes,
regardless of the merits of such disputes, and any potential liability on our
part for Year 2000-related damages, including consequential damages, could
cause our business and prospects to suffer. In addition, we believe that
purchasing patterns of customers and potential customers may be affected by
Year 2000 issues as companies expend significant resources to correct or
upgrade their current software systems for Year 2000 compliance. These
expenditures may reduce funds available to purchase software products such as
those offered by us. To the extent that Year 2000 issues cause significant
delay in, or cancellation of, decisions to purchase our products or services,
our business and prospects could suffer.
Thus far, we have not formulated a contingency plan should we or any of our
key third parties sustain business interruptions caused by Year 2000 problems.
We are reviewing our internal management information and other systems in order
to identify and modify any products, services or systems that are not Year 2000
compliant. To date, we have not encountered any material Year 2000 problems
with our computer systems or any other equipment which might be subject to
these problems. Our plan for the Year 2000 calls for compliance verification of
external vendors supplying software and information systems to us and
communication with significant suppliers to determine their ability to
remediate their own Year 2000 issues. As part of our assessment, we are
evaluating the level of validation we will require of third parties to ensure
their Year 2000 readiness. In the event that any of these third parties cannot
timely provide us with products, services or systems that meet the Year 2000
requirements, we may incur unexpected expenses to remedy any problems. These
expenses could potentially include purchasing replacement hardware or software.
In addition, our business and our ability to deliver our products and services
could be severely affected, at least for a certain period of time, in the event
that Year 2000 related problems were to cause disruption or failure in the
Internet
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<PAGE>
as a means of delivery of our products and services or more generally,
disruption to the infrastructure. The total cost of these Year 2000 compliance
activities has not been, and is not anticipated to be, material to our
business, results of operations and financial condition. These costs and the
timing in which we plan to complete our Year 2000 modification and testing
processes are based on our management's estimates. We may not be able to
remediate all significant Year 2000 problems on a timely basis. Our remediation
efforts may involve significant time and expense, and could cause our business
and prospects to suffer.
Government regulation and legal uncertainties could limit our business or slow
our growth.
Our services include the transmission of data over public telephone lines.
These transmissions are subject to the regulatory authority of the Federal
Communications Commission and the state public utility commissions. However, to
date, neither the FCC nor the state public utility commissions has elected to
exercise such authority. Our services could be affected by changes in federal
and state law or regulation in the telecommunications arena, especially changes
relating to telecommunications markets in general and the Internet in
particular. Such changes could directly or indirectly affect our costs, limit
usage or subscriber-related information, and increase the likelihood or scope
of competition from Regional Bell Operating Companies or other
telecommunications companies.
As our services become available over the Internet in foreign countries, and
as we facilitate sales by our customers to end users located in such foreign
countries, these foreign jurisdictions may decide that we are required to
qualify to do business in the particular foreign country. Such decisions could
subject us to taxes and other costs. It is also possible that claims could be
made against online service companies and Internet service providers under
foreign law for defamation, negligence, copyright or trademark infringement, or
other theories based on the nature and content of the materials disseminated
through their networks.
Implementation of any future changes in law or regulation, including those
discussed herein, could cause our business and prospects to suffer. Our
business and prospects may also be harmed by the imposition of certain tariffs,
duties and other import restrictions on facilities and resources that we obtain
from non-domestic suppliers. As a result, changes in law or regulation in the
United States or elsewhere could cause our business and prospects to suffer.
For a more detailed discussion of the possible risks associated with changes in
law or regulation, please see "Business--Government Regulation."
We have anti-takeover defenses that could delay or prevent a takeover that
stockholders may consider favorable.
Certain provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could have the effect of delaying, deferring or
preventing an acquisition of Digital Island. For example, our board of
directors is divided into three classes to serve staggered three-year terms, we
may authorize the issuance of up to 10,000,000 shares of "blank check"
preferred stock, our stockholders may not take actions by written consent and
our stockholders are limited in their ability to make proposals at stockholder
meetings. See "Description of Capital Stock" for a further discussion of these
provisions.
Risks Related to Our Offering
Our stock will likely be subject to substantial price and volume fluctuations
due to a number of factors, some of which are beyond our control.
Stock prices and trading volumes for many Internet companies fluctuate
widely for a number of reasons, including some reasons which may be unrelated
to their businesses or results of operations. This market volatility, as well
as general domestic or international economic, market and political conditions,
could materially adversely affect the price of our common stock without regard
to our operating performance. In addition, our operating results may be below
the expectations of public market analysts and investors. If this were to
occur, the market price of our common stock would likely significantly
decrease.
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<PAGE>
After this offering, our executive officers, directors, and their affiliates,
in the aggregate, will control 37% of our voting stock.
Our executive officers, directors and their affiliates own a large enough
stake in us to have an influence on the matters presented to stockholders. As a
result, these stockholders may have the ability to control all matters
requiring stockholder approval, including the election and removal of
directors, the approval of significant corporate transactions, such as any
merger, consolidation or sale of all or substantially all of Digital Island's
assets, and the control of the management and affairs of Digital Island.
Accordingly, such concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of Digital Island, impede a merger,
consolidation, takeover or other business combination involving Digital Island
or discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of Digital Island, which in turn could have an
adverse effect on the market price of Digital Island's common stock.
Shares eligible for future sale in the open market could depress our stock
price.
Sales of substantial amounts of our common stock (including shares issued
upon the exercise of outstanding options and warrants) in the public market
following this offering, or the appearance that a large number of shares is
available for sale, could depress the market price for our common stock. The
number of shares of common stock available for sale in the public market will
be limited by agreements under which the holders of substantially all of our
outstanding shares of common stock and options and warrants to purchase common
stock 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, subject to certain
consents and exceptions. Bear, Stearns & Co. Inc., may in its sole discretion
and at anytime without notice, release all or any portion of the shares subject
to such agreements. In addition to the adverse effect a price decline could
have on holders of our common stock, that decline would likely impede our
ability to raise capital through the issuance of additional shares of common
stock or other equity securities. In addition, the holders of 25,248,511
restricted shares of our stock are entitled to certain rights with respect to
registration of such shares for sale in the public market. If these holders
sell in the public market, such sales could have a material adverse effect on
the market price of our common stock. See "Shares Eligible for Future Sale" and
"Certain Transactions--Investors' Rights Agreement."
Our management will have broad discretion in allocating proceeds from this
offering, which it may not use effectively.
The net proceeds to us from this offering, after deducting underwriting
commissions and expenses payable by us, are estimated to be approximately $75.7
million. The primary purposes of this offering are to fund operating losses,
working capital needs and capital expenditures expected to be incurred in
connection with the execution of our business plan, including the expansion of
our operations. A portion of the net proceeds also may be used to repay
currently outstanding or future indebtedness, or to acquire or invest in
complementary businesses or products. Accordingly, our management will retain
broad discretion as to the allocation of most of the proceeds of this offering.
The failure of management to apply these funds effectively could negatively
impact our business and prospects. See "Use of Proceeds."
The liquidity of our common stock is uncertain since it has not been publicly
traded.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The initial public offering price will be
determined by negotiations between Digital Island and the representatives of
the Underwriters and may bear no relationship to the price at which the common
stock will trade upon completion of this offering. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.
We make many forward-looking statements in this prospectus, which depend on
factors outside our control and may turn out to be wrong.
Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and
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elsewhere in this prospectus include forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events, including, among other things,
. implementing our business strategy;
. obtaining and expanding market acceptance of the services we offer;
. forecasts of Internet and our market size and growth;
. predicting pricing trends in domestic and foreign telecommunications;
. meeting our requirements under key contracts; and
. competition in our market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions. These statements are based on our current beliefs, expectations
and assumptions and are subject to a number of risks and uncertainties. Actual
results and events may vary significantly from those discussed in the forward-
looking statements. A description of risks that could cause our results to vary
appears under the caption "Risk Factors" and elsewhere in this prospectus.
These forward-looking statements are made as of the date of this prospectus,
and we assume no obligation to update them or to explain the reasons why actual
results may differ. In light of these assumptions, risks and uncertainties, the
forward-looking events discussed in this prospectus might not occur.
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USE OF PROCEEDS
The net proceeds from this offering, at an assumed initial public offering
price of $11.00 per share, are estimated to be $75.7 million ($87.2 million if
the underwriters' over-allotment option is exercised in full), after deducting
estimated underwriting discounts and commissions and expenses payable by us. We
expect to use the net proceeds from this offering, together with existing cash,
to fund operating losses, working capital needs and up to approximately $15
million of capital expenditures expected to be incurred in connection with our
operations. Our management will retain broad discretion in the allocation of
such net proceeds. Although we may use a portion of the net proceeds to pursue
possible acquisitions of, or enter into joint ventures with respect to,
complementary businesses, technologies or products in the future, there are no
present understandings, commitments or agreements with respect to any such
acquisitions or joint ventures. Pending the use of such net proceeds, we intend
to invest these funds in short-term, investment grade securities.
DIVIDEND POLICY
We have not declared or paid any dividends since our inception and do not
intend to pay cash dividends on our capital stock in the foreseeable future. We
anticipate that we will retain all future earnings, if any, for use in our
operations and the expansion of our business. Our credit agreements restrict
our ability to declare or pay any dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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CAPITALIZATION
The following table sets forth, as of March 31, 1999:
. Our actual capitalization;
. Our pro forma capitalization, assuming the conversion of outstanding
shares of our convertible preferred stock into common stock and the
exercise of warrants to purchase 95,000 shares of our common stock;
and
. Our pro forma capitalization, as adjusted to give effect to the sale
of 7,500,000 shares of common stock offered by us in this offering
at an assumed initial public offering price of $11.00 per share,
after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us, and the application of
the estimated net proceeds from this offering.
This information should be read in conjunction with our consolidated
financial statements and the notes related thereto appearing elsewhere in this
prospectus. See "Use of Proceeds."
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------
(unaudited)
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Long-term obligations, less current portion.... $ 2,219 $ 2,219 $ 2,219
Stockholders' equity:
Convertible preferred stock, $0.001 par
value, Series A, Series B, Series C, Series
D and Series E, 30,000,000 shares
authorized, $86,894,973 aggregate
liquidation preference, 25,070,363 shares
issued and outstanding on an actual basis
and no shares issued and outstanding
pro forma and as adjusted................... 25 -- --
Preferred stock, $0.001 par value, 10,000,000
shares authorized; no shares issued and
outstanding on an actual and pro forma basis
and as adjusted............................. -- -- --
Common stock, $0.001 par value, 40,000,000
shares authorized, 2,622,225 shares issued
and outstanding on an actual basis and
27,965,736 issued and outstanding on a pro
forma basis; $0.001 par value, 100,000,000
shares authorized, 35,465,736 shares issued
and outstanding on an as adjusted basis .... 3 28 35
Stockholder note receivable.................. (110) (110) (110)
Common stock warrants........................ 29 -- --
Additional paid-in capital................... 90,168 90,207 165,925
Deferred compensation........................ (4,969) (4,969) (4,969)
Accumulated deficit.......................... (35,997) (35,997) (35,997)
-------- -------- ---------
Total stockholders' equity................. 49,149 49,159 124,884
-------- -------- ---------
Total capitalization....................... $ 51,368 $ 51,378 $ 127,103
======== ======== =========
</TABLE>
The table above excludes 4,218,839 shares of common stock issuable upon
exercise of options outstanding with a weighted average exercise price of $2.13
per share and 7,544,000 shares reserved for future issuances under our 1999
stock incentive plan. See "Executive Compensation and Other Information--
Employee Benefit Plans."
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DILUTION
Our net tangible book value as of March 31, 1999 was approximately $49.1
million, or $1.76 per share of common stock. Net tangible book value per share
is calculated by subtracting our total liabilities from our total tangible
assets, which equals total assets less intangible assets, and dividing this
amount by the number of shares of common stock outstanding as of March 31,
1999. Assuming the sale by us of 7,500,000 shares of common stock offered in
this offering at an assumed initial public offering price of $11.00 per share
and the application of the estimated net proceeds from this offering, our net
tangible book value as of March 31, 1999 would be $124.9 million, or $3.52 per
share of common stock. Assuming completion of this offering, there will be an
immediate increase in the net tangible book value of $1.76 per share to our
existing stockholders and an immediate dilution in the net tangible book value
of $7.48 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $11.00
Pro forma net tangible book value per share as of March 31,
1999....................................................... $1.76
Pro forma increase attributable to new investors............ $1.76
-----
Pro forma net tangible book value per share after the
offering..................................................... $ 3.52
------
Pro forma dilution per share to new investors................. $ 7.48
======
</TABLE>
The following table summarizes the total number of shares of common stock
purchased from us, the total consideration paid to us and the average price per
share paid by existing stockholders and by new investors, in each case based
upon the number of shares of common stock outstanding as of March 31, 1999.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 27,965,736 78.8% $ 84,719,867 50.7% $ 3.03
New investors........... 7,500,000 21.2% $ 82,500,000 49.3% $11.00
---------- ---- ------------ ----
Total................. 35,465,736 100% $167,219,867 100%
========== ==== ============ ====
</TABLE>
If the underwriters' over-allotment is exercised in full, the number of
shares of common stock held by existing stockholders will be reduced to 76.4%
of the total number of shares of common stock to be outstanding after this
offering, and will increase the number of shares of common stock held by the
new investors to 8,625,000, or 23.6% of the total number of shares of common
stock to be outstanding immediately after this offering. See "Principal
Stockholders."
The tables and calculations above assume no exercise of outstanding options.
At March 31, 1999, there were 4,218,839 shares of common stock issuable upon
exercise of options outstanding with a weighted average exercise price of $2.13
per share and 7,544,000 shares reserved for future issuance under our 1999
Stock Incentive Plan. To the extent that these options are exercised, there
will be further dilution to new investors. See "Executive Compensation and
Other Information--Employee Benefit Plans."
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statement of operations
data for each of the years in the three-year period ended September 30, 1998
and the balance sheet data at September 30, 1997 and 1998, are derived from our
financial statements that have been audited by PricewaterhouseCoopers LLP,
independent accountants, included elsewhere in this prospectus. The statement
of operations data for the period ended September 30, 1994 and the year ended
September 30, 1995 and the balance sheet data at September 30, 1994, 1995 and
1996, are derived from our audited financial statements that are not included
in this prospectus. The statement of operations data for the six months ended
March 31, 1998 and 1999, and the balance sheet data at March 31, 1999, are
derived from our unaudited financial statements included elsewhere in this
prospectus. We did not begin offering our global network services until January
1997; prior to such time, we were engaged in activities unrelated to our
current operations. Accordingly, our results of operations prior to 1997 are
not comparable to our results of operations for 1997 or any subsequent periods.
<TABLE>
<CAPTION>
Period from Six Months Ended
inception to Years Ended September 30, March 31,
September 30, -------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
------------- ------- ------- --------- --------- --------- ---------
(in thousands, except per share
data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ -- $ -- $ -- $ 218 $ 2,343 $ 691 $ 3,795
Costs and expenses:
Cost of revenue........ -- -- -- 2,508 9,039 4,026 7,750
Sales and marketing.... -- -- -- 1,205 4,847 1,787 5,171
Product development.... -- -- -- 378 1,694 571 2,010
General and
administrative........ 33 7 26 1,502 3,392 1,164 2,963
Stock compensation
expense............... -- -- -- -- -- -- 516
------- ------- ------- --------- --------- --------- ---------
Total cost and
expenses............. 33 7 26 5,594 18,971 7,547 18,410
------- ------- ------- --------- --------- --------- ---------
Loss from operations.... (33) (7) (26) (5,376) (16,629) (6,856) (14,615)
Interest income
(expense), net......... -- (2) (1) 87 353 64 257
------- ------- ------- --------- --------- --------- ---------
Loss before income
taxes.................. (33) (9) (26) (5,288) (16,275) (6,792) (14,358)
Provision for income
taxes.................. -- 1 1 1 2 1 2
------- ------- ------- --------- --------- --------- ---------
Net loss................ $ (33) $ (10) $ (27) $ (5,289) $ (16,277) $ (6,793) $ (14,360)
======= ======= ======= ========= ========= ========= =========
Basic and diluted loss
per share(1)........... $ (0.12) $ (0.04) $ (0.10) $ (3.53) $ (7.28) $ (3.07) $ (6.07)
======= ======= ======= ========= ========= ========= =========
Shares used in basic and
diluted loss per
share(1)............... 275,000 275,000 275,000 1,497,711 2,236,452 2,215,875 2,366,951
Other Data:
Depreciation and
amortization........... -- -- -- $ 158 $ 811 $ 293 $ 924
Capital
expenditures(2)........ -- -- $ 2 $ 2,128 $ 3,640 $ 412 $ 3,024
</TABLE>
<TABLE>
<CAPTION>
September 30,
----------------------------- March 31,
1994 1995 1996 1997 1998 1999
---- ---- ---- ------ ------- -----------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........... $ 20 $ 7 $344 $4,584 $ 5,711 $29,751
Investments......................... -- -- -- 1,983 10,123 20,915
Working capital..................... 10 5 76 4,613 12,883 44,010
Total assets........................ 102 93 432 9,223 22,617 62,359
Long-term obligations, including
current portion.................... -- -- -- 705 3,992 4,039
Total stockholders' equity.......... $ 92 $86 $ 84 $6,265 $15,490 $49,149
</TABLE>
- ----------
(1) See notes 2 and 9 of the notes to our consolidated financial statements for
the determination of shares used in computing basic and diluted loss per
share.
(2) Capital expenditures represent purchases of property and equipment,
including non-cash transactions such as the acquisition of equipment under
capital leases.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Digital Island should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ from those anticipated
in these forward-looking statements as a result of various factors including
but not limited to, those discussed in "Risk Factors," "Business" and elsewhere
in this prospectus.
Overview
We offer a global network and related services for companies that are using
the Internet to deploy key business applications worldwide. We target
corporations that are increasingly relying on the Internet to conduct business
but are constrained by the unreliability, slow performance and limited range of
functions of the public Internet. The Digital Island Global IP Applications
Network and our services enable customers to effectively deploy and manage
global Internet applications by combining the reliability, performance and
broad range of functions of private intranets with the global access of the
public Internet. We also offer service level guarantees, customized billing,
security services, network management and other application services designed
to improve the performance of applications deployed on our network.
We did not begin offering our Global IP Applications Network services until
January 1997; prior to such time we were engaged in activities unrelated to our
current operations and, accordingly, comparisons for the periods ended
September 30, 1997 and 1996 are not meaningful and have not been made. Since
inception, we have incurred net losses and experienced negative cash flow from
operations. We expect to continue to operate at a net loss and to experience
negative cash flows at least through the year 2000. Our ability to achieve
profitability and positive cash flow from operations will be dependent upon our
ability to grow our revenues substantially and achieve other operating
efficiencies.
We derive our revenues from a family of services, which include Application
Hosting and Content Distribution Services, consisting of server management,
hardware management and co-location services, and Network Services, consisting
of the sale of open, reserved and managed bandwidth. We currently sell our
services under contracts having terms of one or more years.
Cost of revenues consists primarily of the cost of contracting for lines
from telecommunication providers worldwide and, to a lesser extent, the cost of
our network operations. We lease lines under contracts of one year or more. The
leasing of transoceanic lines comprises the largest component of our
telecommunications expense, with additional costs arising from leasing local
circuits between our data centers and points of presence in the United States
and international markets. In the future, we expect to increase the size and
number of circuits leased based on increases in network volume and geographic
expansion. The cost of our network operations is comprised primarily of data
centers, equipment maintenance, personnel and related costs associated with the
management and maintenance of the network.
Some options granted and common stock issued during the six months ended
March 31, 1999 have been considered to be compensation. Total stock
compensation expense associated with such equity transactions as of March 31,
1999 amounted to $5.5 million. These amounts are being amortized over the
vesting periods of such securities. Of the total stock compensation expense,
$516,000 was amortized in the six months ended March 31, 1999. We expect
amortization of $2.3 million and $1.8 million in the years ending September 30,
1999 and 2000, respectively, relating to these grants.
Six Months Ended March 31, 1999 and 1998
Revenue. Revenue increased to $3.8 million for the six months ended March
31, 1999 from $0.7 million for the six months ended March 31, 1998. The
increase in revenue was due primarily to an increase in the number of billing
customers from 16 to 48.
24
<PAGE>
Cost of Revenue. Cost of revenue increased to $7.7 million for the six
months ended March 31, 1999 from $4.0 million for the six months ended March
31, 1998. The increase in cost of revenue was due to $3.3 million of spending
for additional network capacity as well as $0.4 million in recruitment and
compensation costs relating to the addition of network operations personnel. We
anticipate that our cost of revenue will grow significantly in future periods
in order to accommodate planned increases in the number of customers and
increased usage by existing customers.
Sales and Marketing. Sales and marketing expenses consist primarily of
staffing and marketing personnel and marketing programs, salespeople, sales
engineering, customer service personnel and administrative personnel. Sales and
marketing expenses increased to $5.2 million for the six months ended March 31,
1999 from $1.8 million for the six months ended March 31, 1998. This increase
was due to $3.2 million of recruitment and compensation expense relating to the
addition of sales and marketing personnel and $0.2 million of program and other
expenses, including new collateral, competitive analysis and partnering
programs. We expect sales and marketing expenses to increase in future periods.
Product Development. Product development expenses consist primarily of costs
associated with personnel and related costs and those costs associated with new
product introductions. Product development expenses increased to $2.0 million
for the six months ended March 31, 1999 from $0.6 million for the six month
period ended March 31, 1998. This increase was due primarily to $1.3 million of
growth in personnel and $0.1 million in related costs arising from new product
initiatives including TraceWare, mirroring and caching. We expect product
development expenses to increase in future periods.
General and Administrative. General and administrative expenses consist of
personnel related expenses and other costs associated with office facilities,
professional services and other administrative related expenses. General and
administrative expenses increased to $3.0 million for the six months ended
March 31, 1999 from $1.2 million for the six months ended March 31, 1998. This
increase was due to $0.8 million of growth in personnel and related expenses,
$0.6 million of depreciation of network equipment and $0.4 million of office
facility expenses, legal and accounting fees and other administrative related
expenses. We expect general and administrative expenses to increase in future
periods to support expected growth in future revenues and costs related to
being a public company.
Interest Income, net. Interest income, net, includes interest income from
our cash and cash equivalents, and investments. Interest expense relates to our
financing obligations, including bank borrowings and borrowings associated with
equipment leasing. Interest income, net, increased to $257,000 for the six
months ended March 31, 1999 from $64,000 for the six months ended March 31,
1998. This increase was due to a higher average cash balance as a result of the
proceeds of the issuance of shares of our preferred stock.
Provision for Income Taxes. Digital Island has had net operating losses for
every period through March 31, 1999. We may not be able to utilize all or any
of these tax loss carry-forwards as a result of this offering and prior
financings. We have not recognized a provision for income taxes due to the
uncertainty surrounding the realization of the favorable tax attributes in
future tax returns and we have placed a valuation allowance against our net
deferred tax assets.
Fiscal Years Ended September 30, 1998 and 1997
We did not begin offering our Global IP Applications Network services until
January 1997; prior to such time we were engaged in activities unrelated to our
current operations. Additionally, during the periods prior to January 1997, we
had no revenues and our operating expenses, although not material, consisted of
general and administrative expenses associated with an unrelated technology
business venture. Accordingly, our results of operations prior to 1997 are not
comparable to our results of operations for 1997 or any subsequent periods, and
comparisons to periods prior to 1997 have not been made.
Revenue. Revenue increased to $2.3 million for the year ended September 30,
1998 from $0.2 million for the year ended September 30, 1997. The increase in
revenue was due primarily to an increase in the number of billing customers
from 31 to 48.
25
<PAGE>
Cost of Revenue. Cost of revenue increased to $9.0 million for the year
ended September 30, 1998 from $2.5 million for the year ended September 30,
1997. The increase in cost of revenue was due to $5.7 million of spending for
additional network capacity and $0.8 million in recruitment and compensation
costs relating to the addition of network operations personnel.
Sales and Marketing. Sales and marketing expenses increased to $4.8 million
for the year ended September 30, 1998 from $1.2 million for the year ended
September 30, 1997. This increase was due to $3.1 million of growth in
personnel and related costs and $0.5 million of program expenses.
Product Development. Product development expenses increased to $1.7 million
for the year ended September 30, 1998 from $0.4 million for the year ended
September 30, 1997. This increase was due primarily to $1.2 million in growth
of personnel and related costs and $0.1 million of costs arising from new
product initiatives, including TraceWare, mirroring and caching technologies.
General and Administrative. General and administrative expenses increased to
$3.4 million for the year ended September 30, 1998 from $1.5 million for the
year ended September 30, 1997. This increase was due to $0.7 million of
depreciation of network equipment, $0.7 million of growth in personnel and
related expenses, and $0.5 million office facility expenses, legal and
accounting fees and other administrative related expenses.
Interest Income, net. Interest income, net, increased to $353,000 for the
year ended September 30, 1998 from $87,000 for the year ended September 30,
1997. This increase was due to a higher average cash balance as a result of the
proceeds of the issuance of shares of our preferred stock.
Quarterly Results of Operations
The following tables set forth certain unaudited statements of operations
data for the six quarters ended March 31, 1999. This data has been derived from
the unaudited interim financial statements prepared on the same basis as the
audited consolidated financial statements contained in this prospectus, and in
the opinion of management include, all adjustments consisting only of normal
recurring adjustments that we consider necessary for a fair presentation of
such information when read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this prospectus. The
operating results for any quarter should not be considered indicative of
results of any future period.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------
(unaudited)
Mar.
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, 31,
1997 1998 1998 1998 1998 1999
-------- -------- -------- --------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 277 $ 414 $ 725 $ 927 $ 1,385 $ 2,411
Costs and expenses:
Cost of revenue....... 1,961 2,065 2,267 2,746 2,923 4,827
Sales and marketing... 860 927 1,296 1,764 2,046 3,125
Product development... 214 357 538 585 843 1,167
General and
administrative....... 531 632 902 1,326 1,260 1,703
Stock compensation
expense.............. -- -- -- -- 61 455
------- ------- ------- ------- ------- -------
Total cost and
expenses........... 3,566 3,981 5,003 6,421 7,133 11,277
Loss from operations.... (3,289) (3,567) (4,278) (5,494) (5,748) (8,866)
Interest income
(expense), net......... 45 19 123 166 96 160
------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (3,244) (3,548) (4,155) (5,328) (5,652) (8,706)
Provision for income
taxes.................. -- 1 -- 1 2 --
------- ------- ------- ------- ------- -------
Net loss................ $(3,244) $(3,549) $(4,155) $(5,329) $(5,654) $(8,706)
======= ======= ======= ======= ======= =======
</TABLE>
26
<PAGE>
We expect to experience significant fluctuations in our future results of
operations due to a variety of factors, many of which are outside of our
control, including:
. demand for and market acceptance of our products and services may
decline or fail to increase enough to offset our costs;
. introductions of new products and services or enhancements by us and
our competitors may increase our costs or make our existing products
or services obsolete;
. the prices we can charge our customers may decline due to price
competition with our competitors;
. utilization of our global network may increase beyond our capacity
and we may incur expenses to increase such capacity;
. continuity of our service and network availability could be
interrupted, reducing revenue;
. the availability and cost of bandwidth may reduce our ability to
increase bandwidth as necessary, reducing our revenue;
. the timing of customer installations and the timing of expansion of
our network infrastructure may vary from quarter to quarter;
. the mix of products and services we sell may change and the new mix
may generate less revenue;
. the timing and magnitude of our capital expenditures, including
costs relating to the expansion of operations may vary from quarter
to quarter;
. bandwidth used by customers may fluctuate from quarter to quarter
affecting our profits from such customers; and
. conditions specific to the Internet industry and other general
economic factors may affect the prices we can charge or the expenses
we incur.
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to telecommunications capacity,
depreciation, real estate and interest expenses and personnel, and therefore
our results of operations are particularly sensitive to fluctuations in
revenues. Due to the foregoing factors, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful and that
such comparisons cannot be relied upon as indicators of future performance.
Liquidity and Capital Resources
From inception through March 31, 1999, we financed our operations primarily
through private equity placements of $86.9 million dollars and borrowings under
notes payable and capital leases from financial institutions of $5.7 million.
At March 31, 1999, we had an accumulated deficit of $36.0 million and cash and
cash equivalents and short-term investments of $50.7 million.
Net cash used in our operating activities for the six months ended March 31,
1999 was $10.4 million. The net cash used by operations was primarily due to
working capital requirements and net losses, offset by increases in accounts
payable and accrued expenses. Net cash used in investing activities was $12.9
million for the period ended March 31, 1999 and is comprised of equipment
purchases of $2.3 million and investments of $10.6 million in commercial paper
with maturities of less than one year. Net cash provided by financing
activities was $47.3 million and is related primarily to the issuance of our
Series E Preferred Stock, as well as net borrowing under our bank and leasing
lines of credit.
We have a $750,000 revolving line of credit with a commercial bank for the
purpose of financing equipment purchases. As of March 31, 1999, $451,000 was
outstanding thereunder. The loan contains standard
27
<PAGE>
covenants including minimum working capital, minimum tangible net worth, debt
to equity ratio and financial reporting requirements. Interest on borrowings
thereunder accrues at the lender's prime rate plus 0.75% (which was 8.5% at
March 31, 1999), and is payable monthly. No further advances were permitted
following October 18, 1997, and any outstanding amounts are payable on or
before October 18, 2000.
We also have a $7.5 million line of credit with a commercial bank,
consisting of a revolving credit facility of up to $5 million and other
facilities of up to $2.5 million. As of March 31, 1999, approximately $230,000
was outstanding under the revolving credit facility, and approximately $718,000
was outstanding under equipment loan facilities. No further amounts may be
borrowed under the equipment loan facilities. Advances under the line of credit
are limited to a percentage of our recurring contract revenue. The loan
contains standard covenants, including minimum working capital, minimum
tangible net worth, debt to equity ratio and financial reporting requirements.
Interest on borrowings thereunder accrues at the lender's prime rate plus 0.25%
(which was 8.00% at March 31, 1999), and is payable monthly. Under the terms of
the equipment loan facilities, interest is charged at the lender's prime rate
plus 0.75%, which was 8.5% at March 31, 1999. The loans mature at various times
in 2001. Between October 1, 1998 and January 31, 1999, we did not comply with
the minimum tangible net worth and financial reporting covenants. However, we
obtained waivers for all covenant violations. We have complied with all
covenants since January 31, 1999. Additionally, we have two lease lines of
credit totaling $4.4 million for equipment purchased. Total borrowings under
these two lease lines of credit were $2.6 million at March 31, 1999.
We believe that the estimated net proceeds from this offering, together with
our existing cash and funds available under our existing credit facilities,
will be sufficient to fund our operating losses, working capital needs and
capital expenditures, for at least the next 12 months. The execution of our
business plan will require substantial additional capital to fund our operating
losses, working capital needs, sales and marketing expenses, lease payments and
capital expenditures thereafter. While we currently have no material
commitments for capital expenditures, we anticipate making up to approximately
$15.0 million of capital expenditures for network expansion, facilities and
personnel related costs in the next 12 months. We intend to continue to
consider our future financing alternatives, which may include the incurrence of
indebtedness, additional public or private equity offerings or an equity
investment by a strategic partner. Actual capital requirements may vary based
upon the timing and success of the expansion of our operations. Our capital
requirements may change based upon technological and competitive developments.
In addition, several factors may affect our capital requirements:
. demand for our services or our anticipated cash flow from operations
being less than expected;
. our development plans or projections proving to be inaccurate;
. our engaging in acquisitions or other strategic transactions; or
. our accelerating deployment of our network services or otherwise
altering the schedule of our expansion plan.
Other than the current bank note payable and lease financing, we have no
present commitments or arrangements assuring us of any future equity or debt
financing, and there can be no assurance that any such equity or debt financing
will be available to us on favorable terms, or at all. If we do not obtain
additional financing, we believe that our existing cash resources will be
adequate to continue expanding operations on a reduced scale.
Recent Accounting Pronouncements
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires computer software
costs related to internal software that are incurred in the preliminary project
stage should be expensed as incurred. Once the capitalization criteria of SOP
98-1 have been met, external direct costs of materials and services consumed in
developing or obtaining internal-use computer software; payroll and payroll-
related costs for
28
<PAGE>
employees who are directly associated with and who devote time to the internal-
use computer software project (to the extent of the time spent directly on the
project); and interest costs incurred when developing computer software for
internal use should be capitalized. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. Accordingly, we
will adopt SOP 98-1 in our consolidated financial statements for the year
ending September 30, 2000.
On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities", which provides guidance on the financial reporting of
start-up costs and organization costs. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December
15, 1998. As we have not capitalized such costs, the adoption of SOP 98-5 is
not expected to have a material impact on our consolidated financial
statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. We do not believe the adoption of
SFAS 133 will have a material effect on our consolidated results of operations
or financial condition.
Year 2000 Compliance
Many currently installed computer systems are not able to distinguish 21st
century dates from 20th century dates. As a result, in less than one year,
computer systems and software used by many companies and organizations in a
wide variety of industries (including technology, transportation, utilities,
finance, telecommunications, among others) will experience operating
difficulties unless they are adequately modified or upgraded to process
information related to the century change.
We recognize the need to ensure that our operations will not be adversely
affected by Year 2000 software failures. We are reviewing our internal
management information and other systems in order to identify and modify any
products, services or systems that are not Year 2000 compliant. To date, we
have not encountered any material Year 2000 problems with our computer systems
or any other equipment which might be subject to these problems.
We have made inquiries of our vendors of software and information systems
regarding their own Year 2000 readiness. Although we have received various
assurances, we have not received affirmative documentation of Year 2000
compliance from any of these vendors and we have not performed any operational
tests on our internal systems. As part of our assessment, we are evaluating the
level of validation we will require of third parties to ensure their Year 2000
readiness. In the event that any of these third parties cannot timely provide
us with products, services or systems that meet the Year 2000 requirements, we
may not be able to find alternative suppliers and our business and prospects
may suffer.
We anticipate that our review of Year 2000 issues and any remediation
efforts will continue throughout calendar 1999. The total cost of our Year 2000
compliance activities has not been, and is not anticipated to be, material to
our business, results of operations and financial condition. Our view is based
on a number of assumptions, including the assumption that we have already
identified our most significant Year 2000 issues. However, these assumptions
may not be accurate, and actual results could differ materially from those
anticipated. In view of our Year 2000 review and remediation efforts to date,
we do not consider contingency planning to be necessary at this time. However,
the cost of developing and implementing such a plan, if necessary, could be
material. See "Risk Factors--Year 2000 computer complications could disrupt our
operations and harm our business" and "Risk Factors--We depend on a limited
number of third party suppliers for key components of our network
infrastructure and the loss of one or more suppliers may harm our business."
29
<PAGE>
BUSINESS
Overview
We offer a global network and related services for companies that are using
the Internet to deploy key business applications worldwide. Our services make
it easier for companies to globalize their operation and to provide a higher
quality of service and more functions than in the public Internet. We target
corporations that are increasingly relying on the Internet to conduct business
but are constrained by its unrealiability, slow performance and limited range
of functions. Our global private network and expert services enable customers
to effectively deploy and manage global applications by combining the
reliability, performance and broad range of functions available in private
intranets operated by individual companies for their own users, with the global
access of the public Internet. We also offer service level guarantees,
customized billing, security services to protect the integrity of data
transmissions, network management and other high quality services designed to
improve the applications deployed on our network. Our customers, which include
multinational corporations such as Autodesk, Cisco Systems, E*TRADE Group and
National Semiconductor, use our services and proprietary technology to
facilitate the deployment of a wide variety of applications, including
electronic commerce, online customer service, software, document and multimedia
distribution, sales force automation and online training. As of March 31, 1999,
we had contracts with 62 customers, of which 48 were deployed and generating
revenues.
We developed our global network to help companies globalize their
applications. We operate Web sites and Internet applications, manage computer
servers and maintain networking equipment for our customers in our state-of-
the-art network data centers, and provide network management expertise to our
customers for their own network data centers. The business applications
delivered through our network services are accessed globally in the same way as
any Web site, but with a significant difference: these business applications
are highly available and are designed to operate substantially faster and with
a greater range of functions than sites that rely solely on the public
Internet.
Our global private network consists of a centralized high-speed network
which acts as a backbone connecting four strategically located data centers in
Honolulu, London, New York City and Santa Clara, California. This core network
architecture connects over dedicated lines directly to local Internet service
providers in 18 countries. This enables our customers to transmit Internet
traffic seamlessly over our network with dedicated capacity and to connect
directly to international users through local Internet service providers. We
also help our customers distribute content over the Internet by mirroring
(replicating) and caching (storing) their applications in multiple locations
close to their end-users. This allows our customers to benefit from the lower
overall cost of data storage versus transport and to provide a better online
experience for their end-users. For example, Digital Island Local Content
Managers enable us to help customers readily store files which are repeatedly
accessed in specific geographic regions.
We offer a variety of services that allow customers to benefit from the
Digital Island global private network. We manage computer servers, maintain Web
sites and Internet applications for our customers in our four network data
centers, and offer a range of data transport options which allow customers to
reserve network capacity consistent with their expected network usage on
request. These services are designed to allow customers to outsource Internet
activities to us, thereby transferring to us the burden of attracting and
retaining scarce technical staff and adopting continuously changing
technologies, while lowering their operating costs and speeding deployment.
Industry Background
The Internet continues to experience rapid growth and expansion as an
important global medium for communications and electronic business.
International Data Corporation, known as IDC, has estimated that the total
number of Internet users in the world reached approximately 69 million in 1997
and will increase to approximately 319 million in 2002, a 36% compound annual
growth rate. As the numbers of Internet users has grown, enterprises have
increasingly viewed the Internet as an opportunity to interact rapidly with a
larger
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number of geographically distributed offices, employees, customers, suppliers
and partners. Many enterprises that focus solely on delivering services over
the Internet have emerged as well as offline businesses that have implemented
Internet sites incorporating e-commerce applications. As the Internet has
emerged as a strategic component of business, investment in Internet services
has begun to increase dramatically. According to IDC, the demand for U.S.
Internet and e-commerce services was $2.9 billion in 1997 and is expected to
grow to $22.1 billion by 2002, a 50% compound annual growth rate. In addition,
demand for data transport services is growing rapidly as evidenced by IDC's
estimate that Internet service providers' corporate access revenues are
expected to grow from $2.9 billion in 1998 to $12.0 billion by 2003, a 33%
compound annual growth rate.
Increasing Reliance on Internet Business Applications. As use of the
Internet grows, enterprises are increasing the breadth and depth of their
Internet product and service offerings. Businesses have begun to use the
Internet for an expanding variety of commercial applications, including
customer service, electronic sales, software and multimedia document
distribution, sales force automation and distance learning. For many
enterprises, loss of the availability of such business-critical applications
often results in loss of revenue and impairment of customer good will. As a
result, enterprises are increasingly demanding that their networks deliver
consistent, fast global performance, remain easy to upgrade as the scale and
complexity of applications grows and technologies change, operate continuously
24 hours per day, seven days per week, and offer the applications support and
functionality (e.g. security, user location, identification and usage patterns)
previously provided only in wide area networks.
Inherent Problems with the Internet/Need for a Robust Global Solution. The
public Internet infrastructure was designed for applications requiring limited
communications bandwidth capacity and was not designed with the quality
necessary for core business uses such as electronic commerce. For enterprises
requiring global solutions, the U.S.-centric nature of the public Internet
results in poor response times, particularly for applications requiring large
file transfers, instantaneous interaction between networked users and overseas
transport. This occurs because data transmittal between countries must travel
through telecommunications lines in the U.S. where the Internet originated and
where most of its infrastructure is still located, and make a large number of
connections through various regional and national Internet service providers
before reaching its destination. Data packets often become lost in the transfer
process, especially for data-intensive transfers involving large software
downloads, multimedia document distribution and audio or video content. The
response time for users is also often slow.
Trend Toward Outsourcing of Internet Operations. In seeking to address the
performance issues of the public Internet, enterprises have increasingly found
that investing in the resources and personnel required to maintain in-house
private networks is cost-prohibitive and extremely difficult given the shortage
of technical talent and risk of technological obsolescence. With the failure of
in-house solutions to address their needs, today's enterprises have
increasingly sought third party providers to support their Internet
applications deployment, operations and ongoing maintenance. Regional and
national Internet service providers, however, often fail to provide an adequate
solution because they lack the geographically distributed network capability
necessary to deliver content globally using replication and caching
technologies, which are becoming increasingly important as the Internet usage
and bandwidth demand increase. IDC estimates that corporate spending on web
hosting services will increase from approximately $414 million in 1997 to $11.8
billion by 2002, a 95% compound annual growth rate. Enterprises are
increasingly seeking companies that combine hosting services and geographically
dispersed data centers that deploy the enterprise's applications closer to the
end-user to provide value-added solutions.
The Digital Island Solution
Digital Island offers a global private network and related services for
companies that need worldwide deployment of key business applications over the
Internet. Our solution provides the following key advantages:
Global Connectivity and Availability. The Digital Island Global IP
Applications Network currently has connection point in 18 countries in Asia,
Europe, North America, South America and Australia. We believe that this global
reach provides our customers with local access to the majority of existing
Internet users.
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High Performance and Scalability. The Digital Island Global IP Applications
Network bypasses the primary congestion points of the public Internet to
provide fast, consistent performance for our customers. By routing and managing
Internet traffic over a centralized high-speed network directly between our
strategic, globally distributed data centers and local points of presence, our
solution avoids transmission of data over multiple routers and switches
(systems that relay data in networks) and network access points (locations at
which Internet service providers exchange traffic) in the public Internet,
thereby substantially reducing transmission time and improving network security
and performance. Our network architecture is reliable, can scale to many users
and enables a consistent end user experience independent of time of day and
geography.
Local Content Management. We own and operate a growing number of Digital
Island Local Content Managers in high volume markets around the world. We have
created "digital warehouses" where we help customers readily store files which
are repeatedly accessed within the regional area. This solution is a more cost
effective and scalable solution when supporting high volume global access to
information. It also allows for a more geographically localized experience
(e.g. language and currency). We currently operate Digital Island Local Content
Manager sites in Germany, Japan, Australia, the U.S., and the United Kingdom
and plan to continue our current expansion.
Cost-Effective Outsourcing Solution. Our customers directly benefit from the
significant investments of technical expertise and other resources that we have
made to develop our unique Digital Island Global IP Applications Network. Most
enterprises today do not have the infrastructure that mission-critical Internet
operations require, including strategic, globally distributed data centers, 24
hours per day, seven days per week operations and specialized Internet
technology expertise. Our solution allows customers to address shortages of
technical resources and continuously changing technologies, while substantially
lowering the application deployment and operational costs of new Internet
applications. We believe that our solutions and economies of scale are
significantly more cost-effective than most in-house alternatives.
Innovative Solutions. We believe that, as a result of our advanced network
architecture and highly experienced product development team, we are able to
provide a unique set of value-added product offerings. For example, we offer
open, reserved and managed bandwidth products that enable our customers to
allocate their bandwidth purchases according to their changing needs. In
addition, our proprietary technology enables us to bill our customers according
to the number of bits of data transmitted over our network, geographic
destination of transmission and time of day, as opposed to traditional flat-
rate billing. This allows us to provide more flexible service pricing, and
benefits the customer by more accurately correlating network cost to actual
network utilization by geography. We are developing and deploying our
proprietary TraceWare technology that enables customers to identify the source
of Internet protocol requests. Being able to correlate the source and
destination (where the data enters and exits our network) provides our
customers with significant service and product opportunities, such as flexible
pricing plans, localization of content and currency, assistance in fraud
detection, authentication and compliance with export regulations and the
enhancement of other applications deployed across our network.
Business Strategy
Our objective is to be the leader in offering network services for
globalizing Internet business applications. In order to achieve this objective,
we are implementing a business strategy focused on the following key elements:
Target Multinational Corporations. We have designed our network to address
the sophisticated needs of multinational customers, who are increasingly
relying on the Internet to conduct business and require consistent levels of
high performance and reliability. We primarily target leading customers in
industries which are early adopters of Internet technologies, such as the
financial services, technology, media publishing, entertainment and other
Internet-centric sectors. We have tailored our services to enhance the
performance of our customers in electronic commerce and services, such as
digital media distribution. The Digital Island Global IP Applications Network
has connection points in 18 countries worldwide, providing our customers with
access to
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a significant majority of existing Internet users, and we plan to expand our
global reach through additional connection points in the future.
Expand Customer Relationships. We plan to extend our leadership in the
market for global Internet application services by continuing to expand our
base of customers. By integrating other Internet services into the Digital
Island Global IP Applications Network, and by providing high-quality customer
support, we believe that businesses will increasingly rely on us for their
Internet business needs, which in turn should enhance customer retention and
increase demand for both application services and network usage. For example,
Autodesk initially used our network to deploy applications in a single country;
subsequently, Autodesk chose to deploy applications in other countries served
by Digital Island and added additional applications and extended usage of our
services to key subsidiaries.
Develop Additional Network Services. We seek to be a leader in designing and
deploying a global business network that enables customers to capture the
benefits of ubiquitous access to applications and the performance and range of
functions of private intranets operated by individual companies for their own
users. We are committed to investing resources to implement new Internet
technology and services that will allow our customers to optimize their
deployment and operation of applications globally. To this end, we collaborate
with providers of leading Internet technologies to develop and deploy
proprietary technologies in order to enhance our service offerings and to
address our customers' evolving needs. Some of our recent innovations have
included reserved and managed bandwidth technologies that allow customers to
tailor bandwidth to their individual needs and benefit from usage-based
billing, and our TraceWare technology, which is not yet commercially released,
that enables customers to identify the source of Internet traffic. Our Digital
Island Local Content Managers enable customers to readily store files which are
repeatedly accessed within specific geographical regions. We believe that
continuing leading edge innovation is the key to differentiating Digital
Island's products and services in the long term.
Expand Strategic Relationships. We believe that strategic relationships
should enhance our ability to reach new customers. Potential partners include
system integrators, software vendors and application service providers that
provide network equipment and services to companies. Further, strategic
relationships with our customers in our target markets, such as with E*TRADE,
bring not only a high level of understanding of the specific needs of that
market but also credibility and visibility with potential new customers. We are
also targeting partners which can enhance our ability to develop and deliver
new application services. Through these relationships we hope to leverage these
enterprises' research and development expertise to cost effectively develop new
network services.
Expand Global Sales Capabilities. We target our customers predominately
through a direct sales channel complimented by a range of external alliances
and channels. We currently have 52 professionals in our sales organization in
offices in the U.S., Asia and Europe and intend to grow our sales organization
substantially over the next year. Our Global Partner Program is targeted at
increasing the effectiveness of our direct channel. In addition to co-
marketing, we have a growing number of sales channel partners which represent
our products and services either as a sales agent or a reseller.
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The Digital Island Intelligent Network
[GRAPHIC APPEARS HERE]
The graphic above illustrates the Digital Island Intelligent Network, which
utilizes four data centers with an asynchronous transfer mode backbone (a
centralized high-speed network) to connect to local connection points in 18
countries with the assistance of major international network service providers.
Network Architecture
The Digital Island Intelligent Network consists of an asynchronous transfer
mode, or "ATM," backbone that connects four geographically dispersed data
centers. This ATM backbone router core is a centralized high-speed network that
connects to local Internet service providers in 18 countries forming a
distributed network architecture that minimizes the number of separate
transmissions, necessary to transmit data, resulting in greater speed and
reliability for our customers' end-users. Our four distributed data centers
permit us to disseminate information reliably on a global basis and, using our
sophisticated data tracking capability, allow us to optimize data transmissions
internationally, minimizing the use of expensive transoceanic fiber optic
circuits. The Digital Island network is designed to increase the speed and
reliability of data transmission and circumvents a design weakness of the
public Internet, which requires transmission of information over numerous
routers and network inter-exchange points, often leading to delays and loss of
data. Local Content Managers, where customers can store files which are
repeatedly accessed within the regional area, are located in Australia, Japan,
Germany, the United Kingdom and all three U.S. data centers. We believe our
architecture is superior to traditional networks for the distribution of
applications because of its manageability, ability to scale to many users and
connectivity over dedicated lines to local Internet service providers and
network service providers through dedicated connection points.
We currently have direct connections in 18 countries with one or more local
Internet service providers, providing customers with direct access to local
markets worldwide. Currently, we purchase transit from AT&T, GTE, Sprint and
MCI WorldCom in the United States and have established transport relationships
in 17 other countries, giving us a total of 26 different direct points of
connection to the Internet. Unlike traditional peering
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relationships, these network service providers carry the Internet traffic of
our customers without any reciprocal transit agreement. While Digital Island
pays a fee to the network service providers for this arrangement, it gives us
access to thousands of Internet service providers without the obligation of
carrying traffic originating outside of our network. Both the Santa Clara and
New York data centers have direct connections through circuits with each of the
four network service providers. In addition to the U.S., we have established
private Internet connection relationships in 17 other countries as listed
below:
<TABLE>
<S> <C> <C>
Australia Israel South Korea
Brazil Japan Sweden
Canada Mexico Switzerland
China Netherlands Taiwan
France Russia United Kingdom
Germany Singapore
</TABLE>
In China, we have connections in both Hong Kong and Beijing. With 26
different connection points to the Internet, we believe we offer our customers
one of the most diverse, redundant and reliable networks for the deployment of
business applications globally.
We currently have a state-of-the-art network operations center,
headquartered in Honolulu, Hawaii, which provides real time end-to-end
monitoring of our network 24 hours per day, seven days a week, 365 days per
year. The network operations center helps us to ensure the efficient and
reliable performance of our network, enabling us to identify, and often
prevent, potential network disruptions and to respond immediately to actual
disruptions. In addition, through traffic management and forecasting, line
performance reporting and alarm monitoring, remote link restoration and
coordination, and provisioning of network services, the network operations
center enables us to schedule and conduct maintenance with minimal
interferences to the network.
We currently lease lines or bandwidth from multiple telecommunications
carriers. These carriers include MCI WorldCom, GTE and Sprint, as well as
several international carriers such as Cable & Wireless, IDC, Telstra and
Singapore Telecom. Leasing from multiple carriers assists us in achieving
competitive pricing, provides us with diversity of routes and redundancy and
provides access to multiple sources of bandwidth on different cable systems
globally. Our lease contract term with a carrier is typically one year, which
allows us to benefit from declining bandwidth costs over time. In some cases
the term may extend to three years where we determine there is a significant
cost advantage implicit in such arrangement or that the route served by such
line is bandwidth constrained.
Services
We offer a family of services designed to allow companies to deploy their
Internet applications globally without developing or acquiring their own global
network. Our services are especially suited to Internet applications requiring
a high performance end user experience which is consistent and reliable when
downloading files (e.g., software, documentation and video clips), downloading
graphic-intensive web content or engaging in real-time transactions (e.g.,
transaction clearing and video conferencing) across a range of access speeds.
We work with each of our customers to optimize cost and performance
requirements. Our content hosting, mirroring and caching services allow
customer applications to be replicated throughout the network to lower costs
and improve response times and our transport services guarantee bandwidth into
local markets. Our network engineering team provides our customers with global
networking expertise and consultation in the design and deployment of their
applications on the Digital Island Global IP Applications Network. We also
provide 24 hours per day, seven days per week, 365 days per year operations
support and security experts to keep their applications up and running on a
global basis.
We currently offer service level guarantees, customized billing, network
security services, network management and other application services designed
to improve the performance of applications deployed on our network. We plan to
continue to develop or acquire extensions to our application services to fuel
ongoing
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product and service delivery. For example, we believe that our proprietary
TraceWare technology, which is not yet commercially released, enables our
customers to identify the source of Internet protocol requests as well as the
destinations of Internet traffic. This technology will be predominantly used
for targeted advertising and local language content delivery.
Application Hosting and Content Distribution Services
Our application hosting and content distribution services, including
mirroring and caching, enable customers to gain the benefit of having their
application (whether on a server on their site or on a server in one of our
data centers) appear to be located in every country where we have a connection
point. Leveraging our network architecture and technologies, our application
hosting services provide end users globally with what we believe, based on our
past experience, to be fast, reliable and seamless access to our customers'
content. Each of our data centers has state-of-the-art power management,
security, and fire suppression systems. Customers have access to our network
operations center and our on-site personnel for ongoing maintenance services.
Customers can choose from the following packages:
Server Management Package. This is an all-inclusive solution for customers
seeking to outsource their day-to-day hardware and server administration. We
operate two production-ready environments: Sun Solaris(TM) and Windows NT(TM)
operating on Compaq servers. We host these servers, as well as servers provided
by our customers, in our data centers and provide the network infrastructure as
well as application monitoring, performance optimization, server administration
and security services. This package provides a production-ready environment
with maximum uptime.
Hardware Management Package. This enables our customers to outsource day-to-
day hardware maintenance, while allowing our customers' IT staff unhindered
access to perform any needed system administration functions. This package
includes services from our data center personnel for hardware management and
repair plus access to our network infrastructure. Our centrally managed network
architecture provides optimized routing, resulting in the uptime, performance,
and reliability required by our customers.
Co-location Package. This allows our customers to house their own servers in
one of our data centers, and provides a secure environment designed to deliver
maximum uptime for the server plus access to our Global IP Applications
Network.
Globeport. For customers choosing to maintain content at their own data
centers, we will arrange dedicated connections from the client's site to our
closest point of presence. This package includes network services enabling our
customers to extend their reach globally.
Network Services
We offer a range of network services to be used with our Application Hosting
and Content Distribution Services:
Open Bandwidth. Customers pay a minimum monthly fee for access to our
network and are charged based on actual usage (per gigabit) above these minimum
levels. Customers may also pay for services based on distance traveled.
Customers can generate utilization reports which allow them to determine usage
flows by country.
Reserved Bandwidth. Reserved Bandwidth is a network service that guarantees
a minimum throughput level, expressed in kilobytes per second to a specified
connection point. Our customer is billed for a pre-specified minimum amount of
data transfer to that specified connection point. Unlike other methods of
relaying Internet traffic such as frame relay services, our network is
engineered to accommodate peaks in traffic above the minimum guaranteed levels.
Gigabytes in excess of the reserved monthly amount are billed at the applicable
data transfer rate.
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Managed Bandwidth. Managed Bandwidth is our premium network transport
service offering. Using a web browser interface, IT professionals can readily
allocate bandwidth by geographic region at any time from any location. Through
this service, IT professionals can configure the Digital Island network to meet
their organization's international throughput requirements.
Professional Services
We augment our primary product and service offerings with a range of
professional service options for customers. Professional services include
helping our customers to provide security on their networks, making
recommendations for network equipment and consulting as to Internet application
deployment.
Customers
We primarily target leading customers in industries which are early adopters
of Internet technologies, such as the financial services, technology, media and
other Internet-centric sectors. Within our target markets, we have tailored our
services to enhance the performance of our customers in electronic commerce,
electronic services and electronic fulfillment, such as digital media
distribution. Our customers use our services and proprietary technology to
facilitate the deployment of commercial applications, including electronic
commerce, online customer service, software distribution, multimedia document
distribution, sales management and distance learning. As of March 31, 1999, we
had contracts with 62 customers including Autodesk, Cisco Systems, Diamond
Multimedia Systems, E*TRADE, Mastercard International, National Semiconductor,
Novell, and Platinum Technology.
The following examples, which are based on information furnished by the
companies listed below, illustrate how some of our customers use our global
private network for deployment of business applications:
Autodesk. Autodesk is a supplier of design software and multimedia tools
that address several markets including architectural and mechanical design,
filmmaking, videography and geographic information systems. Autodesk was
seeking a consistent, reliable, secure and fast access mechanism to distribute
their technical documentation and software to customers in over 150 countries
and selected Digital Island's Server Management Package and Managed Bandwidth
services.
Cisco Systems. Cisco Systems is a leading provider of networking software
and hardware for the Internet. Cisco sought a highly reliable and fast way for
engineers to access the Cisco customer care online website in order to download
Cisco software and to upgrade routers in the field. Using a combination of our
Globeport, Hardware and Server Management Packages and our Open Bandwidth
services and mirroring technology, Cisco was able to increase customer service
by allowing the field engineers and customers to access critical information
and download software while working at the client site.
E*TRADE. E*TRADE is an online financial services company that has engaged
Digital Island to provide a broad range of network solutions to deliver
mission-critical applications in 32 countries and provide their customers with
consistent performance online. E*TRADE customers rely on the Internet for their
trading and research requests, making the applications that provide these
services mission-critical to E*TRADE's business. The applications serving these
requests also require high levels of consistent bandwidth. By utilizing our
Globeport Package and customized network services, E*TRADE provides its
customers worldwide with a more consistent, fast and high quality online
experience.
National Semiconductor. National Semiconductor is a multinational company
that develops and manufactures semiconductor products for high growth markets
in the electronics equipment industry. National Semiconductor needed a real-
time global solution for distributing their technical documentation to customer
engineers and technical information to their sales-force. Utilizing Digital
Island's Co-location Package and network services, National Semiconductor is
able to globally deploy technical documents to customers on a real-time basis,
thereby greatly reducing documentation delivery times and costs. Digital
Island's network also
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enables National Semiconductor to communicate with its global sales force on a
real-time basis to assess demand and forecast production levels.
Sales and Marketing
Our sales and marketing strategy is designed to target multinational
businesses that depend on the Internet for core business operations.
To reach these enterprises, we utilize a multi-tiered channel approach. In
North America, we primarily rely on direct sales and augment this effort with
resellers, agents or co-marketing partners where appropriate. In Europe, Asia
and Latin America, we are hiring direct sales personnel and developing agents
and reseller channels. Our channel partners also provide services to us in the
form of data center capacity, connectivity to local backbones or service
providers and router installation/repair.
We are actively seeking to increase our sales and distribution capabilities
globally. Currently, most of our sales are derived from the efforts of our
direct sales force. We have begun developing indirect sales channels targeting
content developers (such as firms that develop Web sites), system integrators,
consulting companies, suppliers and international Internet service providers.
As of March 31, 1999, we had five channel partners in Europe and Asia who we
pay commissions to refer customers.
Our marketing organization is responsible for product management, product
marketing, public relations and marketing communications. Product management
includes defining the product plan and bringing to market our products and
services. These activities include product strategy and definition, pricing,
competitive analysis, product launches, channel program development and product
life cycle management. We stimulate product demand through a broad range of
marketing communications and public relations activities. Primary marketing
communications activities include public relations, collateral, advertising,
direct response programs and management of our Web site. Our public relations
focuses on cultivating industry analyst and media relationships with the goal
of securing broad media coverage and recognition as a leader and innovator in
global Internet application deployment.
While we have not entered into any material partnering arrangements, a key
element of our marketing strategy includes identifying and partnering with
component suppliers, customers and other application service companies. We have
a dedicated team focused on creating new, and expanding existing, relationships
which will be critical to the ongoing success of future product developments.
Customer Support
We seek to provide superior customer service by understanding the technical
requirements and business objectives of our customers and fulfilling their
needs proactively on an individual basis. By working closely with the customer,
we seek to optimize the performance of our customers' Internet operations,
avoid downtime, resolve quickly any problems that may arise and make
adjustments in services as customer needs change over time.
Before sales are made, we provide technical advice to customers in order to
help them understand their networking needs and how our products and services
can provide solutions for particular needs. During the installation phase, we
assign a support team led by our Customer Advocacy group which also retains
support responsibility for the account after the customer's application is
installed and operational, to assist the customer through the installation
process. After commencing services, primary technical support is provided by
our network operation center, which is operated 24 hours per day, seven days
per week by highly trained technicians who respond to customer calls, monitor
site and network operations and escalate problems to engineering to solve
problems quickly and professionally. Our Customer Advocacy personnel are also
available to assist with billing and business issues and to assist in planning
for additional customer applications usage on the network.
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Finally we employ network engineers who collaborate with customers to design
and maintain their application across the network. Our network engineers are
trained on Windows NT, Solaris and other UNIX platforms, as well as Cisco
routers and switches, and they serve as the escalation path to resolve customer
problems. We also employ a team of network backbone engineers that constantly
monitor the network design and effectiveness to optimize performance for
customers, rerouting and redesigning their applications as conditions require.
Competition
Our market is highly competitive. There are few substantial barriers to
entry and we expect that we will face additional competition from existing
competitors and new market entrants in the future. The principal competitive
factors in this market include Internet system engineering expertise, customer
service, network capability, reliability, quality of service and ability to
scale to many users, broad geographic presence, brand name recognition,
technical expertise and range of functions, the variety of services offered,
the ability to maintain and expand distribution channels, price, the timing of
introductions of new services, network security, financial resources and
conformity with industry standards. We may not have the resources or expertise
to compete successfully in the future.
Our current and potential competitors in the market include:
. information technology and Internet outsourcing firms;
. national and regional Internet service providers; and
. global, regional and local telecommunications companies.
Our competitors may operate in one or more of these areas and include
companies such as AboveNet Communications, Inc., AT&T Corp., Exodus
Communications, Inc., GTE Corporation, MCI WorldCom, Inc. and business units of
Frontier GlobalCenter, Inc. In particular, Exodus and GlobalCenter provide
services that are directly competitive with services that we provide.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
As a result, these competitors may be able to develop and expand their network
infrastructures and service offerings more quickly, adapt to new or emerging
technologies and changes in customer requirements more quickly, take advantage
of acquisition and other opportunities more readily, devote greater resources
to the marketing and sale of their products and adopt more aggressive pricing
policies than we can. In addition, these competitors have entered and will
likely continue to enter into joint ventures or consortiums to provide
additional services competitive with those that we provide.
Some of our competitors may be able to provide customers with additional
benefits in connection with their Internet system and global applications
network solutions, including reduced communications costs, which could reduce
the overall costs of their services relative to the cost of our services. We
may not be able to offset the effects of any such price reductions. In
addition, we believe that the businesses in which we compete are likely to
encounter consolidation in the near future, which could result in increased
price and other competition that could cause our business and prospects to
suffer.
Intellectual Property Rights
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect proprietary
rights in our products and services. Although we have filed a patent
application with respect to our TraceWare technology with the United States
Patent and Trademark Office, such application is pending and we currently have
no patented technology that would preclude or inhibit
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competitors from entering our market. In addition, we have registered the mark
"Digital Island" with the Patent and Trademark Office, and we have a pending
trademark application for the mark "TraceWare" with the Patent and Trademark
Office. Our "Digital Island" mark is either registered or pending in several
foreign countries. We have entered into confidentiality and invention
assignment agreements with our employees, and nondisclosure agreements with our
suppliers, distributors and appropriate customers in order to limit access to
and disclosure of our proprietary information. These contractual arrangements
or the other steps that we take to protect our intellectual property may not be
sufficient to prevent misappropriation of our technology or to deter
independent third-party development of similar technologies. The laws of
foreign countries may not protect our products, services or intellectual
property rights to the same extent as do the laws of the United States.
To date, we have not been notified that our products infringe the
proprietary rights of third parties, but third parties may in the future claim
that our current or future products infringe upon their proprietary rights. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of products and competitors in our industry
segment grows. Any such claim, whether meritorious or not, could be time
consuming, result in costly litigation, cause product installation delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to us, or at
all. As a result, any such claim could harm our business and prospects.
Government Regulation
Federal Regulation. The FCC does not currently regulate network software or
computer equipment-related services that transport data or voice messages on
telecommunications facilities, except when provided by any of the Regional Bell
Operating Companies. However, we provide network services including
transmitting data over public telephone lines, and those transmissions are
governed to some extent by federal regulatory policies establishing charges and
terms for wireline communications. Operators of those types of networks that
provide access to regulated transmission facilities only as part of a data
services package currently are not subject to direct regulation as
"telecommunications carriers" by the FCC or any other federal agency, other
than regulations generally applicable to businesses.
The absence of direct FCC regulation reflects, in part, the status of
Internet services as a relatively recent phenomenon. The federal legal and
regulatory framework for such services is therefore in its nascent state of
development.
The evolving state of federal law and regulation is reflected in the FCC's
April 10, 1998 Report to Congress. In the April 1998 Report, the FCC discussed
whether Internet service providers should be classified as telecommunications
carriers, and, on that basis, be required to contribute to the Universal
Service Fund which was created by federal statute and funded by interstate
telecomunications carriers for the purpose of ensuring that all segments of the
population of the United States have access to basic telecommunications
services. The report concluded that Internet access service which the FCC
defined as an offering combining computer processing, information storage,
protocol conversion, and routing transmissions is an "information service"
under the Telecommunications Act of 1996 and thus not subject to regulation. In
contrast, the FCC found that the provision of transmission capabilities to
Internet service providers and other information service providers does
constitute "telecommunications services" under the Telecommunications Act of
1996. Consequently, parties providing those latter services are presently
subject to FCC regulation (and the corresponding Universal Service Fund
obligations).
New federal laws and regulations may be adopted in the future that would
subject the provision of our Internet services to government regulation.
Legislative initiatives currently being considered in Congress, for example,
may require taxation of Internet-related services like those that we offer or
impose access charges on Internet service providers. Any new laws regarding the
Internet, particularly those that impose regulatory or financial burdens, could
cause our business and prospects to suffer. We cannot predict the impact, if
any, that any future changes in law or regulation may have on our business.
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Certain changes in federal law and regulations could cause our business and
prospects to suffer. Changes of particular concern include those that directly
or indirectly affect the regulatory status of Internet services, increase the
cost telecommunications services (including the application of access charges
or Universal Service Fund contribution obligations to Internet services), or
increase the competition from the RBOCs and other telecommunications companies.
We cannot predict the impact, if any, that such legislative or regulatory
changes may have on our business. For instance, the FCC could determine through
any one of its ongoing or future proceedings that the Internet is subject to
regulation. In that event, we could be required to comply with:
. FCC entry or exit regulations;
. tariff filing, reporting, fee, and record-keeping requirements;
. marketing restrictions;
. access charge obligations; and
. contributions to the Universal Service Fund obligations.
Any one or more of those changes could adversely impact our ability to
provide services. The FCC could similarly conclude that providing Internet
transport or telephony services over an Internet protocol-based network is
subject to regulation. For example, the FCC currently has ongoing proceedings
in which it is considering whether to regulate certain transmissions provided
via the Internet, such as services functionally equivalent to traditional two-
way voice telephony. Such determination could cause our business and prospects
to suffer.
Another major and unresolved regulatory issue concerns the obligation of
information service providers, including Internet service providers, to pay
access charges to Incumbent Local Exchange Carriers. A proceeding initiated by
the FCC in December 1996 that raises the issue whether Incumbent Local Exchange
Carriers, which are local telephone companies that began providing service
prior to the enactment of the Telecommunications Act of 1996, can assess
interstate access charges on information service providers, including Internet
service providers. Unlike basic services, enhanced services, which the FCC has
concluded are synonymous with information services and include Internet access
services, are exempt from interstate access charges. The FCC has reaffirmed
that information service providers are exempt from access charges, and a United
States Court of Appeals has affirmed this decision by the FCC.
Another major regulatory issue concerns Internet-based telephony. In its
April 1998 Report, the FCC observed that Internet protocol telephony appears to
be a telecommunications service rather than an unregulated information service.
The FCC explained that it would determine on a case-by-case basis whether to
regulate the service and thereby require providers of Internet protocol
telephony to contribute to the Universal Service Fund. The ultimate resolution
of Internet protocol telephony issues could negatively impact the regulatory
status, cost and other aspects of our service offerings.
Another major and unresolved regulatory proceeding that could affect the
benefit and cost of our service offerings (to the extent we become involved in
the exchange of communications traffic) involves reciprocal compensation.
Reciprocal compensation relates to the fees paid by one carrier to terminate
traffic on another carrier's network. In July 1997, the FCC was asked to
determine whether Competitive Local Exchange Carriers (local telephone
companies that provide service in competition with Incumbent Local Exchange
Carriers) that serve Internet service providers are entitled to reciprocal
compensation under the Telecommunications Act of 1996 for calls originated by
customers of an Incumbent Local Exchange Carriers to an Internet service
provider served by a Competitive Local Exchange Carriers within the same local
calling area. Prior to the time the FCC addressed the issue, every state that
addressed the issue from an intrastate perspective (at least twenty-nine in
number) determined that calls to Internet service providers are to be treated
as local for purposes of reciprocal compensation. In February 1999, the FCC
concluded that it would regulate in the future calls to Internet service
41
<PAGE>
providers as interstate traffic. The FCC sought comment on how this traffic
should be compensated prospectively between carriers. The FCC's ultimate
resolution of the compensation issue could increase Internet service provider
costs in the future by increasing telephone charges if the FCC adopts a rule
that precludes compensation for calls to Internet service providers or
prescribes a rate that is substantially less than the reciprocal compensation
rates that were paid in the past and are being paid under some existing inter-
carrier agreements.
We could also be harmed by federal (as well as state) laws and regulations
relating to the liability of on-line services companies and Internet access
providers for information carried on or disseminated through their networks.
Several private lawsuits seeking to impose such liability upon on-line services
companies and Internet access providers are currently pending. In addition,
legislation has been enacted and new legislation has imposed liability for the
transmission of, or prohibits the transmission of certain types of, information
on the Internet, including sexually explicit and gambling information. The
United States Supreme Court has already held unconstitutional certain sections
of the Communications Decency Act of 1996 that, among other provisions,
proposed to impose criminal penalties on anyone distributing "indecent"
material to minors over the Internet. Congress subsequently enacted legislation
that imposes both criminal and civil penalties on persons who knowingly or
intentionally make available materials through the Internet that are "harmful"
to minors. However, the new law generally excludes from the definition of
"person" Internet service providers that are not involved in the selection of
content disseminated through their networks. Congress also enacted legislation
recently that limits liability for online copyright infringement. That latter
law includes exemptions which enable Internet service providers to avoid
copyright infringement if they merely transmit material produced and requested
by others. It is possible that other laws and regulations could be enacted in
the future that would place copyright infringement liability more directly on
Internet service providers. The imposition of potential liability on us and
other Internet access providers for information carried on or disseminated
through their systems could require us to implement measures to reduce our
exposure to such liability, which may in turn require us to expend substantial
resources or to discontinue service or product offerings. The increased
attention to liability issues as a result of lawsuits and legislative action,
could similarly impact the growth of Internet use. While we carry professional
liability insurance, such insurance may not be adequate to compensate claimants
or may not cover us in the event we become liable for information carried on or
disseminated through our networks. Any costs not covered by insurance incurred
as a result of such liability or asserted liability could cause our business
and prospects to suffer.
State Regulation. The proliferation of Internet use in the past several
years has prompted state legislators and regulators to consider the adoption of
laws and regulations to govern Internet usage. Much of the legislation that has
been proposed to date may, if enacted, handicap further growth in the use of
the Internet. It is possible that state legislatures and regulators will
attempt to regulate the Internet in the future, either by regulating
transactions or by restricting the content of the available information and
services. While state public utility commissions generally have declined to
directly regulate enhanced or information services, some states have continued
to regulate particular aspects of enhanced services in limited circumstances,
such as where they are provided by local telecommunications carriers. Moreover,
the public utility commissions of several states continue to consider potential
regulation of such service. Enactment of such legislation or adoption of such
regulations could cause our business and prospects to suffer.
Another area of adverse potential state regulation concerns taxes. The
United States Congress recently enacted a three-year moratorium on new state
and local taxes on the Internet (those not generally imposed or actually
enforced prior to October 1, 1998) as well as on taxes that discriminate
against commerce through the Internet. Congress also established an advisory
commission to study and make recommendations on the federal, state and local
taxation of Internet-related commerce. These recommendations are due to
Congress by April 2000 and could serve as the basis for additional legislation.
Previous to the enactment of the tax moratorium a significant number of bills
had been introduced in state legislatures that would have taxed commercial
transactions on the Internet. Future laws or regulatory changes that lead to
state taxation of Internet transactions could cause our business and prospects
to suffer.
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<PAGE>
One issue of growing importance revolves around contract law. Although
customer-level use of the Internet to conduct commercial transactions is still
in its infancy, a growing number of corporate entities are engaging in Internet
transactions. This Internet commerce has spawned a number of state legal and
regulatory issues, such as whether and how provisions of the Uniform Commercial
Code (adopted by 49 states) apply to transactions carried out on the Internet
and how to decide which jurisdiction's laws are to be applied to a particular
transaction. It is not possible to predict how state law will evolve to address
new transactional circumstances created by Internet commerce or whether the
evolution of such laws will cause our business and prospects to suffer.
State legislators and regulators have also sought to restrict the transition
or limit access to certain materials on the Internet. For example, in the past
several years, various state legislators have sought to limit or prohibit:
. certain communications between adults and minors;
. anonymous and pseudonymous use of the Internet;
. on-line gambling; and
. the offering of securities on the Internet.
Enforcement of such limitations or prohibitions in some states could affect
transmission in other states. State laws and regulations that restrict access
to such materials on the Internet could inadvertently block access to other
permissible sites. We cannot predict the impact, if any, that any future laws
or regulatory changes in this area may have on our business.
Some states have also sought to impose tort liability or criminal penalties
on certain conduct involving the Internet, such as the use of "hate" speech,
invasion of privacy, and fraud. The adoption of such laws could adversely
impact the transmission of non-offensive material on the Internet and, to that
extent, could cause our business and prospects to suffer.
Local Regulation. Although local jurisdictions generally have not sought to
regulate the Internet and related services, it is possible that such
jurisdictions will seek to impose regulations in the future. In particular,
local jurisdictions may attempt to tax various aspects of Internet access or
services, such as transactions handled through the Internet or subscriber
access, as a way of generating municipal revenue. The imposition of local taxes
and other regulatory burdens by local jurisdictions could cause our business
and prospects to suffer. Our networks may also be subject to numerous local
regulations such as building codes and licensing. Such regulations vary on a
city by city and county by county basis.
Foreign Regulation. As our services become available over the Internet in
foreign countries, and as we facilitate sales by our customers to end users
located in such foreign countries, these foreign jurisdictions may decide that
we are required to qualify to do business in the particular foreign country or
to obtain permits or licenses to provide permits or licenses to provide value-
added network services. Such decisions could subject us to taxes and other
costs and could result in our inability to enforce contracts in such
jurisdictions. It is possible that claims could be made against online service
companies and Internet service providers under foreign law for defamation,
negligence, copyright or trademark infringement, or other theories based on the
nature and content of the materials disseminated through their networks. Any
such new legislation or regulation, or the application of laws or regulations
from jurisdictions whose laws do not currently apply to our business, could
cause our business and prospects to suffer.
Employees
As of March 31, 1999, we had 146 employees, including 64 people in sales and
marketing, 34 people in engineering, 32 people in operations and 16 people in
finance and administration. We believe that our future success will depend in
part on our continued ability to attract, hire and retain qualified personnel.
The
43
<PAGE>
competition for such personnel is intense, and there can be no assurance that
we will be able to identify, attract and retain such personnel in the future.
None of our employees is represented by a labor union, and management believes
that our employee relations are good.
Facilities
We currently have the following facilities: our corporate headquarters in
San Francisco, and data centers in Honolulu, Santa Clara (California), New York
City, and London. We have entered into a lease for new corporate headquarters
in San Francisco, and plan to move to the new location in July 1999. We plan to
open an additional data center in Hong Kong in September 1999. In addition, we
have sales offices in Boston, New York City, Minneapolis, Chicago,
Philadelphia, Dallas, Houston, St. Louis, Japan, Malaysia, the Netherlands,
Switzerland and the United Kingdom.
Legal Proceedings
We are not party to any material legal proceeding.
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MANAGEMENT
Officers, Directors and Senior Management
The following table sets forth the names and ages of our executive officers
and directors and certain members of our senior management as of March 31,
1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Ron Higgins........................ 41 Chairman of the Board of Directors
Ruann F. Ernst(1)(4)(5)............ 52 Chief Executive Officer and President
and Director
T.L. Thompson...................... 52 Chief Financial Officer and Secretary
Paul Evenson....................... 38 Vice President of Operations
Sanne Higgins...................... 49 Vice President of Corporate
Communications
Allan Leinwand..................... 32 Vice President of Engineering and Chief
Technology Officer
Bruce Pinsky....................... 35 Vice President of Solutions Engineering
and Chief Information Officer
Michael T. Sullivan................ 48 Vice President of Finance
Rick Schultz....................... 40 Vice President of North American Sales
Tim Wilson......................... 39 Vice President of Marketing and
International Sales
Charlie Bass(2).................... 57 Director
Christos Cotsakos(4)............... 50 Director
Marcelo A. Gumucio(2)(3)(4)........ 61 Director
Cliff Higgerson (1)(3)............. 57 Director
Shahan Soghikian(1)................ 40 Director
David Spreng....................... 37 Director
</TABLE>
- ----------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
(4) Member of Nominating Committee
(5) Member of Special Stock Option Committee
Each director will hold office for the term described below in "--Classified
Board" and until such director's successor is elected and qualified or until
such director's earlier resignation or removal. Each officer serves at the
discretion of the board of directors of Digital Island. Ron and Sanne Higgins
are husband and wife. There are no other family relationships among any of the
directors, officers or key employees of Digital Island.
Ron Higgins has served as Chairman of the board of directors since June 1998
and as a director since February 1994, when he founded Digital Island. Mr.
Higgins served as President and Chief Executive Officer from February 1994
until June 1998 and as Chairman of the board of directors from February 1994
until January 1998. For the past 18 years, Mr. Higgins has been involved in
developing high technology companies in the areas of networking,
communications, desktop publishing and multimedia. Mr. Higgins holds a B.S. in
Business Administration from the University of Southern California.
Ruann F. Ernst has served as President and Chief Executive Officer and as a
director since June 1998. Prior to joining Digital Island, Ms. Ernst served
with Hewlett Packard, a computer equipment and services
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<PAGE>
company, for over ten years, most recently as general manager of the Financial
Services Business Unit. Ms. Ernst has also served as Director, Medical
Computing Services Division and Assistant Professor, Medicine and Computer
Science at The Ohio State University and as a Congressional Fellow in the
Office of Technology Assessment. Ms. Ernst serves on the Board of Directors of
The Institute for the Future, Phoenix International and Advanced Fibre
Communications, Inc. Ms. Ernst holds a B.S. in Mathematics, a Masters Degree in
Computer Science and a Ph.D. in Technology and Organizational Change from The
Ohio State University.
T.L. Thompson has served as Chief Financial Officer since January 1999. Mr.
Thompson served as Chief Financial Officer of Narrowline, an Internet marketing
firm, from October 1996 to November 1998. From 1989 to 1996 he served in
various financial capacities at Ziff-Davis Publishing Company, most recently as
Vice President of Business Development. Mr. Thompson holds a B.S. in Economics
and an M.B.A. from Northwestern University.
Paul Evenson has served as Vice President of Operations since November 1998.
From 1996 to 1998, Mr. Evenson served as Vice President of Sales and Operations
at Westech Communications, Inc., a communications services firm. From 1986 to
1996, Mr. Evenson served as Vice President of Information Technology at
Montgomery Securities, an investment banking firm. Mr. Evenson studied
Engineering at Oregon State University.
Sanne Higgins joined Digital Island in June 1996 and has served as Vice
President of Corporate Communications since October 1997. From March 1990 to
June 1996, Ms. Higgins served as an independent marketing consultant to
companies with a broad range of products, including local area networking,
hardware, computer displays, video and computer entertainment, software
productivity tools, robotics and in-circuit test equipment. Ms. Higgins holds a
B.A. from the California College of Arts & Crafts.
Allan Leinwand has served as Vice President of Engineering and Chief
Technology Officer of Digital Island since January 1997 and as a director from
January 1997 to February 1999. Prior to joining Digital Island, from August
1990 to February 1997, Mr. Leinwand served as Manager, Consulting Engineer at
Cisco Systems, a network equipment provider, where he designed and deployed
global internetworks for large corporations, governments and institutions. Mr.
Leinwand also served as a network design and implementation engineer at Hewlett
Packard from 1988 to 1990. Mr. Leinwand holds a B.S. in Computer Science from
the University of Colorado, Boulder.
Bruce Pinsky has served as Vice President of Solutions Engineering and Chief
Information Officer since March 1997. From August 1992 to March 1997, Mr.
Pinsky worked in Customer Engineering and Global Support Engineering for Cisco
Systems. Mr. Pinsky holds a B.S. in Computer Science from California State
University, Hayward.
Michael T. Sullivan has served as Vice President of Finance since May 1997
and served as Chief Financial Officer from October 1997 to January 1999. From
July 1993 to May 1996 Mr. Sullivan served as Vice President of Operations and
Chief Financial Officer for Tut Systems, a network equipment provider.
Mr. Sullivan holds a B.S. in Business Administration from the University of
California, Berkeley. Mr. Sullivan is a certified public accountant.
Rick Schultz has served as Vice President of North American Sales since
March 1999. From December 1995 to February 1999, Mr. Schultz served as Vice
President of Sales at Pacific Bell Network Integration, a subsidiary of Pacific
Bell, a telecommunications company. Mr. Schultz also held various senior
management positions at AT&T from June 1980 to November 1995 in Sales, Product
Management and Sales Management. Mr. Schultz holds a B.S. in Commerce from De
Paul University and an M.B.A. from the University of San Francisco.
Tim Wilson has served as Vice President of Marketing and International Sales
since March 1998. From January 1996 to March 1998, Mr. Wilson served as general
manager within the Business Communications Systems Division of Lucent
Technologies, a telecommunications equipment supplier. Mr. Wilson also served
as
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Executive Director and General Manager of the Business Communications Systems
Division of AT&T Australia from November 1993 to December 1995. From August
1983 to October 1993, Mr. Wilson held several management positions in
engineering, sales and marketing at AT&T Corp. and AT&T Bell Laboratories. Mr.
Wilson holds a B.A. in Physics from Bowdoin College and an M.B.A. from the
Fuqua School of Business at Duke University.
Charlie Bass has served as a director since March 1997. Dr. Bass is Trustee
of The Bass Trust, General Partner of Bass Associates and a Consulting
Professor of Electrical Engineering at Stanford University. He is also Chairman
of the board of directors of Meridian Data, Inc., Socket Communications, Inc.
and SoloPoint, Inc. and serves on the board of directors of several private
communications companies. Prior to co-founding Ungermann-Bass in 1979, Dr. Bass
was at Zilog, Inc., and prior to the formation of Zilog, Inc. in 1975, he was
on the Electrical Engineering and Computer Sciences faculty at the University
of California at Berkeley from 1972 to 1975. Dr. Bass holds a Ph.D. in
Electrical Engineering from the University of Hawaii where he participated in
the Aloha System research in radio frequency-based computer networks.
Christos Cotsakos has served as a director of Digital Island since July
1998. Mr. Cotsakos joined E*TRADE, an online financial services company, in
March 1996 as the President and Chief Executive Officer and as a director.
Before joining E*TRADE, he served as President, Chief Operating Officer, Co-
Chief Executive Officer and a director of AC Nielsen Inc., a marketing research
company. Prior to joining AC Nielsen, Mr. Cotsakos spent 19 years with Federal
Express Corporation, where he held a number of senior executive positions. In
addition to E*TRADE, Mr. Cotsakos serves on the boards of directors of Fox
Entertainment Group, Inc., National Processing, Inc., Omega Research, Inc. and
Critical Path, Inc., as well as several private companies. A decorated Vietnam
veteran, he received a B.A. from William Paterson College and an M.B.A. from
Pepperdine University. Mr. Cotsakos is currently pursuing a Ph.D. degree in
economics at the University of London.
Marcelo A. Gumucio has served as a director since January 1998, and served
as Chairman of the board of directors from January 1998 until May 1998. He is
the managing partner of Gumucio Burke & Associates, a private investment firm.
In April 1996, Mr. Gumucio joined Micro Focus PLC, an enterprise software
provider, as its Chief Executive Officer. He had served as a non-executive
director of Micro Focus' board of directors since January 1996. Prior to
joining Micro Focus, from 1992 to 1996, Mr. Gumucio was President, Chief
Executive Officer and Chairman of the board of directors of Memorex Telex NV.
Mr. Gumucio's professional experience in the computer and communications
industry spans almost 30 years and includes senior management positions at Cray
Research, Inc., Northern Telecom Limited, Memorex Corporation and Hewlett-
Packard Company. Mr. Gumucio serves on the board of directors of BidCom Inc.,
E-Stamp Corporation and Burr Brown Corporation. Mr. Gumucio graduated cum laude
with a B.S. in mathematics from the University of San Francisco in 1961. He
received an M.S. in applied mathematics and operations research in 1963 from
the University of Idaho, where he was named a National Science Fellow and
graduated with honors. In 1982, he graduated from the Harvard Business School
Advanced Management Program.
Cliff Higgerson has served as a director since March 1997. Mr. Higgerson has
over 20 years experience with venture capital investments. Prior to forming
Communications Ventures II in the summer of 1997, he was a General Partner of
Vanguard Venture Partners, where he has been since 1993 and where he continues
to manage several portfolio companies. His 25 years of involvement in the
communications field include research, consulting, planning, investment
banking, and venture capital. Mr. Higgerson serves on the board of directors of
Advanced Fibre Communications, Inc., Ciena Corp. and Digital Microwave Corp.,
as well as several private companies. Mr. Higgerson holds a B.S. in electrical
engineering and an M.B.A. from the Haas School of Business at the University of
California at Berkeley.
Shahan Soghikian has served as a director since February 1999. Mr. Soghikian
has over nine years experience with venture capital investments and is a
General Partner of Chase Capital Partners, where he has been since 1990, and
where he develops, executes and monitors investments in private companies.
Mr. Soghikian serves on the board of directors of two private companies, Nextec
Applications, Inc. and AFS
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Holdings. Mr. Soghikian graduated with a B.A. in Biology from Pitzer College
and an M.B.A. from Anderson School of Business at the University of California
at Los Angeles.
David Spreng has served as a director since July 1997. Mr. Spreng has over
10 years of venture capital investment experience, primarily in communications,
and served as President of IAI Ventures, the private equity arm of Investment
Advisers, Inc. from 1992 until September 1998, when Mr. Spreng became the
Managing Member of the General Partners of the successor in interest to IAI
Ventures and IAI, the Crescendo Funds and its management company. Mr. Spreng
serves on the board of directors of Tut Systems, Inc. and several private
companies. Mr. Spreng graduated from the University of Minnesota with a B.S. in
Accounting.
Director Compensation
Our directors do not currently receive compensation for their services as
members of the board of directors. All directors are reimbursed for their
reasonable out-of-pocket expenses in serving on the board of directors or any
committee thereof. Employee directors are eligible to participate in our 1998
stock option/stock issuance plan and will also be eligible to receive equity
incentives, in the form of stock option grants or direct stock issuances, under
our 1999 stock incentive plan.
Non-employee board members will receive option grants at periodic intervals
under the automatic option grant program of the 1999 stock incentive plan and
will also be eligible to receive discretionary option grants under the
discretionary option grant program of such plan. See "Executive Compensation
and Other Information--Employee Benefit Plans."
Classified Board
Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, prior to the
consummation of the offering, two of the nominees to the board will be elected
to one-year terms, three will be elected to two-year terms and three will be
elected to three-year terms. Thereafter, directors will be elected for three-
year terms. Ron Higgins and David Spreng have been designated Class I directors
whose term expires at the 2000 annual meeting of stockholders. Charlie Bass,
Cliff Higgerson and Shahan Soghikian have been designated Class II directors
whose term expires at the 2001 annual meeting of stockholders. Christos
Cotsakos, Ruann Ernst and Marcelo Gumucio have been designated Class III
directors whose term expires at the 2002 annual meeting of stockholders. See
"Description of Capital Stock--Antitakeover Effects of Provisions of Certain
Charter Provisions, Bylaws and Delaware Law."
Board Committees
The executive committee of the board of directors consists of Ruann Ernst,
Cliff Higgerson and Shahan Soghikian. The executive committee, subject to the
following limitations, acts upon all matters concerning our interests, and
manages our business when the full board of directors is not in session. Our
executive committee may not:
. Adopt, amend or repeal the bylaws;
. Elect directors to fill vacancies on the board;
. Fill vacancies on the executive committee, or change its membership;
. Elect to remove officers of Digital Island;
. Amend the corporate charter;
. Act on matters assigned to other committees of the board;
. Appoint standing committees of the board;
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. Recommend to the stockholders any action requiring their approval; or
. Approve the acquisition or disposal of any capital asset or assets to be
used by us or any subsidiary in an amount exceeding an aggregate
$3,000,000 in any interim period between meetings of the board.
The audit committee of the board of directors consists of Marcelo Gumucio
and Cliff Higgerson. The audit committee reviews our financial statements and
accounting practices, makes recommendations to the board of directors regarding
the selection of independent auditors and reviews the results and scope of our
annual audit and other services provided by our independent auditors.
The compensation committee of the board of directors consists of Charlie
Bass and Marcelo Gumucio. The compensation committee makes recommendations to
the board of directors concerning salaries and incentive compensation for our
officers and employees and administers our employee benefit plans including the
grant of options under those plans.
The nominating committee of the board of directors consists of Christos
Cotsakos, Ruann Ernst and Marcelo Gumucio. The nominating committee makes
recommendations to the board of directors concerning candidates for
directorships.
The special stock option committee of the board of directors consists solely
of Ruann Ernst. The special stock option committee has the authority, separate
from the compensation committee, to make discretionary option grants to
eligible individuals other than officers or non-employee members of the board
of directors.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee of the board of directors
was at any time since the formation of Digital Island an officer or employee of
Digital Island. No executive officer of Digital Island serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving on our board of directors or our compensation
committee of the board of directors.
49
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Cash and Certain Other Compensation
The following table sets forth the compensation earned by our named
executive officers which include our Chief Executive Officer and our three
other executive officers whose salary and bonus for services rendered in all
capacities to Digital Island for the fiscal year ended September 30, 1998
exceeded $100,000. Since such date, certain of these executive officers have
been succeeded by new persons and we have added additional officers. For a list
of our current executive officers and certain members of senior management, see
"Management."
The options listed in the following table were originally granted under
either our 1997 stock option and incentive plan or our 1998 stock option/stock
issuance plan. These options have been incorporated into the new 1999 stock
incentive plan, but will continue to be governed by their existing terms. See
"Executive Compensation and Other Information--Employee Benefit Plans."
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
---------------------------------- --------------------
Name and Principal Other Annual Number of Securities
Position(s) Year Salary Bonus Compensation Underlying Options
------------------ ---- -------- ------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
Ruann F. Ernst(1)...... 1998 $ 50,000 $ -- $9,080(4) 794,159
President and Chief
Executive Officer
Allan Leinwand ........ 1998 124,167 41,000 -- 288,000
Chief Technology
Officer
Michael T.
Sullivan(2)........... 1998 136,250 25,750 -- 100,000
Vice President of
Finance
Ron Higgins(3)......... 1998 130,615 20,000 -- 400,000
Chairman of the Board
of Directors
</TABLE>
- ----------
(1) Ms. Ernst has served as President and Chief Executive Officer of Digital
Island since June 1998.
(2) Mr. Sullivan served as Chief Financial Officer of Digital Island in 1998
and was succeeded by T.L. Thompson in such position in January 1999.
(3) Mr. Higgins served as President and Chief Executive Officer of Digital
Island from February 1994 until June 1998.
(4) Consists of reimbursement of rent for Ms. Ernst's apartment in San
Francisco, California.
Stock Options and Stock Appreciation Rights
The following table sets forth information regarding option grants to each
of the named executive officers during the fiscal year ended September 30,
1998. No stock appreciation rights were granted to the named executive officers
during the 1998 fiscal year.
Stock Option Grants in Fiscal Year 1998
<TABLE>
<CAPTION>
Potential Realizable Value
Number of Percentage of at Assumed Annual Rates of
Securities Total Options Stock Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees Price Per Expiration ---------------------------
Name Granted (#) in 1998 Share ($/Sh) Date 5% 10%
---- ----------- ------------- ------------ ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Ruann F. Ernst.......... 794,159 41.7% $1.50 5/31/08 $ 749,163 $ 1,898,527
Allan Leinwand.......... 48,000 2.5% 1.50 6/17/08 45,280 114,749
Michael T. Sullivan..... -- -- -- -- -- --
Ron Higgins............. -- -- -- -- -- --
</TABLE>
50
<PAGE>
The exercise price per share of each option was equal to the fair market
value of the common stock on the date of grant as determined by our board of
directors in its good faith judgment, taking into account factors such as our
operating performance, recent sales of securities, and market conditions.
Each option has a maximum term of 10 years, subject to earlier termination
upon the optionee's cessation of service with Digital Island. Ms. Ernst joined
Digital Island as our President and Chief Executive Officer on June 1, 1998 and
was granted an option for 794,159 shares with an exercise price of $1.50 per
share, effective on her June 1, 1998 start date. The first 635,327 shares,
subject to her options, will vest in a series of 50 successive equal monthly
installments upon her completion of each month of service over the 50-month
period measured from her hire date, and the remaining 158,832 shares will vest
in a series of 50 successive equal monthly installments over the 50-month
period measured from the first anniversary of her hire date. All the option
shares will vest upon an involuntary termination of her employment (other than
for cause) within 18 months following an acquisition of Digital Island by
merger, sale of substantially all the assets or sale of more than 50% of our
outstanding voting securities. Upon any other involuntary termination of her
employment (other than for cause), the vesting of her option shares will be
accelerated by six months. The option granted to Mr. Leinwand for 48,000 shares
will begin to vest starting April 2, 2001 in 24 successive equal monthly
installments.
The actual stock price appreciation over the 10-year option term may not be
at the above 5% and 10% assumed annual rates of compounded stock price
appreciation or at any other defined level. Unless the market price of common
stock appreciates over the option term, no value will be realized from the
option grant made to the named executive officer.
Aggregated Option/SAR Exercises and Fiscal Year-End Values
The following table sets forth information with respect to the named
executive officers concerning their exercise of stock options during the fiscal
year ended September 30, 1998 and the number of shares subject to unexercised
stock options held by them as of the close of such fiscal year. No stock
appreciation rights were exercised during the fiscal year ended September 30,
1998, and no stock appreciation rights were outstanding at the close of such
year. In the following table, "Value Realized" is equal to the difference
between the fair value of the shares at the time of exercise ($1.50 per share)
and the exercise price paid for the shares ($1.50 per share) and the "Value of
Unexercised In-The-Money Options at Year-End" is based upon the fair value per
share at the close of the 1998 fiscal year ($3.25) less the exercise price
payable per share. The fair value per share at the close of fiscal 1998 was
determined by our board of directors based on our revenue growth, customer
base, recent financings and depressed market conditions at that time.
Aggregated Option Exercises in 1998 and Year-End Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired on Options at Year-End Options at Year-End
Exercise Value ------------------------- -------------------------
(#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ruann F. Ernst.......... 100,000 0.00 427,492 266,667 $748,111 $466,667
Allan Leinwand.......... -- -- 132,534 155,466 377,722 390,278
Michael T. Sullivan..... -- -- 32,000 68,000 91,200 193,800
Ron Higgins............. -- -- 158,333 241,667 451,249 688,751
</TABLE>
Employee Benefit Plans
1999 Stock Incentive Plan
Our 1999 stock incentive plan is intended to serve as the successor equity
incentive program to our 1998 stock option/stock issuance plan which was the
successor equity incentive program to our 1997 stock option and incentive plan.
The 1999 stock incentive plan was adopted by the board on April 21, 1999 and
was
51
<PAGE>
subsequently approved by the stockholders on May 3, 1999. The 1999 stock
incentive plan will become effective upon the effective date of the offering.
All outstanding options under our predecessor plan will at that time be
incorporated into the 1999 stock incentive plan, and no further option grants
will be made under that plan. The incorporated options will continue to be
governed by their existing terms, unless the plan administrator elects to
extend one or more features of the 1999 stock incentive plan to those options.
Except as otherwise noted below, the incorporated options have substantially
the same terms as will be in effect for grants made under the discretionary
option grant program of the 1999 stock incentive plan.
An initial reserve of 7,544,000 shares of common stock has been authorized
for issuance under the 1999 stock incentive plan. This share reserve consists
of (i) the number of shares estimated to remain available for issuance under
our predecessor plan, including the shares subject to outstanding options
thereunder, plus (ii) an additional increase of approximately 2,500,000 shares.
The number of shares of common stock reserved for issuance under the 1999 stock
incentive plan will automatically increase on the first trading day in January
each calendar year, beginning in calendar year 2000, by an amount equal to four
percent (4%) of the total number of shares of common stock outstanding on the
last trading day in December in the preceding calendar year, but in no event
will this annual increase exceed 2,000,000 shares. In addition, no participant
in the 1999 stock incentive plan may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances for more than
750,000 shares of common stock in the aggregate per calendar year.
The 1999 stock incentive plan is divided into five separate components:
. the discretionary option grant program, under which eligible
individuals in our employ or service (including officers, non-
employee board members and consultants) may, at the discretion of
the plan administrator, be granted options to purchase shares of
common stock at an exercise price not less than 100% of the fair
market value of those shares on the grant date;
. the stock issuance program under which eligible individuals may, in
the plan administrator's discretion, be issued shares of common
stock directly, upon the attainment of designated performance
milestones or upon the completion of a specified service requirement
or as a bonus for past services;
. the salary investment option grant program, which may, at the plan
administrator's sole discretion, be activated for one or more
calendar years and, if so activated, will allow executive officers
and other key executives selected by the plan administrator the
opportunity to apply a portion of their base salary each year to the
acquisition of special below-market stock option grants;
. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise
price equal to 100% of the fair market value of those shares on the
grant date; and
. the director fee option grant program, which may, in the plan
administrator's sole discretion, be activated for one or more
calendar years and, if so activated, will allow non-employee board
members the opportunity to apply all or a portion of the annual
retainer fee otherwise payable to them in cash each year to the
acquisition of special below-market option grants.
The discretionary option grant program and the stock issuance program will
be administered by the compensation committee. However, a secondary committee
of one or more board members will also have concurrent authority to administer
those programs with respect to individuals who are neither officers nor
directors. The compensation committee or secondary committee as plan
administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when the grants or issuances are to be made, the
number of shares subject to each grant or issuance, the status of any granted
option as either an incentive stock option or a non-statutory stock option
under the Federal tax laws, the vesting schedule to be in effect for the option
grant or stock issuance and the maximum term for which any granted option is to
remain outstanding. However, the board acting by a disinterested majority will
have the exclusive authority to make any discretionary option grants or stock
issuances to members of the compensation committee. The compensation committee
will also have the exclusive
52
<PAGE>
authority to select the executive officers and other highly compensated
employees who may participate in the salary investment option grant program in
the event that program is activated for one or more calendar years. Neither the
compensation committee nor the board will exercise any administrative
discretion with respect to option grants under the salary investment option
grant program or under the automatic option grant or director fee option grant
program for the non-employee board members. All grants under those latter three
programs will be made in strict compliance with the express provisions of each
program.
The exercise price for the shares of common stock subject to option grants
made under the 1999 stock incentive plan may be paid in cash or in shares of
common stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by
the optionee.
The plan administrator will have the authority to effect the cancellation of
outstanding options under the discretionary option grant program (including
options incorporated from our predecessor plan) in return for the grant of new
options for the same or different number of option shares with an exercise
price per share based upon the fair market value of the common stock on the new
grant date.
Stock appreciation rights are authorized for issuance under the
discretionary option grant program. These rights will provide the holders with
the election to surrender their outstanding options for an appreciation
distribution from us equal to the excess of (i) the fair market value of the
vested shares of common stock subject to the surrendered option over (ii) the
aggregate exercise price payable for those shares. Such appreciation
distribution may be made in cash or in shares of common stock. None of the
incorporated options from our predecessor plan contain any stock appreciation
rights.
In the event that we are acquired by merger or asset sale, each outstanding
option under the discretionary option grant program which is not to be assumed
by the successor corporation will automatically accelerate in full, and all
unvested shares under the discretionary option grant and stock issuance
programs will immediately vest, except to the extent our repurchase rights with
respect to those shares are to be assigned to the successor corporation. The
plan administrator will have complete discretion to grant one or more options
under the discretionary option grant program which will vest and become
exercisable for all the option shares in the event those options are assumed in
the acquisition and the optionee's service with us or the acquiring entity is
terminated within a designated period (not to exceed eighteen months) following
that acquisition. The vesting of outstanding shares under the stock issuance
program may be accelerated upon similar terms and conditions.
The plan administrator is also authorized to grant options and structure
repurchase rights so that the shares subject to those options or repurchase
rights will immediately vest in connection with a change in ownership or
control (whether by successful tender offer for more than fifty percent of our
outstanding voting stock or by a change in the majority of our board through
one or more contested elections for board membership). Such accelerated vesting
may occur either at the time of such change or upon the subsequent termination
of the individual's service within a designated period (not to exceed eighteen
months) following the change.
The options to be incorporated from our predecessor plan will immediately
vest and become exercisable for all the option shares if we are acquired by
merger or asset sale, unless the options are assumed by the successor
corporation and our repurchase rights with respect to the unvested shares
subject to those options are concurrently assigned to the successor entity. For
some of these options, the board also has the authority to provide for their
cancellation in return for a cash payment to the option holders in an amount
per cancelled option share equal to the excess of the price to be paid per
share of our common stock in the acquisition over the option exercise price
payable per share under the cancelled option. Other of these options contain a
special acceleration feature. Under that feature, should the optionee's service
be terminated within a designated period following an acquisition in which the
option is assumed and our repurchase rights are assigned, then the option will
vest at that time and become immediately exercisable for all the option shares,
and all unvested shares held by such individual will also vest at that time.
There are no other change in control provisions currently in effect for the
outstanding options under the predecessor plan. However, the plan administrator
will have the discretion to extend the acceleration provisions of the 1999
stock incentive plan to any or all of the options outstanding under our
predecessor plan.
53
<PAGE>
In the event the plan administrator elects to activate the salary investment
option grant program for one or more calendar years, each executive officer and
other key employee selected for participation may elect, prior to the start of
the calendar year, to reduce his or her base salary for that calendar year by a
specified dollar amount not less than $10,000 nor more than $50,000. Each
selected individual who files this timely election will automatically be
granted, on the first trading day in January of the calendar year for which
that salary reduction is to be in effect, a non-statutory option to purchase
that number of shares of common stock determined by dividing the salary
reduction amount by two-thirds of the fair market value per share of common
stock on the grant date. The option will be exercisable at a price per share
equal to one-third of the fair market value of the option shares on the grant
date. As a result, the total spread on the option shares at the time of grant
(the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the amount
of salary invested in that option. The option will vest and become exercisable
in a series of twelve equal monthly installments over the calendar year for
which the salary reduction is to be in effect.
Under the automatic option grant program, eligible non-employee board
members will receive a series of option grants over their period of board
service. Each individual who first becomes a non-employee board member at any
time at or after the effective date of this offering will receive an option
grant for 15,000 shares of common stock on the date such individual joins the
board, provided such individual has not been in our prior employ. In addition,
on the date of each annual stockholders meeting held after the effective date
of this offering, each non-employee board member who is to continue to serve as
a non-employee board member (including the individuals who are currently
serving as non-employee board members) will automatically be granted an option
to purchase 5,000 shares of common stock, provided such individual has served
on the board for at least six months. There will be no limit on the number of
such 5,000 share option grants any one eligible non-employee Board member may
receive over his or her period of continued board service, and non-employee
board members who have previously been in our employ will be eligible to
receive one or more such annual option grants over their period of board
service.
Each automatic grant will have an exercise price per share equal to the fair
market value per share of common stock on the grant date and will have a term
of 10 years, subject to earlier termination following the optionee's cessation
of board service. Each automatic option will be immediately exercisable for all
of the option shares; however, any unvested shares purchased under the 15,000-
share option will be subject to repurchase by Digital Island, at the exercise
price paid per share, should the optionee cease to serve on the board prior to
vesting in those shares. The shares subject to each initial 15,000-share
automatic option grant will vest in a series of six successive equal semi-
annual installments upon the optionee's completion of each month of board
service over the 36 month period measured from the grant date. However, the
shares will immediately vest in full upon certain changes in control or
ownership or upon the optionee's death or disability while a board member. The
shares subject to each annual 5,000-share automatic grant will be fully-vested
when granted. Following the optionee's cessation of board service for any
reason, each option will remain exercisable for a 12-month period and may be
exercised during that time for any or all shares in which the optionee is
vested at the time of such cessation of service.
The Financial Accounting Standards Board recently issued an exposure draft
of a proposed interpretation of the current accounting principles applicable to
equity incentive plans. Under the proposed interpretation, option grants made
to non-employee board members after December 15, 1998 will result in a direct
charge to the company's reported earnings based upon the fair value of the
option measured initially as of the grant date of that option and then
subsequently on the vesting date of each installment of the underlying option
shares. If the proposed interpretation is adopted, then the following changes
will be made to our automatic stock option grant program:
. The 15,000-share option grant will not be made to a newly-elected or
appointed non-employee board member until the first annual
stockholders meeting held more than 12 months after the date of his
or her initial election or appointment to the board. At that annual
meeting, the board member will also receive an option grant for an
additional 5,000 shares under the annual grant portion of the
program.
54
<PAGE>
. One-third of the shares subject to the 15,000-share option grant
will be immediately vested at the time of the option grant, and the
remaining shares will vest in a series of four successive equal
semi-annual installments upon the optionee's completion of each six-
month period of board service over the twenty-four month period
measured from the grant date. However, the shares will immediately
vest in full upon certain changes in control or ownership or upon
the optionee's death or disability while a board member.
If the director fee option grant program is activated in the future, each
non-employee board member will have the opportunity to apply all or a portion
of any annual retainer fee otherwise payable in cash to the acquisition of a
below-market option grant. The option grant will automatically be made on the
first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of common stock on the grant date. As a result,
the total spread on the option (the fair market value of the option shares on
the grant date less the aggregate exercise price payable for those shares) will
be equal to the portion of the retainer fee invested in that option. The option
will vest and become exercisable for the option shares in a series of twelve
equal monthly installments over the calendar year for which the election is to
be in effect. However, the option will become immediately exercisable and
vested for all the option shares upon (i) certain changes in the ownership or
control or (ii) the death or disability of the optionee while serving as a
board member.
The shares subject to each option under the salary investment option grant,
automatic option grant and director fee option grant programs will immediately
vest upon (i) an acquisition of us by merger or asset sale or (ii) the
successful completion of a tender offer for more than 50% of our outstanding
voting stock or a change in the majority of our board effected through one or
more contested elections for board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the automatic option grant, salary investment option
grant and director fee option grant programs and may be granted to one or more
officers as part of their option grants under the discretionary option grant
program. Options with this limited stock appreciation right may be surrendered
to us upon the successful completion of a hostile tender offer for more than
50% of our outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount per
surrendered option share equal to the excess of (i) the highest price per share
of common stock paid in connection with the tender offer over (ii) the exercise
price payable for such share.
The board may amend or modify the 1999 stock incentive plan at any time,
subject to any required stockholder approval. The 1999 stock incentive plan
will terminate on the earliest of (i) April 15, 2009, (ii) the date on which
all shares available for issuance under the 1999 stock incentive plan have been
issued as fully-vested shares or (iii) the termination of all outstanding
options in connection with certain changes in control or ownership.
1999 Employee Stock Purchase Plan
Our 1999 employee stock purchase plan was adopted by the board on April 21,
1999 and approved by the stockholders on May 3, 1999 and will become effective
immediately upon the execution of the Underwriting Agreement for this offering.
The plan is designed to allow our eligible employees and those of our
participating subsidiaries to purchase shares of common stock, at semi-annual
intervals, through their periodic payroll deductions under the plan. 300,000
shares of common stock will initially be reserved for issuance under the plan.
The reserve will automatically increase on the first trading day in January
each year, beginning in calendar year 2000, by an amount equal to one percent
(1%) of the total number of outstanding shares of our common stock on the last
trading day in December in the prior year. In no event will any such annual
increase exceed 500,000 shares.
The plan will be implemented in a series of successive offering periods,
each with a maximum duration of 24 months. However, the initial offering period
will begin on the execution date of the Underwriting Agreement
55
<PAGE>
and will end on the last business day in July 2001. The next offering period
will commence on the first business day in August 2001, and subsequent offering
periods will commence as designated by the plan administrator.
Individuals who are eligible employees (employees scheduled to work more
than 20 hours per week for more than five calendar months per year) on the
start date of any offering period may enter the plan on that start date or on
any subsequent semi-annual entry date (the first business day of February or
August each year). Individuals who become eligible employees after the start
date of the offering period may join the plan on any subsequent semi-annual
entry date within that offering period.
Payroll deductions may not exceed 15% of the participant's base salary, and
the accumulated payroll deductions of each participant will be applied to the
purchase of shares on his or her behalf on each semi-annual purchase date (the
last business day in January and July each year) at a purchase price per share
equal to 85% of the lower of (i) the fair market value of the common stock on
the participant's entry date into the offering period or (ii) the fair market
value on the semi-annual purchase date. In no event, however, may any
participant purchase more than 1,200 shares on any semi-annual purchase date,
nor may all participants in the aggregate purchase more than 200,000 shares on
any semi-annual purchase date. The initial purchase date under the plan will
occur on January 31, 2000.
If the fair market value per share of our common stock on any purchase date
is less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.
Should we be acquired by merger, sale of substantially all our assets or
sale of securities possessing more than fifty percent of the total combined
voting power of our outstanding securities, then all outstanding purchase
rights will automatically be exercised immediately prior to the effective date
of that acquisition. The purchase price will be equal to 85% of the lower of
(i) the fair market value per share of common stock on the participant's entry
date into the offering period in which the acquisition occurs or (ii) the fair
market value per share of common stock immediately prior to the acquisition.
The limitation on the maximum number of shares purchasable in the aggregate on
any one purchase date will not be in effect for any purchase date attributable
to such an acquisition.
The plan will terminate on the earlier of (i) the last business day of July
2009, (ii) the date on which all shares available for issuance under the plan
shall have been sold pursuant to purchase rights exercised thereunder or (iii)
the date on which all purchase rights are exercised in connection with an
acquisition of us by merger or asset sale.
The board may at any time alter, suspend or discontinue the plan. However,
certain amendments, such as increasing the number of shares reserved for
issuance under the plan, require stockholder approval.
401(k)Plan
We sponsor the Digital Island, Inc. 401(k) Plan (the "401(k) Plan").
Employees who complete three months of service with us are eligible to
participate in the 401(k) Plan and may contribute up to 15% of their current
compensation, but in no event may they contribute more than the maximum dollar
amount allowable per calendar year under the federal tax laws. Each participant
is fully vested in his or her salary reduction contributions. Participant
contributions are held in trust and the individual participants may direct the
trustee to invest their accounts in a number of investment alternatives. We may
make contributions to the 401(k) Plan which match a percentage of each
participant's contributions for the year, with the actual percentage match (if
any) for one or more plan years to be determined by us in our discretion. In
addition, we may make discretionary contributions for one or more plan years
which would be allocated to participants on the basis of their compensation for
the plan year. Any discretionary and matching contributions which we may make
to the 401(k) Plan would be subject to a vesting schedule tied to the
participant's years of service with us. To date, we have not made any matching
or discretionary contributions to the 401(k) Plan. We may also make fully
vested qualified non-elective contributions to the 401(k) Plan on behalf of
participants who are not "highly compensated," but have not done so to date.
56
<PAGE>
Employment Contracts and Change of Control Arrangements
We have entered into employment agreements with Ms. Ernst, Mr. Leinwand, and
Mr. Sullivan, each of whom are officers of Digital Island. All outstanding
options held by the foregoing officers will automatically vest in full upon an
acquisition of Digital Island by merger, sale of substantially all the assets
or sale of more than 50% of our outstanding voting securities, unless those
options are assumed or otherwise continued in effect by a successor entity or
our repurchase rights for any unvested shares subject to those options are to
remain in force following such acquisition. The exercise price per share of the
options below were determined by our board of directors as described in "--
Stock Options and Stock Appreciation Rights."
Ruann F. Ernst. On May 20, 1998, Ruann F. Ernst, our Chief Executive Officer
and President, entered into an employment agreement with us. This agreement
provided for an annual salary of $150,000. Ms. Ernst is also entitled to
incentive compensation in an amount not less than forty percent (40%) of her
base salary upon the achievement of performance milestones mutually agreed upon
with our Board of Directors. On March 1, 1999, Ms. Ernst's annual salary was
increased to $200,000. In connection with her employment agreement we granted
Ms. Ernst options to purchase up to 794,159 shares of our common stock at a per
share exercise price of $1.50 per share.
Allan Leinwand. On February 3, 1997, Allan Leinwand, our Vice President of
Engineering and Chief Technology Officer, entered into an employment agreement
with us. This agreement provided for an annual salary of $105,000. Mr. Leinwand
is also eligible for a discretionary quarterly bonus of up to $10,000. Should
we terminate Mr. Leinwand for any lawful reason, we must pay Mr. Leinwand a
severance payment equal to one hundred percent of his then current annual base
salary. Currently, Mr. Leinwand's annual salary is $170,000, and he is eligible
for a discretionary quarterly bonus of up to $12,500. In connection with his
employment agreement, we granted to Mr. Leinwand options to purchase up to
240,000 shares of our common stock at a per share exercise price of $0.40 per
share.
Michael T. Sullivan. On May 5, 1997, Michael T. Sullivan, our Vice President
of Finance, entered into an employment agreement with us. This agreement
provided for an annual salary of $120,000. Mr. Sullivan is also eligible for a
discretionary quarterly bonus of up to $5,000. On March 16, 1998, Mr.
Sullivan's annual salary was increased to $150,000 and his discretionary
quarterly bonus was increased to $7,500. In connection with his employment
agreement, we granted to Mr. Sullivan options to purchase up to 100,000 shares
of our common stock at a per share exercise price of $0.40 per share.
Limitation of Liability and Indemnification
Our certificate of incorporation eliminates, to the fullest extent permitted
by Delaware law, liability of a director to Digital Island or our stockholders
for monetary damages for conduct as a director. Although liability for monetary
damages has been eliminated, equitable remedies such as injunctive relief or
rescission remain available. In addition, a director is not relieved of his or
her responsibilities under any other law, including the federal securities
laws.
Our certificate of incorporation requires us to indemnify our directors to
the fullest extent permitted by Delaware law. We have also entered into
indemnification agreements with each of our directors. We believe that the
limitation of liability provisions in our certificate of incorporation and
indemnification agreements may enhance our ability to attract and retain
qualified individuals to serve as directors. See "Description of Capital
Stock."
57
<PAGE>
CERTAIN TRANSACTIONS
Some of our directors, executive officers and affiliates have entered into
transactions with us as follows:
Preferred Stock Financings
Since October 1, 1997 we have sold 4,283,181 shares of our Series C
Preferred Stock at a price of $3.45 per share, 2,022,476 shares of our Series
D Preferred Stock at a price of $5.25 per share and 11,764,706 shares of our
Series E Preferred Stock at a price of $4.25 per share in a series of private
financings. We sold these securities pursuant to preferred stock purchase
agreements and an investors' rights agreement on substantially similar terms
(except for terms relating to date and price), under which we made standard
representations, warranties, and covenants, and pursuant to which we provided
the purchasers thereunder with registration rights, information rights, and
rights of first refusal, among other provisions standard in venture capital
financings. Each share of our preferred stock will automatically convert into
one share of our common stock upon the completion of the offering, except that
each share of Series D Preferred Stock will automatically convert into
1.088084 shares of our common stock after giving effect to an antidilution
adjustment resulting from the sale of the Series E Preferred Stock. The
purchasers of the preferred stock included, among others, the following
holders of 5% or more of our common stock, directors, and entities associated
with directors:
<TABLE>
<CAPTION>
Shares of Preferred Stock
Purchased
-----------------------------------
Name Series C Series D Series E
---- --------- --------- ---------
<S> <C> <C> <C>
Bass Trust U/D/T dated April 29,
1988(1)............................... 39,420 34,095 27,765
Chase Venture Capital Associates,
L.P.(2)............................... -- -- 2,823,529
The Cotsakos Revocable Trust dated
9/3/87(3)............................. -- 28,571 --
Crescendo II, L.P.(4).................. 289,855(5) 143,429(5) 463,294(5)
Crosspoint Venture Partners............ 289,855 -- 926,824
E*TRADE Group, Inc.(6)................. -- 1,333,334 562,588
FW Ventures III, LP.................... -- -- 1,822,353
Marcelo Gumucio........................ 29,000 -- --
Merrill Lynch KECALP................... -- -- 1,482,824
Tudor Global Trading, Inc.............. 1,015,000 190,476 744,470
Vanguard V, L.P.(7).................... 260,870 142,857 --
</TABLE>
- ----------
(1) Charlie Bass, a director of Digital Island, is the Trustee of the Bass
Trust U/D/T dated April 29, 1998.
(2) Shahan Soghikian, a director of Digital Island, is a General Partner of
Chase Venture Capital Associates, L.P.
(3) Christos Cotsakos, a director of Digital Island, is the Trustee of The
Cotsakos Revocable Trust dated 9/3/87.
(4) David Spreng, a director of Digital Island, is the Managing Member of
Crescendo Ventures II, LLC, the general partner of Crescendo II, L.P.
(5) Includes shares held by Eagle Ventures II, LLC pursuant to a parallel
investment agreement with Crescendo.
(6) Mr. Cotsakos, a director of Digital Island, is Chairman of the Board of
E*TRADE.
(7) Cliff Higgerson, a director of Digital Island, is the General Partner of
Vanguard V, L.P.
Investors' Rights Agreement
Pursuant to the terms of the Amended and Restated Investors' Rights
Agreement dated February 19, 1999, as amended, by and among Digital Island and
the holders of our preferred stock, the investors acquired certain
registration rights with respect to their capital stock of Digital Island. At
any time after the earlier of (i) February 19, 2001, or (ii) one year after
our initial public offering, holders of more than two-thirds of the currently
outstanding preferred stock may require us to effect registration under the
Securities Act covering the lesser of 50% of the outstanding Registrable
Securities (as defined in the Investors' Rights Agreement) or a
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number of shares of common stock yielding gross aggregate proceeds in excess of
$15.0 million, subject in either case to the board of directors' right if such
registration would harm Digital Island to defer such registration for a period
up to 60 days. In addition, if we propose to issue equity securities under the
Securities Act for our own account in an underwritten public offering, then any
of the investors has a right (subject to quantity limitations determined by the
underwriters) to request that Digital Island register such investor's
Registrable Securities. All registration expenses incurred in connection with
the first two demand registrations described above and all piggyback
registrations will be borne by Digital Island. The participating investors will
pay for underwriting discounts and commissions incurred in connection with any
such registrations. We have agreed to indemnify the investors against certain
liabilities in connection with any registration effected pursuant to the
foregoing Investors' Rights Agreement, including Securities Act liabilities.
Employment and Indemnification Agreements
We have entered into employment agreements with Ms. Ernst, Mr. Leinwand and
Mr. Sullivan, who are Named Executive Officers. We have also entered into
indemnification agreements with each of our other directors and officers. See
"Executive Compensation and Other Information--Employment Contracts and Change
of Control Arrangements," and "--Limitation of Liability and Indemnification."
On January 1, 1997, Sanne Higgins, our Vice President of Corporate
Communications, and the spouse of Ron Higgins our Chairman of the board of
directors, entered into an employment agreement with us. This agreement
provided for an annual salary of $100,000 and has been increased to $125,000.
Ms. Higgins is also eligible for a discretionary annual bonus of up to $40,000.
In connection with her employment agreement, we granted to Ms. Higgins options
to purchase up to 75,000 shares of our common stock at a per share exercise
price of $0.40 per share, being the fair market value as determined by our
board of directors after taking into account our operating performance, recent
sales of securities, market conditions and other relevant factors.
Director Arrangements and Stockholder Notes
In February 1998, Digital Island granted a nonstatutory option to purchase a
total of 183,000 shares of our common stock to Marcelo Gumucio, then the
Chairman of the Board of Directors and now a director of Digital Island. These
options were immediately exercisable and subject to repurchase by Digital
Island, with the right to repurchase expiring in 16 equal quarterly
installments. At the time of the option grant, Mr. Gumucio exercised the option
to purchase the entire 183,000 shares of common stock, in exchange for a
$109,800 note. Under the terms of the note, interest accrues on outstanding
amounts at 5.61% per annum. Interest is to be repaid in four equal annual
installments commencing February 24, 1999. The entire principal amount is due
and payable in one lump sum on February 24, 2002. As of March 31, 1999, the
outstanding unpaid principal balance of the shareholder note was $109,800. Mr.
Gumucio also received an aggregate of $60,000 in 1998 in connection with his
services to us as Chairman of our board of directors.
Officer Loans
On April 21, 1999, Ms. Ernst, our President and Chief Executive Officer, and
Mr. Higgins, our Chairman of the Board, each delivered a promissory note to us
in payment of the exercise price of certain outstanding stock options they hold
under our 1998 stock option/stock issuance plan. Ms. Ernst delivered a full-
recourse promissory note in the principal amount of $199,998 in payment of the
exercise price for 133,332 shares of our common stock, and Mr. Higgins
delivered a full-recourse promissory note in the amount of $86,400 in payment
of the exercise price for 216,000 shares of our common stock. Each note bears
interest at the rate of 7.75% per annum, compounded semi-annually, and is
secured by the purchased shares. Accrued interest is due and payable at
successive quarterly intervals over the four-year term of the note, and the
principal balance will become due and payable in one lump sum at the end of
such four-year term. However, the entire unpaid balance of the note will become
due and payable upon termination of employment or failure to pay any
installment of interest when due. None of the shares serving as security for
the note may be sold unless the principal portion of the note attributable to
those shares, together with the accrued interest on that principal portion, is
paid to us.
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E*TRADE Agreements
We have entered into a global data distribution agreement with E*TRADE dated
August 1, 1997 where we provide network connectivity for E*TRADE. Mr. Costakos,
a member of our board of directors, is President, Chief Executive Officer and a
director of E*TRADE.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us
and our officers, directors, principal stockholders and their affiliates will
be approved by a majority of the board of directors, and be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 31, 1999
(except as indicated in the footnotes below) with respect to the beneficial
ownership of our common stock by:
. each person known by us to own beneficially more than 5%, in the
aggregate, of the outstanding shares of our common stock,
. the directors and named executive officers of Digital Island who
hold securities of Digital Island, and
. all executive officers and directors as a group.
Unless otherwise indicated, the address for each shareholder is c/o Digital
Island, Inc., 353 Sacramento Street, Suite 1520, San Francisco, California
94111. Except as indicated by footnote, we understand that the persons named in
the table below have sole voting and investment power with respect to all
shares shown as beneficially owned by them, subject to community property laws
where applicable. In the table below, "Beneficial Ownership of Shares Before
Offering" reflects the beneficial ownership of the common stock, assuming the
conversion of the preferred stock; "Beneficial Ownership of Shares After
Offering" reflects the beneficial ownership of the common stock, assuming the
conversion of the preferred stock and after giving effect to the offering.
Shares of common stock subject to options, which are currently exercisable or
exercisable within 60 days of March 31, 1999, are deemed outstanding for
computing the percentages of the person holding such options but are not deemed
outstanding for computing the percentages of any other person. The number of
shares reflects the number of shares of common stock in the aggregate assuming
the conversion of the preferred stock. Each share of preferred stock is
currently convertible into one share of common stock, with the exception of the
Series D Preferred Stock, each share of which currently converts into 1.088084
shares of common stock. Percentage ownership is based on 27,965,736 shares of
common stock and preferred stock, as converted, outstanding as of March 31,
1999. See "Description of Capital Stock--Preferred Stock."
<TABLE>
<CAPTION>
Beneficial Beneficial
Ownership of Ownership of
Shares Before the Shares After the
Offering Offering
----------------- -----------------
Name of Beneficial Owner Number Percent Number Percent
- ------------------------ --------- ------- --------- -------
<S> <C> <C> <C> <C>
Crosspoint Venture Partners(1)............ 3,246,679 11.6% 3,246,679 9.2%
Chase Venture Capital Associates,
L.P.(2).................................. 2,823,529 10.1% 2,823,529 8.0%
Vanguard V, L.P(3)........................ 2,561,310 9.2% 2,561,310 7.2%
Crescendo Venture Management, LLC(4)...... 2,109,212 7.5% 2,109,212 6.0%
E*TRADE Group, Inc.(5).................... 2,013,367 7.2% 2,013,367 5.7%
Tudor Global Trading, Inc.(6)............. 1,966,724 7.0% 1,966,724 5.6%
FW Ventures III, LP(7).................... 1,882,353 6.7% 1,882,353 5.3%
Merrill Lynch KECALP(8)................... 1,482,824 5.3% 1,482,824 4.2%
Ron Higgins(9)............................ 2,075,000 7.4% 2,075,000 5.8%
Ruann F. Ernst(10)........................ 604,574 2.1% 604,574 1.7%
T. L. Thompson............................ -- -- -- --
Paul Evenson.............................. -- -- -- --
Allan Leinwand(11)........................ 161,725 * 161,725 *
Rick Schultz.............................. -- -- -- --
Michael T. Sullivan(12)................... 83,000 * 83,000 *
Tim Wilson(13)............................ 133,366 * 133,366 *
Charlie Bass(14).......................... 419,283 1.5% 419,283 1.2
Marcelo A. Gumucio(15).................... 212,000 * 212,000 *
Christos Cotsakos(16)..................... 36,644 * 36,644 *
Cliff Higgerson(17)....................... -- -- -- --
Shahan Soghikian(18)...................... -- -- -- --
David Spreng(19).......................... -- -- -- --
All directors and executive officers as a
group (14 people)(20).................... 3,725,592 12.8% 3,725,592 10.2%
</TABLE>
- ----------
* Less than 1%.
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(1) Stock consists of 1,450,000 shares of Series A Preferred Stock held
directly by Crosspoint Venture Partners, 580,000 shares of Series B
Preferred Stock and 289,855 shares of Series C Preferred Stock held
directly by Crosspoint Venture Partners 1996 and 926,824 shares of Series
E Preferred Stock held directly by Crosspoint Venture Partners LS 1997
(collectively, with Crosspoint Venture Partners 1996 and Crosspoint
Venture Partners, the "Crosspoint Entities"). The address for the
Crosspoint Entities is 2925 Woodside Road, Woodside, California 94062.
(2) Stock consists of 2,823,529 shares of Series E Preferred Stock. Mr.
Soghikian, a director of Digital Island, is the General Partner of Chase
Capital Partners, the General Partner of Chase Venture Capital Associates,
L.P. The address for Chase Venture Capital Associates, L.P. is 50
California Street, Suite 2940, San Francisco, California 94111.
(3) Stock includes 95,000 shares subject to warrants exercisable for common
stock, 1,450,000 shares of Series A Preferred Stock, 600,000 shares of
Series B Preferred Stock, 260,870 shares of Series C Preferred Stock and
142,857 shares of Series D Preferred Stock. Mr. Higgerson, a director of
Digital Island, is the General Partner of Vanguard V, L.P. The address of
Vanguard V, L.P. is 505 Hamilton Avenue, Suite 305, Palo Alto, California
94301.
(4) Stock consists of an aggregate of 1,200,000 shares of Series B Preferred
Stock, 289,855 shares of Series C Preferred Stock, 143,429 shares of
Series D Preferred Stock and 463,294 shares of Series E Preferred Stock
held directly by Eagle Ventures II, LLC and Crescendo II, L.P.
(collectively, the "Crescendo Entities"). Mr. Spreng, a director of
Digital Island, is the President of Eagle Ventures II, LLC and the
Managing Member of Crescendo Ventures II, LLC, the General Partner of
Crescendo II, LP. The address for the Crescendo Entities is 505 Hamilton
Avenue, Suite 315, Palo Alto, California 94301.
(5) Stock consists of 1,333,334 shares of Series D Preferred Stock and 562,588
shares of Series E Preferred Stock. Mr. Cotsakos, a director of Digital
Island, is Chairman of the Board and Chief Executive Officer of E*TRADE
Group, Inc. The address of E*TRADE Group, Inc. is Four Embarcadero Place,
2400 Geng Road, Palo Alto, California 94303.
(6) Stock consists of an aggregate of 1,015,000 shares of Series C Preferred
Stock, 190,476 shares of Series D Preferred Stock and 744,470 shares of
Series E Preferred Stock held directly by Raptor Global Fund L.P., Raptor
Global Fund Ltd. and Tudor Private Equity Fund L.P. (collectively, the
"Tudor Entities"). The address for the Tudor Entities is Tudor Global
Trading, Inc., 40 Rowes Wharf, Second Floor, Boston, Massachusetts 02110.
(7) Stock consists of 1,882,353 shares of Series E Preferred Stock. The address
of FW Ventures III, LP is 2775 Sand Hill Road, Menlo Park, California
94025.
(8) Stock consists of 1,482,824 shares of Series E Preferred Stock held
directly by KECALP, Inc., KECALP Inc., as Nominee for Merrill Lynch KECALP
International L.P. 1997 and Merrill Lynch KECALP L.P. 1997 (collectively,
the "Merrill Lynch KECALP Entities"). The address for the Merrill Lynch
KECALP Entities is World Financial Center, North Tower, New York, NY 10281.
(9) Stock consists of 1,450,000 shares of common stock held directly by Mr.
Higgins, 225,000 shares of common stock subject to options exercisable
within 60 days of March 31, 1999, of which 216,000 shares were exercised by
Mr. Higgins on April 20, 1999, 150,000 shares of common stock held directly
by the Ron and Sanne Higgins 1998 Irrevocable Trust Agreement f/b/o
Dana Espinoza (the "Espinoza Trust"), 150,000 shares of common stock held
directly by the Ron and Sanne Higgins 1998 Irrevocable Trust Agreement
f/b/o Nina Higgins (the "Higgins Trust") and 100,000 shares of common stock
held by the Ron and Sanne Higgins 1998 Irrevocable Grandchildren's Trust
Agreement (the "Grandchildren's Trust"). Mr. Higgins is a Trustee of the
Espinoza Trust, the Higgins Trust and the Grandchildren's Trust.
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(10) Stock consists of 100,000 shares of common stock held directly by Ms.
Ernst and 504,574 shares of common stock subject to options exercisable
within 60 days of March 31, 1999, of which 133,332 shares were exercised
by Ms. Ernst on April 20, 1999.
(11) Stock consists of common stock subject to options exercisable within 60
days of March 31, 1999, of which 125,000 shares were exercised by Mr.
Leinwand on April 9, 1999.
(12) Stock consists of 25,000 shares of common stock held directly by Mr.
Sullivan and 58,000 shares of common stock subject to options exercisable
within 60 days of March 31, 1999, of which 46,000 shares were exercised by
Mr. Sullivan on April 21, 1999.
(13) Stock consists of common stock subject to options exercisable within 60
days of March 31, 1999, of which 41,400 shares were exercised by Mr.
Wilson on April 20, 1999.
(14) Stock consists of 225,000 shares of Series A Preferred Stock, 90,000
shares of Series B Preferred Stock, 39,420 shares of Series C Preferred
Stock, 34,095 shares of Series D Preferred Stock and 27,765 shares of
Series E Preferred Stock held directly by the Bass Trust U/D/T dated April
29, 1988 (the "Bass Trust"). Mr. Bass, a director of Digital Island, is
the Trustee of the Bass Trust.
(15) Stock consists of 183,000 shares of common stock and 29,000 shares of
Series C Preferred Stock.
(16) Stock consists of 5,556 shares of common stock subject to options
exercisable within 60 days of March 31, 1999 and 28,571 shares of Series D
Preferred Stock held directly by The Cotsakos Revocable Trust dated
September 3, 1987. Excludes 2,013,367 shares of preferred stock, as
converted, held by E*TRADE Group, Inc. Mr. Cotsakos, a director of Digital
Island, is the Trustee of the Cotsakos Trust and Chairman of the Board and
Chief Executive Officer of E*TRADE Group, Inc. Mr. Cotsakos disclaims
beneficial ownership of the shares of preferred stock held by E*TRADE
Group, Inc. except to the extent of his pecuniary interest therein. See
footnote 5 above.
(17) Excludes an aggregate of 2,561,310 shares comprised of warrants
exercisable for common stock and preferred stock, as converted, held by
Vanguard V, L.P. Mr. Higgerson, a director of Digital Island, is the
General Partner of Vanguard V, L.P. Mr. Higgerson disclaims beneficial
ownership of warrants exercisable for common stock and preferred stock
held by Vanguard V, L.P. except to the extent of his pecuniary interest
therein. See footnote 3 above.
(18) Excludes 2,823,529 shares of preferred stock, as converted, held by Chase
Venture Capital Associates, L.P. Mr. Soghikian, a director of Digital
Island, is the General Partner of Chase Capital Partners, the General
Partner of Chase Venture Capital Associates, L.P. Mr. Soghikian disclaims
beneficial ownership of the shares of preferred stock held by Chase
Venture Capital Associates, L.P. except to the extent of his pecuniary
interest therein. See footnote 2 above.
(19) Excludes an aggregate 2,109,212 shares of preferred stock, as converted,
held by the Crescendo Entities. Mr. Spreng, a director of Digital Island,
is the President of Eagle Ventures II, LLC and the Managing Member of
Crescendo Ventures II, LLC, the General Partner of Crescendo. Mr. Spreng
disclaims beneficial ownership of the shares of preferred stock held by
the Crescendo Entities, except to the extent of his pecuniary interest
therein. See footnote 4 above.
(20) See footnotes 9 through 19 above. Includes options exercisable for
1,088,221 shares of common stock within 60 days of March 31, 1999 under
the 1998 stock option/stock issuance plan.
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DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of Digital
Island will consist of 100,000,000 shares of common stock, $0.001 par value per
share, and 10,000,000 shares of preferred stock, $0.001 par value per share.
Common Stock
As of March 31, 1999, 2,622,225 shares of our common stock were outstanding
and held of record by 35 stockholders. After this offering, 35,465,736 shares
will be outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of options after March 31, 1999. Concurrently with the
completion of this offering, each outstanding share of our preferred stock will
be exchanged for and converted into one share of our common stock, except that
each share of our Series D Preferred Stock will convert into 1.088084 shares of
our common stock to reflect a price based antidilution adjustment. The
following description of rights assumes this conversion.
Holders of common stock are entitled to receive dividends as may from time
to time be declared by our board of directors out of funds legally available
therefor. See "Dividend Policy." Holders of common stock are entitled to one
vote per share on all matters on which the holders of common stock are entitled
to vote and do not have any cumulative voting rights. Holders of common stock
have no preemptive, conversion, redemption or sinking fund rights. In the event
of a liquidation, dissolution or winding up of Digital Island, holders of
common stock are entitled to share equally and ratably in the assets of the
Digital Island, if any, remaining after the payment of all our liabilities and
the liquidation preference of any then outstanding class or series of preferred
stock. The rights, preferences and privileges of holders of common stock are
subject to any series of preferred stock that we may issue in the future, as
described below.
Preferred Stock
Our board of directors has the authority to issue preferred stock in one or
more series and to fix the number of shares constituting any such series and
the preferences, limitations and relative rights, including dividend rights,
dividend rate, voting rights, terms of redemption, redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
series, without any further vote or action by our stockholders. The issuance of
preferred stock by our board of directors could adversely affect the rights of
holders of common stock.
The potential issuance of preferred stock may have the effect of delaying or
preventing a change in control of Digital Island, may discourage bids for our
common stock at a premium over the market price of the common stock and may
adversely affect the market price of, and the voting and other rights of the
holders of, common stock. Immediately after this offering there will be no
shares of preferred stock outstanding, and we have no current plans to issue
shares of preferred stock.
Anti-Takeover, Limited Liability and Indemnification Provisions
Effect of Delaware Anti-takeover Statute. We are subject to Section 203 of
the Delaware General Corporation Law, as amended ("Section 203"), which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless:
. prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
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<PAGE>
. upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding those shares owned (1) by persons who are directors and
also officers and (2) by employee stock plans in which employee
participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender
or exchange offer; or
. on or subsequent to such date, the business combination is approved
by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.
Section 203 defines business combinations to include:
. any merger or consolidation involving the corporation and any
interested stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of
the assets of the corporation involving the interested stockholder;
. any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
. the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more or the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Certificate of Incorporation and Bylaw Provisions. Our certificate of
incorporation and bylaws include provisions that may have the effect of
discouraging, delaying or preventing a change in control of Digital Island or
an unsolicited acquisition proposal that a stockholder might consider
favorable, including a proposal that might result in the payment of a premium
over the market price for the shares held by stockholders. These provisions are
summarized in the following paragraphs.
Classified Board of Directors. Our certificate of incorporation and bylaws
provide for our board to be divided into three classes of directors serving
staggered, three year terms. The classification of the board has the effect of
requiring at least two annual stockholder meetings, instead of one, to replace
a majority of the members of the board of directors.
Supermajority Voting. Our certificate of incorporation requires the approval
of the holders of at least 66 2/3% of our combined voting power to effect
certain amendments to the certificate of incorporation with respect to the
bylaws, directors, stockholder meetings and indemnification or to effect any
business combination (as defined in Section 203) relating to us. Our bylaws may
be amended by either a majority of the board of directors, or the holders of a
majority of our voting stock, provided that certain amendments approved by
stockholders require the approval of at least 66 2/3% of our combined voting
power.
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Authorized but Unissued or Undesignated Capital Stock. Our authorized
capital stock consists of 100,000,000 shares of common stock and 10,000,000
shares of preferred stock. No preferred stock will be designated upon
consummation of this offering. After this offering, we will have outstanding
35,465,736 shares of common stock. The authorized but unissued (and in the case
of preferred stock, undesignated) stock may be issued by the board of directors
in one or more transactions. In this regard, our certificate of incorporation
grants the board of directors broad power to establish the rights and
preferences of authorized and unissued preferred stock. The issuance of shares
of preferred stock pursuant to the board of director's authority described
above could decrease the amount of earnings and assets available for
distribution to holders of common stock and adversely affect the rights and
powers, including voting rights, of such holders and may have the effect of
delaying, deferring or preventing a change in control of Digital Island. The
board of directors does not currently intend to seek stockholder approval prior
to any issuance of preferred stock, unless otherwise required by law or the
rules of any exchange on which our securities are then traded.
Special Meetings of Stockholders. Our bylaws provide that special meetings
of stockholders of Digital Island may be called only by the board of directors,
or by the Chairman of our board of directors or our President.
No Stockholder Action by Written Consent. Our certificate of incorporation
and bylaws provide that an action required or permitted to be taken at any
annual or special meeting of the stockholders of Digital Island may only be
taken at a duly called annual or special meeting of stockholders. This
provision prevents stockholders from initiating or effecting any action by
written consent.
Notice Procedures. Our bylaws establish advance notice procedures with
regard to all stockholder proposals to be brought before meetings of
stockholders of Digital Island, including proposals relating to the nomination
of candidates for election as directors, the removal of directors and
amendments to our certificate of incorporation or bylaws. These procedures
provide that notice of such stockholder proposals must be timely given in
writing to the Secretary of Digital Island prior to the meeting. Generally, to
be timely, notice must be received by our Secretary not less than 120 days
prior to the meeting. The notice must contain certain information specified in
the bylaws.
Other Anti-Takeover Provisions. See "Executive Compensation and Other
Information--Employee Benefit Plans" for a discussion of certain provisions of
the 1999 stock incentive plan which may have the effect of discouraging,
delaying or preventing a change in control of Digital Island or unsolicited
acquisition proposals.
Limitation of Director Liability. Our certificate of incorporation limits
the liability of our directors (in their capacity as directors but not in their
capacity as officers) to Digital Island or our stockholders to the fullest
extent permitted by Delaware law. Specifically, directors of Digital Island
will not be personally liable for monetary damages for breach of a director's
fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to Digital Island
or our stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law, which
relates to unlawful payments of dividends or unlawful stock
repurchases or redemptions; or
. for any transaction from which the director derived an improper
personal benefit.
Indemnification Arrangements. Our bylaws provide that the directors and
officers of Digital Island shall be indemnified and provide for the advancement
to them of expenses in connection with actual or threatened proceedings and
claims arising out of their status as such to the fullest extent permitted by
the Delaware General Corporation Law. Prior to consummation of this offering,
we will enter into indemnification
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agreements with each of our directors and executives officers that will provide
them with rights to indemnification and expense advancement to the fullest
extent permitted under the Delaware General Corporation Law.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is BankBoston, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock. Future sales of substantial amounts of common stock in the public
market, or the prospect of such sales, could adversely affect prevailing market
prices.
Upon completion of this offering, 35,465,736 shares of common stock will be
outstanding, assuming no exercise of the underwriters' over-allotment option
and no exercise of options after March 31, 1999. Of these shares, all of the
shares sold in this offering will be freely tradeable without restriction under
the Securities Act, unless purchased by an "affiliate" of Digital Island, as
that term is defined in Rule 144. The remaining 27,965,736 shares outstanding
after completion of this offering are "restricted securities" as defined in
Rule 144 and may be sold in the public market only if registered under the
Securities Act or if they qualify for an exemption from registration, including
an exemption pursuant to Rule 144.
Substantially all of the holders of our outstanding common stock as of the
date hereof have agreed that, subject to certain exceptions and consents,
during the period beginning from the date of this prospectus, and continuing to
and including the date 180 days after the date of this prospectus, they will
not offer, sell, contract to sell or otherwise dispose of any securities of
Digital Island. Bear, Stearns & Co. Inc., may in its sole discretion and at any
time without notice, release all or any portion of the shares subject to such
agreements. Upon expiration of these agreements, 16,001,170 shares will be
eligible for immediate resale in the public market subject to the limitations
of Rule 144. Of such shares, approximately 9,195,875 will be eligible for
immediate resale in the public market pursuant to Rule 144(k) without regard to
the volume and manner of sale limitations in Rule 144. In addition, a total of
75,000 shares held by several holders of our outstanding common stock as of the
date hereof will be eligible for immediate resale in the public market
immediately upon the effectiveness of this offering.
In general, under Rule 144, a person, including an "affiliate" of Digital
Island, who has beneficially owned restricted shares for at least one year is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of common stock
(approximately 354,657 shares immediately following this offering) or the
average weekly trading volume of the common stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are subject to certain manner
of sale limitations, notice requirements and the availability of current public
information about Digital Island. Rule 144(k) provides that a person who is not
an "affiliate" of the issuer at any time during the three months preceding a
sale and who has beneficially owned shares for at least two years is entitled
to sell those shares at any time without compliance with the public
information, volume limitation, manner of sale and notice provisions of Rule
144.
Additionally in general, under Rule 701 of the Securities Act as currently
in effect, any of our employees, consultants or advisors who purchasers shares
from us in connection with a compensatory stock or option plan or other written
agreement is eligible to resell such shares 90 days after the effective date of
this offering in reliance on Rule 144, but without compliance with certain
restrictions, including the holding period, contained in Rule 144.
As of March 31, 1999, options to purchase 4,218,839 shares of common stock
were outstanding under the 1998 stock option/stock issuance plan. We intend to
file as soon as practicable following completion of this offering a
registration statement on Form S-8 under the Securities Act covering shares of
common stock reserved for issuance under the 1999 stock incentive plan. Based
on the number of options expected to be outstanding upon completion of this
offering and shares reserved for issuance under the 1999 stock incentive plan,
the S-8 registration statement would cover 11,762,839 shares. See "Executive
Compensation and Other Information--Employee Benefit Plans". The S-8
registration statement will become effective immediately upon filing,
whereupon, subject to the satisfaction of applicable exercisability periods,
Rule 144 volume limitations applicable to affiliates and, in certain cases, the
agreements with the underwriters referred to above, shares of Common Stock to
be issued upon exercise of outstanding options granted pursuant to the 1999
stock incentive plan (to the extent that such shares were held by affiliates)
will be available for immediate resale in the open market.
68
<PAGE>
UNDERWRITING
The underwriters of this offering named below, for whom Bear, Stearns & Co.
Inc., Lehman Brothers Inc., and Thomas Weisel Partners LLC are acting as
representatives, have severally agreed with Digital Island, subject to the
terms and conditions of the Underwriting Agreement (the form of which has been
filed as an exhibit to the Registration Statement on Form S-1 of which this
prospectus is a part), to purchase from Digital Island the aggregate number of
shares of common stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc. ........................................
Lehman Brothers Inc. ............................................
Thomas Weisel Partners LLC.......................................
----
Total..........................................................
====
</TABLE>
The nature of the respective obligations of the underwriters is such that
all of the shares of common stock (other than shares of common stock covered by
the over-allotment option described below) must be purchased if any are
purchased. Those obligations are subject, however, to various conditions,
including the approval of certain matters by counsel. Digital Island has agreed
to indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act, and, where such indemnification is
unavailable, to contribute to payments that the underwriters may be required to
make in respect of such liabilities.
The Company has been advised that the underwriters propose to offer the
shares of common stock directly to the public initially at the public offering
price set forth on the cover page of this Prospectus and to certain selected
dealers at such price less a concession not to exceed $ per share, that
the underwriters may allow, and such selected dealers may reallow, a concession
to certain other dealers not to exceed $ per share and that after the
commencement of this offering, the public offering price and the concessions
may be changed.
Digital Island has granted to the underwriters an option to purchase in the
aggregate up to 1,125,000 additional shares of common stock to be sold in this
offering solely to cover over-allotments, if any. The option may be exercised
in whole or in part at any time within 30 days after the date of this
prospectus. To the extent the option is exercised, the underwriters will be
severally committed, subject to certain conditions, including the approval of
certain matters by counsel, to purchase the additional shares of common stock
in proportion to their respective purchase commitments as indicated in the
preceding table.
The underwriters have reserved for sale at the initial public offering price
up to 5% of the number of shares of common stock offered hereby for sale to
certain directors, officers, other employees, business affiliates and related
persons of Digital Island who have expressed an interest in purchasing shares.
The number of shares available for sale to the general public will be reduced
to the extent any reserved shares are purchased. Any reserved shares not so
purchased will be offered by the underwriters on the same basis as the other
shares offered hereby.
Digital Island and our executive officers, directors and substantially all
of our current securityholders have agreed that, subject to certain limited
exceptions, for a period of 180 days after the date of this prospectus, without
the prior written consent of Bear, Stearns & Co. Inc., they will not, directly
or indirectly, issue, sell, offer or agree to sell or otherwise dispose of any
shares of common stock (or securities convertible into, exchangeable for or
evidencing the right to purchase shares of common stock). Bear, Stearns & Co.
Inc., may in its sole discretion and at any time without notice, release all or
any portion of the shares subject to such agreements.
69
<PAGE>
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price will be determined
through negotiations among Digital Island and the representatives of the
underwriters. Among the factors considered in making such determination were
Digital Island's financial and operating history and condition, market
valuations of other companies engaged in activities similar to ours, our
prospects and prospects for the industry in which we do business in general,
the management of Digital Island, prevailing equity market conditions and the
demand for securities considered comparable to those of Digital Island.
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after this offering.
Specifically, the underwriters may over-allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock, than have been sold to them by Digital Island. The underwriters
may elect to cover any such short position by purchasing shares of common stock
in the open market or by exercising the over-allotment option granted to the
underwriters. In addition, the underwriters may stabilize or maintain the price
of the common stock by bidding for or purchasing shares of common stock in the
open market and may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in this
offering are reclaimed if shares of common stock previously distributed in this
offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price of the common stock at a level above that which might otherwise
prevail in the open market. The imposition of a penalty bid may also affect the
price of the common stock to the extent that it discourages resales thereof. No
representation is made as to the magnitude or effect of any such stabilization
or other transactions. Such transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
37 filed public offerings of equity securities, of which 17 have been
completed, and has acted as a syndicate member in an additional 10 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
70
<PAGE>
LEGAL MATTERS
The validity of the issuance of the common stock offered in this offering
will be passed upon for us by Brobeck, Phleger & Harrison LLP, Palo Alto,
California, and will be passed upon for the underwriters by Skadden, Arps,
Slate, Meagher & Flom LLP, Palo Alto, California. As of the date of this
prospectus, attorneys of Brobeck, Phleger & Harrison LLP beneficially own an
aggregate of 41,750 shares of our common stock.
EXPERTS
The Financial Statements of Digital Island as of September 30, 1998 and 1997
and for each of the years in the three-year period then ended included in this
prospectus have been audited by PricewaterhouseCoopers LLP, independent
auditors, as stated in their report appearing herein.
ADDITIONAL INFORMATION
Digital Island has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act with respect to the common stock offered in this offering. This
prospectus omits certain information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
Digital Island and the common stock offered in this offering, reference is made
to such Registration Statement, exhibits and schedules. Statements contained in
this prospectus as to the contents of any contract or other document referred
to are complete in all material respects, and you should refer to the copy of
such contract or other document filed as an exhibit to the Registration
Statement. After consummation of this offering we will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith, will be required to file annual and quarterly
reports, proxy statements and other information with the Commission. The
Registration Statement, including the exhibits and schedules filed therewith,
as well as such reports and other information filed by us may be inspected
without charge at the public reference facilities maintained by the Securities
and Exchange Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Securities and Exchange 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.
Copies of such materials may be obtained from the Public Reference Section of
the Securities and Exchange Commission, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates and from the Commission's Internet
Web site at http://www.sec.gov.
71
<PAGE>
DIGITAL ISLAND, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Shareholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Digital Island, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Digital Island, Inc. (the Company)
at September 30, 1998 and 1997, 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.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
February 19, 1999
The foregoing report is in the form that will be signed upon the completion of
the reincorporation of the Company in Delaware and the related exchange of
common and preferred shares as described in Note 16 to the Consolidated
Financial Statements.
San Francisco, California
June , 1999
F-2
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
------------------------ --------------------------
1999
1997 1998 1999 pro forma
---------- ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $4,583,771 $ 5,710,937 $ 29,750,924 $ 29,760,424
Investments............. 1,982,664 10,122,631 20,915,423
Accounts receivable, net
of allowance of $0,
$55,000, and $168,655
respectively........... 73,558 662,491 2,707,374
Restricted cash......... 383,862 263,082 263,082
Loan receivable......... -- 531,553 --
Deferred offering
costs.................. -- 132,119 --
Prepaid expenses and
other.................. 53,539 151,819 1,364,409
---------- ------------ ------------ ------------
Total current assets.... 7,077,394 17,574,632 55,001,212 55,010,712
Property and equipment,
net..................... 2,109,485 4,937,717 7,039,207
Other assets............. 36,007 104,455 318,948
---------- ------------ ------------ ------------
Total assets........... $9,222,886 $ 22,616,804 $ 62,359,367 $ 62,368,867
========== ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings......... $ 211,393 $ 800,579 $ 800,579
Capital lease
obligations............ -- 756,091 1,019,000
Accounts payable........ 1,922,101 2,407,828 4,774,686
Accrued liabilities..... 322,132 716,133 3,943,669
Deferred revenue........ 8,742 11,000 453,395
---------- ------------ ------------
Total current
liabilities............ 2,464,368 4,691,631 10,991,329
Bank borrowings, less
current portion......... 493,361 884,282 599,192
Capital lease
obligations, less
current portion......... -- 1,550,648 1,619,730
---------- ------------ ------------
Total liabilities....... 2,957,729 7,126,561 13,210,251
---------- ------------ ------------
Commitments (Note 8).
Stockholders' equity:
Series A through E
convertible preferred
stock, $0.001 par
value:
Authorized: 7,000,000
shares in 1997,
14,000,000 shares in
1998 and 30,000,000
shares at March 31,
1999 (unaudited);
issued and outstanding:
7,000,000 shares in
1997, 13,305,657 shares
in 1998, and 25,070,363
shares at March 31,
1999 (unaudited);
(liquidation value:
$86,894,973 at March
31, 1999); pro forma--
no shares authorized,
issued, and
outstanding............ 7,000 13,305 25,070 $ --
Common stock, $0.001 par
value:
Authorized: 13,000,000
shares in 1997,
30,000,000 shares in
1998, and 40,000,000
shares at March 31,
1999 (unaudited);
issued and outstanding:
2,215,875 shares in
1997, 2,519,835 shares
in 1998 and 2,622,225
shares at March 31,1999
(unaudited); pro
forma--70,000,000
shares authorized and
27,965,736 shares
issued and
outstanding............ 2,216 2,520 2,622 27,966
Additional paid-in
capital................ 11,586,366 37,192,110 90,168,185 90,206,513
Deferred compensation... -- -- (4,969,246) (4,969,246)
Stockholder note
receivable............. -- (109,800) (109,800) (109,800)
Common stock warrants... 29,102 29,102 29,102 --
Accumulated deficit..... (5,359,527) (21,636,994) (35,996,817) (35,996,817)
---------- ------------ ------------ ------------
Total stockholders'
equity................. 6,265,157 15,490,243 49,149,116 49,158,616
---------- ------------ ------------ ------------
Total liabilities and
stockholders' equity.. $9,222,886 $ 22,616,804 $ 62,359,367 $ 62,368,867
========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Years Ended September 30, March 31,
----------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- ----------- ------------ ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ 218,186 $ 2,342,759 $ 691,183 $ 3,795,487
Costs and expenses:
Cost of revenue........ -- 2,508,351 9,038,678 4,025,661 7,749,903
Sales and marketing.... -- 1,205,448 4,846,722 1,786,816 5,170,560
Product development.... -- 378,241 1,693,962 571,030 2,010,387
General and
administrative........ 25,669 1,501,659 3,392,135 1,163,693 2,962,877
Stock compensation
expense............... -- -- -- -- 516,264
-------- ----------- ------------ ----------- ------------
Total costs and
expenses............. 25,669 5,593,699 18,971,497 7,547,200 18,409,991
-------- ----------- ------------ ----------- ------------
Loss from operations.. (25,669) (5,375,513) (16,628,738) (6,856,017) (14,614,504)
-------- ----------- ------------ ----------- ------------
Interest income
(expense), net......... (578) 87,349 353,340 64,000 256,572
-------- ----------- ------------ ----------- ------------
Loss before income
taxes................ (26,247) (5,288,164) (16,275,398) (6,792,017) (14,357,932)
Provision for income
taxes.................. 800 800 2,069 1,269 1,891
-------- ----------- ------------ ----------- ------------
Net loss.............. $(27,047) $(5,288,964) $(16,277,467) $(6,793,286) $(14,359,823)
======== =========== ============ =========== ============
Basic and diluted net
loss per share......... $ (0.10) $ (3.53) $ (7.28) $ (3.07) $ (6.07)
======== =========== ============ =========== ============
Weighted average shares
outstanding used in per
share calculation...... 275,000 1,497,711 2,236,452 2,215,875 2,366,951
======== =========== ============ =========== ============
Pro forma basic and
diluted net loss per
share.................. $ (1.35) $ (0.78)
============ ============
Weighted average shares
outstanding used in pro
forma per share
calculation............ 12,042,539 18,353,258
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Stockholder Common
------------------- ----------------- Paid-in Deferred Note Stock Accumulated
Shares Amount Shares Amount Capital Compensation Receivable Warrants Deficit
---------- ------- --------- ------ ----------- ------------ ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
September 30,
1995............ 2,000,000 $ 2,000 275,000 $ 275 $ 129,025 $ -- $ -- $ -- $ (43,516)
Warrants issued
in connection
with convertible
note ........... -- -- -- -- -- -- -- 22,975 --
Net loss........ -- -- -- -- -- -- -- -- (27,047)
---------- ------- --------- ------ ----------- ----------- --------- ------- ------------
Balances,
September 30,
1996............ 2,000,000 2,000 275,000 275 129,025 -- -- 22,975 (70,563)
Common stock
issued for
professional
services........ -- -- 70,875 71 28,279 -- -- -- --
Conversion of
preferred stock
into common
stock........... (2,000,000) (2,000) 2,000,000 2,000 -- -- -- -- --
Repurchase of
common stock.... -- -- (130,000) (130) (1,170) -- -- -- --
Series A
preferred stock
issued for cash,
net of issuance
costs of
$16,569......... 3,341,546 3,342 -- -- 3,321,635 -- -- -- --
Series B
preferred stock
issued for cash,
net of issuance
costs of
$46,199......... 3,000,000 3,000 -- -- 7,450,801 -- -- -- --
Warrants issued
in connection
with convertible
note ........... -- -- -- -- -- -- -- 6,127 --
Conversion of
notes payable
into Series A
preferred
stock........... 658,454 658 -- -- 657,796 -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (5,288,964)
---------- ------- --------- ------ ----------- ----------- --------- ------- ------------
Balances,
September 30,
1997............ 7,000,000 7,000 2,215,875 2,216 11,586,366 -- -- 29,102 (5,359,527)
Series C
preferred stock
issued for cash,
net of issuance
costs of
$34,011......... 4,283,181 4,283 -- -- 14,738,680 -- -- -- --
Series D
preferred stock
issued for cash,
net of issuance
costs of
$33,293......... 2,022,476 2,022 -- -- 10,582,684 -- -- -- --
Issuance of
stockholder note
in exchange for
common stock.... -- -- 183,000 183 109,617 -- (109,800) -- --
Common stock
issued for
professional
services........ -- -- 6,000 6 18,894 -- -- -- --
Common stock
issued for cash
upon exercise of
options......... -- -- 114,960 115 155,869 -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (16,277,467)
---------- ------- --------- ------ ----------- ----------- --------- ------- ------------
Balances,
September 30,
1998............ 13,305,657 13,305 2,519,835 2,520 37,192,110 -- (109,800) 29,102 (21,636,994)
Series E
preferred stock
issued for cash,
net of issuance
costs of
$2,538,580...... 11,764,706 11,765 -- -- 47,449,655 -- -- -- --
Common stock
issued for cash
upon exercise of
options......... -- -- 102,390 102 40,910 -- -- -- --
Deferred
compensation in
connection with
issuance of
stock options... -- -- -- -- 5,485,510 (5,485,510) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 516,264 -- -- --
Net loss........ -- -- -- -- -- -- (14,359,823)
---------- ------- --------- ------ ----------- ----------- --------- ------- ------------
Balances, March
31, 1999
(unaudited)..... 25,070,363 $25,070 2,622,225 $2,622 $90,168,185 $(4,969,246) $(109,800) $29,102 $(35,996,817)
========== ======= ========= ====== =========== =========== ========= ======= ============
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Balances,
September 30,
1995............ $ 87,784
Warrants issued
in connection
with convertible
note ........... 22,975
Net loss........ (27,047)
-------------
Balances,
September 30,
1996............ 83,712
Common stock
issued for
professional
services........ 28,350
Conversion of
preferred stock
into common
stock........... --
Repurchase of
common stock.... (1,300)
Series A
preferred stock
issued for cash,
net of issuance
costs of
$16,569......... 3,324,977
Series B
preferred stock
issued for cash,
net of issuance
costs of
$46,199......... 7,453,801
Warrants issued
in connection
with convertible
note ........... 6,127
Conversion of
notes payable
into Series A
preferred
stock........... 658,454
Net loss........ (5,288,964)
-------------
Balances,
September 30,
1997............ 6,265,157
Series C
preferred stock
issued for cash,
net of issuance
costs of
$34,011......... 14,742,963
Series D
preferred stock
issued for cash,
net of issuance
costs of
$33,293......... 10,584,706
Issuance of
stockholder note
in exchange for
common stock.... --
Common stock
issued for
professional
services........ 18,900
Common stock
issued for cash
upon exercise of
options......... 155,984
Net loss........ (16,277,467)
-------------
Balances,
September 30,
1998............ 15,490,243
Series E
preferred stock
issued for cash,
net of issuance
costs of
$2,538,580...... 47,461,420
Common stock
issued for cash
upon exercise of
options......... 41,012
Deferred
compensation in
connection with
issuance of
stock options... --
Amortization of
deferred
compensation.... 516,264
Net loss........ (14,359,823)
-------------
Balances, March
31, 1999
(unaudited)..... $49,149,116
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months
Years Ended September 30, Ended March 31,
----------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- ----------- ------------ ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(27,047) $(5,288,964) $(16,277,467) $(6,793,286) $(14,359,823)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization.......... -- 158,247 547,376 285,283 435,275
Amortization of
capital lease
obligations........... -- -- 263,433 7,705 488,402
Stock compensation
expense............... -- -- -- -- 516,264
Non-cash revenue in
connection with
barter agreement...... -- (131,912) -- -- --
Debt discount in
conjunction with
convertible notes..... -- 29,102 -- -- --
Amortization of
discounts on
investments........... -- (23,908) (227,280) (30,249) (170,668)
Professional services
in exchange for
common stock.......... -- 28,350 18,900 -- --
Loss on disposal of
property and
equipment............. -- -- 1,373 -- --
Change in operating
assets and
liabilities:
Accounts receivable... -- (73,558) (588,933) (239,983) (2,044,883)
Prepaids expenses and
other................ 1,949 27,137 (98,280) (238,586) (1,212,590)
Deferred offering
costs................ -- -- (132,119) -- 132,119
Accounts payable...... 14,372 1,901,036 485,727 (136,994) 2,366,858
Accrued liabilities... -- 322,132 394,001 41,378 3,227,536
Deferred revenue...... -- 8,742 2,258 (8,742) 442,395
Other assets.......... -- (36,007) (68,448) 24,582 (216,093)
-------- ----------- ------------ ----------- ------------
Net cash used in
operating
activities.......... (10,726) (3,079,603) (15,679,459) (7,088,892) (10,395,208)
-------- ----------- ------------ ----------- ------------
Cash flows from
investing activities:
Purchases of property
and equipment......... (2,327) (2,128,376) (1,234,005) (160,417) (2,283,814)
Proceeds from
maturities of short-
term investments...... -- 1,000,000 5,600,000 2,000,000 12,200,000
Decrease (increase) in
restricted cash....... -- (383,862) 120,780 61,983 --
Purchases of short-term
investments........... -- (2,958,756) (13,512,687) (4,684,688) (22,822,124)
-------- ----------- ------------ ----------- ------------
Net cash used in
investing
activities.......... (2,327) (4,470,994) (9,025,912) (2,783,122) (12,905,938)
-------- ----------- ------------ ----------- ------------
Cash flows from
financing activities:
Proceeds from issuance
of preferred stock,
net................... -- 10,778,778 25,327,669 11,000,100 47,461,420
Proceeds from issuance
of common stock....... -- -- 155,984 -- 41,012
Proceeds from issuance
of notes payable...... 350,000 308,454 -- -- --
Proceeds from bank
borrowings............ -- 704,754 647,378 527,417 531,553
Repayments of bank
borrowings............ -- -- (198,824) (42,712) (285,090)
Repayments of capital
lease obligations..... -- -- (99,670) (16,015) (407,762)
Repurchase of common
stock................. -- (1,300) -- -- --
-------- ----------- ------------ ----------- ------------
Net cash provided by
financing
activities.......... 350,000 11,790,686 25,832,537 11,468,790 47,341,133
-------- ----------- ------------ ----------- ------------
Net increase in cash
and cash
equivalents........ 336,947 4,240,089 1,127,166 1,596,776 24,039,987
Cash and cash
equivalents, beginning
of period.............. 6,735 343,682 4,583,771 4,583,771 5,710,937
-------- ----------- ------------ ----------- ------------
Cash and cash
equivalents, end of
period................. $343,682 $ 4,583,771 $ 5,710,937 $ 6,180,547 $ 29,750,924
======== =========== ============ =========== ============
Supplemental disclosures
of cash flow
information:
Cash paid for
interest.............. $ 1,814 $ 27,219 $ 128,850 $ 45,213 $ 167,604
======== =========== ============ =========== ============
Cash paid for income
taxes................. $ -- $ 1,600 $ 2,069 $ 1,269 $ 1,891
======== =========== ============ =========== ============
Supplemental schedule of
noncash investing and
financing activities:
Common stock issued for
professional services.. $ -- $ 28,350 $ 18,900 $ -- $ --
======== =========== ============ =========== ============
Receivable on bank
borrowings............. $ -- $ -- $ 531,553 $ -- $ --
======== =========== ============ =========== ============
Notes payable converted
into preferred stock... $ -- $ 658,454 $ -- $ -- $ --
======== =========== ============ =========== ============
Conversion of preferred
stock into common
stock.................. $ -- $ 21,300 $ -- $ -- $ --
======== =========== ============ =========== ============
Note receivable issued
in exchange for common
stock.................. $ -- $ -- $ 109,800 $ 109,800 $ --
======== =========== ============ =========== ============
Capital lease
obligations for
equipment.............. $ -- $ -- $ 2,406,409 $ 251,443 $ 739,753
======== =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
1. The Company:
Digital Island, Inc. (the Company) offers a global internet protocol
applications network designed to deploy business-critical applications
worldwide. The Company also offers services such as network management and
application services to customers deployed on its network. The Company was
incorporated in February 1994 under the name Smartvision, Inc. Together, these
services provide a product offering that enables multinational corporations to
reach end users in worldwide local markets.
2. Summary of Significant Accounting Policies:
Initial Public Offering and Unaudited Pro Forma Balance Sheet (unaudited)
In April 1999, the Board of Directors of the Company authorized the filing
of a registration statement with the Securities and Exchange Commission (the
SEC) that would permit the Company to sell shares of the Company's common stock
in connection with a proposed initial public offering (IPO). If the offering is
consummated under the terms presently anticipated, all the outstanding shares
of the Company's convertible preferred stock will automatically convert into
shares of common stock upon the closing of the proposed IPO and the exercise of
outstanding warrants to purchase 95,000 shares of common stock at an exercise
price of $0.10 per share. These warrants expire upon an IPO. The conversion of
the convertible preferred stock and the exercise of the warrants has been
reflected in the accompanying unaudited pro forma balance sheet as if it had
occurred on March 31, 1999.
Principles of Consolidation:
The accompanying interim consolidated financial statements of the Company
include the accounts of Digital Island, Inc. and its wholly-owned subsidiaries,
Digital Island B.V. and Digital Island Ltd., which were established in December
1998 and March 1999, respectively. All significant intercompany accounts and
transactions are eliminated in consolidation.
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.
Unaudited Interim Financial Information:
The accompanying interim consolidated financial statements as of and for the
six months ended March 31, 1998 and 1999, together with the related notes are
unaudited but include all adjustments, consisting of only normal recurring
adjustments, which the Company considers necessary to present fairly, in all
material respects, the consolidated financial position, and consolidated
results of operations and cash flows for the six month periods ended March 31,
1998 and 1999. Results for the six months ended March 31, 1999 are not
necessarily indicative of results for the entire year.
F-7
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
Revenue Recognition:
Revenues are comprised primarily of bandwidth charges, equipment co-location
and storage fees, and one-time fees for installation. Bandwidth charges are
billed and recognized monthly based on customer usage. All other revenues are
based on flat-rate monthly charges. Installation fees are typically recognized
at the time that installation occurs. To date, such revenues have not
significantly exceeded the direct costs of installation.
Computation of Historical Net Loss Per Share and Pro Forma Net Loss Per Share:
The Company has adopted Statement of Financial Accounting Standards No. 128,
(SFAS 128) "Earnings Per Share." In accordance with SFAS 128, basic earnings
per share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the period, using either the as if converted method for
convertible preferred stock or the treasury stock method for options and
warrants. Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued for nominal consideration, prior to the
anticipated effective date of an IPO, are included in the calculation of basic
and diluted net loss per share, as if they were outstanding for all periods
presented. To date, the Company has not had any issuances for nominal
consideration.
Diluted net loss per share for the years ended September 30, 1996, 1997 and
1998, and the six months ended March 31, 1998 and 1999 does not include the
effect of 0, 0, 639, 0 and 0 stock options, respectively, and 0, 67,420,
71,250, 71,250, and 71,250 common stock warrants, respectively, or 2,000,000,
7,000,000, 13,305,657, 11,283,181, and 25,070,363 shares of convertible
preferred stock on an "as if converted" basis, respectively, as the effect of
their inclusion is antidilutive during each period.
Pro forma basic and diluted net loss per share is presented to reflect per
share data assuming the conversion of all outstanding shares of convertible
preferred stock into common stock as if the conversion had taken place at the
beginning of fiscal 1998 or at the date of issuance, if later. This data is
unaudited.
Cash and Cash Equivalents:
Cash and cash equivalents are stated at cost, which approximates fair value.
The Company includes in cash equivalents all highly liquid investments which
mature within three months of their purchase date.
Fair Value of Financial Instruments:
The carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, notes payable,
accounts payable and accrued liabilities approximate fair value due to their
short maturities.
Investments:
At September 30, 1997 and 1998, and March 31, 1999 the Company's investments
consisted of commercial paper. Remaining maturities at the time of purchase are
generally less than one year.
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments in
Debt and Equity Securities." This statement requires that securities be
classified as "held to maturity," "available for sale" or "trading," and the
securities in each
F-8
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
classification be accounted for at either amortized cost or fair market value,
depending upon their classification. The Company has the intent and the ability
to hold investments until maturity. Therefore, all such investments are
classified as held to maturity investments and carried at amortized cost in the
accompanying consolidated financial statements.
The Company's investments consist of the following:
<TABLE>
<CAPTION>
March 31, 1999
September 30, 1997 September 30, 1998 (unaudited)
--------------------- ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial paper........ $1,982,664 $1,982,000 $10,122,631 $10,124,557 $20,915,423 $20,798,002
</TABLE>
Restricted Cash:
Restricted cash consists of irrevocable standby letters of credit issued by
the Company's banks. Funds are generally held in certificates of deposit at the
Company's bank, and have been established in favor of a third party
beneficiary. The funds are released to the beneficiary in the event that the
Company fails to comply with certain specified contractual obligations.
Provided the Company meets these contractual obligations, the letter of credit
is discharged and the Company is no longer restricted from use of the cash.
Property and Equipment:
Property and equipment are recorded at cost and depreciated using the
straight-line method over their useful lives. Equipment recorded under capital
leases is amortized using the straight-line method over the shorter of the
respective lease term or the estimated useful life of the asset. Network and
communications equipment is depreciated over five years, computer equipment and
software is depreciated over three years, and furniture and fixtures are
depreciated over seven years. Maintenance and repairs are charged to expense as
incurred, and improvements and betterments are capitalized. When assets are
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
operations in the period realized.
Long-lived Assets:
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121, (SFAS 121)
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. No such impairments have
been identified to date. The Company assesses the impairment of long-lived
assets when events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable.
Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, (SFAS 109) "Accounting for Income
Taxes." Under SFAS 109, deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances
F-9
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized. Income tax expense represents the tax payable for the
current period and the change during the period in the deferred tax assets and
liabilities.
Software Development Costs:
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, (SFAS 86) "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Under
the standard, capitalization of software development costs begins upon the
establishment of technological feasibility. To date, all such amounts have been
insignificant, and accordingly, the Company has charged all such costs to
research and development expenses.
Deferred Revenues:
Deferred revenues primarily represent advanced billings to customers, or
prepayments by customers prior to completion of installation or prior to
provision of contractual bandwidth usage.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and accounts receivable. The Company places its temporary investments with one
major financial institution.
The Company performs ongoing credit evaluations, does not require
collateral, and maintains reserves for potential credit losses on customer
accounts when deemed necessary. For the year ended September 30, 1997, three
customers accounted for approximately 56%, 20%, and 10%, respectively, of all
revenue generated by the Company, and 0%, 57%, and 31% of accounts receivable
at September 30, 1997, respectively. For the year ended September 30, 1998, the
same customers accounted for approximately 13%, 20%, and 4%, respectively, of
all revenue generated by the Company, and 19%, 5%, and 0% of accounts
receivable at September 30, 1998, respectively. In addition, a fourth customer
accounted for 12% of all revenues generated by the Company for the year ended
September 30, 1998, and 14% of accounts receivable at September 30, 1998. For
the six months ended March 31, 1998, the same four customers accounted for
approximately 15%, 31%, 9%, and 16%, respectively, of all revenues generated by
the Company. For the six months ended March 31, 1999, the same customers
accounted for 5%, 16%, 1%, and 7%, respectively, of all revenues generated by
the Company, and 3%, 35%, 0%, and 6%, respectively, of accounts receivable at
March 31, 1999.
Risks and Uncertainties:
Factors that may materially and adversely affect the Company's future
operating results include: demand for and market acceptance of the Company's
products and services; introductions of products and services or enhancements
by the Company and its competitors; competitive factors that affect our
pricing; capacity utilization of the Digital Island Global IP applications
network; reliable continuity of service and network availability; the ability
and cost of bandwidth and our ability to increase bandwidth as necessary; the
timing of customer installations; the mix of products and services sold by the
Company; customer retention; the timing and success of marketing efforts and
product and service introductions by the Company; the timing and magnitude of
capital expenditures, including costs relating to the expansion of operations;
the timely expansion of its network infrastructure; fluctuations in bandwidth
used by customers; the retention of key personnel; conditions specific to the
Internet industry and other general economic factors; and new government
legislation and regulation.
F-10
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
Comprehensive Income:
The Company has adopted the accounting treatment prescribed by Financial
Accounting Statement No. 130, "Comprehensive Income." The adoption of this
statement had no impact on the Company's financial statements for the periods
presented.
Segment Information:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information about
operating segments in financial statements. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. In accordance with the provisions of SFAS No. 131, the Company has
determined that it does not currently have any separately reportable operating
segments.
Recently Issued Accounting Pronouncements:
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position No. 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires computer software
costs related to internal software that are incurred in the preliminary project
stage should be expensed as incurred. Once the capitalization criteria of SOP
98-1 have been met, external direct costs of materials and services consumed in
developing or obtaining internal-use computer software; payroll and payroll-
related costs for employees who are directly associated with and who devote
time to the internal-use computer software project (to the extent of the time
spent directly on the project); and interest costs incurred when developing
computer software for internal use should be capitalized. SOP 98-1 is effective
for financial statements for fiscal years beginning after December 15, 1998.
Accordingly, the Company will adopt SOP 98-1 in its consolidated financial
statements for the year ending September 30, 2000. The adoption of SOP 98-1 is
not expected to have a material effect on the consolidated financial statements
of the Company.
On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities," which provides guidance on the financial reporting of
start-up costs and organization costs. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December
15, 1998. As the Company has not capitalized such costs, the adoption of SOP
98-5 is not expected to have an impact on the consolidated financial statements
of the Company.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. The Company does not believe the
adoption of SFAS 133 will have a material effect on the Company's consolidated
results of operations or financial condition.
F-11
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
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>
Network equipment........................... $1,503,352 $2,299,279 $4,129,370
Communications equipment.................... 167,571 194,106 197,378
Computer equipment and software............. 301,980 514,651 816,119
Furniture, fixtures, and leasehold
improvements............................... 294,829 491,388 640,371
Equipment and fixtures under capital
leases..................................... -- 2,406,409 3,146,162
---------- ---------- ----------
2,267,732 5,905,833 8,929,400
Less accumulated depreciation and
amortization............................... 158,247 968,116 1,890,193
---------- ---------- ----------
Total property and equipment, net........... $2,109,485 $4,937,717 $7,039,207
========== ========== ==========
</TABLE>
4. Income Taxes:
For the years ended September 30, 1996, 1997, and 1998, the provision for
income taxes consists of state taxes.
The primary components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
September 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Net operating loss carryforwards, federal and
state............................................ $2,140,000 $8,440,000
Accrued employee benefits......................... 41,000 61,000
Sales tax......................................... 11,000 1,000
Accounts receivable allowance..................... -- 22,000
Property and equipment............................ (49,000) (358,000)
---------- ----------
2,143,000 8,166,000
Less valuation allowance.......................... (2,143,000) (8,166,000)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets. The valuation
allowance increased by $2,121,000 and $6,023,000 for the years ended September
30, 1997 and 1998, respectively. The effective income tax rate differs from the
statutory federal income tax rate primarily due to the inability to recognize
the benefit of net operating losses.
At September 30, 1998, the Company had NOL carryforwards of approximately
$21,100,000 and $21,097,000 for federal and state income tax purposes,
respectively. These carryforwards expire beginning 2009 and 2002, respectively.
Pursuant to the provisions of Section 382 of the Internal Revenue Code,
utilization of the NOLs are subject to annual limitations through 2013 due to a
greater than 50% change in the ownership of the Company which occurred during
fiscal 1998.
F-12
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
5. Bank Borrowings:
Bank borrowings consist of:
<TABLE>
<CAPTION>
September 30,
--------------------- March 31,
1997 1998 1999
--------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Line of credit........................... $ -- $ 230,400 $ 230,400
Revolving credit facility................ 704,754 579,150 451,013
Equipment term facility.................. -- 875,311 718,358
--------- ---------- ----------
704,754 1,684,861 1,399,771
Current maturities....................... (211,393) (800,579) (800,579)
--------- ---------- ----------
Long-term bank borrowings................ $ 493,361 $ 884,282 $ 599,192
========= ========== ==========
</TABLE>
On November 21, 1996, the Company entered into a revolving credit agreement
(the Revolving Agreement) with a commercial lender. The aggregate credit under
the Revolving Agreement was originally $250,000, and was increased to $750,000
on April 18, 1997. Interest under the Revolving Agreement is 0.75% over the
"Prime Rate" as announced from time to time by the lender. At both September
30, 1997 and 1998, and March 31, 1999, the effective interest rate was 9.25%,
9.25%, and 8.50%, respectively. The weighted average interest rates for the
years ended September 30, 1997 and 1998, and the six months ended March 31,
1999 were 9.24%, 9.25%, and 8.55%, respectively. Under the terms of the
Revolving Agreement, advances could be made for the purchase of equipment until
October 18, 1997. At that date, the unpaid principal balance of equipment
advances plus interest became payable over 36 months in equal installments.
Outstanding borrowings under the Revolving Agreement at September 30, 1997 and
1998, and March 31, 1999 were $704,754, $579,150, and $451,013, respectively.
All amounts outstanding related to advances for equipment purchases.
On November 19, 1997, the Company entered into a loan agreement (the Loan
Agreement) with the same commercial lender associated with the Revolving
Agreement. Under the terms of the Loan Agreement, the Company was extended a
$5,000,000 line of credit, as well as an equipment loan term facility for
$2,500,000. Any borrowings under this line of credit are collateralized by
substantially all assets of the Company. Certain of the Loan Agreement's
provisions restrict the ability of the Company to declare or pay any dividends
while the credit agreement is in effect.
Advances under the line of credit are limited to a percentage of the
Company's recurring contract revenues, as defined in the Loan Agreement. The
Loan Agreement contains certain standard covenants. At September 30, 1998 and
March 31, 1999, $230,400 and $230,400, respectively, was outstanding under the
line of credit. Interest on borrowings are charged at the lender's prime rate
plus 0.25%, which was 8.75% and 8.00% at September 30, 1998 and March 31, 1999,
respectively. The weighted average interest rate for the year ended September
30, 1998 and the six months ended March 31, 1999, was 8.75% and 8.04%,
respectively. Advances under the line of credit can be repaid and reborrowed at
any time until the maturity date of May 31, 1999.
Under the terms of the equipment loan term facility, the Company had the
ability to borrow up to $1,250,000 for equipment purchases from November 19,
1997 to May 19, 1998 (Equipment Line A), as well as borrow an additional
$1,250,000 from February 1, 1998 to September 30, 1998 (Equipment Line B). At
September 30, 1998 and March 31, 1999, $223,796 and $181,835, respectively was
outstanding related to
F-13
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
advances made under Equipment Line A, and $651,515 and $536,523, respectively,
was outstanding related to advances made under Equipment Line B. Interest on
these borrowings are charged at the lender's prime rate plus 0.75%, which was
9.25% and 8.50% at September 30, 1998 and March 31, 1999, respectively. The
weighted average interest rate for the year ended September 30, 1998 and the
six months ended March 31, 1999 was 9.25% and 8.55%, respectively. Repayments
of advances on Equipment Line A commenced on June 19, 1998, with the unpaid
principal balance as of May 19, 1998, plus interest, being repaid in 36 equal
monthly installments. Repayments of advances on Equipment Line B commenced on
October 19, 1998 in 34 monthly installments of principal and interest.
The Loan Agreement was due to mature on November 19, 1998. On November 18,
1998, the Loan Agreement was modified to extend the maturity date to February
15, 1999. On February 15, 1999 the Loan Agreement was modified again to extend
the maturity date to May 31, 1999.
The Company did not comply with certain financial covenants as of September
30, 1997 and at various points during fiscal 1998, and accordingly, received an
amendment and waiver dated October 6, 1998 from its lender, which waived
covenant violations for periods prior to September 30, 1998 and eliminated one
financial covenant with respect to a minimum profitability threshold.
Subsequent to September 30, 1998, the Company did not comply with certain
financial covenants. The Company obtained waivers for all covenant violations
from October 1, 1998 to January 31, 1999. Through April 22, 1999 the Company
has been in compliance with all covenants.
Interest expense for the years ended September 30, 1997 and 1998, and the
six months ended March 31, 1998 and 1999 was $35,673, $94,400, $42,602, and
$65,738, respectively.
Principal maturities of bank borrowings are as follows:
<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
<S> <C>
1999.............................. $ 800,579
2000.............................. 570,181
2001.............................. 314,101
----------
$1,684,861
==========
</TABLE>
6. Notes Payable:
Between September 27, 1996 and January 31, 1997, the Company issued three
convertible notes totalling $600,000 to a commercial lender. These notes had a
simple interest rate of 6%. In March 1997, all three notes plus accrued
interest of $8,454 were converted into 608,454 shares of Series A preferred
stock.
Prior to October 1, 1996, the Company had issued a $50,000 convertible note
to a related party. In March 1997, this note was converted into 50,000 shares
of Series A preferred stock.
F-14
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
7. Accrued Liabilities:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
September 30,
----------------- March 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Employee compensation......................... $209,275 $595,975 $1,146,930
Accrued sales tax............................. 38,851 2,346 32,637
Travel and entertainment...................... 47,505 52,000 365,500
Series E preferred stock financing costs...... -- -- 2,200,000
Other accrued liabilities..................... 26,501 65,812 198,602
-------- -------- ----------
Total....................................... $322,132 $716,133 $3,943,669
======== ======== ==========
</TABLE>
8. Commitments:
Leases:
The Company leases office space under noncancelable operating leases
expiring through May 2002. Rent expense for the years ended September 30, 1996,
1997, and 1998, and the six months ended March 31, 1998 and 1999 was $0,
$136,678, $715,115, $189,617, and $335,646, respectively.
The Company also leases network equipment under capital leases agreements.
These capital leases are governed by master lease agreements with two separate
lessors. The total credit extended to the Company under these master lease
agreements totalled $3,500,000 and $4,423,169 at September 30, 1998 and March
31, 1999, respectively, of which $2,306,739 and $2,638,730, respectively, had
been borrowed and was outstanding.
The Company's future minimum lease payments under noncancelable operating
leases having an initial or remaining term of more than one year, and capital
leases are as follows:
<TABLE>
<CAPTION>
Year ending September 30, Operating Capital
------------------------- ---------- ----------
<S> <C> <C>
1999................................................. $ 649,204 $ 896,061
2000................................................. 660,380 896,061
2001................................................. 558,708 751,944
2002................................................. 257,718 --
---------- ----------
Total minimum lease payments......................... $2,126,010 2,544,066
==========
Less amounts representing interest................... (237,327)
----------
Present value of minimum lease payments.............. 2,306,739
Less current portion of capital lease obligations.... (756,091)
----------
Long-term portion of capital lease obligations....... $1,550,648
==========
</TABLE>
Carrier Line Agreements:
The Company has entered into various bandwidth capacity agreements with
domestic and foreign carriers. These agreements are generally cancellable and
provide for termination fees if cancelled by the Company prior to expiration.
F-15
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
9. Earnings Per Share:
The following is a reconciliation of the numerator and denominator of basic
and diluted earnings per share (EPS):
<TABLE>
<CAPTION>
Six Months Ended
Years Ended September 30, March 31,
----------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- ----------- ------------ ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Numerator--Basic and
Diluted EPS
Net Loss............... $(27,047) $(5,288,964) $(16,277,467) $(6,793,286) $(14,359,823)
======== =========== ============ =========== ============
Denominator--Basic and
Diluted EPS
Weighted average Common
Stock outstanding..... 275,000 1,497,711 2,361,010 2,250,062 2,586,201
Common Stock subject to
repurchase............ -- -- (124,558) (34,187) (219,250)
-------- ----------- ------------ ----------- ------------
Total weighted average
Common Stock
outstanding........... 275,000 1,497,711 2,236,452 2,215,875 2,366,951
======== =========== ============ =========== ============
Basic and diluted loss
per share.............. $ (0.10) $ (3.53) $ (7.28) $ (3.07) $ (6.07)
======== =========== ============ =========== ============
Pro forma:
Denominator--Basic and
Diluted EPS
Weighted Average Common
Stock................. 2,361,010 2,586,201
Conversion of Preferred
Stock................. 9,711,087 15,891,307
Conversion of
Warrants.............. 95,000 95,000
Common Stock subject to
repurchase............ (124,558) (219,250)
------------ ------------
Total weighted average
Common Stock
outstanding pro
forma................ 12,042,539 18,353,258
============ ============
Basic and diluted pro
forma loss per share... $ (1.35) $ (0.78)
============ ============
</TABLE>
10. Stockholders' Equity:
Convertible Preferred Stock:
As of March 31, 1999, the Company had five series of preferred stock
authorized and outstanding. The holders of the various series of preferred
stock generally have the same rights unless specified.
Liquidation Preference:
In the event of any liquidation, dissolution, or winding up of the Company,
either voluntary or involuntary and including a sale, merger, or
reorganization, the holders of preferred stock retain liquidation preference
over common stockholders. If consideration received in the event of liquidation
of the Company is in the form of cash and/or publicly traded securities with a
fair value of at least $3.00, $7.50, $10.35, $15.75, and $12.75 per share of
Series A, Series B, Series C, Series D, and Series E, respectively, then the
consideration paid in such a transaction shall be distributed among the holders
of all common and preferred stock on a pro rata basis based on the number of
common stock equivalent shares owned by the holder. In the event of a
liquidation in which the fair value of the consideration received is less than
$3.00, $7.50, $10.35, $15.75, and $12.75 per share of Series A, Series B,
Series C, Series D, and Series E, respectively, the holders of Series A, Series
B, Series C, Series D, and Series E preferred stock are entitled to a
distribution of $1.00, $2.50, $3.45, $5.25, and $4.25 per share, respectively.
In the event that the consideration is inadequate to cover the preferential
amounts of $1.00, $2.50, $3.45, $5.25, and $4.25 per share of Series A, B, C,
D, and E, respectively, then the consideration is distributed rateably to all
preferred stockholders. If the consideration received is in excess of these
preferential amounts, then the excess is distributed among the holders of all
common and preferred stock on a pro rata basis based on the number of common
stock equivalent shares owned by the holder.
F-16
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
Voting Rights:
Holders of Series A, Series B, Series C, Series D, and Series E preferred
stock are entitled to vote together with holders of common stock. The number of
votes equal the number of full shares of common stock into which Series A,
Series B, Series C, Series D, and Series E preferred stock could be converted
into.
Conversion:
At the option of the holder, preferred shares are convertible at any time
into shares of common stock at a ratio of the conversion price divided by the
initial purchase price. The conversion price is $1.00 per share for Series A,
$2.50 per share for Series B, $3.45 per share for Series C, and $4.25 per share
for Series E. Series D shares were originally convertible at a price of $5.25
per share. Pursuant to anti-dilution provisions triggered by the issuance of
Series E, Series D shares are now convertible at a price of $4.82 per share.
The conversion price of each series of preferred stock is subject to adjustment
as described in the Company's Articles of Incorporation. All Series A, Series
B, Series C, Series D, and Series E preferred shares will automatically be
converted into shares of common stock upon (1) the election of holders of at
least two-thirds of the outstanding shares of preferred stock, or (2) upon the
closing of an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933 at an offering price of
not less than $7.00 per share (adjusted to reflect stock splits, reverse stock
splits, or stock dividends), and $25,000,000 in the aggregate. In the event the
Company proposes to undertake a dilutive issuance, holders of preferred stock
who do not agree to become participating investors in the dilutive issuance are
deemed non-participating investors. Additionally, in the event that shares of
preferred stock (New Series) are issued for a consideration per share that is
less than the conversion price per share with respect to any previously issued
series of preferred stock (Previous Series), then the conversion price per
share shall be reduced for the Previous Series concurrent with the issuance of
the New Series. The Company has reserved 30,000,000 shares of common stock for
the conversion of the outstanding shares of preferred stock.
Dividends:
Each fiscal year, holders of preferred stock are entitled to receive, when
and if declared by the board of directors, out of any funds legally available,
a preferential non-cumulative dividend of $0.07, $0.18, $0.24, $0.37, and
$0.2975 per share for Series A, Series B, Series C, Series D, and Series E,
respectively. In addition, preferred stockholders are entitled to participate
in cash dividends paid to common stockholders in an amount per share as would
be payable on the number of shares of common stock into which each share of
preferred stock could be converted. As of March 31, 1999 and in accordance with
the Loan Agreement, the board of directors had not declared any dividends.
Convertible preferred stock issued and outstanding as of March 31, 1999 was
as follows:
<TABLE>
<CAPTION>
Shares Issued and Liquidation
Series Designated Outstanding Value
------ ---------- ----------- -----------
<S> <C> <C> <C>
A........................................ 4,000,000 4,000,000 $ 4,000,000
B........................................ 3,000,000 3,000,000 $ 7,500,000
C........................................ 4,300,000 4,283,181 $14,776,974
D........................................ 2,700,000 2,022,476 $10,617,999
E........................................ 11,764,706 11,764,706 $50,000,000
---------- ---------- -----------
25,764,706 25,070,363 $86,894,973
========== ========== ===========
</TABLE>
F-17
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
11. Stock Option and Stock Issuance Plan:
In January 1997, the Company established the 1997 Stock Option and Incentive
Plan (the 1997 Plan) and reserved up to 1,689,125 shares of common stock
issuable upon exercise of options granted to certain employees, directors, and
consultants. In May 1998, the Company adopted the 1998 Stock Option/Stock
Issuance Plan (the 1998 Plan). The 1998 Plan was designed to serve as the
successor to the 1997 Plan. Upon adoption of the 1998 Plan the existing share
reserve under the 1997 Plan was transferred to the 1998 Plan, and all
outstanding options under the 1997 Plan were incorporated into the 1998 Plan.
The Company increased the maximum number of shares issuable to a total of
3,833,284. In November 1998, the Company increased the stock option pool by
another 600,000 shares, bringing the total to 4,433,284. This number of shares
has been reserved for issuance under the 1998 Plan.
Under the terms of the 1998 Plan, the Company has the ability to grant
incentive and nonstatutory stock options, as well as issue vested and unvested
shares of the Company's common stock. Exercise prices of stock options are
generally not less than 100% and 85% of the fair value of the common stock on
the date of grant of incentive stock options and nonstatutory stock options,
respectively, and have a term of up to ten years. Options generally vest
rateably over a period of up to fifty months after the grant date, subject to
accelerated vesting in connection with certain changes in control or ownership
of the Company. In certain instances employees have been granted the right to
exercise options prior to vesting. Upon termination of an employee's employment
with the Company for any reason, the Company has the right to repurchase all or
any portion of the unvested shares acquired by the employee upon exercise of
options at a repurchase price that is equal to the exercise price, within 90
days following the date of termination. At March 31, 1999, 219,250 shares of
common stock were subject to repurchase by the Company. In addition, the
Company has a thirty day right of first refusal if an optionee intends to sell
shares acquired pursuant to options.
A summary of the activity under the 1997 Plan and the 1998 Plan is as
follows:
<TABLE>
<CAPTION>
Weighted
Exercise Aggregate Average
Price Per Exercise Exercise
Shares Share Price Price
--------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Outstanding at September 30,
1996......................... -- -- -- --
Granted..................... 1,688,500 $0.40 $ 675,400 $0.40
Terminated.................. (105,000) $0.40 (42,000) 0.40
--------- ------------ ---------- -----
Outstanding at September 30,
1997......................... 1,583,500 $0.40 633,400 0.40
Granted..................... 1,903,009 $0.40--$3.35 3,283,649 1.73
Exercised................... (297,960) $0.40--$1.50 (265,784) 0.89
Terminated.................. (194,784) $0.40--$3.25 (91,564) 0.47
--------- ------------ ---------- -----
Outstanding at September 30,
1998......................... 2,993,765 $0.40--$3.35 3,559,701 1.19
Granted..................... 1,503,900 $3.35--$4.25 5,987,675 3.98
Exercised................... (102,390) $0.40--$0.60 (41,012) 0.40
Terminated.................. (176,436) $0.40--$3.75 (510,699) 2.89
--------- ------------ ---------- -----
Outstanding at March 31, 1999
(unaudited).................. 4,218,839 $0.40--$4.25 $8,995,665 $2.13
========= ============ ========== =====
</TABLE>
The Company accounts for the 1998 Plan and the 1997 Plan using the intrinsic
value based method in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
For financial reporting purposes, the Company has determined that the deemed
fair
F-18
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
value on the date of grant of employee stock options granted after September
30, 1998 was in excess of the exercise price of the options. Consequently, the
Company has recorded deferred compensation of $5,485,510 for the six-month
period ended March 31, 1999. Of the total deferred compensation, $516,264 was
amortized during the six months ended March 31, 1999.
At March 31, 1999 options to purchase 1,904,273 shares of common stock were
exercisable.
At September 30, 1998 and March 31, 1999, options to purchase 541,559 and
814,095 shares of common stock, respectively, remain available for issuance.
The following summarizes information with respect to stock options
outstanding at September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Prices Exercisable Prices
- ------------ ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.40--$0.60 1,587,356 8.54 $0.42 518,978 $0.40
$0.90--$1.50 951,659 9.67 $1.50 427,492 $1.50
$2.50--$3.35 454,750 9.93 $3.23 124,519 $3.15
</TABLE>
The following information concerning the Company's 1998 Plan is provided in
accordance with Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation."
The fair value of each option grant has been estimated on the date of grant
using the minimum value method with the following weighted average assumptions
used for grants in the years ended September 30, 1997 and 1998:
<TABLE>
<CAPTION>
September September
30, 30,
1997 1998
------------ ------------
<S> <C> <C>
Risk-free interest rates........................... 5.85%--6.86% 4.23%--6.08%
Expected life...................................... 5 years 5 years
Expected dividend yield............................ -- --
Expected volatility................................ -- --
</TABLE>
The weighted average fair value for options granted was $0.10 and $0.36 for
the years ended September 30, 1997 and 1998, respectively.
The pro forma net loss for the Company for the years ended September 30,
1997 and 1998 following the provisions of SFAS 123, was $5,312,228 and
$16,353,107, respectively. The pro forma basic and diluted net loss per share
for the years ended September 30, 1997 and 1998 was $3.55 and $6.93,
respectively.
12. Stockholder Note Receivable:
On February 25, 1998, the Company granted a nonstatutory option to purchase
a total of 183,000 shares of the Company's common stock to a director of the
Company (the Director). These options were immediately exercisable and the
shares purchased thereunder are subject to repurchase by the Company, with the
right to repurchase expiring in 16 equal quarterly installments. At the time
of the option grant, the
F-19
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
Director exercised the option to purchase the entire 183,000 shares of common
stock, in exchange for a $109,800 note. The note is secured by the 183,000
shares of common stock and by other assets of the Director. Under the terms of
the note, interest is accrued at 5.61% per annum. Interest is to be repaid in
four equal annual installments commencing February 24, 1999. The entire
principal amount is due and payable in one lump sum on February 24, 2002. At
March 31, 1999, the Company had not elected to repurchase any of these shares.
13. Warrants:
In connection with the issuance of certain convertible notes (see Note 6),
the Company issued warrants to purchase shares of the Company's common stock to
the note holders. Warrants to purchase 75,000 and 20,000 shares of the
Company's common stock were granted in September 1996 and January 1997,
respectively. The exercise price of the warrants is equal to $0.10 per share.
The warrants expire upon the earlier of i) five years from the date of grant,
ii) the closing of a underwritten public offering of the Company's common stock
for not less than $2.50 per share and gross proceeds of at least $10,000,000,
or iii) the closing of a consolidation or merger of the Company. At March 31,
1999, none of the warrants had as yet been exercised. The fair value of the
warrants was determined using the Black-Scholes model and was accounted for as
interest expense over the time period the notes were outstanding.
14. Related Party Transactions:
One of the parties who has extended credit to the Company under the terms of
a master lease agreement (see Note 8), also is a significant customer of the
Company. For the years ended September 30, 1997 and 1998, and the six month
periods ended March 31, 1998 and 1999, the Company earned $122,000, $309,943,
$104,849, and $207,428, respectively, in revenue from sales to this customer,
and had $138,593 and $75,540 in total receivables at September 30, 1998 and
March 31, 1999, respectively. The Company owed this customer $991,522 and
$1,173,493 at September 30, 1998 and March 31, 1999, respectively, under terms
of the master lease agreement, and also owed another $93,841 and $239,300,
respectively, in other trade-related payables.
An investor, who participated in the Company's Series D and Series E
preferred stock offerings, is also a customer of the Company. For the years
ended September 30, 1997 and 1998, and the six month periods ended March 31,
1998 and 1999, the Company earned $43,000, $457,513, $217,714, and $604,472,
respectively, in revenue from sales to this customer, and had $38,565 and
$957,516 in total receivables at September 30, 1998 and March 31, 1999,
respectively. In addition, $443,395 of the deferred revenue balance at March
31, 1999 related to this customer.
15. Retirement Savings Plan:
On November 1, 1997, the Company established the Digital Island Retirement
Savings Plan (Retirement Plan), a defined contribution plan, covering all
eligible employees. Employees may elect to contribute from 1%-15% of their
annual compensation to the Retirement Plan. Matching contributions by the
Company are discretionary. The Company has made no contributions during the
year ended September 30, 1998, or the six month period ended March 31, 1999.
F-20
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months
ended March 31, 1999 and 1998 is unaudited)
16. Subsequent Events:
On April 20, 1999, executive officers of the Company exercised stock options
to purchase 349,332 shares of common stock in exchange for full-recourse notes.
The total principal amount of these notes is $286,398. The notes bear interest
at the rate of 7.75% per annum, compounded semiannually. Accrued interest is
due and payable at successive quarterly intervals over the four-year term of
the note, and the principal balance will become due and payable in one lump sum
at the end of the four year term. None of the shares purchased with the notes
may be sold unless the principal portion of the note attributable to those
shares, together with the accrued interest on that principal portion, is paid
in full.
On April 21, 1999, the Board of Directors approved the reincorporation of
the Company in the state of Delaware. Pursuant to the reincorporation, each
share of common and preferred stock of the Company's California predecessor
entity is exchanged for one share of common and preferred stock of the newly
formed Delaware entity. Pursuant to the reincorporation, the number of
authorized shares of common stock will increase to 100,000,000 with a par value
of $0.001 per share. Additionally, 10,000,000 shares of undesignated preferred
stock were authorized with a par value of $0.001 per share. These consolidated
financial statements have been restated for the reincorporation of the Company
in Delaware.
Also, on April 21, 1999, the Board of Directors adopted the 1999 Stock
Incentive Plan (the 1999 Plan). The 1999 Plan is to serve as the successor to
the 1998 Plan. Upon the initial public offering of the Company's common stock,
all outstanding options under the 1998 Plan, together with the remaining share
reserved under that plan, are to be incorporated into the 1999 Plan, with no
further grants of common stock options to be made under the 1998 Plan. Upon
implementation of the 1999 Plan, an additional 2,500,000 shares of common stock
will be reserved for issuance.
Additionally, on April 21, 1999, the Board of Directors adopted the 1999
Employee Stock Purchase Plan (1999 ESPP). Under the 1999 ESPP, eligible
employees are allowed to have salary withholdings of up to a certain specified
percentage of their base compensation to purchase shares of common stock at a
price equal to 85% of the lower of the market value of the stock at the
beginning or end of defined purchase periods. The initial purchase period
commences upon the execution and final pricing of the underwriting agreement
for the initial public offering of the Company's common stock. The 1999 ESPP
will become effective upon the initial public offering of the Company's common
stock. A total of 300,000 shares will be reserved for issuance under the 1999
ESPP.
On April 21, 1999, options to purchase 104,500 shares of common stock were
granted at an exercise price of $7.50 per share. Deferred compensation
associated with these shares is $238,800.
On May 5, 1999, the Company entered into an agreement to lease office space
under the terms of a five year lease. The annual base rent is $1.3 million. As
security for performance, the Company was required to deliver an irrevocable
standby letter of credit in the amount of $500,000. The lease agreement
contains a provision that allows the Company to replace the letter of credit
with a $110,372 security deposit in the event the Company becomes a publicly
held corporation.
On May 19, 1999, options to purchase 109,700 shares of common stock were
granted at an exercise price of $9.90 per share.
F-21
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this
prospectus. Neither Digital Island, Inc. nor any underwriter has authorized
anyone to provide prospective investors with different or additional
information. This prospectus is not an offer to sell nor is it seeking an
offer to buy these securities in any jurisdiction where the offer or sale is
not permitted. The information contained in this prospectus is correct only as
of the date of this prospectus, regardless of the time of the delivery of this
prospectus or any sale of these securities.
------------------
TABLE OF CONTENTS
------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
The Offering............................................................. 5
Summary Consolidated Financial Data...................................... 6
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Consolidated Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 30
Management............................................................... 45
Executive Compensation and Other Information............................. 50
Certain Transactions..................................................... 58
Principal Stockholders................................................... 61
Description of Capital Stock............................................. 64
Shares Eligible for Future Sale.......................................... 68
Underwriting............................................................. 69
Legal Matters............................................................ 71
Experts.................................................................. 71
Additional Information................................................... 71
Index to Consolidated Financial Statements............................... F-1
</TABLE>
Until , 1999 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7,500,000 Shares
[DIGITAL ISLAND LOGO]
Digital Island, Inc.
Common Stock
---------------------------
PRELIMINARY PROSPECTUS
---------------------------
Bear, Stearns & Co. Inc.
Lehman Brothers
Thomas Weisel Partners LLC
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts, payable by the Registrant in connection with the offer
and sale of the Common Stock being registered. All amounts are estimates except
the registration fee, the NASD filing fee and the Nasdaq National Market entry
and application fee.
<TABLE>
<S> <C>
Registration fee................................................. $ 28,773
NASD filing fee.................................................. 8,000
Blue Sky/NASD fees and expenses (including legal fees)........... 15,000
Nasdaq National Market entry and application fee................. 95,000
Accounting fees and expenses..................................... 175,000
Other legal fees and expenses.................................... 350,000
Transfer agent and registrar fee................................. 10,000
Printing and engraving........................................... 200,000
Miscellaneous.................................................... 118,227
----------
Total.......................................................... $1,000,000
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). 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, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. Article VII, Section 6, of the
Registrant's Bylaws provides for mandatory indemnification of its directors and
officers and permissible indemnification of employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law. The
Registrant's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") provides that, pursuant to Delaware law, its
directors shall not be liable for monetary damages for breach of the directors'
fiduciary duty as directors to the Company or its stockholders. This provision
in the Certificate of Incorporation does not eliminate the directors' fiduciary
duty, and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment
of dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Registrant has entered into
Indemnification Agreements with its officers and directors, a form of which is
attached as Exhibit 10.5 hereto and incorporated herein by reference. The
Indemnification Agreements provide the Registrant's officers and directors with
further indemnification to the maximum extent permitted by the Delaware General
Corporation Law. The Registrant maintains directors and officers liabilities
insurance. Reference is made to Section 8 of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since April 1, 1996, we have issued and sold the following securities:
(a) The Registrant issued and sold 1,499,430 shares of its common stock
to employees and consultants for an aggregate purchase price of 1,267,234
pursuant to direct stock issuances and the exercise of options under its
1998 Stock Option/Stock Issuance Plan.
(b) In September 1996, the Registrant issued a warrant to purchase up to
75,000 shares of its common stock, at an exercise price of $0.10 per share
(subject to adjustment), to Vanguard V, L.P.
(c) In November 1996, the Registrant issued and sold 50,000 shares of
its common stock to two individuals for an aggregate purchase price of
$20,000.
(d) In January 1997, the Registrant issued a warrant to purchase up to
20,000 shares of its common stock, at an exercise price of $0.10 per share
(subject to adjustment), to Vanguard V, L.P.
(e) In February 1997, the Registrant issued 2,005,875 shares of its
common stock to several investors. Of such shares, 5,875 were sold for an
aggregate consideration of $2,350, and 2,000,000 shares were converted from
outstanding preferred stock.
(f) In March 1997, the Registrant issued and sold an aggregate of
4,000,000 shares of Series A Preferred Stock to several investors for an
aggregate of purchase price of $4,000,000.
(g) In April 1997, the Registrant issued 15,000 shares of its common
stock to one corporation in consideration for services rendered with an
aggregate fair value of $6,000.
(h) In July 1997, the Registrant issued and sold an aggregate of
3,000,000 shares of Series B Preferred Stock to several investors for an
aggregate of purchase price of $7,000,000.
(i) In March 1998 and May 1998, the Registrant issued and sold an
aggregate of 4,283,181 shares of Series C Preferred Stock to several
investors for an aggregate of purchase price of $14,776,974.
(j) In July 1998 and August 1998, the Registrant issued and sold an
aggregate of 2,022,476 shares of Series D Preferred Stock to several
investors for an aggregate of purchase price of $10,617,999.
(k) In February 1999, the Registrant issued and sold an aggregate of
11,764,706 shares of Series E Preferred Stock to several investors for an
aggregate of purchase price of $50,000,000.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients in
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Registrant, to
information about the Registrant.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Form of Amended and Restated Certificate of Incorporation
3.2 Form of Amended and Restated Bylaws
4.1 Reference is made to Exhibit 3.1
4.2 Reference is made to Exhibit 3.2
4.3 Specimen Common Stock certificate
*4.4 Amended and Restated Investors' Rights Agreement, among the Registrant
and the parties listed on the signature pages thereto, dated February
19, 1999
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
4.5 Amendment No. 1 to Amended and Restated Investors' Rights Agreement,
dated April 9, 1999
5.1 Opinion of Brobeck, Phleger & Harrison LLP
10.1 1997 Stock Option and Incentive Plan
10.2 1998 Stock Option/Stock Issuance Plan, as amended to date
10.3 1999 Stock Incentive Plan
10.4 1999 Employee Stock Purchase Plan
*10.5 Form of Indemnification Agreement for Officers and Directors
*10.6 Employment Agreement between the Registrant and Ruann Ernst
*10.7 Employment Agreement between the Registrant and Allan Leinwand
*10.8 Employment Agreement between the Registrant and Michael Sullivan
*10.9 Office Lease Agreement between the Registrant and John Hancock Mutual
Life Insurance Co., dated April 8, 1997
10.10 Lease between the Registrant and Bishop Street Associates, dated October
21, 1996, as amended to date
10.11 Lease Agreement between the Registrant and Forty-Five Fremont
Associates, dated May 5, 1999
10.12 Note Secured by Stock Pledge Agreement by Marcelo A. Gumucio to
Registrant, dated February 25, 1998
10.13 Note Secured by Stock Pledge Agreement by Ruann Ernst to Registrant,
dated April 21, 1999
10.14 Note Secured by Stock Pledge Agreement by Ron Higgins to Registrant,
dated April 21, 1999
*21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent Auditors
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1)
*24.1 Power of Attorney
*27.1 Financial Data Schedule
</TABLE>
- ----------
* Previously filed.
<TABLE>
<S> <C>
(b) Financial Statement Schedules
</TABLE>
<TABLE>
<S> <C>
Schedule II--Valuation and Qualifying Accounts S-2
</TABLE>
Financial Statement Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable or is shown in
the financial statements or notes thereto.
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 provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
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 being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser. The undersigned Registrant hereby
undertakes that: (1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of Prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective and (2) For the
purpose of determining any liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-1 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California, on this 4th day of June, 1999.
Digital Island, Inc.
/s/ Ruann Ernst
By: _________________________________
Ruann Ernst
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amednment No. 1 to the Registration Statement has been signed by the persons
whose signatures appear below, which persons have signed such Registration
Statement in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
* Chairman of the Board of June 4, 1999
____________________________________ Directors
Ron Higgins
/s/ Ruann Ernst Chief Executive Officer, June 4, 1999
____________________________________ President and Director
Ruann Ernst (Principal Executive
Officer
* Chief Financial Officer June 4, 1999
____________________________________ (Principal Financial
T. L. Thompson Officer and Principal
Accounting Officer)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
* Director June 4, 1999
____________________________________
Charlie Bass
* Director June 4, 1999
____________________________________
Christos Cotsakos
* Director June 4, 1999
____________________________________
Marcelo A. Gumucio
* Director June 4, 1999
____________________________________
Cliff Higgerson
* Director June 4, 1999
____________________________________
David Spreng
* Director June 4, 1999
____________________________________
Shahan Soghikian
* Pursuant to Power of Attorney previously filed with the
Commission
/s/ Ruann Ernst Attorney-in-fact
____________________________________
Ruann Ernst
</TABLE>
II-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Stockholders of Digital Island, Inc.
We have audited the financial statements of Digital Island, Inc. as of
September 30, 1998 and 1997, and for each of the three years in the period
ended September 30, 1998, and have issued our report thereon dated February 19,
1999. Our audits also included the financial statement schedule listed in Item
16(b) of this Registration Statement. This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information required to be
included therein.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
February 19, 1999
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Digital Island, Inc.
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended September 30, 1996:
Deferred tax valuation allowance... $ -- $ 22,000 $ -- $ 22,000
---------- ---------- ------- ----------
Total............................. $ -- $ 22,000 $ -- $ 22,000
========== ========== ======= ==========
Year ended September 30, 1997:
Deferred tax valuation allowance... $ 22,000 $2,121,000 $ -- $2,143,000
---------- ---------- ------- ----------
Total............................. $ 22,000 $2,121,000 $ -- $2,143,000
========== ========== ======= ==========
Year ended September 30, 1998:
Allowance for doubtful accounts.... $ -- $ 111,104 $56,104 $ 55,000
Deferred tax valuation allowance... 2,143,000 6,023,000 -- 8,166,000
---------- ---------- ------- ----------
Total............................. $2,143,000 $6,134,104 $56,104 $8,221,000
========== ========== ======= ==========
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Form of Amended and Restated Certificate of Incorporation
3.2 Form of Amended and Restated Bylaws
4.1 Reference is made to Exhibit 3.1
4.2 Reference is made to Exhibit 3.2
4.3 Specimen Common Stock certificate
*4.4 Amended and Restated Investors' Rights Agreement, among the Registrant
and the parties listed on the signature pages thereto, dated February
19, 1999
4.5 Amendment No. 1 to Amended and Restated Investors' Rights Agreement,
dated April 9, 1999
5.1 Opinion of Brobeck, Phleger & Harrison LLP
10.1 1997 Stock Option and Incentive Plan
10.2 1998 Stock Option/Stock Issuance Plan, as amended to date
10.3 1999 Stock Incentive Plan
10.4 1999 Employee Stock Purchase Plan
*10.5 Form of Indemnification Agreement for Officers and Directors
*10.6 Employment Agreement between the Registrant and Ruann Ernst
*10.7 Employment Agreement between the Registrant and Allan Leinwand
*10.8 Employment Agreement between the Registrant and Michael Sullivan
*10.9 Office Lease Agreement between the Registrant and John Hancock Mutual
Life Insurance Co., dated April 8, 1997
10.10 Lease between the Registrant and Bishop Street Associates, dated October
21, 1996, as amended to date
10.11 Lease Agreement between the Registrant and Forty-Five Fremont
Associates, dated May 5, 1999
10.12 Note Secured by Stock Pledge Agreement by Marcelo A. Gumucio to
Registrant, dated February 25, 1998
10.13 Note Secured by Stock Pledge Agreement by Ruann Ernst to Registrant,
dated April 21, 1999
10.14 Note Secured by Stock Pledge Agreement by Ron Higgins to Registrant,
dated April 21, 1999
*21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent Auditors
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1)
*24.1 Power of Attorney
*27.1 Financial Data Schedule
</TABLE>
- ----------
* Previously filed.
<PAGE>
EXHIBIT 1.1
[ ] Shares of Common Stock
Digital Island, Inc.
UNDERWRITING AGREEMENT
----------------------
[ ], 1999
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS INC.
THOMAS WEISEL PARTNERS LLC
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue, 18th Floor
New York, New York 10167
Ladies and Gentlemen:
Digital Island, Inc., a corporation organized and existing under the
laws of Delaware (the "Company"), proposes, subject to the terms and conditions
stated herein, to issue and sell to the underwriters named in Schedule I hereto
(the "Underwriters"), acting severally and not jointly, an aggregate of [ ]
shares (the "Firm Shares") of its common stock, par value $0.001 per share (the
"Common Stock"), and, for the sole purpose of covering over-allotments in
connection with the sale of the Firm Shares, at the option of the Underwriters,
up to an additional [ ] shares (the "Additional Shares") of the Common
Stock. The Firm Shares and any Additional Shares purchased by the Underwriters
are referred to herein as the "Shares." The Shares are more fully described in
the Registration Statement referred to below.
1. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a
<PAGE>
registration statement, and may have filed an amendment or amendments thereto,
on Form S-1 (No. 333-77039), for the registration of the Shares under the
Securities Act of 1933, as amended (the "Act"). Such registration statement,
including the prospectus, financial statements and schedules, exhibits and all
other documents filed as a part thereof, as amended at the time of effectiveness
of the registration statement, including any information deemed to be a part
thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A
or Rule 434 of the Rules and Regulations of the Commission under the Act (the
"Regulations"), is herein called the "Registration Statement." Any registration
statement filed pursuant to Rule 462(b) of the Regulations is herein called the
"462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The prospectus,
in the form first filed with the Commission pursuant to Rule 424(b) of the
Regulations or filed as part of the Registration Statement at the time of
effectiveness if no Rule 424(b) or Rule 434 filing is required, is herein called
the "Prospectus." The term "preliminary prospectus" as used herein means a
preliminary prospectus as described in Rule 430 of the Regulations. For purposes
of this Agreement, all references to the Registration Statement, any preliminary
prospectus, the Prospectus or any amendment, supplement or term sheet with
respect to any of the foregoing shall be deemed to include the copy of such
documents filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval system ("EDGAR"). Neither the Commission nor the Blue Sky
or securities authority of any state or other jurisdiction has issued a stop
order suspending the effectiveness of the Registration Statement, preventing or
suspending the use of any preliminary prospectus, the Prospectus, the
Registration Statement or any amendment or supplement or term sheet thereto,
refusing to permit the effectiveness of the Registration Statement or suspending
the registration or qualification of the Shares, nor has any of such authorities
instituted or threatened to institute nor, to the Company's knowledge,
contemplated instituting, any proceedings with respect to a stop order.
2
<PAGE>
(b) At the respective time of the effectiveness of the
Registration Statement or any 462(b) Registration Statement or the effectiveness
of any post-effective amendment to the Registration Statement, when the
Prospectus is first filed with the Commission pursuant to Rule 424(b) or Rule
434 of the Regulations, when any supplement to or amendment of the Prospectus is
filed with the Commission and at the Closing Date and the Additional Closing
Date, if any (as hereinafter respectively defined), the Registration Statement
and the Prospectus and any amendments and supplements thereto complied or will
comply in all material respects with the applicable provisions of the Act and
the Regulations and do not or will not contain an untrue statement of a material
fact and do not or will not omit to state any material fact required to be
stated therein or necessary in order to make the statements therein (i) in the
case of the Registration Statement, not misleading and (ii) in the case of the
Prospectus, in light of the circumstances under which they were made, not
misleading. When any related preliminary prospectus was first filed with the
Commission (whether filed as part of the registration statement for the
registration of the Shares or any amendment thereto or pursuant to Rule 424(a)
of the Regulations) and when any amendment or supplement thereto was first filed
with the Commission, such preliminary prospectus and any amendments and
supplements thereto complied in all material respects with the applicable
provisions of the Act and the Regulations and did not contain an untrue
statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not mislead-
ing. In addition, each preliminary prospectus and the Prospectus delivered to
the Underwriters for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T. No representation and
warranty is made in this subsection (b), however, with respect to any
information contained in or omitted from the Registration Statement or the
Prospectus or any related preliminary prospectus or any amendment or supplement
thereto in reliance upon and in conformity with information furnished in writing
to the Company by
3
<PAGE>
or on behalf of any Underwriter through you as herein stated expressly for use
in connection with the preparation thereof. If Rule 434 is used, the Company
will comply with the requirements of Rule 434 and the Prospectus shall not be
"materially different," as such term is used in Rule 434, from the Prospectus
included in the Registration Statement at the time it became effective.
(c) PricewaterhouseCoopers LLP, who have certified the financial
statements and supporting schedules included in the Registration Statement, are
independent public accountants as required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, except as set forth
in the Registration Statement and the Prospectus, (A) there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or other) or results of operations of the Company and its subsidiaries taken as
a whole (a "Material Adverse Effect"), including but not limited to
relationships with customers and suppliers of the Company; (B) there have been
no transactions entered into by the Company or any of its subsidiaries, other
than those in the ordinary course of business, which are material with respect
to the Company and its subsidiaries taken as a whole; (C) there has been no
dividend or distribution of any kind declared, paid or made by the Company on
any class of its capital stock; and (D) since the date of the latest balance
sheet presented in the Registration Statement and the Prospectus, neither the
Company nor any of its subsidiaries has incurred or undertaken any liabilities
or obligations, direct or contingent, which are material to the Company and its
subsidiaries taken as a whole, except for liabilities or obligations which are
reflected in the Registration Statement and the Prospectus.
(e) This Agreement and the transactions contemplated herein have
been duly and validly authorized by all necessary corporate action, and this
Agreement has been duly and validly executed and
4
<PAGE>
delivered by the Company. Assuming due authorization, execution and delivery by
the Representatives, this Agreement constitutes a valid and binding obligation
of the Company, enforceable in accordance with its terms.
(f) The execution, delivery, and performance of this Agreement
and the consummation of the transactions contemplated hereby do not and will not
(i) conflict with or result in a breach of any of the terms and provisions of,
or constitute a default (or an event which with notice or lapse of time, or
both, would constitute a default) under, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the Company or
any of its subsidiaries pursuant to, any debenture, note, contract, indenture,
mortgage, deed of trust, lease, joint venture or other agreement, instrument,
franchise, license or permit to which the Company or any of its subsidiaries is
a party or by which any of their respective properties or assets may be bound,
other than any breach, default, lien, change or encumbrance which would not have
a Material Adverse Effect, or (ii) violate or conflict with any provision of the
certificate of incorporation or by-laws of the Company, or any of its
subsidiaries, or any judgment, writ, decree, order, law, statute, rule or
regulation of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its subsidiaries or any of their
respective properties, assets or operations, other than any violation or
conflict which would not have a Material Adverse Effect. No consent, approval,
authorization, order, registration, filing, qualification, license or permit of
or with any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets is necessary or required for the execution,
delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby, including the issuance, sale and delivery of
the Shares to be issued, sold and delivered by the Company hereunder, except the
registration under the Act of the Shares and such consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses and
permits as may be required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the Underwriters.
5
<PAGE>
(g) All of the outstanding shares of capital stock of the
Company are duly and validly authorized and issued, fully paid and
nonassessable, and none of such shares was issued in violation of or is now
subject to any preemptive rights, co-sale rights, registration rights, rights of
first refusal or similar rights granted by the Company which have not otherwise
been waived in writing. All of the outstanding shares of capital stock and all
other outstanding securities of the Company have been issued in compliance in
all material respects with applicable Federal and state laws. The Shares have
been duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued, delivered and sold in accordance with this
Agreement, will be duly and validly issued and outstanding, fully paid and
nonassessable, free and clear of all liens, encumbrances or claims, will not
have been issued in violation of or be subject to any preemptive rights, co-sale
rights, registration rights, rights of first refusal or similar rights and no
holder of Shares will be subject to personal liability by reason of being such a
holder. The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus in the column entitled "Actual" under the caption
"Capitalization", and, after giving effect to the offering will be as set forth
in the column entitled "As Adjusted," and the number of authorized, issued and
outstanding options is set forth in the Prospectus under the caption
Capitalization." Since that date, none of the Company or its subsidiaries have
issued any securities other than (i) Common Stock of the Company pursuant to the
exercise of previously outstanding and privately granted options pursuant to the
Digital Island, Inc. 1998 Stock Option/Stock Incentive Plan (the "Plan"), and
(ii) options granted in the ordinary course of business pursuant to the Plan.
The authorized capital stock of the Company, including the Common Stock, the
Firm Shares and the Additional Shares, conforms in all material respects to the
descriptions thereof contained in the Registration Statement and the Prospectus
and such descriptions conform in all material respects to the rights set forth
in the instruments defining the same. Except as disclosed in the Registration
Statement and the Prospectus, there are no outstanding shares of capital
6
<PAGE>
stock, options, warrants or other securities or other rights calling for the
issuance of, and no commitments, obligations, plans or arrangements to issue,
any securities of the Company or any of its subsidiaries. The outstanding stock
options relating to the Common Stock have been duly authorized and validly
issued and each of the Plan and stock options granted by the Company conform in
all material respects to the descriptions thereof contained in the Registration
Statement and the Prospectus.
(h) Each of the Company and each of its subsidiaries has been
duly organized and is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation. Each of the Company and its
subsidiaries is duly qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its business makes such
qualification necessary, except for those failures to be so qualified or in good
standing which could not in the aggregate have a Material Adverse Effect. All of
the outstanding capital stock of each of the Company's subsidiaries has been
duly authorized and validly issued, is fully paid and nonassessable and is owned
by the Company or a wholly-owned subsidiary of the Company free and clear of any
liens, mortgages, pledges, charges, security interests, claims, encumbrances or
other defects in title whatsoever and none of the outstanding shares of capital
stock of any of the Company's subsidiaries was issued in violation of the
preemptive rights, co-sale rights, registration rights, rights of first refusal
or similar rights, in each case granted by the Company and which have not
otherwise been waived in writing, of any security holder of any such subsidiary
or other party. Except as described in the Prospectus, the Company has no
agreements, commitments, or understandings with respect to acquiring or selling
the business, stock or material assets, except those assets acquired in the
ordinary course of business, of the Company, its subsidiaries or any other
person or entity. The only subsidiaries of the Company are the subsidiaries
listed on Exhibit 21.1 to the Registration Statement. None of the Company nor
any of its subsidiaries owns any capital stock or any other interest in any
other corporation or entity (other than such subsidiaries).
7
<PAGE>
(i) Each of the Company and its subsidiaries has all requisite
corporate power and corporate authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses and permits
(collectively, "Governmental Licenses") of and from all appropriate Federal,
state, local or foreign public, regulatory or governmental agencies and bodies,
to own, lease and operate its properties and conduct its business as now being
conducted, or as presently proposed to be conducted, and as described in the
Registration Statement and the Prospectus, except for such Governmental
Licenses, the absence of which would not have a Material Adverse Effect. Each
such Governmental License is valid and in full force and effect, the Company and
its subsidiaries are in material compliance with the terms and conditions of all
such Governmental Licenses, and no such Governmental License contains a
materially burdensome restriction not disclosed in the Registration Statement
and the Prospectus, and neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or modification of
any such Governmental Licenses.
(j) Neither the Company nor any of its subsidiaries is in
violation of any provision of its charter or by-laws, as the case may be, or in
breach of any of the terms or provisions of or in default (or would be in
default with notice or lapse of time, or both) under any debenture, note,
contract, indenture, mortgage, deed of trust, lease, joint venture or other
agreement, instrument, franchise, license or permit to which the Company or any
of its subsidiaries is a party or by which any of their respective properties,
assets or operations may be bound, which breach, violation, default or defaults
could have, individually or in the aggregate, a Material Adverse Effect, or in
violation of any judgment, writ, decree, order, law, statute, rule or regulation
of any court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
respective properties, assets or operations, the violation of which could have,
individually or in the aggregate, a Material Adverse Effect.
8
<PAGE>
(k) Except as described in the Registration Statement and the
Prospectus, there is no litigation, action, suit, proceeding, inquiry or
governmental proceeding or investigation to which the Company or any of its
subsidiaries is a party or to which any property of the Company or any of its
subsidiaries is subject that would otherwise be required to be described therein
or which is pending or, to the best knowledge of the Company, threatened or
contemplated against the Company or any of its subsidiaries.
(l) The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and the Prospectus
present fairly the consolidated financial position of the Company and its
subsidiaries as of the dates indicated and the results of their operations,
stockholders' equity and cash flows for the periods specified; said financial
statements have been prepared in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis through the periods involved;
the supporting schedules included in the Registration Statement present fairly
the information required to be stated therein; and the selected consolidated
financial data, the summary consolidated financial information, pro forma
financial information, and the capitalization information included in the
Registration Statement and the Prospectus present fairly in accordance with GAAP
and the Regulations the information shown therein and have been compiled on a
basis consistent with that of the financial statements included in the
Registration Statement and the Prospectus. No financial statements are required
to be included in the Registration Statement that have not been so included.
(m) All material Federal, state and local tax returns required
to be filed by the Company and its subsidiaries have been filed and all such
returns are true, complete, and correct in all material respects. All material
taxes that are due or claimed to be due from the Company and its subsidiaries
have been paid other than those (i) currently payable without penalty or
interest or (ii) being contested in good faith and by appropriate proceedings
and for which adequate reserves have been established in accordance
9
<PAGE>
with GAAP. Except as disclosed in the Registration Statement and the Prospectus,
there is no material tax deficiency that has been, or may reasonably be expected
to be, asserted against the Company or any of its subsidiaries.
(n) Either the Company or its subsidiaries maintains insurance
with insurers of recognized financial responsibility of the types and in the
amounts purchased by similarly situated companies and generally deemed adequate
for its respective businesses, including, without limitation, insurance coverage
for real and personal property owned or leased by them against theft, damage,
destruction, acts of vandalism, and all other material risks customarily insured
against, all of which insurance is in full force and effect. Neither the Company
nor any of its subsidiaries has any reason to believe that it will not be able
to renew existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its respective business. The officers and directors of the Company are insured
by insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary for officers and directors
liability insurance of a public company and as would cover claims which could be
made in connection with the issuance of the Shares; and the Company has no
reason to believe that it will not be able to renew its existing directors and
officers liability insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to cover its
officers and directors.
(o) Either the Company or its subsidiaries has good and
marketable title to all personal property and assets owned by it, free and clear
of all mortgages, pledges, security interests, claims, restrictions, liens,
encumbrances and defects except as do not, individually or in the aggregate, do
not interfere in any material respect with the use made or proposed to be made
of such property by the Company or its subsidiaries, as the case may be. Any
real property and buildings held under lease by the Company or any of its
subsidiaries are held under valid, existing and enforceable leases in full force
and effect with such exceptions as are not material and which do not interfere
in
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any material respect with the use made or proposed to be made of such property
and buildings by the Company or its subsidiaries, as the case may be, and
neither the Company or any of its subsidiaries has any notice of any claims of
any sort that has been asserted by anyone adverse to the rights of the Company
or any subsidiary under any such leases.
(p) Except as described in the Registration Statement and the
Prospectus, either the Company or its subsidiaries owns or possesses legal and
valid rights to use all patents, inventions, copyrights, software, databases,
know-how, Internet domain names, trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures,
trademarks, service marks, trade names, rights of publicity pertaining to the
name, likeness, voice, signatures, and/or biographical information of real
persons and other intellectual property (collectively, "Intellectual Property")
necessary to carry on the business of the Company and its subsidiaries as
currently conducted, and as presently proposed to be conducted and described in
the Prospectus, free and clear of all liens, claims and encumbrances, subject to
such exceptions as would not have a Material Adverse Effect. Except as described
in the Registration Statement and the Prospectus, neither the Company nor any of
its subsidiaries has received any notice or is otherwise aware of (i) any claim,
action or demand of any person in the United States or elsewhere or any
proceeding in the United States or elsewhere, pending or threatened, that (A)
challenges the ownership of the Company or any of its subsidiaries in or its
right to use any Intellectual Property or (B) alleges that any product or
service of the Company or any of its subsidiaries infringes or misappropriates
the Intellectual Property rights of others or constitutes unfair competition or
(ii) any facts or circumstances that would render any Intellectual Property
owned or used by the Company or any Intellectual Property license agreement to
which the Company or any of its subsidiaries is a party, invalid or inadequate
to protect the interest of the Company or any of its subsidiaries therein or
thereunder, subject to such exceptions as would not, individually or in the
aggregate, have a Material Adverse Effect. The Company has taken reasonable
steps to protect, maintain and
11
<PAGE>
safeguard its rights in all material Intellectual Property owned or used by the
Company or its subsidiaries and to maintain the secrecy of all such Intellectual
Property as to which improper or unauthorized disclosure would impair its value
or validity, including the execution of appropriate nondisclosure and
confidentiality agreements.
(q) No relationship, direct or indirect, exists between or among the
Company or any of its affiliates, on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or any of its subsidiaries,
on the other hand, that is required by the Act to be described in the
Registration Statement and the Prospectus that is not so described. Except as
disclosed in the Registration Statement and the Prospectus, there are no
outstanding loans, advances, or guarantees or indebtedness by the Company to or
for the benefit of any of the executive officers or directors of the Company or
any of the members of the families of any of them that would be required to be
described in the Registration Statement and the Prospectus.
(r) The Shares have been duly authorized for listing on the
Nasdaq National Market, subject to official notice of issuance.
(s) Except for rights that have been specifically waived in
writing, no holder of securities of the Company has any rights to the
registration of securities of the Company because of the filing of the
Registration Statement or otherwise in connection with the sale of the Shares
contemplated hereby.
(t) The Company is not, and upon consummation of the
transactions contemplated hereby and the application of the net proceeds of the
offering of the Shares as described in the Prospectus will not be, subject to
registration as an "investment company" or an entity "controlled" by an
"investment company" under the Investment Company Act of 1940, as amended.
(u) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent, and the
Company is not aware of any existing or imminent labor
12
<PAGE>
disturbance by the employees of any of its or any subsidiary's principal
suppliers, manufacturers, customers or contractors that are likely, individually
or in the aggregate, to have a Material Adverse Effect.
(v) There are no contracts or documents which are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits thereto which have not been so described and filed as required. The
descriptions of contracts in the Registration Statement and the Prospectus are
accurate and complete in all material respects; except as described therein, all
contracts described in the Registration Statement and the Prospectus are valid,
binding and enforceable and are in full force and effect, and neither the
Company nor any of its subsidiaries or, to the Company's knowledge, any other
party is in breach of or default under any provisions of such contracts, except,
in the case of the Company, for any such breach or default which would not have
a Material Adverse Effect. Neither the Company nor its subsidiaries has
experienced a material adverse change in its business relationships with its
material suppliers.
(w) Each employee benefit plan, within the meaning of Section
3(3) of the Employee Retirement Income Securities Act of 1974, as amended
("ERISA"), that is maintained, administered or contributed to by the Company or
any of its subsidiaries for employees or former employees of the Company or any
of its subsidiaries has been maintained in compliance in all material respects
with its respective terms and the requirements of any applicable statutes,
order, rules and regulations, including but not limited to ERISA and the
Internal Revenue Code of 1986, as amended (the "Code"). No prohibited
transaction, within the meaning of Section 406 of ERISA or Section 4975 of the
Code, has occurred with respect to any such plan, excluding transactions
effected pursuant to a statutory or administrative exemption. For each such plan
that is subject to the funding rules of Section 412 of the Code or Section 302
of ERISA, no "accumulated funding deficiency", as defined in Section 412 of the
Code, has been incurred, whether or not waived, and the fair market value of the
assets of each such plan (excluding for these purposes accrued but unpaid
contributions)
13
<PAGE>
exceeded the present value of all benefits accrued under such plan determined
using reasonable actuarial assumptions. The description of the Company's Plan
and the options or other rights granted and exercised thereunder set forth in
the Registration Statement and the Prospectus accurately and fairly describe, in
all material respects, the information required to be shown with respect to such
Plan, options and rights.
(x) Either the Company or its subsidiaries maintains a system of
internal accounting controls that are sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(y) The statistical and market-related data included in the
Registration Statement and the Prospectus are derived from sources which the
Company reasonably and in good faith believes to be accurate, reasonable and
reliable, and such data agrees in all material respects with the sources from
which they were derived.
(z) The Company has not at any time during the last five (5) years in
any jurisdiction (i) made any unlawful contribution to any candidate for office,
or failed to disclose fully any contribution in violation of law, or (ii) made
any payment to any governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States.
Any certificate signed by any director or officer of the Company or
any of its subsidiaries delivered to the Representative or to the Underwriters'
Counsel (as herein defined) shall be deemed a
14
<PAGE>
representation and warranty by the Company to each Underwriter as the matters
covered thereby.
2. Purchase, Sale and Delivery of the Shares.
------------------------------------------
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, at a purchase
price per share of $[ ], the number of Firm Shares set forth opposite the
respective names of the Underwriters in Schedule I hereto plus any additional
number of Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of
certificates for, the Firm Shares shall be made at the offices of Brobeck,
Phleger & Harrison LLP ("Company Counsel"), Two Embarcadero Place, 2200 Geng
Road, Palo Alto, California 94303, or at such other place as shall be agreed
upon by you and the Company, at 7:00 A.M. on the third or fourth Business Day
(as permitted under Rule 15c6-1 under the Exchange Act) (unless postponed in
accordance with the provisions of Section 9 hereof) following the date of the
effectiveness of the Registration Statement (or, if the Company has elected to
rely upon Rule 430A of the Regulations, the third or fourth business day (as
permitted under Rule 15c6-1 under the Exchange Act) after the determination of
the initial public offering price of the Shares), or such other time not later
than ten Business Days (as hereinafter defined) after such date as shall be
agreed upon by you and the Company (such time and date of payment and delivery
being herein called the "Closing Date"). It is understood that each Underwriter
has authorized you for its account, to accept delivery of, receipt for, and make
payment of the purchase price for, the Firm Shares and the Additional Shares, if
any, which it has agreed to purchase. As used herein, the term "Business Day"
means any day other than a Saturday, Sunday or other day on which commercial
banks are authorized or required to be closed in California. Payment shall be
made to the Company by wire transfer in same day funds, against delivery to you
for the respective accounts of the Underwriters of certificates for the Firm
Shares to be purchased by
15
<PAGE>
them. Certificates for the Firm Shares shall be registered in such name or names
and in such authorized denominations as you may request in writing at least two
full Business Days prior to the Closing Date. The Company will permit you to
examine and package such certificates for delivery at least one full Business
Day prior to the Closing Date.
(c) In addition, on the basis of the representations,
warranties, covenants and agreements herein contained, but subject to the terms
and conditions herein set forth, the Company hereby grants to the Underwriters
the option to purchase, severally and not jointly, up to [ ] Additional Shares
at the same purchase price per share to be paid by the Underwriters to the
Company for the Firm Shares as set forth in this Section 2, for the purpose of
covering over-allotments, if any, in the sale of Firm Shares by the
Underwriters. This option may be exercised at any time, or from time to time, in
whole or in part, on or before the thirtieth day following the date of the
Prospectus, by written notice by you to the Company. Such notice shall set forth
the aggregate number of Additional Shares as to which the option is being
exercised and the date and time, as reasonably determined by you, when the
Additional Shares are to be delivered (such date and time being herein sometimes
referred to as the "Additional Closing Date"); provided, however, that the
-------- -------
Additional Closing Date shall not be earlier than the Closing Date or earlier
than the second full Business Day after the date on which the option shall have
been exercised nor later than the eighth full Business Day after the date on
which the option shall have been exercised (unless such time and date are
postponed in accordance with the provisions of Section 9 hereof). Certificates
for the Additional Shares shall be registered in such name or names and in such
authorized denominations as you may request in writing at least two full
Business Days prior to the Additional Closing Date. The Company will permit you
to examine and package such certificates for delivery at least one full Business
Day prior to the Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter shall
be the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth
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<PAGE>
opposite the name of such Underwriter in Schedule I hereto (or such number
increased as set forth in Section 9 hereof) bears to the total number of Firm
Shares subject, however, to such adjustments to eliminate any fractional shares
as you in your sole discretion shall make.
Payment of the purchase price for the Additional Shares shall be made
to the Company by wire transfer in same day funds to such account as specified
by the Company to the Representatives in writing at least two full Business Days
prior to the Additional Closing Date against delivery to you of the certificates
for the Additional Shares to you for the respective accounts of the
Underwriters.
3. Offering. Upon your delivery of the Firm Shares, the Underwriters
--------
propose to offer the Shares for sale to the public upon the terms set forth in
the Prospectus.
4. Covenants of the Company. The Company covenants and agrees with
------------------------
the Underwriters that:
(a) If the Registration Statement has not yet been declared
effective, the Company will use its reasonable best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as possible, and if Rule 430A is used or the filing of the Prospectus
is otherwise required under Rule 424(b) or Rule 434, the Company will file the
Prospectus (properly completed if Rule 430A has been used) pursuant to and in
compliance with Rule 424(b) or Rule 434 within the prescribed time period and
will provide evidence satisfactory to you of such timely filing. If, with your
consent, the Company elects to rely on Rule 434, the Company will prepare and
file a term sheet that complies with the requirements of Rule 434.
The Company will notify you immediately (and, if requested by
you, will confirm such notice in writing) (i) when the Registration Statement
and any amendments thereto become effective, (ii) of any request by the
Commission for any amendment of or supplement to the Registration Statement or
the Prospectus or for any additional information, (iii) of the mailing or the
17
<PAGE>
delivery to the Commission for filing of any amendment of or supplement to the
Registration Statement or the Prospectus, (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereto or any order preventing or suspending the
use of any preliminary prospectus, or of the initiation, or the threatening, of
any proceedings with respect to any of the foregoing, (v) of the receipt of any
comments from the Commission, and (vi) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the Shares
for sale in any jurisdiction or the initiation or threatening of any proceeding
for that purpose. If the Commission shall propose or enter a stop order at any
time, the Company shall use its reasonable best efforts to prevent the issuance
of any such stop order and, if issued, to obtain the lifting of such order as
soon as possible. The Company will not file any amendment to the Registration
Statement, make any filing under Rule 462(b) of the Regulations, or file any
amendment of or supplement to the Prospectus (including the prospectus required
to be filed pursuant to Rule 424(b)or Rule 434 of the Regulations) before or
after the effective date of the Registration Statement to which you shall
reasonably object in writing after being timely furnished in advance a copy
thereof.
(b) The Company will comply in all material respects with the
Act and the Regulations so as to permit the completion of the distribution of
the Shares as contemplated in this Agreement and the Prospectus. If at any time
when a prospectus relating to the Shares is required to be delivered under the
Act any event shall have occurred or a condition shall exist as a result of
which the Prospectus as then amended or supplemented would, in the judgment of
the Underwriters or the Company, include an untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it shall be necessary at any time to amend or
supplement the Prospectus or Registration Statement to comply with the Act or
the Regulations, the Company will notify you promptly and prepare and file with
the Commission an appropriate amendment or supplement (in form and
18
<PAGE>
substance reasonably satisfactory to you) which will correct such statement or
omission and will use its best efforts to have any amendment to the Registration
Statement declared effective as soon as possible and the Company will furnish to
the Underwriters such number of copies of such amendment or supplement as the
Underwriters may reasonably request.
(c) The Company will promptly deliver to you four conformed copies of
the Registration Statement, including exhibits and all amendments thereto, and
conformed copies of all consents, and will maintain in the Company's files
signed copies of such documents for at least five years from the date of filing,
and the Company will promptly deliver to each of the Underwriters, without
charge, during the period when the Prospectus is required to be delivered under
the Act, such number of copies of any preliminary prospectus, the Prospectus,
the Registration Statement, and all amendments of and supplements to such
documents, if any, as you may reasonably request, and the Company hereby
consents to the use of such copies for purposes permitted by the Act. The
copies of the Registration Statement and Prospectus and each amendment thereto
furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
(d) The Company will endeavor in good faith, in cooperation with you,
at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws relating to
the offering or sale of the Shares of such jurisdictions, domestic or foreign,
as you may designate and to maintain such qualification in effect for so long as
required for the distribution thereof; except that in no event shall the Company
be obligated in connection therewith to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction where it is
not so qualified or subject.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of
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<PAGE>
its fiscal quarter in which the first anniversary date of the effective date of
the Registration Statement occurs, an earnings statement (in form complying with
the provisions of Rule 158 of the Regulations) covering a period of at least
twelve consecutive months beginning after the effective date of the Registration
Statement.
(f) During the period of 180 days from the date of the Prospectus,
each of the Company and its subsidiaries will not directly or indirectly,
without the prior written consent of Bear, Stearns & Co. Inc., (which consent
may be withheld at the sole discretion of Bear, Stearns & Co. Inc.), directly or
indirectly (i) issue, offer to sell, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of, or otherwise dispose of or
transfer any shares of the Company's Common Stock, or any securities convertible
into or exchangeable or exercisable for such Common Stock or any other
securities of the Company or its subsidiaries, whether now owned or hereafter
acquired by such person or with respect to which such person has or hereafter
acquires the power of disposition; or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock or
convertible into or exchangeable for Common Stock whether any such swap
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise (other than as contemplated by this Agreement with respect to
the Shares); provided, however, that, notwithstanding the foregoing, the Company
-------- -------
may issue shares of its Common Stock or options to purchase its Common Stock
upon exercise of options pursuant to any stock option plan, warrants, stock
bonus or other stock plan or arrangement described in the Prospectus, in each
case in the ordinary course of business; provided, that any such shares which
are issued or options which vest during the period of 180 days from the date of
the Prospectus shall be subject to the restrictions set forth above in this
Section 4(f), and, in connection therewith, the Company shall cause any holder
of such shares or vested options to execute an appropriate Lock-Up Agreement
containing such provisions.
20
<PAGE>
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its stockholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission on a
non-confidential basis or any national securities exchange. The Company, during
the period when the Prospectuses are required to be delivered under the Act,
will file all documents required to be filed with the Commission pursuant to the
1934 Act within the time periods required by the 1934 Act (including any
extensions of time obtained thereunder) and the rules and regulations of the
Commission thereunder.
(h) The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus and file with the
Commission such reports and report such use of proceeds as may be required
pursuant to Rule 463 of the Regulations.
(i) The Company will use its reasonable best efforts to cause
the Shares to be listed on the Nasdaq National Market.
(j) The Company will use its reasonable best efforts to do and
perform all things required or necessary to be done and performed under this
Agreement by the Company prior to or after the Closing Date or any Additional
Closing Date, as the case may be, and to satisfy all conditions precedent to the
delivery of the Shares.
Bear Stearns & Co. Inc., on behalf of the several Underwriters, may,
in its sole discretion, waive in writing the performance by the Company of any
one or more of the foregoing covenants or extend the time for their performance;
provided, however, that any such waiver or extension shall be effective only in
- -------- -------
the specific instance and for the specific purpose for which given, and shall
not affect in any manner future compliance with or timely performance of such
covenants by the Company.
5. Payment of Expenses. Whether or not the transactions contemplated
-------------------
in this Agreement are consummated or this Agreement is terminated, the Company
21
<PAGE>
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
financial statements and exhibits thereto), any preliminary prospectus, the
Prospectus and any amendments or supplements thereto (including, without
limitation, fees and expenses of the Company's accountants and counsel and
advisors), the underwriting documents (including this Agreement and the
Agreement Among Underwriters) all other documents related to the public offering
of the Shares (including those supplied to the Underwriters in quantities as
hereinabove stated), (ii) the issuance, transfer and delivery of the Shares to
the Underwriters, including any transfer or other taxes or duties payable in
connection with the transfer and delivery of the Shares to the Underwriters,
(iii) the qualification of the Shares under state or foreign securities or Blue
Sky laws, including, if applicable, the costs of printing and mailing a
preliminary and final "Blue Sky Survey" and any supplements thereto and the
filing fees and reasonable fees of the Underwriters' Counsel, and such counsel's
reasonable disbursements in relation thereto, (iv) listing the Shares on the
Nasdaq National Market, (v) filing fees of the Commission and the National
Association of Securities Dealers, Inc. and the reasonable fees and
disbursements of the Underwriters' Counsel in connection with the review by the
NASD of the terms of the sale of the Shares, (vi) the transportation and other
expenses incurred by the Company in connection with presentations to prospective
purchasers of the Shares, (vii) the cost of preparing, printing, and delivering
certificates representing the Shares and (viii) the fees and expenses of any
transfer agent or registrar.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to (i) the accuracy in all material
respects of the representations and warranties of the Company herein contained,
as of the date hereof and as of the Closing Date (for purposes of this Section 6
"Closing Date" shall refer to the Closing Date for the Firm Shares and any
Additional Closing Date,
22
<PAGE>
if different, for the Additional Shares), (ii) the absence from any
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 of any material misstatement or
material omission, (iii) the material performance by the Company of its
covenants and other obligations hereunder, and (iv) the following additional
conditions:
(a) The Registration Statement, including any Rule 462(b)
Registration Statement, shall have become effective and all necessary approvals
of the Nasdaq National Market shall have been received not later than 5:30 P.M.,
New York time, on the date of this Agreement, or at such later time and date as
shall have been consented to in writing by you; if the Company shall have
elected to rely upon Rule 430A or Rule 434 of the Regulations, the Prospectus
shall have been filed with the Commission in a timely fashion in accordance with
Section 4(a) hereof; and at or prior to the Closing Date, no stop order
suspending the effectiveness of the Registration Statement or any post-effective
amendment thereof shall have been issued and no proceedings therefor shall have
been initiated or threatened by the Commission or any state securities authority
and any request on the part of the Commission for additional information shall
have been complied with to the reasonable satisfaction of the Underwriters.
(b) At the Closing Date, you shall have received an opinion of
Company Counsel, dated the Closing Date, addressed to the Underwriters and in
form and substance reasonably satisfactory to Underwriters' Counsel,
substantially in the form of Exhibit A hereto.
(c) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be reasonably
satisfactory in form and substance to you and to Underwriters' Counsel, and the
Underwriters shall have received from said Underwriters' Counsel a favorable
opinion, dated as of the Closing Date in customary form and covering such
matters as you may reasonably request, and the Company shall have furnished to
Underwriters' Counsel such documents as they reasonably request for the purpose
of enabling them to pass upon such matters. In giving such opinion
Underwriters' Counsel may rely, as to
23
<PAGE>
all matters governed by the laws of jurisdictions other than the law of the
State of California, the Federal law of the United States and the General
Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the Representative. Underwriters' Counsel may also state that,
insofar as such opinion involves factual matters, they have relied, to the
extent they deem proper, upon certificates of officers of the Company and its
subsidiaries and certificates of public officials.
(d) At the Closing Date you shall have received a certificate of each
of the Chairman of the Board of Directors, the Chief Executive Officer and Chief
Financial Officer of the Company, dated the Closing Date to the effect that (i)
the conditions set forth in subsection (a) of this Section 6 have been
satisfied, (ii) as of the date hereof and as of the Closing Date, the
representations and warranties of the Company set forth in Section 1 hereof are
accurate in all material respects, (iii) as of the Closing Date, the obligations
of the Company to be performed hereunder on or prior thereto have been duly
performed in all material respects, and (iv) subsequent to the respective dates
as of which information is given in the Registration Statement and the
Prospectus, the Company and its subsidiaries have not sustained any material
loss or interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental proceeding,
and there has not been any material adverse change, or any development involving
a material adverse change, in the business prospects, properties, operations,
condition (financial or otherwise), or results of operations of the Company and
its subsidiaries taken as a whole, except in each case as described in or
contemplated by the Prospectus.
(e) At the time this Agreement is executed and at the Closing Date,
you shall have received a letter from PricewaterhouseCoopers LLP, independent
public accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Underwriters and in form
and substance reasonably satisfactory to you, stating that,
24
<PAGE>
among other things: (i) they are independent certified public accountants with
respect to the Company within the meaning of the Act and the Regulations and
stating that the information provided in response to Item 10 of the Registration
Statement is correct insofar as it relates to them; (ii) in their opinion, the
financial statements and schedules of the Company included in the Registration
Statement and the Prospectus and covered by their opinion therein comply as to
form in all material respects with the applicable accounting requirements of the
Act and the applicable published rules and regulations of the Commission
thereunder; (iii) on the basis of procedures consisting of a reading of the
latest available unaudited interim consolidated financial statements of the
Company and its subsidiaries, a reading of the minutes of meetings and consents
of the stockholders and boards of directors of the Company and its subsidiaries
and the committees of such boards subsequent to September 30, 1998, inquiries of
officers and other employees of the Company and its subsidiaries who have
responsibility for financial and accounting matters of the Company and its
subsidiaries with respect to transactions and events subsequent to September 30,
1998, a review of interim financial information in accordance with the standards
established by the American Institute of Certified Public Accountants in
Statement of Auditing Standards No. 71, Interim Financial Information with
respect to the six-month period ended March 31, 1999 and other specified
procedures and inquiries to a date not more than five days prior to the date of
such letter, nothing has come to their attention that would cause them to
believe that: (A) the unaudited consolidated financial statements and schedules
of the Company presented in the Registration Statement and the Prospectus,
including the quarterly information set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," do
not comply as to form in all material respects with the applicable accounting
requirements of the Act and, if applicable, the Exchange Act and the applicable
published rules and regulations of the Commission thereunder or that such
unaudited consolidated financial statements are not fairly presented in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited consolidated financial
statements included in the Registration Statement and the Prospectus; (B) with
respect to the
25
<PAGE>
period subsequent to March 31, 1999, there were, as of the date of the most
recently available monthly consolidated financial statements of the Company and
its subsidiaries, if any, and as of a specified date not more than five days
prior to the date of such letter, any changes in the capital stock or long-term
indebtedness of the Company or any decrease in the net current assets or
stockholders' equity of the Company, in each case as compared with the amounts
shown in the most recent balance sheet presented in the Registration Statement
and the Prospectus, except for changes or decreases which the Registration
Statement and the Prospectus disclose have occurred or may occur or which are
set forth in such letter or (C) that during the period from April 1, 1999 to the
date of the most recent available monthly consolidated financial statements of
the Company and its subsidiaries, if any, and to a specified date not more than
five days prior to the date of such letter, there was any decrease, as compared
with the corresponding period in the prior fiscal year, in total revenues, or
total or per share net income, except for decreases which the Registration
Statement and the Prospectus disclose have occurred or may occur or which are
set forth in such letter; and (iv) they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, and other financial
information pertaining to the Company and its subsidiaries set forth in the
Registration Statement and the Prospectus, which have been specified by you
prior to the date of this Agreement, to the extent that such amounts, numbers,
percentages, and information may be derived from the general accounting and
financial records of the Company and its subsidiaries or from schedules
furnished by the Company, and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the application
of specified readings, inquiries, and other appropriate procedures specified by
you set forth in such letter, and found them to be in agreement.
(f) Subject to the final paragraph contained in Section 1 of this
Agreement, prior to the Closing Date, the Company shall have furnished to you
such further information, certificates and documents as you or Underwriters'
Counsel may reasonably request (not involving any additional representations,
warranties or covenants).
26
<PAGE>
(g) At the Closing Date, the Shares shall have been duly authorized
for listing on the Nasdaq National Market, subject to official notice of
issuance.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
cancelled by you at, or at any time prior to, the Closing Date, and the
obligations of the Underwriters to purchase the Additional Shares may be
canceled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, facsimile, telex or telegraph, confirmed in writing.
7 Indemnification.
---------------
(a) The Company hereby agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), against any and all losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim or inquiry whatsoever, and any and all amounts paid in
settlement of any claim or litigation), joint or several, to which they or any
of them may become subject under the Act, the Exchange Act, the common law,
state law or otherwise, insofar as such losses, liabilities, claims, damages or
expenses (or actions in respect thereof) arise out of, relate to or are based
upon (i) any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any amendment thereof, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading; or
(ii) any untrue statement or alleged untrue statement of a material fact
27
<PAGE>
contained in any preliminary prospectus or the Prospectus or in any supplement
thereto or amendment thereof or the omission or alleged omission to state
therein a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
--------
however, that the Company will not be liable in any such case to the extent but
- -------
only to the extent that any such loss, liability, claim, damage or expense
arises out of, relates to or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission: (i) made in any preliminary
prospectus or the Prospectus or in any supplement thereto or amendment thereof
in reliance upon and in conformity with written information furnished to the
Company by or on behalf of any Underwriter expressly for use therein, or (ii)
made in any preliminary prospectus (which untrue statement or alleged untrue
statement or omission or alleged omission was corrected in the Prospectus or in
any supplement thereto or amendment thereof), to the extent that (A) the Company
previously furnished copies of the Prospectus and any supplements thereto or
amendments thereof on a timely basis to the Underwriters, and (B) a prospectus
relating to such Shares was required to be delivered by the Underwriters to the
purchaser of such Shares under the Act, and any such loss, liability, claim,
damage or expense resulted from the fact that there was not sent or given to the
purchaser in question, at or prior to the written confirmation of the sale of
such Shares to such person, a copy of the Prospectus and any supplements thereto
or amendments thereof. This indemnity agreement will be in addition to any
liability which the Company may otherwise have under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of
28
<PAGE>
any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act, the common law, state law or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of, relate to or are based upon (i) any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus or in any supplement thereto or
amendment thereof or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of, relates to or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any Underwriter expressly for use therein; provided,
--------
however, that in no case shall any Underwriter be liable or responsible for any
- -------
amount in excess of the underwriting discount applicable to the Shares purchased
by such Underwriter hereunder. This indemnity will be in addition to any
liability which any Underwriter may otherwise have including under this
Agreement. The Company acknowledges that the statements set forth in the last
paragraph of the cover page and each of the paragraphs set forth under the
caption "Underwriting" in the Prospectus constitute the only information
furnished in writing by or on behalf of any Underwriter expressly for use in the
Registration Statement or in any amendment thereof, any related preliminary
prospectus or the Prospectus or in any amendment thereof or supplement thereto,
as the case may be.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such
29
<PAGE>
subsection, notify each party against whom indemnification is to be sought in
writing of the commencement of such action (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 7). In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of counsel shall be borne by the indemnifying parties;
provided, that the indemnifying parties shall only be--------obligated to pay
the fees and expenses of one such counsel for the benefit of the indemnified
party or parties. The indemnifying party shall indemnify and hold harmless the
indemnified party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with its written consent, or (ii) effected without its written consent if the
settlement is entered into more than twenty Business Days after the indemnifying
party shall have received a request from the indemnified party for reimbursement
for the fees and expenses of counsel (in any case where such fees and expenses
are at the expense of the indemnifying party) and, prior to the date of such
settlement, the
30
<PAGE>
indemnifying party shall have failed to comply with such reimbursement request.
No indemnifying party shall be liable to an indemnified party for any settlement
of any action or claim by the indemnified party without the written consent of
the indemnifying party, which consent shall not be unreasonably withheld or
delayed.
8 Contribution. In order to provide for contribution in
------------
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company, on
the one hand, and the Underwriters, on the other, shall contribute to the
aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provision (including any investigation,
reasonable legal and other expenses incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claims asserted,
but after deducting in the case of losses, claims, damages, liabilities and
expenses suffered by the Company, any contribution received by the Company from
persons, other than the Underwriters, who may also be liable for contribution,
including persons who control the Company within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, officers of the Company who signed
the Registration Statement and directors of the Company) as incurred to which
the Company and one or more of the Underwriters may be subject, in such
proportions as is appropriate to reflect the relative benefits received by the
Company, on the one hand, and the Underwriters, on the other, from the offering
of the Shares or, if such allocation is not permitted by applicable law or
indemnification is not available as a result of the indemnifying party not
having received notice as provided in Section 7 hereof, in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company, on the one hand, and the Underwriters, on the
other, in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company, on the
one hand, and the Underwriters, on the other, shall be deemed to be in
31
<PAGE>
the same proportion as (x) the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company and (y) the underwriting discounts and commissions received by
the Underwriters, respectively, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault of the Company, on the one
hand, and of the Underwriters, on the other, shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 8, (i) in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 8 and the preceding sentence, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. For purposes of this
Section 8, each person, if any, who controls an Underwriter within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the
same rights to contribution as such Underwriter, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution
32
<PAGE>
as the Company, subject in each case to clauses (i) and (ii) of this Section 8.
Any party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties,
notify each party or parties from whom contribution may be sought, but the
omission to so notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.
- -------- -------
9 Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, as the case may be, the Firm Shares or Additional Shares
to which the default relates shall be purchased by the non-defaulting
Underwriters in proportion to the respective proportions which the numbers of
Firm Shares set forth opposite their respective names in Schedule I hereto bear
to the aggregate number of Firm Shares set forth opposite the names of the non-
defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the
total number of Firm Shares or Additional Shares, as the case may be, you may in
your discretion arrange for yourself or for another party or parties (including
any non-defaulting Underwriter or Underwriters who so agree) to purchase such
Firm Shares or Additional Shares, as the case may be, to which such default
relates on the terms contained herein. In the event that within 5 calendar days
after such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the
33
<PAGE>
Underwriters to purchase and of the Company to sell the Additional Shares shall
thereupon terminate, without liability on the part of the Company (except in
each case as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but
nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters
of its or their liability, if any, to the other Underwriters and the Company for
damages occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which
such default relates are to be purchased by the non-defaulting Underwriters, or
are to be purchased by another party or parties as aforesaid, you or the Company
shall have the right to postpone the Closing Date or Additional Closing Date, as
the case may be, for a period not exceeding five Business Days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may
thereby be made necessary or advisable. The term "Underwriter" as used in this
Agreement shall include any party substituted under this Section 9 with like
effect as if it had originally been a party to this Agreement with respect to
such Firm Shares and Additional Shares, as the case may be.
10 Survival of Representations and Agreements. All representations
------------------------------------------
and warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5
hereof, the indemnity agreements contained in Section 7 hereof and the
contribution agreements contained in Section 8 hereof, and in certificates of
directors or officers of the Company provided pursuant hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter or any controlling person thereof or by or on
behalf of the Company or any of its officers and directors or any controlling
person thereof and shall survive delivery of and payment for the Shares to and
by the Underwriters. The representations contained in Section 1 and the
agreements contained in Sections 5, 7, 8, 10 and 11(d)
34
<PAGE>
hereof shall survive the termination of this Agreement, including termination
pursuant to Section 9 or 11 hereof.
11 Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective upon the later of: (i) such
time as you and the Company shall have received notification of the
effectiveness of the Registration Statement, and (ii) the execution of this
Agreement; provided, however, that if either the initial public offering or the
-------- -------
purchase price per Share has not been agreed upon prior to 5:00 P.M., New York
City time, on the fifth full business day after the Registration Statement shall
have been declared effective, this Agreement shall thereupon terminate without
liability to the Company or the Underwriters except as herein expressly
provided. Until this Agreement becomes effective as aforesaid, it may be
terminated by the Company by notifying you or by you notifying the Company.
Notwithstanding the foregoing, the provisions of this Section 11 and of Sections
1, 5, 7, 8 and 10 hereof shall at all times be in full force and effect.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the obligations of the Underwriters to purchase the
Additional Shares at any time prior to the Additional Closing Date, as the case
may be: (i) if any domestic or international event or act or occurrence has
materially disrupted, or in your opinion will in the immediate future materially
disrupt, the market for the Company's securities or securities in general; (ii)
if trading on the New York or American Stock Exchanges or the Nasdaq National
Market (collectively the "Exchanges") shall have been suspended, or minimum or
maximum prices for trading shall have been fixed, or maximum ranges for prices
for securities shall have been required, on any of the Exchanges by the
authorities of such Exchanges or by order of the Commission or any other
governmental authority having jurisdiction; or (iii) if a banking moratorium has
been declared by a state or federal authority or if any new restriction
materially adversely affecting the distribution of the Firm Shares or the
Additional Shares, as the case may be, shall have become effective; or (iv)(A)
if the United States becomes engaged in hostilities or there is an escalation of
35
<PAGE>
hostilities involving the United States or there is a declaration of a national
emergency or war by the United States or (B) if there shall have been such
change in political, financial or economic conditions, if the effect of any such
event in (A) or (B) as in your judgment makes it impracticable or inadvisable to
proceed with the offering, sale and delivery of the Firm Shares or the
Additional Shares, as the case may be, on the terms contemplated by the
Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, facsimile, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied (other than the condition that the Underwriters receive a legal
opinion from the Underwriters' Counsel) or because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or comply
with any provision hereof, the Company will, subject to demand by you, reimburse
the Underwriters for all reasonable out-of-pocket expenses (including the
reasonable fees and expenses of their counsel), incurred by the Underwriters in
connection herewith.
12 Notices. All communications hereunder, except as may be
-------
otherwise specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, sent by facsimile, telex or telegraph
and confirmed in writing by letter, to such Underwriter c/o either Bear, Stearns
& Co. Inc., 245 Park Avenue, 18th Floor, New York, New York 10167, Attention:
Richard S. Lukaj, fax no. (212) 272-3092 (with a copy to Gregory C. Smith, Esq.,
Skadden, Arps, Slate, Meagher & Flom LLP, 525 University Avenue, Suite 220, Palo
Alto, California, 94301, fax no. (650) 470-4570), Lehman Brothers Inc., 3 World
Financial Center, 200 Vesey Street, New York, New York 10285, Attention:
Laurence Band, fax no. (212) 528-7547, or Thomas Weisel Partners LLC, One
Montgomery Street, Suite 3700, San Francisco, California 94104, Attention: Andy
Sessions, fax no. (415)
36
<PAGE>
364-2696; if sent to the Company, shall be mailed, delivered, or sent by
facsimile, telex or telegraph and confirmed in a letter to the Company, Digital
Island, Inc., 353 Sacramento Street, 15th Floor, San Francisco, California
94111, Attention: T.L. Thompson, fax no. (415) 228-4141, with a copy to Curtis
L. Mo, Esq., Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng
Road, Palo Alto, California 94303, fax no. (650) 496-2715.
13 Parties. This Agreement shall inure solely to the benefit of,
-------
and shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Sections 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision contained herein.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of any Shares from any of the Underwriters.
14 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
15 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be an original and all of which together shall
constitute one and the same instrument.
37
<PAGE>
If the foregoing correctly sets forth the understanding between you
and the Company, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
DIGITAL ISLAND, INC.
By:
Name:
---------------------------
Title:
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
By:
---------------------------
Name:
Title:
LEHMAN BROTHERS INC.
By:
---------------------------
Name:
Title:
THOMAS WEISEL PARTNERS LLC
By:
---------------------------
Name:
Title:
Each on behalf of itself and the other
Underwriters named in Schedule I hereto.
38
<PAGE>
SCHEDULE I
Number of Firm
Name of Underwriter Shares to be Purchased
- ------------------- --------------------------------------------
Bear, Stearns & Co. Inc............
Lehman Brothers Inc................
Thomas Weisel Partners LLC.........
Total. . . . . .
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DIGITAL ISLAND, INC.
The undersigned, Ruann F. Ernst and T.L. Thompson, hereby certify
that:
ONE: They are the duly elected, qualified and acting President and
---
Secretary, respectively, of Digital Island, Inc., a Delaware corporation.
TWO: The Certificate of Incorporation of said corporation was
---
originally filed in the Office of the Secretary of State of the State of
Delaware on March 31, 1999 and the Amended and Restated Certificate of
Incorporation of said corporation was originally filed in such office on May 27,
1999.
THREE: The Amended and Restated Certificate of Incorporation of said
-----
corporation is amended and restated to read in its entirety as follows:
ARTICLE I
The name of this corporation is Digital Island, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, Delaware
19801. The name of the Corporation's registered agent at such address is the
Corporation Service Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware (the "GCL").
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares that the Corporation is authorized to issue is One Hundred Ten
Million (110,000,000). One Hundred Million (100,000,000) shares shall be Common
Stock, par value $0.001 per share, and Ten Million (10,000,000) shares shall be
Preferred Stock, par value $0.001 per share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors of the
Corporation is hereby
<PAGE>
authorized to fix or alter the rights, preferences, privileges and restrictions
granted to or imposed upon each series of Preferred Stock, and the number of
shares constituting any such series and the designation thereof, or of any of
them. The rights, privileges, preferences and restrictions of any such
additional series may be subordinated to, pari passu with (including, without
----------
limitation, inclusion in provisions with respect to liquidation and acquisition
preferences, redemption and/or approval of matters by vote), or senior to any of
those of any present or future class or series of Preferred Stock or Common
Stock. The Board of Directors is also authorized to increase or decrease the
number of shares of any series prior or subsequent to the issue of that series,
but not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation. In addition, the
Bylaws may be amended by the affirmative vote of holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of voting stock of
the Corporation entitled to vote at an election of directors.
ARTICLE VI
The number of directors of the Corporation shall be determined by
resolution of the Board of Directors.
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide. Advance notice of stockholder nominations
for the election of directors and of any other business to be brought before any
meeting of the stockholders shall be given in the manner provided in the Bylaws
of this Corporation.
At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, or until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the GCL.
The directors of the Corporation shall be divided into three (3)
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. For the purposes hereof, the initial Class I, Class II
and Class III directors shall be those directors so designated by a resolution
of the Board of Directors. At the first annual meeting of stockholders
following the closing of the initial public offering of the Corporation's Common
Stock, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three (3) years. At the second
annual meeting of stockholders following the closing of the initial public
offering of the Corporation's Common Stock, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three (3) years. At the third annual meeting of stockholders following the
initial public offering of the Corporation's Common
<PAGE>
Stock, the term of office of the Class III directors shall expire and Class III
directors shall be elected for a full term of three (3) years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three (3) years to succeed the directors of the class whose terms expire
at such annual meeting. If the number of directors is hereafter changed, each
director then serving as such shall nevertheless continue as a director of the
Class of which he is a member until the expiration of his current term and any
newly created directorships or decrease in directorships shall be so apportioned
among the classes as to make all classes as nearly equal in number as is
practicable.
Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
even if less than a quorum, at any meeting of the Board of Directors. A person
so elected by the Board of Directors to fill a vacancy shall hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been duly elected and
qualified. A director may be removed from office by the affirmative vote of the
holders of 66 2/3% of the outstanding shares of voting stock of the Corporation
entitled to vote at an election of directors, provided that such removal is for
cause.
ARTICLE VII
Stockholders of the Corporation shall take action by meetings held
pursuant to this Amended and Restated Certificate of Incorporation and the
Bylaws and shall have no right to take any action by written consent without a
meeting. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. Special meetings of the stockholders, for
any purpose or purposes, may only be called by the Board of Directors of the
Corporation. The books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the Corporation.
ARTICLE VIII
To the fullest extent permitted by applicable law, this Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and agents (and any other persons to which
Delaware law permits this Corporation to provide indemnification) through Bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the GCL, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to action for breach of duty to the Corporation, its stockholders, and
others.
No director of the Corporation shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the GCL or any amendment thereto or shall be liable
by reason that, in addition to any and all other requirements for such
liability, such director (1) shall have breached the director's duty or loyalty
to the Corporation or its stockholders, (2) shall have acted in manner involving
intentional misconduct or a knowing violation of law or, in failing to act,
shall have acted in a manner involving
<PAGE>
intentional misconduct or a knowing violation of law, or (3) shall have derived
an improper personal benefit. If the GCL is hereafter amended to authorize the
further elimination or limitation of the liability of a director, the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the GCL, as so amended.
Each person who was or is made a party or is threatened to be made a
party to or is in any way involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or a direct
or indirect subsidiary of the Corporation, or is or was serving at the request
of the Corporation as a director or officer of another entity or enterprise, or
was a director or officer of a foreign or domestic corporation which was
predecessor corporation of the Corporation or of another entity or enterprise at
the request of such predecessor corporation, shall be indemnified and held
harmless by the Corporation, and the Corporation shall advance all expenses
incurred by any such person in defense of any such proceeding prior to its final
determination, to the fullest extent authorized by the GCL. In any proceeding
against the Corporation to enforce these rights, such person shall be presumed
to be entitled to indemnification and the Corporation shall have the burden of
proving that such person has not met the standards of conduct for permissible
indemnification set forth in the GCL. The rights to indemnification and
advancement of expenses conferred by this Article VIII shall be presumed to have
been relied upon by the directors and officers of the Corporation in serving or
continuing to serve the Corporation and shall be enforceable as contract rights.
Said rights shall not be exclusive of any other rights to which those seeking
indemnification may otherwise be entitled. The Corporation may, upon written
demand presented by a director or officer of the Corporation or of a direct or
indirect subsidiary of the Corporation, or by a person serving at the request of
the Corporation as a director or officer of another entity or enterprise, enter
into contracts to provide such persons with specified rights to indemnification,
which contracts may confer rights and protections to the maximum extent
permitted by the GCL, as amended and in effect from time to time.
If a claim under this Article VIII is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the Corporation ) that the claimant
has not met the standards of conduct which make it permissible under the GCL for
the Corporation to indemnify the claimant for the amount claimed, but the
claimant shall be presumed to be entitled to indemnification and the Corporation
shall have the burden of proving that the claimant has not met the standards of
conduct for permissible indemnification set forth in the GCL.
If the GCL is hereafter amended to permit the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment, the indemnification rights conferred by this
Article VIII shall be broadened to the fullest extent permitted by the GCL, as
so amended.
<PAGE>
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in
Articles V, VI, VII, VIII and IX of this Amended and Restated Certificate of
Incorporation may not be repealed or amended in any respect without the
affirmative vote of holders at least 66-2/3% of the outstanding voting stock of
the Corporation entitled to vote at election of directors.
FOUR: The foregoing amendment and restatement has been duly adopted
----
by the Corporation's Board of Directors in accordance with the applicable
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
FIFTH: The foregoing amendment and restatement was approved by the
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holders of the requisite number of shares of the Corporation in accordance with
Section 228 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
__________, 1999.
__________________________________________
Ruann F. Ernst
President
__________________________________________
T.L. Thompson
Secretary
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BYLAWS
OF
DIGITAL ISLAND, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
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County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places
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both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
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directors shall be held at such place as may be fixed from time to time by the
Board of Directors, or at such other place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held at such date
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and time as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. At each annual meeting, the stockholder
shall elect directors to succeed those whose terms expire in that year and shall
transact such other business as may properly be brought before the meeting.
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Section 3. Written notice of the annual meeting stating the place,
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date and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not less than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
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corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
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purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may only be called by the Board.
Section 6. Written notice of a special meeting stating the place,
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date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of stockholders
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shall be limited to the purposes stated in the notice.
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Section 8. The holders of a majority of the stock issued and
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outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted that might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
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holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of
-----------
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three (3) years from its date, unless the proxy provides for a longer
period.
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Section 11. Nominations for election to the Board of Directors must
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be made by the Board of Directors or by a committee appointed by the Board of
Directors for such purpose or by any stockholder of any outstanding class of
capital stock of the corporation entitled to vote for the election of directors.
Nominations by stockholders must be preceded by notification in writing received
by the secretary of the corporation not less than one-hundred twenty (120) days
prior to any meeting of stockholders called for the election of directors. Such
notification shall contain the written consent of each proposed nominee to serve
as a director if so elected and the following information as to each proposed
nominee and as to each person, acting alone or in conjunction with one or more
other persons as a partnership, limited partnership, syndicate or other group,
who participates or is expected to participate in making such nomination or in
organizing, directing or financing such nomination or solicitation of proxies to
vote for the nominee:
(a) the name, age, residence, address, and business address of
each proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of
business and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially,
either directly or indirectly, by each proposed nominee and each such person;
and
(d) a description of any arrangement or understanding of each
proposed nominee and of each such person with each other or any other person
regarding future employment or any future transaction to which the corporation
will or may be a party.
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The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
Section 12. At any meeting of the stockholders, only such business
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shall be conducted as shall have been brought before the meeting (a) pursuant to
the corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in this Bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this Bylaw.
For business to be properly brought before any meeting by a
stockholder pursuant to clause (c) above of this Section 12, the stockholder
must have given timely notice thereof in writing to the secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than one hundred twenty (120) days prior to the date of the meeting. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (a) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, and the name
and address of the beneficial owner, if any, on whose behalf the proposal is
made, (c) the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder of record and by the beneficial
owner, if any, on whose behalf of the proposal is made and (d) any material
interest of such stockholder of record and the beneficial owner, if any, on
whose behalf the proposal is made in such business.
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<PAGE>
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at a meeting except in accordance with the procedures set
forth in this Section 12. The presiding officer of the meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the procedures
prescribed by this Section 12, and if such person should so determine, such
person shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted. Notwithstanding the
foregoing provisions of this Section 12, a stockholder shall also comply with
all applicable requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder with respect to the matters set forth
in this Section 12.
Section 13. Effective upon the closing of the corporation's initial
-----------
public offering of securities pursuant to a registration statement filed under
the Securities Act of 1933, as amended, the stockholders of the Corporation may
not take action by written consent without a meeting but must take any such
actions at a duly called annual or special meeting in accordance with these
Bylaws and the Certificate of Incorporation.
ARTICLE III
DIRECTORS
Section 1. The number of directors of this corporation that shall
----------
constitute the whole board shall be determined by resolution of the Board of
Directors; provided, however, that no decrease in the number of directors shall
have the effect of shortening the term of an incumbent director. The Board of
Directors shall be classified, with respect to the time for which they severally
hold office, into three classes, as nearly equal in number as possible, as
determined by the Board of Directors, one class ("Class I") to hold office
initially for a term
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<PAGE>
expiring at the annual meeting to be held in 2000, another class ("Class II") to
hold office initially for a term expiring at the annual meeting of stockholders
held in 2001 and another class ("Class III") to hold office initially for a term
expiring at the annual meeting of stockholders to be held in 2002, with the
members of each class to hold office until their successors are elected and
qualified. At each annual meeting of stockholders, the successors of the class
of directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election.
Section 2. Vacancies and newly created directorships resulting from
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any increase in the authorized number of directors may be filled by a majority
of the directors then in office, though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
election of the class for which such directors were chose and until their
successors are duly elected and qualified or until earlier resignation or
removal. If there are no directors in office, then an election of directors may
be held in the manner provided by statute.
Section 3. The business of the corporation shall be managed by or
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under the direction of its Board of Directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by these bylaws directed or required
to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
----------
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of Directors
----------
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to
7
<PAGE>
constitute the meeting, provided a quorum shall be present. In the event of the
failure of the stockholders to fix the time or place of such first meeting of
the newly elected Board of Directors, or in the event such meeting is not held
at the time and place so fixed by the stockholders, the meeting may be held at
such time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the Board of Directors, or as shall be
specified in a written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held
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without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
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president on two (2) days' notice to each director by mail or forty-eight (48)
hours notice to each director either personally, or by telephone, telegram or
facsimile; special meetings shall be called by the president or secretary in
like manner and on like notice on the written request of a majority of the Board
unless the Board consists of only one director, in which case special meetings
shall be called by the president or secretary in like manner and on like notice
on the written request of the sole director. A written waiver of notice, signed
by the person entitled thereto, whether before or after the time of the meeting
stated therein, shall be deemed equivalent to notice.
Section 8. At all meetings of the board a majority of the directors
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shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
8
<PAGE>
Section 9. Unless otherwise restricted by the certificate of
----------
incorporation of these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
-----------
majority of the whole board, designate one (1) or more committees, each
committee to consist of one (1) or more of the directors of the corporation.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in
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<PAGE>
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority in reference to amending the
certificate of incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a revocation of a dissolution,
or amending the bylaws of the corporation; and, unless the resolution or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings
-----------
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation 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.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
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<PAGE>
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
-----------
incorporation or bylaws, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
----------
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice (except as provided in Section 7 of Article III of these Bylaws), but
such notice may be given in writing, by mail, addressed to such director or
stockholder, at his address as it appears on the records of the corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
directors may also be given by telephone, telegram or facsimile.
Section 2. Whenever any notice is required to be given under the
----------
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
----------
Board of Directors and shall be a president, a chief financial officer and a
secretary. The Board of Directors may elect from among its members a Chairman
of the Board. The Board of Directors
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<PAGE>
may also choose one or more vice-presidents, assistant secretaries and assistant
treasurers. Any number of offices may be held by the same person, unless the
certificate of incorporation or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
----------
annual meeting of stockholders shall choose a president, a chief financial
officer, and a secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers and
----------
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers of the corporation shall be
----------
fixed by the Board of Directors or any committee established by the Board of
Directors for such purpose. The salaries of agents of the corporation shall,
unless fixed by the Board of Directors, be fixed by the president or any vice-
president of the corporation.
Section 5. The officers of the corporation shall hold office until
----------
their successors are chosen and qualify. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
----------
meetings of the Board of Directors and of the stockholders at which he shall be
present. He/she shall have and may exercise such powers as are, from time to
time, assigned to him by the Board and as may be provided by law.
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<PAGE>
Section 7. In the absence of the Chairman of the Board, the
----------
president, shall preside at all meetings of the Board of Directors and of the
stockholders at which he shall be present. He shall have and may exercise such
powers as are, from time to time, assigned to him by the Board and as may be
provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer of the
----------
corporation; and in the absence of the Chairman of the Board he/she shall
preside at all meetings of the stockholders and the Board of Directors; he/she
shall have general and active management of the business of the corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect.
Section 9. The president or any vice president shall execute bonds,
----------
mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
Section 10. In the absence of the president or in the event of his
-----------
inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
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<PAGE>
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board of
-----------
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He/she shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he/she shall be. He/she shall have custody
of the corporate seal of the corporation and he/she, or an assistant secretary,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by his signature or by the signature of such
assistant secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
his signature.
Section 12. The assistant secretary, or if there be more than one,
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the assistant secretaries in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the secretary or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
THE CHIEF FINANCIAL OFFICER
Section 13. The chief financial officer shall be the chief financial
-----------
officer and treasurer of the corporation, shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the
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<PAGE>
corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the corporation in such depositories as may be designated
by the Board of Directors.
Section 14. He/she shall disburse the funds of the corporation as may
-----------
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 15. Along with the president or any vice president, he/she
-----------
shall be authorized to execute bonds, mortgages and other contracts requiring a
seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the corporation.
Section 16. If required by the Board of Directors, he/she shall give
-----------
the corporation a bond (which shall be renewed every six years) in such sum and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of his/her office and for the
restoration to the corporation, in case of his/her death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his/her control
belonging to the corporation.
Section 17. The assistant treasurer, or if there shall be more than
-----------
one, the assistant treasurers in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the chief financial officer or in the event of his
inability or refusal to act, perform the duties and exercise the powers
15
<PAGE>
of the chief financial officer and shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled
----------
to have a certificate, signed by, or in the name of the corporation by, the
Chairman of the Board of Directors, or the president or a vice-president and the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of the corporation, certifying the number of shares owned by him/her in the
corporation.
Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate that the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating,
16
<PAGE>
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
Any of or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he/she were such
officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 2. The Board of Directors may direct a new certificate or
----------
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his/her
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 3. Upon surrender to the corporation or the transfer agent of
----------
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a
17
<PAGE>
new certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
FIXING RECORD DATE
Section 4. In order that the corporation may determine the
----------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 5. The corporation shall be entitled to recognize the
----------
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
18
<PAGE>
Section 1. Dividends upon the capital stock of the corporation,
----------
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
----------
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the
----------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
----------
resolution of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
----------
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
19
<PAGE>
Section 6. The corporation shall, to the fullest extent authorized
----------
under the laws of the State of Delaware, as those laws may be amended and
supplemented from time to time, indemnify any director made, or threatened to be
made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
corporation or a predecessor corporation or, at the corporation's request, a
director or officer of another corporation, provided, however, that the
corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the corporation. The indemnification provided for in this Section
6 shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled under any bylaw, agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in their official
capacities and as to action in another capacity while holding such office, (ii)
continue as to a person who has ceased to be a director, and (iii) inure to the
benefit of the heirs, executors and administrators of such a person. The
corporation's obligation to provide indemnification under this Section 6 shall
be offset to the extent of any other source of indemnification or any otherwise
applicable insurance coverage under a policy maintained by the corporation or
any other person.
Expenses incurred by a director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of the corporation (or was serving at the corporation's request
as a director or officer of another corporation) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation as authorized by relevant sections of the
General Corporation Law of Delaware. Notwithstanding
20
<PAGE>
the foregoing, the corporation shall not be required to advance such expenses to
an agent who is a party to an action, suit or proceeding brought by the
corporation and approved by a majority of the Board of Directors of the
corporation which alleges willful misappropriation of corporate assets by such
agent, disclosure of confidential information in violation of such agent's
fiduciary or contractual obligations to the corporation or any other willful and
deliberate breach in bad faith of such agent's duty to the corporation or its
stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of
the corporation to indemnify any person, other than a director, made a party to
any action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been "fiduciaries" of any employee benefit plan of the corporation
which may exist from time to time, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this Section 6, be interpreted as follows:
an "other enterprise" shall be deemed to include such an employee benefit plan,
including without limitation, any plan of the corporation which is governed by
the Act of Congress entitled "Employee Retirement Income Security Act of 1974,"
as amended from
21
<PAGE>
time to time; the corporation shall be deemed to have requested a person to
serve an employee benefit plan where the performance by such person of his
duties to the corporation also imposes duties on, or otherwise involves services
by, such person to the plan or participants or beneficiaries of the plan; excise
taxes assessed on a person with respect to an employee benefit plan pursuant to
such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new
----------
bylaws may be adopted by the affirmative vote of holders of at least 66-2/3%
vote of the outstanding voting stock of the corporation. These bylaws may also
be altered, amended or repealed or new bylaws may be adopted by the Board of
Directors, when such power is conferred upon the Board of Directors by the
certificate of incorporation. The foregoing may occur at any regular meeting of
the stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal bylaws is conferred
upon the Board of Directors by the certificate of incorporation it shall not
divest or limit the power of the stockholders to adopt, amend or repeal bylaws.
22
<PAGE>
CERTIFICATE OF ADOPTION BY THE
SECRETARY OF
DIGITAL ISLAND, INC.
The undersigned, T.L. Thompson, hereby certifies that he is the duly
elected and acting Secretary of Digital Island, Inc., a Delaware corporation
(the "Corporation"), and that the Amended and Restated Bylaws attached hereto
constitute the Bylaws of said Corporation as duly adopted by the Board of
Directors and the Stockholders of the Corporation and as in effect on the date
hereof.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this _____ day of _____, 1999.
_____________________________________
T.L. Thompson
Secretary
23
<PAGE>
EXHIBIT 4.3
===============================================================================
NUMBER [LOGO] COMMON STOCK
DI SHARES
SEE REVERSE FOR CERTAIN
DEFINITIONS
CUSIP 25385N 10 1
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON, MA OR NEW YORK, NY
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK,
$0.001 PAR VALUE OF $0.001 PER SHARE, OF
DIGITAL ISLAND, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
[CORPORATE SEAL
OF DIGITAL ISLAND, INC.]
/s/ /s/
CHIEF FINANCIAL OFFICER PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
TRANSFER AGENT AND REGISTRAR
BY /s/
AUTHORIZED SIGNATURE
================================================================================
<PAGE>
================================================================================
DIGITAL ISLAND, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the Certificate
of Incorporation of the Corporation and by any certificate of determination,
the number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-.........Custodian.........
TEN ENT - as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to
JT TEN - as joint tenants with Minors Act..................
right of survivorship (State)
and not as tenants in UNIF TRF MIN ACT- .....Custodian (until age..)
common (Cust)
COM PROP- as community property ......under Uniform Transfer
(Minor)
to Minors Act...............
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
OF ASSIGNEE
_____________________________
_____________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated ____________________________
X __________________________________
X __________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_________________________________
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 4.5
AMENDMENT NO. 1
to
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
This Amendment No. 1, dated as of April 9, 1999, amends that certain
Amended and Restated Investors' Rights Agreement, dated as of February 19, 1999
(the "Agreement"), by and among Digital Island, Inc., a California corporation
---------
(the "Company"), and the individuals or entities listed on the signature pages
-------
thereto (each a "Holder" and collectively, the "Holders"). Capitalized terms
------ -------
used herein without definition shall have the respective meanings ascribed to
them in the Agreement.
WHEREAS, the Company intends to undertake an Initial Public Offering;
and
WHEREAS, the Company and the Holders wish to amend the Agreement to
facilitate the Initial Public Offering; and
WHEREAS, the Agreement, pursuant to Section 14.8 thereof, may be
amended with the written consent of the Company and the Holders of at least 66
2/3% of the outstanding Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred and Registrable Securities.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Section 9 of the Agreement is hereby deleted in its entirety and
the following is substituted therefor:
Section 9
Standoff Agreement
------------------
In connection with the Company's Initial Public Offering, each Holder
agrees not to offer to sell or sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any securities of the
Company held by Holder at any time during such period (other than those included
in the Initial Public Offering, if any), directly or indirectly, without the
prior written consent of the Company or the underwriters of such Initial Public
Offering for a period of one-hundred eighty (180) days following the effective
date of the Initial Public Offering. In connection with the Company's Initial
Public Offering, each Holder further agrees to enter into the managing
underwriter's standard lockup letter. In order to enforce the foregoing, the
Company may impose stop-transfer instructions with respect to the Registrable
Securities of each Holder
<PAGE>
(and the share or securities of every other person subject to the foregoing
restrictions) until the end of such period."
2. Each of the other provisions of the Agreement shall remain in full
force and effect.
This Amendment No. 1 may be executed in counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
instrument.
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Amendment No. 1 as of the date first above written.
By:
----------------------------------
Print Name:
--------------------------
Title:
-------------------------------
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF BROBECK, PHLEGER & HARRISON LLP]
June 4, 1999
Digital Island, Inc.
353 Sacramento Street
Suite 1520
San Francisco, CA 94111
Re: Registration Statement on Form S-1
File No. 333-77039
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 originally filed by
Digital Island, Inc. (the "Company") with the Securities and Exchange
Commission (the "Commission") on April 23, 1999, as thereafter amended or
supplemented (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of 8,625,000 shares
of the Company's Common Stock (the "Shares"). The Shares include an over-
allotment option granted to the Underwriters to purchase 1,125,000 additional
Shares and are to be sold to the Underwriters as described in such Registration
Statement for resale to the public. As your counsel in connection with this
transaction, we have examined the proceedings taken and are familiar with the
proceedings proposed to be taken by you in connection with the sale and
issuance of the Shares.
It is our opinion that, upon conclusion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, the Shares, when issued and sold in the manner described in the
Registration Statement, will be validly issued, fully paid and nonassessable.
We consent to the use of this Opinion as an exhibit to said Registration
Statement, and further consent to the use of our name wherever appearing in
said Registration Statement, including the prospectus constituting a part
thereof, and in any amendment thereto.
Very truly yours,
/s/ Brobeck, Phleger & Harrison LLP
Brobeck, Phleger & Harrison LLP
<PAGE>
EXHIBIT 10.1
DIGITAL ISLAND, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
1. GENERAL
1.1 Purpose
This Stock Option and Incentive Plan (the "Plan") is intended to provide
incentives and encourage stock ownership on the part of officers and selected
key employees of Digital Island, Inc. (the "Company"). The purpose of the Plan
is to provide certain employees with a proprietary interest in the Company and
to encourage them to remain in the employ of and to increase their efforts on
behalf of the Company. The term "Company," as used in this Plan, includes
Digital Island, Inc. and any of its "subsidiary corporations" which meet the
definition of subsidiary corporation contained in Section 425(f) of the Code.
The Plan permits the grant of stock options, restricted stock, stock
appreciation rights, dividend equivalents and performance awards (sometimes
referred to in this Plan, collectively, as "Awards"). The Plan also permits the
grant of incentive stock options ("Incentive Stock Options") within the meaning
of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"),
and the grant of other options that do not constitute Incentive Stock Options
("Nonqualified Stock Options"), Incentive stock options and nonqualified stock
options granted under this Plan are sometimes referred-to in this Plan,
collectively, as "Options." The recipients of Options or Awards are referred to,
individually, as "Optionee" and, collectively, as "Optionees."
1.2 Administration
The Plan will be administered by the Board of Directors of the Company (the
"Board").
The Board will have full and complete authority to promulgate such rules
and regulations as it deems desirable for administering and interpreting the
Plan. All determinations, decisions and computations made by the Board under
this Plan and all interpretations by the Board of any provisions of this Plan or
of any Option or Award will be in the Board's sole and absolute discretion and
will be final and conclusive. No member of the Board will be liable for any an
or determination made in good faith with respect to the Plan or any Option or
Award.
The Board may delegate all or any portion of its authority, rights, duties
or obligations to such other person(s) as the Board will determine from time to
time, except that only the Board can make grants to persons who are subject to
Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
1.3 Eligibility
Subject to the terms and conditions of this Plan, the Board will determine
which employees and/or other individuals will be granted Options and/or Awards
and the terms and conditions of the Options and/or Awards.
1
<PAGE>
1.4 Shares of Stock Subject to the Plan
The shares that may be issued under the Plan will be authorized and
unissued or reacquired shares of the Company's common stock (the "Common
Stock"). The aggregate number of shares which may be issued under the Plan will
not exceed shares of Common Stock, as adjusted in accordance with Session
4. If an option or Award is exercised or otherwise paid, the number of shares of
Common Stock to which the exercise or payment relates will be charged against
the maximum amount of Common Stock that may be delivered pursuant to the Plan
and, if applicable, pursuant to the Option or Award.
If an Option or Award expires or is canceled for any reason without having
been fully exercised or vested, the number of shares subject to that Option or
Award which were not purchased or did not vest may again be made subject to
either an Option or an Award (to the same person or to a different person).
1.5 Amendment of the Plan
The Board may, insofar as permitted by law, from time to time, suspend or
discontinue the Plan or reuse or amend the Plan in any respect whatsoever,
except that no amendment will alter or impair any rights or obligations under
any Options or Awards without the consent of the affected Optionee(s).
1.6 Term of Plan
The Plan will become effective on January 1, 1997. Subject to suspension or
discontinuation of the Plan, Options and Awards may be granted under the Plan at
any time after the Plan becomes effective and until January 1, 2007, on which
date the Plan will terminate. Notwithstanding the foregoing, each Option and
Award granted under the Plan will remain in effect until such Option or Award
has been satisfied by the issuance of shares or terminated in accordance with
its terms and the terms of the Plan.
1.7 Other Provisions
The Option Agreements and other agreements authored under this Plan may
contain provisions not expressly set forth in this Plan, including without
limitation, restrictions upon the exercise of the Option or restrictions
required by any applicable securities laws, as the Board deems advisable.
1.8 Restrictions
The Board may impose as a condition of the exercise of any Award or Option,
that the shares subject to any Award or Option are listed, registered or
qualified under the rules of any securities exchange or under any state or
federal law or regulation and, in that event, the affected Options or Awards may
not be exercised (in whole or in part) unless and until the Board's condition
has been met.
1.9 Nonassignability
No Option or Award will be assignable or transferable by the Optionee,
except by will or by the laws of descent and distribution. During the lifetime
of the Optionee, the Option or Award will be exercisable only by that optionee,
and no other person will acquire any rights in the Option or Award.
2
<PAGE>
1.10 Withholding Taxes
Whenever shares are to be issued, or cash is to be paid, under the Plan,
the Company will have the right to require the Optionee to remit to the Company
an amount adequate to satisfy federal, stale and local withholding tax
requirements prior to the delivery of any certificate for the shares or the
payment of the cash. The Company may deduct withholding taxes from any shares or
cash paid under the Plan.
1.11 Definition of "Fair Market Value"
For the purposes of the Plan, the term "Fair Market Value" will mean, with
respect to a share of Common Stock as of any particular date, (i) the closing
sales price of a share of Common Stock on the principal national securities
exchange (as designated by the Board) for the last preceding date on which there
was a sale of the Common Stock on such exchange; or (ii) if the Common Stock is
not then listed on a national securities exchange, then the average of the
closing bid and asked prices for the shares of Common Stock on the over-the-
counter market on which the shares are traded (or, if more than one, then the
one designated by the Board) for the last preceding date (within the preceding
30-day period) on which there was a sale of the Common Stock in that market; or
(iii) if there has been no reported sale of the Common Stock on an over-the-
cover market within that period, then the average of the closing bid and asked
prices for e shares of Common Stock on the National Association of Securities
Dealers' Automated Quotations System ("NASDAQ"), or any comparable system (as
designated by the Board) on which the shares are listed, on the last preceding
date for which there are closing bid and asked prices; or (iv) if the Common
Stock is not then listed on NASDAQ or any comparable system, then the closing
sales price or, if no reported sale has taken place within the preceding 30-day
period, the average of the closing bid and asked prices, as furnished by any
member of the National Association of Securities Dealers selected from time to
time by the Board for that purpose, for the last preceding date for which there
was a closing sales price or closing bid and asked prices; or (v) if no such
sales or bid and asked prices are available, then the fair market value of a
share of the Common Stock on that date as determined in good faith by the Board.
2. INCENTIVE STOCK OPTIONS
2.1 Award of Incentive Stock Options
Incentive Stock Options may be granted to any employee under all the terms
and conditions contained in this Plan; provided that, during any calendar year,
the aggregate Fair Market Value (determined as of the date of grant) of the
stock with respect to any Incentive Stock Options which are exercisable for the
first time by any one Optionee will not exceed $100,000.
2.2 Term of Options
The term of any Incentive Stock Option shall not exceed ten years from the
date of grant; provided that, the term of any Incentive Stock Option will not
exceed five years from the date of grant if it is issued to a person who, at the
time of the grant and in accordance with Section
3
<PAGE>
425(d) of the Code, owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company.
2.3 Cancellation of and Substitution for Options
With the agreement of Optionee, the Board may cancel any Option at any time
and grant to the same Optionee in substitution a new Option containing terms and
conditions determined by the Board, subject to the express limitations provided
in this Plan.
2.4 Terms and Conditions of Options
All Options will be evidenced by written agreements (individually, "Option
Agreement" collectively, "Option Agreements") containing terms and conditions
determined by the Board from time to time; provided that, each Option Agreement
will comply with the following terms and conditions:
(a) Number of Shares and Type of Option
Each Option Agreement will state the number of shares to which the
Option pertains and whether the Option is intended to be an Incentive Stock
Option or a Nonqualified Stock Option.
(b) Option Price
Each Option Agreement will state the Option price per share (or the
method by which the price will be computed). In the case of an Incentive Stock
Option, the option price will be not less than 100% of the Fair Market Value of
a share of the Common Stock on the date the Incentive Stock Option is printed.
Notwithstanding the foregoing, if the Incentive Stock Option is granted to a
person who, on the date of the grant and in accordance with Section 425(d) of
the Code, owns stock possession more than 10% of the total combined voting power
of all classes of stock of the Company, then the price will be not less than
110% of the Fair Market Value of a share of the Common Stock on the date the
Incentive Stock Option is granted.
(c) Medium and Time of Payment
The Option price will be due and payable upon the exercise of the
Option and payment will be made in cash, in shares of the Common Stock or in a
combination of cash and shares. The Board may permit some or all of a cash
payment to be made pursuant to a promissory note from the Optionee, subject to
those terms and conditions determined by the Board. Upon receipt of payment, the
Company will deliver to the Optionee (or person entitled to exercise the option)
a certificate or certificates for the appropriate number shares of Common Stock.
(d) Exercise of Options
Each Option will state the time(s) when it becomes exercisable. The
Board may waive any vesting provisions contained in an Option Agreement. To the
extent that an Option has become vested, and subject to the foregoing
restrictions, it may be exercised in whole or in such lesser amount as may be
authorized by the Option Agreement. If exercised in part, the unexercised
portion of an Option will continue to be held by the Optionee under the terms
and conditions of the Option Agreement and this Plan.
4
<PAGE>
(e) Termination and Transfer of Options
An Option Agreement may provide for the termination of all or any
portion of an Option under certain circumstances, including, without limitation,
termination of the Optionee's employment or service as a result of resignation,
retirement, disability or death, or for cause, and may distinguish among various
causes of termination as the Board deems appropriate.
3. OTHER AWARDS
3.1 General
The Board may grant the Awards described in this Section. All Awards (other
than Options) will be evidenced by a written agreement(s) containing the terms
and conditions determined by the Board from time to time.
3.2 Restricted Stock.
The Board may award restricted stock to officers and key employees of the
Company. The number of shares of Common Stock to be delivered, the date of
delivery, the price, if any, to be paid for the shares, the dividend, voting and
other shareholder rights and the restrictions imposed on the shares will be
determined by the Board and set forth in a restricted stock agreement.
3.3 Stock Appreciation Rights.
(a) Award of Stock Appreciation Rights
Stock appreciation rights may be related or unrelated to Options or
other Awards, and may extend to all or a portion of the shares covered by a
related Option or Award. Stock appreciation rights may be awarded at any time,
unless related to an Incentive Stock Option, in which case they may be awarded
only at the time of the grant of the related Incentive Stock Option. The terms
and conditions of the exercise of stock appreciation rights will be determined
by the Board and set forth in a stock appreciation rights agreement.
(b) Payment
(i) Upon the exercise of a stock appreciation right and, if such
stock appreciation right is related to an Option, surrender of an
exercisable portion of the related Option, the employee will be entitled to
receive payment of an amount determined by multiplying: (A) the difference
obtained by subtracting (x) the purchase price of a share of Common Stock
specified in the related Option or, if such stock appreciation right is
unrelated to an Option, the initial share value specified in the award of a
share of Common Stock, from (y) the Fair Market Value (or other method of
valuation as determined by the Board) a share of Common Stock on the date
of exercise of such stock appreciation right, by (B) the number of shares
as to which such stock appreciation right has been exercised.
(ii) The Company may pay the amount determined under the preceding
paragraph in cash, in shares of Common Stock (valued at Fair Market Value
on the
5
<PAGE>
business day next preceding the date of exercise of the stock appreciation
right), or a combination of cash and shares.
3.4 Performance Awards
The Board may grant one or more performance awards to any officer or key
employee of the Company. The value of such awards will be determined based on
the Fair Market Value of the Common Stock or any other performance criteria
determined appropriate by the Board. In making its determinations, the Board
will consider (among such other factors as it deems relevant in light of the
specific type of award) the contributions, responsibilities and other
compensation of the Optionee. The payment of performance awards may be made in
shares of Common Stock, or in cash, or a combination of cash and shares.
3.5 Dividend Equivalents
Under the terms and conditions determined by the Board, an Optionee may be
granted dividend equivalents based on the dividends declared and paid on the
Common Stock covered by the Option or Award during the period between the date
the Option or Award is granted and the date the Option or Award is exercised,
vests or expires, as determined by the Board. Dividend equivalents may be
granted concurrently with or subsequent to the grant of an Option or Award;
provided that, any dividend equivalent relating to an Incentive Stock Option may
be granted only concurrently with the grant of the Incentive Stock Option.
3.6 Deferral of Awards
Payment of any portion or all of an Award may be deferred by the Board in
accordance with guidelines established by the Board. Without limiting the
generality of the foregoing, the Board may provide for (i) the crediting of
interest on cash payments that are deferred (and setting the rates(s) of
interest) and (ii) the crediting of dividends or dividend equivalents on
deferred payments denominated in the form of shares.
3.7 Termination of Awards
An award agreement may provide for the termination of all or any portion of
an Award under certain circumstances, including, without limitation, termination
of the Optionee's employment or service as a result of resignation, retirement,
disability or death, or for cause, and may distinguish among various causes of
termination as the Board deems appropriate.
4. RECAPITALIZATION AND REORGANIZATION
4.1 Stock Dividends, etc.
The number of shares of Common Stock covered by figs Plan, and the number
of shares and price per share of each outstanding Option and Award, will be
proportionately adjusted for any increase or decrease in the number of issued
and outstanding shares of Common Stock resulting from a subdivision or
consolidation of shares, or the payment of a stock dividend, or any other
increase or decrease in the number of issued and outstanding shares of Common
Stock effected without receipt of consideration by the Company.
6
<PAGE>
4.2 Mergers, etc.
If the Company is the surviving corporation in any merger or consolidation,
each outstanding Option and Award will apply to the same number and type of
securities in the new entity that would have been received if the Option or
Award had been fully exercised and the Optionee had become the holder of the
shares of Common Stock that are subject to the Option or Award. In the event of
dissolution or liquidation of the Company or a merger or consolidation in which
the Company is not the surviving corporation, each outstanding Option and Award
will be terminated, unless the agreement of merger or consolidation otherwise
provides (a "Terminating Transaction"); provided, however, each Optionee will
have the right immediately prior to the Terminating Transaction to exercise each
Option or Award in whole or in part, subject to the limitations required by the
Code.
4.3 General
Any adjustments required under this Section will be made by the Board
pursuant to Section 1.2 (Administration). The grant of an Option or Award will
not affect in any way the Company's right or power to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or to
transfer all or any part of its business or assets.
5. MISCELLANEOUS PROVISIONS
5.1 Rights as a Shareholder
No Optionee (or transferee) will have any rights as a shareholder of the
Company with respect to any shares covered by an Option or Award until the
exercise of the Option or Award and the receipt by the Company of all payments
due under this Plan. No adjustment will be made with respect to any Option or
Award for dividends (ordinary or extraordinary, whether in cash, securities or
other property) or distributions or other rights prior to the exercise of the
Option or Award and the receipt by the Company of all payments due under this
Plan, except as expressly provided in this Plan.
5.2 Modification, Extension and Renewal of Options and Awards
Subject to the terms and conditions of this Plan, the Board may modify,
extend, renew or cancel outstanding any Options and/or Awards; provided that,
any change which impairs or diminishes any rights or obligations under any
Option or Award will require the affected Optionee(s) consent.
5.3 Application of Funds
The proceeds received by the Company from the sale of Common Stock pursuant
to the exercise of Options will be used for general corporate purposes.
5.4 No Obligation to Exercise Option or Award
The granting of an Option or Award will not impose any obligation upon the
Optionee (or any transferee) to exercise the Option or Award.
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<PAGE>
5.5 Not an Employment Agreement
Nothing in this Plan or in any Option or Award granted under this Plan will
affect the right of the Company to terminate at any time or for any reason the
employment of any Optionee.
5.6 Securities Law Requirements
(a) Investment Representation
The Board may require any person, as a condition of either the grant
or the exercise of an Option or Award pursuant to this Plan, to represent and
establish to the satisfaction of the Board that all shares of Common Stock
required upon the exercise of such Option or Award will be acquired for
investment and not for distribution.
(b) Registration Requirements
No shares of Common Stock will be issued upon the exercise of any
Option or Award if counsel for the Company determines that there has not been
met any applicable registration requirements under the Exchange Act or the
Securities Act of 1933, as mended, any applicable listing requirement of any
stock exchange on which the Common Stock is listed, any state securities law or
any other applicable provision of state or federal law.
(c) Information to Optionees
The Company will provide to each Optionee, during the period for which
he or she has one or more options or awards outstanding, copies of all annual
reports and other information which are provided to all shareholders of the
Company. The Company will not be required to provide such information if the
issuance of options under the Plan is limited to key employees whose duties in
connection with the Company assure their access to equivalent information.
5.7 Shareholder Approval
This Plan is subject to the approval of the shareholders of the Company on
or before January 1, 1998, and any Option Agreement entered into under this Plan
before that approval will contain a provision to the effect that the exercise of
that Option is subject to shareholder approval.
8
<PAGE>
EXHIBIT 10.2
DIGITAL ISLAND, INC.
1998 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
(As Amended and Restated through March 18, 1999)
ARTICLE ONE
GENERAL PROVISIONS
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I. PURPOSE OF THE PLAN
This 1998 Stock Option/Stock Issuance Plan is intended to promote the
interests of Digital Island, Inc., a California corporation, by providing
eligible persons in the Corporation's employ or service with the opportunity to
acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Corporation as an incentive for them to continue in such employ
or service.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate equity programs:
(i) the Option Grant Program under which eligible persons
may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock, and
(ii) the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan Administrator, be issued shares
of Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any Parent
or Subsidiary).
B. The provisions of Articles One and Four shall apply to both
equity programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the functions of the Committee
and reassume all powers and authority previously delegated to the Committee.
<PAGE>
B. The Plan Administrator shall have full power and authority
(subject to the provisions of the Plan) to establish such rules and regulations
as it may deem appropriate for proper administration of the Plan and to make
such determinations under, and issue such interpretations of, the Plan and any
outstanding options or stock issuances thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator shall be final and binding on all
parties who have an interest in the Plan or any option or stock issuance
thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Plan are as follows:
(i) Employees,
(ii) non-employee members of the Board or the non-employee
members of the board of directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. The Plan Administrator shall have full authority to determine,
(i) with respect to the grants made under the Option Grant Program, which
eligible persons are to receive the option grants, the time or times when those
grants are to be made, the number of shares to be covered by each such grant,
the status of the granted option as either an Incentive Option or a Non-
Statutory Option, the time or times when each option is to become exercisable,
the vesting schedule (if any) applicable to the option shares and the maximum
term for which the option is to remain outstanding, and (ii) with respect to
stock issuances made under the Stock Issuance Program, which eligible persons
are to receive such stock issuances, the time or times when those issuances are
to be made, the number of shares to be issued to each Participant, the vesting
schedule (if any) applicable to the issued shares and the consideration to be
paid by the Participant for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 5,433,284
shares.
2.
<PAGE>
B. Such authorized share reserve is comprised of (i) the number of
shares which remained available for issuance under the Predecessor Plan as of
the Plan Effective Date, including the shares subject to the outstanding options
to be incorporated into this Plan pursuant to the provisions of Section II of
Article Four, plus (ii) an additional increase of 794,159 shares authorized as
of the Plan Effective Date and subsequently approved by the shareholders, plus
(iii) an additional increase of 750,000 shares authorized by the Board on July
17, 1998, subject to shareholder approval, plus (iv) an additional increase of
600,000 shares authorized by the Board on October 18, 1998, subject to
shareholder approval, and plus (v) an additional increase of 1,000,000 shares
authorized by the Board on March 18, 1999, subject to shareholder approval.
C. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the option exercise or direct issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan.
D. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan and (ii) the number and/or class of securities and the exercise
price per share in effect under each outstanding option in order to prevent the
dilution or enlargement of benefits thereunder. The adjustments determined by
the Plan Administrator shall be final, binding and conclusive. In no event shall
any such adjustments be made in connection with the conversion of one or more
outstanding shares of the Corporation's preferred stock into shares of Common
Stock.
3.
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
--------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:
(i) The exercise price per share shall not be less than
eighty-five percent (85%) of the Fair Market Value per share of Common
Stock on the option grant date.
(ii) If the person to whom the option is granted is a 10%
Shareholder, then the exercise price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12 of the 1934 Act at the time the option is exercised, then the
exercise price may also be paid as follows:
(i) in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions (A) to a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such
4.
<PAGE>
exercise and (B) to the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete the
sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option grant. However, no option shall have a term in excess of ten (10)
years measured from the option grant date.
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Should the Optionee cease to remain in Service for any
reason other than death, Disability or Misconduct, then the Optionee shall
have a period of three (3) months following the date of such cessation of
Service during which to exercise each outstanding option held by such
Optionee.
(ii) Should Optionee's Service terminate by reason of
Disability, then the Optionee shall have a period of twelve (12) months
following the date of such cessation of Service during which to exercise
each outstanding option held by such Optionee.
(iii) If the Optionee dies while holding an outstanding
option, then the personal representative of his or her estate or the person
or persons to whom the option is transferred pursuant to the Optionee's
will or the laws of inheritance shall have a twelve (12)-month period
following the date of the Optionee's death to exercise such option.
(iv) Under no circumstances, however, shall any such option
be exercisable after the specified expiration of the option term.
(v) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding with respect to any and all option shares for which the
option is not otherwise at the time exercisable or in which the Optionee is
not otherwise at that time vested.
5.
<PAGE>
(vi) Should Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to remain outstanding.
2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(vii) extend the period of time for which the option is to
remain exercisable following Optionee's cessation of Service or death from
the limited period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
(viii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the Optionee
would have vested under the option had the Optionee continued in Service.
D. Shareholder Rights. The holder of an option shall have no
------------------
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become the
recordholder of the purchased shares.
E. Unvested Shares. The Plan Administrator shall have the discretion
---------------
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right. The Plan Administrator may not impose a vesting schedule upon
the option grant or any shares of Common Stock subject to that option which is
more restrictive than twenty percent (20%) per year vesting, with the initial
vesting to occur not later than one (1) year after the option grant date.
However, such limitation shall not be applicable to any option grants made to
individuals who are officers of the Corporation, non-employee Board members or
independent consultants.
F. First Refusal Rights. Until such time as the Common Stock is
--------------------
first registered under Section 12 of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Plan. Such right of first refusal shall be exercisable in accordance
with the terms established by the Plan Administrator and set forth in the
document evidencing such right.
6.
<PAGE>
G. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.
H. Withholding. The Corporation's obligation to deliver shares of
-----------
Common Stock upon the exercise of any options granted under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of the Plan shall be applicable to Incentive Options. Options which
are specifically designated as Non-Statutory Options shall not be subject to the
terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Exercise Price. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Shareholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Shareholder, then the option term shall not exceed five (5)
years measured from the option grant date.
III. CORPORATE TRANSACTION
A. The shares subject to each option outstanding under the Plan at
the time of a Corporate Transaction shall automatically vest in full so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all of the shares of Common Stock at
the time subject to that option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, the shares subject to an
outstanding option shall not vest on such an accelerated basis if and to the
extent: (i) such option is assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and the Corporation's repurchase rights
with respect to the unvested option shares are concurrently
7.
<PAGE>
assigned to such successor corporation (or parent thereof) or (ii) such option
is to be replaced with a cash incentive program of the successor corporation
which preserves the spread existing on the unvested option shares at the time of
the Corporate Transaction and provides for subsequent payout in accordance with
the same vesting schedule applicable to those unvested option shares or (iii)
the acceleration of such option is subject to other limitations imposed by the
Plan Administrator at the time of the option grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction, had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
--------
securities shall remain the same.
E. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration (in whole or in part) of
one or more outstanding options (and the immediate termination of the
Corporation's repurchase rights with respect to the shares subject to those
options) upon the occurrence of a Corporate Transaction, whether or not those
options are to be assumed in the Corporate Transaction.
F. The Plan Administrator shall also have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to structure such option so that the shares subject
to that option will automatically vest on an accelerated basis should the
Optionee's Service terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which the option is assumed and the
repurchase rights applicable to those shares do not otherwise terminate. Any
option so accelerated shall remain exercisable for the fully-vested option
shares until the earlier of (i) the expiration of the option term or (ii) the
-------
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination. In addition, the Plan Administrator may provide that
one or more
8.
<PAGE>
of the Corporation's outstanding repurchase rights with respect to shares held
by the Optionee at the time of such Involuntary Termination shall immediately
terminate on an accelerated basis, and the shares subject to those terminated
rights shall accordingly vest at that time.
G. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction shall remain exercisable as an Incentive Option
only to the extent the applicable One Hundred Thousand Dollar limitation is not
exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.
H. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
9.
<PAGE>
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Plan and to grant in
substitution therefor new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
10.
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the issue date. However, the purchase
price per share of Common Stock issued to a 10% Shareholder shall not be less
than one hundred and ten percent (110%) of such Fair Market Value.
2. Subject to the provisions of Section I of Article Four,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. However, the Plan Administrator may not impose a vesting schedule
upon any stock issuance effected under the Stock Issuance Program which is more
restrictive than twenty percent (20%) per year vesting, with initial vesting to
occur not later than one (1) year after the issuance date. Such limitation shall
not apply to any Common Stock issuances made to the officers of the Corporation,
non-employee Board members or independent consultants.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
11.
<PAGE>
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full shareholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further shareholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to such surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the non-
completion of the vesting schedule applicable to such shares. Such waiver shall
result in the immediate vesting of the Participant's interest in the shares of
Common Stock as to which the waiver applies. Such waiver may be effected at any
time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.
C. First Refusal Rights. Until such time as the Common Stock
--------------------
is first registered under Section 12 of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
II. CORPORATE TRANSACTION
A. Upon the occurrence of a Corporate Transaction, all outstanding
repurchase rights under the Stock Issuance Program shall terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, except to the extent: (i) those repurchase
rights are assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated vesting is
precluded by other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.
12.
<PAGE>
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights with respect to those shares remain
outstanding, to provide that those rights shall automatically terminate on an
accelerated basis, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those repurchase rights are assigned
to the successor corporation (or parent thereof).
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion,
be held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
13.
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant
to pay the option exercise price or the purchase price for shares issued to such
person under the Plan by delivering a full-recourse, interest-bearing promissory
note payable in one or more installments and secured by the purchased shares.
However, any promissory note delivered by a consultant must be secured by
collateral in addition to the purchased shares of Common Stock. In no event
shall the maximum credit available to the Optionee or Participant exceed the sum
of (i) the aggregate option exercise price or purchase price payable for the
purchased shares plus (ii) any Federal, state and local income and employment
tax liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan became effective on the Plan Effective Date and
was subsequently approved by the shareholders on June 12, 1998. On July 17,
1998, October 18, 1998 and March 18, 1999, the Board authorized an increase to
the number of shares of Common Stock reserved for issuance under the Plan by an
additional 750,000 shares, 600,000 shares and 1,000,000 shares, respectively,
with each such increase subject to shareholder approval on or before July 16,
1999. If such shareholder approval is not obtained, then all options granted on
the basis of such share increases will terminate and cease to be outstanding
without ever becoming exercisable for the option shares, and no further option
grants, and no issuances of Common Stock, shall be made on the basis of such
increase. Subject to such limitation, the Plan Administrator may grant options
and issue shares under the Plan at any time after the Plan Effective Date and
before the date fixed herein for termination of the Plan.
B. The Plan shall serve as the successor to the Predecessor
Plan, and no further option grants or direct stock issuances shall be made under
the Predecessor Plan after the Plan Effective Date. All options outstanding
under the Predecessor Plan on the Plan Effective Date shall be incorporated into
this Plan at that time and shall be treated as outstanding options under this
Plan. However, each outstanding option so incorporated shall continue to be
governed solely by the terms of the documents evidencing such option, and no
provision of this Plan shall be deemed to affect or otherwise modify the rights
or obligations of the holders of such incorporated options with respect to their
acquisition of shares of Common Stock.
14.
<PAGE>
C. The Plan shall terminate upon the earliest of (i) the
--------
expiration of the ten (10)-year period measured from the Plan Effective Date,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as vested shares or (iii) the termination of all outstanding
options in connection with a Corporate Transaction. All options and unvested
stock issuances outstanding at that time under the Plan shall continue to have
full force and effect in accordance with the provisions of the documents
evidencing such options or issuances.
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect the rights and obligations with
respect to options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require shareholder approval
pursuant to applicable laws and regulations.
B. Options may be granted under the Option Grant Program and
shares may be issued under the Stock Issuance Program which are in each instance
in excess of the number of shares of Common Stock then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained shareholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such shareholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock
upon the exercise of any options or upon the issuance or vesting of any shares
issued under the Plan shall be subject to the satisfaction of all applicable
Federal, state and local income and employment tax withholding requirements.
15.
<PAGE>
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any option or (ii) under the Stock Issuance Program shall be subject
to the Corporation's procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the options granted
under it and the shares of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
VIII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income
statement at least annually to each individual holding an outstanding option
under the Plan, unless such individual is a key Employee whose duties in
connection with the Corporation (or any Parent or Subsidiary) assure such
individual access to equivalent information.
16.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Code shall mean the Internal Revenue Code of 1986, as
----
amended.
C. Committee shall mean a committee of two (2) or more Board
---------
members appointed by the Board to exercise one or more administrative functions
under the Plan.
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following
---------------------
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting power
of the Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
F. Corporation shall mean Digital Island, Inc., a California
-----------
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of Digital Island, Inc. which shall by appropriate action
adopt the Plan.
G. Disability shall mean the inability of the Optionee or the
----------
Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment and shall be determined by
the Plan Administrator on the basis of such medical evidence as the Plan
Administrator deems warranted under the circumstances.
H. Employee shall mean an individual who is in the employ of
--------
the Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
I. Exercise Date shall mean the date on which the Corporation
-------------
shall have received written notice of the option exercise.
J. Fair Market Value per share of Common Stock on any relevant
-----------------
date shall be determined in accordance with the following provisions:
A-1.
<PAGE>
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market. If there is no closing selling
price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding
date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither listed on
any Stock Exchange nor traded on the Nasdaq National Market, then the
Fair Market Value shall be determined by the Plan Administrator after
taking into account such factors as the Plan Administrator shall deem
appropriate.
K. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
L. Involuntary Termination shall mean the termination of the
-----------------------
Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge
by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation which
materially reduces his or her duties and responsibilities or the level
of management to which he or she reports, (B) a reduction in his or her
level of compensation (including base salary, fringe benefits and
target bonuses under any corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation of
such individual's place of employment by more than fifty (50) miles,
provided and only if such change, reduction or relocation is effected
without the individual's consent.
A-2.
<PAGE>
M. Misconduct shall mean the commission of any act of fraud,
----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
N. 1934 Act shall mean the Securities Exchange Act of 1934, as
--------
amended.
O. Non-Statutory Option shall mean an option not intended to
--------------------
satisfy the requirements of Code Section 422.
P. Option Grant Program shall mean the option grant program in
--------------------
effect under the Plan.
Q. Optionee shall mean any person to whom an option is granted
--------
under the Plan.
R. Parent shall mean any corporation (other than the
------
Corporation) in an unbroken chain of corporations ending with the Corporation,
provided each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
S. Participant shall mean any person who is issued shares of
-----------
Common Stock under the Stock Issuance Program.
T. Plan shall mean the Corporation's 1998 Stock Option/Stock
----
Issuance Plan, as set forth in this document.
U. Plan Administrator shall mean either the Board or the
------------------
Committee acting in its capacity as administrator of the Plan.
V. Plan Effective Date shall mean May 14, 1998, the date the Plan
-------------------
was adopted by the Board.
W. Predecessor Plan shall mean the Corporation's Stock Option and
----------------
Incentive Plan. adopted by the Board.
X. Service shall mean the provision of services to the
-------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant.
A-3.
<PAGE>
Y. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
Z. Stock Issuance Agreement shall mean the agreement entered
------------------------
into by the Corporation and the Participant at the time of issuance of shares of
Common Stock under the Stock Issuance Program.
AA. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under the Plan.
BB. Subsidiary shall mean any corporation (other than the
----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
CC. 10% Shareholder shall mean the owner of stock (as determined
---------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
A-4.
<PAGE>
DIGITAL ISLAND
1998 STOCK OPTION /STOCK ISSUANCE PLAN
PLAN AMENDMENT
--------------
The Digital Island 1998 Stock Option/Stock Issuance Plan (the "Plan") is
hereby amended, effective May 19, 1999, as follows:
1. Section IIIA of the Plan is hereby amended to read as
follows:
A. The Plan shall be administered by the Board. However,
any or all administrative functions otherwise exercisable by the Board
may, with respect to officers and Board members, be delegated to the
Primary Committee and, with respect to all other persons eligible to
participate in the Plan, to the Secondary Committee. Members of the
Primary Committee or any Secondary Committee shall serve for such period
of time as the Board may determine and shall be subject to removal by
the Board at any time. The Board may also at any time terminate the
functions of the Primary Committee or any Secondary Committee and
reassume all powers and authority previously delegated to such
committee.
2. For purposes of this Plan Amendment, the following
definitions shall be in effect:
Primary Committee shall mean a committee of two or more Board
-----------------
members appointed by the Board to exercise one or more administrative
functions under the Plan with respect to officers and non-employee Board
members.
Secondary Committee shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Plan with respect to
eligible persons other than officers and non-employee Board members.
3. Except to the extent specifically modified by this Plan
Amendment, all of the terms and conditions of the Plan shall continue in
full force and effect.
IN WITNESS WHEREOF, Digital Island has caused this Plan
Amendment to be executed on its behalf by its duly-authorized officer on this
19th day of May, 1999.
- ----
DIGITAL ISLAND
By: /s/ Ruann T. Ernst
----------------------------
Title: CEO and President
-------------------------
6.
<PAGE>
EXHIBIT 10.3
DIGITAL ISLAND, INC.
1999 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests of
Digital Island, Inc., a Delaware corporation, by providing eligible persons in
the Corporation's service with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in such service.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,
- the Salary Investment Option Grant Program under which eligible
employees may elect to have a portion of their base salary invested each year
in special option grants,
- the Stock Issuance Program under which eligible persons may, at
the discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of such shares or as a bonus for
services rendered the Corporation (or any Parent or Subsidiary),
- the Automatic Option Grant Program under which eligible non-
employee Board members shall automatically receive option grants at designated
intervals over their period of continued Board service, and
- the Director Fee Option Grant Program under which non-employee
Board members may elect to have all or any portion of their annual retainer fee
otherwise payable in cash applied to a special stock option grant.
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee shall be made by a disinterested majority of the Board.
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of those programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
D. The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under those
programs.
2
<PAGE>
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive such grants, the time or times
when those grants are to be made, the number of shares to be covered by each
such grant, the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive such issuances, the time or times when the issuances are
to be made, the number of shares to be issued to each Participant, the vesting
schedule (if any) applicable to the issued shares and the consideration for such
shares.
D. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
E. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
first become non-employee Board members on or after the Underwriting Date,
whether through appointment by the Board or election by the Corporation's
stockholders, and (ii) those individuals who continue to serve as non-employee
Board members at one or more Annual Stockholders Meetings held after the
Underwriting Date. A non-employee Board member who has previously been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an option grant under the Automatic Option Grant Program at the time he
or she first becomes a non-employee Board member, but shall be eligible to
receive periodic option grants under the Automatic Option Grant Program while he
or she continues to serve as a non-employee Board member.
F. All non-employee Board members shall be eligible to participate in
the Director Fee Option Grant Program.
3
<PAGE>
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall not exceed 7,544,000
shares. Such reserve shall consist of (i) the number of shares estimated to
remain available for issuance, as of the Plan Effective Date, under the
Predecessor Plan as last approved by the Corporation's stockholders, including
the shares subject to outstanding options under that Predecessor Plan, (ii) plus
an additional increase of approximately 2,500,000 shares to be approved by the
Corporation's stockholders prior to the Underwriting Date.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2000, by
an amount equal to four percent (4%) of the total number of shares of Common
Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
2,000,000 shares.
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 750,000 shares of Common Stock in the aggregate per calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation at the original issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section IV of Article Two, Section III of Article Three,
Section 11 of Article Five or Section III of Article Six of the Plan shall not
be available for subsequent issuance under the Plan.
4
<PAGE>
E. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made by the Plan Administrator to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the number and/or class of securities
for which any one person may be granted stock options, separately exercisable
stock appreciation rights and direct stock issuances under the Plan per calendar
year, (iii) the number and/or class of securities for which grants are
subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan, (v) the number and/or class of securities and price per
share in effect under each outstanding option incorporated into this Plan from
the Predecessor Plan and (vi) the maximum number and/or class of securities by
which the share reserve is to increase automatically each calendar year pursuant
to the provisions of Section V.B of this Article One. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
5
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall, subject to the provisions of Section I of Article Seven
and the documents evidencing the option, be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
6
<PAGE>
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option held by the Optionee at the time of death and
exercisable in whole or in part at that time may be subsequently exercised
by the personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or the laws of inheritance or by the Optionee's designated beneficiary or
beneficiaries of that option.
(iii) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of' Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested had the
Optionee continued in Service.
7
<PAGE>
D. Stockholder Rights. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory Option
may, in connection with the Optionee's estate plan, be assigned in whole or in
part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate. Notwithstanding the foregoing, the Optionee may also designate
one or more persons as the beneficiary or beneficiaries of his or her
outstanding options under this Article Two, and those options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred option, including (without limitation) the limited time
period during which the option may be exercised following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section 11, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Nonstatutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000).
8
<PAGE>
To the extent the Employee holds two (2) or more such options which
become exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
C. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become fully exercisable for
the total number of shares of Common Stock at the time subject to such option
and may be exercised for any or all of those shares as fully vested shares of
Common Stock. However, an outstanding option shall not become exercisable on
such an accelerated basis if and to the extent: (i) such option is, in
connection with the Corporate Transaction, to be assumed by the successor
corporation (or parent thereof) or (ii) such option is to be replaced with a
cash incentive program of the successor corporation which preserves the spread
existing at the time of the Corporate Transaction on any shares for which the
option is not otherwise at that time exercisable and provides for subsequent
payout in accordance with the same exercise/vesting schedule applicable to those
option shares or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
B. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted
9
<PAGE>
stock options, separately exercisable stock appreciation rights and direct stock
issuances under the Plan per calendar year and (iv) the maximum number and/or
class of securities by which the share reserve is to increase automatically each
calendar year.
E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effect date of
such Corporate Transaction, become fully exercisable for the total number of
shares of Common Stock at the time subject to those options and may be exercised
for any or all of those shares as fully vested shares of Common Stock, whether
or not those options are to be assumed in the Corporate Transaction. In
addition, the Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the
Discretionary Option Grant Program so that those rights shall not be assignable
in connection with such Corporate Transaction and shall accordingly terminate
upon the consummation of such Corporate Transaction, and the shares subject to
those terminated rights shall thereupon vest in full.
F. The Plan Administrator shall have full power and authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall become fully exercisable for the total
number of shares of Common Stock at the time subject to those options in the
event the Optionee's Service is subsequently terminated by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of any Corporate Transaction in which those
options are assumed and do not otherwise accelerate. Any options so accelerated
shall remain exercisable for fully vested shares until the earlier of (i) the
expiration of the option term or (ii) the expiration of the one (1) year period
measured from the effective date of the Involuntary Termination. In addition,
the Plan Administrator may structure one or more of the Corporation's repurchase
rights so that those rights shall immediately terminate with respect to any
shares held by the Optionee at the time of his or her Involuntary Termination,
and the shares subject to those terminated repurchase rights shall accordingly
vest in full at that time.
G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effect date of a
Change in Control, become fully exercisable for the total number of shares of
Common Stock at the time subject to those options and may be exercised for any
or all of those shares as fully vested shares of Common Stock. In addition, the
Plan Administrator shall have the discretionary authority to structure one or
more of the Corporation's repurchase rights under the Discretionary Option Grant
Program so that those rights shall terminate automatically upon the consummation
of such Change in Control, and the shares subject to those terminated rights
shall thereupon vest in full. Alternatively, the Plan Administrator may
condition the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program and the termination of one or more of the
Corporation's outstanding repurchase rights under such program upon the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control. Each option so
accelerated shall remain exercisable for fully vested shares until the earlier
-------
of (i) the expiration of the option term or (ii) the expiration of the one (1)
year period measured from the effective date of Optionee's cessation of Service.
10
<PAGE>
H. The portion of any Incentive Option accelerated in connection with
a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution from
the Corporation in an amount equal to the excess of (a) the Fair Market
Value (on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.
(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator, either at the time of the actual option
surrender or at any earlier time. If the surrender is so approved, then the
distribution to which the Optionee shall be entitled may be made in shares
of Common Stock valued at Fair Market Value on the option surrender date,
in cash, or partly in shares and partly in cash, as the Plan Administrator
shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is not approved by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
later of (a) five (5) business days after the
-----
11
<PAGE>
receipt of the rejection notice or (b) the last day on which the option is
otherwise exercisable in accordance with the terms of the documents
evidencing such option, but in no event may such rights be exercised more
than ten (10) years after the option grant date.
C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited
stock appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation. In return for the surrendered option, the
Optionee shall receive a cash distribution from the Corporation in an
amount equal to the excess of (A) the Take-Over Price of the shares of
Common Stock at the time subject to such option (whether or not the
Optionee is otherwise vested in those shares) over (B) the aggregate
exercise price payable for those shares. Such cash distribution shall be
paid within five (5) days following the option surrender date.
(iii) At the time such limited stock appreciation right is
granted, the Plan Administrator shall pre-approve any subsequent exercise
of that right in accordance with the terms of this Paragraph C.
Accordingly, no further approval of the Plan Administrator or the Board
shall be required at the time of the actual option surrender and cash
distribution.
12
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for such calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely
authorization shall automatically be granted an option under the Salary
Investment Grant Program on the first trading day in January of the calendar
year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
that each such document shall comply with the terms specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the reduction in the Optionee's base
salary for the calendar year to be in effect pursuant to this program,
and
13
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.
D. Effect of Termination of Service. Should the Optionee cease
--------------------------------
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
ten-n or (ii) the expiration of the two (2)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or the laws of inheritance or by the designated beneficiary
or beneficiaries of such option. Such right of exercise shall lapse, and the
option shall terminate, upon the earlier of (i) the expiration of the ten (10)-
--------
year option term or (ii) the two (2)-year period measured from the date of the
Optionee's cessation of Service. However, the option shall, immediately upon
the Optionee's cessation of Service for any reason, terminate and cease to
remain outstanding with respect to any and all shares of Common Stock for which
the option is not otherwise at that time exercisable.
III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all the shares of Common Stock at the
time subject to such option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully-
vested shares until the earlier of (i) the expiration of the ten (10)-year
option term or (ii) the expiration of the two (2)-year period measured from the
date of the Optionee's cessation of Service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become fully exercisable for all the shares of Common Stock at the time subject
to such option and may be exercised for any or all of those shares as fully-
vested shares of Common Stock.
14
<PAGE>
The option shall remain so exercisable until the earliest to occur of
(i) the expiration of the ten (10)-year option term, (ii) the expiration of the
two (2)-year period measured from the date of the Optionee's cessation of
Service, (iii) the termination of the option in connection with a Corporate
Transaction or (iv) the surrender of the option in connection with a Hostile
Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. The Primary Committee shall, at the time the option
with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
E. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
15
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards which entitle the recipients to receive
those shares upon the attainment of designated performance goals.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
16
<PAGE>
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
6. Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock shall
actually be issued in satisfaction of those awards, if the performance goals
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock under one
or more outstanding share right awards as to which the designated performance
goals have not been attained.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.
17
<PAGE>
B. The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).
C. The Plan Administrator shall also have the discretionary authority
to structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
18
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. Grant Dates. Option grants shall be made on the dates specified
-----------
below:
1. Each individual who is first elected or appointed as a
nonemployee Board member at any time on or after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 15,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
2. On the date of each Annual Stockholders Meeting held after the
Underwriting Date, each individual who is to continue to serve as an Eligible
Director, whether or not that individual is standing for re-election to the
Board at that particular Annual Meeting, shall automatically be granted a Non-
Statutory Option to purchase 5,000 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 5,000-share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received one or
more stock option grants from the Corporation prior to the Underwriting Date
shall be eligible to receive one or more such annual option grants over their
period of continued Board service.
B. Exercise Price.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
-------------------------------
exercisable for any or all of the option shares. However, any unvested shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each initial
15,000-share grant shall vest, and the Corporation's repurchase right shall
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<PAGE>
lapse, in a series of six (6) successive equal semi-annual installments upon the
Optionee's completion of each six (6)-month period of service as a Board member
over the thirty-six (36)month period measured from the option grant date. The
shares subject to each annual 5,000-share option grant shall be fully vested as
of the grant date.
E. Limited Transferability of Options. Each option under this
----------------------------------
Article Five may, in connection with the Optionee's estate plan, be assigned in
whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. The Optionee may also designate one or more persons as the
beneficiary or beneficiaries of his or her outstanding options under this
Article Three, and those options shall, in accordance with such designation,
automatically be transferred to such beneficiary or beneficiaries upon the
Optionee's death while holding those options. Such beneficiary or beneficiaries
shall take the transferred options subject to all the terms and conditions of
the applicable agreement evidencing each such transferred option, including
(without limitation) the limited time period during which the option may be
exercised following the Optionee's death.
F. Termination of Board Service. The following provisions shall
----------------------------
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or persons
to whom the option is transferred pursuant to the Optionee's will or the
laws of inheritance or by the designated beneficiary or beneficiaries of
such option) shall have a twelve (12)-month period following the date of
such cessation of Board service in which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the option
may not be exercised in the aggregate for more than the number of vested
shares of Common Stock for which the option is exercisable at the time of
the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve (12)-month
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised.
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However, the option shall, immediately upon the Optionee's cessation of
Board service for any reason other than death or Permanent Disability,
terminate and cease to be outstanding to the extent the option is not
otherwise at that time exercisable for vested shares.
G. Special Modification. If the financial accounting treatment for
--------------------
non-employee director stock options proposed in the March 31, 1999 Exposure
Draft of the Financial Accounting Standards Board under APB Opinion No. 25 is
adopted, then following changes shall be made to the foregoing provisions of the
Automatic Option Grant Program:
. The 15,000-share option grant shall not be made to a newly-
elected or appointed non-employee Board member until the first Annual
Stockholders Meeting held more than twelve (12) months after the date
of his or her initial election or appointment to the Board. At that
annual meeting, the non-employee Board member shall also receive an
option grant for an additional 5,000 shares under the annual grant
portion of the Automatic Option Grant Program.
. One-third of the shares subject to the 15,000-share option
grant shall be immediately vested at the time of the option grant, and
the remaining shares shall vest in a series of four (4) successive
equal semi-annual installments upon the Optionee's completion of each
six (6)-month period of Board service over the twenty-four (24)-month
period measured from the grant date.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as fully-
vested shares of Common Stock. Immediately following the consummation of the
Corporate Transaction, each automatic option grant shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.
C. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction or Change in
Control.
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<PAGE>
D. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required at the time of the
actual option surrender and cash distribution.
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
F. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
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<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years for which the Director Fee Option Grant
Program is to be in effect. For each such calendar year the program is in
effect, each non-employee Board member may elect to apply all or any portion of
the annual retainer fee otherwise payable in cash for his or her service on the
Board for that year to the acquisition of a special option grant under this
Director Fee Option Grant Program. Such election must be filed with the
Corporation's Chief Financial Officer prior to first day of the calendar year
for which the annual retainer fee which is the subject of that election is
otherwise payable. Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
the annual retainer fee which is the subject of that election would otherwise be
payable in cash.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
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<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) equal monthly installments upon the Optionee's
completion of each month of Board service over the twelve (12)-month period
measured from the grant date. Each option shall have a maximum term of ten (10)
years measured from the option grant date.
D. Limited Transferability of Options. Each option under this
----------------------------------
Article Six may, in connection with the Optionee's estate plan, be assigned in
whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. The Optionee may also designate one or more persons as the
beneficiary or beneficiaries of his or her outstanding options under this
Article Three, and those options shall, in accordance with such designation,
automatically be transferred to such beneficiary or beneficiaries upon the
Optionee's death while holding those options. Such beneficiary or beneficiaries
shall take the transferred options subject to all the terms and conditions of
the applicable agreement evidencing each such transferred option, including
(without limitation) the limited time period during which the option may be
exercised following the Optionee's death.
E. Termination of Board Service. Should the Optionee cease Board
----------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the two (2)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
F. Death or Permanent Disability. Should the Optionee's service as
-----------------------------
a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the two (2)-year period measured
from the date of such cessation of Board service. In the event of the Optionee's
death while holding such option, the option may be exercised by the personal
representative of the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or the laws of inheritance
or by the designated beneficiary or beneficiaries of such option.
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<PAGE>
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the two
(2)-year period measured from the date of the Optionee's cessation of Board
service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for the total number of shares of Common
Stock at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. Each such outstanding
option shall terminate immediately following the Corporate Transaction, except
to the extent assumed by the successor corporation (or parent thereof) in such
Corporate Transaction. Any option so assumed and shall remain exercisable for
the fully-vested shares until the earlier of (i) the expiration of the ten (10)-
-------
year option term or (ii) the expiration of the two (2)-year period measured from
the date of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall immediately become fully exercisable for the total number of shares of
Common Stock at the time subject to such option and may be exercised for any or
all of those shares as fully-vested shares of Common Stock. The option shall
remain so exercisable until the earliest to occur of (i) the expiration of the
ten (10)-year option term, (ii) the expiration of the two (2)-year period
measured from the date of the Optionee's cessation of Board service, (iii) the
termination of the option in connection with a Corporate Transaction or (iv) the
surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required at the time of the actual option surrender and
cash distribution.
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<PAGE>
D. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
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<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Withholding Taxes to which
such holders may become subject in connection with the exercise of their options
or the vesting of their shares. Such right may be provided to any such holder in
either or both of the following formats:
Stock Withholding: The election to have the Corporation withhold,
-----------------
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Withholding
Taxes (not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at the
--------------
time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
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<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately on the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant Program shall not be implemented until such time as the Primary
Committee may deem appropriate. Options may be granted under the Discretionary
Option Grant at any time on or after the Plan Effective Date, and the initial
option grants under the Automatic Option Grant Program shall also be made on the
Plan Effective Date to any non-employee Board members eligible for such a grant
at that time. However, no options granted under the Plan may be exercised, and
no shares shall be issued under the Plan, until the Plan is approved by the
Corporation's stockholders. If such stockholder approval is not obtained within
twelve (12) months after the Plan Effective Date, then all options previously
granted under this Plan shall terminate and cease to be outstanding, and no
further options shall be granted and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan, and
no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Plan Effective Date. All options outstanding under
the Predecessor Plan on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.
C. One or more provisions of the Plan, including (without limitation)
the option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control, may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest to occur of (i) April
15, 2009, (ii) the date on which all shares available for issuance under the
Plan shall have been issued as fully-vested shares or (iii) the termination of
all outstanding options in connection with a Corporate Transaction. Should the
Plan terminate on April 15, 2009, then all option grants and unvested stock
issuances outstanding at that time shall continue to have force and effect in
accordance with the provisions of the documents evidencing such grants or
issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
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<PAGE>
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
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APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option
------------------------------
grant program in effect under Article Five of the Plan.
B. Board shall mean the Corporation's Board of Directors.
------
C. Change in Control shall mean a change in ownership or control of
------------------
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
-----
E. Common Stock shall mean the Corporation's common stock.
- -------------
F. Corporate Transaction shall mean either of the following
----------------------
stockholder approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
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G. Corporation shall mean Digital Island, Inc., a Delaware
------------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Digital Island, Inc. which shall by appropriate action
adopt the Plan.
H. Director Fee Option Grant Program shall mean the special stock
---------------------------------
option grant in effect for non-employee Board members under Article Six of the
Plan.
I. Discretionary Option Grant Program shall mean the discretionary
----------------------------------
option grant program in effect under Article Two of the Plan.
J. Eligible Director mean a non-employee Board member eligible to
-----------------
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Articles One and Five.
K. Employee shall mean an individual who is in the employ of the
---------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. Exercise Date shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date
------------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to the
price per share at which the Common Stock is to be sold in the initial
public offering pursuant to the Underwriting Agreement.
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<PAGE>
N. Hostile Take-Over shall mean the acquisition, directly or
------------------
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
O. Incentive Option shall mean an option which satisfies the
-----------------
requirements of Code Section 422.
P. Involuntary Termination shall mean the termination of the Service
------------------------
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her duties and responsibilities or the level of management to which
he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonus under any
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without the
individual's consent.
Q. Misconduct shall mean the commission of any act of fraud,
-----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
R. 1934 Act shall mean the Securities Exchange Act of 1934, as
---------
amended.
S. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
T. Optionee shall mean any person to whom an option is granted
---------
under the Discretionary Option Grant, Salary Investment Option Grant, Automatic
Option Grant or Director Fee Option Grant Program.
32
<PAGE>
U. Parent shall mean any corporation (other than the Corporation)
-------
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Participant shall mean any person who is issued shares of Common
------------
Stock under the Stock Issuance Program.
W. Permanent Disability or Permanently Disabled shall mean the
---------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. Plan shall mean the Corporation's 1999 Stock Incentive Plan, as
-----
set forth in this document.
Y. Plan Administrator shall mean the particular entity, whether the
-------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. Plan Effective Date shall mean the date the Plan shall become
--------------------
effective and shall be coincident with the Underwriting Date.
AA. Predecessor Plan shall mean the Corporation's 1998 Stock
-----------------
Option/Stock Issuance Plan in effect immediately prior to the Plan Effective
Date hereunder.
BB. Primary Committee shall mean the committee of two (2) or more
-----------------
nonemployee Board members appointed by the Board to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and
to administer the Salary Investment Option Grant Program solely with respect to
the selection of the eligible individuals who may participate in such program.
CC. Salary Investment Option Grant Program shall mean the salary
--------------------------------------
investment option grant program in effect under Article Three of the Plan.
DD. Secondary Committee shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
33
<PAGE>
EE. Section 16 Insider shall mean an officer or director of the
-------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
FF. Service shall mean the performance of services for the
--------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
GG. Stock Exchange shall mean either the American Stock Exchange or
---------------
the New York Stock Exchange.
HH. Stock Issuance Program shall mean the agreement entered into by
----------------------
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
II. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under Article Four of the Plan.
JJ. Subsidiary shall mean any corporation (other than the
-----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
KK. Take-Over Price shall mean the greater of (i) the Fair Market
----------------
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
LL. 10% Stockholder shall mean the owner of stock (as determined
----------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
MM. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
NN. Underwriting Date shall mean the date on which the Underwriting
------------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
OO. Withholding Taxes shall mean the Federal, state and local income
-----------------
and employment withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of those options or the vesting of those shares.
34
<PAGE>
EXHIBIT 10.4
DIGITAL ISLAND, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests
of Digital Island, Inc., a Delaware corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll-deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares of Common Stock
purchased on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall be limited to three
hundred thousand (300,000) shares.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2000, by
an amount equal to one percent (1%) of the total number of shares of Common
Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
five hundred thousand (500,000) shares.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date, (iii) the maximum number and class of
securities purchasable by all Participants in the aggregate on any one Purchase
Date, (iv) the maximum
<PAGE>
number and/or class of securities by which the share reserve is to increase
automatically each calendar year pursuant to the provisions of Section III.B of
this Article One and (v) the number and class of securities and the price per
share in effect under each outstanding purchase right in order to prevent the
dilution or enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in July
2001. The next offering period shall commence on the first business day in
August 2001, and subsequent offering periods shall commence as designated by the
Plan Administrator.
C. Each offering period shall be comprised of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in February to the last business day in July each year and from the
first business day in August each year to the last business day in January in
the following year. However, the first Purchase Interval in effect under the
initial offering period shall commence at the Effective Time and terminate on
the last business day in January 2000.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new
offering period shall have a duration of twenty (24) months, unless a shorter
duration is established by the Plan Administrator within five (5) business days
following the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
any offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
2.
<PAGE>
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Base Salary paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the
offering period, reduce his or her rate of payroll deduction to
become effective as soon as possible after filing the appropriate
form with the Plan Administrator. The Participant may not,
however, effect more than one (1) such reduction per Purchase
Interval.
(ii) The Participant may, prior to the commencement of
any new Purchase Interval within the offering period, increase
the rate of his or her payroll deduction by filing the
appropriate form with the Plan Administrator. The new rate (which
may not exceed the fifteen percent (15%) maximum) shall become
effective on the start date of the first Purchase Interval
following the filing of such form.
B. Payroll deductions shall begin on the first pay day
administratively feasible following the Participant's Entry Date into the
offering period and shall (unless sooner terminated by the Participant) continue
through the pay day ending with or immediately prior to the last day of that
offering period. The amounts so collected shall be credited to the Participant's
book account under the Plan, but no interest shall be paid on the balance from
time to time outstanding in such account. The amounts collected from the
Participant shall not be required to be held in any segregated account or trust
fund and may be commingled with the general assets of the Corporation and used
for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
3.
<PAGE>
VII. PURCHASE RIGHTS
A. Grant of Purchase Right. A Participant shall be granted a
-----------------------
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.
C. Purchase Price. The purchase price per share at which Common
--------------
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
-----
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. Number of Purchasable Shares. The number of shares of Common
----------------------------
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed 1,200 shares, subject to periodic adjustments in the event of certain
changes in the Corporation's capitalization. In addition, the maximum aggregate
number of shares of Common Stock purchasable by all Participants on any one
Purchase Date shall not exceed 200,000 shares, subject to periodic adjustments
in the event of certain changes in the Corporation's capitalization. However,
the Plan Administrator shall have the discretionary authority, exercisable prior
to the start of any offering period under the Plan, to increase or decrease the
limitations to be in effect for the number of shares purchasable per Participant
and in the aggregate by all Participants on each Purchase Date during that
offering period.
4.
<PAGE>
E. Excess Payroll Deductions. Any payroll deductions not applied to
-------------------------
the purchase of shares of Common Stock on any Purchase Date because they are
not sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable per Participant or in the
aggregate on the Purchase Date shall be promptly refunded.
F. Termination of Purchase Right. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next
scheduled Purchase Date in the offering period, terminate his or
her outstanding purchase right by filing the appropriate form
with the Plan Administrator (or its designate), and no further
payroll deductions shall be collected from the Participant with
respect to the terminated purchase right. Any payroll deductions
collected during the Purchase Interval in which such termination
occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next Purchase
Date. If no such election is made at the time such purchase right
is terminated, then the payroll deductions collected with respect
to the terminated right shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the
offering period for which the terminated purchase right was
granted. In order to resume participation in any subsequent
offering period, such individual must re-enroll in the Plan (by
making a timely filing of the prescribed enrollment forms) on or
before his or her scheduled Entry Date into that offering period.
(iii) Should the Participant cease to remain an
Eligible Employee for any reason (including death, disability or
change in status) while his or her purchase right remains
outstanding, then that purchase right shall immediately
terminate, and all of the Participant's payroll deductions for
the Purchase Interval in which the purchase right so terminates
shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid
leave of absence, then the Participant shall have the right,
exercisable up until the last business day of the Purchase
Interval in which such leave commences, to (a) withdraw all the
payroll deductions collected to date on his or her behalf for
that Purchase Interval or (b) have such funds held for the
purchase of shares on his or her behalf on the next scheduled
Purchase Date. In no event, however, shall any further payroll
deductions be collected on the Participant's behalf during such
leave. Upon the Participant's return to active service (x) within
ninety (90) days following the commencement of such leave or (y)
prior to the expiration of any longer period for which such
Participant's right to reemployment with the Corporation is
guaranteed by statute or contract, his or her payroll deductions
under the Plan shall automatically resume at the rate in
5.
<PAGE>
effect at the time the leave began, unless the Participant
withdraws from the Plan prior to his or her return. An individual
who returns to active employment following a leave of absence
which exceeds in duration the applicable (x) or (y) time period
will be treated as a new Employee for purposes of subsequent
participation in the Plan and must accordingly re-enroll in the
Plan (by making a timely filing of the prescribed enrollment
forms) on or before his or her scheduled Entry Date into the
offering period.
G. Change in Control. Each outstanding purchase right shall
-----------------
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
-----
Stock on the Participant's Entry Date into the offering period in which such
Change in Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change in Control. However, the
applicable limitation on the number of shares of Common Stock purchasable per
Participant shall continue to apply to any such purchase, but not the limitation
applicable to the maximum number of shares of Common Stock purchasable in the
aggregate.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. Proration of Purchase Rights. Should the total number of shares
----------------------------
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. Assignability. The purchase right shall be exercisable only by
-------------
the Participant and shall not be assignable or transferable by the Participant.
J. Stockholder Rights. A Participant shall have no stockholder
------------------
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans
6.
<PAGE>
(within the meaning of Code Section 423) of the Corporation or any Corporate
Affiliate, would otherwise permit such Participant to purchase more than Twenty-
Five Thousand Dollars ($25,000.00) worth of stock of the Corporation or any
Corporate Affiliate (determined on the basis of the Fair Market Value per share
on the date or dates such rights are granted) for each calendar year such rights
are at any time outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in a series of installments on each successive
Purchase Date during the offering period on which such right remains
outstanding.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one or more other purchase rights at a rate equal to Twenty-Five Thousand
Dollars ($25,000.00) worth of Common Stock (determined on the basis of the
Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on April 21, 1999 and shall
become effective at the Effective Time, provided no purchase rights granted
--------
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
7.
<PAGE>
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in July 2009, (ii) the date on
--------
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Change in Control. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the recognition of compensation
expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments
or revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify the eligibility requirements for participation in
the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
B. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.
8.
<PAGE>
Schedule A
----------
Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time
------------------------
Digital Island, Inc.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Base Salary shall mean the regular base salary paid to a
-----------
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan. Base
Salary shall be calculated before deduction of (A) any income or employment tax
withholdings or (B) any and all contributions made by the Participant to any
Code Section 401(k) salary deferral plan or Code Section 125 cafeteria benefit
program now or hereafter established by the Corporation or any Corporate
Affiliate. Base Salary shall not include (i) any overtime payments, bonuses,
commissions, profit-sharing distributions and other incentive-type payments
received during the period of participation in the Plan and (ii) any
contributions made on the Participant's behalf by the Corporation or any
Corporate Affiliate to any employee benefit or welfare plan now or hereafter
established (other than Code Section 401(k) or Code Section 125 contributions).
B. Board shall mean the Corporation's Board of Directors.
-----
C. Change in Control shall mean a change in ownership of the
-----------------
Corporation pursuant to any of the following transactions:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined
voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons
holding those securities immediately prior to such transaction,
or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly by an
person or related group of persons (other than the Corporation or
a person that directly or indirectly controls, is controlled by
or is under common control with the Corporation) of beneficial
ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities
pursuant to a tender or exchange offer made directly to the
Corporation's stockholders.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
A-1.
<PAGE>
E. Corporate Affiliate shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
G. Corporation shall mean Digital Island, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Digital Island, Inc. which shall by appropriate action
adopt the Plan.
H. Effective Time shall mean the time at which the Underwriting
--------------
Agreement is executed and the Common Stock priced for the initial public
offering. Any Corporate Affiliate which becomes a Participating Corporation
after such Effective Time shall designate a subsequent Effective Time with
respect to its employee-Participants.
I. Eligible Employee shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. Entry Date shall mean the date an Eligible Employee first
----------
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as such price is reported by the National Association
of Securities Dealers on the Nasdaq National Market. If there is
no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question
on the Stock Exchange determined by the Plan Administrator to be
the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which
such quotation exists.
(iii) For purposes of the initial offering period which
begins at the Effective Time, the Fair Market Value shall be
deemed to be equal to the price per share at which the Common
Stock is sold in the initial public offering pursuant to the
Underwriting Agreement.
A-2.
<PAGE>
L. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
M. Participant shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
N. Participating Corporation shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
O. Plan shall mean the Corporation's 1999 Employee Stock Purchase
----
Plan, as set forth in this document.
P. Plan Administrator shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
Q. Purchase Date shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be January 31, 2000.
R. Purchase Interval shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. Semi-Annual Entry Date shall mean the first business day in
----------------------
February and August each year on which an Eligible Employee may first enter an
offering period.
T. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
U. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
<PAGE>
Exhibit 10.10
LEASE
Between
BISHOP STREET ASSOCIATES
and
DIGITAL ISLAND, INC.
TABLE OF CONTENTS
PAGE
SECTION DESCRIPTION NUMBER
------- ----------- ------
1. Premises and Basic Lease Information............. 1
2. Term............................................. 3
3. Base Rent; Adjustments; General Rent Provisions.. 3
4. Additional Rent.................................. 3
5. Security Deposit................................. 5
6. Restrictions on Use; Compliance with Laws........ 6
7. Improvements and Alterations..................... 6
8. Repairs and Maintenance.......................... 7
9. Lien............................................. 7
10. Assignment and Subletting........................ 8
11. Waiver; Indemnity................................ 9
12. Insurance........................................ 10
13. Service and Utilities............................ 11
14. Estoppel Certificate............................. 12
15. Holding Over 20.................................. 12
16. Subordination; Requirements of Lenders........... 13
17. Observance of Rules and Regulations.............. 13
18. Access by Landlord............................... 13
19. Default by Tenant................................ 14
20. Remedies of Landlord............................. 14
21. Default by Landlord; Limitation of Liability..... 17
22. Damage and Destruction........................... 17
23. Eminent Domain................................... 18
i
<PAGE>
TABLE OF CONTENTS
PAGE
SECTION DESCRIPTION NUMBER
- ------- ----------- ------
24. Sale by Landlord........... 18
25. Surrender of Premises...... 18
26. Quiet Enjoyment............ 18
27. Notices.................... 19
28. Personal Property Taxes.... 19
29. Interest and Late Charges.. 19
30. Successors and Assigns..... 20
31. Attorney's Fees............ 20
32. Light and Air.............. 20
33. Signs and Directory........ 20
34. Parking.................... 20
35. Brokers.................... 21
36. Relocation Right........... 21
37. Authority.................. 21
38. Miscellaneous.............. 21
39. Rules and Regulations...... 23
40. Door Sign Rules............ 26
ADDENDUM TO LEASE
Exhibit "A"....... Outline of Premises
Exhibit "B"....... Work Agreement
Exhibit "C"....... Form of Notice of Lease Term Dates
Exhibit "D"....... Form of Estoppel Agreement
<PAGE>
LEASE
THIS LEASE ("Lease") is made as of ,1996, by and between Bishop Street
-----
Associates, a Hawaii Limited Partnership ("Landlord") and DIGITAL ISLAND, INC.,
a California corporation (the "Tenant") upon the following terms and conditions:
1. Premises and Basic Lease Information
1.1 Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord, upon the terms and conditions set forth in this Lease, those
certain premises (the "Premises") described in Section 1.1.1 of the Basic
Lease Information (as defined below) and outlined in Exhibit "A" attached
hereto and hereby made a part hereof. For purposes of this Lease, the
rentable area. of the Premises has been determined by Landlord's space
planner or architect by reference to the "Standard Method for Measuring
Floor Area in Office Buildings," adopted by the Building Owners and
Managers Association International and approved by the American National
Standards Institute, Inc., August 1990 reprint. The Premises are situated
in that certain office building (the "Building") located at 1132 Bishop
Street, Honolulu, Hawaii. The land upon which the Building is located (the
"Land"), together with the Building and related facilities and
appurtenances, including, but not limited to, the area adjacent to the
Building known as "Union Mall", shall hereinafter be collectively referred
to as the "Project." The terms and conditions of this Lease shall include,
without limitation, the following basic Lease information (the "Basic
Lease Information"):
1.1.1 Premises (Section 1.1): Suite 1001 on floor ten (10) of the
Building, consisting of approximately 2,588 rentable square feet and
approximately 2,270 usable square feet.
1.1.2 Term (Section 2): Five (5) years, to commence on November 1,
1996, and to expire on October 31, 2001.
1.1.3 Base Rent (Section 3.1): In the following amounts:
Period Rate Total Amount
------ ---- ------------
11/01/96 through $0.00 $0.00 per month
04/30/97
05/01/97 through $1.00 per rentable square foot $2,588.00 per month
10/31/01 per month
1.1.4 Additional Rent (Section 4.1): Equal to Tenant's Percentage Share
(Section 1.1.6) of Operating Costs (Section 4.8).
1.1.5 Rentable Square Footage of the Building: 450,000 square feet.
1.1.6 Tenant's Percentage Share (Section 4.1): 0.575%, which was
computed by dividing the rentable area of the Premises described in
Section 1.1.1 by the rentable area of the Building.
1.1.7 Security Deposit (Section 5): One (1) month's gross rent
($5,256.84), subject to adjustment as provided herein. Gross rent
shall be equal to the sum of (i) Base Rent, plus (ii) Additional Rent
equal to Tenant's Percentage Share of Operating Costs, plus (iii)
State of Hawaii general excise tax on such Base Rent and Additional
Rent at the rate of 0.04166. Notwithstanding Section 5, such deposit
shall be increased from time to time to correspond to any increase in
Base Rent, Additional Rent and/or general excise tax.
1.1.8 Permitted Use (Section 6.1): General office use and as an office
to market digital communication.
<PAGE>
1.1.9 Minimum Limits for Commercial General Liability Insurance:
$1,000,000.00 per occurrence and $1,000,000.00 aggregate for bodily
injury, death and property damage, including liquor liability if
liquor is sold; $1,000,000.00 fire legal liability to value coverage
(section 12.1.1).
1.1.10 For notices to Tenant:
DIGITAL ISLAND, INC.
1132 Bishop Street, Suite 1001
Honolulu, Hawaii 96813
Attention: Ron Higgins
Telephone No.:(808)____________
1.1.11 (Intentionally Omitted.)
1.1.12 Parking Rights (Section 34): Two (2) automobiles in unassigned
parking stalls, at an initial rate of $150.00 per month per automobile
with adjustment pursuant to Section 34, together with State of Hawaii
general excise taxes thereon as provided herein.
1.1.13 Interest and Late Charges (Section 29): Interest rate on unpaid
amount(s) equal to the rate which is the lesser of (a) one percent
(1%) per month, or (b) the maximum rate permitted by law; late charge
office percent (5%) of unpaid amount.
1.1.14 Tenant's Broker (Section 3:5): Monroe & Friedlander, Inc.
1.1.15 Tenant's Broker (Section 35): Monroe & Friedlander, Inc.
1.1.16 Landlord's Construction Representative (Exhibit "B"): The Harris
Company
1.1.17 Tenant's Construction Representative (Exhibit "B"): Ron Higgins
1.1.18 Guarantor (if any): None
1.1.19 Additional provisions: See Addendum to Lease.
Each reference in this Lease to any of the Basic Lease Information shall
be construed to incorporate, in addition to the Basic Lease Information set
forth above, the terms and conditions set forth in the particular Lease section
in which such reference is made.
1.2 The term "common areas" as used in this Lease shall mean all areas and
facilities around the Premises and within the exterior boundaries of the
Project which are provided and designated from time to time by Landlord
for the general use and convenience of Tenant and other tenants of the
Building and their respective employees and invitees. Common areas
include, without limitation, the lobby area, walk-ways, parking
facilities, arcades, landscaped areas, sidewalks, service quarters,
hallways, corridors, restrooms (if not part of the Premises), stairways,
elevators (except elevators which may be reserved for the exclusive use of
one or more tenants), walls, fire stairs, telephone and electrical
closets, aisles, truck docks, plazas, service areas, lobbies and all other
common service areas of the Land and Building or any other area of the
Project intended for such use. Floors wholly occupied by Tenant shall not
have any facilities which would be used in common with other tenants,
except for fire stairs, shafts and similar installations. Tenant, its
employees and invitees, shall have the nonexclusive right to use the
common areas along with others entitled to use the same, subject to
Landlord's rights and duties as hereinafter set forth. Without Tenant's
consent and without liability to Tenant, Landlord shall have the right to
do the following:
1.2.1 Establish and enforce reasonable rules and regulations concerning
the maintenance, management, use and operation of the common areas;
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<PAGE>
1.2.2 Temporarily close any of the common areas for maintenance,
alternation or improvement purposes;
1.2.3 Select, appoint and/or contract with any person for the purpose
of operating and maintaining the common areas; and
1.2.4 Change the size, use, shape or nature of any of the common areas.
Landlord shall use reasonable efforts to minimize any interference
with Tenant's use and access of the Premises resulting from Landlord's
exercise of such rights.
2. Term
The term of this Lease shall commence upon the later of the following dates
(the "Commencement Date"): (i) the scheduled Commencement Date specified in
Section 1.1.2 of the Basic Lease Information, or (b) the date that Landlord
tenders possession to Tenant, provided that any work to be performed by Landlord
pursuant to the Work Agreement attached to this Lease as Exhibit "B" is
substantially completed, as determined by Landlord's space planner or architect,
or would have been so substantially completed but for any delay caused by any
occurrence within the control of Tenant or its agents, employees or contractors.
Such term shall continue until the expiration date specified in said Section
1.1.2, unless sooner terminated pursuant to any provision hereof.
This Lease shall not be void or voidable, nor shall Landlord be subject to
any liability as a result of any delay in the Commencement Date for any reason,
except that if the delay has resulted from actions of Landlord (not caused by
delays of Tenant) rent shall not commence until the Premises are available for
occupancy by Tenant with all work to be performed by Landlord substantially
completed. The parties hereto shall execute a written statement, substantially
in the form attached hereto as Exhibit "C" and hereby made a part hereof,
setting forth the Commencement Date and the date of expiration of this Lease,
promptly after same have been ascertained, but the enforceability of this Lease
shall not be affected should either party fail or refuse to execute such
statement. If permission is given to Tenant, in Landlord's sole discretion, to
enter or occupy the Premises prior to the Commencement Date, such early entrance
or occupancy shall be subject to all the terms of such permission and all the
provisions of this Lease which could be reasonably and logically construed as
applying thereto, and Tenant shall not in any way interfere with or delay any of
Landlord's work to be performed in the Premises from being substantially
completed or otherwise cause additional cost or expense to Landlord.
3. Base Rent; Adjustments; General Rent Provisions.
3.1 Tenant shall pay to Landlord as base rent ("Base Rent") for the
Premises, without prior notice or demand, throughout the term of this
Lease, the amount so specified in Section 1.1.3 of the Basic Lease
Information (subject to any increase provided herein), in advance, on or
before the first day of each and every calendar month during the term
hereof, except that Base Rent for the first full month for which Base Rent
shall be payable hereunder shall be paid upon the execution hereof.
3.2 (Intentionally Deleted.)
3.3. Base Rent and any other rent (except for parking rental) due under
this Lease for any period during the term hereof which is for less than
one (1) month shall be a pro rata portion of the monthly amount due, based
upon a thirty (30) day month. Rent and all other amounts due to Landlord
shall be paid to Landlord, without deduction, offset or abatement, at
Landlord's address as specified in Section 27 below or to such other firm
or at such other place as Landlord may from time to time designate in
writing. Landlord shall have the right to accept all rent and other
payments, whether full or partial, and to negotiate checks in payment
thereof without any waiver of rights, irrespective of any conditions to
the contrary sought to be imposed by Tenant. Rent hereunder shall be
deemed paid to Landlord when received by Landlord, or its designee, at
Landlord's address or at such other address as Landlord shall have
designated.
4. Additional Rent
4.1 Commencing with the calendar year in which the term hereof commences
and during each succeeding calendar year (or portion thereof) of the lease
term, Tenant shall pay as additional rent ("Additional Rent") in addition
to and at the time provided
-3-
<PAGE>
for payment of Base Rent an amount equal to Tenant's Percentage Share of
the estimated Operating Costs of the Project for the then current calendar
year as specified in Section 1.1.6 of the Basic Lease Information.
4.2 Prior to the end of each calendar year, Landlord shall furnish to
Tenant a written statement or statements showing in reasonable detail
Landlord's estimate of Operating Costs for the immediately succeeding
calendar year and the amount of any Additional Rent payable by Tenant,
appropriately prorated on a monthly basis. Thereafter, Tenant shall pay
monthly as Additional Rent hereunder the amount set forth in such
estimated Additional Rent statement from Landlord. Neither Landlord's
failure to deliver, nor the late delivery of, such statement or statements
shall constitute a default by Landlord hereunder or a waiver of Landlord's
right to any estimated or actual Additional Rent.
4.3 Within one hundred twenty (120) days following the close of each
calendar year, Landlord shall furnish to Tenant a written statement of
reconciliation (the ("Reconciliation") showing in reasonable detail
Landlord's actual Operating Costs for the relevant calendar year, together
with a statement of any adjustments necessary to reconcile any sums paid
by Tenant hereunder as estimated Additional Rent during such calendar year
with those sums actually payable and due hereunder for such calendar year
as set forth in the Reconciliation. If the Reconciliation shows that
additional sums are due from Tenant hereunder, Tenant shall pay such sums
to Landlord within ten (10) days after receipt of the Reconciliation. If
the Reconciliation shows that an overpayment has been made by Tenant with
respect to Additional Rent, such overpayment shall be refunded to Tenant
within thirty (30) days after Tenant's receipt of the Reconciliation. In
the event this Lease has expired or been terminated prior to the end of a
calendar year, the party's obligation to reconcile shall survive such
expiration or termination. Landlord's failure to deliver the
Reconciliation to Tenant as provided herein shall not constitute a default
by Landlord hereunder nor operate as a waiver of Landlord's right to
collect all Additional Rent and other sums due hereunder. Where only a
portion of a calendar year falls within the term hereof, Landlord shall
calculate estimated (or actual, as the ease may be) Additional Rent based
upon a reasonable proration of estimated (or actual) Operating Costs for
such calendar year.
4.4 Landlord may divide the statements referred to above into separate
statement(s) for Tax Costs (as defined in Section 4.6 below) and Building
Operating Costs (as defined in Section 4.7 below). Additionally, Landlord
may estimate and measure Tax Costs or Building Operating Costs or both, on
a fiscal year instead of a calendar year basis, and in such event any and
all references in this Section 4 to calendar year shall be deemed to refer
to such fiscal year.
4.5 Notwithstanding anything to the contrary contained herein, under no
circumstances shall the provisions of this Section 4 cause Base Rent to be
reduced. Any reference to Landlord's "actual" Operating Costs in this
Section 4 shall be deemed to include an allowance for any adjustment to
reflect the level of occupancy of the Building to the extent provided for
below.
4.6 "Tax Costs" shall mean the sum of the following: any and all real
property taxes, assessments (including, but not limited to, general and
special assessments) charges, surcharges, license and other fees, levies,
cost of improvement bonds, penalties, and any and all other taxes (other
than income, franchise and estate or gift taxes of Landlord) on or
relating to all or a portion of the Project (as it may exist from time to
time) including, but not limited to walkways, parking facilities, common
areas, landscaped areas, fountains and art works or any legal or equitable
interest of Landlord therein which may be imposed, levied, assessed or
charged for any reason by any authority having the direct or indirect
power to tax including, but not limited to, the United States or the
state, county or city in which the Building is located, or any other local
governmental authority, agency, district or political subdivision thereof,
together With personal property taxes, assessments, fees and charges
(other than those paid by Tenant pursuant to Section 28 below), fees of
tax consultants and attorneys retained to seek a reduction, to contest or
to act in some other manner in connection with any of the foregoing Tax
Costs, together with any tax, assessment or other amount (including,
without limitation, commercial rental taxes) imposed, levied or charged as
a substitute for or a supplement to the foregoing. If, for any calendar
year subsequent to the year in which the Commencement Date occurs, the
assessed valuation or Tax Costs of the Building shall not be based upon a
completed building at least ninety-five percent (95%) occupied, then for
the purpose of computing Additional Rent due hereunder Tax Costs actually
incurred during such calendar year shall be increased to reflect the
amounts which would have been payable if the Building had been completed
and was ninety-five percent (95%) occupied. Tax Costs for each tax year
shall be appropriately prorated to determine the Tax Costs for the subject
calendar year.
4.7 "Building Operating Costs" shall mean the sum of the following: any and
all costs, expenses and disbursements paid or incurred by landlord in
connection with the management, operation, security, maintenance, and
repair of the Project (as it may
<PAGE>
exist from time to time) including, but not limited to, salaries, wages,
benefits and related costs for employees, management fees, either as
charged to Landlord by outside management companies or an amount not
exceeding the amount typically charged by outside management companies if
Landlord manages the Building itself, together with the rental value of
space occupied as the Project management office and any building operating
costs (including, but not limited to, real property taxes, utilities, and
insurance) attributed to such space occupied as the project management
office; charges for utilities and services (including any taxes thereon);
the cost of insurance; the cost of building cleaning supplies and
materials; ground rent; and a reasonable allowance for depreciation (or
amortization) with respect to machinery and equipment and other capital
expenditures and improvements; provided, however, that the only
depreciation (or amortization and expenditures) includable in Building
Operating Costs shall be a reasonable allowance for depreciation (or
amortization) on (a) items intended to result in cost savings, (b) common
area interior floor and wall coverings and resurfacing and common area
window treatments, and (c) Required Alterations (as defined below). If,
during any calendar year subsequent to the year in which the Commencement
Date occurred, the Building is less than ninety-five percent (95%)
occupied, then for the purpose of computing Additional Rent due hereunder
Building Operating Costs actually incurred during such calendar year shall
be increased to reflect the amounts which would have been payable if the
Building had been ninety five percent (95%) occupied.
Without limiting the generality of the foregoing, and notwithstanding any
contrary provision herein, if at any time Landlord is required by any rule,
regulation or law, to make any changes, alterations or improvements to the
common area or the Building, the Premises, or any other portion of the Project
(including, but not limited to, electrical, mechanical, water sprinkler, or
other systems or components) ("Required Alterations") (but excluding Required
Alterations attributable exclusively to Tenant's specific use and occupancy of
the Premises, which alterations shall be Tenant's sole responsibility), all
costs relating to such Required Alterations (including, but not limited to, all
planning, legal, architectural, engineering, construction, financing and other
costs) shall be fully included in Building Operating Costs in the year in which
such charges accrue, or in such year as Landlord pays such charges, as Landlord
shall elect. If under generally accepted accounting principles a portion of
costs relating to Required Alterations should be allocated to capital
improvements, to be depreciated or amortized over two (2) or more years,
Landlord shall be entitled each year to include in Building Operating Costs a
reasonable allowance for depreciation (or amortization) with respect thereto.
The capital costs described herein shall include all costs relating to the
financing of any Required Alterations or other capital investment items. If
Landlord internally finances any such capital costs, interest shall be added to
such costs at an annual rate reasonably determined by Landlord.
4.8 "Operating Costs" shall mean the aggregate of Tax Costs and Building
Operating Costs.
4.9 In addition to any other items payable by Tenant to Landlord under this
Lease, Tenant shall pay not less than ten (10) days after written notice
from Landlord, as Additional Rent, any conveyance tax imposed by the
State of Hawaii in connection with this Lease and shall at Landlord's
request execute such affidavits and other documentation as may be
necessary or proper in connection therewith.
4.10 Tenant will also pay to Landlord, as Additional Rent, at the time
and together with each payment of Base Rent, Additional Rent or other
charge required hereunder by Tenant to Landlord which is subject to the
State of Hawaii general excise tax on gross income, any sales or value
added taxes under any successor, similar or new federal, state or county
law which may be hereafter enacted, on account of the receipt, actual or
constructive, by Landlord of the rental payments, reimbursement of gross
income taxes, any other taxable gross income attributable to the Premises
or this Lease, an amount which, when added to Base Rent, Additional Rent
or other charge (whether actually or constructively received by
Landlord), shall yield to Landlord, after deduction of all such taxes
payable by Landlord with respect thereto, an amount equal to that which
Landlord would have realized therefrom had no such taxes been imposed.
For purpose of illustration only, the amount of such tax is presently
four percent (4%), resulting in a figure to be divided into Base Rent,
Additional Rent and other amounts payable by Tenant hereunder of .96 in
order to ascertain the total amount due.
5. Security Deposit.
Concurrently with Tenant's execution hereof, Tenant shall pay to Landlord a
security deposit to secure the performance and observance of all obligations and
covenants of Tenant hereunder. The initial amount of such deposit is specified
in Section 1.1.7 of the Basic Lease Information. Such deposit shall be increased
proportionately (a) upon determination of the rentable area of the Premises, to
correspond to any resultant increase in the initial Base Rent, and (b) from time
to time thereafter to correspond to any increase in Base Rent. Landlord may
apply such deposit to remedy any failure by Tenant to perform or observe any of
its obligations and covenants hereunder. Should Landlord use any portion of such
-5-
<PAGE>
deposit pursuant to the foregoing, Tenant shall forthwith replenish such deposit
in full. Landlord shall, upon the expiration or sooner termination hereof,
promptly return any unused portion of such deposit to Tenant (or the last
permitted assignee of Tenant's interest hereunder. Landlord shall not be
required to keep such deposit separate from its general funds, and Tenant shall
not be entitled to any interest on such deposit.
6. Restrictions on Use; Compliance with Laws.
6.1. Tenant shall use and occupy the Premises only for the specific uses
specified in Section 1.1.8 of the Basic Lease Information and for no
other uses whatsoever. Tenant shall not do or permit anything to be
done in or about the Premises which will in any way obstruct or
interfere with the rights of other tenants or occupants of the Building
or injure or annoy them, nor use or allow the Premises to be used for
any improper immoral, unlawful or objectionable purpose, nor shall
Tenant cause or maintain or permit any nuisance in or about the
Premises, nor shall Tenant cause or permit any hazardous or toxic
waste, substance or material to be brought to the Promises or used,
transported, generated, handled, stored or disposed of in or about the
Premises. Tenant shall not conduct business or other activity in or
about the Premises of such a nature as to place an unreasonable or
excessive burden upon the public and common areas of the Building.
Tenant shall not place a load upon any floor exceeding the floor load
which such floor was designed to carry, nor shall Tenant install any
equipment, apparatus or device in the Premises which shall cause
vibrations or excessive noise. Tenant shall not commit or suffer the
commission of any waste in or about the Premises.
6.2 Tenant shall not use the Premises or permit anything to be done in
or about the Premises which shall in any way conflict with any law,
statute, ordinance or governmental rule or regulation now in force or
which may hereafter be enacted or promulgated. Tenant shall not do or
permit anything to be done in or about the Premises or bring or keep
anything therein which will in any way increase the rate of any
insurance upon the Building or any of its contents, or cause
cancellation of said insurance or otherwise affect said insurance in
any manner, and Tenant shall at its sole cost and expense promptly
comply with all laws, statutes, ordinances and governmental rules,
regulations and requirements now in force or which may hereafter be in
force and with the requirements of any board of fire underwriters or
other similar body now or hereafter constituted relating to or
affecting the condition, use or occupancy of the Premises.
7. Improvements and Alterations.
7.1 Initial improvements to the Premises shall be governed by the
provisions of Exhibit "B" attached thereto and hereby made a part
hereof (the "Work Agreement") and the other provisions of this Lease
not in conflict therewith.
Without the prior written consent of Landlord, Tenant shall not make or
permit to be made any alterations, additions, or improvements in, on or to the
Premises or the Project or any part thereof, except for interior, non-structural
alterations to the Premises not exceeding One Thousand Dollars ($1,000) in
cumulative costs throughout the term hereof.
7.2 Landlord may impose as a condition to such consent such requirements
as Landlord may deem necessary in its sole discretion, including
(without limitation) requirements relating to the manner in which the
work is done, the contractor by whom it is performed, and the limes
during which it is accomplished, as well as the requirement that upon
written request of Landlord, Tenant will remove at its expense any and
all permanent improvements or additions to the Premises installed by
Tenant. Any damage done to the Premises in connection with such removal
shall be repaired at Tenant's sole cost and expense. Landlord may, in
connection with any such removal which reasonably might involve
damaging the Premises, require that such removal be performed by a
bonded contractor or other person for which a bond satisfactory to
Landlord has been furnished covering the cost of repairing the
anticipated damage.
Notwithstanding any contrary provision herein, Tenant shall not, in any
event, make any alterations, additions or improvements which might or could
affect the structure of the Building or to the mechanical or electrical systems
of the Building or which are visible from the exterior of the Premises or which
interfere with or disrupt other tenants in the Building or with any work then
being carried out therein by Landlord or its contractors. Any alterations,
additions or improvements desired by Tenant shall be made at Tenant's sole cost
and expense in compliance with Section 9 below and in accordance with plans and
specifications, and pursuant to governmental permits, approved in advance by
Landlord. Any contractor selected by Tenant to make same must be bondable and
licensed and be approved in advance by Landlord and must provide insurance
-6-
<PAGE>
coverage acceptable to Landlord. Such work shall be performed by union labor
unless Landlord determines that the use of nonunion labor is not likely to cause
labor unrest or disputes.
At Landlord's option, any alterations, additions or improvements desired
by Tenant shall be made by Landlord or its contractors for Tenant's account, and
Tenant shall pay the cost thereof to Landlord prior to Landlord's contracting
for such work; provided, however, that Landlord's price shall not exceed the
lowest bona fide bid, from a contractor reasonably satisfactory to Landlord,
therefore obtained by Tenant and communicated to Landlord. Upon completion of
any alterations, additions or improvements, Tenant shall furnish Landlord a set
of "as built" plans and specifications therefor, and, within ten (I 0) days
after such completion, Tenant shall cause an appropriate notice of completion to
be recorded in the office of the Clerk of Circuit Court of the First Circuit,
State of Hawaii, pursuant to Section 507-43, Hawaii Revised Statutes, as
amended.
Tenant shall cause all such alterations, additions or improvements to be
completed in a good, workmanlike, diligent, prompt and expeditious manner in
compliance with all applicable laws. Landlord's approval of Tenant's plans and
specifications shall not constitute a representation or warranty of Landlord as
to the adequacy thereof or compliance thereof with applicable laws. Tenant shall
pay to Landlord a fee equal to ten percent (10%) of the total cost of the
subject work for reviewing Tenant's plans and specifications and Landlord's
coordination, scheduling and review of subject work, regardless of whether
Landlord or Tenant contracts for such work.
8. Repairs and Maintenance.
8.1 By taking possession of the Premises, Tenant shall be deemed to have
conclusively agreed to accept the Premises "AS-IS" and as being in the
condition in which Landlord is required to deliver the same and
otherwise in good order, condition and repair (except for latent
defects). Subject to the provisions of Section 22 below, Tenant shall,
at all times during the term hereof and at Tenant's sole cost and
expense, keep the Premises and every part thereof in good condition and
repair. It is understood and agreed that Landlord has no obligation to
alter, remodel, improve, repair, decorate or paint the Premises or any
part thereof, except as specified in Section 22 below or in the Work
Agreement, and that no representations relating to the condition of the
Premises, the Building or the Project have been made by Landlord (or
any employee or agent thereof) to Tenant, except as may be specifically
set forth in this Lease.
8.2 Subject to the provisions of Section 8.1 above and Section 22 below,
Landlord shall maintain the common area, the foundation and structural
portions of the Building, and the mechanical and electrical systems
providing the services and utilities to be furnished by Landlord
pursuant to Section 13.1 below, in good order and condition, provided
however, if such maintenance and repairs are caused in whole or in part
by the act, neglect, fault, or omission of any duty by Tenant, its
agents, servants, employees, or invitees, Tenant shall pay to Landlord
the reasonable cost of such maintenance and repairs. Landlord shall not
be liable for any failure to make any such repairs or to perform any
maintenance unless such failure shall persist for an unreasonable time
after written notice of the need of such repairs or maintenance is
given to Landlord by Tenant. Except as provided in Section 22 hereof,
there shall be no abatement of rent and no liability of Landlord by
reason of any injury to or interference with Tenant's business arising
from the making of any repairs, alterations or improvements in or to
any portion of the Building or the Premises, or in or to fixtures,
appurtenances and equipment therein. Tenant waives the right to make
repairs at Landlord's expense under any law, statute or ordinance now
or hereafter in effect.
9. Lien.
Tenant shall keep the Project free from any liens arising out of any work
performed, materials furnished or obligations incurred by Tenant. In the event
that Tenant shall not within ten (10) days following the imposition of any such
lien, cause the same to be released of record by payment or posting of a proper
bond, Landlord shall have, in addition to all other remedies provided herein and
at law or in equity, the right to cause same to be released by such means as it
shall deem proper including, but not limited to, payment (from the security
deposit referred to in Section 5 above or otherwise) of the claim giving rise to
such lien. All such sums paid by Landlord and all expenses incurred by it in
connection therewith shall be considered additional rent and shall be payable to
it by Tenant on demand with interest at the Interest Rate (as defined in Section
29 below).
Landlord may require, at Landlord's sole option, that Tenant cause to be
provided to Landlord, at Tenant's sole cost and expense, a performance and labor
and materials payment bond acceptable to Landlord with respect to any
improvements, additions or alterations to the Premises. Landlord shall have the
right at all times to post and keep posted on the Premises any notices permitted
or required by law, or which
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Landlord shall deem proper, for the protection of Landlord, the Project and
any other party having an interest therein from mechanics' and materialmen's
liens.
10. Assignment and Subletting.
10.1 Tenant shall not assign, sublease or otherwise transfer,
("Transfer") to any party ("Transferee") voluntarily, by operation of
law or otherwise, any interest herein or in the Premises, or permit any
Transfer to occur, or permit the use of the Premises except for
Tenant's own business operations by any person other than Tenant and
the agents and servants of Tenant, without in each case Landlord's
prior written consent, which consent shall not be unreasonably
withheld. Any such Transfer without Landlord's prior written consent
shall be void.
In determining whether to grant such consent, Landlord may consider
various factors including, but not limited to, the following: (a) business
criteria relating to the proposed Transferee's background, experience,
reputation, general operating ability and ability to perform Lease obligations,
and potential for succeeding in its business, (b) financial criteria relating to
the proposed Transferee's financial responsibility, credit rating and
capitalization, (e) the identity and personal characteristics of the proposed
Transferee and its invitees and guests, and (d) the nature of the proposed use
and business of the proposed Transferee and its effect on the tenant mix of the
Building, the public repute of the Building and the impact on the common areas
or utility systems of the Building. Without limiting the generality of the
foregoing, Landlord hereby reserves the right to condition any such consent upon
Landlord's determination that (i) the proposed Transferee is at least as
financially responsible as Tenant and at least as financially and morally
responsible as Tenant then is or was upon the execution hereof, whichever is
greater, (ii) the proposed Transferee shall use the Premises for a use
compatible with other tenancies in the Building, and (iii) the proposed
Transferee's use of the Premises will not adversely materially impact on the
common areas or utility systems of the Building.
Notwithstanding any provision of this Lease to the contrary, Tenant shall
not enter into any proposed Transfer of any interest herein or in the Premises
which would result in (a) detraction from the first-class character or image of
the Building or diminution in the value thereof, (b) the Premises being occupied
by more than two (2) tenants, or (e) a breach by Landlord of any then-existing
exclusive right in favor of any other tenant of the Building, any loan
obligation or agreement, any covenants, conditions and restrictions of record,
or any insurance policy. Tenant shall give Landlord thirty (30) days prior
written notice of its intention to Transfer its lease. Tenant shall submit the
following information with such notice and with a written request for Landlord's
consent to any Transfer: (i) all Transfer and related documents, (ii) financial
statements of the proposed Transferee, (iii) business, credit and personal
references and history of the proposed Transferee, and (iv) such other
information as Landlord may reasonably request relating to the proposed Transfer
and the parties involved therein. Any transaction which does not comply with
provisions of this Section shall be voidable at the option of Landlord.
If Landlord disapproves the proposed Transfer, Tenant shall not complete
such proposed Transfer. On the other hand, if Landlord approves such proposed
Transfer, Tenant shall be required to pay Landlord's reasonable legal fees and
other costs incurred in connection with Landlord's review of the proposed
Transfer and the execution of documents reflecting such Transfer, plus an
administrative fee of $500.00. In addition, in the event Landlord consents to
the proposed Transfer: (i) any subtenant of part or all of Tenant's interest in
the Premises shall agree that in the event Landlord gives such subtenant notice
that Tenant is in default under this Lease, such subtenant shall thereafter make
all sublease or other payments direct to Landlord, which payments will be
received by Landlord without any liability whether to honor the sublease or
otherwise (except to credit such payments against sums due under the Lease); and
any subtenant shall at Landlord's option agree to attorn to Landlord or its
successors and assigns should the Lease be terminated for any reason,
voluntarily, or otherwise, except that in no event shall Landlord or its
successors or assigns be obligated to accept such attornment, (ii) any such
Transfer and consent shall be effected on forms, the form and substance of which
will be supplied or approved by Landlord; and (iii) Landlord may require that
Tenant not then be in default hereunder in any respect.
10.2 The parties acknowledge that Landlord's economic stake in the
Building housing the Premises is significantly greater than Tenant's
economic stake in this Lease or in the Premises, and that Tenant has
not leased the Premises to make a profit on transferring the same, but
solely to occupy the same. Accordingly, the parties have expressly
bargained for the following allocation of any consideration to be
derived by Tenant from any Transfer of this Lease. Tenant shall be
required to pay Landlord fifty percent (50%) of any rent, key money,
transfer consideration, or other premiums of any kind or nature on the
Transfer in excess of the rental and other charges dues under this
Lease, whether such premium be in the form of an increased rental, a
lump sum payment in consideration of the Transfer, or consideration of
any other form. If such Transfer pertains to a portion of the Premises
only, any premium shall be computed on the assumption that Tenant's
rental and other sums due hereunder are allocable on a pro rata, per
square foot basis.
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The provisions of this Section shall apply regardless of whether such
Transfer is made in compliance with the provisions of this Lease. Any payments
made to Landlord pursuant to this Section shall not cure any default under this
Lease arising from such Transfer. Tenant shall not artificially structure any
Transfer to reduce the amount payable to Landlord under this Section, nor shall
Tenant take any other steps for the purpose of circumventing its obligation to
pay amounts to Landlord under this Section; in the event that Tenant does same,
the amount payable to Landlord under this Section shall be the amount that would
have been payable to Landlord had same not occurred.
10.3 No Transfer, even with the consent of Landlord, shall result in
Tenant's being released from any of its obligations hereunder.
Landlord's consent to any one Transfer shall apply only to the specific
transaction thereby authorized and such consent shall not be construed
as a waiver of the duty of Tenant or any Transferee to obtain
Landlord's consent to any other or subsequent Transfer or as modifying
or limiting Landlord's rights hereunder in any way. Landlord's
acceptance of rent directly from any assignee, subtenant or other
Transferee shall not be construed as Landlord's approval or consent
thereto nor Landlord's agreement to accept the attornment of any
subtenant in the event of any termination of this Lease. In no event
shall Landlord's enforcement of any provision of this Lease against a
Transferee be deemed a waiver of Landlord's right to enforce any term
of this Lease against Tenant or other person.
10.4 If Tenant is a corporation, an unincorporated association or a
partnership, any cumulative Transfer, of any stock or interest in such
corporation, association or partnership greater than twenty-five
percent (25%) then of, or any cumulative Transfer (other than in the
ordinary course of business) of any assets of such corporation,
association or partnership greater than twenty-five percent (25%)
thereof, shall be deemed an assignment within the meaning and
provisions of this Section and shall be subject to the provisions
hereof; provided, however, that the foregoing shall not apply to
corporations, fifty percent (50%) or more of the stock of which is
traded through a national or regional exchange or over-the-counter.
10.5 Notwithstanding any of the foregoing provisions, covenants and
conditions to the contrary, in the event that this Lease is assigned to
any person or entity pursuant to the provisions of the Bankruptcy Code,
11 U.S.C. 101 et seq (the "Bankruptcy Code"), any and all monies or
-- ---
other consideration payable or otherwise to be delivered in connection
with such assignment shall be paid or delivered to Landlord, shall be
and remain the exclusive property of Landlord and shall not constitute
property of Tenant or of the estate of Tenant within the meaning of the
Bankruptcy Code. Any and all monies or other consideration constituting
Landlord's property under the preceding sentence not paid or delivered
to Landlord shall be held in trust for the benefit of Landlord and
shall promptly be paid to or turned over to Landlord. If Tenant
proposes to assign this Lease pursuant to the provisions of the
Bankruptcy Code to any person or entity who shall have made a bona fide
offer to accept an assignment of this Lease on terms acceptable to
Tenant, then notice of such proposed assignment setting forth (i) the
name and address of such person (ii) all of the terms and conditions of
such offer, (iii) the adequate assurance provided by Tenant to assure
such person's future performance under this Lease, including without
limitation, the assurance referred to in Section 365 of the Bankruptcy
Code, or any such successor or substitute legislation or rule thereto,
shall be given to Landlord by Tenant no later than twenty (20) days
after receipt by Tenant, but in any event no later than ten (10) days
prior to the date that Tenant shall make application to a court of
competent jurisdiction for authority and approval to enter into such
assignment and assumption. Landlord shall thereupon have the prior
right and option, to be exercised by notice to Tenant given at any time
prior to the effective date of such proposed assignment, to accept an
assignment of this Lease upon the same terms and conditions and for the
same consideration, if any, as the bonafide offer made by such person,
less any brokerage commissions which may be payable out of the
consideration to be paid by such person for the assignment of this
Lease. Any person or entity to which this Lease is assigned pursuant to
the provisions of the Bankruptcy Code shall be deemed without further
act or deed to have assumed all of the obligations arising under this
Lease on and after the date of such assignment. Any such assignee shall
upon demand execute and deliver to Landlord an instrument confirming
such assumption.
11. Waiver; Indemnity
11.1 Notwithstanding any contrary provision herein, and except to the
extent arising from the gross negligence or willful misconduct of
Landlord, Landlord shall not be liable and Tenant hereby waives all
claims against Landlord for any injury or damage to any person or
property or any other loss (including, but not limited to loss of
income), which may be sustained by the persons, goods, wares,
merchandise or property of Tenant, its agent, contractors, employees,
invitees or customers or any other person in or about the Premises, the
Building, or the Project by or from any cause whatsoever, and, without
limiting the generality of the foregoing, whether caused by or
resulting from water leakage of any character from the roof, walk,
windows, basement, or any other portion
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of the Premises, the Building, or the Project, or by fire, steam,
electricity, gas or oil, or by any interruption of utilities or
services, or by any tenant, occupant, or other person, or by any other
cause whatsoever, in, on or about the Premises, the Building or the
Project. Notwithstanding any contrary provision in the Lease, Landlord
shall in no event be liable for consequential damages hereunder.
11.2 Except to the extent that claims arise from the gross negligence or
willful misconduct of Landlord, Tenant shall indemnify Landlord and
hold Landlord harmless from and against any and all claims, demands,
losses, damages, liabilities, costs and expenses (including, but not
limited to, reasonable attorneys' fees) arising from Tenant's use or
enjoyment of the Project, from the conduct of Tenant's business, from
any act or omission, work or thing done, permitted or suffered by
Tenant (or any officer, employee, agent, contractor, representative,
licensee, guest, invitee or visitor thereof) in or about the Project,
or from any default under this Lease by Tenant. If any action or
proceeding is brought against Landlord by reason of any such matter,
Tenant shall, upon notice from Landlord, defend same at Tenant's
expense by counsel satisfactory to Landlord. Tenant, as a material part
of the consideration to Landlord, hereby assumes all risk of damage to
property of Tenant, or injury to persons in or about the Premises,
except to the extent arising from gross negligence or willful
misconduct of Landlord, and Tenant hereby waives all claims in respect
thereof against Landlord. The provision of this Section shall survive
the expiration or termination of this Lease with respect to any claims
or liability arising from events occurring prior to such expiration or
termination.
12. Insurance
12.1 Throughout the term hereof, Tenant shall carry and maintain, at its
own expense, the following types, amounts and forms of insurance.
12.1.1 Tenant shall carry and maintain a policy of commercial general
liability if insurance in the name of Tenant (with Landlord and, if
requested by Landlord, any mortgagee, trust deed holder, ground
lessor or secured party with an interest in this Lease, the
Building, or the Project named as an additional insured). Such
policy shall specifically include, without limitation, personal
injury, broad form property damage, and contractual liability
coverage, the last of which shall cover the insuring provisions of
this Lease and the performance of Tenant of the indemnity agreements
in Section 11 above. Such policy shall provide coverage on an
occurrence basis. The minimum limits of liability shall not be less
than the amounts specified in Section 1.1.9. The amount of such
insurance required here under shall be subject to adjustment from
time to time as reasonably requested by Landlord.
12.1.2 Tenant shall carry and maintain a policy or policies of
property insurance in the name of Tenant (with Landlord and, if
requested by Landlord, any mortgagee, trust deed holder, ground
lessor or secured party with an interest in this Lease, the Building
or the Project named as additional insured) covering Leasehold
improvements, including without limitation any improvements made to
the Premises by Landlord for the benefit of Tenant, and any property
of Tenant at the Premises and providing protection against all
perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, special extended peril (all
risk) and sprinkler leakage, in an amount equal to at least one
hundred percent (100%) of the replacement cost thereof from time to
time (including without limitation, cost of debris removal). Any
proceeds from such insurance shall be used for the repair or
replacement of the property damaged or destroyed, unless this Lease
is terminated pursuant to the provisions hereof. If the Premises are
not repaired or restored following damage or destruction, Landlord
shall receive any proceeds from such insurance allocable to Tenant's
leasehold improvements.
12.1.3 Tenant shall carry and maintain a policy or policies of
worker's compensation and employer's liability insurance in
compliance with all applicable laws.
12.1.4 Tenant shall carry and maintain such other policies of
insurance (including without limitation, business interruption or
rental income insurance) in connection with the Premises as Landlord
may from time to time require.
12.1.5 All of the policies required to be obtained by Tenant pursuant
to the provisions of this Section 12.1 shall be issued by companies
and shall be in the form and content acceptable to Landlord. Without
limiting the generality of the foregoing, any deductible amounts
under said policies shall be subject to Landlord's approval. Each
policy shall designate Landlord as an
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additional insured and shall provide full coverage in the amounts
set forth herein. Although named as an additional insured, Landlord
shall be entitled to recover under said policies for any loss
occasioned to it, its servants, agents and employees, by reason of
the negligence of Tenant.
Tenant shall, prior to delivery of the Premises by Landlord to Tenant,
provide Landlord with copies of and certificates for all insurance policies. All
insurance policies shall provide that they may not be modified or canceled until
after thirty (30) days written notice to Landlord (by any means described in
Section 27 below) and to any other additional insureds thereunder. Tenant shall,
at least thirty (30) days prior to the expiration of any of such policies,
furnish Landlord with a renewal or binder therefor.
Tenant may carry insurance under a so-called "blanket" policy, provided
that such policy provides that the amount of insurance required hereunder shall
not be prejudiced by other losses covered thereby. All insurance policies
carried by Tenant shall be primary with respect to, and non-contributory with,
any other insurance available to Landlord.
If Tenant fails to carry any insurance policy required hereunder or to
furnish copies thereof and certificates therefor pursuant hereto, Landlord may,
without waiving Tenant's default, upon notice, obtain such insurance, and Tenant
shall reimburse Landlord for the costs thereof with the next monthly rental
payments due hereunder.
12.2 During the term of this Lease, landlord shall keep and maintain
property insurance for the Project in such reasonable amounts, and with
such reasonable coverages, as would be carried by a prudent owner of a
similar building in the city where the Building is located, or as any
lienholder may require. Tenant acknowledges that it shall not be a
named insured in such policies and that it has no right to receive any
proceeds from any such insurance policies carried by Landlord.
Notwithstanding any contrary provision herein, Landlord shall not be
required to carry insurance covering the property described in Section
12.1.2 above or covering flood or earthquake.
12.3 Each party hereto hereby waives any and all rights to recover
against the other party, or against the officers, employees or
principals thereof, for loss or damage arising from any peril insured
against under any property or worker's compensation insurance policy
required to be carried by such waiving party pursuant to the provisions
of this Lease. To the extent reasonably available, each such policy
shall be endorsed to reflect the foregoing.
12.4 Tenant shall pay any increases in insurance premiums relating to
property in the Project other than the Premises to the extent that any
such increase is specified by the insurance carrier as being caused by
Tenant's acts or omission or use or occupancy of the Premises.
13. Service and Utilities
13.1 Subject to the provisions contained elsewhere herein and to the
rules and regulations of the Building, Landlord shall cause to be
furnished to the Premises electricity, together with heating,
ventilating and air conditioning ("HVAC"), required in Landlord's
reasonable judgment for the comfortable use and occupation of the
Premises (but not in excess of such utilities and services which are
customarily furnished in comparable office buildings in the immediate
market area), during the business hours of the Building, which shall
initially be 7:00 A.M. to 6:00 P.M., Monday through Friday, except for
holidays determined by Landlord from time to lime, and janitorial
services during the times and in the manner that such services are
customarily furnished in comparable office buildings in the immediate
market area. Landlord shall, at Tenant's request, provide after-hours
HVAC to the Premises, provided that Tenant shall pay to Landlord a
charge therefor as reasonably determined by landlord from time to time.
Tenant shall notify Landlord in advance prior to noon on any business
day of Tenant's after-hour HVAC requirements. Tenant shall keep and
cause to be kept closed all window coverings when necessary because of
the sun's position, and Tenant shall at all times cooperate fully with
Landlord and abide by all the regulations and requirements which
Landlord may prescribe for the proper functioning and protection of the
heating, ventilating and air conditioning system. If any heat-
generating machines, excess lighting or equipment used in the Premises
affects the temperature otherwise maintained by the air conditioning
system for the Premises and the Building, or requires additional
cooling for its operation, Landlord may install supplementary air
conditioning for the Premises, and the cost thereof (including, but not
limited to, the cost of installation, operation and maintenance
thereof) shall be paid by Tenant to Landlord upon demand by Landlord.
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13.2 Tenant shall not, without the prior written consent of Landlord,
use in the Premises any apparatus, device, machine or equipment using
excess righting, electricity or water, nor shall Tenant connect any
apparatus or device to sources of electrical current or water except
through existing electrical outlets or water pipes in the Premises. If
Tenant shall require excess electricity or any other resource in excess
of that customarily supplied for use of similar premises, in comparable
office buildings in the area of the Project, Tenant shall first request
the consent of Landlord. In the event that Landlord gives its consent,
Tenant may cause a separate metering device to be installed in the
Promises. The cost of any such separate metering device including, but
not limited to, the cost of installation, maintenance and repair
thereof shall be paid by Tenant. Tenant shall promptly pay the cost of
all excess resources consumed within the Premises, together with any
additional administrative expense incurred by Landlord in connection
therewith. For purposes of the foregoing, excess electricity shall be
deemed to consist of any amount in excess of 2.5 kilowatt hours at 277
volts per rentable square foot on an annualized basis for fluorescent
lighting and 2.5 kilowatt hours at 120 volts per rentable square foot
on an annualized basis for convenience power.
13.3 Landlord shall not be in default hereunder or be liable for any
damages directly or indirectly resulting from any interruption of
utilities or services caused by (i) the installation or repair of any
equipment in connection with the furnishing of utilities or services,
(ii) acts of God or the elements, labor disturbances of any character,
any other accidents or any other conditions beyond the reasonable
control of Landlord, or by the making of repairs or improvements to the
Premises or the Project, or (iii) the limitation, curtailment,
rationing or restriction imposed by any governmental agency or service
or utility supplier on use of water or electricity, gas or any other
form of energy or any other service or utility whatsoever serving the
Premises or the Project. Furthermore, Landlord shall be entitled,
without any obligation or compensation to Tenant, to cooperate
voluntarily in a reasonable manner with the efforts of national, state
or local governmental agencies or service or utility suppliers in
reducing energy or other resource consumption. If Landlord shall so
cooperate, Tenant shall also reasonably cooperate therewith.
13.4 Any sums payable under this Section 13 shall be considered
Additional Rent and may be added to any installment of rent thereafter
becoming due, and Landlord shall have the same remedies for a default
in payment of such sums as for a default in the payment of rent.
14. Estoppel Certificate
14.1 Within ten (10)days after any written request which Landlord may
make from time to time, Tenant shall execute and deliver to Landlord a
certificate (the "Certificate") substantially in the form attached
hereto as Exhibit "D" and hereby made a part hereof, together with such
financial information relating to Tenant or any guarantor as Landlord
or any prospective purchaser or lender may reasonably request. Landlord
shall have the right to amend or otherwise supplement the Certificate
to include such other information and provisions as may be reasonably
requested by any existing or prospective lender or by any prospective
purchaser. Any failure by Tenant to so execute and deliver the
Certificate shall, at Landlord's election, constitute a certification
by Tenant that the statements which may be included in the Certificate
(as same may have been so amended or supplemented) are true and
correct, except as Landlord shall otherwise indicate. Landlord and
Tenant intend that the Certificate may be relied upon by any existing
or prospective lender or by any prospective purchaser. Tenant hereby
acknowledges that any failure by it to execute and deliver the
Certificate would likely result in Landlord's incurring substantial
consequential damages.
15. Holding Over
15.1 If Tenant, with Landlord's written consent, remains in possession
of all or any portion of the Premises after the expiration or sooner
termination of the term hereof, such holding over shall constitute and
be construed as a tenancy from month-to-month only, upon such terms and
conditions hereof as may reasonably and logically be construed as
applying thereto; provided, however, that during such holding over,
Base Rent and any parking charges shall be two hundred percent (200%)
of the Base Rent and parking charges in effect immediately prior to
such expiration or termination, and any and all options or other
preferential rights of Tenant shall be deemed to have lapsed and to be
of no further force or effect. Landlord may terminate such tenancy from
month to month by giving to Tenant written notice of termination at
least twenty-five (25) days prior to the end of the rental month.
Acceptance by Landlord of any rent after such expiration or termination
shall not be deemed to constitute Landlord's consent to such holding
over.
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16. Subordination; Requirements of Lenders
16.1 Without the necessity of any additional document being executed by
Tenant for the purpose of effecting a subordination, this Lease shall
be subject and subordinate at all times to (a) all ground leases or
underlying leases which may now exist or hereafter be executed
affecting all or any portion of the Project and (b) the lien of any
mortgage or deed of trust which may now exist or hereafter be executed
affecting all or any portion of the Project.
Notwithstanding the foregoing, Landlord shall have the right to
subordinate or cause to be subordinated any such ground leases or underlying
leases or any such liens to this Lease. If any ground lease or underlying lease
terminates for any reason or any mortgage or deed of trust is foreclosed or a
deed in lieu of foreclosure is made for any reason, then at the election of such
ground lessor or mortgagee or beneficiary, Tenant shall, notwithstanding any
subordination, attorn to and become the Tenant of the successor-in-interest at
the option of such successor-in-interest. It shall be a condition to any future
subordination of the Lease that the ground lessor or mortgagee or beneficiary
requesting such subordination shall agree that so long as Tenant is not in
default under this Lease, Tenant's possession of the Premises shall not be
disturbed as a result of such termination, foreclosure or deed in lieu of
foreclosure. Tenant shall execute and deliver, upon demand by Landlord and in
the form requested by Landlord, any additional documents evidencing the priority
or subordination of this Lease and the attornment of Tenant with respect to any
such ground leases or underlying leases or the lien of any such mortgage or deed
of trust. Tenant hereby irrevocably appoints Landlord as attorney-in-fact of
Tenant to execute, deliver and record any such documents in the name and on
behalf of Tenant if Tenant fails to do same pursuant to the foregoing.
16.2 If, in connection with the obtainment of financing for the Project
or any portion thereof, the lender requests reasonable modifications of
this Lease as a condition to the furnishing of such financing, Tenant
shall not unreasonably withhold or delay its consent thereto, provided
that such modifications do not increase the obligations of Tenant
hereunder or materially adversely affect Tenant's rights hereunder.
17. Observance of Rules and Regulations
Tenant shall observe and comply with the rules and regulations set forth in
Section 39 below and any and all reasonable modifications thereof and additions
thereto from time to time established by Landlord. Landlord shall not be
responsible for the non-observance of, or noncompliance with, any of said rules
and regulations by any other tenant or occupant of the Building. In the event of
any conflict between said rules and regulations and other provisions hereof, the
latter shall control.
18. Access by Landlord
Landlord reserves, and Landlord (and its agents, contractors and employees)
shall at reasonable times have, the right to enter the Premises to inspect same,
to supply janitorial services and any other service to be provided by Landlord
to Tenant hereunder, to show the Premises to any prospective purchaser,
beneficiary, mortgagee, or, during the last six (6) months of the term hereof to
prospective tenants, and to make any alteration, improvement or repair to the
Premises or any portion of the Building, or Project, without abatement of rent,
and Landlord may for that purpose erect, use and maintain scaffolding, pipes,
conduits and other necessary structures in and through the Premises where
reasonably required by the character of the work to be performed, provided that
entrance to the Premises shall not be blocked thereby, and provided further that
Landlord shall use reasonable efforts to minimize any interference with Tenant's
use of and access to the Premises resulting from the foregoing. Tenant hereby
waives any claim for damages or abatement of rent for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the Premises, and any other loss occasioned thereby,
except to the extent arising from the gross negligence or willful misconduct of
Landlord. For each of the aforesaid purposes, Landlord shall at all times have
and retain a key with which to unlock all of the doors in, upon and about the
Premises, excluding Tenant's vaults and safes, and Landlord shall have the right
to use any and all means which Landlord may deem necessary or proper to open
said doors in an emergency, in order to obtain entry to any portion of the
Premises, and any entry to the Premises or portions thereof obtained by Landlord
by any such means or otherwise shall not under any circumstances be construed or
deemed to be a forcible or unlawful entry into, or a detainer of, the Premises,
or an eviction, actual or constructive, of Tenant from the Premises or any
portion thereof.
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Landlord shall also have the right at any time, without same constituting
an actual or constructive eviction and without incurring any liability to Tenant
therefor, to change the arrangement and/or location of entrances or passageways,
doors and doorways, and corridors, elevators, stairs, toilets or other public
parts of the Building, provided that Landlord shall use reasonable efforts to
minimize any interference with Tenant's use of and access to the Premises
resulting from the foregoing.
19. Default by Tenant
The occurrence of any of the following shall constitute a breach of and
default under this Lease by Tenant:
19.1 Failure by Tenant to pay any amount (including, without limitation,
monthly installments of Base Rent and Additional Rent) when and as same
become payable in accordance with the provisions of this Lease, or to
duly, promptly and completely perform any obligation of Tenant under
Section 14 or 16 above, and continuation of such failure for a period
of three (3) days after written notice from Landlord to Tenant
specifying the nature of such failure.
19.2 Failure by Tenant in the due, prompt and complete performance or
observance of any other express or implied covenant, agreement or
obligation of Tenant contained in this Lease, and the continuation of
such failure for a period often (10) days after written notice from
Landlord to Tenant specifying the nature of such failure; provided,
however, that if any such failure not involving a hazardous condition
is curable, but cannot reasonably be cured within such period, Tenant
shall not be deemed to be in default hereunder if Tenant promptly
commences such cure within such period and thereafter diligently
pursues such cure to completion within a reasonable time, but in no
event more than thirty (30) days after such notice.
19.3 Tenant's vacating or abandoning of the Premises.
19.4 Any financial statement or any representation given to Landlord by
Tenant, or any assignee, sublessee, other transferee or successor of
Tenant or any guarantor of this Lease, proves to be materially false or
misleading.
19.5 The insolvency of Tenant, the making by Tenant of any assignment
for the benefit of creditors; the filing by or against Tenant of a
petition to have Tenant adjudged bankrupt or of a petition for
reorganization or arrangement under any law relating to bankruptcy,
insolvency or creditor's rights in general (unless in the case of a
petition filed against Tenant, the same is dismissed within sixty (60)
days); the appointment of a trustee or receiver to take possession of
all or a substantial part of Tenant's assets or of Tenant's interest
under this Lease, where such seizure is not discharged within thirty
(30) days. The occurrence of any of the acts or events referred to in
this subsection with respect to any guarantor of this Lease shall also
constitute a default hereunder.
19.6 The attachment, execution or other judicial seizure of a
substantial portion of Tenant's assets or of Tenant's interest in this
Lease, where such seizure is not discharged within thirty (30) days.
20. Remedies of Landlord
20.1 In the event of Tenant's breach of or default under this Lease as
provided in Section 19 above, Landlord, at Landlord's option, and
without limiting Landlord in the exercise of any other right or remedy
Landlord may have on account of such default, and without any further
demand or notice, may terminate this Lease and/or, to the extent
permitted by law, remove all persons and property from the Premises,
which property shall be stored by Landlord at a warehouse or elsewhere
at the risk, expense and for the account of Tenant.
20.2 If Landlord elects to terminate this Lease as provided in Section
20.1 above, Landlord shall be entitled to recover from Tenant the
aggregate of:
20.2.1 The worth at the time of the award of the unpaid rent and charges
equivalent to rent earned as of the date of the termination hereof;
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20.2.2 The worth at the time of award of the amount by which the future
rent and charges equivalent to future rent and other amounts due
hereunder which would have been earned after the date of termination
hereof until the time of the award exceeds the amount of such rental
loss that Tenant proves could have been reasonably avoided;
20.2.3 The worth at the time of the award of the amount by which the
future rent and charges equivalent to future rent for the balance of
the term hereof after the time of the award exceeds the amount of
such rental loss that Tenant proves could have been reasonably
avoided;
20.2.4 Any other amount necessary to compensate Landlord for the
detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which, in the ordinary course of
things, would be likely to result therefrom; and,
20.2.5 Any other amount which Landlord may hereafter be permitted to
recover from Tenant to compensate Landlord for the detriment caused
by Tenant's default.
For the purposes of this Section, the "time of the award" shall mean
the date upon which the judgement in any action brought by Landlord against
Tenant by reason of such default is entered or such earlier date as the court
may determine; the "worth at the time of award" of the amounts referred to in
Sections 20.2.1 and 20.2.2 shall be computed by allowing interest at the
Interest Rate, but not less than the legal rate; and the "worth at the time of
award" of the amount referred to in Section 20.2.3 shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of the award plus one percent (1%) per annum.
20.3 Nothing in this Section 20 shall be deemed to affect Landlord's
right to indemnification, under the indemnification clause or clauses
contained in this Lease for claims or liability arising from events
occurring prior to the termination of this Lease.
20.4 Notwithstanding anything to the contrary set forth herein,
Landlord's reentry to perform acts of maintenance or preservation of,
or in connection with efforts to relet, the Premises, or any portion
thereof, or the appointment of a receiver upon Landlord's initiative to
protect Landlord's interest under this Lease shall not terminate
Tenant's right to possession of the Premises or any portion thereof
and, until Landlord does elect to terminate this Lease, this Lease
shall continue in full force and Landlord may pursue all its remedies
hereunder including, without limitation, the right to recover from
Tenant as they become due hereunder all rent and other charges required
to be paid by Tenant under the terms of this Lease.
20.5 In the event of any default by Tenant as set forth above, then in
addition to any other remedies available to Landlord at law or in
equity or under this Lease, Landlord shall have the right to bring an
action or actions from time to time against Tenant, in any court of
competent jurisdiction, for all rental and other sums due or becoming
due under this Lease, including all damages and costs proximately
caused thereby, notwithstanding Tenant's abandonment or vacation of the
Premises or other acts of Tenant. Such remedy may be exercised by
Landlord without prejudice to its right to thereafter terminate this
Lease in accordance with the other provisions contained in this Section
20.
20.6 The term "rent" and "rental" as used in this Section 20 and in any
and all other provisions of this Lease, shall mean Base Rent,
Additional Rent and any and all other amounts payable by Tenant
pursuant to the provisions of this Lease.
20.7 In the event of Tenant's abandonment of the Premises or if Landlord
shall elect to reenter or shall take possession of the Premises
pursuant to any legal proceeding or pursuant to any notice provided by
law, and until Landlord elects to terminate this Lease, Landlord may,
from time to time, without terminating this Lease, recover all rental
as it becomes due under Section 20.5 above and/or relet the Premises or
any part thereof for the account of and on behalf of Tenant, on any
terms, for any term (whether or not longer than the term of this Lease)
and at any rental as Landlord in its reasonable discretion may deem
advisable, and Landlord may make any alterations and repairs to the
Premises in connection therewith. Tenant hereby irrevocably constitutes
and appoints Landlord as its special attorney-in-fact, irrevocable and
coupled with an interest, for purposes of reletting the Premises
pursuant to the immediately preceding sentence. In the event that
Landlord shall elect to so relet the Premises on behalf of Tenant, then
rentals received by Landlord from such reletting shall be applied:
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20.7.1 First, to reimburse Landlord for the costs and expenses of such
reletting (including, without limitation, costs and expenses or
retaking or repossessing the Premises, removing persons and property
therefrom, securing new tenants, and, if Landlord shall maintain and
operate the Premises, the costs thereof) and necessary or reasonable
alterations.
20.7.2 Second, to the payment of any indebtedness of Tenant to Landlord
other than Base Rent, adjustments to Base Rent, Additional Rent and
other sums due and unpaid hereunder.
20.7.3 Third, to the payment of rent, Base Rent, Additional Rent and
other sums due and unpaid hereunder, and the residue, if any, shall
be held by Landlord and applied in payment of other or future
obligations of Tenant to Landlord as the same may become due and
payable.
Should the rentals received from such reletting, when applied in the
manner and order indicated above at any time be less than the total amount owing
from Tenant pursuant to this Lease, then Tenant shall pay such deficiency to
Landlord and if Tenant does not pay such deficiency within five (5) days of its
receipt of written notice, Landlord may bring an action against Tenant for
recovery of such deficiency or pursue its other remedies hereunder.
20.8 All rights, powers and remedies of Landlord hereunder and under any
other agreement now or hereafter in force between Landlord and Tenant
shall be cumulative and not alternative and shall be in addition to all
rights, powers and remedies given to Landlord at law or in equity. The
exercise of any one or more of such rights or remedies shall not impair
Landlord's right to exercise any other right or remedy.
20.9 As security for Tenant's performance and satisfaction of each and
every one of its duties and obligations under this Lease, Tenant does
hereby assign and grant to Landlord a security interest under the
Hawaii Commercial Code in and to Tenant's right, power and authority,
during the continuance of this Lease, to receive the Tenants' share of
rents, issues, profits or other payments received under any sublease or
other transfer of part or all of Tenant's interest in the Premises,
reserving unto Tenant the right prior to any default hereunder to
collect and retain the Tenant's share of said rents, issues and profits
as they become due and payable, except that nothing contained herein
shall be construed to alter the provisions of Section 10 above. Upon
any such default, Landlord shall have the right at any time thereafter,
without notice (except as may be provided for herein), either in
person, by agent or receiver to be appointed by a court, to enter and
take possession of the Premises and collect such Tenant's share of such
rents, issues, profits or other payments, including without limitation
those past due and unpaid, and apply same, less court costs and
expenses of collection, including without limitation reasonable
attorneys' fees upon any indebtedness secured hereby and in such order
as Landlord may determine.
20.10 If, after Tenant's abandonment of the Premises, Tenant leaves behind
any items of personal property, then Landlord shall store such property
at a warehouse or any other location at the risk, expense and for the
account of Tenant, and such property shall be released only upon
Tenant's payment of any and all moving and storage charges, as well as
any expense or damages incurred as a result of the removal, moving and
storage of such property, together with all sums due and owing under
this Lease. If Tenant does not reclaim such property within the period
permitted by law, Landlord may sell such property in accordance with
law and apply the proceeds of such sale to any sums due and owing
hereunder, or retain said property, granting Tenant credit against sums
due and owing hereunder for the reasonable value of such property.
20.11 To the extent permitted by law, Tenant hereby waives all provisions
of, and protection under, any decisions, statutes, rules, regulations
and other laws of the State of Hawaii to the extent same are
inconsistent and in conflict with specific terms and provisions hereof.
If, at any time during the term hereof, Tenant fails, refuses or
neglects to do any of the things provided to be done by Tenant, Landlord may,
after notice (except in the event of emergency), do the same, but at the expense
and for the account of Tenant. The amount of any money so expended or
obligations so incurred by Landlord, together with interest thereon at the
Interest Rate, shall be repaid to Landlord within five (5) days after demand by
Landlord.
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21. Default by Landlord; Limitation of Liability
21.1 Landlord shall not be deemed to be in default hereunder unless
obligations required by Landlord hereunder are not performed by
Landlord, or by any beneficiary under any deed of trust, mortgagee,
ground lessor or other lienholder with rights in all or any portion of
the Project, within thirty (30) days after written notice thereof by
Tenant to Landlord and to such other parties whose names and addresses
are furnished to Tenant in writing, which notice specifies that there
has been a failure to perform such obligation provided, however, that
if the nature of such obligations is such that more than thirty (30)
days are reasonably required for their cure, Landlord shall not be
deemed to be in default hereunder if Landlord or any such other
party(s) commences such cure within such thirty (30) day period and
thereafter diligently pursues such cure to completion.
21.2 If Landlord is in default hereunder and, as a consequence thereof,
Tenant recovers a judgment against Landlord, such judgment may be
satisfied only out of the right, title and interest of Landlord in the
Project and out of the rent or other revenue receivable by Landlord
from the Project, or out of the proceeds receivable by Landlord from
the sale or other disposition of all or any portion of Landlord's
right, title and interest in the Project. Neither Landlord nor any of
the partners of Landlord shall be personally liable for any deficiency
or otherwise.
22. Damage and Destruction
22.1 If the Premises or the Project is damaged by an insured casualty,
occurring more than six (6) months prior to the expiration of the term
hereof, Landlord shall forthwith repair same, or cause same to be
repaired, to the extent that insurance proceeds are made available to
Landlord therefor and provided that such repairs can, in Landlord's
reasonable opinion, be made within ninety (90) from the date of such
damage (without payment of overtime or other premiums) under the laws
and regulations of the federal, state and local governmental
authorities having jurisdiction thereof.
If the Premises or the Project is damaged by an uninsured casualty which
shall cost more than $100,000 to repair, or if with respect to an insured
casualty the repairs shall require more than ninety (90) days to complete
without payment of overtime or other premium, or if the Premises or the Project
is damaged by casualty within the last six (6) months of the term and cost in
excess of $ I00,000 to repair, Landlord shall have the option within forty-five
(45) days from the date of such damage either to (i) notify Tenant of Landlord's
election to repair such damage, in which event Landlord shall thereafter repair
same, or (ii) notify Tenant of Landlord's election to immediately terminate this
Lease, in which event the Lease shall be so terminated. Landlord shall refund to
Tenant any rent previously paid for any period of time subsequent to such
termination. Notwithstanding any contrary provision herein, and regardless of
whether caused by casualty, (a) Landlord shall not be required to repair any
damage to the property of Tenant or to repair or replace any paneling,
decorations, railings, floor coverings, alterations, additions, fixtures or
improvements installed on the Premises by or at the expense of Tenant, and (b)
any damage caused by the negligence or willful misconduct of Tenant or any of
its agents, contractors, employees or invitees shall be promptly repaired by
Tenant, at its sole cost and expense, to the reasonable satisfaction of
Landlord; provided, however, that Landlord shall bear such cost and expense to
the extent it receives proceeds covering such damage from insurance obtained by
Landlord as part of Building Operating Costs.
22.2 If Landlord repairs damage to the Premises pursuant to the
provisions of Section 22. l above, Base Rent and Additional Rent
payable hereunder until such repairs are completed shall be abated in
the proportion that the rentable area of the portion, if any, of the
Premises rendered unusable by Tenant (and therefore not used) bears to
the rentable area of the Premises; provided, however, that there shall
be such rent abatement only if (i) the damage so repaired is not caused
by the negligence or willful misconduct of Tenant or any of its agents,
contractors, employees, guests or invitees, and (ii) a material portion
of the Premises is so rendered unusable for more than five (5)
consecutive business days. Except for abatement of rent, if any, Tenant
shall have no claim against Landlord for any damage suffered by reason
o(Pounds) (1) any damage to the Premises, (2) such repairs or (3) any
inconvenience, interruption, annoyance, loss of business, or continued
expense of operation caused by such damage or repair.
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23. Eminent Domain
23.1 If the entire Premises or so much thereof as to render the balance
thereof not reasonably usable for the conduct of Tenant's business,
shall be taken or appropriated under the power of eminent domain or
conveyed in lieu thereof, either party hereto may, by serving written
notice upon the other party hereto within thirty (30) days thereafter,
immediately terminate this Lease. If any such substantial part of the
Project excluding the Premises shall be taken or appropriated under the
power of eminent domain or conveyed in lieu thereof, Landlord may so
terminate this Lease. In either of such events, Landlord shall receive
(and Tenant shall assign to Landlord upon demand by Landlord) any
income, rent, award or any interest therein which may be paid in
connection therewith, and Tenant shall have no claim for any part of
any sum so paid, whether or not attributable to the value of the
unexpired term of this Lease; provided, however, that nothing herein
shall prevent Tenant from pursuing a separate award in connection with
the taking of Tenant's removable tangible personal property placed in
the Premises solely at Tenant's expense and for Tenant's relocation
costs.
If a part of the Premises shall be so taken, appropriated or conveyed and
neither party hereto shall elect to so terminate this Lease, (i) Base Rent and
Additional Rent payable hereunder shall be abated in the proportion that the
rentable area of the Premises so taken, appropriated or conveyed beats to the
rentable area of the entire Premises, and (ii) if the Premises shall have been
damaged as a consequence of such partial taking, appropriation or conveyance,
Landlord shall, to the extent of any severance damages received by Landlord,
restore the Premises continuing under this Lease, provided, however, that
Landlord shall not be required to repair or restore any damage to the property
of Tenant or to make any repairs to or restoration of any alterations,
additions, fixtures or improvements installed on the Premises by or at the
expense of Tenant, and Tenant shall pay any amount in excess of such severance
damages required to complete such repairs or restoration.
Notwithstanding anything to the contrary contained in this Section, if the
temporary use or occupancy of any part of the Premises shall be taken or
appropriated under the power of eminent domain or conveyed in lieu thereof
during the term of this Lease, this Lease shall be and remain unaffected by such
taking, appropriation or conveyance and Tenant shall continue to pay in full all
rent payable hereunder by Tenant during the term of this Lease. In the event of
any such temporary taking, appropriation or conveyance, Tenant shall be entitled
to receive that portion of any award which represents compensation for loss of
the use or occupancy of the Premises during the term of this Lease, and Landlord
shall be entitled to receive the balance of such award.
24. Sale by Landlord
If Landlord sells or transfers all or any portion of the Project including
the Premises, Landlord shall, upon consummation of the sale or transfer, be
released from any liability relating to obligations or covenants thereafter to
be performed or observed under this Lease, and in such event Tenant agrees to
look solely to Landlord's successor-in-interest with respect to such liability.
Landlord may transfer or credit any security deposit or prepaid rent to
Landlord's successor-in-interest, and upon such transfer Landlord shall be
discharged from any further liability therefor.
25. Surrender of Premises
Tenant shall upon the expiration or sooner termination of the term hereof,
surrender to Landlord the Premises, and all repairs, changes, alterations,
additions and improvements thereto, in good order, condition and repair,
ordinary wear and tear excepted, clean and free of debris provided, however,
that Landlord may require that Tenant remove any changes, alterations, additions
and improvements to the Premises installed by Tenant upon such expiration or
termination, in which event Tenant shall so remove same and restore the Premises
to its former state at its sole cost and expense. Tenant shall, upon the
expiration or sooner termination of the term hereof, and at Tenant's sole cost
and expense, remove all movable furniture, equipment and other personal property
belonging to Tenant placed in the Premises solely at Tenant's expense, Tenant
shall immediately, at its sole cost and expense, repair any damage caused by the
removal of any property.
26. Quiet Enjoyment
So long as Tenant is not in default hereunder, Tenant shall have the right
to the quiet peaceful enjoyment and possession of the Premises and the common
areas during the term of this Lease, subject to the terms and conditions of this
Lease.
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27. Notices
Whenever any notice, demand or other communication is to be given under the
provisions of this Lease by either party hereto to the other party hereto, it
shall be in writing and shall be (a) personally served, (b) mailed by United
States registered or certified mail, return receipt requested, postage prepaid,
(c) sent by a nationally recognized courier service (e.g. Federal Express) for
next day delivery, to be confirmed in writing by such courier, (d) or "faxed"
with appropriate provisions for confirmation of receipt, addressed as set forth
in Sections 1.1.10 and 1.1.11 of the Basic Lease Information with respect to
Tenant and as follows with respect to Landlord:
Bishop Street Associates
1132 Bishop Street
Suite 1405
Honolulu, Hawaii 96813
Facsimile No. (808) 599-5211
with a copy to:
Monroe & Friedlander Management, Inc.
220 South King Street, Suite 1800
Honolulu, HI 96813
Facsimile No. (808) 545-5689
Attention: Bobbie Lau
In the event that a different address is furnished by either party hereto
to the other party hereto in writing, notices, demands and other communications
shall thereafter be sent or delivered to the new address. Service by mail shall
be deemed complete on the day of actual delivery as shown by the addressee's
registered or certified mail receipt or at the expiration of the third (3rd)
business day after the date of mailing, whichever first occurs. Service by
personal service or courier shall be deemed complete on receipt. Service by
"fax" shall be deemed complete on confirmation of receipt.
28. Personal Property Taxes
Tenant shall pay before delinquency all taxes, assessments, license fees
and other charges (collectively "taxes") that are levied and assessed against
Tenant's trade fixtures and other personal property installed or located in or
on the Premises, and that become payable during the term. On demand by Landlord,
Tenant shall furnish Landlord with satisfactory evidence of such payments. If
any taxes on Tenant's personal property are levied against Landlord or
Landlord's property, or if the assessed value of the Building and other
improvements in which the Premises are located is increased by the inclusion of
a value placed on Tenant's personal property or leasehold improvements, as
determined by Landlord, and if Landlord pays the taxes on any of these items or
the taxes based on the increased assessment of these items, Tenant, on demand,
shall immediately reimburse Landlord for the sum of the taxes levied against
Landlord, or the proportion of the taxes resulting from the increases in
Landlord's assessment. Landlord shall have the right to pay these taxes
regardless of the validity of the levy.
29. Interest and Late Charges
Any amount not paid by Tenant to Landlord when due hereunder shall bear
interest at a rate (the "Interest Rate") equal to the rate specified in Section
1.1.13 of the Basic Lease Information, from the due date until paid, unless
otherwise specifically provided herein, but the payment of such interest shall
not excuse or cure any such failure by Tenant under this Lease. In addition to
such interest, if any amount is not paid within ten (10) days after same is due,
a late charge equal to the amount specified in Section 1.1.13 of the Basic Lease
Information of such amount shall be assessed, which late charge Tenant hereby
agrees is a reasonable estimate of the damages Landlord shall suffer as a result
of Tenant's late payment, which damages include Landlord's additional
administrative and other costs associated with such late payment. The parties
agree that it would be impracticable and extremely difficult to fix Landlord's
actual damages in such event. Such interest and late charges are separate and
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cumulative and are in addition to and shall not diminish or represent a
substitute for any or all of Landlord's rights or remedies under any other
provision of this Lease. If a late charge is payable hereunder, whether or not
collected, for any three (3) installments of Base Rent during any twelve (12)
month period, then all further Base Rent shall automatically become due and
payable quarterly in advance, rather than monthly, notwithstanding any provision
of this Lease to the contrary.
30. Successors and Assigns
Subject to Sections 10 and 24 above, the provisions hereof shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, executors, administrators, successors and assigns.
31. Attorney's Fees
In any litigation arising herefrom between the parties hereto, the
prevailing party shall be entitled to recover reasonable attorney's fees and
costs incurred therein.
32. Light and Air
Tenant covenants and agrees that no diminution of light, air or view by any
structure which may hereafter be erected (whether or not by Landlord) shall
entitle Tenant to any reduction of rent under this Lease, result in any
liability of Landlord to Tenant, or in any other way affect this Lease or
Tenant's obligations hereunder.
33. Signs and Directory
33.1 Tenant shall not, without the prior written consent of Landlord,
place, construct or maintain any sign, advertisement, awning, banner or
other decoration on or visible from, or otherwise use, the exterior or
interior of the Premises (including, but not limited to, the outer
surfaces of the exterior walls and doors of the Premises), any
terraces, the roof of the Building, and the public and common areas of
the Project. All door signs on the corridor doors of the Premises which
lead to the common areas of the Project must conform to standards of
the Project as to size, style, placement, color and number of included
names, and other matters set forth in Section 40 below.
33.2 Landlord shall place, construct and maintain a directory(ies) to be
located in the lobby of the Building and in such other locations, if
any, as Landlord, in its sole discretion, may determine, which
directory(ies) shall be for the display of the business names of
tenants in the Building and their respective suite numbers, provided,
however, that Tenant shall notify Landlord of the business names it
desires to include on such directory and shall, upon demand by
Landlord, pay the cost of directory sign strips bearing such Tenant's
business name. Landlord shall have the sole right to determine and
change from time to time the type of such directory(ies) and such sign
and all common Project signage, including door signs and the contents
thereof, including, but not limited to, size of letters, style, color
and placement.
34. Parking
Subject to applicable rules and regulations, Tenant shall have parking
rights hereunder With respect to such number of its employees' automobiles in
the parking facility of the Building, and at such rental rate(s) and upon such
other terms, as may be specified in Section 1.1.12 of the Basic Lease
Information. All of such parking rights shall be exercised by Tenant throughout
the entire term hereof. Tenant may not sell, assign or transfer its parking
rights hereunder, except pursuant to a permitted sublease or assignment of this
Lease. Except as may otherwise be specifically provided in said Section 1.1.12
or elsewhere in this Lease, Tenant shall not be entitled to any designated,
reserved, assigned or valet parking hereunder. In addition to such rights,
Tenant and its invitees shall have the right to use in common with other tenants
of the Building and their invitees and the general public any portions of the
parking facilities of the Building designated for public use, subject to the
rates, rules and
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regulations, and any other charges, fees and taxes to be collected by Landlord,
for such parking facility use. Landlord reserves the right to establish and
alter, from time to time, all parking rates, rules and regulations, including
the parking rates set forth in Section 1.1.12.
35. Brokers
35.1 Landlord has entered into an agreement with the real estate broker
specified as Landlord's broker in Section 1.1.14 of the Basic Lease
Information ("Landlord's Broker") pursuant to which Landlord has
granted to Landlord's Broker the exclusive right to lease space in the
Building. Landlord shall pay any commissions or fees that are payable
to Landlord's Broker with respect to this Lease in accordance with the
provisions of a separate commission contract. Landlord shall have no
further or separate obligation for payment of commissions or fees to
any other real estate broker, finder or intermediary. Tenant represents
that it has not had any dealings with any real estate broker, finder or
intermediary with respect to this Lease, other than Landlord's Broker
and Tenant's broker ("Tenant's Broker"), if any, specified in Section
1.1.15 of the Basic Lease Information. Any commissions or fees payable
to Tenant's Broker with respect to this Lease shall be paid exclusively
by Landlord's Broker and/or Tenant, and Landlord shall have no
obligation of any kind with respect to such commissions or fees.
Subject to the foregoing, each party hereto shall indemnify and hold
harmless the other hereto from and against all losses, all damages,
liabilities, costs and expenses (including, but not limited to,
reasonable attorneys' fees and related costs) resulting from any claims
that may be assessed against such other party by any real estate
broker, finder or intermediary arising from any act of the indemnifying
party in connection with this Lease.
36. Relocation Right
Landlord may, upon not less than sixty (60) days' prior written notice to
Tenant, substitute for the Premises reasonably similar space elsewhere in the
Building, and this Lease shall be deemed modified so as to eliminate the
Premises hereby leased and to substitute therefor such other premises. In such
event, in all other respects this Lease shall remain in full force and effect
according to its terms. In connection therewith, the costs of preparing such
other premises for Tenant's use shall be borne by Landlord, and any other
Tenant's reasonable costs of moving with respect thereto shall be paid by
Landlord.
37. Authority
If Tenant is a corporation, trust or partnership, each individual executing
this Lease on behalf of Tenant represents and warrants that he or she is duly
authorized to so execute and deliver this Lease. If Tenant is a corporation,
trust or partnership, it shall, within ten (10) days after execution of this
Lease, deliver to Landlord satisfactory evidence of such authority. If Tenant is
a corporation or partnership, it shall, upon demand by Landlord, also deliver to
Landlord satisfactory evidence of (a) good standing in Tenant's state of
incorporation or formation and (b) qualification to do business in Hawaii.
38. Miscellaneous
38.1 If Landlord waives the performance of any term, covenant or
condition contained in this Lease, such waiver shall not be deemed to
be a waiver of any other breach of the same or of any other term,
covenant or condition contained herein. Furthermore, the acceptance of
rent by Landlord shall not constitute 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 rent so accepted,
regardless of Landlord's knowledge of such breach at the time of
Landlord's acceptance of such rent. Failure by Landlord to enforce any
of the terms, covenants or conditions of this Lease for any length of
time shall not be deemed to waive or to affect the right of Landlord to
insist thereafter upon strict performance by Tenant. Waiver by Landlord
of any term, covenant or condition contained in this Lease may only be
made by a written document signed by Landlord.
38.2 Any voluntary or other surrender of this Lease by Tenant, mutual
termination hereof or termination hereof by Landlord shall not work a
merger, and shall, at the option of Landlord, terminate all or any
existing subleases or sub-tenancies, or may, at the option of Landlord,
operate as an assignment to Landlord of any or all such subleases or
sub-tenancies.
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38.3 This Lease shall not be recorded, no memorandum hereof shall be
recorded without Landlord's prior written consent.
38.4 Rent and all other sums payable under this Lease must be paid in
lawful money of the United States of America.
38.5 This Lease may be executed in counterparts with the same effect as
if both parties hereto had executed the same document. Both
counterparts shall be construed together and shall constitute a single
lease.
38.6 Nothing contained in this Lease shall be construed to create the
relationship of principal and agent, partnership, joint venture or any
other relationship between the parties hereto, other than the
relationship of landlord and tenant.
38.7 Any provisions of this Lease which shall prove to be invalid, void
or illegal shall in no way affect, impair or invalidate any other
provision hereof, and such other provisions shall remain in full force
and effect, provided, however, that if in Landlord's reasonable
judgment the invalidation or voiding of any such provision or
provisions would materially frustrate the reasonable expectations of
the parties hereto in entering into this Lease, then Landlord may
terminate this Lease and release Tenant from prospective liability
hereunder upon sixty (60) days' advance written notice.
38.8 The term "Premises" shall be deemed to include (unless, based on
the context, such meaning would clearly be unintended) the space
demised and improvements on or at any time hereafter built in such
space.
38.9 The Term "Tenant" or any pronoun used in place hereof shall
indicate and include the masculine or feminine, the singular or plural
number, individual, firms or corporations, and any successor in
interest of Tenant.
38.10 The section headings herein are for convenience of reference only
and shall in no way define, increase, limit or describe the scope or
intent of any provision of this Lease.
38.11 In any case where this Lease is entered into by co--tenants, the
obligations of such co-tenants hereunder shall be joint and several.
38.12 Time is of the essence of this Lease and all of its provisions.
38.13 This Lease shall in all respects be governed by the laws of the
state in which the Premises is located. The parties acknowledge that
the laws of the state in which the Premises is located may change by
virtue of legislative enactment or judicial decision. The parties
further acknowledge that they have entered into this Lease based on the
law at the time of the execution of the Lease, and each hereby
expressly waives any further rights, benefits, or advantages derived
from or as a result of any future changes in law. In any action or
proceeding arising herefrom, Tenant hereby consents to (a) the
jurisdiction of any competent court within the state in which the
Premises is located, (b) service of process by any means authorized by
the law of the state in which the Premises is located, and (c) trial
without a jury.
38.14 This Lease contains the entire agreement of the parties hereto with
respect to the subject matter hereof and supersedes any previous
negotiations. There have been no representations made by Landlord or
any representative thereof or understandings made between the parties
other than those set forth in this Lease. Without limiting the
generality of the foregoing, Tenant specifically acknowledges and
agrees that neither Landlord nor any broker, agent or representative
thereof has made any warranty or representation with respect to the
tenant mix of the Building, the identity of prospective or other
tenants of the Building, profitability or suitability of the Premises
for Tenant use, the state of repair of the Project and the Premises, or
the amount and extent of provided services, except as may be otherwise
specifically set forth herein.
38.15 This Lease may not be modified, except by a written document
executed by the parties hereto.
38.16 If any guarantee of this Lease is required by Landlord, such
guarantee shall be in the form and content attached hereto.
38.17 The words "person" and "persons" as used herein shall include
individuals, firms, partnerships, associations and corporations.
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38.18 The language in all parts of this Lease shall be in all cases
construed simply according to its fair meaning, and not strictly for or
against Landlord or Tenant. Any reference to any Section herein shall
be deemed to include all subsections thereof unless otherwise specified
or reasonably required from the context. Any reference to "days" or
"months" herein shall refer to calendar days or months, respectively,
unless specifically provided to the contrary. Unless clearly
inconsistent with the context, any reference herein to the "term
hereof" or "the term of this Lease" shall refer to the term of this
Lease as the same may be extended pursuant to any extension option(s)
contained herein. The terms "herein", hereunder" and "hereof" as used
in this Lease shall mean "in this Lease" and "of this Lease"
respectively, except as otherwise specifically set forth in this Lease.
38.19 Any and all exhibits and addendums referred to in this Lease are
incorporated herein as a part hereof.
38.20 Tenant hereby acknowledges and agrees that the exterior walls of the
Building and the area between the demising walls of the Premises and
the finished ceilings and floors of the Building thereabove or
therebelow have not been demised hereby and that the use thereof,
together with the right to install, maintain, use, repair and replace
pipes, ducts, conduits and wires leading through, under, above or
alongside the Premises, is hereby excepted and reserved unto Landlord.
38.21 The submission of this Lease by Landlord or its agent or
representative for examination or execution by Tenant does not
constitute an option to offer to lease the Premises upon the terms and
conditions contained herein or a reservation of the Premises in favor
of Tenant, it being intended hereby that this Lease shall become
effective only upon the execution hereof by Landlord and delivery of a
fully executed counterpart hereof to Tenant.
38.22 Tenant hereby warrants and represents that neither its execution of
nor performance under this Lease shall cause Tenant to be in violation
of any agreement, instrument, contract, law, rule or regulation by
which Tenant is bound, and Tenant agrees to indemnify Landlord against
any loss, cost, damage or liability including, without limitation,
reasonable attorney's fees and related costs arising out of Tenant's
breach of this warranty and representation.
38.23 Tenant acknowledges that Landlord may choose not to designate a
thirteenth (13th) floor in the Building.
38.24 Rent shall not be abated, nor may this Lease be terminated by
Tenant, except as may otherwise be expressly provided herein.
39. Rules and Regulations
39.1 No sidewalks, entrance, passages, courts, elevators, vestibules,
stairways, corridors or halls shall be obstructed or encumbered by
Tenant or used for any purpose other than ingress and egress to and
from the Premises of the Building and if the Premises is situated on
the ground floor of the building, Tenant shall further, at Tenant's own
expense, keep the sidewalks and curb directly in front of the Premises
clean and free from rubbish.
39.2 No awning or other projection shall be attached to the outside
walls or windows of the Building without the prior written consent of
Landlord. No curtains, blinds, shades, drapes or screens shall be
attached to or hung in, or used in connection with any window or door
of the Premises, without the prior written consent of Landlord. Such
awnings, projections, curtains, blinds, shades, drapes, screens and
other fixtures must be of a quality, type, design, color, material and
general appearance approved by Landlord, and shall be attached in the
manner approved by Landlord. All electrical fixtures hung in offices or
spaces along the perimeter of the Premises must be fluorescent, of a
quality, type, design, bulb color, size and general appearance approved
by Landlord.
39.3 No sign, advertisement, notice or other lettering shall be
exhibited, inscribed, painted or affixed by Tenant on any part of the
outside or inside of the Premises or of the Building, without the prior
written consent of Landlord. In the event of the violation of the
foregoing by Tenant, Landlord may remove same without any liability,
and may charge the expense incurred by such removal to Tenant. Interior
signs on doors and directory tablet shall be inscribed, painted or
affixed for Tenant by Landlord at the expense of Tenant, and shall be
of a quality, quantity, type, design, color, size, style, composition,
material, location and general appearance acceptable to Landlord.
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39.4 The sashes, sash doors, skylights, windows, and doors that reflect
or admit light or air into the halls, passageways or other public
places in the Building shall not be covered or obstructed by Tenant,
nor shall any bottles, parcels, or other articles be placed on the
window sills, or in the public portions of the Building.
39.5 No show cases or other articles shall be put in front of or affixed
to any part of the exterior of the Building, nor placed in public
portions thereof without the prior written consent of Landlord.
39.6 The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed,
and no sweepings, rubbish, rags or other substances shall be thrown
therein. All damages resulting from any misuse of the fixtures shall be
borne by Tenant to the extent that Tenant or Tenant's agents, servants,
employees, contractors, visitors or licensees shall have caused the
same.
39.7 Tenant shall not mark, paint, drill into or in any way deface any
part of the Premises or the Building. No boring, cutting or stringing
of wires shall be permitted, except with the prior written consent of
Landlord, and as Landlord may direct.
39.8 No animal or bird of any kind or bicycles shall be brought into or
kept in or about the Premises or the Building.
39.9 Prior to leaving the Premises for the day, Tenant shall draw or
lower window coverings and extinguish all lights.
39.10 Tenant shall not make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of the Building
or neighboring buildings or premises or those having business with them.
Tenant shall not throw anything out of the doors, windows or skylights or
down the passageways.
39.11 Neither Tenant or any of Tenant's agents, servants, employees,
contractors, visitors or licensees shall at any time bring or keep upon
the Premises any inflammable, combustible or explosive fluid, chemical or
substance.
39.12 No additional locks, bolts, or mail slots of any kind shall be
placed upon any of the doors or windows by Tenant, nor shall any change
be made in existing locks or the mechanism thereof. Tenant must, upon the
termination of the tenancy, restore to Landlord all keys of stores,
offices and toilet rooms, either furnished to, or otherwise procured by
Tenant, and in the event of the loss of any keys so furnished, Tenant
shall pay to Landlord the cost thereof.
39.13 All removals, or the carrying in or out of any safes, freight,
furniture, fixtures, bulky matter or heavy equipment of any description
must take place only during the hours which Landlord or its agent may
determine from time to time. Landlord reserves the right to prescribe the
weight and position of all safes, which must be placed upon two-inch
thick plank strips to distribute the weight. The moving of safes,
freight, furniture, fixtures, bulky matter or heavy equipment of any kind
must be made upon previous notice to the Superintendent of the Building
and in a manner and at times prescribed by him, and the person employed
by Tenant for such work are subject to Landlord's prior approval.
Landlord reserves the right to inspect all safes, freight or other bulky
articles to be brought into the Building and to exclude from the Building
all safes, freight or other bulky articles which violate any of these
Rules and Regulations or the lease of which these Rules and Regulations
are a part.
39.14 Tenant shall not occupy or permit any portion of the Premises to be
occupied as an office that is not generally consistent with the character
and nature of all other tenancies in the Building, or is (a) for an
employment agency, a public stenographer or typist, a labor union office,
a physician's or dentist's office, a dance or music studio, a school, a
beauty parlor or barber shop, the business or photographic or multilith
or multigraph reproductions or offset printing (not precluding using any
part of the Premises for photographic, multilith or multigraph
reproductions solely in connection with Tenant's own business and/or
activities), a restaurant or bar, an establishment for the sale of
confectionery or soda or beverages or sandwiches or ice cream or baked
goods, an establishment for the preparation or dispensing or consumption
of food or beverages (of any kind) in any manner whatsoever, or as a news
or cigar stand, or as a radio or television or recording studio, theater
or exhibition-hall, for manufacturing, for the storage of merchandise or
for the sale of merchandise, goods or property of any kind at auction, or
for lodging, sleeping or for any immoral purpose, or for any business
which would tend to generate a large amount of elevator or foot traffic
in or about the Building or the land upon which it is located, or any of
the arms used in the operation of the Building, or (b) a use which
conflicts with any so-called "exclusive" then in favor of, or is for any
use the same as that stated in any percentage lease to, another tenant of
the Building, or
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any of Landlord's then buildings which are in the same complex as the
Building, or (c) a use which would be prohibited by any other portion of
this Lease (including but not limited to any Rules and Regulations then
in effect) or in violation of law. Tenant shall not engage or pay any
employees of the Premises, except those actually working for Tenant on
the Premises nor shall Tenant advertise for laborers giving an address at
the Premises.
39.15 Tenant shall not purchase spring water, towels, janitorial or
maintenance or other like service from any company or person not approved
by Landlord. Landlord shall approve a sufficient number of sources of
such services to provide Tenant with a reasonable selection, but only in
such instances and to such extent as Landlord in its reasonable judgment
shall deem appropriate after due consideration to matters concerning
security and proper operation of the Building.
39.16 Landlord shall have the right to prohibit any advertising or
business conducted by Tenant referring to the Building which, in
Landlord's opinion tends to impair the reputation of the Building or its
desirability as a first class building for offices, and upon. notice from
Landlord, Tenant shall refrain from or discontinue such advertising.
39.17 Landlord reserves the right to exclude from the Building between the
hours of 6:00 P.M. and 7:00 A.M. on all days, and at all hours on
Saturdays, Sundays and legal holidays, all persons who do not present a
pass to the Building issued by Landlord. Landlord may furnish passes to
Tenant so that Tenant may validate and issue same. Tenant shall safeguard
said passes and shall be responsible for all acts of persons in or about
the Building who possess a pass issued to Tenant.
39.18 Tenant's contractors shall, while in the Building or elsewhere in
the complex of which the Building forms a part, be subject to and under
the control and direction of the Superintendent of the Building (but not
as agent or servant of said Superintendent or of Landlord).
39.19 If the Premises or the Project is or becomes infested with vermin as
a result of the use or any misuse or neglect of the Premises by Tenant,
its agents, servants, employees, contractors, visitors or licensees,
Tenant shall forthwith at Tenant's expense cause the same to be
exterminated from time to time to the satisfaction of Landlord and shall
employ such licensed exterminators as shall be approved in writing in
advance by Landlord.
39.20 The requirements of Tenant will be attended to only upon application
at the office of the Building. Building personnel shall not perform any
work or do anything outside of their regular duties, unless under special
instructions from the office of Landlord.
39.21 Canvassing, soliciting and peddling in the Building are prohibited
and Tenant shall co-operate to prevent the same.
39.22 No water cooler, air conditioning unit or system or other apparatus
shall be installed or used by Tenant without the written consent of
Landlord.
39.23 There shall not be used in any space, or in the public halls, plaza
areas or lobbies of the Building, or elevators in the complex of which
the Building forms a part, either by Tenant or by jobbers or others, in
the delivery or receipt of merchandise, any hand trucks or dollies except
those equipped with rubber tires and side guards.
39.24 Tenant, Tenant's agents, servants, employees, contractors, licensees
or visitors shall not park any vehicle in any driveway, service
entrances, or areas posted as "No Parking."
39.25 Tenant shall install and maintain, at Tenant's sole cost and
expense, an adequate visibly marked (at all times properly operational)
fire extinguisher next to any duplicating or photocopying machine or
similar heat producing equipment, which may or may not contain
combustible material, in the Premises.
39.26 Tenant shall keep its window coverings closed during any period of
the day when the sun is shining directly on the windows of the Premises.
39.27 Tenant shall not use the name of the Building for any purpose other
than as the address of the business to be conducted by Tenant in the
Premises, nor shall Tenant use any picture of the Building in its
advertising, stationery or in any other manner without
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the prior written permission of Landlord. Landlord expressly reserves the
right at anytime to change said name without in any manner being liable
to Tenant therefor.
40. Door Sign Rules
40.1 There shall be one frame for the suite number and one frame for the
plaques containing the name.
40.2 The top of the frame which holds the suite number plaque will be
located 35 inches from the ceiling.
40.3 The top of the frame which holds the name plaques will be located
40 inches from the ceiling, and the bottom of the frame which holds the
last name plaque will be located no lower than 55 inches from the
ceiling.
40.4 No more than six name plaques shall be permitted on a door, and
each plaque may contain only one line.
40.5 No more than 28 letters and spaces will be allowed on a plaques
(including punctuation).
40.6 Only firm names and names of individuals will be permitted.
Designations such as "Sales Office", "Private", etc. will not be
allowed.
40.7 The name of a firm or individual may be placed only once on any
door.
40.8 The lettering on all door plaques must be centered within the
plaque.
40.9 All door plaques will be in building standard size, color, style
and material as determined by Landlord.
40.10 There may be no signs on any door visible from the corridors of the
Building other than suite main entry doors.
40.11 Any suite which has double entry doors will be treated as having
only one entry door, and signs will be located only on one of such
doors.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date
first hereinabove set forth.
LANDLORD: TENANT:
BISHOP STREET ASSOCIATES DIGITAL ISLAND, INC.,
a California Corporation
By: 1132, INC.
Its Sole General Partner By: /s/ Brian Higgins
--------------------------
Its: CEO
By: /s/ Intelligible By:
----------------------------- --------------------------
Its President Its
THIS LEASE HAS BEEN PREPARED FOR TENANT'S REVIEW AND FOR TENANT'S SUBMISSION
TO ITS LEGAL AND/OR TAX CONSULTANT. NO REPRESENTATION OR RECOMMENDATION IS MADE
BY LANDLORD OR BROKER, OR THE AGENTS OR EMPLOYEES OF EITHER, AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION
RELATING HERETO.
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ADDENDUM TO LEASE
This Addendum is attached to and made a part of that certain Lease (the
"Lease") dated ,1996, between Bishop Street Associates, a Hawaii Limited
partnership ("Landlord"), and DIGITAL ISLAND, INC., a California corporation
("Tenant"), relating to premises described as Suite 1001 of the Building located
at 1132 Bishop Street, Honolulu, Hawaii. The provisions set forth below shall
supersede any inconsistent provisions set forth in the Lease. To the extent
possible, the provisions set forth below have been numbered to coincide with the
numbered sections of the Lease to which they relate. Except as otherwise
provided below, capitalized terms used below shall their respective meaning set
forth in the Lease.
13. Utilities.
Tenants operations require 24-hour, 7 days a week usage of air conditioning
for the room designated as "New computer room" on said Exhibit "1". Landlord, at
Landlord's expense, shall install and maintain the equipment to provide such air
conditioning for said Room A; provided that Tenant shall pay for the cost of
operating such air conditioning equipment, including without limitation, the
cost of electricity to operate such air conditioning equipment.
41. Existing Improvements.
Notwithstanding any term contained herein to the contrary, Landlord shall
deliver the Premises to Tenant together with all tincture then located in the
Premises. Tenant shall be entitled to use such furniture without the payment of
additional rent, provided that Tenant shall surrender such furniture to Landlord
upon the expiration or sooner termination of the term of this Lease, in good
order, condition and repair, ordinary wear and tear excepted.
42. Right of Second Refusal.
Subject to the rights of Hawaii Pacific Engineers Inc. to rent the Area
(hereafter defined), during the term of this Lease, Landlord shall not rent the
area shown in Exhibit "A" attached hereto (the "Area"), containing a rentable
area of approximately 706 square feet to any person or entity until Landlord
shall have (i) offered (in writing) to rent the Area to Tenant upon the same
terms, rent and conditions that Landlord would rent the Area to any other person
or entity, and (ii) allowed Tenant seven (7) days after receipt of said offer to
accept such offer in writing. If Tenant does not accept Landlord's offer by
delivering a written acceptance to Landlord within said seven (7) days period,
then Landlord may rent the Area to any other person or entity upon those terms,
rent and conditions which were offered to Tenant. Should the terms, rent or
conditions of such lease be changed, the Area shall again be offered to Tenant
upon the revised terms, rent or conditions and Tenant shall be allowed seven (7)
days after receipt of such revised offer within which to accept such revised
offer in writing. Notwithstanding any term contained herein to the contrary,
Tenant's rights under this Section 42 shall terminate upon the expiration of the
term of this Lease.
43. Letter Credit.
Upon the execution of this Lease by Landlord and Tenant, Tenant shall
deliver to Landlord a Letter of Credit (i) issued by a bank authorized to do
business in the State of Hawaii, (ii) for the sum of $25,000.00, and (iii) in
such form as shall be reasonably approved by Landlord (the "Letter of Credit").
The Letter of Credit shall provide that Landlord may draw upon the Letter of
Credit upon the occurrence of any of the events described in Section 19 of this
Lease. The Letter of Credit shall commence on November 1, 1996 and shall expire
on October 31, 1997.
Landlord's Tenant's
Initial: Initial:
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Exhibit A
10TH FLOOR
TOTAL RENTABLE AREA: 19,008 sf
<PAGE>
WORK AGREEMENT
--------------
This Work Agreement supplements the Lease dated _____, 1996, executed
concurrently herewith by BISHOP STREET ASSOCIATES, a Hawaii limited partnership,
as "Landlord," and DIGITAL ISLAND, INC., a California corporation, as the
"Tenant," for Suite 1001 (the "Premises") on the tenth (10th) floor of the
Building located at 1132 Bishop Street, Honolulu, Hawaii (the "Building").
1. Construction of Building. Landlord has constructed or will construct the
Building consisting of:
A. The Building shell;
B. The core area including basic mechanical, electrical, plumbing, life
safety, air conditioning and ventilation system therein;
C. Core area toilet rooms including necessary plumbing fixtures, ceramic
tile floors, accessories, ceilings and lighting;
D. Interior dry wall covering all exposed core walls, perimeter columns
and exterior building wall areas except at windows;
E. Air conditioning duct mains;
F. Finished elevator lobbies;
G. Finished hallways on multi-tenant floors; and
H. Parking facilities.
2. Agreement to Complete. Landlord agrees to complete the Premises for Tenant
in accordance with the provisions of this Work Agreement. Tenant agrees to duly
and timely perform all of the acts, and pay all of the consideration, required
of Tenant hereunder, all to the effect that the Premises can be timely completed
as provided in this Work Agreement.
3. Tenant's Space Plan. Landlord agrees to be solely responsible to pay for
the cost of the Final Space Plan, as defined herein, prepared by Landlord's
architect or space planner. The Final Space Plan dated 10/14, 1996 (the
-----
"Final Space Plan") and the Estimate of Probable Cost dated 10/15, 1996, have
-----
been approved by Landlord and Tenant, and copies thereof are attached as Exhibit
"1" and made a part hereof.
4. Landlord's Installation. In completing the Premises, Landlord, at
Landlord's expense, agrees to provide and install the improvements in accordance
with the Final Space Plan, including without limitation the following:
A. Install all building standard wall partitions with sound batting.
EXHIBIT "B"
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B. Install all building standard doors and hardware.
C. Install building standard light switches, one (1) per each 175 square
feet of usable area.
D. Install building standard duplex receptacle wall outlets, three (3)
per each 150 square feet of usable area.
E. Install building standard telephone wall outlets, one (1) per each 100
square feet of usable area.*
F. Install building standard computer outlets one (1) per each 100 square
feet of usable area.
G. Install building standard air conditioning. Zoning designed by
building engineer.
H. Install building standard 2'x 4' parolouver light fixtures.
I. Install building standard acoustical ceiling tile in all rooms.
J. Install building standard carpeting including building standard 4"
rubber carpet base.
K. Paint all walls with semi-gloss washable paint. Choice limited to 3
colors per suite.
L. In lieu of paint Landlord will prime walls for wall covering. The wall
covering and its installation will be Tenant's expense.
M. One inch metal mini-blinds for all exterior windows.
* Landlord will provide box and stub conduit above the ceiling. Tenant
must provide and install plenum rated cabling for the telephone and
computers.
5. Tenant's Installations. Tenant shall pay for the cost of all installations
which are not shown or described in the attached Final Space Plan and Estimate
of Probable Cost.
6. Landlord's Quote. Landlord shall not be required to approve any change to
the Final Space Plan which would have a material impact or place an undue load
on the structural, mechanical or electrical systems in the Building beyond that
which would be expected for space of the type and kind rented to Tenant, or
which would result in the Premises being not in keeping with the overall
character of the Building, or which will not meet the approval of all applicable
governmental authorities. When and if Landlord approved any change to the Final
Space Plan, Landlord shall concurrently notify Tenant in writing of the price to
Tenant for the quantities (and\or qualities) of items included in such change
which are in excess of Landlord's Standard Installations as described in
paragraph 4 above. Landlord shall not be required to commence work unless Tenant
has approved in writing the cost of the over-standard work to be paid for by
Tenant. Tenant shall pay the agreed amount of Tenant's costs in excess of
Landlord's Standard Installations not later than five (5) days after receipt of
billing therefor.
EXHIBIT "B"
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Page 2 of 4
<PAGE>
7. Schedule of Work All work shall be scheduled by Landlord in coordination
with Tenant and Tenant shall reimburse Landlord for any extra expense incurred
by Landlord by reason of delays caused by Tenant.
8. Time for Completion. Landlord shall not be required to complete Landlord's
Standard Installations in the Premises for Tenant sooner than sixty (60) days
after the later of (i) the delivery to Landlord of Tenant's written approval of
the cost of the over-standard work to be paid by Tenant as described in
paragraph 6 above, or (ii) receipt of approval of the Final Space Plan by all
applicable governmental authorities. If Tenant's written approval of the cost
and said over-standard work is not received by Landlord at least sixty (60) days
prior to the scheduled commencement date specified in Section 1.1.2 of the Basic
Lease Information (the "Commencement Date"), then notwithstanding the fact that
the Premises have not been completed by the Commencement Date, rent shall,
nevertheless, commence to accrue on the Commencement Date.
9. Changes. If Tenant shall timely request any change to the Final Space
Plan, Landlord shall have the right to approve the change in accordance with the
standards set forth in paragraph 6 above. If Landlord approves such change,
Landlord shall promptly give Tenant a written estimate of the maximum cost of
engineering and design services to revise the Final Space Plan in accordance
with such request, the time delay expected because of such request and the extra
cost to Tenant for such change. If Tenant approves such estimate in writing,
Landlord shall have working drawings prepared and proceed to make such change
and Tenant shall promptly reimburse Landlord for the cost thereof. Tenant shall
approve or disapprove such estimate within three (3) business days. In the
absence of such written authorization Landlord shall not be obligated to make
such change and shall continue work on the Premises in accordance with the then
current Final Space Plan. Tenant shall be chargeable with any delay in the
completion of the Premises resulting from any such change, and rent shall
commence to accrue on the Commencement Date whether or not the Premises have
then been completed.
10. Delays. If the completion of Landlord's Standard Installations in the
Premises is delayed by Tenant's failure to comply with any of the foregoing
provisions, or by Tenant's requirement of materials or installations different
from Landlord's Standard Installations, or by changes in the work ordered by
Tenant or by extra work ordered by Tenant, then notwithstanding the delay in
completion of the Premises, the rent shall commence to accrue on the
Commencement Date. Further, if beyond the schedule for completion thereof
because of the unavailability of materials or work specially requested by
Tenant, then rent shall commence on the Commencement Date, notwithstanding that
such work is not completed. Provided, however, Landlord shall notify Tenant of
anticipated delays in delivery of non-standard materials.
11. Data Processing. All data processing and other special electrical
equipment shall be installed only under the supervision of Landlord's electrical
contractor.
12. Substitutions. If plans and specifications for construction of the
Premises shall require Landlord's Standard Installation(s) in mounts which are
in excess of standards to be provided by Landlord as described in Paragraph 4
above, then Tenant shall pay for such additional quantities at Landlord's actual
cost therefore. Landlord may substitute an item of equal quality for any
standard item(s) listed, provided that it is specifically understood and agreed
that if such substitution shall result in a total cost exceeding Landlord's
budget for improvements of the Premises, Tenant shall pay to Landlord the amount
of such additional cost.
13. Energy Conservation. Due to energy conservation requirements, Tenant will
be restricted in the installation and use of lighting in any part of the
Building except as approved by Landlord.
14. Common Areas. It is specifically acknowledged that portions of the
Building and the common areas may not be completed on or prior to the
Commencement Date, without liability of Landlord to Tenant, and without any
abatement or reduction in rent,
EXHIBIT "B"
-----------
Page 3 of 4
<PAGE>
provided that Landlord shall have obtained a temporary certificate of occupancy
for the Premises as well as for the Building, and Landlord's architect/designer
shall have certified that the Premises are substantially complete and Tenant
shall have reasonable access to the Premises.
15. Access. During the thirty (30) day period immediately prior to the
Commencement Date, Tenant shall be afforded reasonable access to the Premises
for the purpose of coordinating the installation of its tenant improvements.
16. Landlord's Representative. During the construction of the Premises all
matters and questions for Landlord shall be referred to The Harris Company who
-------------------
shall act as Landlord's representative.
17. Tenant's Representatives. During the construction of the Premises all
matters and questions for Tenant shall be referred to G. Stephen Elisha who
shall act as Tenant's representative.
DATED:
BISHOP STREET ASSOCIATES
By 1132, Inc.
Its Sole General Partner
By: /s/ Unintelligible
------------------------------
Its President
"Landlord"
DIGITAL ISLAND, INC.,
a California corporation
By: /s/ Brian Higgins
------------------------------
Its CEO
By:
------------------------------
Its
"Tenant"
Landlord's Tenant's
Initial: Initial:
EXHIBIT "B"
-----------
Page 4 of 4
<PAGE>
Notice of Lease Term Dates
------ -- ----- ---- -----
1132 Bishop Street
Honolulu, Hawaii 96813
(808) 599-5009
Telecopier: (808) 599-5211
Gentlemen:
Congratulations on moving into your new suite. We are looking forward to many
years of pleasant and friendly relations.
In order to eliminate any future misunderstanding, we wish to go on record
that the commencement date of the Lease between Bishop Street Associates and you
is_____________ and the termination date is _____________________.
I would appreciate your confirming the foregoing by signing the enclosed copy
of this letter and returning it to the office of the Building at 1132 Bishop
Street, Honolulu, Hawaii 96813.
Sincerely,
BISHOP STREET ASSOCIATES
By 1132, Inc.
Its Sole General Partner
By: /s/ Unintelliglble
----------------------------------
Its Presdident
APPROVED:
- ----------------------------------,
a _____________________________
BY
---------------------------------
Its
Landlord's Tenant's
Initial: Initial:
EXHIBIT "C"
-----------
<PAGE>
ESTOPPEL CERTIFICATE
TO: ___________________________ and its successors and assigns.
FROM: ___________________________________________________________.
RE: Lease for Suite ___, of the Building located at 1132 Bishop Street,
Honolulu, Hawaii.
The undersigned is the current tenant under that certain Lease
dated , 1996, between Bishop Street Associates, as Landlord; and , as
Tenant, relating to Suite (the "Premises"), in the building located at
1132 Bishop Street, Honolulu, Hawaii (the "Building").
The undersigned has been requested to furnish this Estoppel Certificate in
accordance with Section 14 of the Lease below described.
The undersigned, understanding that the Landlord under the Lease below
described and institutional lenders will materially rely thereon, hereby
represents and warrants the following:
1. Attached hereto is a true copy of the Lease dated ___________ together with
all of the amendments thereto dated _________________ (the "Lease").
2. The Lease amendments set forth in paragraph I above are the only amendments
to the Lease, and the Lease, as amended by said amendments, is otherwise
modified and in full force and effect, and constitutes the only agreement
between the Landlord and the undersigned relating to the Premises.
3. The undersigned is the current Tenant under the Lease.
4. The Premises consists of _______________ square feet of rentable area.
5. The Lease commencement date was ___________, and the Lease termination date
is ________________, with ____________, ______________ year options to renew
or extend at rent.
6. The base rent currently being paid by the undersigned under the Lease is
$__________ per month. All free rent or other concessions to which the
undersigned is entitled under the Lease have been utilized except
_____________________.
7. The percentage rent is (a) _____________ % over a floor of $_____________
in gross sales; (b) none (strike one).
8. Rent is adjusted every _______ year(s) under the Lease for increases in the
consumer price index. There is (is not) a "cap" on such increases. Such cap
is ____________%. The undersigned's share of any consumer price index
adjustments under the Lease has been paid through __________________.
EXHIBIT "D"
-----------
Page 1 of 2
<PAGE>
9. As of the date hereof, the Lease is valid and subsisting and in full force
and effect, and the undersigned has accepted and is presently occupying the
Premises.
10. To the best knowledge of the undersigned, there are no uncured breaches or
defaults on the part of the Landlord under the Lease, and the undersigned has
no knowledge of any event, which with the giving of notice or the passage of
time, or both, would constitute a default thereunder. The undersigned has no
unfulfilled claims or offsets or defenses of any kind under the Lease as of
the date hereof.
11. Rent has been paid through _________________________, 19__. No rent has
been paid in advance.
12. (Intentionally deleted).
13. A security deposit of $_________ has been paid to Landlord under the
Lease.
14. The undersigned is entitled to ______________ parking spaces under the
Lease for the term of the Lease for $ per month. The undersigned is (is not)
entitled to free (validated) parking for its invitees.
15. All improvements required to be placed and completed on the Premises by
the Landlord under the Lease have been so placed and completed and conform to
the Lease requirements except _______________________.
16. The undersigned has no purchase options affecting the Premises or the
Building.
Very truly yours,
______________________________
Landlord's Tenant's
Initial: Initial:
EXHIBIT "D"
-----------
Page 2 of 2
<PAGE>
Exhibit "1"
FLOOR PLAN - 12TH
<PAGE>
ESTIMATE OF PROBABLE COST
Tenant: Digital Island Architect: Architekton Ltd.
Location: First Hawaiian Tower- 10th Floor Date: Oct. 17, 1996
Owner: Bishop Street Associates By: AL
<TABLE>
<CAPTION>
NO ITEM QTY UNIT PRICE TOTAL
====================================================================================================================================
BUILDING STANDARD WORK:
====================================================================================================================================
<C> <S> <C> <C> <C> <C>
1 SUPERVISION/GEN REQUIREMENTS 1 LS 809.35 809
- ----------------------------------------------------------------------------------------------------------------------==============
2 0 LF 0.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
3 DEMOLITION 1 LS 500.00 500
- ----------------------------------------------------------------------------------------------------------------------==============
4 INTERIOR PARTITION (no insulation) 6 LF 50.00 300
- ----------------------------------------------------------------------------------------------------------------------==============
5 GYPSUM BD. FURRING 0 SF 3.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
6 CORRIDOR DOORS (SC) 0 EA 1,600.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
7 INTERIOR DOORS (HC) 1 EA 1,000.00 1,00
- ----------------------------------------------------------------------------------------------------------------------==============
8 POCKET/SLIDING DOOR (HC) 0 EA 800.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
9 CARPET (anti-static type) 30 SY 300.00 900
- ----------------------------------------------------------------------------------------------------------------------==============
10 VINYL COMPOSITION TILE (@ Library & Storag 0 SF 4.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
11 MINI-BLINDS @ PERIMETER WINDOWS 0 EA 200.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
12 RESILIENT BASE 0 LF 2.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
13 PAINT 840 SF 1.25 1,050
- ----------------------------------------------------------------------------------------------------------------------==============
14 SUSPENDED CEILING (patch/repair) 494 SF 0.75 371
- ----------------------------------------------------------------------------------------------------------------------==============
15 ELECTRICAL (addt'l power, 24 hr. a/c) 494 SF 5.50 2,717
- ----------------------------------------------------------------------------------------------------------------------==============
16 MECHANICAL (Bldg. Std. A/C) 494 SF 5.00 2,470
- ----------------------------------------------------------------------------------------------------------------------==============
17 SUBTOTAL 10,117
- ----------------------------------------------------------------------------------------------------------------------==============
18 CONTRACTORS PROFIT 10% 1,012
- ----------------------------------------------------------------------------------------------------------------------==============
19 TOTAL BUILDING STANDARD WORK $11,129
====================================================================================================================================
BUILDING NON-STANDARD WORK:
====================================================================================================================================
20 24 HR. A/C (Portable Unit(s)) 1 LS 10,000.00 10,000
- ----------------------------------------------------------------------------------------------------------------------==============
21 RAISED ACCESS FLOORING (w/steps & railing) 264 SF 33.00 8,712
- ----------------------------------------------------------------------------------------------------------------------==============
22 INTERIOR GLASS 45 SF 25.00 1,125
- ----------------------------------------------------------------------------------------------------------------------==============
23 EMERGENCY/BACK-UP POWER HOOK-UP 1 LS 1,100.00 1,100
- ----------------------------------------------------------------------------------------------------------------------==============
24 0
- ----------------------------------------------------------------------------------------------------------------------==============
25 0
- ----------------------------------------------------------------------------------------------------------------------==============
26 0
- ----------------------------------------------------------------------------------------------------------------------==============
27 0
- ----------------------------------------------------------------------------------------------------------------------==============
28 0
- ----------------------------------------------------------------------------------------------------------------------==============
29 0
- ----------------------------------------------------------------------------------------------------------------------==============
30 0
- ----------------------------------------------------------------------------------------------------------------------==============
31 SUBTOTAL 20,937
- ----------------------------------------------------------------------------------------------------------------------==============
29 CONTRACTORS PROFIT 10% 2,094
- ----------------------------------------------------------------------------------------------------------------------==============
30 TOTAL BUILDING NON-STANDARD WORK $23,031
====================================================================================================================================
31 TOTAL OF PROBABLE CONSTRUCTION COST $34,159
====================================================================================================================================
32 0
- ----------------------------------------------------------------------------------------------------------------------==============
32 0
- ----------------------------------------------------------------------------------------------------------------------==============
33 PERMIT/BOWS FEES 560
- ----------------------------------------------------------------------------------------------------------------------==============
34 GRAND TOTAL $34,719
====================================================================================================================================
</TABLE>
NOTE: The actual cost will vary based on the final scope of work and
construction bid(s) received.
<PAGE>
LAND COURT REGULAR SYSTEM
- --------------------------------------------------------------------------------
AFTER RECORDATION, RETURN BY MAIL [ ] PICK-UP [ ]
- --------------------------------------------------------------------------------
AMENDMENT OF LEASE
------------------
THIS AMENDMENT is made as of the 15th day of November 1996, by
------ -------------
and between BISHOP STREET ASSOCIATES, a Hawaii limited partnership, whose post
office address is 1132 Bishop Street, Suite 1405, Honolulu, Hawaii 96813 (the
"Landlord"), and DIGITAL ISLAND, INC., a California corporation, whose post
office address is 1132 Bishop Street, Suite 1001, Honolulu, Hawaii 96813 (the
"Tenant").
RECITALS:
- ---------
A. Landlord and Tenant entered into that certain Lease dated ______,
1996 (the "Lease"), for the rental of Suite 1001 of the office building located
at 1132 Bishop Street, Honolulu, Hawaii 96813 (the "Building"), containing
approximately 2,588 rentable square feet (the "Premises").
<PAGE>
B. Landlord and Tenant desire to amend the provisions of the Lease
concerning the Letter of Credit given by Tenant to secure Tenant's performance
of its obligations under the Lease.
AGREEMENT:
- ---------
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant
hereby agree as follows:
1. The following paragraph is added to the Lease as Paragraph 44:
"44. Letter of Credit.
Upon the execution of this Lease by Landlord and Tenant, Tenant
shall deliver to Landlord a Letter of Credit (i) issued by a bank
authorized to do business in the State of Hawaii, (ii) for the sum of
$63,082.10, and (iii) in such form as shall be reasonably required by
Landlord (the "Letter of Credit"). The Letter of Credit shall provide
that Landlord may draw upon the Letter of Credit upon the occurrence
of any of the events described in Section 19 of this Lease, to satisfy
any amounts owed by Tenant under the terms of this Lease. The Letter
of Credit shall commence on November 1, 1996 and shall expire on
November 1, 2001. In the event that the bank issuing the Letter of
Credit (the "Bank") notifies Landlord that the Bank will not renew the
---
Letter of Credit on its annual expiration date and thus the Letter of
Credit will expire prior to November 1,2001, such occurrence shall be
deemed a default under this Lease. Upon Landlord's receipt of such
notice, Landlord shall be entitled to pursue any and all remedies
provided to Landlord under Section 20 of this Lease. In addition to
--------
such remedies, Landlord may draw down the remaining balance of the
Letter of Credit as liquidated damages for Tenant's default under this
Lease. Landlord and Tenant hereby acknowledge that they understand and
have agreed that in such event, the injury or damages to Landlord will
be difficult and/or expensive to determine in view of: Landlord's
financial commitments with respect to the Building, the difficulty in
obtaining a new tenant for the Premises and the nature of the rental
market for commercial space in Honolulu, Hawaii. AS A REASONABLE
ESTIMATE OF LANDLORD'S FAIR COMPENSATION FOR ANY INJURY OR DAMAGES
RESULTING FROM SUCH DEFAULT, THE PARTIES AGREE THAT THE SUMS TO BE
DRAWN UNDER THE LETTER OF CREDIT SHALL BELONG TO LANDLORD AS
LIQUIDATED DAMAGES. Landlord may, in addition to the aforesaid
damages, pursue any other remedy, including specific performance,
permitted by law or equity. All costs, including reasonable attorneys'
fees, incurred by reason of Tenant's default shall be borne by Tenant,
regardless of whether or not a lawsuit is filed."
-2-
<PAGE>
2. No Defenses. Tenant hereby agrees and acknowledges that Tenant
-----------
has no claims, offsets, deductions or defenses against its payment of sums due
under the Lease, or against the performance of its obligations under the Lease.
Tenant further agrees that Landlord is not currently in default of any of its
obligations under the Lease.
3. Gender. Landlord and Tenant agree that in interpreting this
------
instrument, the use of any gender shall be construed to include all genders, and
the use of any number shall be construed as singular or plural, as the
circumstances may require. The terms "Landlord" and "Tenant", together with any
pronouns used in lieu thereof, refer to the singular or plural, as the case may
be.
4. Successors and Assigns. The covenants made by Landlord and/or
----------------------
Tenant, and all rights and benefits conferred hereunder upon Landlord and/or
Tenant, shall be binding upon and inure to the benefit of Landlord and/or Tenant
and their respective legal representatives, successors in trust, successors and
assigns.
5. Governing Law. This instrument shall be governed by, and
-------------
construed in accordance with, the laws of the State of Hawaii.
6. Attorneys' Fees and Costs. If any party hereto commences an
-------------------------
action or arbitration proceeding to interpret or enforce this Amendment, or any
provision hereof, the prevailing party shall be entitled to an award of costs
and attorneys' fees in addition to all other amounts awarded by the court or
arbitrator. Tenant also agrees to pay all costs and reasonable attorneys' fees
which may be incurred or paid by Landlord in enforcing without litigation any of
the covenants contained hereunder.
7. In all other respects the Lease shall remain unamended and in
full force and effect.
-3-
<PAGE>
IN WITNESS WHEREOF, the Landlord and Tenant have executed this
instrument as of the day and year first above written.
LANDLORD: BISHOP STREET ASSOCIATES,
- -------- a Hawaii limited partnership
By 1132, Inc.,
a Hawaii corporation
Its Sole General Partner
By /s/ S. Steven Sofos
--------------------------------
S. Steven Sofos
Its President
TENANT: DIGITAL ISLAND, INC.,
- ------ a California corporation
By /s/ Ron Higgins
--------------------------------
Its CEO
By
--------------------------------
Its
-4-
<PAGE>
SECOND AMENDMENT OF LEASE
-------------------------
THIS SECOND AMENDMENT OF LEASE ("Amendment") is made as of April 14
-------------- --------
, 1997, by and between BSOT HOLDINGS, LLC, a Delaware limited liability company,
whose post office address is 1132 Bishop Street, Suite 1405, Honolulu, Hawaii
96813 (the "Landlord"), and DIGITAL ISLAND, INC., a California corporation,
----------
whose post office address is 1132 Bishop Street, Suite 1001, Honolulu, Hawaii
96813 (the "Tenant" ).
--------
Recitals:
- ---------
(a) Bishop Street Associates, a Hawaii limited partnership, and Tenant
entered into that certain Lease dated October 21, 1996, for the rental of Suite
1001 of the office building located at 1132 Bishop Street, Honolulu, Hawaii
96813 (the "Building"), containing approximately 2,588 rentable square feet (the
----------
"Existing Premises"), as amended by an Amendment of Lease dated November 15,
- -------------------
1996 (the "Lease").
(b) Landlord has acquired the Building and is now the landlord under
the Lease.
(c) Landlord and Tenant desire to amend the Lease to increase the area
of the Existing Premises.
Agreements:
- ----------
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant
hereby agree as follows:
1. The Premises as shown on Exhibit A attached to the Lease shall
include not only the area outlined by a heavy dark line and identified as "Suite
1001" but also the area out-lined by a heavy dark line and identified as "Vacant
706rsf".
2. Section 1.1.1 Of the Lease is amended in its entirety to read as
follows:
1.1.1 Premises (Section 1.1): Suite 1001 on floor ten (10) of the
Building, consisting of approximately 3,294 rentable square feet
and approximately 2,889 usable square feet.
<PAGE>
3. Section 1.1.3 of the Lease is amended in its entirety to read as
follows:
1.1.3 Base Rent (Section 3.1): In the following amounts:
Period Rate Total Amount
------ ---- ------------
11/01/96 $0.00 0.00 per month
through
04/14/97
04/15/97 $1.00 per $706.00 per month
through rentable
04/30/97 square foot
per month
05/01/97 $1.00 per $3,294.00 per
through rentable month
11/05/01 square foot
per month
4. Section 1.1.6 of the Lease is amended in its entirety to read as
follows:
1.1.6 Tenant's Percentage Share (Section 4.1): 0.732%, which was
computed by dividing the rentable area of the Premises described
in Section 1.1.1 by the rentable area of the Building.
5. The security deposit under Section 1.1.7 of the Lease shall
remain unchanged at $5,256.84, notwithstanding the increase in the area of the
Premises and in the amount of the Base Rent as provided in this Amendment. The
security deposit may be subject to change in the future as otherwise provided in
the Lease.
6. Landlord shall create an opening between the areas identified on
Exhibit A attached to the Lease as "Suite 1001" and "Vacant 706rsf". The opening
does not include the installation of a door. Landlord's obligation to create the
opening is subject to and upon the terms of the Work Agreement attached to the
Lease as Exhibit B.
7. Lease in Full Force and Effect. Landlord and Tenant hereby
------------------------------
confirm and agree that all of the terms of the Lease remain in full force and
effect, as amended hereby.
2
<PAGE>
8. Miscellaneous
-------------
8.1 Definitions. Capitalized terms not other-wise defined in this
-----------
Amendment have the meanings given to them in the Lease.
8.2 No Defenses. Tenant hereby agrees and acknowledges that Tenant has
-----------
no claims, offsets, deductions or defenses against its payment of sums due under
the Lease, or against the performance of its obligations under the Lease. Tenant
further agrees that Landlord is not currently in default of any of its
obligations under the Lease.
8.3 Gender. Landlord and Tenant agree that in interpreting this
------
Amendment, the use of any gender shall be construed to include all genders, and
the use of any number shall be construed as singular or plural, as the
circumstances may require. The terms "Landlord" and "Tenant", together with any
pronouns used in lieu thereof, refer to the singular or plural, as the case may
be.
8.4 Successors and Assigns. The covenants made by Landlord and/or
----------------------
Tenant, and all rights and benefits conferred hereunder upon Landlord and/or
Tenant, shall be binding upon and inure to the benefit of Landlord and/or Tenant
and their respective legal representatives, successors in trust, successors and
assigns.
8.5 Governing Law. This Amendment shall be governed by, and construed
-------------
in accordance with, the laws of the State of Hawaii.
8.6 Attorneys' Fees and Costs. If any party hereto commences an action
-------------------------
or arbitration proceeding to interpret or enforce this Amendment, or any
provision hereof, the prevailing party shall be entitled to an award of costs
and attorneys' fees in addition to all other amounts awarded by the court or
arbitrator. Tenant also agrees to pay all costs and reasonable attorneys' fees
which may be incurred or paid by Landlord in enforcing without litigation any of
the covenants contained hereunder.
IN WITNESS WHEREOF, the Landlord and Tenant have ex-
3
<PAGE>
ecuted this Amendment as of the day and year first above written.
BSOT HOLDINGS, LLC, DIGITAL ISLAND, INC.,
a Delaware limited liability a California corporation
company
By BSOT, Inc., By /s/ Ron Higgins
a California corporation ---------------------------------
Its Manager Its
By /s/ Nicholas Lock By CEO
-------------------------- ---------------------------------
Nicholas Lock Its
Its Vice President
Landlord Tenant
4
<PAGE>
FLOOR PLAN
THE FIRST HAWAIIAN TOWER
<PAGE>
Exhibit 10.11
OFFICE LEASE
FORTY-FIVE FREMONT ASSOCIATES,
A CALIFORNIA GENERAL PARTNERSHIP,
Landlord
and
DIGITAL ISLAND, INC.,
Tenant
DATED AS OF: May 5, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Paragraph Page
- --------- ----
<C> <S> <C>
1. Premises........................................................... 1
2. Certain Basic Lease Terms.......................................... 1
3. Term; Delivery of Possession of Premises........................... 2
4. Condition of Premises.............................................. 2
5. Monthly Rent....................................................... 5
6. Lease Security..................................................... 6
7. Additional Rent: Increases in Operating Expenses and Tax Expenses.. 7
8. Use of Premises; Compliance with Law............................... 10
9. Alterations and Restoration........................................ 11
10. Repair............................................................. 12
11. Abandonment........................................................ 13
12. Liens.............................................................. 13
13. Assignment and Subletting.......................................... 13
14. Indemnification of Landlord........................................ 17
15. Insurance.......................................................... 17
16. Mutual Waiver of Subrogation Rights................................ 19
17. Utilities.......................................................... 19
18. Personal Property and Other Taxes.................................. 20
19. Rules and Regulations.............................................. 20
20. Surrender; Holding Over............................................ 21
21. Subordination and Attornment....................................... 21
22. Financing Condition................................................ 22
23. Entry by Landlord.................................................. 22
24. Insolvency or Bankruptcy........................................... 22
25. Default and Remedies............................................... 23
26. Damage or Destruction.............................................. 25
27. Eminent Domain..................................................... 26
28. Landlord's Liability; Sale of Building............................. 26
29. Estoppel Certificates.............................................. 27
30. Right of Landlord to Perform....................................... 27
31. Late Charge........................................................ 27
32. Attorneys' Fees; Waiver of Jury Trial.............................. 27
33. Waiver............................................................. 28
34. Notices............................................................ 28
35. Deleted............................................................ 28
36. Defined Terms and Marginal Headings................................ 28
37. Time and Applicable Law............................................ 28
38. Successors......................................................... 28
39. Entire Agreement; Modifications.................................... 29
40. Light and Air...................................................... 29
41. Name of Building................................................... 29
42. Severability....................................................... 29
43. Authority.......................................................... 29
44. No Offer........................................................... 29
45. Real Estate Brokers................................................ 29
46. Consents and Approvals............................................. 29
47. Reserved Rights.................................................... 30
48. Financial Statements............................................... 30
49. Deleted............................................................ 30
50. Nondisclosure of Lease Terms....................................... 30
51. Hazardous Substance Disclosure..................................... 30
52. Stairway Access.................................................... 31
53. Right of First Offer............................................... 31
54. Signage............................................................ 32
55. Parking............................................................ 32
</TABLE>
<PAGE>
EXHIBITS:
- --------
A - Outline of Premises
B - Rules and Regulations
C - Appraisal Procedure
<PAGE>
LEASE
-----
THIS LEASE is made as of the 5th day of May, 1999, between FORTY-FIVE
FREMONT ASSOCIATES, a California general partnership ("Landlord"), and DIGITAL
ISLAND, INC., a California corporation ("Tenant").
1. Premises. Landlord hereby leases to Tenant, and Tenant hereby
--------
leases from Landlord, on the terms and conditions set forth herein, the space
outlined on the attached Exhibit A (the "Premises"). The Premises are located on
the floor(s) specified in Paragraph 2 below of the building (the "Building")
located at 45 Fremont Street, San Francisco, California. The Building, the
parcel(s) of land (the "Land") on which the Building is located and the other
improvements on the Land are referred to herein as the "Real Property".
Tenant's lease of the Premises shall include the right to use, in
common with others and subject to the other provisions of this Lease, the public
lobbies, entrances, stairs, elevators and other public portions of the Building.
All of the windows and outside walls of the Premises and any space in the
Premises used for shafts, stacks, pipes, conduits, ducts, electrical equipment
or other utilities or Building facilities are reserved solely to Landlord and
Landlord shall have rights of access through the Premises for the purpose of
operating, maintaining and repairing the same.
2. Certain Basic Lease Terms. As used herein, the following terms
-------------------------
shall have the meaning specified below:
a. Floor(s) on which the Premises are located: Eleventh (11th) and
twelfth (12th) floors.
b. Lease term: Approximately five (5) years and two (2) months,
commencing on the date Landlord delivers the Premises to Tenant
(the "Commencement Date") and ending on the last day of the
sixtieth (60th) full calendar month after the Rent Commencement
Date (as defined in Paragraph 2.c. below)(the "Expiration Date").
c. Monthly Rent: One Hundred Ten Thousand Three Hundred Seventy-Two
Dollars ($110,372.00).
The "Rent Commencement Date" shall be the date which is the
earlier of (i) sixty (60) days after the Commencement Date
(provided that if the Tenant Improvements (as defined in
Paragraph 4.a.i. below) have not been Substantially Completed (as
defined below) by the end of such 60-day period due to a delay
caused by Force Majeure (as defined below) or a Landlord Delay
(as defined below), then the 60-day period shall be extended by
the length of such delay; provided, however, that any such
extension of the 60-day period on account of Force Majeure shall
be limited to five (5) days), or (ii) the date Tenant commences
occupancy of any portion of the Premises for the conduct of
Tenant's business therein.
For purposes of the foregoing, the following terms shall have the
following meanings:
Substantial Completion of the Tenant Improvements shall have
occurred when, in Landlord's and Tenant's reasonable judgment,
the Tenant Improvements have been completed in accordance with
the Final Plans (as defined in Paragraph 4.a.i. below),
subject only to correction or completion of "Punch List"
items, which items shall be limited to minor items of
incomplete or defective work or materials or mechanical
maladjustments that are of such a nature that they do not
materially interfere with or impair Tenant's use of the
Premises for Tenant's business. The definition of Substantial
Completion shall also apply to the term "Substantially
Completed."
"Force Majeure" shall mean any delay in the Substantial
Completion of the Tenant Improvements that is caused by (i)
strikes, lockout, labor disputes, shortages of customary
materials and supplies (for which reasonable replacements are
not readily available) or labor, fire or other casualty, acts
of God or any similar cause that is beyond the reasonable
control of the party from whom performance is required, or
(ii) the failure of the
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applicable governmental authority, following receipt of all of
the required plans and other information, to issue the
required building permits or approvals within the customary
time periods for such issuance that existed as of the date of
this Lease.
"Landlord Delay" shall mean any delay in the Substantial
Completion of the Tenant Improvements that is due to (i)
Landlord's failure to provide any required consent or
disapproval within the time periods set forth in Paragraph 4
below, (ii) Landlord's failure to timely disburse Landlord's
Contribution in accordance with Paragraph 4.d.i. below, or
(iii) any other delay that is directly and solely caused by
the acts or failures to act (subject to any applicable time
periods for such actions provided for in Paragraph 4 below) of
Landlord or its agents or contractors.
d. Letter of Credit Amount: Five Hundred Thousand Dollars
($500,000.00).
e. Tenant's Share: 6.54%
f. Base Year: The calendar year 1999.
Base Tax Year: The fiscal tax year ending June 30, 2000.
g. Business of Tenant: Global internet service provider.
h. Real estate broker(s): Shorenstein Management Inc., and CB
Richard Ellis, Inc.
3. Term Delivery of Possession of Premises.
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a. The term of this Lease shall commence on the Commencement Date
(as defined in Paragraph 2.b.) and, unless sooner terminated pursuant to the
terms hereof or at law, shall expire on the Expiration Date (defined in
Paragraph 2.b.).
b. Landlord shall deliver possession of the Premises to Tenant as
soon as reasonably possible following the date hereof. Except as expressly
provided below, in the event of any delay in the delivery of the Premises to
Tenant, this Lease shall not be void or voidable, nor shall Landlord be liable
to Tenant for any loss or damage resulting therefrom. Notwithstanding the
foregoing, if Landlord has not delivered the Premises to Tenant for commencement
of construction of the Tenant Improvements on or before June 1, 1999 (the
"Outside Delivery Date") then Tenant may terminate this Lease by providing
Landlord with written notice of such termination prior to the date that the
Premises are delivered to Tenant for commencement of construction of the Tenant
Improvements, but in no event later than five (5) business days following the
Outside Delivery Date (as such date may have been extended pursuant to the
following). The foregoing Outside Delivery Date shall be extended by the length
of any delay in the delivery of the Premises to Tenant that is caused by
strikes, lock-outs, labor disputes, fire or other casualty, acts of God, or any
other cause beyond the reasonable control of Landlord; provided, however, that
the Outside Delivery Date may not be extended solely as a result of Landlord's
inability to recover possession of the Premises from the prior tenant of the
Premises and/or remove such tenant's possessions from the Premises. Tenant's
foregoing right to terminate this Lease shall be Tenant's sole remedy for
Landlord's failure to deliver the Premises to Tenant by the Outside Delivery
Date (as such date may have been extended pursuant to the terms hereof).
4. Condition of Premises. Improvements shall be constructed in the
---------------------
Premises in accordance with this Paragraph 4.
a. Plans; Selection of General Contractor.
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i. Plans. On or before May 3, 1999, Tenant shall furnish to
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Landlord for Landlord's review and reasonable approval working plans and
specifications for the improvements Tenant desires to be constructed in the
Premises, prepared by an architect reasonably acceptable to Landlord ("Tenant's
Architect"). The working plans and specifications shall show improvements that
conform to Landlord's base building requirements, the "Tenant Construction
Standards" and "Conditions for Construction" applicable to the Building
(collectively, the Building Construction Standards"), applicable building codes
and other Legal Requirements (as defined in Paragraph 7.a.(16) below) and shall
be in sufficient detail as to enable the general contractor for the work to
obtain all necessary governmental permits for commencement of the improvements
and to secure complete bids from qualified contractors to perform the work.
Landlord's approval of the working plans and specifications shall merely
indicate Landlord's consent to the proposed work shown thereon. In no event
shall such consent by Landlord be deemed to constitute a representation by
Landlord that the work called for in the working plans and specifications
complies with applicable building codes or other Legal Requirements nor shall
such consent release Tenant from Tenant's obligation to supply working plans and
specifications which do so conform
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to applicable building codes and Legal Requirements. Landlord shall respond to
each portion of the plans, either in writing or by marking up the submitted
plans, as soon as reasonably possible (but in any event within five (5) business
days of its receipt thereof) and, if Landlord disapproves of any portion of the
plans, Landlord shall advise Tenant of Landlord's reasons therefor. Tenant shall
respond to any reasonable objections of Landlord to the plans and resubmit
appropriately revised plans to Landlord. Landlord shall respond to any
resubmission of the plans as soon as reasonably possible (but in any event,
within five (5) business days of Landlord's receipt thereof), provided that the
resubmitted plans shall clearly indicate /which portions of the plans are
revised and which portions of the plan remain unchanged from the previously
submitted plans. (The working plans and specifications, as approved in writing
by Landlord, are hereinafter called the "Final Plans" and the improvements to be
performed in accordance with the Final Plans are hereinafter called the "Tenant
Improvements".) Notwithstanding anything to the contrary herein, Landlord and
Tenant shall cooperate with each other to resolve any space plan issues raised
by applicable local building codes.
ii. Selection of General Contractor. On or before the date that
-------------------------------
is five (5) business days following the approval by Landlord and Tenant of the
Final Plans, Tenant shall advise Landlord of whether Tenant selects Landlord's
designated contractor ("Landlord's Contractor") to be the general contractor for
the construction of the Tenant Improvements or whether Tenant desires to hire an
outside general contractor ("Tenant's Contractor") to construct the Tenant
Improvements.
b. Construction by Tenant's Contractor. If Tenant selects Tenant's
-----------------------------------
Contractor to construct the Tenant Improvements pursuant to Paragraph 4.a.ii.
above, the following provisions shall apply:
i. Tenant's Contractor shall be subject to Landlord's prior
written approval, which approval shall not be unreasonably withheld.
ii. Tenant's Contractor shall (1) have substantial recent
experience in the construction of tenant improvements in high-rise office
buildings in downtown San Francisco, (2) be licensed by the State of
California (as evidenced by Tenant's submission to Landlord of Tenant's
Contractor's state license number), and (3) have the capacity to be bonded
by a recognized surety company to assure full performance of the
construction contract for the work shown on the Final Plans (as evidenced
by Tenant's submission to Landlord of a commitment or other writing issued
by a recognized surety company confirming that Tenant's Contractor is
bondable for construction projects having a contract price not less than
the contract price under the construction contract for the Tenant
Improvements).
Tenant shall be responsible for Tenant's Contractor,
subcontractors, suppliers and materialmen (A) utilizing only union labor on
the construction, (B) obtaining Landlord's prior written approval (which
Landlord shall not unreasonably withhold) of all subcontractors to be
utilized in the performance of such construction work, (C) obtaining all
necessary governmental permits and approvals in connection with the Tenant
Improvements (and Landlord shall have no responsibility whatsoever in
connection with obtaining the same) and (D) furnishing to Landlord, prior
to the commencement of any construction in the Premises, certificates of
insurance evidencing insurance with coverage and in form and amount
required by Landlord for the subject contractors' or materialmens'
operations in the Premises, which policies shall name Landlord as an
additional insured. Landlord shall have no responsibility for furnishing
any security services in or about the Building or Premises to safeguard the
construction project or materials in connection therewith, other than that
customarily provided in the Building for its use as an office building.
iii. Following selection of Tenant's Contractor, Tenant shall
promptly enter into a contract with Tenant's Contractor for construction of
the Tenant Improvements. Tenant shall then cause Tenant's Contractor to
promptly commence and diligently pursue to completion the Tenant
Improvements in accordance with the Final Plans. If Tenant requests any
change, addition or alteration in or to the Final Plans ("Changes"), Tenant
shall cause Tenant's Architect to prepare additional plans implementing
such Change and such additional plans shall be submitted to Landlord for
Landlord's prior written approval, which approval shall not be unreasonably
withheld. Tenant's Contractor shall comply with the Building's reasonable
construction procedures and with all applicable laws and governmental
requirements regarding the performance of the work.
c. Construction By Landlord's Contractor. If Tenant selects
-------------------------------------
Landlord's Contractor to construct the Tenant Improvements pursuant to Paragraph
4.a.ii. above, the following provisions shall apply:
i. Construction. As soon as Landlord and Tenant have approved
------------
the Final Plans, Landlord shall cause Landlord's Contractor to commence and
diligently pursue construction of the Tenant Improvements to completion.
Landlord will provide ordinary power wiring to locations shown on the Final
Plans and shall provide and cause Landlord's Contractor to install conduits
as required for Tenant's telephone and computer systems as shown on the
Final Plans, but unless
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required by Tenant and specifically indicated on the Final Plans,
Landlord's Contractor shall not install, pull or hook up such wires, supply
jacks or plugs or provide wiring necessary for special conditioned power to
the Premises. The Tenant Improvements shall be constructed by Landlord's
Contractor in conformance with the Final Plans (subject to approved
Changes) and Landlord's Contractor shall comply with applicable
governmental requirements regarding the performance of the work; provided,
however, that the foregoing shall in no event require Landlord's Contractor
to identify and correct any violations of codes or laws reflected in the
Final Plans, it being agreed that, as expressly stated in Paragraph 4.a.i.
hereof, Tenant is responsible for submitting to Landlord Final Plans that
comply with all applicable laws.
Landlord's Contractor's fee for the construction of the
Tenant Improvements shall be as agreed upon by Tenant and Landlord.
ii. Changes. If Tenant requests any Changes to the Final Plans,
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Tenant shall cause Tenant's Architect to prepare additional plans
implementing such Change and such plans shall be submitted to Landlord for
Landlord's prior written approval, which approval shall not be unreasonably
withheld. As soon as reasonably possible after the completion of such
additional plans and Landlord's approval thereof, Landlord shall notify
Tenant of the estimated cost of the Change and the estimated affect the
Change will have on the construction schedule for the Tenant Improvements.
Within five (5) business days after receipt of such cost and timing
estimate, Tenant shall notify Landlord in writing whether Tenant approves
the Change. If Tenant approves the Change, Landlord shall proceed with the
Change and the cost of the Change shall be added to the cost of the Tenant
Improvements. If Tenant fails to approve the Change within such five (5)
business day period, construction of the Tenant Improvements shall proceed
as provided in accordance with the Final Plans as they existed prior to the
requested Change.
iii. Punch List Items. Upon notice from Landlord that the Tenant
----------------
Improvements have been completed in accordance With the Final Plans,
subject only to correction or completion of "Punch List" items (which Punch
List Items shall be limited to minor items of incomplete or defective work
or materials or mechanical maladjustments that are of such a nature that
they do not materially interfere with or impair Tenant's use of the
Premises for Tenant's business) Landlord and Tenant shall tour the Premises
and prepare a joint list of Punch List Items. Landlord shall cause
Landlord's Contractor to complete the Punch List items as soon as
reasonably possible.
d. Cost of Tenant Improvements. The cost of the construction and
---------------------------
installation of the Tenant Improvements shall be borne as follows:
i. Landlord's Contribution. Landlord shall contribute toward the
-----------------------
cost of the design, construction and installation of the Tenant
Improvements (including, without limitation, the fee for Landlord's
Contractor or Tenant's Contractor, whichever is applicable, and the
Construction Management Fee (as defined below) if applicable) an amount not
to exceed Five Hundred Thirty-Six Thousand Nine Hundred Forty Dollars
($536,940.00)("Landlord's Contribution"); provided, however that not more
than Seventy-One Thousand Five Hundred Ninety-Two Dollars ($71,592.00) of
Landlord's Contribution may be applied to Tenant's reasonable space
planning, architectural and engineering costs for the design of the Tenant
Improvements. No portion of Landlord's Contribution may be applied to the
cost of equipment, trade fixtures, moving expenses, furniture, signage or
free rent.
Tenant shall pay for all costs of the construction of the Tenant
Improvements in excess of Landlord's Contribution (the "Excess Cost").
Based on the estimated cost of the construction of the Tenant Improvements
(inclusive of the applicable fees referenced above)(which estimated cost
shall be mutually and reasonably agreed upon by Landlord and Tenant, and is
referred to hereinafter as the "Estimated Costs"), the prorata share of the
Estimated Costs payable by Landlord and Tenant shall be determined and an
appropriate percentage share established for each (a "Share of Costs").
Tenant and Landlord shall fund the cost of such work (including the
applicable portion of the applicable fees) as the same is performed, in
accordance with their respective Share of Costs for such work, with
Tenant's payments being made to Landlord's Contractor within thirty (30)
days of written demand if Landlord's Contractor constructs the Tenant
Improvements. At such time as Landlord's Contribution has been entirely
disbursed, Tenant shall pay the remaining Excess Cost, if any, which
payments shall be made in installments as construction progresses in the
same manner as Tenant's payments of Tenant's Share of Costs were paid.
If Tenant's Contractor constructs the Tenant Improvements, the
following provisions shall govern the disbursement of Landlord's
Contribution. Landlord shall disburse Landlord's Contribution (with each
payment being calculated in accordance with Landlord's Share of Costs as
provided above) directly to Tenant's Contractor, or subcontractors, or to
Tenant as Landlord and Tenant may agree, in monthly installments. Each
disbursement shall be conditioned upon Landlord's receipt of invoices to be
furnished by Tenant covering work actually performed, construction in place
and materials delivered to the site (as may be applicable). No payment will
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be made for materials or supplies not on site. To the extent permitted by
law, Landlord may withhold the amount of any and all retention percentages
provided for in original contracts or subcontracts until the earlier of (i)
the expiration of the applicable lien period or (ii) Landlord's receipt of
a waiver of lien rights from Tenant's Contractor, subcontractors or
suppliers whose invoices are applicable to the respective disbursement for,
and/or on account of, the work or materials covered by such invoice. Tenant
shall pay Tenant's Share of Costs directly to the contractor or suppliers
involved and shall furnish to Landlord copies of receipted invoices
therefor and such waivers of lien rights as Landlord may reasonably
require.
Notwithstanding the foregoing, Landlord shall retain from the amount
of Landlord's Contribution, as compensation to Landlord for review of the
Final Plans and for construction inspection, administration and management
with regard to the Tenant Improvements, a sum (the "Construction Management
Fee") equal to Twenty-Four Thousand Dollars ($24,000.00). At the time
Landlord makes any disbursement of Landlord's Contribution, Landlord shall
retain from Landlord's Contribution, as a partial payment of the
Construction Management Fee, a proportionate amount of the Construction
Management Fee based upon Landlord's reasonable estimation of the amount
required to be withheld from each disbursement in order to ensure that the
entire Construction Management Fee is retained over the course of
construction on a prorata basis. At such time as Landlord's Contribution
has been entirely disbursed, Tenant shall, within thirty (30) days of
written demand, pay to Landlord the remainder, if any, of the Construction
Management Fee not yet paid to Landlord.
ii. Landlord's Work. In additional to Landlord's Contribution,
---------------
Landlord shall pay for the entire cost of Landlord's Work described in
Paragraph 4.e. below.
e. Landlord's Work. Regardless of whether Tenant's Contractor or
---------------
Landlord's Contractor constructs the Tenant Improvements, Landlord shall cause
the following work ('Landlord's Work") to be performed at Landlord's cost:
i. Perform the work, if any, required to bring the restrooms on
the 11th and 12th floors of the Building into compliance
with Title 24 accessibility requirements.
ii. Perform the work, if any, required to bring the common areas
of the Building that are reasonably anticipated to be in
Tenant's path of travel, to comply with Title 24
accessibility requirements in effect as of the Commencement
Date.
Landlord's Work shall be performed concurrently with the construction of the
Tenant Improvements.
5. Monthly Rent.
------------
a. On or before the first day of each calendar month during the term
hereof, Tenant shall pay to Landlord, as monthly rent for the Premises, the
Monthly Rent specified in Paragraph 2 above. If the term of this Lease commences
on a day other than the first day of a calendar month, or terminates on a day
other than the last day of a calendar month, then the Monthly Rent payable for
such partial month shall be appropriately prorated on the basis of a thirty
(30)-day month. Monthly Rent and the Additional Rent specified in Paragraph 7
shall be paid by Tenant to Landlord, in advance, without deduction, offset,
prior notice or demand, in immediately available funds of lawful money of the
United States of America, or by good cheek as described below, at the office of
Shorenstein Company, L.P., at 555 California Street, 14th floor, San Francisco,
California 94104, or to such other person or at such other place as Landlord may
from time to time designate in writing not less than five (5) business days in
advance. Payments made by cheek must be drawn either on a California financial
institution or on a financial institution that is a member of the federal
reserve system. Notwithstanding the foregoing, Tenant shall pay to Landlord with
execution of this Lease an amount equal to one (1) month's Monthly Rent
hereunder, which amount shall be applied to the Monthly Rent first due and
payable hereunder.
b. All amounts payable by Tenant to Landlord under this Lease, or
otherwise payable in connection with Tenant's occupancy of the Premises, in
addition to the Monthly Rent hereunder and Additional Rent under Paragraph 7,
shall constitute rent owed by Tenant to Landlord hereunder.
c. Any rent not paid by Tenant to Landlord when due shall bear
interest from the date due to the date of payment by Tenant at an annual rate of
interest (the "Interest Rate") equal to the lesser of (i) the maximum annual
interest rate allowed by law on such due date for business loans (not primarily
for personal, family or household purposes) not exempt from the usury law, or
(ii) a rate equal to the sum of six (6) percentage points over the six-month
United States Treasury bill rate (the "Treasury Rate") in effect from time to
time during such delinquency (or if there is no such publicly announced rate,
the rate quoted by the San Francisco Main Office of Bank of America, NT&SA, or
any successor bank thereto, in pricing ninety (90)-day commercial loans to
substantial commercial borrowers). Failure by Tenant to pay rent when due,
including any interest accrued under this subparagraph, shall constitute an
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Event of Default (as defined in Paragraph 25 below) giving rise to all the
remedies afforded Landlord under this Lease and at law for nonpayment of rent.
d. No security or guaranty which may now or hereafter be furnished
to Landlord for the payment of rent due hereunder or for the performance by
Tenant of the other terms of this Lease shall in any way be a bar or defense to
any of Landlord's remedies under this Lease or at law.
6. Lease Security. As security for the performance by Tenant of
--------------
Tenant's obligations hereunder, Tenant shall cause to be delivered to Landlord
concurrently with the execution of this Lease by Tenant, an original irrevocable
standby letter of credit (the "Letter of Credit") in the amount of Five Hundred
Thousand Dollars ($500,000.00), which Landlord may draw upon to cure any default
under this Lease or to compensate Landlord for any damage Landlord incurs as a
result of Tenant's failure to perform any of its obligations hereunder. Any such
draw on the Letter of Credit shall not constitute a waiver of any other rights
of Landlord with respect to such default. The Letter of Credit shall be issued
by a major commercial bank reasonably acceptable to Landlord with a San
Francisco service and claim point for the Letter of Credit, have an expiration
date not earlier than the Expiration Date (or, in the alternative, have a term
of not less than one (1) year and be automatically renewable for an additional
one (1) year period unless notice of non-renewal is given by the issuer to
Landlord not later than sixty (60) days prior to the expiration thereof). The
Letter of Credit shall provide for payment to Landlord upon the issuer's receipt
of a sight draft from Landlord together with Landlord's certificate certifying
that the requested sum is due and payable from Tenant and Tenant has failed to
pay, and with no other conditions, and otherwise be in form and content
satisfactory to Landlord. If the Letter of Credit has an expiration date earlier
than the Expiration Date, then throughout the term hereof (including any renewal
or extension of the term) Tenant shall provide evidence of renewal of the Letter
of Credit to Landlord at least sixty (60) days prior to the date the Letter of
Credit expires. If Landlord draws on the Letter of Credit pursuant to the terms
hereof, Tenant shall immediately replenish the Letter of Credit or provide
Landlord with an additional letter of credit conforming to the requirements of
this paragraph so that the amount available to Landlord from the Letter of
Credit(s) provided hereunder is $500,000.00
Tenant's failure to deliver any replacement, additional or extension of
the Letter of Credit, or evidence of renewal of the Letter of Credit, within the
time specified under this Lease shall entitle Landlord to draw upon the full
amount of the Letter of Credit then in effect and (a) Landlord shall hold the
drawn amount as security for Tenant's obligations under this Lease and no
interest shall accrue to Tenant with regard to such sums so held by Landlord,
(b) Landlord may (but shall not be required to) use the sums so held or any
portion thereof to cure any Event of Default or to compensate Landlord for any
damage Landlord incurs as a result of Tenant's failure to perform any of its
covenants or obligations hereunder, it being understood that any use of such
sums shall not constitute a bar or defense to any of Landlord's remedies under
this Lease or at law (and if Landlord so uses all or part of the security
deposit, then upon written notice from Landlord to Tenant specifying the amount
of the security deposit so utilized by Landlord and the particular purpose for
which such amount was applied, Tenant shall immediately deposit with Landlord an
amount sufficient to return the security deposit to an amount equal to one
hundred percent (100%) of the security deposit held by Landlord prior to such
application of the security deposit; and Tenant's failure to make such payment
to Landlord within five (5) business days of receipt of Landlord's notice shall
constitute an Event of Default, (e) if Tenant is not in default at the
expiration or termination of this Lease, Landlord shall return to Tenant the
balance of such sums so held by Landlord; provided, however, that in no event
shall any such return be construed as an admission by Landlord that Tenant has
performed all of its covenants and obligations under the Lease, and (d) no
holder of a Superior Interest (as defined in Paragraph 21 below), nor any
purchaser at any judicial or private foreclosure sale of the Real Property or
any portion thereof, shall be responsible to Tenant for the sums so held by
Landlord unless and only to the extent such holder or purchaser shall have
actually received the same.
Tenant may from time to time during the Lease term (but not more than
once during any twelve (12) month period) request that Landlord review Tenant's
then current financial statement to determine if Landlord will continue to
require the Letter of Credit as security for Tenant's obligations under this
Lease. Tenant acknowledges that Landlord shall in no event be required to
eliminate the requirement that Tenant provide the Letter of Credit, it being
agreed that Landlord's sole obligation under this grammatical paragraph is to
review the financial statement submitted by Tenant.
If, at any time during the term hereof while the Letter of Credit is in
effect, Tenant becomes a publicly held corporation, then Tenant may replace the
Letter of Credit with a cash security deposit equal to One Hundred Ten Thousand
Three Hundred Seventy-Two Dollars ($110,372.00). Upon Landlord's receipt from
Tenant of (i) reasonable documentation evidencing that Tenant has become a
publicly held company and (ii) the $110,372.00 security deposit, Landlord shall
return to Tenant the Letter of Credit held by Landlord. If Tenant does
substitute a cash security deposit for the Letter of Credit, the provisions of
(a) through (d) of the second grammatical paragraph of this Paragraph 6 shall
apply thereto. Once the Letter of Credit is replaced with the security deposit,
the security deposit shall remain in effect throughout the remainder of the
Lease term, and Landlord shall be under no further obligation to review Tenant's
financial statements.
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7. Additional Rent: Increases in Operating Expenses and Tax Expenses.
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a. Operating Expenses. Tenant shall pay to Landlord, at the times
------------------
hereinafter set forth, Tenant's Share, as specified in Paragraph 2.e. above, of
any increase in the Operating Expenses (as defined below) incurred by Landlord
in each calendar year subsequent to the Base Year specified in Paragraph 2.f.
above, over the Operating Expenses incurred by Landlord during the Base Year.
The amounts payable under this Paragraph 7.a. and Paragraph 7.b. below are
termed "Additional Rent" herein.
The term "Operating Expenses" shall mean the total costs and expenses incurred
by Landlord in connection with the management, operation, maintenance, repair
and ownership of the Real Property, including, without limitation, the following
costs: (1) salaries, wages, bonuses and other compensation (including
hospitalization, medical, surgical, retirement plan, pension plan, union dues,
life insurance, including group life insurance, welfare and other fringe
benefits, and vacation, holidays and other paid absence benefits) relating to
employees of Landlord or its agents engaged in the operation, repair, or
maintenance of the Real Property; (2) payroll, social security, workers'
compensation, unemployment and similar taxes with respect to such employees of
Landlord or its agents, and the cost of providing disability or other benefits
imposed by law or otherwise, with respect to such employees; (3) the cost of
uniforms (including the cleaning, replacement and pressing thereof) provided to
such employees; (4) premiums and other charges incurred by Landlord with respect
to fire, other casualty, rent and liability insurance, any other insurance as is
deemed necessary or advisable in the reasonable judgment of Landlord, or any
insurance required by the holder of any Superior Interest (as defined in
Paragraph 21 below), and, after the Base Year, costs of repairing an insured
casualty to the extent of the deductible amount under the applicable insurance
policy, or, in the event of earthquake damage sustained during any period that
Landlord does not actually carry earthquake insurance, the costs of repairing
the earthquake damage up to the amount of the deductible that Landlord would
have paid had Landlord actually carried earthquake insurance at the time of the
earthquake (provided that Landlord may include in Operating Expenses the amount
of Landlord's deductible (or deemed deductible, with regard to repairs of
earthquake damage sustained during any period that Landlord does not actually
carry earthquake insurance) only to the extent such deductible (or deemed
deductible) does not materially exceed the customary range of deductibles for
comparable first-class office buildings in the San Francisco financial district;
and provided, further, if the Real Property sustains earthquake damage, and
Tenant's Share of the deductible paid by Landlord under Landlord's earthquake
policy (or deemed deductible, in the event Landlord does not carry earthquake
insurance) is more than $110,372.00, then Tenant may, at Tenant's option, either
(i) pay the entire amount of Tenant's Share of the deductible in the manner
required by application of this Paragraph 7 or (ii) pay only $110,372.00 at the
time Tenant's payment is due pursuant to the provisions of this Paragraph 7,
with the remaining portion of Tenant's Share of the deductible to be paid by
Tenant by amortizing such amount over the remaining term of the Lease, which
amortization shall be on a straight line basis, with monthly payments, at an
interest rate equal to the rate (as of the commencement of the amortization
period) quoted by the San Francisco Main Office of Bank of America, NT&SA, or
any successor bank thereto, in pricing commercial loans of a duration equal to
the subject amortization period to substantial commercial borrowers); (5) water
charges and sewer rents or fees; (6) license, permit and inspection fees; (7)
sales, use and excise taxes on goods and services purchased by Landlord in
connection with the operation, maintenance or repair of the Real Property and
Building systems and equipment; (8) telephone, telegraph, postage, stationery
supplies and other expenses incurred in connection with the operation,
maintenance, or repair of the Real Property; (9) management fees and expenses;
(10) costs of repairs to and maintenance of the Real Property, including
building systems and appurtenances thereto and normal repair and replacement of
worn-out equipment, facilities and installations, but excluding the replacement
of major building systems (except to the extent provided in (16) and (17)
below); (11) fees and expenses for janitorial, window cleaning, guard,
extermination, water treatment, rubbish removal, plumbing and other services and
inspection or service contracts for elevator, electrical, mechanical and other
building equipment and systems or as may otherwise be necessary or proper for
the operation, repair or maintenance of the Real Property; (12) costs of
supplies, tools, materials, and equipment used in connection with the operation,
maintenance or repair of the Real Property; (13) accounting, legal and other
professional fees and expenses; (14) fees and expenses for painting the exterior
or the public or common areas of the Building and the cost of maintaining the
sidewalks, landscaping and other common areas of the Real Property; (15) costs
and expenses for electricity, chilled water, air conditioning, water for
heating, gas, fuel, steam, heat, lights, power and other energy related
utilities required in connection with the operation, maintenance and repair of
the Real Property; (16) the cost of any capital improvements made by Landlord to
the Real Property or capital assets acquired by Landlord after the Base Year in
order to comply with any local, state or federal law, ordinance, role,
regulation, code or order of any governmental entity or insurance requirement
(collectively, "Legal Requirement") with which the Real Property was not
required to comply during the Base Year, or to comply with any amendment or
other change to the enactment or interpretation of any Legal Requirement from
its enactment or interpretation during the Base Year; (17) the cost of any
capital improvements made by Landlord to the Building or capital assets acquired
by Landlord after the Base Year for the protection of the health and safety of
the occupants of the Real Property or that are designed to reduce other
Operating Expenses; (18) the cost of furniture, draperies, carpeting,
landscaping and other customary and ordinary items of personal property
(excluding paintings, sculptures and other works of art) provided by Landlord
for use in common areas of the Building or in the Building office (to the extent
that such Building office is dedicated to the operation and
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management of the Real Property); (19) any expenses and costs resulting from
substitution of work, labor, material or services in lieu of any of the above
itemizations, or for any additional work, labor, services or material resulting
from compliance with any Legal Requirement applicable to the Real Property or
any parts thereof; and (20) Building office rent or rental value; provided that
the rent or rental value shall be for premises not to exceed One Thousand Five
Hundred (1,500) rentable square feet of space and the rent or rental value shall
not to exceed the fair market rent for the subject space. With respect to the
costs of items included in Operating Expenses under (16) and (17), such costs
shall be amortized over a reasonable period (which period shall be determined by
Landlord in accordance with generally accepted property management practices),
together with interest on the unamortized balance at a rate per annum equal to
three (3) percentage points over the Treasury Rate charged at the time such item
is constructed or acquired, or, if Landlord borrows funds to finance the
construction or acquisition of the subject item, at the actual interest rate
paid by Landlord on such funds borrowed for the purpose of constructing or
acquiring such item, but in either case not more than the maximum rate permitted
by law at the time such item is constructed or acquired.
Operating Expenses shall not include the following: (i) depreciation
on the Building or equipment or systems therein; (ii) principal or interest
payments on loans secured by mortgages or trust deed on the Real Property; (iii)
rental under any ground or underlying lease; (iv) interest (except as expressly
provided in this Paragraph 7.a.); (v) Tax Expenses (as defined in Paragraph 7.b.
below); (vi) attorneys' fees and expenses incurred in connection with lease
negotiations with prospective Building tenants or disputes with Building
tenants; (vii) the cost (including any amortization thereof) of any improvements
or alterations which would be properly classified as capital expenditures
according to generally accepted property management practices (except to the
extent expressly included in Operating Expenses pursuant to Paragraphs 7.a.(16)
and (17); (viii) the cost of decorating, improving for tenant occupancy,
painting or redecorating portions of the Building to be demised to tenants; (ix)
salaries of executives and officers above the function of Director of Property
Management, or the cost of labor and employees with respect to personnel not
located at the Building on a full-time basis unless such costs are appropriately
allocated between the Building and the other responsibilities of such personnel;
(x) advertising; (xi) real estate broker's or other leasing commissions, rental
concessions, build-outs for tenants and lease buy-outs; (xii) penalties or other
costs incurred due to a violation by Landlord, as determined by written
admission, stipulation, final judgment or arbitration award, of any of the terms
and conditions of this Lease or any other lease relating to the Building except
to the extent such costs reflect costs that would have been incurred by Landlord
absent such violation; (xiii) subject to the Operating Expense inclusions set
forth in item (4) above, repairs and other work occasioned by fire, windstorm or
other casualty; (xiv) costs, penalties or fines arising from Landlord's
violation of any applicable governmental role or authority except to the extent
such costs reflect costs that would have been incurred by Landlord absent such
violation; (xv) overhead and profit increments paid to subsidiaries or
affiliates of Landlord for management or other services on or to the Building or
for supplies or other materials to the extent that the cost of the services,
supplies or materials materially exceed the amounts normally payable for similar
goods and services under similar circumstances (taking into account the market
factors in effect on the date any relevant contracts were negotiated) in first
class buildings in the San Francisco Financial District; (xvi) the cost of
services or facilities made available at no special cost to any tenant in the
Building but not to Tenant; (xvii) costs associated with the operation of the
business of the partnership or corporation which constitutes Landlord, as the
same are distinguished from the costs of the operation of the Real Property by
Landlord; (xviii) political or charitable contributions; (xix) costs solely
attributable to the garage in the Building (provided, however, that the cost of
providing utilities to the garage shall be included in Operating Expenses); (xx)
the cost of any service for which Tenant pays directly to third parties or for
which Landlord is reimbursed by tenants (other than by application of provisions
such as this Paragraph 7); (xxi) the cost of damage and repairs necessitated by
the deliberate misconduct of Landlord; (xxii) any costs incurred in installing,
operating, maintaining or owning any specialty not normally installed, operated
and maintained in buildings comparable to the Building and not necessary for
Landlord's operation, repair, maintenance and providing of required services for
the Building, including, but not limited to any observatory, broadcasting
facility (other than the Building's music system and life support systems),
luncheon club, athletic or recreational club; (xxiii) the costs of purchasing or
leasing any sculpture, paintings or other works of art; or (xxiv) costs incurred
in large scale or material (as opposed to minor or incidental) cleaning-up or
removing hazardous materials from the Real Property pursuant to government
mandate.
b. Tax Expenses. Tenant shall pay to Landlord as Additional Rent
------------
under this Lease, at the times hereinafter set forth, Tenant's Share, as
specified in Paragraph 2.e. above, of any increase in Tax Expenses (as defined
below) incurred by Landlord in each calendar year over Tax Expenses incurred by
Landlord during the Base Tax Year. Notwithstanding the foregoing, if any
reassessment, reduction or recalculation of any item included in Tax Expenses
during the term results in a reduction of Tax Expenses, then for purposes of
calculating Tenant's Share of increases in Tax Expenses from and after the
calendar year in which such adjustment occurs, Tax Expenses for the Base Tax
Year shall be adjusted to reflect such reduction.
The term "Tax Expenses" shall mean all taxes, assessments (whether
general or special), excises, transit charges, housing fund assessments or other
housing charges, improvement districts, levies
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or fees, ordinary or extraordinary, unforeseen as well as foreseen, of any kind,
which are assessed, levied, charged, confirmed or imposed on the Real Property,
on Landlord with respect to the Real Property, on the act of entering into
leases of space in the Real Property, on the use or occupancy of the Real
Property or any part thereof, with respect to services or utilities consumed in
the use, occupancy or operation of the Real Property, on any improvements,
fixtures and equipment and other personal property of Landlord located in the
Real Property and used in connection with the operation of the Real Property, or
on or measured by the rent payable under this Lease or in connection with the
business of renting space in the Real Property, including, without limitation,
any gross income tax or excise tax levied with respect to the receipt of such
rent, by the United States of America, the State of California, the City and
County of San Francisco, any political subdivision, public corporation, district
or other political or public entity or public authority, and shall also include
any other tax, fee or other excise, however described, which may be levied or
assessed in lieu of, as a substitute (in whole or in part) for, or as an
addition to, any other Tax Expense. Tax Expenses shall include reasonable
attorneys' fees, costs and disbursements incurred in connection with proceedings
to contest, determine or reduce Tax Expenses. If it shall not be lawful for
Tenant to reimburse Landlord for any increase in Tax Expenses as defined herein,
the Monthly Rent payable to Landlord prior to the imposition of such increases
in Tax Expenses shall be increased to net Landlord the same net Monthly Rent
after imposition of such increases in Tax Expenses as would have been received
by Landlord prior to the imposition of such increases in Tax Expenses.
Tax Expenses shall not include income, franchise, transfer, inheritance
or capital stock taxes, unless, due to a change in the method of taxation, any
of such taxes is levied or assessed against Landlord in lieu of, as a substitute
(in whole or in part) for, or as an addition to, any other charge which would
otherwise constitute a Tax Expense.
c. Adjustment for Occupancy Factor. Notwithstanding any other
-------------------------------
provision herein to the contrary, in the event the Building is not fully
occupied during the Base Year or any calendar year during the term after the
Base Year, an adjustment shall be made by Landlord in computing Operating
Expenses for such year so that the Operating Expenses shall be computed for such
year as though the Building had been fully occupied during such year. In
addition, if any particular work or service includable in Operating Expenses is
not furnished to a tenant who has undertaken to perform such work or service
itself, Operating Expenses shall be deemed to be increased by an amount equal to
the additional Operating Expenses which would have been incurred if Landlord had
furnished such work or service to such tenant. The parties agree that statements
in this Lease to the effect that Landlord is to perform certain of its
obligations hereunder at its own or sole cost and expense shall not be
interpreted as excluding any cost from Operating Expenses or Tax Expenses if
such cost is an Operating Expense or Tax Expense pursuant to the terms of this
Lease.
d. Intention Regarding Expense Pass-Through. It is the intention of
----------------------------------------
Landlord and Tenant that the Monthly Rent paid to Landlord throughout the term
of this Lease shall be absolutely net of all increases, respectively, in Tax
Expenses and Operating Expenses over, respectively, Tax Expenses for the Base
Tax Year and Operating Expenses for the Base Year, and the foregoing provisions
of this Paragraph 7 are intended to so provide.
e. Notice and Payment. On or before the first day of each calendar
------------------
year during the term hereof subsequent to the Base Year, or as soon as
practicable thereafter, Landlord shall give to Tenant notice of Landlord's
estimate of the Additional Rent, if any, payable by Tenant pursuant to
Paragraphs 7.a. and 7.b. for such calendar year subsequent to the Base Year. On
or before the first day of each month during each such subsequent calendar year,
Tenant shall pay to Landlord one-twelfth (1/12th) of the estimated Additional
Rent; provided, however, that if Landlord's notice is not given prior to the
first day of any calendar year Tenant shall continue to pay Additional Rent on
the basis of the prior year's estimate until the month after Landlord's notice
is given. If at any time it appears to Landlord that the Additional Rent payable
under Paragraphs 7.a. and/or 7.b. will vary from Landlord's estimate by more
than five percent (5%), Landlord may, by written notice to Tenant, revise its
estimate for such year, and subsequent payments by Tenant for such year shall be
based upon the revised estimate. On the first monthly payment date after any new
estimate is delivered to Tenant, Tenant shall also pay any accrued cost
increases, based on such new estimate.
f. Annual Accounting. Landlord shall maintain adequate records of the
-----------------
Operating Expenses and Tax Expenses in accordance with generally accepted
property management practices. Within ninety (90) days after the close of each
calendar year subsequent to the Base Year, or as soon after such ninety (90) day
period as practicable, Landlord shall deliver to Tenant a statement of the
Additional Rent payable under Paragraphs 7.a. and 7.b. for such year. The
statement shall be based on the results of an audit of the operations of the
Building prepared for the applicable year by a nationally recognized certified
public accounting firm selected by Landlord. Upon Tenant's request, Landlord
shall promptly deliver to Tenant a copy of the auditor's statement on which
Landlord's annual statement is based and such other information regarding the
annual statement as may be reasonably required by Tenant to ascertain Landlord's
compliance with this Paragraph 7. Landlord's annual statement shall be final and
binding upon Landlord and Tenant unless either party, within ninety (90) days
after Tenant's receipt thereof, shall contest any item therein by giving written
notice to the other, specifying each item contested and the
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<PAGE>
reason therefor. Notwithstanding the foregoing, the Tax Expenses included in any
such annual statement may be modified by any subsequent adjustment or
retroactive application of Tax Expenses affecting the calculation of such Tax
Expenses. Provided that the issue is raised by either party within the
aforementioned ninety (90) day period, Landlord and Tenant shall endeavor in
good faith to promptly resolve any disagreement between the parties regarding
the subject annual statement. If the annual /'statement shows that Tenant's
payments of Additional Rent for such calendar year pursuant to Paragraph 7.e.
above exceeded Tenant's obligations for the calendar year, Landlord shall, at
Tenant's option, either (1) credit the excess to the next succeeding
installments of estimated Additional Rent or (2) pay the excess to Tenant within
thirty (30) days after delivery of such statement. If the annual statement shows
that Tenant's payments of Additional Rent for such calendar year pursuant to
Paragraph 7.e. above were less than Tenant's obligation for the calendar year,
Tenant shall pay the deficiency to Landlord within thirty (30) days after
delivery of such statement.
g. Proration for Partial Lease Year. If this Lease terminates on a
--------------------------------
clay other than the last clay of a calendar year, the Additional Rent payable by
Tenant pursuant to this Paragraph 7 applicable to the calendar year in which
this Lease terminates shall be prorated on the basis that the number of days
from the commencement of such calendar year to and including such termination
date bears to three hundred sixty-five (365).
8. Use of Premises; Compliance with Law.
------------------------------------
a. Use of Premises. The Premises shall be used solely for general
---------------
office purposes which are consistent with the operation of the Building as a
first-class office building, which do not materially increase (beyond that which
would be typical for use of the Premises by a general office user typical of
first-class financial district office buildings) (a) the operating costs for the
Building, (b) the burden on the Building services, or (c) the foot traffic,
elevator usage or security concerns in the Building, and which do not create an
increased probability of the comfort and/or safety of the Landlord or other
tenants of the Building being compromised or reduced, or which may conflict with
any exclusive uses granted to other tenants of the Real Property, or with the
terms of any easement, covenant, condition or restriction or other agreement
affecting the Real Property, and for no other use or purpose without the prior
written consent of Landlord, which may be withheld in Landlord's sole discretion
(for example, but not exclusively, Landlord's consent shall be required for and
may be denied with respect to, use of the Premises for a school or training
facility, an entertainment, sports or recreation facility, retail sales to the
public, or a consulate or similar office).
Tenant shall not do or suffer or permit anything to be done in or about
the Premises or the Real Property, nor bring or keep anything therein, which
would in any way subject Landlord, Landlord's agents or the holder of any
Superior Interest (as defined in Paragraph 21) to any liability, increase the
premium rate of or affect any fire, casualty, liability, rent or other insurance
relating to the Real Property or any of the contents of the Building, or cause a
cancellation of, or give rise to any defense by the insurer to any claim under,
or conflict with, any policies for such insurance. If any act or omission of
Tenant results in any such increase in premium rates, Tenant shall pay to
Landlord upon demand the amount of such increase. Tenant shall not do or suffer
or permit anything to be done in or about the Premises or the Real Property
which will in any way obstruct or interfere with the rights of other tenants or
occupants of the Building or injure or annoy them, or use or suffer or permit
the Premises to be used for any immoral, unlawful or objectionable purpose, nor
shall Tenant cause, maintain, suffer or permit any nuisance in, on or about the
Premises or the Real Property. Without limiting the foregoing, no loudspeakers
or other similar device which can be heard outside the Premises shall, without
the prior written approval of Landlord, be used in or about the Premises. Tenant
shall not commit or suffer to be committed any waste in, to or about the
Premises.
Tenant agrees not to employ any person, entity or contractor for any work
in the Premises (including moving Tenant's equipment and furnishings in, out or
around the Premises) whose presence may give rise to a labor or other
disturbance in the Building and, if necessary to prevent such a disturbance in a
particular situation, Landlord may require Tenant to employ union labor for the
work.
b. Compliance with Law. Tenant shall not do or permit anything to be
-------------------
done in or about the Premises which will in any way conflict with any Legal
Requirement (as defined in Paragraph 7.a.(16) above) now in force or which may
hereafter be enacted. Tenant, at its sole cost and expense, shall promptly
comply with all such present and future Legal Requirements relating to the
condition, use or occupancy of the Premises, and shall perform all work to the
Premises or other portions of the Real Property required to effect such
compliance (or, at Landlord's election, Landlord may perform such work at
Tenant's cost). Notwithstanding the foregoing, however, Tenant shall not be
required to perform any structural changes to the Premises or other portions of
the Real Property unless such changes are related to or affected or triggered by
(i) Tenant's Alterations (as defined in Paragraph 9 below), (ii) Tenant's
particular use of the Premises (as opposed to Tenant's use of the Premises for
general office purposes in a normal and customary manner), (iii) Tenant's
particular employees or employment practices, or (iv) the construction of
initial improvements to the Premises (except that Tenant shall have no
responsibility for performing Landlord's Work, as defined in Paragraph 4.e.
above). The judgment of any court of competent
10
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jurisdiction or the admission of Tenant in an action against Tenant, whether or
not Landlord is a party thereto, that Tenant has violated any Legal Requirement
shall be conclusive of that fact as between Landlord and Tenant. Tenant shall
immediately furnish Landlord with any notices received from any insurance
company or governmental agency or inspection bureau regarding any unsafe or
unlawful conditions within the Premises or the violation of any Legal
Requirement.
c. Hazardous Materials. Tenant shall not cause or permit the
-------------------
storage, use, generation, release, handling or disposal (collectively,
"Handling") of any Hazardous Materials (as defined below), in, on, or about the
Premises or the Real Property by Tenant or any agents, employees, contractors,
licensees, subtenants, customers, guests or invitees of Tenant (collectively
with Tenant, "Tenant Parties"), except that Tenant shall be permitted to use
normal quantities of office supplies or products (such as copier fluids or
cleaning supplies) customarily used in the conduct of general business office
activities ("Common Office Chemicals"), provided that the Handling of such
Common Office Chemicals shall comply at all times with all Legal Requirements,
including Hazardous Materials Laws (as defined below). Notwithstanding anything
to the contrary contained herein, however, in no event shall Tenant permit any
usage of Common Office Chemicals in a manner that may cause the Premises or the
Real Property to be contaminated by any Hazardous Materials or in violation of
any Hazardous Materials Laws. Tenant shall immediately advise Landlord in
writing of (a) any and all enforcement, cleanup, remedial, removal, or other
governmental or regulatory actions instituted, completed, or threatened pursuant
to any Hazardous Materials Laws relating to any Hazardous Materials affecting
the Premises; and (b) all claims made or threatened by any third party against
Tenant, Landlord, the Premises or the Real Property relating to damage,
contribution, cost recovery, compensation, loss, or injury resulting from any
Hazardous Materials on or about the Premises. Without Landlord's prior written
consent (which consent may be withheld in Landlord's sole discretion), Tenant
shall not take any remedial action or enter into any agreements or settlements
in response to the presence of any Hazardous Materials in, on, or about the
Premises. Tenant shall be solely responsible for and shall indemnify, defend and
hold Landlord and all other Indemnitees (as defined in Paragraph 14.b. below),
harmless from and against all Claims (as defined in Paragraph 14.b. below),
arising out of or in connection with, or otherwise relating to (i) any Handling
of Hazardous Materials by any Tenant Party or Tenant's breach of its obligations
hereunder, or (ii) any removal, cleanup, or restoration work and materials
necessary to return the Real Property or any other property of whatever nature
located on the Real Property to their condition existing prior to the Handling
of Hazardous Materials in, on or about the Premises. Tenant's obligations under
this paragraph shall survive the expiration or other termination of this Lease.
For purposes of this Lease, "Hazardous Materials" means any explosive,
radioactive materials, hazardous wastes, or hazardous substances, including
without limitation asbestos containing materials, PCB's, CFC's, or substances
defined as "hazardous substances" in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601-9657;
the Hazardous Materials Transportation Act of 1975, 49 U.S.C. Section 1801-1812;
the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901-6987;
or any other Legal Requirement regulating, relating to, or imposing liability or
standards of conduct concerning any such materials or substances now or at any
time hereafter in effect (collectively, "Hazardous Materials Laws").
d. Applicability of Paragraph. The provisions of this Paragraph 8
--------------------------
are for the benefit of Landlord, the holder of any Superior Interest (as defined
in Paragraph 21 below), and the other Indemnitees only and are not nor shall
they be construed to be for the benefit of any tenant or occupant of the
Building.
9. Alterations and Restoration.
---------------------------
a. Tenant shall not make or permit to be made any alterations,
modifications, additions, decorations or improvements to the Premises, or any
other work whatsoever that would directly or indirectly involve the penetration
or removal (whether permanent or temporary) of, or require access through, in,
under, or above any floor, wall or ceiling, or surface or coveting thereof in
the Premises (collectively, "Alterations"), except as expressly provided in this
Paragraph 9. Tenant shall have the right, without Landlord's consent, to make
any Alteration to the Premises, provided that (a) the Alteration is decorative
in nature (such as paint, carpet or other wall or floor finishes, partitions or
other such work), (b) Tenant provides Landlord with five (5) business days'
advance notice of the commencement of any such Alteration, (e) such Alteration
does not affect the Building's electrical, mechanical or HVAC systems or any
part of the Building other than the Premises, (d) the work will not decrease the
value of the Premises, does not require a building permit or other governmental
permit, uses only first-class materials and is performed in a workmanlike manner
and in accordance with all applicable Legal Requirements, (e) the work does not
involve opening the ceiling of the Premises and (f) the work does not involve
the Building's asbestos procedures. At the time Tenant notifies Landlord of any
such work, Tenant shall give Landlord a copy of Tenant's plans for the work. If
the Alterations are of such a nature that formal plans will not be prepared for
the work, Tenant shall provide Landlord with a reasonably specific description
of the work. If Tenant desires any Alteration that is not covered by the second
sentence of this grammatical paragraph, Tenant must obtain Landlord's prior
written approval of such Alteration, which approval Landlord agrees, shall not
be unreasonably withheld.
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All Alterations shall be made at Tenant's sole cost and expense
(including the expense of complying with all present and future Legal
Requirements, including those regarding asbestos, if applicable, and any other
work required to be performed in other areas within or outside the Premises by
reason of the Alterations). Alterations shall be made, at Tenant's election, by
Landlord or by a contractor reasonably approved by Landlord. If Tenant hires
Landlord to perform the Alteration, Landlord's contractor shall be entitled to
receive a fee as negotiated by Tenant and Landlord. If Landlord does not perform
the work pursuant to the above, Tenant shall pay Landlord on demand prior to or
during the course of such construction an amount (the "Alteration Operations
Fee") equal to five percent (5%) of the total cost of the Alteration (and for
purposes of calculating the Alteration Operations Fee, such cost shall not
include architectural, engineering or permit fees) as compensation to Landlord
for electrical energy consumed in connection with the work, freight elevator
operation, additional cleaning expenses, additional security services, and for
other miscellaneous costs incurred by Landlord as result of the work.
All such work shall be performed diligently and in a first-class
workmanlike manner and in accordance with plans and specifications approved by
Landlord, and shall comply with all Legal Requirements and Landlord's
construction procedures and requirements for the Building (including Landlord's
requirements relating to insurance and contractor qualifications). In no event
shall Tenant employ any person, entity or contractor to perform work in the
Premises whose presence may give rise to a labor or other disturbance in the
Building. Default by Tenant in the payment of any sums agreed to be paid by
Tenant for or in connection with an Alteration (regardless of whether such
agreement is pursuant to this Paragraph 9 or separate instrument) shall entitle
Landlord to all the same remedies as for non-payment of rent hereunder. Any
Alterations, including, without limitation, moveable partitions that are affixed
to the Premises (but excluding moveable, free standing partitions) and all
carpeting, shall at once become part of the Building and the property of
Landlord. Tenant shall give Landlord not less than five (5) days prior written
notice of the date the construction of the Alteration is to commence. Landlord
may post and record an appropriate notice of nonresponsibility with respect to
any Alteration and Tenant shall maintain any such notices posted by Landlord in
or on the Premises.
b. Landlord shall advise Tenant at the time of Landlord's approval
of any Alteration requested by Tenant whether Landlord will require that the
Alteration be removed by Tenant from the Premises at the expiration or sooner
termination of this Lease and the Premises restored by Tenant to their condition
prior to the making of the Alteration, ordinary wear and tear excepted. The
removal of the Alterations so required to be removed from the Premises and the
restoration of the Premises shall be performed by a general contractor selected
by Tenant and approved by Landlord, and Tenant shall pay the general
contractor's fees and costs in connection with such work. Any separate work
letter or other agreement which is hereafter entered into between Landlord and
Tenant pertaining to Alterations shall be deemed to automatically incorporate
the terms of this Lease without the necessity for further reference thereto.
10. Repair.
------
a. Except as specifically provided in this Lease, Tenant agrees that
the Premises are in good condition and repair. Tenant, at Tenant's sole cost and
expense, shall keep the Premises and every part thereof (including the interior
walls and ceilings of the Premises, those portions of the Building systems
located within and exclusively serving the Premises (which, as to the Building's
HVAC system, shall be limited to branch line flex duct, mixing boxes, diffusers
and thermostats), and improvements and Alterations) in good condition and
repair; provided that Tenant shall not be responsible for repairs to the extent
such repairs are (i) necessitated because of fire, earthquake, act of God or the
elements, (ii) necessitated by the negligence or willful misconduct of Landlord
or Landlord's agents, employees or contractors, or (iii) Landlord's obligation
pursuant to Paragraph 10.b. below. It is specifically understood and agreed
that, except as specifically set forth in this Lease, Landlord has no obligation
and has made no promises to alter, remodel, improve, repair, decorate or paint
the Premises or any part thereof, and that no representations respecting the
condition of the Premises or the Building have been made by Landlord to Tenant.
Notwithstanding the foregoing, if any portion of the Building systems located
within and exclusively serving the Premises require maintenance or repair,
Landlord shall perform the required work and Tenant shall reimburse Landlord for
the reasonable costs thereof within thirty (30) days of receipt of Landlord's
written invoice therefor. Tenant hereby waives the provisions of California
Civil Code Sections 1932(1), 1941 and 1942 and of any similar Legal Requirement
now or hereafter in effect.
b. Repairs to the Premises due to item (i) described in Paragraph
10.a. above shall be governed by Paragraph 26 below. Landlord shall repair the
Premises if they are damaged due to item (ii) described in Paragraph 10.a.
above. Further, Landlord shall repair and maintain in good condition and repair
the structural portions of the Building and all Building systems, including
plumbing, air conditioning, heating, electrical, life safety and other systems
installed or furnished by Landlord (other than the portions of those systems
that are Tenant's responsibility to maintain and repair pursuant to Paragraph
10.a. above) and the exterior windows of the Premises, but excluding (i) non-
Building standard lighting and electrical wiring and (ii) extraordinary
quantities of electrical, plumbing, HVAC or other Building facilities or
distribution thereof; provided, however, that to the extent repairs which
Landlord is required to make pursuant to this sentence are necessitated by the
negligence or deliberate misconduct of
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Tenant or Tenant's agents, employees or contractors, then Tenant shall reimburse
Landlord for the cost of such repair to the extent Landlord is not reimbursed
therefor by insurance. Landlord shall in no event be obligated to repair any
wear and tear to the Premises.
11. Abandonment. Tenant shall not vacate or abandon the Premises or any
-----------
part thereof at any time during the term hereof. Tenant understands that if
Tenant leaves the Premises or any part thereof vacant, the risk of fire, other
casualty and vandalism to the Premises and the Building will be increased.
Accordingly, such action by Tenant shall constitute an Event of Default
hereunder regardless Of whether Tenant continues to pay Monthly Rent and
Additional Rent under this Lease. Upon the expiration or earlier termination of
this Lease, or if Tenant abandons, vacates or surrenders all or any part of the
Premises or is dispossessed of the Premises by process of law, or otherwise, any
movable furniture, equipment, trade fixtures, or other personal property
belonging to Tenant and left on the Premises shall at the option of Landlord be
deemed to be abandoned and, whether or not the property is deemed abandoned,
Landlord shall have the right to remove such property from the Premises and
charge Tenant for the removal and any restoration of the Premises as provided in
Paragraph 9. Landlord may charge Tenant for the storage of Tenant's property
left on the Premises at such rates as Landlord may from time to time reasonably
determine, or, Landlord may, at its option, store Tenant's property in a public
warehouse at Tenant's expense. Notwithstanding the foregoing, neither the
provisions of this Paragraph 11 nor any other provision of this Lease shall
impose upon Landlord any obligation to care for or preserve any of Tenant's
property left upon the Premises, and Tenant hereby waives and releases Landlord
from any claim or liability in connection with the removal of such property from
the Premises and the storage thereof and specifically waives the provisions of
California Civil Code Section 1542 with respect to such release. Landlord's
action or inaction with regard to the provisions of this Paragraph 11 shall not
be construed as a waiver of Landlord's right to require Tenant to remove its
property, restore any damage to the Premises and the Building caused by such
removal, and make any restoration required pursuant to Paragraph 9 above.
12. Liens. Tenant shall not permit any mechanic's, materialman's or
-----
other liens arising out of work performed at the Premises by or on behalf of
Tenant to be filed against the fee of the Real Property nor against Tenant's
interest in the Premises. Landlord shall have the right to post and keep posted
on the Premises any notices which it deems necessary for protection from such
liens. If any such liens are filed, Landlord may, upon ten (10) days' written
notice to Tenant, without waiving its rights based on such breach by Tenant and
without releasing Tenant from any obligations hereunder, pay and satisfy the
same and in such event the sums so paid by Landlord shall be due and payable by
Tenant immediately without notice or demand, with interest from the date paid by
Landlord through the date Tenant pays Landlord, at the Interest Rate. Tenant
agrees to indemnify, defend and hold Landlord and the other Indemnitees (as
defined in Paragraph 14.b. below) harmless from and against any Claims (as
defined in Paragraph 14.b. below) for mechanics', materialmen's or other liens
in connection with any Alterations, repairs or any work performed, materials
furnished or obligations incurred by or for Tenant.
13. Assignment and Subletting.
-------------------------
a. Landlord's Consent. Landlord's and Tenant's agreement with regard
------------------
to Tenant's right to transfer all or part of its interest in the Premises is as
expressly set forth in this Paragraph 13. Tenant agrees that, except upon
Landlord's prior written consent, which consent shall not (subject to Landlord's
rights under Paragraph 13.d. below) be unreasonably withheld, neither this Lease
nor all or any part of the leasehold interest created hereby shall, directly or
indirectly, voluntarily or involuntarily, by operation of law or otherwise, be
assigned, mortgaged, pledged, encumbered or otherwise transferred by Tenant or
Tenant's legal representatives or successors in interest (collectively an
"assignment") and neither the Premises nor any part thereof shall be sublet or
be used or occupied for any purpose by anyone other than Tenant (collectively, a
"sublease"). Any assignment or subletting without Landlord's prior written
consent shall, at Landlord's option, be void and shall constitute an Event of
Default entitling Landlord to terminate this Lease and to exercise all other
remedies available to Landlord under this Lease and at law.
The parties hereto agree and acknowledge that, among other circumstances
for which Landlord may reasonably withhold its consent to an assignment or
sublease, it shall be reasonable for Landlord to withhold its consent where: (i)
the assignment or subletting would increase the operating costs for the Building
or the burden on the Building services, or generate additional foot traffic,
elevator usage or security concerns in the Building, or create an increased
probability of the comfort and/or safety of Landlord and other tenants in the
Building being compromised or reduced, (ii) the space will be used for a school
or training facility, an entertainment, sports or recreation facility, retail
sales to the public (unless Tenant's permitted use is retail sales), a personnel
or employment agency, an office or facility of any governmental or quasi-
governmental agency or authority, a place of public assembly (including without
limitation a meeting center, theater or public forum), any use by or affiliation
with a foreign government (including without limitation an embassy or consulate
or similar office), or a facility for the provision of social, welfare or
clinical health services or sleeping accommodations (whether temporary, daytime
or overnight); (iii) the proposed assignee or subtenant is a prospective tenant
of the Building with whom Landlord is then negotiating to lease space in the
Building and Landlord has adequate available space to meet such prospective
tenant's space requirements, or is a current tenant of the Building and Landlord
has
13
<PAGE>
adequate available space to meet such current tenant's expansion requirements;
(iv) Landlord disapproves of the proposed assignee or subtenant's reputation or
creditworthiness; (v) Landlord determines that the character of the business
that would be conducted by the proposed assignee or subtenant at the Premises,
Or the manner of conducting such business, would be inconsistent with the
character of the Building as a first-class office building; (vi) the proposed
assignee or subtenant is an entity or related to an entity with whom Landlord or
any affiliate of Landlord has had adverse dealings; (vii) the assignment or
subletting may conflict with any exclusive uses granted to other tenants of the
Real Property, or with the terms of i any easement, covenant, condition or
restriction, or other agreement affecting the Real Property; (viii) the
assignment or subletting would involve a change in use from that expressly
permitted under this Lease; or (ix) Landlord determines that the proposed
assignee may be unable to perform all of Tenant's obligations under this Lease
or the proposed subtenant may be unable to perform all of its obligations under
the proposed sublease. Landlord's foregoing rights and options shall continue
throughout the entire term of this Lease.
For purposes of this Paragraph 13, the following events shall be deemed
an assignment or sublease, as appropriate: (i) the issuance of equity interests
(whether stock, partnership interests or otherwise) in Tenant or any subtenant
or assignee, or any entity controlling any of them, to any person or group of
related persons, in a single transaction or a series of related or unrelated
transactions, such that, following such issuance, such person or group shall
have Control (as defined below) of Tenant or any subtenant or assignee; (ii) a
transfer of Control of Tenant or any subtenant or assignee, or any entity
controlling any of them, in a single transaction or a series of related or
unrelated transactions (including, without limitation, by consolidation, merger,
acquisition or reorganization), except that the transfer of outstanding capital
stock or other listed equity interests by persons or parties other than
"insiders" within the meaning of the Securities Exchange Act of 1934, as
amended, through the "over-the-counter" market or any recognized national or
international securities exchange, shall not be included in determining whether
Control has been transferred; (iii) a reduction of Tenant's assets to the point
that this Lease is substantially Tenant's only asset; (iv) a change or
conversion in the form of entity of Tenant, any subtenant or assignee, or any
entity controlling any of them, which has the effect of limiting the liability
of any of the partners, members or other owners of such entity; or (v) the
agreement by a third party to assume, take over, or reimburse Tenant for, any or
all of Tenant's obligations under this Lease, in order to induce Tenant to lease
space with such third party. "Control" shall mean direct or indirect ownership
of 50% or more of all of the voting stock of a corporation or 50% or more of the
legal or equitable interest in any other business entity, or the power to direct
the operations of any entity (by equity ownership, contract or otherwise).
Notwithstanding anything to the contrary in this grammatical paragraph or
elsewhere in this Paragraph 13, (i) if Digital Island, Inc., a California
corporation ("Digital Island") makes a public offering of shares of Tenant in
conformance with applicable securities laws, the issuance of stock in Tenant
pursuant to such laws shall not constitute an assignment or subletting of the
Lease and Landlord's consent shall not be required therefor and (ii) if Digital
Island, Inc., a California corporation issues any equity interests in itself as
a result of investments or strategic partnerships with or by any public or
private entities or individuals, then the issuance of such equity interests
shall not be deemed an assignment for the purposes of this Lease, or require the
consent of Landlord thereto, notwithstanding the fact that the issuance of such
equity interests may result in a change in Control, so long as the issuance of
such equity interests does not result in a decrease in the net worth of Digital
Island and, following such issuance of the equity interests, Digital Island
continues substantially the same business operations as were in effect of the
date as of this Lease. The provisions of the immediately preceding sentence are
personal to Digital Island, and shall not apply to any assignee or subtenant
thereof.
If this Lease is assigned, whether or not in violation of the terms of
this Lease, Landlord may collect rent from the assignee. If the Premises or any
part thereof is sublet, Landlord may, upon an Event of Default by Tenant
hereunder, collect rent from the subtenant. In either event, Landlord may apply
the amount collected from the assignee or subtenant to Tenant's monetary
obligations hereunder.
The consent by Landlord to an assignment or subletting hereunder shall
not relieve Tenant or any assignee or subtenant from obtaining Landlord's
express prior written consent to any other or further assignment or subletting
(which consent shall not be unreasonably withheld, subject to Landlord's rights
under this Paragraph 13). Neither an assignment or subletting nor the collection
of rent by Landlord from any person other than Tenant, nor the application of
any such rent as provided in this Paragraph 13.a. shall be deemed a waiver of
any of the provisions of this Paragraph 13.a. or release Tenant from its
obligation to comply with the provisions of this Lease and Tenant shall remain
fully and primarily liable for all of Tenant's obligations under this Lease. If
Landlord approves of an assignment or subletting hereunder and this Lease
contains any renewal options, expansion options, rights of first refusal, rights
of first negotiation or any other rights or options pertaining to additional
space in the Building, such rights and/or options shall not run to the subtenant
or assignee unless such subtenant or assignee is an Affiliate (as defined in
Paragraph 13.g. below), it being agreed by the parties hereto that any such
rights and options are personal to the Tenant originally named herein and may
not be transferred other than to an Affiliate.
b. Processing Expenses. Tenant shall pay to Landlord, as Landlord's
-------------------
cost of processing each proposed assignment or subletting, an amount equal to
the sum of (i) Landlord's reasonable attorneys'
14
<PAGE>
and other professional fees, plus (ii) the sum of $750.00 for the cost of
Landlord's administrative, accounting and clerical time (collectively,
"Processing Costs"), and the amount of all out-of-pocket costs and expenses (if
any) incurred by Landlord directly arising from the assignee or sublessee taking
Occupancy of the subject space (including, without limitation, costs of freight
elevator operation for moving of furnishings and trade fixtures, security
service, janitorial and cleaning service, and rubbish removal service).
Notwithstanding anything to the contrary herein, Landlord shall not be required
to process any request for Landlord's consent to an assignment or subletting
until Tenant has paid to Landlord the amount of Landlord's estimate of the
Processing Costs and all other direct and indirect costs and expenses of
Landlord and its agents arising from the assignee or subtenant taking occupancy.
c. Consideration to Landlord. In the event of any assignment or
-------------------------
sublease, whether or not requiting Landlord's consent, Landlord shall be
entitled to receive, as additional rent hereunder, seventy-five percent (75%) of
any consideration (including, without limitation, payment for leasehold
improvements and any "Leasehold Profit" as defined below) paid by the assignee
or subtenant for the assignment or sublease and, in the case of a sublease,
seventy-five percent (75%) of the excess of the amount of rent paid for the
sublet space by the subtenant over the amount of Monthly Rent under Paragraph 5
above and Additional Rent under Paragraph 7 above attributable to the sublet
space for the corresponding month; except that Tenant may first recapture (i)
any brokerage commissions paid by Tenant in connection with the subletting or
assignment (not to exceed commissions typically paid in the market at the time
of such subletting or assignment), (ii) reasonable legal fees paid by Tenant in
connection with such assignment or subletting (provided that Tenant shall submit
to Landlord evidence reasonably acceptable to Landlord of such legal fees
actually paid by Tenant, which evidence shall include copies of the applicable
attorney bills) and (iii) any improvement allowance or construction costs
incurred by Tenant in connection with the assignment or sublease (collectively
the "Assignment or Subletting Costs"), provided that, as a condition to Tenant
recapturing the Assignment or Subletting Costs, Tenant shall provide to
Landlord, within ninety (90) days of Landlord's execution of Landlord's consent
to the assignment or subletting, a detailed accounting of the Assignment or
Subletting Costs and supporting documents, such as receipts and construction
invoices. To effect the foregoing, Tenant shall deduct from the monthly amounts
received by Tenant from the subtenant or assignee as rent or consideration (i)
the Monthly Rent and Additional Rent payable by Tenant to Landlord for the
subject space and (ii) the Assignment or Subletting Costs, and seventy-five
percent (75%) of the then remaining sum shall be paid promptly to Landlord. Upon
Landlord's request, Tenant shall assign to Landlord all amounts to be paid to
Tenant by any such subtenant or assignee and that belong to Landlord, and shall
direct such subtenant or assignee to pay the same directly to Landlord. If there
is more than one sublease under this Lease, the amounts (if any) to be paid by
Tenant to Landlord pursuant to the preceding sentence shall be separately
calculated for each sublease and amounts due Landlord with regard to any one
sublease may not be offset against rental and other consideration pertaining to
or due under any other sublease.
"Leasehold Profit" shall be the value allocated to the leasehold between
the parties to the assignment or sublease, provided that, if (a) such allocation
is less than the "Calculated Leasehold Profit" (which Calculated Leasehold
Profit shall be the excess of the present value of the fair market rent of the
Premises for the remaining term of this Lease after such assignment or sublease,
over the present value of the Monthly Rent payable hereunder for such remaining
term (as reasonably estimated by Landlord and Tenant)), (b) Tenant will receive
from the assignee or subtenant pursuant to the written agreement between Tenant
and the assignee or subtenant, an amount in excess of Tenant's monetary
obligations under the Lease for the subject space and (c) Tenant does not
provide reasonable evidence to Landlord that the excess consideration received
by Tenant from the assignee or subtenant is attributable to payment for some
value received by the assignee or subtenant from Tenant other than the value of
the leasehold, then the Leasehold Profit shall be deemed to be the Calculated
Leasehold Profit; provided, however, that Landlord shall collect Landlord's
share of Leasehold Profit only to the extent such amounts are actually paid by
the assignee or subtenant to Tenant in connection with such assignment or
sublease.
d. Procedures. If Tenant desires to assign this Lease or any
----------
interest therein or sublet all or part of the Premises, Tenant Shall give
Landlord written notice thereof and the terms proposed (the "Sublease Notice"),
which Sublease Notice, in the case of a proposed sublease, shall designate the
space proposed to be sublet. Landlord shall have the prior right and option (to
be exercised by written notice to Tenant given within thirty (30) days after
receipt of the Sublease Notice) (i) in the event of an assignment of the Lease,
to terminate this Lease in its entirety, and in the event of a sublease that
will result in more than twenty-five percent (25%) of the Premises being under
sublease or a sublease that will terminate during the final eighteen (18) months
of the Lease term, to terminate the Lease as it pertains to the portion of the
Premises so proposed by Tenant to be sublet, or (ii) to approve Tenant's
proposal to sublet conditional upon Landlord's subsequent written approval of
the specific sublease obtained by Tenant and the specific subtenant named
therein. If Landlord exercises its option described in (ii) above, then Tenant
shall have six (6) months thereafter to submit to Landlord, for Landlord's
written approval, Tenant's proposed sublease agreement (in which the proposed
subtenant shall be named, and which agreement shall otherwise meet the
requirements of Paragraph 13.e. below), together with a current financial
statement of such proposed subtenant and any other information reasonably
requested by Landlord. If (x) Tenant fails to submit the specific sublease and
other required information within such time, or (y) the rent under the specific
sublease submitted by Tenant is Five Dollars ($5.00) or more per
15
<PAGE>
square foot per annum lower than the rental rate set forth in the Sublease
Notice previously approved by Landlord pursuant to (ii) above, or (z) the size
of the space to be sublet under the specific sublease submitted by Tenant
differs by more than twenty-five percent (25%) from the size set forth in the
Sublease Notice approved by Landlord pursuant to (ii) above, then Tenant shall
be required to submit a new Sublease Notice for Landlord's evaluation pursuant
to the procedures set forth in this paragraph. If Landlord fails to exercise any
such option to sublet or to terminate, this shall not be construed as or
constitute a waiver of any of the provisions of Paragraphs 13.a., b., c. or d.
herein. If Landlord exercises any option to terminate, any costs of demising the
portion of the Premises affected by such termination shall be borne by Landlord.
In addition, Landlord shall have no liability for any real estate brokerage
commission(s) or with respect to any of the costs and expenses that Tenant may
have incurred in connection with its proposed subletting, and Tenant agrees to
indemnify, defend and hold Landlord and all other Indemnitees harmless from and
against any and all Claims (as defined in Paragraph 14.b. below), including,
without limitation, claims for commissions arising from such proposed
subletting. Landlord's foregoing rights and options shall continue throughout
the entire term of this Lease. For purposes of this Paragraph 13.d., a proposed
assignment of this Lease in whole or in part shall be deemed a proposed
subletting of such space.
If Landlord exercises its rights under (i) of the immediately preceding
grammatical paragraph, then, notwithstanding anything to the contrary in
Paragraph 13.b. above, the Processing Costs provided for therein shall be
inapplicable with regard to the proposed assignment or sublease which triggered
Landlord's exercise of its rights under (i) above.
e. Documentation. No permitted assignment or subletting by Tenant
-------------
shall be effective until there has been delivered to Landlord a fully executed
counterpart of the assignment or sublease which expressly provides that (i) the
assignee or subtenant may not further assign or sublet the assigned or sublet
space without Landlord's prior written consent (which, in the case of a further
assignment proposed by an assignee, shall not be unreasonably withheld, subject
to Landlord's rights under the provisions of this Paragraph 13), (ii) the
assignee or subtenant will comply with all of the provisions of this Lease, and
Landlord may enforce the Lease provisions directly against such assignee or
subtenant, (iii) in the case of an assignment, the assignee assumes all of
Tenant's obligations under this Lease arising on or after the date of the
assignment, and (iv) in the case of a sublease, the subtenant agrees to be and
remain jointly and severally liable with Tenant for the payment of rent
pertaining to the sublet space in the amount set forth in the sublease, and for
the performance of all of the terms and provisions of this Lease. In addition to
the foregoing, no sublease by Tenant shall be effective until there has been
delivered to Landlord a fully executed counterpart of Landlord's consent to
sublease form or, in the case of a sublease to an Affiliate pursuant to
Paragraph 13.g. below, a waiver and acknowledgement form. The failure or refusal
of a subtenant or assignee to execute any such instrument shall not release or
discharge the subtenant or assignee from its liability as set forth above.
Notwithstanding the foregoing, however, no subtenant or assignee shall be
permitted to occupy the Premises unless and until such subtenant or assignee
provides Landlord with certificates evidencing that such subtenant or assignee
is carrying all insurance coverage required of such subtenant or assignee under
this Lease.
f. No Merger. Without limiting any of the provisions of this
---------
Paragraph 13, if Tenant has entered into any subleases of any portion of the
Premises, the voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation by Landlord and Tenant, shall not work a merger, and shall, at the
option of Landlord, terminate all or any existing subleases or subtenancies or,
at the option of Landlord, operate as an assignment to Landlord of any or all
such subleases or subtenancies. If Landlord does elect that such surrender or
cancellation operate as an assignment of such subleases or subtenancies,
Landlord shall in no way be liable for any previous act or omission by Tenant
under the subleases or for the return of any deposit(s) under the subleases that
have not been actually delivered to Landlord, nor shall Landlord be bound by any
sublease modification(s) executed without Landlord's consent or for any advance
rental payment by the subtenant in excess of one month's rent.
g. Affiliates. Notwithstanding anything to the contrary in
----------
Paragraphs 13.a. and 13.d., but subject to Paragraphs 13.e. and 13.f., Tenant
may assign this Lease or sublet the Premises or any portion thereof, without
Landlord's consent, to any partnership, corporation or other entity which
controls, is controlled by, or is under common control with Tenant or Tenant's
parent (control being defined for such purposes as ownership of at least 50% of
the equity interests in, or the power to direct the management of, the relevant
entity) or to any partnership, corporation or other entity resulting from a
merger or consolidation with Tenant or Tenant's parent, or to the corporation
resulting from a corporate reorganization of Tenant (provided that, following
such reorganization, the corporation continues substantially the same business
operations of Tenant as were in effect as of the date of this Lease) or to any
person or entity which acquires substantially all the assets of Tenant as a
going concern (collectively, an "Affiliate"), provided that (i) Landlord
receives prior written notice of an assignment or subletting, (ii) the
Affiliate's net worth is sufficient, in Landlord's sole but good faith judgment,
to satisfy Landlord's then existing financial criteria for new tenants of the
Building, (iii) the Affiliate (or its officers and employees) has proven
experience in the operation of a first-class business of a type consistent with
the use of the Building as a first-class office Building, (iv) the Affiliate
remains an Affiliate for the duration of the subletting or the balance of the
term in the event of an assignment, (v) the Affiliate assumes (in the event
16
<PAGE>
of an assignment) in writing all of Tenant's obligations under this Lease and
(vi) Landlord receives a fully executed copy of an assignment or sublease
agreement between Tenant and the Affiliate.
h. Shared Space Arrangement. Notwithstanding anything to the
------------------------
contrary in this Paragraph 13, Tenant may from time to time permit third parties
with whom Tenant will share office services to use a portion of the Premises and
such use shall not be deemed to be a sublease so long as (i) no more than 1,500
rentable square feet of the Premises is so used at any one time, and (ii) the
space Occupied by such parties is not separately demised from the balance of the
Premises (i.e. separated from the balance of the space by a wall or other
constructed device and having separate entrances to the common areas) and (iii)
the use of the space is not a use which increases (a) the operating costs for
the Building, (b)the burden on the Building services, or (c) the foot traffic,
elevator usage or security concerns in the Building, or creates an increased
probability of the comfort and/or safety of the Landlord and other tenants in
the Building being unreasonably compromised or reduced, and (iv) Tenant does not
realize a profit with respect to the space so used. The rights set forth in this
paragraph are personal to Digital Island, Inc., a California corporation, and
shall not inure to the benefit of any successor, assignee or subtenant of
Tenant. Tenant shall be fully responsible for the conduct of such parties within
the Premises and the Real Property, and Tenant's indemnification obligations set
forth in Paragraph 14 of this Lease shall apply with respect to the conduct of
such parties. Tenant shall supply Landlord with the terms of any such space
sharing arrangement. If such arrangement indicates that the sums payable
thereunder for the value of the use of the space exceed the Monthly Rent and
Additional Rent payable under Paragraphs 5 and 7 hereof for such space, that
particular space sharing arrangement will be deemed to be a sublease for the
purpose of applying the provisions of Paragraph 13.e. above. Notwithstanding the
foregoing, Tenant shall not permit any party to occupy space in the Premises (or
conduct business in the Premises) pursuant to the above until Tenant delivers to
Landlord a fully executed counterpart of Landlord's waiver and acknowledgement
form for space sharing arrangements.
14. Indemnification of Landlord.
---------------------------
a. Landlord and the holders of any Superior Interests (as defined in
Paragraph 21 below) shall not be liable to Tenant and Tenant hereby waives all
claims against such parties for any loss, injury or other damage to person or
property in or about the Premises or the Real Property from any cause
whatsoever, including without limitation, water leakage of any character from
the roof, walls, basement, fire sprinklers, appliances, air conditioning,
plumbing or other portion of the Premises or the Real Property, or gas, fire,
explosion, falling plaster, steam, electricity, or any malfunction within the
Premises or the Real Property, or acts of other tenants of the Building;
provided, however, that the foregoing waiver shall be inapplicable to any loss,
injury or damage resulting directly from Landlord's gross negligence or willful
misconduct. Tenant acknowledges that from time to time throughout the term of
this Lease, construction work may be performed in and about the Building and the
Real Property by Landlord, contractors of Landlord, or other tenants or their
contractors, and that such construction work may result in noise and disruption
to Tenant's business. In addition to and without limiting the foregoing waiver
or any other provision of this Lease, Tenant agrees that Landlord shall not be
liable for, and Tenant expressly waives and releases Landlord and the other
Indemnitees (as defined in Paragraph 14.b. below) from any Claims (as defined in
Paragraph 14.b. below), including without limitation, any and all consequential
damages or interruption or loss of business, income or profits, or claims of
constructive eviction, arising or alleged to be arising as a result of any such
construction activity.
b. Tenant shall hold Landlord and the holders of any Superior
Interest, and the constituent shareholders, partners or other owners thereof,
and all of their agents, contractors, servants, officers, directors, employees
and licensees (collectively with Landlord, the "Indemnitees") harmless from and
indemnify the Indemnitees against any and all claims, liabilities, damages,
costs and expenses, including reasonable attorneys' fees and costs incurred in
defending against the same (collectively, "Claims"), to the extent arising from
(a) the acts or omissions of Tenant or any other Tenant Parties (as defined in
Paragraph 8.e. above) in, on or about the Real Property, or (b) any construction
or other work undertaken by or on behalf of Tenant in, on or about the Premises,
whether prior to or during the term of this Lease, or (e) any breach or Event of
Default under this Lease by Tenant, or (d) any accident, injury or damage,
howsoever and by whomsoever caused, to any person or property, occurring in, on
or about the Premises; except to the extent such Claims are caused directly by
the gross negligence or willful misconduct of Landlord or its authorized
representatives. In case any action or proceeding be brought against any of the
Indemnitees by reason of any such Claim, Tenant, upon notice from Landlord,
covenants to resist and defend at Tenant's sole expense such action or
proceeding by counsel reasonably satisfactory to Landlord. The provisions of
this Paragraph 14.b. shall survive the expiration or earlier termination of this
Lease with respect to any injury, illness, death or damage occurring prior to
such expiration or termination.
15. Insurance.
---------
a. Tenant's Insurance. Tenant shall, at Tenant's expense, maintain
------------------
during the term of this Lease (and, if Tenant occupies or conducts activities in
or about the Premises prior to or after the term hereof, then also during such
pre-term or post-term period): (i) commercial general liability insurance
17
<PAGE>
including contractual liability coverage, with minimum coverages of $1,000,000
per occurrence combined single limit for bodily injury and property damage,
$1,000,000 for products-completed operations coverage, $100,000 fire legal
liability, $1,000,000 for personal and advertising injury (which coverage shall
not be subject to the contractual liability exclusion), with a $2,000,000
general aggregate limit, for injuries to, or illness or death of, persons and
damage to property occurring in or about the Premises or otherwise resulting
from Tenant's operations in the Building, (ii) property insurance protecting
Tenant against loss or damage by fire and such other risks as arc insurable
under then-available standard forms Of "all risk" insurance policies (excluding
earthquake and flood but including water damage), coveting Tenant's personal
property and trade fixtures in or about the Premises or the Real Property, and
any improvements and/or Alterations in the Premises, for the full replacement
value thereof without deduction for depreciation; (iii) workers' compensation
insurance in statutory limits; (iv) at least three months' coverage for loss of
business income and continuing expenses, providing protection against any peril
included within the classification "all risk," excluding earthquake and flood
but including water damage; and (v) if Tenant operates owned, leased or non-
owned vehicles on the Real Property, comprehensive automobile liability
insurance with a minimum coverage of $1,000,000 per occurrence, combined single
limit. The above described policies shall protect Tenant, as named insured, and
Landlord and all the other Indemnitees and any other parties designated by
Landlord, as additional insureds; shall insure Landlord's and such other
parties' contingent liability with regard to acts or omissions of Tenant; shall
specifically include all liability assumed by Tenant under this Lease (provided,
however, that such contractual liability coverage shall not limit or be deemed
to satisfy Tenant's indemnity obligations under this Lease); and, if subject to
deductibles, shall provide for deductible amounts not in excess of those
reasonably approved in advance in writing by Landlord. Landlord reserves the
right to increase the foregoing amount of liability coverage from time to time
as Landlord determines is required to adequately protect Landlord and the other
parties designated by Landlord from the matters insured thereby (provided,
however, that Landlord makes no representation that the limits of liability
required hereunder from time to time shall be adequate to protect Tenant);
provided, however, such increased amounts shall not materially exceed the
greater of (a) those amounts normally required for comparable buildings in the
San Francisco Financial District or (b) those amounts required to provide
Landlord with the same relative protection as the amounts set forth above as of
the date of this Lease. Further, Landlord reserves the right to require that
Tenant cause any of its contractors, vendors, movers or other parties conducting
activities in or about or occupying the Premises to obtain and maintain
insurance as reasonably determined by Landlord and as to which Landlord and such
other parties designated by Landlord shall be additional insureds.
b. Policy Form. Each insurance policy required pursuant to Paragraph
-----------
15.a. above shall be issued by an insurance company licensed in the State of
California and with a general policyholders' rating of "A+" or better and a
financial size ranking of "Class VIII" or higher in the most recent edition of
Best's Insurance Guide. Each insurance policy, other than Tenant's workers'
compensation insurance, shall (i) provide that it may not be materially changed,
cancelled or allowed to lapse unless thirty (30) days' prior written notice to
Landlord and any other insureds designated by Landlord is first given, (ii)
provide that no act or omission of Tenant shall affect or limit the obligations
of the insurer with respect to any other insured, (iii) include all waiver of
subrogation rights endorsements necessary to effect the provisions of Paragraph
16 below, and (iv) provide that the policy and the coverage provided shall be
primary, that Landlord, although an additional insured, shall nevertheless be
entitled to recovery under such policy for any damage to Landlord or the other
Indemnitees by reason of acts or omissions of Tenant, and that any coverage
carried by Landlord shall be noncontributory with respect to policies carried by
Tenant. Each such insurance policy or a certificate thereof shall be delivered
to Landlord by Tenant on or before the effective date of such policy and
thereafter Tenant shall deliver to Landlord renewal policies or certificates at
least thirty (30) days prior to the expiration dates of expiring policies. If
Tenant fails to procure such insurance or to deliver such policies or
certificates, Landlord may, at its option, procure the same for Tenant's
account, and the cost thereof shall be paid to Landlord by Tenant upon demand.
Landlord may at any time, and from time to time, inspect and/or copy any and all
insurance policies required by this Lease.
Nothing in this Paragraph 15 shall be construed as creating or
implying the existence of (i) any ownership by Tenant of any fixtures,
additions, Alterations, or improvements in or to the Premises or (ii) any right
on Tenant's part to make any addition, Alteration or improvement in or to the
Premises.
d. Landlord's Insurance. During the term hereof, Landlord shall keep
--------------------
the Building and all Tenant Improvements to the Premises made pursuant to
Paragraph 4 hereof (but excluding any Alterations made pursuant to Paragraph 9
hereof, and any personal property, fixtures, office equipment, furniture,
artwork and other decoration not affixed to and a part of the Building) insured
through reputable insurance underwriters against perils covered by a standard
"all risk" insurance policy or policies as such policies are in use as of the
date of this Lease (excluding perils such as earthquake, flood and other
standard "all risk" policy form exclusions, although Landlord may carry
earthquake insurance at Landlord's option), if such a policy is reasonably
available, with a deductible provision, if any, that does not materially exceed
that which prudent, efficient operators of first-class high-rise office
buildings in the downtown San Francisco financial district would carry from
time-to-time in the exercise of reasonable business judgment, in an amount or
amounts equal to not less than eighty percent (80%) of the full
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replacement value of the Building (excluding the land and the footings,
foundations and installations below the basement level) and the Tenant
Improvements made pursuant to Paragraph 4 hereof, without deduction for
depreciation, including the costs of demolition and debris removal, or such
other fire and property damage insurance as Landlord shall reasonably determine
to give substantially equal or greater protection.
16. Mutual Waiver of Subrogation Rights. Each party hereto hereby
-----------------------------------
releases the other respective party and, in the Case of Tenant as the releasing
party, the other Indemnitees, and the respective partners, shareholders, agents,
employees, officers, directors and authorized representatives of such released
party, from any claims such releasing party may have for damage to the Building,
the Premises or any of such releasing party's fixtures, personal property,
improvements and alterations in or about the Premises, the Building or the Real
Property that is caused by or results from risks insured against under any fire
and extended coverage insurance policies actually carried by such releasing
party or deemed to be carried by such releasing party; provided, however, that
such waiver shall be limited to the extent of the net insurance proceeds payable
by the relevant insurance company with respect to such loss or damage (or in the
case of deemed coverage, the net proceeds that would have been payable). For
purposes of this Paragraph 16, Tenant shall be deemed to be carrying any of the
insurance policies required pursuant to Paragraph 15 but not actually carried by
Tenant, and Landlord shall be deemed to carry standard fire and extended
coverage policies on the Real Property with a deductible not to exceed the
customary range of deductibles in effect for comparable first-class office
buildings in the San Francisco Financial District. Each party hereto shall cause
each such fire and extended coverage insurance policy obtained by it to provide
that the insurance company waives all rights of recovery by way of subrogation
against the other respective party and the other released parties in connection
with any matter covered by such policy.
17. Utilities.
---------
a. Basic Services. Landlord shall furnish the following utilities
--------------
and services ("Basic Services") for the Premises: (i) during the hours of 8 A.M.
to 6 P.M. ("Business Hours") Monday through Friday (except public holidays)
("Business Days"), electricity for Building standard lighting and power suitable
for the use of the Premises for ordinary general office purposes, (ii) during
Business Hours on Business Days, heat and air conditioning required in
Landlord's reasonable judgment for the comfortable use and occupancy of the
Premises for ordinary general office purposes, (iii) unheated water for the
restroom(s) and drinking fountains in the public areas servicing the Premises,
(iv) elevator service to the floor(s) of the Premises by nonattended automatic
elevators for general office pedestrian usage, and (v) on Business Days,
janitorial services limited to emptying and removal of general office refuse,
light vacuuming as needed and window washing as determined by Landlord.
Notwithstanding the foregoing, however, Tenant may use water, heat, air
conditioning, electric current, elevator and janitorial service in excess of
that provided in Basic Services ("Excess Services," which shall include without
limitation any power usage other than through existing standard 110-volt AC
outlets; electricity and/or water consumed by Tenant in connection with any
dedicated or supplemental heating, ventilating and/or air conditioning, computer
power, telecommunications and/or other special units or systems of Tenant;
chilled, heated or condenser water; or water used for any purpose other than
ordinary drinking and lavatory purposes), provided that the Excess Services
desired by Tenant are reasonably available to Landlord and to the Premises (it
being understood that in no event shall Landlord be obligated to make available
to the Premises more than the pro rata share of the capacity of any Excess
Service available to the Building or the applicable floor of the Building, as
the case may be), and provided further that Tenant complies with the procedures
established by Landlord from time to time for requesting and paying for such
Excess Services and with all other provisions of this Paragraph 17. Landlord
reserves the right to install in the Premises or the Real Property electric
current and/or water meters (including, without limitation, any additional
wiring, conduit or panel required therefor) to measure the electric current or
water consumed by Tenant or to cause the usage to be measured by other
reasonable methods (e.g. by temporary "check" meters or by survey).
b. Payment for Utilities and Services. The cost of Basic Services
----------------------------------
shall be included in Operating Expenses. In addition, Tenant shall pay to
Landlord upon demand (i) the cost, at Landlord's prevailing rate (based on
Landlord's actual cost thereof) of any Excess Services used by Tenant, (ii) the
cost of installing, operating, maintaining, repairing or reasonable costs of
monitoring, any meter or other device or system used to measure Tenant's
consumption of utilities and (iii) the cost of installing, operating,
maintaining, repairing or reasonable costs of monitoring, any Temperature
Balance Equipment (as defined in Paragraph 17.c. below) for the Premises and/or
any equipment required in connection with any Excess Services requested by
Tenant. Landlord's failure to bill Tenant for any of the foregoing shall not
waive Landlord's right to bill Tenant for the same at a later time.
c. Temperature Balance. If the temperature otherwise maintained in
-------------------
any portion of the Premises by the heating, air conditioning or ventilation
system is affected as a result of (i) the type or quantity of any lights,
machines or equipment (including without limitation typical office equipment)
used by Tenant in the Premises, (ii) the occupancy of such portion of the
Premises by more than one person per two hundred (200) square feet of rentable
area therein, (iii) an electrical load for lighting or power in excess of the
limits specified in Paragraph 17.d. below, or (iv) any rearrangement of
partitioning or other improvements, then at Tenant's sole cost, Landlord may
install any equipment, or modify any
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existing equipment (including the standard air conditioning equipment) Landlord
deems necessary to restore the temperature balance (such new equipment or
modifications to existing equipment termed herein "Temperature Balance
Equipment"). Tenant agrees to keep closed, when necessary, draperies which,
because of the sun's position, must be closed to provide for the efficient
operation of the air conditioning system, and Tenant agrees to cooperate with
Landlord and to abide by the regulations and requirements which Landlord may
prescribe for the proper functioning and protection of the heating, ventilating
and air conditioning system. Landlord makes no representation to Tenant
regarding the adequacy or fitness of the heating, air conditioning or
ventilation equipment in the Building to maintain temperatures that may be
required for, or because of, any computer or communications rooms, machine
rooms, conference rooms or other areas of high concentration of personnel or
electrical usage, or any other uses other than or in excess of the fractional
horsepower normally required for office equipment, and Landlord shall have no
liability for loss or damage suffered by Tenant or others in connection
therewith.
d. Utility Connections. Tenant shall not connect or use any
-------------------
apparatus or device in the Premises (i) using current in excess of 110 volts, or
(ii) which would cause Tenant's electrical demand load to exceed 1.0 watts per
rentable square foot for overhead lighting or 2.0 watts per rentable square foot
for convenience outlets, or (iii) which would exceed the capacity of the
existing panel or transformer serving the Premises. Tenant shall not connect
with electric current (except through existing outlets in the Premises or such
additional outlets as may be installed in the Premises as part of initial
improvements or Alterations approved by Landlord), or water pipes, any apparatus
or device for the purpose of using electrical current or water.
Landlord will not permit additional coring of the floor of the Premises
in order to install new electric outlets in the Premises unless Landlord is
satisfied, on the basis of such information to be supplied by Tenant at Tenant's
expense, that coring of the floor in order to install such additional outlets
will not weaken the structure of the floor.
e. Interruption of Services. Landlord's obligation to provide
------------------------
utilities and services for the Premises are subject to the Rules and Regulations
of the Building, applicable Legal Requirements (including the rules or actions
of the public utility company furnishing the utility or service), and shutdowns
for maintenance and repairs, for security purposes, or due to strikes, lockouts,
labor disputes, fire or other casualty, acts of God, or other causes beyond the
control of Landlord. In the event of an interruption in, or failure or inability
to provide any service or utility for the Premises for any reason, such
interruption, failure or inability shall not constitute an eviction of Tenant,
constructive or otherwise, or impose upon Landlord any liability whatsoever,
including, but not limited to, liability for consequential damages or loss of
business by Tenant. Tenant hereby waives the provisions of California Civil Code
Section 1932(1) or any other applicable existing or future Legal Requirement
permitting the termination of this Lease clue to such interruption, failure or
inability.
f. Governmental Controls. In the event any governmental authority
---------------------
having jurisdiction over the Real Property or the Building promulgates or
revises any Legal Requirement or building, fire or other code or imposes
mandatory or voluntary controls or guidelines on Landlord or the Real Property
or the Building relating to the use or conservation of energy or utilities or
the reduction of automobile or other emissions (collectively "Controls") or in
the event Landlord is required or elects to make alterations to the Real
Property or the Building in order to comply with such mandatory or voluntary
Controls, Landlord may, in its sole discretion, comply with such Controls or
make such alterations to the Real Property or the Building related thereto;
provided that in making any such alterations, Landlord shall use commercially
reasonable efforts to minimize any disruption to Tenant's business in the
Premises. Such compliance and the making of such alterations shall not
constitute an eviction of Tenant, constructive or otherwise, or impose upon
Landlord any liability whatsoever, including, but not limited to, liability for
consequential damages or loss of business by Tenant.
18. Personal Property and Other Taxes. Tenant shall pay before
---------------------------------
delinquency, any and all taxes, fees, charges or other governmental impositions
levied or assessed against Landlord or Tenant (a) upon Tenant's equipment,
furniture, fixtures, improvements and other personal property (including
carpeting installed by Tenant) located in the Premises, (b) by virtue of any
Alterations made by Tenant to the Premises, and (e) upon this transaction or any
document to which Tenant is a party creating or transferring an interest or an
estate in the Premises. If any such fee, charge or other governmental imposition
is paid by Landlord, Tenant shall reimburse Landlord for Landlord's payment upon
demand.
19. Rules and Regulations. Tenant shall comply with the rules and
---------------------
regulations set forth on Exhibit B attached hereto, as such rules and
---------
regulations may be reasonably modified or amended by Landlord from time to time,
provided that such modifications or amendments do not conflict with the express
provisions of this Lease (the "Rules and Regulations"). Landlord shall not be
responsible to Tenant for the nonperformance or noncompliance by any other
tenant or occupant of the Building of or with any of the Rules and Regulations,
but Landlord shall use reasonable efforts to enforce the Rules and Regulations.
20
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20. Surrender; Holding Over.
------------------------
a. Surrender. Upon the expiration or other termination of this
---------
Lease, Tenant shall surrender the Premises to Landlord vacant and broom-clean,
with all improvements and Alterations (except as provided below) in their
original condition, except for reasonable wear and tear, damage from casualty or
condemnation or from acts of Landlord or its agents, employees or contractors
and any changes resulting from approved Alterations; provided, however, that
prior to the expiration or termination of this Lease Tenant shall remove from
the Premises any Alterations that Tenant is required by Landlord to remove under
the provisions of this Lease, and all of Tenant's personal property and trade
fixtures, and, at Landlord's sole election, any portion of the Tenant
Improvements constructed pursuant to Paragraph 4 above that Landlord advises
Tenant, at the time Landlord approves of the Final Plans therefor, Landlord will
require be removed upon the expiration or sooner termination of this Lease. If
such removal is not completed at the expiration or other termination of this
Lease, Landlord may remove the same at Tenant's expense. Any damage to the
Premises or the Building caused by such removal shall be repaired promptly by
Tenant (including the patching or repairing of ceilings and walls) or, if Tenant
fails to do so, Landlord may do so at Tenant's expense. The removal of
Alterations from the Premises shall be governed by Paragraph 9 above. Tenant's
obligations under this paragraph shall survive the expiration or other
termination of this Lease. Upon expiration or termination of this Lease or of
Tenant's possession, Tenant shall surrender all keys to the Premises or any
other part of the Building and shall make known to Landlord the combination of
locks on all safes, cabinets and vaults that may be located in the Premises.
b. Holding Over. If Tenant remains in possession of the Premises
------------
after the expiration or earlier termination of this Lease with the express
written consent of Landlord (which consent may be withheld in Landlord's sole
discretion), Tenant's occupancy shall be a month-to-month tenancy at a rent
equal to the greater of (i) for the first thirty (30) days of any such holdover
period, one hundred twenty-five percent (125%), and for each day of the holdover
period thereafter, one hundred fifty percent (150%), of the Monthly Rent and
Additional Rent payable under this Lease during the last full month prior to the
date of the expiration of this Lease or (ii) the then fair market rental (as
reasonably determined by Landlord) for the Premises; provided, however, if
Landlord and Tenant agree in writing that a different monthly rent shall apply
during such month-to-month tenancy, then the monthly rent specified in such
written agreement shall instead apply. Except as provided in the preceding
sentence, the month-to-month tenancy shall be on the terms and conditions of
this Lease, except that any renewal options, expansion options, rights of first
refusal, rights of first negotiation or any other rights or options pertaining
to additional space in the Building contained in this Lease shall be deemed to
have terminated and shall be inapplicable thereto. Landlord's acceptance of rent
after such holding over with Landlord's written consent shall not result in any
other tenancy or in a renewal of the original term of this Lease. If Tenant
remains in possession of the Premises after the expiration or earlier
termination of this Lease without Landlord's consent as required above, Tenant's
continued possession shall be on the basis of a tenancy at sufferance and Tenant
shall pay as Monthly Rent during the holdover period an amount equal to the
greater of (i) one hundred twenty-five percent (125%) of the fair market rental
(as reasonably determined by Landlord) for the Premises or (ii) two hundred
percent (200%) of the Monthly Rent and Additional Rent payable under this Lease
for the last full month prior to the date of such expiration or termination.
c. Indemnification. Tenant shall indemnify, defend and hold Landlord
---------------
harmless from and against all Claims incurred by or asserted against Landlord
and arising directly or indirectly from Tenant's failure to timely surrender the
Premises, including but not limited to (i) any rent payable by or any loss,
cost, or damages, including lost profits, claimed by any prospective tenant of
the Premises or any portion thereof, and (ii) Landlord's damages as a result of
such prospective tenant rescinding or refusing to enter into the prospective
lease of the Premises or any portion thereof by reason of such failure to timely
surrender the Premises.
21. Subordination and Attornment.
----------------------------
a. This Lease is expressly made subject and subordinate to any
mortgage, deed of trust, ground lease, underlying lease or like encumbrance
affecting any part of the Real Property or any interest of Landlord therein
which is now existing or hereafter executed or recorded, any present or future
modification, amendment or supplement to any of the foregoing, and to any
advances made thereunder (any of the foregoing being a "Superior Interest")
without the necessity of any further documentation evidencing such
subordination. Notwithstanding the foregoing, Tenant shall, within ten (10) days
after Landlord's request, execute and deliver to Landlord a document evidencing
the subordination of this Lease to a particular Superior Interest, and Tenant's
failure to timely deliver the required document shall constitute an Event of
Default under Paragraph 25.a.3. below. If the interest of Landlord in the Real
Property or the Building is transferred to any person ("Purchaser") pursuant to
or in lieu of proceedings for enforcement of any Superior Interest, Tenant shall
immediately and automatically attorn to the Purchaser, and this Lease shall
continue in full force and effect as a direct lease between the Purchaser and
Tenant on the terms and conditions set forth herein.
b. Notwithstanding the above, upon Tenant's written request,
Landlord will request that the then existing (if any) holders of a Superior
Interest execute a written "non-disturbance agreement"
21
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on Tenant's behalf providing that, if Tenant is not in default under this Lease
beyond any applicable grace period, that such party will recognize this Lease
and Tenant's rights hereunder and will not disturb Tenant's possession
hereunder, and if this Lease is by operation of law terminated in a foreclosure,
that a new lease will be entered into on the same terms as this Lease for the
remaining term hereof. The failure of any future holder of a Superior Interest
to execute and deliver such a non-disturbance agreement upon Landlord's request
shall not constitute a default hereunder by Landlord, it being understood that
Landlord's sole obligation is to request in good faith the execution and
delivery of such agreement. Further, if in order to obtain such non-disturbance
agreement, Landlord is required to expend any sum, Landlord shall so notify
Tenant and Tenant may elect to pay such sum. In no event shall Landlord be
required to expend any sums in connection therewith.
22. Financing Condition. If any lender or ground lessor that intends to
-------------------
acquire an interest in, or holds a mortgage, ground lease or deed of trust
encumbering any portion of the Real Property should require, either the
execution by Tenant of an agreement requiring Tenant to send such lender written
notice of any default by Landlord under this Lease, giving such lender the right
to cure such default until such lender has completed foreclosure, and preventing
Tenant from terminating this Lease unless such default remains uncured after
foreclosure has been completed, and/or any modification of the agreements,
covenants, conditions or provisions of this Lease, then Tenant agrees that it
shall, within ten (10) days after Landlord's request, execute and deliver such
agreement and modify this Lease as required by such lender or ground lessor;
provided, however, that no such modification shall affect the length of the term
or increase the rent payable by Tenant under Paragraphs 5 and 7 or otherwise
materially lessen the rights, or increase the obligations of, Tenant hereunder.
Tenant acknowledges and agrees that its failure to timely execute any such
agreement or modification required by such lender or ground lessor may cause
Landlord serious financial damage by causing the failure of a financing
transaction and giving Landlord all of its rights and remedies under Paragraph
25 below, including its right to damages caused by the loss of such financing.
23. Entry by Landlord. Landlord may, at any and all reasonable times,
-----------------
and upon reasonable advance notice (provided that no advance notice need be
given if an emergency necessitates an immediate entry or prior to entry to
provide routine janitorial services), enter the Premises to (a) inspect the same
and to determine whether Tenant is in compliance with its obligations hereunder,
(b) supply janitorial and any other service Landlord is required to provide
hereunder, (c) show the Premises to prospective lenders or purchasers or, during
the final twelve (12) months of the Lease term, to prospective tenants, (d) post
notices of nonresponsibility, and (e) alter, improve or repair the Premises or
any other portion of the Real Property. In connection with any such alteration,
improvement or repair, Landlord may erect in the Premises or elsewhere in the
Real Property scaffolding and other structures reasonably required for the work
to be performed. In no event shall such entry or work entitle Tenant to an
abatement of rent, constitute an eviction of Tenant, constructive or otherwise,
or impose upon Landlord any liability whatsoever, including but not limited to
liability for consequential damages or loss of business or profits by Tenant;
provided, however, that Landlord shall use good faith efforts to cause all such
work to be done in such a manner as to cause as little interference to Tenant as
reasonably possible without incurring additional expense. Landlord shall at all
times retain a key with which to unlock all of the doors in the Premises, except
Tenant's vaults and safes. If an emergency necessitates immediate access to the
Premises, Landlord may use whatever force is necessary to enter the Premises and
any such entry to the Premises shall not constitute a forcible or unlawful entry
into the Premises, a detainer of the Premises, or an eviction of Tenant from the
Premises, or any portion thereof.
In any entrance into the Premises pursuant to the provisions of this
Paragraph 23, Landlord shall endeavor in good faith to comply with Tenant's
reasonable security procedures previously detailed by Tenant to Landlord, except
to the extent Landlord or its agents determine that an emergency makes
compliance with such procedures impracticable.
24. Insolvency or Bankruptcy. The occurrence of any of the following
------------------------
shall constitute an Event of Default under Paragraph 25 below:
1. Tenant ceases doing business as a going concern, makes an
assignment for the benefit of creditors, is adjudicated an insolvent, files a
petition (or files an answer admitting the material allegations of such
petition) seeking for Tenant any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar arrangement under any state or
federal bankruptcy or other law, or Tenant consents to or acquiesces in the
appointment, pursuant to any state or federal bankruptcy or other law, of a
trustee, receiver or liquidator for the Premises, for Tenant or for all or any
substantial part of Tenant's assets; or
2. Tenant fails within sixty (60) days after the commencement of
any proceedings against Tenant seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any state or
federal bankruptcy or other Legal Requirement, to have such proceedings
dismissed, or Tenant fails, within sixty (60) days after an appointment pursuant
to any state or federal bankruptcy or other Legal Requirement without Tenant's
consent or acquiescence, of any trustee,
22
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receiver or liquidator for the Premises, for Tenant or for all or any
substantial part of Tenant's assets, to have such appointment vacated; or
3. Tenant is unable, or admits in writing its inability, to pay
its debts as they mature; or
4. Tenant gives notice to any governmental body of its
insolvency or pending insolvency, or of its suspension or pending suspension of
operations.
In no event shall this Lease be assigned or assignable by reason of any
voluntary or involuntary bankruptcy, insolvency or reorganization proceedings,
nor shall any rights or privileges hereunder be an asset of Tenant, the trustee,
debtor-in-possession, or the debtor's estate in any bankruptcy, insolvency or
reorganization proceedings.
25. Default and Remedies.
a. Events of Default. The occurrence of any of the following shall
-----------------
constitute an "Event of Default" by Tenant:
1. Tenant fails to pay Monthly Rent, Additional Rent or any
other rent due hereunder within five (5) business days following written notice
that such sum is past due; provided, however, if Landlord is entitled to give
written notice to Tenant that sums due under this Lease are past due and
Landlord actually gives such notice to Tenant two (2) times during any twelve
(12) month period, then thereafter the above five (5) business day notice and
grace period for payment shall no longer apply until a period of twelve (12)
months passes during which all payments due from Tenant to Landlord under this
Lease are timely paid by Tenant, at which time the five (5) business day notice
and grace period provided for above shall again apply; or
2. Tenant fails to occupy and use the Premises for thirty (30)
consecutive days, which failure shall be deemed an abandonment of the Premises
by Tenant; or
3. Tenant fails to deliver any estoppel certificate pursuant to
Paragraph 29 below, subordination agreement pursuant to Paragraph 21 above, or
document required pursuant to Paragraph 22 above, within the applicable period
set forth therein; or
4. Tenant violates the bankruptcy and insolvency provisions of
Paragraph 24 above; or
5. Tenant makes or has made or delivers or has delivered any
warranty, representation or statement to Landlord in connection with this Lease,
or any other agreement made by Tenant for the benefit of Landlord, which is or
was false or misleading in any material respect when made or furnished; or
6. Tenant assigns this Lease or subleases any portion of the
Premises in violation of Paragraph 13 above; or
7. A default by Tenant occurs under any other lease between
Tenant and Landlord or any affiliate of Landlord, and Tenant fails to cure such
default within the applicable period set forth therein; or
8. Tenant fails to comply with any other provision of this Lease
in the manner required after notice from Landlord of such failure, or, with
respect to matters which do not pose a health, safety or security risk and do
not annoy other tenants, Tenant fails to comply within thirty (30) calendar days
after written notice of such failure (or if the noncompliance cannot by its
nature be cured within the 30-day period, if Tenant fails to commence to cure
such noncompliance within the 30-day period and thereafter diligently prosecute
such cure to completion) .
b. Remedies. Upon the occurrence of an Event of Default Landlord
--------
shall have the following remedies, which shall not be exclusive but shall be
cumulative and shall be in addition to any other remedies now or hereafter
allowed by law:
1. Landlord may terminate Tenant's right to possession of the
Premises at any time by written notice to Tenant. Tenant expressly acknowledges
that in the absence of such written notice from Landlord, no other act of
Landlord, including, but not limited to, its re-entry into the Premises, its
efforts to relet the Premises, its reletting of the Premises for Tenant's
account, its storage of Tenant's personal property and trade fixtures, its
acceptance of keys to the Premises from Tenant, its appointment of a receiver,
or its exercise of any other rights and remedies under this Paragraph 25 or
otherwise at law, shall constitute an acceptance of Tenant's surrender of the
Premises or constitute a termination of this Lease or of Tenant's right to
possession of the Premises.
23
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Upon such termination in writing of Tenant's right to possession of
the Premises, this Lease shall terminate and Landlord shall be entitled to
recover damages from Tenant as provided in California Civil Code Section 1951.2
or any other applicable existing or future Legal Requirement providing for
recovery of damages for such breach, including but not limited to the following:
(i) The reasonable cost of recovering the Premises; plus
(ii) The reasonable cost of removing Tenant's Alterations,
trade fixtures and improvements; plus
(iii) All unpaid rent due or earned hereunder prior to the
date of termination, less the proceeds of any reletting or any rental received
from subtenants prior to the date of termination applied as provided in
Paragraph 25.b.2. below, together with interest at the Interest Rate, on such
sums from the date such rent is due and payable until the date of the award of
damages; plus
(iv) The amount by which the rent which would be payable by
Tenant hereunder, including Additional Rent under Paragraph 7 above, as
reasonably estimated by Landlord, from the date of termination until the date of
the award of damages, exceeds the amount of such rental loss as Tenant proves
could have been reasonably avoided, together with interest at the Interest Rate
on such sums from the date such rent is due and payable until the date of the
award of damages; plus
(v) The amount by which the rent which would be payable by
Tenant hereunder, including Additional Rent under Paragraph 7 above, as
reasonably estimated by Landlord, for the remainder of the then term, after the
date of the award of damages exceeds the amount such rental loss as Tenant
proves could have been reasonably avoided, discounted at the discount rate
published by the Federal Reserve Bank of San Francisco for member banks at the
time of the award plus one percent (1%); plus
(vi) Such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable law, including
without limitation any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom.
2. Landlord has the remedy described in California Civil Code
Section 1951.4 (a landlord may continue the lease in effect after the tenant's
breach and abandonment and recover rent as it becomes due, if the tenant has the
right to sublet and assign subject only to reasonable limitations), and may
continue this Lease in full force and effect and may enforce all of its rights
and remedies under this Lease, including, but not limited to, the right to
recover rent as it becomes due. After the occurrence of an Event of Default,
Landlord may enter the Premises without terminating this Lease and sublet all or
any part of the Premises for Tenant's account to any person, for such term
(which may be a period beyond the remaining term of this Lease), at such rents
and on such other terms and conditions as Landlord deems advisable. In the event
of any such subletting, rents received by Landlord from such subletting shall be
applied (i) first, to the payment of the costs of maintaining, preserving,
altering and preparing the Premises for subletting, the other costs of
subletting, including but not limited to brokers' commissions, attorneys' fees
and expenses of removal of Tenant's personal property, trade fixtures and
Alterations; (ii) second, to the payment of rent then due and payable hereunder;
(iii) third, to the payment of future rent as the same may become due and
payable hereunder; (iv) fourth, the balance, if any, shall be paid to Tenant
upon (but not before) expiration of the term of this Lease. If the rents
received by Landlord from such subletting, after application as provided above,
are insufficient in any month to pay the rent due and payable hereunder for such
month, Tenant shall pay such deficiency to Landlord monthly upon demand.
Notwithstanding any such subletting for Tenant's account without termination,
Landlord may at any time thereafter, by written notice to Tenant, elect to
terminate this Lease by virtue of a previous Event of Default.
During the continuance of an Event of Default, for so long as Landlord
does not terminate Tenant's right to possession of the Premises and subject to
Paragraph 13, entitled Assignment and Subletting, and the options granted to
Landlord thereunder, Landlord shall not unreasonably withhold its consent to an
assignment or sublease of Tenant's interest in the Premises or in this Lease.
3. During the continuance of an Event of Default, Landlord may
enter the Premises without terminating this Lease and remove all Tenant's
personal property, Alterations and trade fixtures from the Premises and store
them at Tenant's risk and expense. If Landlord removes such property from the
Premises and stores it at Tenant's risk and expense, and if Tenant fails to pay
the cost of such removal and storage after written demand therefor and/or to pay
any rent then due, then after the property has been stored for a period of
thirty (30) days or more Landlord may sell such property at public or private
sale, in the manner and at such times and places as Landlord deems commercially
reasonable following reasonable notice to Tenant of the time and place of such
sale. The proceeds of any such sale shall be applied first to the payment of the
expenses for removal and storage of the property, the preparation for and the
conducting of such sale, and for attorneys' fees and other legal expenses
incurred
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by Landlord in connection therewith, and the balance shall be applied as
provided in Paragraph 25.b.2. above.
Tenant hereby waives all claims for damages that may be caused by
Landlord's reentering and taking possession of the Premises or removing and
storing Tenant's personal property pursuant to this Paragraph 25, and Tenant
shall indemnify, defend and hold Landlord harmless from and against any and all
Claims resulting from any such act. No reentry by Landlord shall constitute or
be construed as a forcible entry by Landlord.
4. Landlord may require Tenant to remove any and all
Alterations from the Premises or, if Tenant fails to do so within ten (10) days
after Landlord's request, Landlord may do so at Tenant's expense.
5. Landlord may cure the Event of Default at Tenant's
expense, it being understood that such performance shall not waive or cure the
subject Event of Default. If Landlord pays any sum or incurs any expense in
curing the Event of Default, Tenant shall reimburse Landlord upon demand for the
amount of such payment or expense with interest at the Interest Rate from the
date the sum is paid or the expense is incurred until Landlord is reimbursed by
Tenant. Any amount due Landlord under this subsection shall constitute
additional rent hereunder.
c. Waiver of Redemption. Tenant hereby waives, for itself and all
--------------------
persons claiming by and under Tenant, all rights and privileges which it might
have under any present or future Legal Requirement to redeem the Premises or to
continue this Lease after being dispossessed or ejected from the Premises.
26. Damage or Destruction. If all or a part of the Premises are
---------------------
damaged by fire or other casualty, or if the Building is so damaged that access
to or use and occupancy of the Premises is materially impaired, Landlord shall
promptly give Tenant notice of Landlord's reasonable estimate of the time
required to make such repairs (the "Damage Estimate"). If the Damage Estimate is
one hundred twenty (120) days or less, then Landlord shall repair the damage and
this Lease shall remain in full force and effect. If the Damage Estimate is more
than one hundred twenty (120) days, Landlord, at its option exercised by written
notice to Tenant within sixty (60) days of the date of the damage, shall either
(a) repair the damage, in which event this Lease shall continue in full force
and effect, or (b) terminate this Lease as of the date specified by Landlord in
the notice, which date shall be not less than thirty (30) days nor more than
sixty (60) days after the date such notice is given, and this Lease shall
terminate on the date specified in the notice. If the Damage Estimate is more
than one hundred eighty (180) days, and Landlord does not give notice
terminating this Lease, then Tenant may give notice to Landlord, within thirty
(30) calendar days after Tenant receives the Damage Estimate, terminating this
Lease as of the date of such fire or casualty.
Notwithstanding anything to the contrary contained in this Paragraph 26,
if the initial Damage Estimate is more than ninety (90) days, and the date on
which Landlord reasonably anticipates the repairs of such damage will be
completed is during the last twelve (12) months of the Lease term, Landlord and
Tenant shall each have the option to terminate this Lease as of the date of such
damage by giving written notice to the other, in the case of Landlord together
with the Damage Estimate, or, in the case of Tenant, within thirty (30) days of
Tenant's receipt of the Damage Estimate.
If the fire or other casualty damages the Premises or the common areas of
the Real Property necessary for Tenant's use and occupancy of the Premises,
Tenant ceases to use any portion of the Premises as a result of such damage, and
the damage does not result from the negligence or willful misconduct of Tenant
or any other Tenant Parties, then during the period the Premises or portion
thereof are rendered unusable by such damage and repair, Tenant's Monthly Rent
and Additional Rent under Paragraphs 5 and 7 above shall be proportionately
reduced based upon the extent to which the damage and repair prevents Tenant
from conducting, and Tenant does not conduct, its business at the Premises.
Landlord shall not be obligated to repair or replace any of Tenant's movable
furniture, equipment, trade fixtures, and other personal property, nor any
Alterations installed in the Premises by Tenant, and no damage to any of the
foregoing shall entitle Tenant to any abatement, and Tenant shall, at Tenant's
sole cost and expense, repair and replace such items. All such repair and
replacement of Alterations shall be constructed in accordance with Paragraph 9
above regarding Alterations.
A total destruction of the Building shall automatically terminate this
Lease. In no event shall Tenant be entitled to any compensation or damages from
Landlord for loss of use of the whole or any part of the Premises or for any
inconvenience occasioned by any such destruction, rebuilding or restoration of
the Premises, the Building or access thereto, except for the rent abatement
expressly provided above. Tenant hereby waives California Civil Code Sections
1932(2) and 1933(4), providing for termination of hiring upon destruction of the
thing hired and Sections 1941 and 1942, providing for repairs to and of
premises.
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27. Eminent Domain.
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a. If all or any part of the Premises are taken by any public or
quasi-public authority under the power of eminent domain, or any agreement in
lieu thereof (a "taking"), this Lease shall terminate as to the portion of the
Premises taken effective as of the date of taking. If only a portion of the
Premises is taken, Landlord or Tenant may terminate this Lease as to the
remainder of the Premises upon written notice to the other party within ninety
(90) days after the taking; provided, however, that Tenant's right to terminate
this Lease is conditioned upon the remaining portion of the Premises being of
Such size or configuration that such remaining portion of the Premises is
unusable or uneconomical for Tenant's business. Landlord shall be entitled to
all compensation, damages, income, rent awards and interest thereon whatsoever
which may be paid or made in connection with any taking and Tenant shall have no
claim against Landlord or any governmental authority for the value of any
unexpired term of this Lease or of any of the improvements or Alterations in the
Premises; provided, however, that the foregoing shall not prohibit Tenant from
prosecuting a separate claim against the taking authority for an amount
separately designated for Tenant's relocation expenses or the interruption of or
damage to Tenant's business or as compensation for Tenant's personal property,
trade fixtures, Alterations or other improvements paid for by Tenant so long as
any award to Tenant will not reduce the award to Landlord.
In the event of a partial taking of the Premises which does not result
in a termination of this Lease, the Monthly Rent and Additional Rent under
Paragraphs 5 and 7 hereunder shall be equitably reduced. If all or any part of
the Real Property other than the Premises is taken, Landlord may terminate this
Lease upon written notice to Tenant given within ninety (90) days after the date
of taking.
b. Notwithstanding the foregoing, if all or any portion of the
Premises is taken for a period of time ending prior to the end of the term of
this Lease, this Lease shall remain in full force and effect and Tenant shall
continue to pay all rent and to perform all of its obligations under this Lease;
provided, however, that Tenant shall be entitled to all compensation, damages,
income, rent awards and interest thereon that is paid or made in connection with
such temporary taking of the Premises (or portion thereof), except that any such
compensation in excess of the rent or other amounts payable to Landlord
hereunder shall be promptly paid over to Landlord as received. Landlord and
Tenant each hereby waive the provisions of California Code of Civil Procedure
Section 1265.130 and any other applicable existing or future Legal Requirement
providing for, or allowing either party to petition the courts of the state in
which the Real Property is located for, a termination of this Lease upon a
partial taking of the Premises and/or the Building.
28. Landlord's Liability; Sale of Building. The term "Landlord," as
--------------------------------------
used in this Lease, shall mean only the owner or owners of the Real Property at
the time in question. Notwithstanding any other provision of this Lease, the
liability of Landlord for its obligations under this Lease is limited solely to
Landlord's interest in the Real Property as the same may from time to time be
encumbered, and no personal liability shall at any time be asserted or
enforceable against any other assets of Landlord or against the constituent
shareholders, partners or other owners of Landlord, or the directors, officers,
employees and agents of Landlord or such constituent shareholder, partner or
other owner, on account of any of Landlord's obligations or actions under this
Lease. For purposes of the foregoing, Landlord's interest in the Real Property
shall include (subject to the rights of any holder of a Superior Interest) (a)
any condemnation awards receivable (but not received) by Landlord in respect of
a taking of a portion of the Real Property and (b) any proceeds of casualty
insurance receivable (but not received) by Landlord in respect of damage to or
destruction of any portion of the Real Property, but only to the extent that
such insurance proceeds are not used or to be used for the repair or replacement
of any portion of the Real Property damaged or destroyed. In addition, in the
event of any conveyance of title to the Real Property, then the grantor or
transferor shall be relieved of all liability with respect to Landlord's
obligations to be performed under this Lease after the date of such conveyance.
In no event shall Landlord be deemed to be in default under this Lease unless
Landlord fails to perform its obligations under this Lease, Tenant delivers to
Landlord written notice specifying the nature of Landlord's alleged default, and
Landlord fails to cure such default within thirty (30) days following receipt of
such notice (or, if the default cannot reasonably be cured within such period,
to commence action within such thirty (30)-day period and proceed diligently
thereafter to cure such default). Upon any conveyance of title to the Real
Property, the grantee or transferee shall be deemed to have assumed Landlord's
obligations to be performed under this Lease from and after the date of such
conveyance, subject to the limitations on liability set forth above in this
Paragraph 28. If Tenant provides Landlord with any security for Tenant's
performance of its obligations hereunder, and Landlord transfers such security
to the grantee or transferee of Landlord's interest in the Real Property,
Landlord shall be released from any further responsibility or liability for such
security. Notwithstanding any other provision of this Lease, but not in
limitation of the provisions of Paragraph 14.a. above, Landlord shall not be
liable for any consequential damages, or interruption or loss of business,
income or profits, or claims of constructive eviction, nor shall Landlord be
liable for loss of or damage to artwork, currency, jewelry, bullion, unique or
valuable documents, securities or other valuables, or for other property not in
the nature of ordinary fixtures, furnishings and equipment used in general
administrative and executive office activities and functions. Wherever in this
Lease Tenant (a) releases Landlord from any claim or liability, (b) waives or
limits any right of Tenant to assert any claim against Landlord or to seek
recourse against any property of Landlord or (c) agrees to indemnify
26
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Landlord against any matters, the relevant release, waiver, limitation or
indemnity shall run in favor of and apply to Landlord, the constituent
shareholders, partners or other owners of Landlord, and the directors, officers,
employees and agents of Landlord and each such constituent shareholder, partner
or other owner.
Notwithstanding anything to the contrary contained above in this
Paragraph 28 or elsewhere in this Lease, in the event that Landlord's interest
in the Real Property, as the same may from time to time be encumbered, shall be
in excess often Million Dollars ($10,000,000.00), then such excess shall not be
subject to any claims by Tenant or liability to Tenant arising out of or in
connection with this Lease.
29. Estoppel Certificates. At any time and from time to time, upon
---------------------
not less than ten (10) business days' prior notice from Landlord, Tenant shall
execute, acknowledge and deliver to Landlord a statement certifying the
commencement date of this Lease, stating that this Lease is unmodified and in
full force and effect (or if there have been modifications, that this Lease is
in full force and effect as modified and the date and nature of each such
modification), that Landlord is not in default under this Lease (or, if Landlord
is in default, specifying the nature of such default), that Tenant is not in
default under this Lease (or if Tenant is in default, specifying the nature of
such default), the current amounts of and the dates to which the Monthly Rent
and Additional Rent has been paid, and setting forth such other matters as may
be reasonably requested by Landlord. Any such statement may be conclusively
relied upon by a prospective purchaser of the Real Property or by a lender
obtaining a lien on the Real Property as security. If Tenant fails to execute
and deliver to Landlord the required certificate within the required ten (10)
business day period, then Landlord may send Tenant a second written notice
requesting that Tenant execute and deliver such certificate to Landlord pursuant
to the terms hereof. If Tenant fails to execute and return such certificate to
Landlord within ten (10) business days following such second written notice,
then such failure shall be conclusive upon Tenant that (i) this Lease is in full
force and effect, without modification except as may be represented by Landlord,
(ii) there are no uncured defaults in Landlord's performance of its obligations
hereunder, (iii) not more than one month's installment of Monthly Rent has been
paid in advance, and (iv) any other statements of fact included by Landlord in
such statement are correct. Tenant acknowledges and agrees that its failure to
execute such certificate within the ten (10) business day period following
Landlord's second written notice to Tenant, as provided above, may cause
Landlord serious financial damage by causing the failure of a sale or financing
transaction and shall give Landlord all of its rights and remedies under
Paragraph 25 above, including its right to damages caused by the loss of such
sale or financing.
30. Right of Landlord to Perform. If Tenant fails to make any payment
----------------------------
required hereunder (other than Monthly Rent and Additional Rent) or fails to
perform any other of its obligations hereunder within any applicable notice and
cure period provided for herein, Landlord may, but shall not be obliged to, and
without waiving any default of Tenant or releasing Tenant from any obligations
to Landlord hereunder, make any such payment or perform any other such
obligation on Tenant's behalf. All sums so paid by Landlord and all necessary
incidental costs in connection with the performance by Landlord of an obligation
of Tenant (together with interest thereon from the date of such payment by
Landlord until paid at the Interest Rate) shall be payable by Tenant to Landlord
within thirty (30) days of written demand, and Tenant's failure to make such
payment within such thirty (30) day period shall entitle Landlord to the same
rights and remedies provided Landlord in the event of non-payment of rent.
31. Late Charge. Tenant acknowledges that late payment of any
-----------
installment of Monthly Rent or Additional Rent or any other amount required
under this Lease will cause Landlord to incur costs not contemplated by this
Lease and that the exact amount of such costs would be extremely difficult and
impracticable to fix. Such costs include, without limitation, processing and
accounting charges, late charges that may be imposed on Landlord by the terms of
any encumbrance or note secured by the Real Property and the loss of the use of
the delinquent funds. Therefore, if any installment of Monthly Rent or
Additional Rent or any other amount due from Tenant is not received when due,
Tenant shall pay to Landlord on demand, on account of the delinquent payment, an
additional sum equal to the greater of (i) five percent (5%) of the overdue
amount, or (ii) $100.00, which additional sum represents a fair and reasonable
estimate of the costs that Landlord will incur by reason of late payment by
Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant's
default with respect to the overdue amount, nor prevent Landlord from exercising
its right to collect interest as provided above, rent, or any other damages, or
from exercising any of the other rights and remedies available to Landlord.
32. Attorneys' Fees; waiver of Jury Trial. In the event of any action
-------------------------------------
or proceeding between Landlord and Tenant (including an action or proceeding
between Landlord and the trustee or debtor in possession while Tenant is a
debtor in a proceeding under any bankruptcy law) to enforce any provision of
this Lease, the losing party shall pay to the prevailing party all costs and
expenses, including, without limitation, reasonable attorneys' fees and
expenses, incurred in such action and in any appeal in connection therewith by
such prevailing party. The "prevailing party" will be determined by the court
before whom the action was brought based upon an assessment of which party's
major arguments or positions taken in the suit or proceeding could fairly be
said to have prevailed over the other party's major arguments or positions on
major disputed issues in the court's decision. Notwithstanding the foregoing,
27
<PAGE>
however, Landlord shall be deemed the prevailing party in any unlawful detainer
or other action or proceeding instituted by Landlord based upon any default or
alleged default of Tenant hereunder if (i) judgment is entered in favor of
Landlord, or (ii) prior to trial or judgment Tenant pays all or any portion of
the rent claimed by Landlord, vacates the Premises, or otherwise cures the
default claimed by Landlord.
If Landlord becomes involved in any litigation or dispute, threatened or
actual, by or against anyone not a party to this Lease, but arising by reason of
or related to any act or omission of Tenant or any Tenant Party, Tenant agrees
to pay Landlord's reasonable attorneys' fees and other costs incurred in
connection with the litigation or dispute, regardless of whether a lawsuit is
actually filed.
IF ANY ACTION OR PROCEEDING BETWEEN LANDLORD AND TENANT TO ENFORCE THE
PROVISIONS OF THIS LEASE (INCLUDING AN ACTION OR PROCEEDING BETWEEN LANDLORD AND
THE TRUSTEE OR DEBTOR IN POSSESSION WHILE TENANT IS A DEBTOR IN A PROCEEDING
UNDER ANY BANKRUPTCY LAW) PROCEEDS TO TRIAL, LANDLORD AND TENANT HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY IN SUCH TRIAL. Landlord and Tenant agree that
this paragraph constitutes a written consent to waiver of trial by jury within
the meaning of California Code of Civil Procedure Section 631 (a)(2), and Tenant
does hereby authorize and empower Landlord to file this paragraph and/or this
Lease, as required, with the clerk or judge of any court of competent
jurisdiction as a written consent to waiver of jury trial.
33. Waiver. No provisions of this Lease shall be deemed waived by
------
Landlord or Tenant unless such waiver is in a writing signed by the party giving
such waiver. The waiver by either party of any breach of any provision of this
Lease by the other party shall not be deemed a waiver of any subsequent breach
of the same or any other provision of this Lease. No delay or omission in the
exercise of any right or remedy of Landlord upon any default by Tenant, or of
Tenant upon any default of Landlord, shall impair such right or remedy or be
construed as a waiver. Landlord's acceptance of any payments of rent due under
this Lease shall not be deemed a waiver of any default by Tenant under this
Lease (including Tenant's recurrent failure to timely pay rent) other than
Tenant's nonpayment of the accepted sums, and no endorsement or statement on any
check or accompanying any check or payment shall be deemed an accord and
satisfaction. Tenant's payment of rent due and Tenant's continuance in
possession shall not constitute a waiver by Tenant of any default of Landlord.
Landlord's consent to or approval of any act by Tenant requiring Landlord's
consent or approval shall not be deemed to waive or render unnecessary
Landlord's consent to or approval of any subsequent act by Tenant.
34. Notices. All notices and demands which may or are required to be
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given by either party to the other hereunder shall be in writing. All notices
and demands by Landlord to Tenant shall be delivered personally or sent by
United States certified or registered mail, return receipt requested, postage
prepaid, or by any reputable overnight or same-day courier, addressed to Tenant
at the Premises, or to such other place as Tenant may from time to time
designate by notice to Landlord hereunder. All notices and demands by Tenant to
Landlord shall be sent by United States mail, postage prepaid, or by any
reputable overnight or same-day courier, addressed to Landlord in care of
Shorenstein Company, L.P., 555 California Street, 49th floor, San Francisco,
California 94104, or to such other place as Landlord may from time to time
designate by notice to Tenant hereunder. In the event Tenant requests multiple
notices hereunder, Tenant will be bound by such notice from the earlier of the
effective times of the multiple notices.
35. Deleted.
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36. Defined Terms and Marginal Headings. When required by the context of
-----------------------------------
this Lease, the singular includes the plural. If more than one person or entity
signs this Lease as Tenant, the obligations hereunder imposed upon Tenant shall
be joint and several, and the act of, written notice to or from, refund to, or
signature of, any Tenant signatory to this Lease (including without limitation
modifications of this Lease made by fewer than all such Tenant signatories)
shall bind every other Tenant signatory as though every other Tenant signatory
had so acted, or received or given the written notice or refund, or signed. The
headings and titles to the paragraphs of this Lease are for convenience only and
are not to be used to interpret or construe this Lease. Wherever the term
including or includes is used in this Lease it shall be construed as if followed
by the phrase "without limitation." The language in all parts of this Lease
shall in all eases be construed as a whole and in accordance with its fair
meaning and not construed for or against any party simply because one party was
the drafter thereof."
37. Time and Applicable Law. Time is of the essence of this Lease and of
-----------------------
each and all of its provisions, except as to the conditions relating to the
delivery of possession of the Premises to Tenant. This Lease shall be governed
by and construed in accordance with the laws of the State of California, and the
venue of any action or proceeding under this Lease shall be the City and County
of San Francisco, California.
38. Successors. Subject to the provisions of Paragraphs 13 and 28 above,
----------
the covenants and conditions hereof shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors, executors, administrators and assigns.
28
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39. Entire Agreement; Modifications. This Lease (including any
-------------------------------
exhibit, rider or attachment hereto) constitutes the entire agreement between
Landlord and Tenant with respect to Tenant's lease of the Premises. No provision
of this Lease may be amended or otherwise modified except by an agreement in
writing signed by the parties hereto. Neither Landlord nor Landlord's agents
have made any representations or warranties with respect to the Premises, the
Building, the Real Property or this Lease except as expressly set forth herein,
including without limitation any representations or warranties as to the
suitability or fitness of the Premises for the conduct of Tenant's business or
for any other purpose, nor has Landlord or its agents agreed to undertake any
alterations or construct any improvements to the Premises except those, if any,
expressly provided in this Lease, and no rights, easements or licenses shall be
acquired by Tenant by implication or otherwise unless expressly set forth
herein. Neither this Lease nor any memorandum hereof shall be recorded by
Tenant.
40. Light and Air. Tenant agrees that no diminution of light, air or
-------------
view by any structure which may hereafter be erected (whether or not by
Landlord) shall entitle Tenant to any reduction of rent hereunder, result in any
liability of Landlord to Tenant, or in any other way affect this Lease.
41. Name of Building. Tenant shall not use the name of the Building for
----------------
any purpose other than as the address of the business conducted by Tenant in the
Premises without the written consent of Landlord, which consent may be denied in
Landlord's sole discretion. Landlord reserves the right to change the name of
the Building at any time in its sole discretion by written notice to Tenant and
Landlord shall not be liable to Tenant for any loss, cost or expense on account
of any such change of name.
42. Severability. If any provision of this Lease or the application
------------
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Lease and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
43. Authority. If Tenant or Landlord is a corporation, partnership,
---------
trust, association or other entity, Tenant and Landlord and each person
executing this Lease on their respective behalf, hereby covenant and warrant
that (a) Tenant or Landlord, as the case may be, is duly incorporated or
otherwise established or formed and validly existing under the laws of its state
of incorporation, establishment or formation, (b) Tenant or Landlord, as the
case may be, has and is duly qualified to do business in California, (c) Tenant
or Landlord, as the case may be, has full corporate, partnership, trust,
association or other appropriate power and authority to enter into this Lease
and to perform all Tenant's obligations hereunder, and (d) each person (and all
of the persons if more than one signs) signing this Lease on behalf of Tenant or
Landlord is duly and validly authorized to do so.
44. No Offer. Submission of this instrument for examination and
--------
signature by Tenant does not constitute an offer to lease or a reservation of or
option for lease, and is not effective as a lease or otherwise until execution
and delivery by both Landlord and Tenant.
45. Real Estate Brokers. Landlord and Tenant each represents and
-------------------
warrants to the other that such party has negotiated this Lease directly with
the Real Estate Broker(s) identified in Paragraph 2 and has not authorized or
employed, or acted by implication to authorize or to employ, any other real
estate broker or salesman to act for such party in connection with this Lease.
Each party shall hold the other harmless from and indemnify and defend the other
against any and all Claims by any real estate broker or salesman other than the
Real Estate Broker(s) identified in Paragraph 2 for a commission, finder's fee
or other compensation as a result of the inaccuracy of such party's
representation above.
46. Consents and Approvals. Wherever the consent, approval, judgment or
----------------------
determination of Landlord is required or permitted under this Lease, such
consent, approval, judgment or determination shall not be unreasonably withheld,
unless the provision providing for such consent, approval, judgment or
determination specifies that Landlord's consent or approval may be granted or
denied in Landlord's sole discretion or otherwise states specific criteria for
the granting or withholding of consent or approval. Whenever Tenant requests
Landlord to take any action or give any consent or approval, Tenant shall
reimburse Landlord for all of Landlord's reasonable costs incurred in reviewing
the proposed action or consent (whether or not Landlord consents to any such
proposed action), including without limitation reasonable attorneys' or
consultants' fees and expenses, within thirty (30) days after Landlord's
delivery to Tenant of a statement of such costs. If it is determined that
Landlord failed to give its consent or approval where it was required to do so
under this Lease, Tenant's sole remedy will be an order of specific performance
or mandatory injunction of the Landlord's agreement to give its consent or
approval. The review and/or approval by Landlord of any item shall not impose
upon Landlord any liability for accuracy or sufficiency of any such item or the
quality or suitability of such item for its intended use. Any such review or
approval is for the sole purpose of protecting Landlord's interest in the Real
Property, and neither Tenant nor any Tenant Party nor any person or entity
claiming by, through or under Tenant, nor any other third party shall have any
rights hereunder by virtue of such review and/or approval by Landlord.
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47. Reserved Rights. Landlord retains and shall have the rights set
---------------
forth below, exercisable without notice and without liability to Tenant for
damage or injury to property, person or business and without effecting an
eviction, constructive or actual, or disturbance of Tenant's use or possession
of the Premises or giving rise to any claim for rent abatement:
(a) To grant to anyone the exclusive right to conduct any business or render
any service in or to the Building and its tenants, provided that such
exclusive right shall not operate to require Tenant to use or patronize
such business or service or to exclude Tenant from its use of the
Premises expressly permitted herein.
(b) To perform, or cause or permit to be performed, at any time and from time
to time, including during Business Hours, construction in the common
areas and facilities or other leased areas in the Real Property.
(c) To reduce, increase, enclose or otherwise change at any time and from
time to time the size, number, location, lay-out and nature of the common
areas and facilities and other tenancies and premises in the Real
Property and to create additional rentable areas through use or enclosure
of common areas.
48. Financial Statements. Upon submission of this Lease to Landlord
--------------------
and at any time thereafter within thirty (30) days after Landlord's request
therefor, Tenant shall furnish to Landlord copies of true and accurate financial
statements reflecting Tenant's then current financial situation (including
without limitation balance sheets, statements of profit and loss, and changes in
financial condition) and Tenant's most recent audited or certified annual
financial statements pertaining to Tenant's business, and in addition shall
cause to be furnished to Landlord similar financial statements for any
guarantor(s) of this Lease. Landlord shall use good faith efforts to keep such
information received from Tenant confidential, except that Landlord may disclose
such financial information received from Tenant to any lender or prospective
lender for, or purchaser or prospective purchaser of, the Real Property and
except that the foregoing confidentiality requirement shall be inapplicable in
the event the subject financial information is made publicly available by the
Security and Exchange Commission or any other governmental body.
49. Deleted.
-------
50. Nondisclosure of Lease Terms. Tenant agrees that the terms of
----------------------------
this Lease are confidential and constitute proprietary information of Landlord,
and that disclosure of the terms hereof could adversely affect the ability of
Landlord to negotiate with other tenants. Tenant hereby agrees that Tenant and
its partners, officers, directors, employees, agents, real estate brokers and
sales persons and attorneys shall not disclose the terms of this Lease to any
other person without Landlord's prior written consent (which consent may be
denied in Landlord's sole discretion), except to (i) any accountants of Tenant
in connection with the preparation of Tenant's financial statements or tax
returns, (ii) to an assignee of this Lease or sublessee of the Premises, (iii)
to an entity or person to whom disclosure is required by applicable law or in
connection with any action brought to enforce this Lease, (iv) Tenant's
consultants, agents, architects or attorneys representing Tenant in connection
with this Lease or (v) any governmental or judicial entity involved in any
investigation into the compliance of the Premises or the Real Property with
applicable Legal Requirements.
51. Hazardous Substance Disclosure. California law requires landlords
------------------------------
to disclose to tenants the existence of certain hazardous substances.
Accordingly, the existence of gasoline and other automotive fluids, maintenance
fluids, copying fluids and other office supplies and equipment, certain
construction and finish materials, tobacco smoke, cosmetics and other personal
items, and asbestos-containing materials ("ACM") must be disclosed. Gasoline and
other automotive fluids are found in the garage area of the Building. Cleaning,
lubricating and hydraulic fluids used in the operation and maintenance of the
Building are found in the utility areas of the Building not generally accessible
to Building occupants or the public. Many Building occupants use copy machines
and printers with associated fluids and toners, and pens, markers, inks, and
office equipment that may contain hazardous substances. Certain adhesives,
paints and other construction materials and finishes used in portions of the
Building may contain hazardous substances. Although smoking is prohibited in the
public areas of the Building, these areas may, from time to time, be exposed to
tobacco smoke. Building occupants and other persons entering the Building from
time-to-time may use or carry prescription and non-prescription drugs, perfumes,
cosmetics and other toiletries, and foods and beverages, some of which may
contain hazardous substances. Further, certain portions of the Building contain
ACM in the form of fireproofing on structural elements, heat insulation sealed
within fire doors, and small areas of resilient floor tile, but these areas are
generally inaccessible to Building occupants and visitors, such as machinery and
utility rooms, the inside of sealed walls and above suspended ceilings. Landlord
has made no special investigation of the Premises with respect to any hazardous
substances. Tenant agrees not to expose or disturb any ACM unless Landlord has
given Tenant prior written consent thereto (which consent may be denied in
Landlord's sole discretion) and Tenant complies with all applicable Legal
Requirements and Landlord's written procedures for handling ACM. Tenant's
failure to comply with the immediately preceding sentence
30
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shall constitute an Event of Default under Paragraph 25 of this Lease. Tenant
may obtain a copy of Landlord's written procedures for handling ACM from the
Building office.
52. Stairway Access. Throughout the Lease term, Landlord shall permit
---------------
Tenant to use the Building's fire stairs for access by Tenant's employees
between the 11th floor of the Premises and the 12th floor of the Premises.
Tenant acknowledges that the doors leading from the fire stairs to individual
floors are kept locked, subject to applicable Legal Requirements and Building
procedures. Accordingly, a security system mutually acceptable to Landlord and
Tenant (such as code access, card key access or other system) shall be installed
by Tenant, at Tenant's sole cost, on the doors leading from the fire stairs to
the 11th floor of the Premises and the 12th floor of the Premises so that
Tenant's employees are able to open the doors from the fire stairs using such
system. Such installation shall be performed either as a part of the Tenant
Improvements or as an Alteration pursuant to Paragraph 9 below. Tenant's access
rights provided in this Paragraph 52 shall be subject to applicable Legal
Requirements and reasonable Building procedures currently or hereinafter in
effect. Throughout the Lease term, Tenant shall, at Tenant's sole cost, maintain
the security system in first class working condition. Notwithstanding anything
to the contrary above, if Landlord, at any time during the Lease term and for
any reason, adopts a uniform policy that tenants of the Building may not use the
fire stairs for access to their premises, then Landlord may revoke Tenant's
rights under this Paragraph 52 to use the fire stairs for such access. Upon the
expiration or earlier termination of this Lease (or such earlier date that
Landlord, in accordance with the provisions above, revokes Tenant's right to use
the fire stairs for access between the 11th and 12th floors) Landlord may, at
its option, require that the security system be removed and the affected
portions of the Building returned to their condition immediately prior to the
installation of the security system (ordinary wear and tear excepted). If
Landlord does so require that the security system be removed, then Landlord
shall perform such removal and Tenant shall reimburse Landlord for the
reasonable costs thereof, within thirty (30) days of Landlord's written demand
therefor.
53. Right of First Offer.
--------------------
a. First Offer Right; Available Space. If, during the first three
----------------------------------
(3) years of the Lease term, the entire thirteenth (13th) floor of the Building
(the "First Offer Space") becomes "available for lease," then Tenant shall have
a right of first offer to lease the First Offer Space, subject to the provisions
of this Paragraph 53. The First Offer Space shall not be deemed "available for
lease" if the tenant under an expiring lease of such space desires to renew or
extend its lease, whether pursuant to a renewal option or a new arrangement with
Landlord, or if any tenant of the Building exercises an option or right of first
offer to lease such space, which option or right of first offer existed as of
the date of this Lease. Upon Landlord obtaining knowledge that the First Offer
Space will be available for lease, Landlord shall send Tenant a written notice
(the "Availability Notice") specifying the availability date (or estimated
availability date).
b. Exercise of First Offer Right. If Tenant elects to lease the
-----------------------------
First Offer Space (and Tenant must lease the entire First Offer Space, and may
not elect to lease only a portion thereof), Tenant shall so notify Landlord in
writing within five (5) business days after Tenant's receipt of the Availability
Notice. If Tenant does not exercise its right to lease the First Offer Space
within such five (5) business day period, then Landlord shall be released of its
obligation to lease the First Offer Space to Tenant and the provisions of this
Paragraph 53 shall no longer have any force or effect either as to the First
Offer Space.
c. Terms and Conditions.
--------------------
(i) Upon Tenant's election to lease the First Offer Space,
Landlord and Tenant shall promptly enter into an amendment of this Lease, adding
the First Offer Space to the Premises on all the terms and conditions set forth
in this Lease as to the Premises originally demised hereunder, except that (1)
the term of the lease to Tenant of the First Offer Space shall commence upon the
availability date specified in the Availability Notice (but in event sooner than
thirty (30) days after the date of Landlord's Availability Notice to Tenant) or,
if later, the date Landlord actually delivers the space to Tenant, vacant and
free of other tenancies, and shall continue coextensively with the remaining
term hereof and any extension thereof, (2) the Monthly Rent payable by Tenant
under Paragraph 5 of this Lease for the First Offer Space shall be the fair
market rent for the First Offer Space, as provided below, (3) Tenant's Share for
purposes of Paragraph 7 hereof with respect to the First Offer Space shall be
determined by dividing the rentable square footage of such First Offer Space by
the rentable square footage of the Building, (4) for purposes of Paragraph 7
hereof, the Base Year for the First Offer Space shall be the calendar year in
which the First Offer Space is added to this Lease and the Base Tax Year shall
be the fiscal tax year in which the First Offer Space is added to this Lease,
and (5) Tenant shall take the First Offer Space in its then "as-is" condition.
For purposes of this Paragraph 53.c., the term "fair market rent"
shall mean the rental rate that would be applicable for a lease term commencing
on the commencement date of the lease as to the First Offer Space and that would
be payable in any arms length negotiations for the First Offer Space for a lease
term of the length of the term that Tenant will lease the First Offer Space
(provided, however,
31
<PAGE>
if the term of this Lease as to the First Offer Space will be less than five (5)
years, then for the purposes of establishing the fair market rent for the First
Offer Space, the term of this Lease shall be deemed to be five (5) years), which
rental rate may be established by reference to rental terms actually negotiated
for comparable space under primary lease (and not sublease), taking into
consideration the fact that the First Offer Space is being leased in its as-is
condition, and taking into consideration the location of the Building and such
amenities as existing improvements, view, floor on which the First Offer Space
is situated and the like, situated in first-class, reputable, established office
and retail complexes in comparable locations in the San Francisco Financial
District, in comparable physical and economic condition, taking into
consideration the then-prevailing ordinary rental market practices with respect
to tenant concessions (if any) (e.g. not offering extraordinary rental,
promotional deals and other concessions to tenants which deviate from what is
the then-prevailing ordinary practice in an effort to alleviate cash flow
problems, difficulties in meeting loan obligations or other financial distress,
or in response to a greater than average vacancy rate).
The fair market rent for the First Offer Space shall be mutually
agreed upon by Landlord and Tenant in writing within the thirty (30)-day period
commencing with Landlord's notice to Tenant stating the commencement date for
the First Offer Space, but no sooner than three (3) months prior to the date the
First Offer Space is to be added to this Lease. If Landlord and Tenant are
unable to agree upon the fair market rent within such thirty (30)-day period,
the fair market rent shall be established by appraisal in accordance with the
procedures set forth in Exhibit C attached hereto.
---------
(ii) If Tenant exercises the right of first offer granted
herein, Landlord does not guarantee that the First Offer Space will be available
on the stated availability date for the lease thereof, if the then existing
occupants of the First Offer Space shall hold-over, or for any other reason
beyond Landlord's reasonable control. In such event, rent with respect to the
First Offer Space shall be abated until Landlord legally delivers the same to
Tenant, as Tenant's sole recourse.
d. Minimum Monthly Rent. Notwithstanding anything in the foregoing
--------------------
or Exhibit C to the contrary, at no time during the term of this Lease may the
Monthly Rent for the First Offer Space be less than the amount produced by
multiplying the rentable square footage of such First Offer Space by the
aggregate of the monthly rental rate per rentable square foot payable by Tenant
for the original Premises leased under this Lease under Paragraphs 5 and 7
hereof, as such monthly rental rate may adjust from time to time during the term
hereof.
e. Limitation on Tenant's Right of First Offer. Notwithstanding the
-------------------------------------------
foregoing, if (i) on the date of exercise of the right of first offer, or the
date immediately preceding the date the Lease term for the First Offer Space is
to commence, Tenant is in default of any of its obligations under this Lease, or
(ii) on the date immediately preceding the date the Lease term for the First
Offer Space is to commence Tenant named herein (a) is not in occupancy of eighty
percent (80%) of the Premises then leased hereunder or (b) does not intend to
occupy eighty percent (80%) of the Premises then leased hereunder, together with
the entire First Offer Space, then Tenant shall have no right to lease the First
Offer Space and the exercise of the right of first offer shall be null and void.
54. Signage. Tenant may, at Tenant's expense, install a sign
-------
identifying Tenant's business at the entrance to the Premises, provided that the
design, size, color and location of the sign shall be in accordance with the
Building's standard signage program and subject to Landlord's prior reasonable
approval. Tenant shall be entitled, at no cost to Tenant, to have the name of
Tenant's company listed on the Building directory situated in the lobby of the
Building.
55. Parking.
--------
a. Commencing upon the date that Tenant first conducts its business
from the Premises, Landlord shall provide Tenant with five (5) reserved parking
spaces in such areas of the parking facility for the Building as Landlord may
designate from time to time, and Tenant shall pay for such parking at the rate
or charge in effect from time to time for parking in the Building. Tenant
acknowledges that monthly parking rates apply only to parking during Business
Hours on Business Days and that parking outside or beyond such hours shall be
subject to additional hourly rates in effect from time to time, and Tenant
further acknowledges that the monthly and hourly rates or charges in effect may
vary from time to time based on, among other things, the time of day, type of
parking (e.g., valet, self-park, or tandem), occurrence of "special events", and
general rate increases.
b. Tenant shall provide Landlord with advance written notice of the
names of each individual to whom Tenant from time to time distributes Tenant's
parking rights hereunder, and shall cause each such individual to execute
Landlord's standard waiver form for garage users. If the parking charge is not
paid when due, and such failure continues for ten (10) days after written notice
to Tenant of such failure, then in addition to any other remedies afforded
Landlord under this Lease by reason of nonpayment of rent, Landlord may
terminate Tenant's rights under this Paragraph 55. Further, if at any time
Tenant releases to Landlord any parking space provided for in this Paragraph 55,
then Tenant's right under this Paragraph 55 to use such released parking space
shall automatically terminate.
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c. The parking spaces to be made available to Tenant hereunder may
contain a reasonable mix of spaces for compact ears. Landlord shall take
reasonable actions to ensure the availability of the parking spaces leased by
Tenant, but Landlord does not guarantee the availability of those spaces at all
times against the actions of other tenants of the Building and users of the
parking facility, and Landlord further reserves the right to restrict the hours
during which the parking facility is available to Tenant for use of the parking
spaces provided to Tenant hereunder to Business Hours on Business Days. Without
limiting the foregoing, in no event shall this Lease be void or voidable, nor
shall Landlord be liable to Tenant for any loss or damage, nor shall there be
any abatement of rent hereunder (other than the parking charge paid hereunder
for any parking space no longer made available), by reason of any reduction in
Tenant's parking rights hereunder by reason of strikes, lock-outs, labor
disputes, shortages of material or labor, fire, flood or other casualty, acts of
God or any other cause beyond the control of Landlord. Access to the parking
spaces to be made available to Tenant shall, at Landlord's option, be by card,
pass, bumper sticker, decal or other appropriate identification issued by
Landlord, and Tenant's right to use the parking facility is conditioned on
Tenant's abiding by and shall otherwise be subject to such rules and regulations
as may be promulgated by Landlord from time to time for the parking facility.
d. The parking rights set forth in this Paragraph 55 are non-
transferrable, are personal to the Tenant originally named herein, and shall not
inure to the benefit of any successor, assignee or subtenant of Tenant other
than an Affiliate (as defined in Paragraph 13.g. above). In the event of any
assignment or sublease of parking space rights that is approved by Landlord
(provided, however, that such approval may be granted or withheld by Landlord in
its sole and absolute discretion), Landlord shall be entitled to receive one
hundred percent (100%) of any profit received by Tenant in connection with such
assignment or sublease.
THIS LEASE IS EXECUTED by Landlord and Tenant as of the date set forth at
----------------------
the top of page 1 hereof.
FORTY-FIVE FREMONT ASSOCIATES, DIGITAL ISLAND, INC., a California
a California general partnership corporation
By Shorenstein Company, L.P., a By /s/ TL THOMPSON
California limited partnership, --------------------------------
General Partner Name TL Thompson
------------------------------
By Shorenstein Management, Inc., a Title CFO
California corporation, -----------------------------
General Partner Tenant
By /s/ Douglas W. Shorenstein
__________________________
Douglas W. Shorenstein
President
Landlord
33
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[PREMISES FLOOR PLAN]
45 FREMONT
FLOOR 11
EXHIBIT A
Page 1 of 2
<PAGE>
[PREMISES FLOOR PLAN]
45 FREMONT
FLOOR 12
EXHIBIT A
Page 2 of 2
<PAGE>
EXHIBIT B
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RULES AND REGULATIONS
FORTY-FIVE FREMONT STREET BUILDING
1. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside or
inside of the Building or any part of the Premises visible from the exterior of
the Premises without the prior written consent of Landlord, which consent may be
withheld in Landlord's sole discretion. Landlord shall have the right to remove,
at Tenant's expense and without notice to Tenant, any such sign, placard,
picture, advertisement, name or notice that has not been approved by Landlord.
All approved signs or lettering on doors and walls shall be
printed, painted, affixed or inscribed at the expense of Tenant by a person
approved of by Landlord.
If Landlord notifies Tenant in writing that Landlord objects to
any curtains, blinds, shades or screens attached to or hung in or used in
connection with any window or door of the Premises, such use of such curtains,
blinds, shades or screens shall be removed immediately by Tenant. No awning
shall be permitted on any part of the Premises.
2. No ice, drinking water, towel, barbering or bootblacking,
shoeshining or repair services, or other similar services shall be provided to
the Premises, except from persons authorized by Landlord and at the hours and
under regulations fixed by Landlord.
3. The bulletin board or directory of the Building will be provided
exclusively for the display of the name and location of tenants only and
Landlord reserves the right to exclude any other names therefrom.
4. The sidewalks, halls, passages, exits, entrances, elevators and
stairways shall not be obstructed by any of the Tenant Parties or used by Tenant
for any purpose other than for ingress to and egress from its Premises. The
halls, passages, exits, entrances, elevators, stairways, balconies and roof are
not for the 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 Building and its tenants. No tenant and no employees or
invitees of any tenant shall go upon the roof of the Building.
5. Tenant shall not alter any lock or install any new or additional
locks or any bolts on any interior or exterior door of the Premises without the
prior written consent of Landlord.
6. The toilet rooms, toilets, urinals, wash bowls and other 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.
7. Tenant shall not overload the floor of the Premises or mark, drive
nails, screw or drill into the partitions, woodwork or plaster or in any way
deface the Premises or any part thereof.
8. No furniture, freight or equipment of any kind shall be brought
into the Building without the consent of Landlord and all moving of the same
into or out of the Building shall be done at such time and in such manner as
Landlord shall designate. Landlord shall have the right to prescribe the weight,
size and position of all safes and other heavy equipment brought into the
Building and also the times and manner of moving the same in and out of the
Building. Safes or other heavy objects shall, if considered necessary by
Landlord, stand on a platform of such thickness as is necessary to properly
distribute the weight. Landlord will not be responsible for loss of or damage to
any such safe or property from any cause, and all damage done to the Building by
moving or maintaining any such safe or other property shall be repaired at the
expense of Tenant. The elevator designated for freight by Landlord shall be
available for use by all tenants in the Building during the hours and pursuant
to such procedures as Landlord may determine from time to time. The persons
employed to move Tenant's equipment, material, furniture or other property in or
out of the Building must be acceptable to Landlord. The moving company must be a
locally recognized professional mover, whose primary business is the performing
of relocation services, and must be bonded and fully insured. In no event shall
Tenant employ any person or company whose presence may give rise to a labor or
other disturbance in the Real Property. A certificate or other verification of
such insurance must be received and approved by Landlord prior to the start of
any moving operations. Insurance must be sufficient in Landlord's sole opinion,
to cover all personal liability, theft or damage to the Project, including, but
not limited to, floor coverings, doors, walls, elevators, stairs, foliage and
landscaping. Special care must be taken to prevent damage to foliage and
landscaping during adverse weather. All moving operations shall be conducted at
such times and in such a manner as Landlord shall direct, and all moving shall
take place during non-business hours unless Landlord agrees in writing
otherwise.
1
<PAGE>
9. Tenant shall not employ any person or persons other than the
janitor of Landlord for the purpose of cleaning the Premises, unless otherwise
agreed to by Landlord. Except with the written consent of Landlord, no person or
persons other than those approved by Landlord shall be permitted to enter the
Building for the purpose of cleaning the Building or the Premises. Tenant shall
not cause any unnecessary labor by reason of Tenant's carelessness or
indifference in the preservation of good order and cleanliness.
10. Tenant shall not use, keep or permit to be used or kept any foul
or noxious gas or substance in the Premises, 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 therein, nor
shall any animals or birds be brought in or kept in or about the Premises or the
Building. In no event shall Tenant keep, use, or permit to be used in the
Premises or the Building any guns, firearm, explosive devices or ammunition.
11. No cooking shall be done or permitted by Tenant in the Premises,
nor shall the Premises be used for the storage of merchandise, for washing
clothes, for lodging, or for any improper, objectionable or immoral purposes.
12. Tenant shall not use or keep in the Premises or the Building any
kerosene, gasoline, or inflammable or combustible fluid or material, or use any
method of heating or air conditioning other than that supplied by Landlord.
13. Landlord will direct electricians as to where and how telephone
and telegraph wires are to be introduced into the Premises and the Building. No
boring or cutting for wires will be allowed without the prior consent of
Landlord. The location of telephones, call boxes and other office equipment
affixed to the Premises shall be subject to the prior approval of Landlord.
14. Upon the expiration or earlier termination of the Lease, Tenant
shall deliver to Landlord the keys of offices, rooms and toilet rooms which have
been furnished by Landlord to Tenant and any copies of such keys which Tenant
has made. In the event Tenant has lost any keys furnished by Landlord, Tenant
shall pay Landlord for such keys.
15. Tenant shall not lay linoleum, tile, carpet or other similar
floor covering so that the same shall be affixed to the floor of the Premises,
except to the extent and in the manner approved in advance by Landlord. The
expense of repairing any damage resulting from a violation of this rule or
removal of any floor covering shall be borne by the tenant by whom, or by whose
contractors, employees or invitees, the damage shall have been caused.
16. No furniture, packages, supplies, equipment or merchandise will
be received in the Building or carried up or down in the elevators, except
between such hours and in such elevators as shall be designated by Landlord,
which elevator usage shall be subject to the Building's customary charge
therefor as established from time to time by Landlord.
17. On Saturdays, Sundays and legal holidays, and on other days
between the hours of 6:00 P.M. and 8:00 A.M., access to the Building, or to the
halls, corridors, elevators or stairways in the Building, or to the Premises may
be refused unless the person seeking access is known to the person or employee
of the Building in charge and has a pass or is properly identified. Landlord
shall in no ease be liable for damages for any error with regard to the
admission to or exclusion from the Building of any person. In ease of invasion,
mob, riot, public excitement, or other commotion, Landlord reserves the right to
prevent access to the Building during the continuance of the same by closing the
doors or otherwise, for the safety of the tenants and protection of property in
the Building.
18. Tenant shall be responsible for insuring that the doors of the
Premises are closed and securely locked before leaving the Building and must
observe strict care and caution that all water faucets or water apparatus are
entirely shut off before Tenant or Tenant's employees leave the Building, and
that all electricity, gas or air shall likewise be carefully shut off, so as to
prevent waste or damage, and for any default or carelessness Tenant shall make
good all injuries sustained by other tenants or occupants of the Building or
Landlord. Landlord shall not be responsible to Tenant for loss of property on
the Premises, however occurring, or for any damage to the property of Tenant
caused by the employees or independent contractors of Landlord or by any other
person.
19. Landlord reserves the right to exclude or expel from the Building
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 the rules and regulations of the Building.
20. The requirements of any tenant will be attended to only upon
application 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 instructions from Landlord, and no employee will admit any person
(tenant or otherwise) to any office without specific instructions from Landlord.
2
<PAGE>
21. No vending machine or machines of any description shall be
installed, maintained or operated upon the Premises without the prior written
consent of Landlord.
22. Subject to Tenant's right of access to the Premises in accordance
with Building security procedures, Landlord reserves the right to close and keep
locked all entrance and exit doors of the Building on Saturdays, Sundays and
legal holidays and on other days between the hours of 6:00 P.M. and 8:00 A.M.,
and during such further hours as Landlord may deem advisable for the adequate
protection of the Building and the property of its tenants.
3
<PAGE>
EXHIBIT C
---------
Appraisal Procedure
-------------------
Within fifteen (15) days after the expiration of the thirty (30)-day
period set forth in Paragraph 53 of the Lease for the mutual agreement of
Landlord and Tenant as to the fair market monthly rental, each party hereto, at
its cost, shall engage a real estate appraiser to act on its behalf in
determining the fair market monthly rental. The appraisers each shall have at
least ten (10) years' experience with leases in first-class office/retail
buildings in the San Francisco Financial District and shall submit to Landlord
and Tenant in advance for Landlord's and Tenant's reasonable approval the
appraisal methods to be used. If a party does not appoint an appraiser within
such fifteen (15)-day period but an appraiser is appointed by the other
respective party, the single appraiser appointed shall be the sole appraiser and
shall set the fair market monthly rental. If the two appraisers are appointed by
the parties as stated in this paragraph, such appraisers shall meet promptly and
attempt to set the fair market monthly rental. If such appraisers are unable to
agree within thirty (30) days after appointment of the second appraiser, the
appraisers shall elect a third appraiser meeting the qualifications stated in
this paragraph within ten (10) days after the last date the two appraisers are
given to set the fair market monthly rental. Each of the parties hereto shall
bear one-half (1/2) the cost of appointing the third appraiser and of the third
appraiser's fee. The third appraiser shall be a person who has not previously
acted in any capacity for either party.
The third appraiser shall conduct his own investigation of the fair
market monthly rent, and shall be instructed not to advise either party of his
determination of the fair market monthly rent except as follows: When the third
appraiser has made his determination, he shall so advise Landlord and Tenant and
shall establish a date, at least five (5) days after the giving of notice by the
third appraiser to Landlord and Tenant, on which he shall disclose his
determination of the fair market monthly rent. Such meeting shall take place in
the third appraiser's office unless otherwise agreed by the parties. After
having initialed a paper on which his determination of fair market monthly rent
is set forth, the third appraiser shall place his determination of the fair
market monthly rent in a sealed envelope. Landlord's appraiser and Tenant's
appraiser shall each set forth their determination of fair market monthly rent
on a paper, initial the same and place them in sealed envelopes. Each of the
three envelopes shall be marked with the name of the party whose determination
is inside the envelope.
In the presence of the third appraiser, the determination of the fair
market monthly rent by Landlord's appraiser and Tenant's appraiser shall be
opened and examined. If the higher of the two determinations is 105% or less of
the amount set forth in the lower determination, the average of the two
determinations shall be the fair market monthly rent, the envelope containing
the determination of the fair market monthly rent by the third appraiser shall
be destroyed and the third appraiser shall be instructed not to disclose his
determination. If either party's envelope is blank, or does not set forth a
determination of fair market monthly rent, the determination of the other party
shall prevail and be treated as the fair market monthly rent. If the higher of
the two determinations is more than 105% of the amount of the lower
determination, the envelope containing the third appraiser's determination shall
be opened. If the value determined by the third appraiser is the average of the
values proposed by Landlord's appraiser and Tenant's appraiser, the third
appraiser's determination of fair market monthly rent shall be the fair market
monthly rent. If such is not the case, fair market monthly rent shall be the
rent proposed by either Landlord's appraiser or Tenant's appraiser which is
closest to the determination of fair market monthly rent by the third appraiser.
4
<PAGE>
EXHIBIT 10.12
DIGITAL ISLAND, INC.
--------------------
NOTE SECURED BY STOCK PLEDGE AGREEMENT
--------------------------------------
$109,800.00 February 25, 1998
San Francisco, California
FOR VALUE RECEIVED, Marcelo A. Gumucio ("Maker") promises to pay to
the order of Digital Island, Inc. (the "Corporation"), at its corporate offices
at 353 Sacramento Street, Suite 1520, San Francisco, California, 94111, the
principal sum of One Hundred Nine Thousand and Eight Hundred Dollars
($109,800.00), together with all accrued interest thereon, upon the terms and
conditions specified below.
1. Principal. The principal balance of this Note shall become due
---------
and payable in one lump sum on February 24, 2002.
2. Interest. Interest shall accrue on the unpaid balance outstanding
--------
from time to time under this Note at the rate of 5.61% per annum, compounded
semi-annually. Accrued interest shall be payable in a series of four (4)
successive equal annual installments over a four (4)-year period, with the first
such installment due on February 24, 1999, and the last such installment due on
February 24, 2002.
3. Payment. Payment shall be made in lawful tender of the United
-------
States and shall be applied first to the payment of all accrued and unpaid
interest and then to the payment of principal. Prepayment of the principal
balance of this Note, together with all accrued and unpaid interest, may be made
in whole or in part at any time without penalty.
4. Events of Acceleration. The entire unpaid principal balance of
----------------------
this Note, together with all accrued and unpaid interest, shall become
immediately due and payable prior to the specified due date of this Note upon
the occurrence of one or more of the following events:
A. the failure of the Maker to pay any installment of accrued
interest under this Note when due and the continuation of such default for
more than thirty (30) days; or
B. the expiration of the thirty (30)-day period following the
date the Maker ceases for any reason to remain in the service of the
Corporation; or
C. the insolvency of the Maker, the commission of any act of
bankruptcy by the Maker, the execution by the Maker of a general assignment
for the benefit of creditors, the filing by or against the Maker of any
petition in bankruptcy or any petition for relief under the provisions of
the Federal bankruptcy act or any other state or Federal law for the relief
of debtors and the
<PAGE>
continuation of such petition without dismissal for a period of thirty (30)
days or more, the appointment of a receiver or trustee to take possession
of any property or assets of the Maker or the attachment of or execution
against any property or assets of the Maker; or
D. the occurrence of any event of default under the Stock Pledge
Agreement securing this Note or any obligation secured thereby.
5. Special Acceleration Event. In the event the Maker sells or
--------------------------
otherwise transfers for value one or more shares of the Corporation's common
stock purchased with the proceeds of this Note, then any unpaid portion of the
principal balance of this Note attributable to the purchase price of those
shares shall become immediately due and payable, together with all accrued and
unpaid interest on that principal portion.
6. Services. For purposes of applying the provisions of this Note,
--------
the Maker shall be considered to remain in the service of the Corporation for so
long as the Maker renders services as (i) a member of the Corporation's Board of
Directors or the board of directors of any successor entity or any of the
Corporation's fifty percent (50%)-or-more owned subsidiaries or (ii) as an
independent consultant to the Corporation or any successor entity or one or more
of the Corporation's fifty percent (50%)-or-more owned subsidiaries.
7. Security. The proceeds of the loan evidenced by this Note shall
--------
be applied solely to the payment of the purchase price of shares of the
Corporation's common stock, and payment of this Note shall be secured by a
pledge of those shares with the Corporation pursuant to the Stock Pledge
Agreement to be executed this date by the Maker. The Maker, however, shall
remain personally liable for payment of this Note and assets of the Maker, in
addition to the collateral under the Stock Pledge Agreement, may be applied to
the satisfaction of the Maker's obligations hereunder.
8. Collection. If action is instituted to collect this Note, the
----------
Maker promises to pay all costs and expenses (including reasonable attorney
fees) incurred in connection with such action.
9. Waiver. A waiver of any term of this Note, the Stock Pledge
------
Agreement or of any of the obligations secured thereby must be made in writing
and signed by a duly-authorized officer of the Corporation and any such waiver
shall be limited to its express terms. No delay by the Corporation in
acting with respect to the terms of this Note or the Stock Pledge Agreement
shall constitute a waiver of any breach, default, or failure of a condition
under this Note, the Stock Pledge Agreement or the obligations secured thereby.
The Maker waives presentment, demand, notice of dishonor, notice of
default or delinquency, notice of acceleration, notice of protest and
nonpayment, notice of costs, expenses or losses and interest thereon, notice of
interest on interest and diligence in taking any action to collect any sums
owing under this Note or in proceeding against any of the rights or interests in
or to properties securing payment of this Note.
2
<PAGE>
10. Conflicting Agreements. In the event of any inconsistencies
----------------------
between the terms of this Note and the terms of any other document related to
the loan evidenced by the Note, the terms of this Note shall prevail.
11. Governing Law. This Note shall be construed in accordance with
-------------
the laws of the State of California without resort to that State's conflict-of-
laws rules.
MARCELO A. GUMUCIO, MAKER
3
<PAGE>
EXHIBIT 10.13
DIGITAL ISLAND, INC.
--------------------
NOTE SECURED BY STOCK PLEDGE AGREEMENT
--------------------------------------
$199,998.00 April 21, 1999
San Francisco, California
FOR VALUE RECEIVED, Ruann Ernst ("Maker") promises to pay to the order
of Digital Island, Inc. (the "Corporation"), at its corporate offices at 353
Sacramento Street, Suite 1520, San Francisco, California, 94111, the principal
sum of One Hundred Ninety Nine Thousand Nine Hundred Ninety Eight Dollars
($199,998.00), together with all accrued interest thereon, upon the terms and
conditions specified below.
1. Principal. The principal balance of this Note shall become due
---------
and payable in one lump sum on April 20, 2003.
2. Interest. Interest shall accrue on the unpaid balance outstanding
--------
from time to time under this Note at the rate of 7.75% per annum, compounded
semi-annually. Accrued interest shall be payable in a series of sixteen (16)
successive equal quarterly installments over the four (4)-year period measured
from the April 21, 1999 execution date of this Note. The first such installment
shall become due and payable on July 20, 1999, and the last such installment
shall become due and payable on April 20, 2003.
3. Payment. Payment shall be made in lawful tender of the United
-------
States and shall be applied first to the payment of all accrued and unpaid
interest and then to the payment of principal. Prepayment of the principal
balance of this Note, together with all accrued and unpaid interest, may be made
in whole or in part at any time without penalty.
4. Events of Acceleration. The entire unpaid principal balance of
----------------------
this Note, together with all accrued and unpaid interest, shall become
immediately due and payable prior to the specified due date of this Note upon
the occurrence of one or more of the following events:
A. the failure of the Maker to pay any installment of accrued
interest under this Note when due and the continuation of such default for
more than thirty (30) days; or
B. the expiration of the thirty (30)-day period following the
date the Maker ceases for any reason to remain in the service of the
Corporation; or
C. the insolvency of the Maker, the commission of any act of
bankruptcy by the Maker, the execution by the Maker of a general assignment
for the benefit of creditors, the filing by or against the Maker of any
petition in bankruptcy or any petition for relief under the provisions of
the Federal
<PAGE>
bankruptcy act or any other state or Federal law for the relief of debtors
and the continuation of such petition without dismissal for a period of
thirty (30) days or more, the appointment of a receiver or trustee to take
possession of any property or assets of the Maker or the attachment of or
execution against any property or assets of the Maker; or
D. the occurrence of any event of default under the Stock Pledge
Agreement securing this Note or any obligation secured thereby.
5. Special Acceleration Event. In the event the Maker sells or
--------------------------
otherwise transfers for value one or more shares of the Corporation's common
stock purchased with the proceeds of this Note, then any unpaid portion of the
principal balance of this Note attributable to the purchase price of those
shares shall become immediately due and payable, together with all accrued and
unpaid interest on that principal portion.
6. Services. For purposes of applying the provisions of this Note,
--------
the Maker shall be considered to remain in the service of the Corporation for so
long as the Maker renders services as (i) an employee of the Corporation or any
successor entity or one or more of the Corporation's fifty percent (50%)-or-more
owned subsidiaries, (ii) a member of the Corporation's Board of Directors or the
board of directors of any successor entity or (iii) an independent consultant to
the Corporation or any successor entity.
7. Security. The proceeds of the loan evidenced by this Note shall
--------
be applied solely to the payment of the purchase price of shares of the
Corporation's common stock, and payment of this Note shall be secured by a
pledge of those shares with the Corporation pursuant to the Stock Pledge
Agreement to be executed this date by the Maker. The Maker, however, shall
remain personally liable for payment of this Note and assets of the Maker, in
addition to the collateral under the Stock Pledge Agreement, may be applied to
the satisfaction of the Maker's obligations hereunder.
8. Collection. If action is instituted to collect this Note, the
----------
Maker promises to pay all costs and expenses (including reasonable attorney
fees) incurred in connection with such action.
9. Waiver. A waiver of any term of this Note, the Stock Pledge
------
Agreement or of any of the obligations secured thereby must be made in writing
and signed by a duly-authorized officer of the Corporation and any such waiver
shall be limited to its express terms.
No delay by the Corporation in acting with respect to the terms of
this Note or the Stock Pledge Agreement shall constitute a waiver of any breach,
default, or failure of a condition under this Note, the Stock Pledge Agreement
or the obligations secured thereby.
The Maker waives presentment, demand, notice of dishonor, notice of
default or delinquency, notice of acceleration, notice of protest and
nonpayment, notice of costs, expenses or losses and interest thereon, notice of
interest on interest and diligence in taking any action to collect any sums
owing under this Note or in proceeding against any of the rights or interests in
or to properties securing payment of this Note.
2
<PAGE>
10. Conflicting Agreements. In the event of any inconsistencies
----------------------
between the terms of this Note and the terms of any other document related to
the loan evidenced by the Note, the terms of this Note shall prevail.
11. Governing Law. This Note shall be construed in accordance with
-------------
the laws of the State of California without resort to that State's conflict-of-
laws rules.
____________________________________
RUANN ERNST, MAKER
3
<PAGE>
Exhibit 10.14
DIGITAL ISLAND, INC.
--------------------
NOTE SECURED BY STOCK PLEDGE AGREEMENT
--------------------------------------
$86,400.00 April 21, 1999
San Francisco, California
FOR VALUE RECEIVED, Ron Higgins ("Maker") promises to pay to the order
of Digital Island, Inc. (the "Corporation"), at its corporate offices at 353
Sacramento Street, Suite 1520, San Francisco, California, 94111, the principal
sum of Eighty Six Thousand Four Hundred Dollars ($86,400.00), together with all
accrued interest thereon, upon the terms and conditions specified below.
1. Principal. The principal balance of this Note shall become due
and payable in one lump sum on April 20, 2003.
2. Interest. Interest shall accrue on the unpaid balance outstanding
from time to time under this Note at the rate of 7.75% per annum, compounded
semi-annually. Accrued interest shall be payable in a series of sixteen (16)
successive equal quarterly installments over the four (4)-year period measured
from the April 21, 1999 execution date of this Note. The first such installment
shall become due and payable on July 20, 1999, and the last such installment
shall become due and payable on April 20, 2003.
3. Payment. Payment shall be made in lawful tender of the United
States and shall be applied first to the payment of all accrued and unpaid
interest and then to the payment of principal. Prepayment of the principal
balance of this Note, together with all accrued and unpaid interest, may be made
in whole or in part at any time without penalty.
4. Events of Acceleration. The entire unpaid principal balance of
this Note, together with all accrued and unpaid interest, shall become
immediately due and payable prior to the specified due date of this Note upon
the occurrence of one or more of the following events:
A. the failure of the Maker to pay any installment of accrued
interest under this Note when due and the continuation of such default for
more than thirty (30) days; or
B. the expiration of the thirty (30)-day period following the
date the Maker ceases for any reason to remain in the service of the
Corporation; or
C. the insolvency of the Maker, the commission of any act of
bankruptcy by the Maker, the execution by the Maker of a general assignment
for the benefit of creditors, the filing by or against the Maker of any
petition in bankruptcy or any petition for relief under the provisions of
the Federal
<PAGE>
bankruptcy act or any other state or Federal law for the relief of debtors
and the continuation of such petition without dismissal for a period of
thirty (30) days or more, the appointment of a receiver or trustee to take
possession of any property or assets of the Maker or the attachment of or
execution against any property or assets of the Maker; or
D. the occurrence of any event of default under the Stock Pledge
Agreement securing this Note or any obligation secured thereby.
5. Special Acceleration Event. In the event the Maker sells or
otherwise transfers for value one or more shares of the Corporation's common
stock purchased with the proceeds of this Note, then any unpaid portion of the
principal balance of this Note attributable to the purchase price of those
shares shall become immediately due and payable, together with all accrued and
unpaid interest on that principal portion.
6. Services. For purposes of applying the provisions of this Note,
the Maker shall be considered to remain in the service of the Corporation for so
long as the Maker renders services as (i) an employee of the Corporation or any
successor entity or one or more of the Corporation's fifty percent (50%)-or-more
owned subsidiaries, (ii) a member of the Corporation's Board of Directors or the
board of directors of any successor entity or (iii) an independent consultant to
the Corporation or any successor entity.
7. Security. The proceeds of the loan evidenced by this Note shall
be applied solely to the payment of the purchase price of shares of the
Corporation's common stock, and payment of this Note shall be secured by a
pledge of those shares with the Corporation pursuant to the Stock Pledge
Agreement to be executed this date by the Maker. The Maker, however, shall
remain personally liable for payment of this Note and assets of the Maker, in
addition to the collateral under the Stock Pledge Agreement, may be applied to
the satisfaction of the Maker's obligations hereunder.
8. Collection. If action is instituted to collect this Note, the
Maker promises to pay all costs and expenses (including reasonable attorney
fees) incurred in connection with such action.
9. Waiver. A waiver of any term of this Note, the Stock Pledge
Agreement or of any of the obligations secured thereby must be made in writing
and signed by a duly-authorized officer of the Corporation and any such waiver
shall be limited to its express terms.
No delay by the Corporation in acting with respect to the terms of
this Note or the Stock Pledge Agreement shall constitute a waiver of any breach,
default, or failure of a condition under this Note, the Stock Pledge Agreement
or the obligations secured thereby.
The Maker waives presentment, demand, notice of dishonor, notice of
default or delinquency, notice of acceleration, notice of protest and
nonpayment, notice of costs, expenses or losses and interest thereon, notice of
interest on interest and diligence in taking any action to collect any sums
owing under this Note or in proceeding against any of the rights or interests in
or to properties securing payment of this Note.
2
<PAGE>
10. Conflicting Agreements. In the event of any inconsistencies
between the terms of this Note and the terms of any other document related to
the loan evidenced by the Note, the terms of this Note shall prevail.
11. Governing Law. This Note shall be construed in accordance with
the laws of the State of California without resort to that State's conflict-of-
laws rules.
____________________________________
RON HIGGINS, MAKER
3
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-1 of our report dated
February 19, 1999, except for Note 16, which is as of June 7, 1999, relating to
the financial statements and financial statement schedules of Digital Island,
Inc., which appear in such Prospectus. We also consent to the references to us
under the headings "Experts" and "Selected Consolidated Financial Data" in such
Prospectus. However, it should be noted that PricewaterhouseCoopers LLP has not
prepared or certified such "Selected Consolidated Financial Data."
/s/ PricewaterhouseCoopers LLP
San Francisco, California
June 7, 1999
