<PAGE>
As filed with the Securities and Exchange Commission on April 26, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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DIGITAL ISLAND, INC.
(Exact Name of Registrant as Specified in its Certificate of Incorporation)
----------------
<TABLE>
<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)
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Copies to:
<TABLE>
<CAPTION>
<S> <C>
Therese A. Mrozek, Esq. Gregory C. Smith, Esq.
Curtis L. Mo, Esq. Michael J. Cordero, Esq.
Rodrigo M. Guidero, Esq. Christopher A. Rose, Esq.
Andrew R. Hull, 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.
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If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement 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>
Title of Each Class of Securities Proposed Maximum Amount of
to be Registered Aggregate Offering Price(1) Registration Fee
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<S> <C> <C>
Common Stock, $0.001 par value.. $75,000,000 $20,850
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</TABLE>
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933, as amended.
----------------
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 APRIL , 1999
PRELIMINARY PROSPECTUS
Shares
[LOGO]
Digital Island, Inc.
Common Stock
-----------
This is an initial public offering of shares of our common stock. We
are selling all of the shares of common stock offered under this prospectus.
There is currently no public market for our shares. We intend to apply to have
our common stock approved for listing on the Nasdaq National Market under the
symbol "ISLD."
See "Risk Factors" beginning on page 8 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 under certain circumstances may purchase up to an additional
shares of common stock from us at the initial public offering price
less the underwriting discount, solely to cover over-allotments.
The underwriters are severally underwriting the shares being offered. 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>
[Graphic depiction of company products and services]
<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. Unless otherwise indicated or required by the
context, references to years in this prospectus refer to our fiscal years. In
this prospectus, Digital Island, "we," "us," and "our" refers to Digital
Island, Inc. but not to the underwriters listed in this prospectus.
DIGITAL ISLAND, INC.
We offer a leading global e-business network for companies that are using
the Internet for worldwide deployment of business-critical applications. We
have developed a private global Internet protocol applications network to avoid
congestion points common on the public Internet and to intelligently allocate
bandwidth and storage to maximize the performance and functionality of our
customers' applications. We provide a complete range of applications hosting,
server management and co-location services in our state-of-the-art data
centers, and network management expertise in connection with our customers' own
data centers. The e-business applications delivered over our network are
accessed globally in the same way as any Web site, but with a significant
difference: these e-business applications are highly available and are designed
to operate substantially faster and with greater functionality than sites that
rely solely on the public Internet.
We target multinational corporations that are increasingly relying on the
Internet to conduct business but are constrained by its unreliability, slow
performance and lack of functionality. Our Global Internet Protocol
Applications Network and value-added services enable customers to effectively
deploy and manage global applications by combining the reliability,
performance, and functionality of private wide area networks 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. 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 and multimedia document distribution, sales force automation
and distance learning.
The public Internet infrastructure was designed for applications requiring
limited bandwidth and for uses which were not business-critical. 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, real time interaction and overseas transport.
This occurs because data transmitted between countries must make a large number
of connections or "hops" through various regional and national Internet service
providers before reaching a destination. Data packets often become lost in the
transfer process, especially data-intensive transfers involving large software
downloads, multimedia document distribution and audio and video streaming. 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 wide area networks is cost-prohibitive and
extremely difficult given the shortage of technical talent and risk of
technological obsolescence.
Our Global Internet Protocol Applications Network consists of a proprietary
asynchronous transfer mode 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 17 countries. This enables our customers to
transmit Internet traffic seamlessly over our proprietary backbone with
dedicated transoceanic capacity and to connect directly to international users
through local
3
<PAGE>
points of presence. We also offer content distribution services, including
mirroring and caching, which enable us to forward deploy our customers'
applications in 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 a variety of services that allow customers to benefit from the
Digital Island global e-business network. Customers can take advantage of our
extensive server management and hosting services offered at our four data
centers and can purchase a range of transport options, including open, reserved
or managed bandwidth. Our outsourced solutions are designed to allow customers
to transfer to us the burden of attracting and retaining scarce technical staff
and adopting continuously changing technologies, while lowering their operating
costs and speeding deployment.
Our objective is to be the leading global e-business network. In order to
achieve this objective, we intend to continue to:
. focus or leading multinational customers in targeted industries which
utilize Internet technologies;
. extend our leadership in the market for global Internet
protocol application services by continuing to expand our base of
customers, and by increasing demand for network usage among our
existing customers;
. develop and implement new Internet protocol technology and services
that will allow our customers to optimize their deployment and
operation of applications globally;
. expand strategic relationships with potential partners such as system
integrators, software vendors, application services, and certain of
our customers in targeted vertical markets; and
. expand our distribution 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.
----------------
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 of Digital Island 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.................... shares
Common Stock outstanding after this offering.. shares
Use of proceeds............................... We plan to use the net proceeds
from this offering for capital
expenditures and working
capital needs.
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 loss per
share........................ $ (3.53) $ (7.28) $ (3.07) $ (6.07)
========= =========== ========= ===========
Shares used in basic and
diluted loss per share....... 1,497,711 2,236,452 2,215,875 2,366,951
Basic and diluted pro forma
loss per share............... $ (1.35) $ (.78)
=========== ===========
Shares used in basic and
diluted pro forma 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 $
Total assets................................................ 62,359
Long-term obligations, including current portion............ 4,039
Total stockholders' equity.................................. 49,149
</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
shares of common stock by Digital Island at an
assumed initial public offering price of $ per share and after
deducting the underwriting discounts and commissions and estimated
offering expenses.
See Notes 2 and 9 of Notes to Consolidated Financial Statements for the
determination of shares used in computing basic and diluted loss per share.
6
<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
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 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 certain 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.
TRADEMARKS
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.
7
<PAGE>
RISK FACTORS
An investment in our shares is extremely risky. This section describes some,
but not all, of the 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 other risks not mentioned here, 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, have incurred operating losses since our
inception and expect future operating losses.
We were incorporated in 1994, and began offering our global IP 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 a limited operating history and some of
the members of our senior management team have been working together at Digital
Island for less than one year. From inception, we have experienced operating
losses, negative cash flows from operations and net losses in each quarterly
and annual period. As of March 31, 1999, we had an accumulated deficit of
approximately $36.0 million. The revenue and income potential of our business
and market is unproven, and our limited operating history makes it difficult to
evaluate us and our prospects.
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;
. provide scalable, reliable and cost-effective services;
. continue to grow our infrastructure to accommodate new IP
developments and increased capacity utilization of our network;
. expand our channels of distribution;
. retain and motivate qualified personnel; and
. respond to competition.
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.
There are many factors beyond our control which may cause fluctuations in our
quarterly operating results.
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;
. introductions of products and services or enhancements by us and our
competitors;
. competitive factors that affect our pricing;
8
<PAGE>
. capacity utilization of our global IP applications network;
. reliable continuity of service and network availability;
. the availability and cost of bandwidth and our ability to increase
bandwidth as necessary;
. the timing of customer installations;
. the mix of products and services we sell;
. the timing and magnitude of capital expenditures, including costs
relating to the expansion of operations;
. the timing of expansion of our 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 or regulation.
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.
The success of our business is dependent upon our ability to price our services
above the overall cost of bandwidth.
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. 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 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 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.
More generally, our business is dependent on our ability to accurately predict
the decline in costs of bandwidth and to sell our services at prices sufficient
to enable our business to become profitable. Many of our existing and potential
competitors have significantly greater resources than us, which could enable
them to provide services at lower costs in order to capture new business and to
expand or establish market share. If we fail to accurately predict the decline
in costs of bandwidth and, in any event, if we are unable to sell our services
at acceptable prices relative to our bandwidth costs, our business and
prospects will suffer.
Our mirroring and caching business is compelling 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.
9
<PAGE>
Our business and prospects will suffer if we do not retain and expand our
customer base.
Our success depends on the continued growth of our customer base and the
retention of our customers. 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 negatively impact our business
and prospects.
Our operations are dependent upon our ability to protect our network
infrastructure against damage from:
. human error;
. fire;
. earthquakes;
. floods;
. power loss;
. telecommunications failures;
. sabotage;
. intentional acts of vandalism; 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. In addition, failure of our telecommunications
providers to provide required data communications capacity to us could result
in interruptions in our services. A reduction in, or termination of, services
to our customers could cause our business and prospects to suffer.
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.
10
<PAGE>
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. In addition, as we upgrade our
infrastructure, we may encounter certain delays or failures. 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 widespread acceptance
of our products and services is uncertain.
We cannot accurately estimate the size of our market or the potential demand
for our services. 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 market acceptance depends principally on our:
. marketing strategy and efforts;
. product and service differentiation and quality;
. extent of coverage;
. customer support;
. distribution and pricing strategies as compared to our competitors;
. industry reputation; and
. general economic conditions.
Some of the foregoing factors are beyond our control. If our customer base
does not expand, our business and prospects will be harmed.
We may require additional capital in the future and may not be able to secure
adequate funds on terms acceptable to us.
The expansion and development of our business will require significant
capital to fund our operating losses, working capital needs and capital
expenditures. 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. During the next twelve months, we
expect to meet our cash requirements with existing cash, cash equivalents and
short-term investments, the net proceeds from this offering, cash flow from
sales of our services and proceeds from existing and future working capital
lines of credit and other borrowings. 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. 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.
We may not be able to obtain future equity or debt financing on favorable
terms or at all. In addition, our credit agreements contain certain 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
11
<PAGE>
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 failure to manage growth could adversely affect us.
The planned expansion of our operations will place a significant strain on
our management, financial controls, operations systems, personnel and other
resources. Our ability to manage our future growth, should it occur, will
depend in large part upon a number of factors, including our ability to:
. control costs;
. maintain regulatory compliance;
. maintain effective quality controls;
. significantly expand our internal management and financial control
systems;
. acquire a significant amount of equipment to support our network
systems; and
. attract, assimilate and retain qualified personnel.
We expect that our customers increasingly will demand additional information
and reports with respect to the services we provide. To do so, we must develop
and implement an automated customer service system to handle these demands and
enable future traffic growth. 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.
Breaches of our network security could disrupt our services and 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. Computer
viruses, break-ins or other problems caused by third parties 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.
Our management team is new and we may not be able to recruit and retain the
personnel we need to succeed.
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. 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.
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We are highly dependent on certain 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.
We depend on third party suppliers for key components of our network
infrastructure.
We are dependent on other companies to supply certain 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 adversely affect
us, and there is a risk of infringement.
We believe that patents and other proprietary rights are important to our
business. Our policy is to file patent applications to protect our technology,
inventions and improvements to our inventions that we consider important to our
business. We principally rely upon a combination of copyright, trademark and
trade secret laws, and contractual restrictions to protect our proprietary
technology.
Patents. We believe the protection of patentable inventions is important to
our future success. We currently have one U.S. patent application pending,
relating to our TraceWare technology. However, none of our technology is
patented abroad, nor do we currently have any international patent applications
pending. Moreover, it is possible that:
. our pending patent application may not result in the issuance of
patents;
. any patents that may be issued to us could still be successfully
challenged by third parties, which could result in our loss of the
right to prevent others from exploiting the inventions claimed in
those patents;
. current and future competitors may independently develop similar
technology, duplicate our products or design around any patents that
may be issued to us;
. effective patent protection may not be available in every country in
which we do business; and
. any patents that may be issued to us may not provide significant
proprietary protection or commercial advantage to us.
Trademarks, Copyrights and Trade Secrets. We believe the protection of our
copyrightable materials, trademarks and trade secrets is important to our
future success. We rely on a combination of laws, such as copyright, trademark
and trade secret laws, and contractual restrictions, such as confidentiality
agreements and licenses, to establish and protect our proprietary rights. In
particular, we generally enter into confidentiality or
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<PAGE>
license agreements with our employees and consultants and with our customers
and corporations with whom we have strategic relationships, and maintain
control over access to and distribution of our software, documentation and
other proprietary information. In addition, we generally register our important
trademarks with the United States Patent and Trademark Office, or PTO, to
preserve their value and establish proof of our ownership and use of these
trademarks. We have registered the mark "Digital Island" with the PTO and we
have a pending trademark application for the mark "TraceWare" with the PTO. Our
"Digital Island" mark is either registered or pending in several foreign
countries. Despite any precautions that we have taken:
. laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
. other companies may claim common law trademark rights based upon
state or foreign law that precede our federal registration of such
marks;
. effective trademark, copyright and trade secret protection may be
unavailable or limited in certain foreign countries;
. policing unauthorized use of our products and trademarks is
difficult, expensive and time-consuming and we are unable to
determine the extent to which piracy of our products and trademarks
may occur, particularly overseas; and
. any trademarks that may be issued to us may not provide significant
proprietary protection or commercial advantage to us.
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 certain activities. 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.
We are subject to risks associated with entering into joint ventures.
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
The market in which we operate is highly competitive and has many more
established competitors.
The market we serve is highly competitive. There are few substantial
barriers to entry and we expect that this market will face additional
competition from existing competitors and new market entrants in the future.
The principal competitive factors in this market include:
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<PAGE>
. system engineering and technical expertise;
. IP network reliability and security;
. quality of service and scalability;
. broad geographic presence;
. customer service;
. brand name recognition;
. the variety of services offered;
. price;
. financial resources; and
. conformity with industry standards.
We may not have the resources or expertise to compete successfully in this
market 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 certain 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. As a result, certain of 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 services, and adopt more aggressive pricing
policies than we are able to implement. In addition, these competitors have
entered and will likely continue to enter into joint ventures or consortiums to
provide additional services which are competitive with those provided by us.
Certain of our competitors may be able to provide customers with additional
benefits in connection with their Internet systems and network solutions,
including reduced communications costs, which could reduce the overall costs of
their services relative to us. 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.
Our market changes rapidly due to changing technology and evolving industry
standards. Our future success will depend on our ability to meet the
sophisticated needs of our customers.
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;
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<PAGE>
. 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.
We 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 could suffer.
We are subject to risks associated with information disseminated through our
network.
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,
certain 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 certain 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
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<PAGE>
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.
We are subject to risks associated with operating in international markets.
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;
. longer payment and sales cycles;
. problems in collecting accounts receivable;
. political and economic instability;
. fluctuations in currency exchange rates;
. imposition of currency exchange controls;
. costs of customizing products for foreign countries;
. protectionist laws and business practices favoring local
competition;
. dependence on local vendors;
. seasonal reductions in business activity; and
. potentially adverse tax consequences.
Any of these risks could harm our international operations. For example,
certain European countries already have laws and regulations related to certain
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.
We currently pay some of our suppliers in foreign currencies which subject
us to currency fluctuation risks. To date, all of our customers have paid for
our services in U.S. dollars. However, we believe that in the future an
increasing portion of our revenues 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 our international revenues are currently subject to the risks of
foreign currency fluctuations.
Year 2000 compliance could harm our business.
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. Significant uncertainty exists in
the software and other industries concerning the scope and magnitude of
problems associated with the century change. We
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<PAGE>
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.
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, our business and prospects could suffer. 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 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.
We may be subject to government regulation and legal uncertainties which could
harm us.
We provide value-added IP-based network services which include transmitting
data over public telephone lines. These transmissions are governed by the
regulations and policies of the Federal Communications Commission, or "FCC,"
and the state public utility commissions. However, our services are deemed to
be enhanced or information services (as opposed to common carrier services) and
are not currently subject to direct regulation by the FCC or any other federal
or state communications regulatory agency.
The nature, scope and prices of our services could be affected by changes in
law or regulation in the telecommunications arena, especially changes relating
to Internet connectivity and telecommunications markets. 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. For example,
proceedings are pending at the FCC to determine whether and to what extent
information service providers, including Internet service providers that
provide Internet-related
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services like ours, should be considered telecommunications carriers. An
affirmative response to that inquiry could subject such companies to various
regulations, including, but not limited to:
. an obligation to contribute monies to the Universal Service Fund, or
"USF";
. FCC entry and exit regulations;
. reporting, fee and record-keeping requirements;
. marketing restrictions; and
. access charge obligations for use of the public switched telephone
network.
Although the FCC has decided for the time being that information service
providers, including Internet service providers, are not telecommunications
carriers, that decision is not yet final and is being challenged by various
parties, including the Regional Bell Operating Companies. Some members of
Congress have also disagreed with the FCC's conclusion. Congressional
dissatisfaction with the FCC's conclusions could result in further changes to
the FCC's governing statute. 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, such jurisdictions may claim that we are
required to qualify to do business in the particular foreign country. Our
failure to qualify as a foreign corporation in a jurisdiction where we are
required to do so could subject us to taxes and penalties 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.
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.
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.
After this offering, our officers, directors, and their affiliates, in the
aggregate, will control % of our voting stock.
Some of our stockholders 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
19
<PAGE>
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.
The sale of 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
after this offering could adversely affect the market price of our common
stock. Such sales also might make it more difficult for us to sell equity-
related securities in the future at a time and price that we deem appropriate.
In addition to the shares of common stock offered hereby (assuming no
exercise of the underwriters' over-allotment option), as of the date of this
prospectus, there will be shares of common stock outstanding, all of
which are restricted shares under the Securities Act of 1933, as amended. As of
such date, no restricted shares will be eligible for sale in the public market.
Following the expiration of the 180-day lock-up agreements with the
representatives of the underwriters, restricted shares will be
available for sale in the public market and the remaining restricted shares
will be eligible for sale from time to time thereafter upon expiration of
applicable holding periods under Rule 144, 144(k) or 701 promulgated under the
Securities Act. In addition, as of March 31, 1999, there were outstanding
options to purchase 4,218,839 shares of common stock and warrants to purchase
95,000 shares of common stock (all of which warrants are expected to be
exercised on or before the closing of this offering). Bear, Stearns & Co. Inc.
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. In addition, the
holders of restricted shares and options to purchase
shares of our common stock are entitled to certain rights with respect to
registration of such shares for sale in the public market. If such holders sell
in the public market, such sales could have a material adverse effect on the
market price of our common stock.
Our management will have broad discretion in allocating proceeds from this
offering.
The net proceeds to us from this offering, after deducting underwriting
commissions and expenses payable by us, are estimated to be approximately
$ million. The primary purposes of this offering are to fund capital
expenditures, working capital and operating losses 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 on our business and prospects.
There is no current market for our common stock.
Prior to this offering, there has been no public market for Digital Island's
common stock, and an active public market may not develop or be sustained after
this offering and investors may not be able to sell the common stock should
they desire to do so. 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 have certain anti-takeover defenses that could delay or prevent an
acquisition of Digital Island.
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.
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USE OF PROCEEDS
The net proceeds from this offering, at an assumed initial public offering
price of $ per share, are estimated to be $ million, 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 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. Certain of our credit agreements
restrict our ability to declare or pay any dividends while the credit agreement
is in effect. 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 shares of common stock offered by us in this offering at
an assumed initial public offering price of $ 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
Stockholders' equity:
Convertible preferred stock, no 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 and pro forma basis
and no shares issued and outstanding as
adjusted.................................... $ 84,226 --
Preferred stock, $0.001 par value, 10,000,000
shares authorized; no shares issued and
outstanding on an actual basis and as
adjusted.................................... -- --
Common stock, no 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, shares issued
and outstanding on an as adjusted basis .... 484 84,720
Stockholder note receivable.................. (110) (110)
Common stock warrants........................ 29 --
Additional paid-in capital................... 5,486 5,515
Deferred compensation........................ (4,969) (4,969)
Accumulated deficit.......................... (35,997) (35,997)
-------- -------- ---
Total stockholders' equity................. 49,149 49,159
-------- -------- ---
Total capitalization....................... $ 51,368 $ 51,378 $
======== ======== ===
</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 shares of common stock offered in this
offering at an assumed initial public offering price of $ 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 $ million, or $
per share of common stock. Assuming completion of this offering, there
will be an immediate increase in the net tangible book value of $ per
share to our existing stockholders and an immediate dilution in the net
tangible book value of $ per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $
Pro forma net tangible book value per share as of March 31,
1999........................................................ $1.76
Pro forma increase attributable to new investors............. $
-----
Pro forma net tangible book value per share after the
offering...................................................... $
-----
Pro forma dilution per share to new investors.................. $
=====
</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.. 27,692,588 % $84,710,367 % $3.06
New investors.......... % $ % $
---------- ------ ----------- ------
Total................ % $ %
========== ====== =========== ======
</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
, or % 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 , or % 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."
23
<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 year ended September 30, 1995 and the balance sheet
data at September 30, 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. The statement of operations
data for the period from inception to September 30, 1994 and the balance sheet
data at September 30, 1994 are derived from our unaudited financial statements
that are not included in this prospectus. 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. 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
(unaudited) 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
----------- ---- ---- ------ ------- -----------
(unaudited) (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.............. 15 5 76 4,613 12,883 44,010
Total assets................. 107 93 432 9,223 22,617 62,359
Long-term obligations,
including current portion... -- -- -- 705 3,992 4,039
Total stockholders' equity... $ 97 $86 $ 84 $6,265 $15,490 $49,149
</TABLE>
- ----------
(1) See Notes 2 and 9 of Notes to 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.
24
<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
Digital Island offers a leading global e-business network for companies that
are using the Internet for worldwide deployment of business-critical
applications. We serve multinational corporations that are increasingly relying
on the Internet to conduct business but are constrained by the unreliability,
slow performance and lack of functionality of the public Internet. The Digital
Island Global IP Applications Network and value-added services enable customers
to effectively deploy and manage global IP applications by combining the
reliability, performance and functionality of private wide area networks 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. 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.
Certain 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 $691,000 for the six months ended March 31, 1998. The increase in
revenue was due primarily to an increase in the number of customers and
increased usage by existing customers.
25
<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 spending for additional
network capacity as well as 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 primarily to the addition of direct sales personnel and related costs
and program expenses. 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 $571,000 for the six month period
ended March 31, 1998. This increase was due primarily to growth in personnel
and related costs and to 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 growth in personnel and related expenses, 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 primarily 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.
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 $218,000 for the year ended September 30, 1997. The increase in
revenue was due primarily to an increase in the number and usage of new
customers and increased usage by existing customers.
26
<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 an increase in network
capacity as well as an increase in new lines deployed.
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 primarily to growth in personnel and
related costs and program expenses.
Product Development. Product development expenses increased to $1.7 million
for the year ended September 30, 1998 from $378,000 for the year ended
September 30, 1997. This increase was due primarily to the growth of personnel
and related costs and to new product initiatives.
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 growth in personnel and
related expenses, 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 primarily 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
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)
Dec. 31, Mar. 31 June 30, Sept. 30 Dec. 31, Mar. 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>
27
<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;
. introductions of products and services or enhancements by us and our
competitors;
. competitive factors that affect our pricing;
. capacity utilization of our global IP applications network;
. reliable continuity of service and network availability;
. the availability and cost of bandwidth and our ability to increase
bandwidth as necessary;
. the timing of customer installations;
. the mix of products and services we sell;
. the timing and magnitude of capital expenditures, including costs
relating to the expansion of operations;
. the timing of expansion of our 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 or regulation.
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. 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 certain standard covenants. 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
28
<PAGE>
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 certain standard covenants. 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. Subsequent to September 30,
1998, we did not comply with certain financial covenants. We obtained waivers
for all covenant violations from October 1, 1998 to 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 capital expenditures, cash needs and operating
losses for at least the next 12 months. The execution of our business plan will
require substantial additional capital to fund our operating losses, sales and
marketing expenses, capital expenditures, lease payments and working capital
requirements thereafter. 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 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
29
<PAGE>
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, our
business, results of operations and financial condition could be materially
adversely affected.
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. We have derived
these estimates using 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 compliance could harm our
business."
30
<PAGE>
BUSINESS
Overview
Digital Island offers a leading global e-business network for companies that
are using the Internet for worldwide deployment of business-critical
applications. We target multinational corporations that are increasingly
relying on the Internet to conduct business but are constrained by its
unreliability, slow performance, and lack of functionality. Our global Internet
protocol, or "IP," applications network and value-added services enable
customers to effectively deploy and manage global IP applications by combining
the reliability, performance and functionality of private wide area networks
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. Our customers, which include 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 and multimedia
document distribution, sales force automation and distance learning. As of
March 31, 1999, we had contracts with 62 customers, of which 48 were deployed
and generating revenues.
We use the Digital Island Global IP Applications Network to avoid congestion
points common on the public Internet and to intelligently allocate bandwidth
and storage. The e-business applications delivered over our network are
accessed globally in the same way as any Web site, with a noticeable
difference: these e-business applications are highly available and are designed
to operate substantially faster and with greater functionality than sites that
rely solely on the public Internet.
The Digital Island Global IP Applications Network consists of a proprietary
asynchronous transfer mode, or "ATM," 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 17 countries. This enables our
customers to transmit Internet traffic seamlessly over our proprietary backbone
with dedicated transoceanic capacity and to connect directly to international
users through local points of presence. We also offer content distribution
services including mirroring (replicating) and caching (storing) which enable
us to forward deploy our customers' applications in locations close to their
end-users. This allows our customers to benefit from the low 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.
Digital Island offers a variety of services that allow customers to benefit
from the Digital Island Global e-business network. Customers can take advantage
of our extensive server management and hosting services offered at our four
data centers, and can purchase a range of transport options, including open,
reserved, or managed bandwidth. Our outsourced solutions are designed to allow
customers to transfer 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 e-business. E-business is the
use of the Internet and emerging technologies to replace or maximize
traditional business channels and practices. International Data Corporation, or
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 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
31
<PAGE>
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 E-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 IP 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
bandwidth and for uses which were not business-critical. 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, real time interaction and overseas transport. This is because
data transmittal between countries must make a large number of connections or
"hops" 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 streaming.
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 wide area IP 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 IP 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 leading global e-business network for companies that
need worldwide deployment of business-critical applications over the Internet.
Our solution provides the following key advantages:
Global Connectivity and Availability. The Digital Island Global IP
Applications Network currently has points of presence in 17 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.
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 an ATM backbone directly between our strategic, globally
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distributed data centers and local points of presence, our solution avoids
transmission of data over multiple routers, switches and network access points
in the public Internet, thereby substantially reducing transmission time and
improving network security and performance. Our network architecture is
reliable, scalable 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. Using
technology developed in conjunction with other leading industry suppliers, 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 IP
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 IP 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 tiered and regional pricing,
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 leading global e-business network. 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, electronic services and
electronic fulfillment, such as digital media distribution. The Digital Island
Global IP Applications Network has points of presence in 17 countries
worldwide, providing our customers with access to a significant majority of
existing Internet users, and we plan to expand our global reach through
additional points of presence in the future.
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Expand Customer Relationships. We plan to extend our leadership in the
market for global IP application services by continuing to expand our base of
customers. By integrating other value-added 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 e-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 Value-Added Services. We seek to be a leader in designing
and deploying a global e-business network that enables customers to capture the
benefits of ubiquitous access to applications and the performance and
functionality of private wide area networks. We are committed to investing
resources to implement new IP 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.
Further, strategic relationships with our customers in our target vertical
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 value-added 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 45 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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[GRAPHIC APPEARS HERE]
Network Architecture
The Digital Island Intelligent Network consists of an ATM backbone that
connects four geographically dispersed data centers. This ATM backbone router
core connects to points of presence in 17 countries forming a distributed star
architecture that minimizes the number of separate transmissions, or hops,
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
distributed star architecture is superior to traditional meshed networks for
the distribution of centralized, hybrid and distributed applications because of
its manageability, scalability and connectivity over dedicated lines to local
Internet service providers and network service providers through dedicated
points of presence.
We currently have direct connections in 17 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 16 other countries, giving us a total of 25 different direct points of
connection to the Internet. Unlike traditional peering 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
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connections through circuits with each of the four network service providers.
In addition to the U.S., we have established private peering relationships in
16 other countries as listed below:
<TABLE>
<S> <C> <C>
Australia Israel South Korea
Brazil Japan Sweden
Canada Mexico Taiwan
China Netherlands United Kingdom
France Russia
Germany Singapore
</TABLE>
In China, we have connections in both Hong Kong and Beijing. With 25
different peering points to the Internet, we believe we offer our customers one
of the most diverse, redundant and reliable networks for the deployment of e-
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 IP
applications globally without developing or acquiring their own global network.
Our services are especially suited to IP 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
IP 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, 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
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 IP requests as well as the destinations of
Internet traffic. This technology will be predominantly used for targeted
advertising and local language content delivery.
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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 point of
presence. Leveraging our network architecture, multi-cast technologies and
distributed server arrays, our application hosting services provide end users
globally with 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 locally load balanced
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 application 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
point of presence. Our customer is billed for a pre-specified minimum amount of
data transfer to that specified point of presence. Unlike 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.
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
security audits, server/database optimization, application deployment
consulting and application management and monitoring services.
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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 force automation 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 certain customers use our global e-
business network for deployment of business-critical 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 mechanism to distribute their technical documentation and software to
customers in over 150 countries. Using Digital Island's Server Management
Package and Managed Bandwidth services, Autodesk customers experience
consistent, reliable, secure and fast access to download documentation and
software worldwide.
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 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 mission-critical operations.
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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 an indirect sales channel
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.
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 IP application deployment.
A key element of the 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.
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.
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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 scalability,
broad geographic presence, brand name recognition, technical expertise and
functionality, 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 certain business
units of Frontier GlobalCenter, Inc. In particular, Exodus and GlobalCenter
provide services that are directly competitive with certain of the 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, certain of 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 certain
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, or "PTO," such application is pending and
we currently have no patented technology that would preclude or inhibit
competitors from entering our market. In addition, we have registered the mark
"Digital Island" with the PTO, and we have a pending trademark application for
the mark "TraceWare" with the PTO. 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
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technology or to deter independent third-party development of similar
technologies. The laws of certain 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 value-added 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 value-added IP-based
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 value-added 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, or "USF." 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 USF
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.
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 USF 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
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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
. USF obligations.
Any one or more of those changes could have a material adverse impact on our
ability to provide certain services, our results of operations and financial
condition. The FCC could similarly conclude that providing Internet transport
or telephony services over an IP-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, or "ILECs". A proceeding
initiated by the FCC in December 1996 that raises the issue whether ILECs 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 IP 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 IP telephony to
contribute to the USF. The ultimate resolution of IP 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, or "CLECs," that serve
Internet service providers are entitled to reciprocal compensation under the
Telecommunications Act of 1996 for calls originated by customers of an ILEC to
an Internet service provider served by a CLEC 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 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
42
<PAGE>
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 certain
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 certain states continue to consider potential
regulation of such service. Enactment of such legislation or adoption of such
regulations could have a material adverse impact on us.
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.
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 certain 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;
43
<PAGE>
. 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 certain 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, such jurisdictions may claim that we are
required to qualify to do business in the particular foreign country or to
obtain certain permits or licenses to provide permits or licenses to provide
value-added network services. Our failure to qualify as a foreign corporation
in a jurisdiction where we are required to do so could subject us to taxes and
penalties 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 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 intend to move our corporate headquarters to a new
location in San Francisco 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.
44
<PAGE>
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)............... 52 Chief Executive Officer and President
and Director
T.L. Thompson...................... 52 Chief Financial Officer
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
Each director will hold office until the next annual meeting of stockholders
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 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 for over ten years, most recently as
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<PAGE>
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 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. From 1986 to 1996, Mr. Evenson served as Vice
President of Information Technology at Montgomery Securities. 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, 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. Mr. Sullivan holds a B.S. in Business
Administration from the University of California, Berkeley.
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. 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. Mr. Wilson also served as 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.
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<PAGE>
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 a member of 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 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. Prior to joining AC Nielsen, Mr. Cotsakos spent 19 years
with Federal Express Corporation, where he held a number of senior executive
positions. Mr. Cotsakos serves on the Board of Directors of several technology
companies, both publicly traded and private. 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 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 is a member of 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 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
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<PAGE>
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."
Officers are appointed by the Board of Directors on an annual basis and
serve until their successors have been duly elected and qualified. 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.
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;
. 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.
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<PAGE>
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.
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.
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."
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation Awards
---------------------
Annual Compensation
--------------------- Number of Securities
Name and Principal Position(s) Year Salary Bonus Underlying Options(1)
------------------------------ ---- -------- ------- ---------------------
<S> <C> <C> <C> <C>
Ruann F. Ernst(2).................. 1998 $ 50,000 $ -- 794,159
President and Chief Executive
Officer
Allan Leinwand .................... 1998 124,167 41,000 288,000
Chief Technology Officer
Michael T. Sullivan(3)............. 1998 136,250 25,750 100,000
Vice President of Finance
Ron Higgins(4)..................... 1998 130,615 20,000 400,000
Chairman of the Board of Directors
</TABLE>
- ----------
(1) The options listed in the table were originally granted under either our
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."
(2) Ms. Ernst has served as President and Chief Executive Officer of Digital
Island since June 1998.
(3) 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.
(4) Mr. Higgins served as President and Chief Executive Officer of Digital
Island from February 1994 until June 1998.
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 at Assumed Annual
Number of Percentage of 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 $ 1,940,402 $ 3,089,766
Allan Leinwand.......... 48,000 2.5% 1.50 6/17/08 117,280 186,749
Michael T. Sullivan..... -- -- -- -- -- --
Ron Higgins............. -- -- -- -- -- --
</TABLE>
50
<PAGE>
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.
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(2)
Exercise Value ------------------------- -------------------------
(#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
----------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ruann F. Ernst.......... 100,000 0.00 443,492 250,667 $776,111 $438,667
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>
- ----------
(1) 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).
(2) Based upon the fair value per share at the close of the 1998 fiscal year
($3.25) less the exercise price payable per share.
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 Stock Option and Incentive Plan. The
1999 Stock Incentive Plan was adopted by the board on April 21, 1999 and was
subsequently approved by the stockholders on , 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
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administrator elects to extend one or more features of the 1999 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. The compensation 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 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
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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 three predecessor plans) 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. The
board also has the authority to provide for the cancellation of those options
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. Should the optionee's service be terminated
within a designated period following an acquisition in which the outstanding
options under our predecessor plan are assumed and our repurchase rights are
assigned, then all of the optionee's outstanding options under that plan 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 those
options. 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 three predecessor plans.
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
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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. 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. 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. 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.
. 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
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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 , 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
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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 an 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 an acquisition occurs or (ii) the fair market
value per share of common stock immediately prior to an 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 may 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.
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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 executive officers. All outstanding options held
by the foregoing executive 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.
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 $0.10 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."
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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. 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(1)
-----------------------------------
Name Series C Series D Series E
---- --------- --------- ---------
<S> <C> <C> <C>
Bass Trust U/D/T dated April 29,
1988(2)............................... 39,420 34,095 27,765
Chase Venture Capital Associates,
L.P.(3)............................... -- -- 2,823,529
The Cotsakos Revocable Trust dated
9/3/87(4)............................. -- 28,571 --
Crescendo II, L.P.(5).................. 289,855(6) 143,429(6) 463,294(6)
Crosspoint Venture Partners............ 289,855 -- 926,824
E*TRADE Group, Inc.(7)................. -- 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.(8).................... 260,870 142,857 --
</TABLE>
- ----------
(1) 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.
(2) Charlie Bass, a director of Digital Island, is the Trustee of the Bass
Trust U/D/T dated April 29, 1998.
(3) Shahan Soghikian, a director of Digital Island, is a General Partner of
Chase Venture Capital Associates, L.P.
(4) Christos Cotsakos, a director of Digital Island, is the Trustee of The
Cotsakos Revocable Trust dated 9/3/87.
(5) David Spreng, a director of Digital Island, is the Managing Member of
Crescendo Ventures II, LLC, the general partner of Crescendo II, L.P.
(6) Includes shares held by Eagle Ventures II, LLC pursuant to a parallel
investment agreement with Crescendo.
(7) Mr. Cotsakos, a director of Digital Island, is Chairman of the Board of
E*TRADE.
(8) 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.
Co-Sale Agreement
Pursuant to the terms of a Co-Sale Agreement dated February 19, 1999 by and
among Digital Island, Mr. Higgins and the investors, the investors acquired
certain co-sale rights with respect to their shares of preferred stock. Subject
to certain customary exceptions, in the event that Mr. Higgins proposes to sell
shares of common stock, each investor may elect to participate pro-rata in such
sale on the same terms and conditions as Mr. Higgins. These co-sale rights will
terminate upon completion of this offering.
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.
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 $179,999 in payment of the
exercise price for 119,999 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
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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.
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, 353 Sacramento Street, Suite 1520, San Francisco, CA 94111.
<TABLE>
<CAPTION>
Beneficial Beneficial
Ownership of Ownership of
Shares Before the Shares After the
Offering(2)(3) Offering(4)
----------------- -----------------
Name of Beneficial Owner(1) Number Percent Number Percent
- --------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Crosspoint Venture Partners(5)............ 3,246,679 11.7% 3,246,679
Chase Venture Capital Associates,
L.P.(6).................................. 2,823,529 10.1% 2,823,529
Vanguard V, L.P(7)........................ 2,561,310 9.2% 2,561,310
Crescendo Venture Management, LLC(8)...... 2,109,212 7.6% 2,109,212
E*TRADE Group, Inc.(9).................... 2,013,367 7.2% 2,013,367
Tudor Global Trading, Inc.(10)............ 1,966,724 7.1% 1,966,724
FW Ventures III, LP(11)................... 1,882,353 6.8% 1,882,353
Merrill Lynch KECALP(12).................. 1,482,824 5.3% 1,482,824
Ron Higgins(13)........................... 2,075,000 7.4% 2,075,000
Ruann F. Ernst(14)........................ 836,159 2.9% 836,159
T. L. Thompson(15)........................ 251,000 * 251,000
Paul Evenson(16).......................... 200,000 * 200,000
Allan Leinwand(17)........................ 195,267 * 195,267
Rick Schultz(18).......................... 200,000 * 200,000
Michael T. Sullivan(19)................... 83,000 * 83,000
Tim Wilson(20)............................ 179,200 * 179,200
Charlie Bass(21).......................... 419,283 1.5% 419,283
Marcelo A. Gumucio(22).................... 212,000 * 212,000
Christos Cotsakos(23)..................... 36,644 * 36,644
Cliff Higgerson(24)....................... -- -- -- --
Shahan Soghikian(25)...................... -- -- -- --
David Spreng(26).......................... -- -- -- --
All directors and executive officers as a
group (14 people)(27).................... 4,687,553 16.2% 4,687,553
</TABLE>
- ----------
* Less than 1%.
(1) Except as indicated by footnote, we understand that the persons named in
the table above have sole voting and investment power with respect to all
shares shown as beneficially owned by them, subject to community property
laws where applicable.
(2) 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.
(3) 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
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converts into 1.088084 shares of common stock. Percentage ownership is
based on 27,870,736 shares of common stock and preferred stock, as
converted, outstanding as of March 31, 1999. See "Description of Capital
Stock--Preferred Stock."
(4) "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.
(5) 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.
(6) 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, CA 94111.
(7) 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.
(8) 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, CA 94301.
(9) 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.
(10) 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.
(11) 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, CA
94025.
(12) 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.
(collectively, the "Merrill Lynch KECALP Entities"). The address for the
Merrill Lynch KECALP Entities is Word Financial Center, North Tower, New
York, NY 10281.
(13) Stock consists of 1,575,000 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
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<PAGE>
were exercised by Mr. Higgins on April 20, 1999, 100,000 shares of common
stock held directly by the Ron and Sanne Higgins 1998 Irrevocable Trust
Agreement f/b/o Dana Espinoza (the "Espinoza Trust"), 100,000 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 75,000 shares
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.
(14) Stock consists of 100,000 shares of common stock held directly by Ms.
Ernst and 736,159 shares of common stock subject to options exercisable
within 60 days of March 31, 1999, of which 119,999 shares were exercised
by Ms. Ernst on April 20, 1999.
(15) Stock consists of common stock subject to options exercisable within 60
days of March 31, 1999.
(16) Stock consists of common stock subject to options exercisable within 60
days of March 31, 1999.
(17) 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.
(18) Stock consists of common stock subject to options exercisable within 60
days of March 31, 1999.
(19) 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.
(20) 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.
(21) 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.
(22) Stock consists of 183,000 shares of common stock and 29,000 shares of
Series C Preferred Stock.
(23) 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 9 above.
(24) 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 7 above.
(25) 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 6 above.
(26) 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 8 above.
(27) See footnotes 13 through 26 above. Includes options exercisable for
2,050,182 shares of common stock within 60 days of March 31, 1999 under
the 1998 Stock Option/Stock Issuance Plan.
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<PAGE>
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, shares will
be outstanding. 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 outstanding shares of common stock are, and the shares of common
stock offered by us in this offering when issued will be, fully paid and
nonassessable. 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.
Certain 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,
subject to certain exceptions, 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 or any
majority-owned subsidiary of the corporation and any other person or
entity;
. subject to certain exceptions, any sale, transfer, pledge or other
disposition of 10% or more of the assets of the corporation or any
majority-owned subsidiary of the corporation involving the
interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation or any majority-owned
subsidiary of the corporation of any stock of the corporation to the
interested stockholder;
. any transaction involving the corporation or any majority-owned
subsidiary of the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the
corporation or any majority-owned subsidiary 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 or any majority-owned
subsidiary of 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 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
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 our Chairman of the Board of Directors or 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, shares of common stock will be
outstanding. 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 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.
All 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. Upon
expiration of these agreements, shares will be eligible for immediate
resale in the public market subject to the volume and other limitations of
Rule 144, and shares will be eligible for immediate resale pursuant to
Rule 144(k) without such limitations, unless they are held by affiliates of
Digital Island. Of such shares, approximately will be eligible for
immediate resale in the public market pursuant to Rule 144 subject to the
volume and manner of sale limitations in Rule 144 and shares will be
eligible for resale without such volume limitations.
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 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.
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 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.
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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 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 the majority of our
current stockholders 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).
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 LLC has co-managed public offerings
of equity securities and has acted as an underwriter in an additional
public offerings of equity securities. Thomas Weisel Partners LLC does not have
any material relationship with us or any of our officers, directors or
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. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP,
Palo Alto, California.
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 not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. 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
April 23, 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
SHAREHOLDERS' 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 27,787
Additional paid-in
capital................ 11,586,366 37,192,110 90,168,185 90,206,692
Deferred compensation... -- -- (4,969,246) (4,969,246)
Shareholder 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
shareholder 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
shareholder 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.i.o. 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 global connectivity fees, 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.
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.
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.
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>
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)
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.
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>
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)
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 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.
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)
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.
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.
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)
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.
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>
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)
10. Shareholders' 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 shareholders. 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.
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),
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)
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 shareholders are entitled to participate
in cash dividends paid to common shareholders 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>
11. Stock Option and Stock Issuance Plan:
In January 1997, the Company established the 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, within 90 days following the date of termination. At March 31, 1999,
219,250 shares of common stock were subject to repurchase by the
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)
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>
For financial reporting purposes, the Company has determined that the
deemed fair 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 2,960,863 shares of common stock were
exercisable.
At September 30, 1998 and March 31, 1999, options to purchase 541,559 and
815,095 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 Company accounts for the
1998 Plan in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
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)
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. Shareholder 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 the then chairman of
the board of directors (the Optionee). 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 Optionee 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 Optionee. 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.
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)
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.
16. Subsequent Events:
On April 20, 1999, executive officers of the Company exercised stock options
to purchase 335,999 shares of common stock in exchange for full-recourse notes.
The total principal amount of these notes is $266,399. 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.
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)
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 99,500 shares of common stock were
granted at an exercise price of $7.50. Deferred compensation associated with
these shares is $238,800.
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
Cautionary Note on Forward-Looking Statements............................ 7
Trademarks............................................................... 7
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Consolidated Financial Data..................................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 31
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
[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.................................................... $20,850
NASD filing fee..................................................... 8,000
Blue Sky/NASD fees and expenses (including legal fees).............. *
Nasdaq National Market entry and application fee.................... *
Accounting fees and expenses........................................ 150,000
Other legal fees and expenses....................................... 300,000
Transfer agent and registrar fee.................................... *
Printing and engraving.............................................. 140,000
Miscellaneous....................................................... *
-------
Total............................................................. $ *
</TABLE>
- ----------
* To be supplied by amendment.
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 Indemnity
Agreements with its officers and directors, a form of which is attached as
Exhibit 10.4 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 406,350 shares of its common stock to
employees and consultants for an aggregate purchase price of $280,512
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 $10,617,999.00.
(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 $50,000,000.05
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.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws, as amended to date
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
5.1* Opinion of Brobeck, Phleger & Harrison LLP
10.1* 1998 Stock Option/Stock Issuance Plan
10.2* Form of 1999 Stock Incentive Plan
10.3* Form of 1999 Employee Stock Purchase Plan
10.4 Form of Indemnification Agreement for Officers and Directors
10.5 Employment Agreement between the Registrant and Ruann Ernst
10.6 Employment Agreement between the Registrant and Allan Leinwand
10.7 Employment Agreement between the Registrant and Michael Sullivan
10.8 Office Lease Agreement, between the Registrant and John Hancock Mutual
Life Insurance Co., dated as of April 8, 1997
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 (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- ----------
* To be filed by amendment.
<TABLE>
<S> <C>
(b) Financial Statement Schedules
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
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
26th day of April, 1999.
Digital Island, Inc.
/s/ Ruann Ernst
By: _________________________________
Ruann Ernst
Chief Executive Officer and
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, Ruann Ernst and T. L.
Thompson, and each one of them, his true and lawful attorneys-in-fact and
agents, each with full power of substitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to sign any
registration statement for the same offering covered by this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b)
promulgated under the Securities Act of 1933, as amended, and all post-
effective amendments thereto, and to file the same, with all exhibits thereto
and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming that each of said attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
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>
/s/ Ron Higgins Chairman of the Board of April 26, 1999
____________________________________ Directors
Ron Higgins
/s/ Ruann Ernst Chief Executive Officer, April 26, 1999
____________________________________ President and Director
Ruann Ernst (Principal Executive
Officer
/s/ T. L. Thompson Chief Financial Officer April 26, 1999
____________________________________ (Principal Financial
T. L. Thompson Officer and Principal
Accounting Officer)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Charlie Bass Director April 26, 1999
____________________________________
Charlie Bass
/s/ Christos Cotsakos Director April 26, 1999
____________________________________
Christos Cotsakos
/s/ Marcelo A. Gumucio Director April 26, 1999
____________________________________
Marcelo A. Gumucio
/s/ Cliff Higgerson Director April 26, 1999
____________________________________
Cliff Higgerson
/s/ David Spreng Director April 26, 1999
____________________________________
David Spreng
/s/ Shahan Soghikian Director April 26, 1999
____________________________________
Shahan Soghikian
</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* Amended and Restated Certificate of Incorporation
3.2* Bylaws, as amended to date
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
5.1* Opinion of Brobeck, Phleger & Harrison LLP
10.1* 1998 Stock Option/Stock Issuance Plan
10.2* Form of 1999 Stock Incentive Plan
10.3* Form of 1999 Employee Stock Purchase Plan
10.4 Form of Indemnification Agreement for Officers and Directors
10.5 Employment Agreement between the Registrant and Ruann Ernst
10.6 Employment Agreement between the Registrant and Allan Leinwand
10.7 Employment Agreement between the Registrant and Michael Sullivan
10.8 Office Lease Agreement, between the Registrant and John Hancock Mutual
Life Insurance Co., dated as of April 8, 1997
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 (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- ----------
* To be filed by amendment.
<PAGE>
EXHIBIT 4.4
DIGITAL ISLAND, INC.
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
February 19, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
Section 1 Certain Definitions 1
1.1 Certain Definitions................................... 1
1.2 "SEC" ................................................ 1
1.3 "Exchange Act"........................................ 2
1.4 "Initial Public Offering" or "IPO".................... 2
1.5 "register", "registered" and "registration"........... 2
1.6 "Registrable Securities".............................. 2
1.7 "Securities Act"...................................... 2
1.8 "Affiliate"........................................... 2
Section 2 Piggyback Rights ....................................... 3
2.1 Notice of Registration................................ 3
2.2 Underwriting.......................................... 3
2.3 Right to Terminate Registration....................... 4
2.4 Definition of Holder.................................. 4
Section 3 Demand Registration .................................... 4
3.1 Demand Registration................................... 4
3.2 Underwritten Public Offering.......................... 4
3.3 Limitations........................................... 5
Section 4 Form S-3 Registration 5
4.1 Registrations on Form S-3............................. 5
4.2 Limitations........................................... 6
Section 5 Obligations of Company 6
Section 6 Expenses of Registration 7
Section 7 Indemnification 8
7.1 The Company........................................... 8
7.2 Holders............................................... 8
7.3 Defense of Claims..................................... 9
Section 8 Rule 144 Reporting 9
Section 9 Standoff Agreement 10
Section 10 Limitations on Subsequent Registration Rights 10
Section 11 Information Rights 11
11.1 Financial Information................................. 11
11.2 Inspection............................................ 12
11.3 Termination of Information and Inspection Covenants... 12
11.4 Confidentiality....................................... 13
Section 12 Right of First Refusal ................................ 13
Section 13 Termination of Rights ................................. 15
Section 14 Miscellaneous ......................................... 15
14.1 Assignment............................................ 15
14.2 Aggregation of Shares................................. 15
14.3 Governing Law......................................... 15
14.4 Counterparts.......................................... 16
14.5 Titles and Subtitles.................................. 16
i
<PAGE>
14.6 Notices............................................... 16
14.7 Attorneys' Fees....................................... 16
14.8 Amendments and Waivers................................ 16
14.9 Severability.......................................... 16
14.10 Delays or Omissions................................... 16
14.11 Entire Agreement; Superseding Effect.................. 17
ii
<PAGE>
DIGITAL ISLAND, INC.
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (the
"Agreement") is entered into as of February 19, 1999, by and among DIGITAL
ISLAND, INC., a California corporation (the "Company"), and the individuals or
entities listed on the signature pages hereof (each a "Holder" and collectively,
the "Holders").
RECITALS
A. Certain of the Holders have purchased or will purchase shares of
the Company's Series E Preferred Stock (the "Series E Preferred") pursuant to
the terms of a Series E Preferred Stock Purchase Agreement dated as of even date
herewith among the Company and such Holders (the "Purchase Agreement").
B. The execution of this Agreement is a condition to the closing of
the transactions contemplated by the Purchase Agreement.
C. The Company desires to enter into this Agreement and grant the
Holders the rights contained herein in order to fulfill such condition.
D. The Company and those Holders who hold shares of the Company's
Series A Preferred Stock (the "Series A Preferred"), Series B Preferred Stock
(the "Series B Preferred"), Series C Preferred Stock (the "Series C Preferred")
and Series D Preferred Stock (the "Series D Preferred"), are parties to an
Amended and Restated Rights Agreement dated as of July 13, 1998 (the "Existing
Rights Agreement"), and wish to amend and restate the Existing Rights Agreement,
upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties agree as follows:
Section 1
Certain Definitions
-------------------
Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following respective meanings:
1.1 "SEC" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
<PAGE>
1.2 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC promulgated thereunder, as the
same shall be in effect from time to time.
1.3 "Initial Public Offering" or "IPO" means the Company's sale of its
Common Stock in a bona fide, firm commitment underwriting pursuant to a
registration statement under the Securities Act yielding gross proceeds to the
Company of at least $25,000,000.00 and a per share offering price of at least
$7.00 (as adjusted for stock splits and the like).
1.4 The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act (as defined below), and the declaration or
ordering of the effectiveness of such registration statement.
1.5 "Registrable Securities" means (i) the shares of Common Stock of
the Company issuable or issued upon conversion of the Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred or Series E Preferred of the
Company (such shares of Common Stock, the "Stock"), and (ii) any other shares of
the Company's Common Stock issued as (or issuable upon conversion or exercise of
any warrant, right or other security which is issued as) a dividend or other
distribution with respect to or in exchange for or replacement of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred of the Company or the Stock, excluding in all cases, however, any
Registrable Securities sold by a person in a transaction in which a Holder's
rights under this Agreement are not assigned; provided, however, that
Registrable Securities shall only be treated as Registrable Securities if and so
long as, they have not been (A) sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction or (B)
sold in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act under Section 4(1) thereof so that all
transfer restrictions and restrictive legends with respect thereto are removed
upon the consummation of such sale.
1.6 "Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations of the SEC promulgated thereunder, as the same
shall be in effect from time to time.
1.7 An "Affiliate" of an entity referenced herein shall mean (i) any
entity who controls, is controlled by, or is under common control with such
entity, (ii) any constituent partner or shareholder of such entity, (iii) all
mutual funds or other pooled investment vehicles or entities under the control
or management of such entity, or the general partner or investment advisor of
such entity, or any Affiliate of such mutual funds, pooled investment vehicles,
general partner or investment advisor, or (iv) with respect to an individual,
such individual's spouse, siblings, ancestors and descendants (whether natural
or adopted), any spouses of such siblings, ancestors and descendants, any
siblings of such ancestors and descendants, and any trust established solely for
the benefit of one or more of such individual's spouse, siblings, ancestors
and/or descendants.
2
<PAGE>
Section 2
PIGGYBACK RIGHTS
----------------
2.1 Notice of Registration. If at any time or from time to time, the
----------------------
Company shall determine to register any of its equity securities for its own
account in an underwritten public offering, the Company will:
(i) promptly give to the Holders written notice thereof; and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and underwriting, all the Registrable
Securities (subject to cutback as set forth in Section 2.2) specified in a
written request or requests made within thirty (30) days after receipt of such
written notice from the Company by any Holder.
2.2 Underwriting. The right of any Holder to registration pursuant
------------
to this Section 2 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of Registrable Securities in the underwriting to
the extent provided herein. If any Holder proposes to distribute its securities
through such underwriting, such Holder shall (together with the Company and any
other shareholders distributing their securities through such underwriting)
enter into an underwriting agreement in customary form with the managing
underwriter selected for such underwriting by the Company. Notwithstanding any
other provision of this Section 2, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the Registrable Securities to
be included in such registration. The Company shall so advise the Holder and
the other shareholders distributing their securities through such underwriting
pursuant to piggyback registration rights similar to this Section 2, and the
number of shares of Registrable Securities and other securities that may be
included in the registration and underwriting shall be allocated among the
Holder and any other participating shareholders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holder and other securities held by other shareholders and entitled to
registration rights at the time of filing the registration statement, provided
that the aggregate amount of Registrable Securities held by selling Holders
included in the offering shall not be reduced below twenty percent (20%) of the
total amount of securities included in that offering unless the offering is the
Initial Public Offering of the Company's securities, in which case all
Registrable Securities held by Holders may be excluded. In the event the
managing underwriter does determine that marketing factors require a limitation
of the number of shares to be underwritten (the "Cutback"), such Cutback shall
be applied first to any participating shareholders other than Holders of
Registrable Securities before it shall be applied to Holders of Registrable
Securities, subject to the above mentioned twenty percent (20%) reduction limit,
if at all. To facilitate the allocation of shares in accordance with the above
provisions, the Company or the underwriters may round the number of shares
allocated to each Holder or other shareholder to the nearest 100 shares. If any
Holder or other shareholder disapproves of the terms of any such underwriting,
he or she may elect to withdraw therefrom by written notice to the Company and
the managing underwriter. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to one-hundred eighty (180) days
after the effective date of the registration statement relating thereto.
3
<PAGE>
2.3 Right to Terminate Registration. The Company shall have the
-------------------------------
right to terminate or withdraw any registration initiated by it under this
Section 2 prior to the effectiveness of such registration, whether or not any
Holder has elected to include securities in such registration.
2.4 Definition of Holder. Solely for purposes of this Section 2 and
--------------------
for so long as he remains employed by the Company, Ron Higgins shall be deemed
to be a "Holder" and all shares of the Company's capital stock held by him shall
be deemed to be "Registrable Securities."
Section 3
Demand Registration
-------------------
3.1 Demand Registration. Beginning on the earlier of (i) February 19,
-------------------
2001, or (ii) one year after the Company's Initial Public Offering, if Holders
of more than 66-2/3% of the Registrable Securities request that the Company file
a registration statement for the lesser of 50% of the outstanding Registrable
Securities or a number of shares yielding gross aggregate proceeds in excess of
$15,000,000, then the Company will (x) promptly give written notice of the
proposed registration to all other Holders, and (y) use its reasonable best
efforts to cause such shares to be registered (together with any Registrable
Securities of any Holder or Holders joining in such request as are specified in
a written request received by the Company within twenty (20) days after receipt
of such written notice from the Company); provided, however, that (a) the
Company shall not be required to effect any such registration within one-hundred
eighty (180) days prior to its good faith estimate of the date of the filing of,
and one-hundred eighty (180) days following the effective date of, a
registration statement pertaining to an underwritten public offering of the
Company's securities, (b) such registration obligation shall be deferred for not
more than sixty days if the Company furnishes the requesting holders with a
certificate of the President of the Company stating that in the good faith
judgment of the Board of Directors it would be detrimental to the Company or its
shareholders for a registration statement to be filed in the near future, but
the Company shall not be entitled to such deferral more than twice in any 12-
month period and (c) the Company shall not be obligated to effect more than a
total of two such demand registrations. Any such registration shall be firmly
underwritten by an underwriter of nationally recognized standing which shall be
mutually agreeable to the Company and a majority in interest of the Holders
requesting the registration. If any Holder disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Holders making the request. The
Registrable Securities so withdrawn shall also be withdrawn from registration,
and such Registrable Securities shall not be transferred in a public
distribution prior to ninety (90) days after the effective date of such
registration; provided, however, that, if by the withdrawal of such Registrable
Securities, a greater number of Registrable Securities held by other Holders may
be included in such registration (up to the maximum of any limitation imposed by
the underwriters), then the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities. Holders shall be so entitled to include additional
Registrable Securities in the registration upon written notice within 10 days of
such offer being made.
3.2 Underwritten Public Offering. The Company shall enter into an
----------------------------
underwriting agreement with an investment banking firm or firms containing
representations,
4
<PAGE>
warranties, indemnities and agreements then customarily included by an issuer in
underwriting agreements with respect to secondary distributions. The Company
shall not cause the registration under the Securities Act of any other shares of
its Common Stock to become effective (other than registration of an employee
stock plan, or registration in connection with any Rule 145 or similar
transaction) during the effectiveness of a registration requested hereunder for
an underwritten public offering if, in the judgment of the underwriter or
underwriters, marketing factors would adversely affect the price of the
Registrable Securities subject to such underwritten registration.
3.3 Limitations. Notwithstanding the foregoing, if at the time of
-----------
any request to register Registrable Securities pursuant to this Section 3, the
Company is engaged, or has fixed plans to engage within one-hundred eighty (180)
days of the request, in a registered public offering or any other activity that,
in the good faith determination of the Board of Directors of the Company, would
be adversely affected by the requested registration to the material detriment of
the Company, then the Company may, at its option, direct that such request be
delayed for a period not in excess of one-hundred eighty (180) days from the
effective date of such offering, or the date of commencement of such other
material activity, as the case may be. Such rights to delay a request to be
exercised by the Company may not be exercised more than once in any twelve month
period.
Section 4
FORM S-3 REGISTRATION
---------------------
4.1 Registrations on Form S-3. Holders shall be entitled to request
-------------------------
(an "S-3 Registration Request") an unlimited number of registrations of
Registrable Securities then owned by such requesting Holders on a Form S-3
registration statement or any successor form under the Securities Act (an "S-3
Registration"). The S-3 Registration Request must be made in writing and the S-3
Registration Request shall: (i) specify the number of shares intended to be
offered and sold; (ii) express the present intention of the requesting Holders
to offer or cause the offering of such shares for distribution; and (iii)
contain the undertaking of the requesting Holders to provide all such
information and materials and take all such action as may be required in order
to permit the Company to comply with all applicable requirements of the SEC and
to obtain any desired acceleration of the effective date of such registration
statement. The Company shall, as soon as practicable, (a) promptly give written
notice of the proposed registration to all other Holders, and (b) file an S-3
Registration and use its reasonable best efforts to obtain all such
qualifications and compliance as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of the requesting
Holders' Registrable Securities as are specified in the S-3 Registration Request
(together with any Registrable Securities of any Holder or Holders joining in
such request as are specified in a written request received by the Company
within twenty (20) days after receipt of such written notice from the Company),
within 45 days after receipt of such written notice by the Company; provided,
--------
however, that the Company shall not be obligated to effect any such
- -------
registration, qualification or compliance, pursuant to this Section 4 if: (i)
Form S-3 is not available for such offering by the requesting Holders; (ii) the
requesting Holders, together with the holders of any other securities of the
Company entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate gross price to the
public of less than $1,000,000; or (iii) the Company has, within the twelve (12)
month period preceding
5
<PAGE>
the date of such request, already effected two registrations on Form S-3 for any
Holder pursuant to this Section 4.
4.2 Limitations. Notwithstanding the foregoing, if at the time of
-----------
any request to register Registrable Securities pursuant to this Section 4, the
Company is engaged, or has fixed plans to engage in any activity that, in the
good faith determination of the Board of Directors, would be adversely affected
by the requested registration to the material detriment of the Company, then the
Company may, at its option, direct that such request be delayed for a period not
in excess of forty-five (45) days from the effective date of such material
activity. Such rights to delay a request to be exercised by the Company may not
be exercised more than once in any twelve month period.
Section 5
OBLIGATIONS OF COMPANY
----------------------
Whenever the Company is required by the provisions of this Agreement
to use its reasonable best efforts to effect the registration of the Registrable
Securities, the Company shall: (i) prepare and, as soon as possible, file with
the SEC a registration statement with respect to the Registrable Securities, and
use its reasonable best efforts to cause such registration statement to become
effective and to remain effective until the earlier of the sale of the
Registrable Securities so registered or one hundred twenty (120) days subsequent
to the effective date of such registration provided, however, that if the
-------- -------
Holders requesting a demand registration pursuant to an S-3 Registration
pursuant to Section 4 state in their request that they desire a shelf
registration pursuant to Rule 415 under the Securities Act (a "Shelf
Registration"), then the Company shall, solely in the first such instance, cause
such registration statement to be a Shelf Registration and shall cause such
registration statement to become effective and to remain effective until the
earlier of the date of the sale of the Registerable Securities so registered or
nine (9) months subsequent to the effective date of such registration statement;
(ii) prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to make and to keep such registration statement effective and to
comply with the provisions of the Securities Act with respect to the sale or
other disposition of all securities proposed to be registered in such
registration statement until the earlier of the sale of the Registrable
Securities so registered or one hundred twenty (120) days subsequent to the
effective date of such registration statement, or, in the case of a Shelf
Registration, until the earlier of the sale of the Registerable Securities so
registered or nine (9) months subsequent to the effective date of such
registration statement; (iii) furnish to any Holder such number of copies of any
prospectus (including any preliminary prospectus and any amended or supplemented
prospectus), in conformity with the requirements of the Securities Act, as such
Holder may reasonably request in order to effect the offering and sale of the
Registrable Securities to be offered and sold, but only while the Company shall
be required under the provisions hereof to cause the registration statement to
remain current; (iv) use its reasonable best efforts to register or qualify the
Registrable Securities covered by such registration statement under the
securities or blue sky laws of such states as Holder shall reasonably request,
maintain any such registration or qualification current until the earlier of the
sale of the Registrable Securities so registered or one hundred twenty (120)
days subsequent to the effective date of the registration statement, or, in the
case of a Shelf Registration, until the earlier of the sale of the Registrable
Securities so registered or nine (9) months subsequent to the effective date
6
<PAGE>
of such registration statement and, take any and all other actions either
necessary or reasonably advisable to enable Holders to consummate the public
sale or other disposition of the Registrable Securities in jurisdictions where
such Holders desire to effect such sales or other disposition; (v) cause all
Registrable Securities registered pursuant hereunder to be listed on each
securities exchange on which the same class of securities of the Company are
then listed; and (vi) take all such other actions either necessary or reasonably
desirable to permit the Registrable Securities held by a Holder to be registered
and disposed of in accordance with the method of disposition described herein,
including causing the Company's senior management to use their commercially
reasonable efforts in the marketing of any securities pursuant to any
underwritten public offering so registered. Notwithstanding the foregoing, the
Company shall not be required to register or to qualify an offering of the
Registrable Securities under the laws of a state if as a condition to so doing
the Company is required to qualify to do business or to file a general consent
to service of process in any such state or jurisdiction, unless the Company is
already subject to service in such jurisdiction.
Section 6
EXPENSES OF REGISTRATION
------------------------
Except with respect to the Demand Registrations and the S-3
Registrations set forth in Sections 3 and 4 hereof for which the Company shall
pay for only the first two Demand Registrations and the first two S-3
Registrations initiated pursuant to this Agreement, the Company shall pay all of
the fees and expenses incurred in connection with any registration statement
that is initiated pursuant to this Agreement, including, without limitation, all
SEC and blue sky registration and filing fees, printing expenses, transfer agent
and registrar fees, the fees and disbursements of the Company's outside counsel,
the reasonable fees and disbursements of one counsel to the Holders and
independent accountants (the "Registration Expenses"). If a registration
proceeding is begun upon the request of Holders pursuant to Section 3 or 4 but
such request is subsequently withdrawn, then the Holders of Registrable
Securities to have been registered may either: (i) bear all Registration
Expenses of such proceeding, pro rata on the basis of the number of shares to
have been registered, in which case the Company shall be deemed not to have
effected a registration pursuant to Section 3 or 4, as applicable, of this
Agreement; or (ii) require the Company to bear all Registration Expenses of such
proceeding, in which case the Company shall be deemed to have effected a
registration pursuant to Section 3 or 4, as applicable, of this Agreement.
Notwithstanding the foregoing, however, if at the time of the withdrawal, the
Holders have learned of a material adverse change in the condition, business or
prospects of the Company from that known to the Holders at the time of their
request, then the Holders shall be required to pay one-half (1/2) of any of said
Registration Expenses, unless the Company shall have failed to perform any of
its obligations with respect to such registration proceeding in which case the
holders shall bear none of the Registration Expenses. In such case, the Company
shall be deemed not to have effected a registration pursuant to Section 3 or 4,
as applicable, of this Agreement. The Holders shall pay all of the fees and
expenses incurred in connection with any Demand Registration or S-3 Registration
initiated pursuant to this Agreement after the filing of the first two Demand
Registrations and the first two S-3 Registrations. In addition, any
underwriting discounts, fees and disbursements of any additional counsel to the
Holders, selling commissions and stock transfer or other taxes applicable to the
Registrable Securities registered on behalf of Holders shall be borne by the
Holders of the Registrable Securities included in such registration.
7
<PAGE>
Section 7
INDEMNIFICATION
---------------
7.1 The Company. To the extent permitted by law, the Company will
-----------
indemnify Holders and each person controlling Holders within the meaning of
Section 15 of the Securities Act, and each underwriter if any, of the Company's
securities, with respect to any registration, qualification or compliance which
has been effected pursuant to this Agreement, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of any
rule or regulation promulgated under the Securities Act applicable to the
Company in connection with any such registration, qualification or compliance,
and the Company will reimburse Holders and each person controlling Holders, and
each underwriter, if any, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Company by such Holder or
controlling person or underwriter seeking indemnification expressly for use
therein; and provided further, that the indemnity provided in this Section 7.1
with respect to any losses, claims, damages, liabilities or actions, arising
from a sale of Registrable Securities pursuant to a registration hereunder,
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state a material fact in any preliminary or
final prospectus (or amendment or supplement thereto) of the Company shall not
inure to the benefit of or be available to the Holders or any other person if a
copy of the prospectus, as further amended or supplemented, in which such untrue
statement or alleged untrue statement or omission or alleged omission was
corrected is sent or given to those persons asserting such losses, claims,
damages, liabilities or actions within the time required by the Act and the
Rules and Regulations thereto.
7.2 Holders. To the extent permitted by law, each Holder will, if
-------
Registrable Securities held by such Holder are included in the securities as to
which such registration, qualification or compliance is being effected (the
"Indemnifying Holder"), indemnify the Company, each of its directors and
officers and each person who controls the Company within the meaning of Section
15 of the Securities Act, and each underwriter, if any, of the Company's
securities with respect to any registration, qualification or compliance which
has been effected pursuant to this Agreement, against all expenses, claims,
losses, damages and liabilities (or actions in respect thereof), arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any 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 any violation by
such Indemnifying Holder of any rule or regulation
8
<PAGE>
promulgated under the Securities Act applicable to such Indemnifying Holder in
connection with any such registration, qualification or compliance, and the
Indemnifying Holder will reimburse the Company, such directors and officers and
each person controlling Company and each underwriter, if any, for any legal or
any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action, in
each case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, in reliance upon and in conformity with written
information furnished to the Company by such Indemnifying Holder expressly for
use therein, provided that in no event shall any indemnity under this Section
7.2 exceed the gross proceeds of the offering received by such Indemnifying
Holder; and provided further, that the indemnity provided in this Section 7.2
with respect to any losses, claims, damages, liabilities or actions, arising
from a sale of Registrable Securities pursuant to a registration hereunder,
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state a material fact in any preliminary or
final prospectus (or amendment or supplement thereto) of the Company shall not
inure to the benefit of or be available to the Company or any other person if
the Holder corrected such untrue statement or alleged untrue statement or
omission or alleged omission and sent it to the Company for inclusion in the
prospectus within the time required by the Act and the Rules and Regulations
thereto.
7.3 Defense of Claims. Each party entitled to indemnification under
-----------------
this Section 7 (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying Party
-------- -------
shall pay such expense if representation of the Indemnified Party by counsel
retained by the Indemnifying Party would be inappropriate due to actual or
potential differing interests between the Indemnified Party and any other party
represented by such counsel in such proceeding, and provided further that the
-------- -------
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Section 7 unless
the failure to give such notice is materially prejudicial to an Indemnifying
Party's ability to defend such action. No Indemnifying Party, in the defense of
any such claim or litigation shall, except with the consent of each Indemnified
Party which consent shall not be unreasonably withheld, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation and
include a statement as to or an admission of fault, culpability or a failure to
act by or on behalf of any Indemnified Party. No Indemnifying Party shall be
required to indemnify any Indemnified Party with respect to any settlement
entered into without such Indemnifying Party's prior written consent.
Section 8
RULE 144 REPORTING
------------------
9
<PAGE>
With a view to making available the benefits of certain rules and
regulations of the SEC which may at any time permit the sale of the Registrable
Securities to the public without registration, the Company agrees to use its
reasonable best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times from
and after ninety (90) days following the effective date of the IPO;
(b) File with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements; and
(c) So long as a Holder owns any Registrable Securities, furnish to
such Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 (at any time from
and after ninety (90) days following the effective date of the IPO), and of the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements), a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents of the Company, and
such other reports and documents so filed as a Holder may reasonably request in
availing itself of any rule or regulation of the SEC allowing such Holder to
sell any such securities without registration.
Section 9
STANDOFF AGREEMENT
------------------
In connection with the Company's Initial Public Offering, if requested
by the Company and the managing underwriter, 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 for such period of time (not to exceed one-
hundred eighty (180) days) as may be requested by the Company and the managing
underwriter, provided that all officers, directors and other shareholders of the
Company enter into similar agreements. In order to enforce the foregoing, the
Company may impose stop-transfer instructions with respect to the Registrable
Securities of each Holder (and the share or securities of every other person
subject to the foregoing restrictions) until the end of such period.
Section 10
LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS
---------------------------------------------
From and after the date of this Agreement, the Company shall not,
without the prior written consent of Holder(s) of at least a majority of the
outstanding Registrable Securities (excluding Ron Higgins), enter into any
agreement with any holder or prospective holder of any securities of the Company
giving such holder or prospective holder any registration rights the terms of
which are pari passu or more favorable than the registration rights granted to
Holders hereunder or to require the Company to effect a registration earlier
than the date on which Holders can first require a registration under Section
3.1.
10
<PAGE>
Section 11
INFORMATION RIGHTS
------------------
11.1 Financial Information. The Company shall deliver the following
---------------------
reports or information indicated below to each Holder or any transferee of a
Holder who holds, together with Affiliates, at least 500,000 shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred or Registrable Securities (the "Requisite Minimum Shares"):
(a) Monthly Financial Statements. As soon as available, but in any
----------------------------
event not later than 30 days after the end of each month (other than the last
month of any fiscal year of the Company), the unaudited consolidated balance
sheet of the Company and its subsidiaries as at the end of each such month and
the related unaudited consolidated statements of income and cash flows of the
Company and its subsidiaries for such month and for the elapsed period in such
fiscal year, all in reasonable detail and stating in comparative form (i) the
figures as of the end of and for the comparable periods of the preceding fiscal
year and (ii) the figures reflected in the operating budget for such period as
specified in the financial plan of the Company delivered pursuant to
subparagraph (d) hereof. All such financial statements shall be certified by the
Company's Chief Financial Officer, shall be complete and correct in all material
respects, and shall be prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
reflected therein except as stated therein and subject to normal year-end
adjustments.
(b) Quarterly Financial Statements. As soon as available, but in any
------------------------------
event not later than 30 days after the end of each quarter (other than the last
quarter of any fiscal year of the Company), the unaudited consolidated balance
sheet of the Company and its subsidiaries as at the end of each such quarter and
the related unaudited consolidated statements of income and cash flows of the
Company and its subsidiaries for such quarter and for the elapsed period in such
fiscal year, all in reasonable detail and stating in comparative form (i) the
figures as of the end of and for the comparable periods of the preceding fiscal
year and (ii) the figures reflected in the operating budget for such period as
specified in the financial plan of the Company delivered pursuant to
subparagraph (c) hereof. All such financial statements shall be certified by the
Company's Chief Financial Officer, shall be complete and correct in all material
respects, and shall be prepared in accordance with GAAP applied on a consistent
basis throughout the periods reflected therein except as stated therein and
subject to normal year-end adjustments.
(c) Annual Financial Statements. As soon as available, but in any
---------------------------
event within 90 days after the end of each fiscal year of the Company, a copy of
the audited consolidated and consolidating balance sheet of the Company and its
subsidiaries as at the end of such fiscal year and the related audited
consolidated statements of operations, shareholders' equity and cash flows of
the Company and its subsidiaries for such fiscal year, all in reasonable detail
and stating in comparative form the figures as at the end of and for the
previous fiscal year, accompanied by an opinion of an accounting firm of
recognized national standing selected by the Company, which opinion shall state
that such accounting firm's audit was conducted in accordance
11
<PAGE>
with generally accepted auditing standards. All such financial statements shall
be complete and correct in all material respects and prepared in reasonable
detail and in accordance with GAAP applied on a consistent basis throughout the
periods reflected therein except as stated therein.
(d) Budgets and Other Information. As soon as available, but in any
-----------------------------
event not later than 30 days prior to the end of each fiscal year of the
Company, the draft financial plan of the Company for the next succeeding fiscal
year, and prior to the end of each fiscal year the final draft of such plan, in
each such case, including but not limited to a cash flow projection and
operating budget, calculated monthly, as contained in its operating plan
approved by the Company's Board of Directors as well as any updates or revisions
to such plan as soon as available. From time to time, such additional
information which is normally prepared by the Company regarding results of
operations, financial condition, business or prospects of the Company and its
subsidiaries, as a Holder holding the Requisite Minimum Shares may reasonably
request.
(e) Other Reports and Statements. Promptly (but in any event within
----------------------------
ten days) after any distribution to the Company's shareholders generally, to its
directors or to the financial community of an annual report, proxy statement or
other report or communication, a copy of each such report, proxy statement or
other report or communication and promptly (but in any event within ten days)
after any filing by the Company with the SEC or with any national securities
exchange or automated quotation system, of any publicly available annual or
periodic or special report or proxy statement or registration statement, a copy
of such report or statement and copies of all press releases and other
statements made available generally by the Company to the public concerning
material developments in the Company's business.
11.2 Inspection. The Company shall permit each Holder, at such
----------
Holder's expense, to visit and inspect the Company's properties, to examine its
books of account and records and to discuss the Company's affairs, finances and
accounts with its officers, with reasonable written notice to the Company and
all at such reasonable times as may be requested by such Holder; provided,
--------
however, that the Company shall not be obligated pursuant to this Section 11.2
- -------
to provide access to any information which it reasonably considers to be a trade
secret or similar confidential information. In addition, one representative from
each of JAFCO America Ventures, Inc., Partech International, E*Trade Group,
Inc., Arbor Investors, L.L.C., and KECALP Inc. (each an "Investor
Representative") shall be entitled to attend each meeting of the Company's Board
of Directors as an observer, shall be given timely notice of each meeting of the
Company's Board of Directors in the same manner and at the same time that
directors of the Company are given notice of such meeting and shall have their
reasonable out-of-pocket expenses incurred in attending such meetings reimbursed
to the same extent and in the same manner as such expenses are reimbursed for
the members of the Company's Board of Directors. Each Investor Representative
may be changed or replaced from time to time at the discretion of JAFCO America
Ventures, Inc., Partech International, E*Trade Group, Inc., Arbor Investors,
L.L.C., and KECALP Inc., with respect to each entity's appointed Investor
Representative by written notice to the Company.
11.3 Termination of Information and Inspection Covenants. The
---------------------------------------------------
covenants set forth in Sections 11.1 and 11.2 shall terminate as to each Holder
and be of no further force or effect immediately upon the earliest of (a) the
consummation of an IPO; (b) at such time as the
12
<PAGE>
Holder fails to own the Requisite Minimum Shares; or (c) when the Company first
becomes subject to the periodic reporting requirements of Section 12(g) and
15(d) of the Exchange Act.
11.4 Confidentiality. Each of the Holders agrees to keep
---------------
confidential and not to disclose to persons other than its employees,
professional consultants and advisors any information concerning the Company
which is confidential or proprietary ("Confidential Information"), except as
otherwise required by law or as deemed necessary by a Holder to be disclosed to
its own partners or Affiliates. No Confidential Information shall be used or
disclosed by a Holder for any purpose except in connection with the transactions
contemplated by the Purchase Agreement and the agreements executed and delivered
in connection with the Purchase Agreement and in the enforcement of its rights
thereunder. Each Holder shall use no less a level of care with the Confidential
Information than it uses with its own confidential information. Notwithstanding
the foregoing, the restrictions set forth in this Section 11.4 shall not be
applicable to any information that is publicly available through no fault of a
Holder, any information independently developed by a Holder or its professional
consultants, any information known to a Holder or its professional consultants
before the disclosure thereof by the Company, or any information disclosed to a
Holder by a person without any confidentiality duty to the Company. This
provision shall survive any termination of this Agreement.
Section 12
RIGHT OF FIRST REFUSAL
----------------------
The Company hereby grants to each Holder the right of first refusal to
purchase, pro rata, a portion of "New Securities" (as defined in this Section
12) that the Company may, from time to time, propose to sell and issue. Each
Holder's pro rata share, for purposes of this right of first refusal, is the
ratio of (X) the number of shares of Common Stock owned (or issuable upon the
conversion of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred held) by such Holder immediately after
the Closing (as defined in the Purchase Agreement) to (Y) the total number of
shares of Common Stock outstanding (or issuable upon the conversion of all
outstanding Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred) immediately after the Closing, provided,
however, that in the event that any Holder elects not to purchase its pro rata
share in accordance with the above (a "Non-Participating Holder"), then each
participating Holder purchasing New Securities may purchase, on a pro rata basis
among the participating Holders, such Non-Participating Holder's pro rata share.
This right of first refusal shall be subject to the following provisions:
(a) "New Securities" shall mean any Common Stock and Preferred
--------------
Stock of the Company whether or not authorized on the date hereof, and rights,
options or warrants to purchase such Common Stock or Preferred Stock, and
securities of any type whatsoever that are, or may become, convertible into said
Common Stock or Preferred Stock; provided, however, that "New Securities" does
not include the following:
(i) shares of Common Stock, or options to purchase shares of
Common Stock, issued or granted to directors, employees, vendors or consultants
of the Company pursuant to option plans or other employee benefit plans or
arrangements approved by
13
<PAGE>
a majority of the Board of Directors of the Company, including the Option Plan
(as that term is defined in Section 2.2(c) of the Purchase Agreement);
(ii) shares of Common Stock or other securities issuable upon
conversion of the Company's Preferred Stock;
(iii) securities of the Company offered to the public pursuant
to a bona fide public offering;
(iv) securities of the Company issued pursuant to an
acquisition of or by the Company whether by merger, consolidation or purchase or
sale of all or substantially all of the assets of the Company or another entity,
or other reorganization;
(v) shares of Common Stock or Preferred Stock issued in
connection with any stock split, stock dividend, or recapitalization by the
Company; or
(vi) securities of the Company that are purchased pursuant to
the rights provided in this Section 12.
(b) In the event that the Company proposes to undertake an issuance of
New Securities, it shall give each Holder written notice of its intention,
describing the type of New Securities, the price, and the general terms upon
which the Company proposes to issue the same. Each Holder shall have ten (10)
business days from the date such notice is given to agree to purchase its pro
rata share of such New Securities or any portion thereof at the price and upon
the general terms specified in the notice by giving written notice to the
Company and stating therein the quantity of New Securities to be purchased.
(c) In the event that the Holders' aggregate pro rata exercised portion
is less than the amount of New Securities proposed to be issued in the notice
referred to above, the Company shall have sixty (60) days thereafter to sell (or
enter into an agreement pursuant to which the sale of New Securities covered
thereby shall be closed, if at all, within thirty (30) days from the date of
such agreement) the New Securities respecting which the Holders' rights were not
exercised at a price and upon general terms no more favorable to the purchaser
thereof than specified in the Company's notice. In the event the Company has not
sold the New Securities within such sixty (60) day period (or sold and issued
New Securities in accordance with the foregoing within thirty (30) days from the
date of such agreement), the Company shall not thereafter issue or sell any New
Securities without first offering such New Securities to the Holders in the
manner provided above.
(d) The right of first refusal granted under this Agreement shall
terminate upon the first to occur of (i) the effective date of a merger of the
Company with or into another corporation in which fifty percent (50%) or more of
the voting power of the Company is disposed of, or the sale of all or
substantially all of the assets of the Company unless the Company's
shareholders, as of the date of this Agreement, control more than fifty percent
(50%) of the surviving entity; (ii) the closing date of an IPO; or (iii) the
liquidation or dissolution of the Company.
14
<PAGE>
Section 13
TERMINATION OF RIGHTS
---------------------
Unless otherwise specified herein, the rights and provisions of this
Agreement shall terminate as to all Holders on the seventh (7th) anniversary of
the date of the Company's seventh Initial Public Offering. The rights of any
individual Holder to receive notice and to participate in a registration
pursuant to the terms of Section 2 or Section 3 hereof or to request a
registration pursuant to the terms of Section 4 hereof shall terminate at such
time as such Holder (i) owns less than one percent (1%) of the outstanding Stock
of the Company and (ii) could sell all of the Registrable Securities held by
such Holder in any one three-month period pursuant to Rule 144 (including Rule
144(k)) under the Securities Act, and in any event, upon the second anniversary
of the IPO.
Section 14
MISCELLANEOUS
-------------
14.1 Assignment. Subject to compliance with the Purchase Agreement,
----------
the rights to cause the Company to register Registrable Securities, the
information rights provided in Section 11, and (upon the prior written consent
of the Company, not to be unreasonably withheld) the right of first refusal
provided in Section 12 granted to the Holders by the Company under this
Agreement may be transferred or assigned by the Holders to an Affiliate or may
be transferred or assigned by any Holder to a transferee which acquires at least
100,000 Shares of the Registrable Securities (including, for such purposes, the
Series A Preferred, the Series B Preferred, the Series C Preferred, the Series D
Preferred and the Series E Preferred) owned as of the date of this Agreement by
such Holder; provided that the Company is given written notice at the time of or
--------
within a reasonable time after said transfer or assignment, stating the name and
address of the transferee or assignee and identifying the securities with
respect to which such rights are being transferred or assigned, and, provided
--------
further, that the transferee or assignee of such rights assumes the obligations
- -------
of such Holder under this Agreement and agrees to be bound hereby pursuant to a
written instrument in form and substance reasonably satisfactory to the Company.
Subject to the preceding sentence, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. Any transferee or assignee shall thereafter be treated as a Holder
in all respects, subject to the limitations herein. Until the Company receives
actual notice of any transfer or assignment, it shall be entitled to rely on the
then existing list of Holders and the failure to notify the Company of any
transfer or assignment shall not affect the validity of a notice properly given
by the Company to the Holders pursuant to lists maintained by the Company.
14.2 Aggregation of Shares. All shares of Registrable Securities held
---------------------
or acquired by affiliated entities or persons, including without limitation,
Affiliates, shall be aggregated together for the purpose of determining the
availability of any rights under this Agreement.
14.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of California as applied to agreements entered into
solely between residents of and to be performed entirely within, such state.
15
<PAGE>
14.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
14.6 Notices. All notices, requests, demands and other communications
-------
under this Agreement or in connection herewith shall be given to or made upon
the Holder at the addresses set forth in the Company's records and, if to the
Company, at the address previously furnished by the Company to the Holders,
addressed to the attention of the President.
(a) All notices, requests, demands and other communications given or
made in accordance with the provisions of this Agreement shall be in writing,
and shall be sent by airmail, return receipt requested, or by facsimile with
confirmation of receipt, and shall be deemed to be given or made when receipt is
so confirmed.
(b) Any party may, by written notice to the other, alter its address or
respondent, and such notice shall be considered to have been given three (3)
days after the airmailing or faxing thereof.
14.7 Attorneys' Fees. If any action at law or in equity (including
---------------
arbitration) is necessary to enforce or interpret the terms of this Agreement,
the prevailing party shall be entitled to reasonable attorneys' fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
14.8 Amendments and Waivers. Any term of this Agreement may be amended
----------------------
or any right hereunder waived with the written consent of the Company and the
Holders of 66-2/3% of the outstanding Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred and Registrable
Securities. Any amendment or waiver effected in accordance with this Section
14.8 shall be binding upon the Holders and each transferee of the Registrable
Securities, each future holder of all such Registrable Securities and the
Company.
14.9 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, portions of such provisions, or
such provisions in their entirety, to the extent necessary, shall be severed
from this Agreement, and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
14.10 Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to any party to this Agreement, upon any breach
or default of the other party, shall impair any such right, power or remedy of
such non-breaching party nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions
16
<PAGE>
or conditions of this Agreement, must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement, or by law or otherwise afforded to any Holder, shall be
cumulative and not alternative.
14.11 Entire Agreement; Superseding Effect. This Agreement and the
------------------------------------
documents referred to herein constitute the entire agreement between the parties
hereto pertaining to the subject matter hereof and any other written or oral
agreements between the parties hereto pertaining thereto are expressly canceled.
This Agreement amends and restates the Existing Rights Agreement in its
entirety, and the Existing Rights Agreement shall be deemed terminated upon the
execution of this Agreement by the Company and the Holders of a majority of the
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred (and Common Stock issuable upon conversion thereof) party thereto.
17
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amended and Restated
Investors' Rights Agreement to be executed as of the date first written above.
"Company" "Holders"
DIGITAL ISLAND, INC.
------------------------
By: By:
------------------------ ---------------------
Name: Name:
----------------------- --------------------
Title: Title:
---------------------- -------------------
**AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT**
<PAGE>
EXHIBIT 10.4
DIGITAL ISLAND, INC.
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered
into this ___ day of _____, 1999, between Digital Island, Inc., a Delaware
corporation (the "Company"), and _________________ ("Indemnitee").
WHEREAS, Indemnitee, a member of the Board of Directors or an officer,
employee or agent of the Company, performs a valuable service in such capacity
for the Company;
WHEREAS, the stockholders of the Company have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors,
employees and agents of the Company to the maximum extent authorized by Section
145 of the Delaware General Corporation Law, as amended (the "Code");
WHEREAS, the Bylaws and the Code, by their non-exclusive nature,
permit contracts between the Company and the members of its Board of Directors,
officers, employees or agents with respect to indemnification of such directors,
officers, employees or agents;
WHEREAS, in accordance with the authorization as provided by the Code,
the Company either has purchased and presently maintains or intends to purchase
and maintain a policy or policies of Directors and Officers Liability Insurance
("D & O Insurance") covering certain liabilities which may be incurred by its
directors and officers in the performance of their duties as directors and
officers of the Company;
WHEREAS, as a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors or officers,
employees or agents by such D & O Insurance and by statutory and bylaw
indemnification provisions; and
WHEREAS, in order to induce Indemnitee to continue to serve as a
member of the Board of Directors, officer, employee or agent of the Company, the
Company has determined and agreed to enter into this contract with Indemnitee.
NOW, THEREFORE, in consideration of Indemnitee's continued service as
a director, officer, employee or agent after the date hereof, and for other good
and valid consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
<PAGE>
1. Indemnification of Indemnitee. The Company hereby agrees to hold
-----------------------------
harmless and indemnify Indemnitee to the fullest extent authorized or permitted
by the provisions of the Code, as may be amended from time to time.
2. Additional Indemnity. Subject only to the exclusions set forth in
--------------------
Sections 3 and 6(c) hereof, the Company hereby further agrees to hold harmless
and indemnify Indemnitee:
(a) against any and all expenses (including attorneys' fees),
witness fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of the Company) to which
Indemnitee is, was or at any time becomes a party, or is threatened to be made a
party, by reason of the fact that Indemnitee is, was or at any time becomes a
director, officer, employee or agent of the Company or any subsidiary of the
Company, or is or was serving or at any time serves at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise;
and
(b) otherwise to the fullest extent as may be provided to
Indemnitee by the Company under the non-exclusivity provisions of Article VII,
Section 6 of the Bylaws of the Company and the Code.
3. Limitations on Additional Indemnity.
-----------------------------------
(a) No indemnity pursuant to Section 2 hereof shall be paid by the
Company:
i) in respect to remuneration paid to Indemnitee if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
ii) on account of any suit in which judgment is rendered
against Indemnitee for an accounting of profits made from the purchase or sale
by Indemnitee of securities of the Company pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;
iii) on account of Indemnitee's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest or to
constitute willful misconduct;
iv) on account of Indemnitee's conduct which is the subject of
an action, suit or proceeding described in Section 6(c)(ii) hereof;
2
<PAGE>
v) on account of any action, claim or proceeding (other than a
proceeding referred to in Section 7(b) hereof) initiated by the Indemnitee
unless such action, claim or proceeding was authorized in the specific case by
action of the Board of Directors;
vi) if a final decision by a Court having jurisdiction in the
matter shall determine that such indemnification is not lawful (and, in this
respect, both the Company and Indemnitee have been advised that the Securities
and Exchange Commission believes that indemnification for liabilities arising
under the federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication); and
vii) except to the extent the aggregate of losses to be
indemnified thereunder exceeds the sum of (a) such losses for which the
Indemnitee is indemnified pursuant to Section 1 hereof and (b) any additional
amount paid to the Indemnitee pursuant to any D & O Insurance purchased and
maintained by the Company.
(b) No indemnity pursuant to Section 1 or 2 hereof shall be paid
by the Company if the action, suit or proceeding with respect to which a claim
for indemnity hereunder is made arose from or is based upon any of the
following:
i) Any solicitation of proxies by Indemnitee, or by a group of
which he was or became a member consisting of two or more persons that had
agreed (whether formally or informally and whether or not in writing) to act
together for the purpose of soliciting proxies, in opposition to any
solicitation of proxies approved by the Board of Directors.
ii) Any activities by Indemnitee that constitute a breach of or
default under any agreement between Indemnitee and the Company.
4. Contribution. If the indemnification provided in Sections 1 and 2
------------
hereof is unavailable by reason of a Court decision described in Section
3(a)(vi) hereof based on grounds other than any of those set forth in paragraphs
(i) through (v) of Section 3 (a) hereof, then in respect of any threatened,
pending or completed action, suit or proceeding in which the Company is jointly
liable with Indemnitee (or would be if joined in such action, suit or
proceeding), the Company shall contribute to the amount of expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred and paid or payable by Indemnitee in such proportion as is
appropriate to reflect (i) the relative benefits received by the Company on the
one hand and Indemnitee on the other hand from the transaction from which such
action, suit or proceeding arose, and (ii) the relative fault of the Company on
the one hand and of Indemnitee on the other in connection with the events which
resulted in such expenses, judgments, fines or settlement amounts, as well as
any other relevant equitable considerations. The relative fault of the Company
on the one hand and of Indemnitee on the other shall be determined by reference
to, among other things, the parties' relative intent, knowledge, access to
information and opportunity to correct
3
<PAGE>
or prevent the circumstances resulting in such expenses, judgments, fines or
settlement amounts. The Company agrees that it would not be just and equitable
if contribution pursuant to this Section 4 were determined by pro rata
allocation or any other method of allocation which does not take account of the
foregoing equitable considerations.
5. Notification and Defense of Claim. Not later than thirty (30)
---------------------------------
days after receipt by Indemnitee of notice of the commencement of any action,
suit or proceeding, Indemnitee shall, if a claim in respect thereof is to be
made against the Company under this Agreement, notify the Company of the
commencement thereof; but Indemnitee's omission so to notify the Company will
not relieve the Company from any liability which it may have to Indemnitee
otherwise than under this Agreement. With respect to any such action, suit or
proceeding as to which Indemnitee notifies the Company of the commencement
thereof:
(a) The Company will be entitled to participate therein at its own
expense.
(b) Except as otherwise provided below, to the extent that it may
wish, the Company shall, jointly with any other indemnifying party similarly
notified, be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Indemnitee. After notice from the Company to Indemnitee of its
election to assume the defense thereof, the Company will not be liable to
Indemnitee under this Agreement for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof, other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ its own counsel in such action, suit or
proceeding, but the fees and expenses of such counsel incurred after notice from
the Company of the Company's assumption of the defense thereof shall be at the
expense of Indemnitee unless (i) the employment of counsel by Indemnitee has
been authorized by the Company; (ii) Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Company and Indemnitee in
the conduct of the defense of such action; or (iii) the Company shall not in
fact have employed counsel to assume the defense of such action; in each of
which cases the fees and expenses of Indemnitee's separate counsel shall be paid
by the Company. The Company shall not be entitled to assume the defense of any
action, suit or proceeding brought by or on behalf of the Company or as to which
Indemnitee shall have made the conclusion provided for in (ii) above.
(c) The Company shall not be liable to indemnify Indemnitee under
this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall be permitted to settle
any action except that it shall not settle any action or claim in any manner
which would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent. Neither the Company nor Indemnitee will unreasonably withhold
its consent to any proposed settlement.
4
<PAGE>
6. Advancement and Repayment of Expenses.
-------------------------------------
(a) In the event that Indemnitee employs his or her own counsel
pursuant to Sections 5(b)(i) through (iii) above, the Company shall advance to
Indemnitee, prior to any final disposition of any threatened or pending action,
suit or proceeding, whether civil, criminal, administrative or investigative,
any and all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding within ten (10)
days after receiving from Indemnitee copies of invoices presented to Indemnitee
for such expenses.
(b) Indemnitee agrees that Indemnitee will reimburse the Company
for all reasonable expenses paid by the Company in investigating or defending
any civil or criminal action, suit or proceeding against Indemnitee in the event
and only to the extent it shall be ultimately determined by a final judicial
decision (from which there is no right of appeal) that Indemnitee is not
entitled, under the provisions of the Code, the Bylaws, this Agreement or
otherwise, to be indemnified by the Company for such expenses.
(c) Notwithstanding the foregoing, the Company shall not be
required to advance such expenses to Indemnitee in respect of any action arising
from or based upon any of the matters set forth in subsection (b) of Section 3
or if Indemnitee (i) commences any action, suit or proceeding as a plaintiff
unless such advance is specifically approved by a majority of the Board of
Directors or (ii) is a party to an action, suit or proceeding brought by the
Company and approved by a majority of the Board which alleges willful
misappropriation of corporate assets by Indemnitee, disclosure of confidential
information in violation of Indemnitee's fiduciary or contractual obligations to
the Company, or any other willful and deliberate breach in bad faith of
Indemnitee's duty to the Company or its shareholders.
7. Enforcement.
-----------
(a) The Company expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on the Company hereby in
order to induce Indemnitee to continue as a director, officer, employee or other
agent of the Company, and acknowledges that Indemnitee is relying upon this
Agreement in continuing in such capacity.
(b) In the event Indemnitee is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is successful
in such action, the Company shall reimburse Indemnitee for all Indemnitee's
reasonable fees and expenses, including attorney's fees, in bringing and
pursuing such action.
8. Subrogation. In the event of payment under this agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be
5
<PAGE>
necessary to secure such rights and to enable the Company effectively to bring
suit to enforce such rights.
9. Continuation of Obligations. All agreements and obligations of
---------------------------
the Company contained herein shall commence upon the date that Indemnitee first
became a member of the Board of Directors or an officer, employee or agent of
the Company, as the case may be, and shall continue during the period Indemnitee
is a director, officer, employee or agent of the Company (or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise) and shall continue thereafter so long as Indemnitee shall be
subject to any possible claim or threatened, pending or completed action, suit
or proceeding, whether civil, criminal or investigative, by reason of the fact
that Indemnitee was a director, officer, employee or agent of the Company or
serving in any other capacity referred to herein.
10. Survival of Rights. The rights conferred on Indemnitee by this
------------------
Agreement shall continue after Indemnitee has ceased to be a director, officer,
employee or other agent of the Company and shall inure to the benefit of
Indemnitee's heirs, executors and administrators.
11. Non-Exclusivity of Rights. The rights conferred on Indemnitee by
-------------------------
this Agreement shall not be exclusive of any other right which Indemnitee may
have or hereafter acquire under any statute, provision of the Company's
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office; provided, however, that this
Agreement shall supersede and replace any prior indemnification agreements
entered into by and between the Company and Indemnitee and that any such prior
indemnification agreement shall be terminated upon the execution of this
Agreement.
12. Separability. Each of the provisions of this Agreement is a
------------
separate and distinct agreement and independent of the others, so that if any or
all of the provisions hereof shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of the Company
to indemnify the Indemnitee to the full extent provided by the Bylaws or the
Code.
13. Governing Law. This Agreement shall be interpreted and enforced
-------------
in accordance with the laws of the State of Delaware.
14. Binding Effect. This Agreement shall be binding upon Indemnitee
--------------
and upon the Company, its successors and assigns, and shall inure to the benefit
of Indemnitee, his or her heirs, personal representatives and assigns and to the
benefit of the Company, its successors and assigns.
6
<PAGE>
15. Amendment and Termination. No amendment, modification,
-------------------------
termination or cancellation of this Agreement shall be effective unless it is in
writing and is signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
DIGITAL ISLAND, INC.
a Delaware corporation
By: ________________________
T.L. Thompson, Secretary
INDEMNITEE
By: ________________________
Name: ______________________
Address: ___________________
___________________
___________________
7
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT made as of the 20th day of May, 1998 by and
between DIGITAL ISLAND, a California corporation (the "Corporation"), and Ruann
Ernst ("Executive").
WHEREAS, the Corporation and Executive wish to enter into a formal
employment contract which will govern the terms and conditions applicable to
Executive's employment with the Corporation and will provide certain severance
benefits for Executive in the event her employment should be involuntarily
terminated.
NOW, THEREFORE, the parties hereto agree as follows:
PART ONE-- TERMS AND CONDITIONS OF EMPLOYMENT
1. DUTIES AND RESPONSIBILITIES.
---------------------------
A. Executive shall serve as the Chief Executive Officer of the
Corporation and shall in such capacity report directly to the Corporation's
Board of Directors (the "Board"). As Chief Executive Officer, Executive shall
have primary responsibility for the formulation, implementation and execution of
strategic policies relating to the Corporation's business operations, financial
objectives and market growth and shall accordingly have overall responsibility
for the formulation of the business plan for each fiscal year to be submitted
for Board approval. Executive shall be appointed to the Board of the Directors
(the "Board") at the time she commences service as President and Chief Executive
Officer, and her membership on the Board shall continue during the period of
this Agreement while the Corporation remains privately held. Once the
Corporation is publicly held, the Corporation shall use its best efforts to
maintain Executive on the Board throughout the remainder of her period of
employment with the Corporation as Chief Executive Officer by taking all action
necessary to nominate Executive for election to the Board at each shareholders
meeting held during her period of service as Chief Executive Officer at which
Board members are to be elected.
B. Executive hereby agrees to remain in such executive capacity
during the employment period specified in Paragraph 2 and to perform in good
faith and to the best of her ability all services which may be required of
Executive hereunder and to be available to render services at all reasonable
times and places in accordance with such reasonable directions and requests made
by the Corporation acting by majority vote of the Board.
C. Executive shall, during the term hereof, devote her full time,
ability, energy and skill to the performance of her duties and responsibilities
hereunder. Executive shall be based at the Corporation's principal offices in
the San Francisco/Bay Area, California, but Executive shall be required to
travel to other geographic locations in connection with the performance of her
executive duties hereunder.
<PAGE>
2. PERIOD OF EMPLOYMENT. Executive's employment with the Corporation
---------------------
shall be governed by the provisions of this Agreement for the period commencing
June 1, 1998 and continuing until this Agreement is terminated in accordance
with the provisions of Paragraph 10. The period during which Executive's
employment continues in effect shall be hereafter referred to as the "Employment
Period."
3. CASH COMPENSATION.
-----------------
A. Executive shall be paid a base salary at the annual rate of not
less than One Hundred Fifty Thousand Dollars ($150,000.00). Such rate shall be
subject to annual review by the Board and may be increased at the Board's
discretion. Base salary shall be paid at periodic intervals in accordance with
the Corporation's payroll practices for salaried employees.
B. For each fiscal year of the Corporation during the Employment
Period, beginning with the 1999 fiscal year commencing October 1, 1998,
Executive shall be entitled to incentive compensation in an amount not less than
forty percent (40%) of her base salary which is to become payable upon the
Corporation's achievement of the financial objectives and performance milestones
mutually agreed upon by the Board and Executive for each such year. For the
period June 1, 1998 to September 30, 1998, the target bonus shall be Twenty
Thousand Dollars ($20,000.00) to become payable upon the Corporation's
achievement of the financial milestones mutually agreed upon by the Board and
Executive.
C. The Corporation shall deduct and withhold from the compensation
payable to Executive hereunder any and all applicable Federal, State and local
income and employment withholding taxes and any other amounts required to be
deducted or withheld by the Corporation under applicable statutes, regulations,
ordinances or orders governing or requiring the withholding or deduction of
amounts otherwise payable as compensation or wages to employees.
4. EQUITY COMPENSATION
-------------------
A. Effective immediately upon Executive' s commencement of employment
on or before June 1, 1999, Executive shall be granted two separate stock options
to acquire shares of the Corporation's common stock (the "Common Stock"). The
first option will cover 635,327 shares of Common Stock (representing four
percent (4%) of the Corporation's currently outstanding equity securities on a
fully-diluted basis), and the second option will cover 158,832 shares of Common
Stock (representing an additional one percent (1%) of the Corporation's
currently outstanding equity securities on a fully-diluted basis). Each option
will have an exercise price per share of $1.50, the current fair market value
per share of Common Stock as determined by the Board.
2.
<PAGE>
B. The first option will be an incentive stock option for 333,333 shares
and a non-statutory option for the balance of the shares. The second option will
be a non-statutory option for all 158,832 shares. Each option will have a term
of ten (10) years, subject to earlier termination upon Executive's termination
of employment with the Corporation.
C. The incentive stock option will be immediately exercisable for 66,666
shares and will become exercisable for the remaining shares in a series of four
(4) successive equal annual installments on the first trading day in January in
each of the 1999 through 2002 calendar years. Each of the non-statutory options
will be immediately exercisable for all the option shares. All shares purchased
under the incentive stock and non-statutory options and unvested at the time of
Executive's termination of employment with the Corporation will be subject to
repurchase by the Corporation at the exercise price paid per share. Executive
shall vest in the shares subject to the four percent (4%) option (both the
incentive stock option and non-statutory stock option components) in a series of
fifty (50) successive equal monthly installments upon her completion of each of
her first fifty (50) months of employment with the Corporation. Executive shall
vest in the shares subject to the one percent (1%) option in a series of fifty
(50) successive equal monthly installments upon her completion of each month of
employment over the fifty (50)-month period beginning one year after the grant
date of such option. Except as otherwise provided in Paragraphs 4.D and 11, no
additional shares will vest after Executive's termination of employment with the
Corporation.
D. In the event of a Change in Control, all of the shares subject to
your two stock options will immediately vest, unless the acquiring entity
assumes those options. Should those options be assumed, then the shares subject
to those options will vest on accelerated basis in accordance with the following
terms:
- Should there occur an Involuntary Termination of
Executive's employment with the Corporation (or the successor
entity) within eighteen (18) months after the effective date of
the Change in Control, then all the option shares shall
immediately vest at that time.
- Should Executive voluntarily resign from employment
(other than in connection with an event which constitutes grounds
for an Involuntary Termination) within six (6) months after the
effective date of the Change in Control, then Executive shall
immediately vest in the lesser of (i) fifty percent (50%) of the
------
total number of shares for which the two options were granted or
(ii) the total number of unvested shares at the time subject to
the two options.
D. For purposes of this Agreement, the following definitions shall be
in effect'
CHANGE IN CONTROL shall mean any of the following transactions
-----------------
effecting a change in ownership or control of the Corporation:
3.
<PAGE>
(i) a merger, consolidation or reorganization
approved by the Corporation's stockholders, unless securities
------
representing more than fifty percent (50%) of the total combined
voting power of the voting securities of the successor
corporation are immediately thereafter beneficially owned,
directly or indirectly and in substantially the same proportion,
by the persons who beneficially owned the Corporation's
outstanding voting securities immediately prior to such
transaction, or
(ii) any stockholder-approved transfer or other
disposition of all or substantially all of the Corporation's
assets, or
(iii) 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.
In no event, however, shall a Change in Control be deemed to occur in
connection with any public offering of the Common Stock.
INVOLUNTARY TERMINATION shall mean (i) the involuntary termination of
-----------------------
Executive's employment with the Corporation other than a termination for Cause
or (ii) Executive's voluntary resignation within ninety (90) days following (A)
a material reduction in the scope of her duties and responsibilities or the
level of management to which she reports, (B) a reduction in her level of base
salary or (C) a relocation of her principal place of employment by more than
fifty (50) miles. Involuntary Termination shall not include the termination of
Executive's employment by reason of death or Disability.
CAUSE shall have the meaning assigned to such term in Paragraph 10.C
-----
of this Agreement.
5. EXPENSE REIMBURSEMENT. In addition to the compensation specified
----------------------
in Paragraph 3, Executive shall be entitled, in accordance with the
reimbursement policies in effect from time to time, to receive reimbursement
from the Corporation for all business expenses incurred by Executive in the
performance of her duties hereunder, provided Executive furnishes the
---------
Corporation with vouchers, receipts and other details of such. expenses in the
form required by the Corporation sufficient to substantiate a deduction for such
business expenses under all applicable roles and regulations of federal and
state taxing authorities.
4.
<PAGE>
D. FRINGE BENEFITS.
---------------
A. Executive shall, throughout the Employment Period, be eligible to
participate in all group term life insurance plans, group health plans,
accidental death and dismemberment plans and short-term disability programs and
other executive perquisites which are made available to the Corporation's
executives and for which Executive qualifies.
B. Executive shall accrue paid vacation benefits during the
Employment Period at the rate of one (1) week per calendar quarter and may take
her accrued vacation at such times as are mutually convenient to Executive and
the Corporation.
6. DEATH OR DISABILITY. Upon Executive's death or Disability during
-------------------
the Employment Period, the employment relationship created pursuant to this
Agreement shall immediately terminate, and no further compensation shall become
payable to Executive pursuant to Paragraph 3. In connection with such
termination, the Corporation shall only be required to pay Executive or her
estate (i) any unpaid base salary earned under Paragraph 3 for services rendered
through the date of her death or Disability, (ii) the dollar value of all
accrued and unused vacation benefits based upon Executive's most recent level of
base salary and (iii) any incentive compensation which becomes due and payable
for the calendar year of the Executive's death or Disability, pro-rated in
amount on the basis of the portion of that year completed prior to Executive's
death or Disability. No additional shares purchased or purchasable under the
stock options granted to Executive pursuant to Paragraph 4 shall vest following
the termination of the employment relationship by reason of Executive's death or
Disability. However, should Executive die within the first six (6) months of the
Employment Period after having purchased at least One Hundred Thousand (100,000)
shares of Common Stock pursuant to her stock options under Paragraph 4, then a
portion of those shares shall immediately vest upon her death. The portion which
shall so vest shall be equal to One Hundred Thousand (100,000) shares less
Twelve Thousand Seven Hundred and Eight (12,708) shares for each full calendar
month of employment completed by Executive during the Employment Period.
For purposes of this Paragraph 6, Disability shall mean the
Executive's inability, by reason of any physical or mental injury or illness, to
substantially perform the services required of her hereunder for a period in
excess of one hundred eighty (180) consecutive days. In such event, Executive
shall be deemed to have terminated employment by reason of Disability on the
last day of such one hundred eighty (180)-day period.
7. RESTRICTIVE COVENANTS. During the Employment Period'
---------------------
(i) Executive shall devote Executive's full time
and energy solely and exclusively to the performance of
Executive's duties described herein, except during periods of
illness or vacation periods.
5.
<PAGE>
(ii) Executive shall not directly or indirectly
provide services to or through any person, firm or other entity
except the Corporation, unless otherwise authorized by the Board
in writing. However, Executive may continue to serve during the
Employment Period as a non-employee member of the board of
directors of any companies for which she so serves on the
effective date of this Agreement and may join the board of
directors of other companies in the future with the Board's
consent.
(iii) Executive shall not render any services of
any kind or character for Executive's own account or for any
other person, firm or entity without first obtaining the
Corporation's written consent.
However, Executive shall have the right to perform such incidental
services as are necessary in connection with (a) Executive's private passive
investments, but only if Executive is not obligated or required to (and shall
not in fact) devote any managerial efforts which interfere with the services
required to be performed by her hereunder, or (b) Executive's charitable or
community activities, or participation in trade or professional organizations,
but only if such incidental services do not interfere with the performance of
Executive's services hereunder.
8. NON-COMPETITION. During any period for which Executive is
----------------
receiving payments from the Corporation, either pursuant to Paragraph 3 of this
Part One or Paragraph 11 of Part Two of this Agreement, Executive shall not
directly or indirectly:
(i) own, manage, operate, join, control or
participate in the ownership, management, operation or control
of, or be employed by or connected in any manner with, any
enterprise which is engaged in any business competitive with or
similar to that of the Corporation; provided, however, that such
--------
restriction shall not apply to any passive investment
representing an interest of less than two percent (2%) of an
outstanding class of publicly-traded securities of any
corporation or other enterprise which is not, at the time of such
investment, engaged in a business competitive with the
Corporation's business; or
(ii) encourage or solicit any of the
Corporation's employees to leave the Corporation's employ for any
reason or interfere in any other manner with employment
relationships at the time existing between the Corporation and
its employees; or
(iii) solicit any client of the Corporation,
induce any ofthe Corporation's clients to terminate its existing
business relationship with the Corporation or interfere in any
other manner with any existing business relationship between the
Corporation and any client or other third party.
6.
<PAGE>
Executive hereby acknowledges that monetary damages may not be
sufficient to compensate the Corporation for any economic loss which may be
incurred by reason of her breach of the foregoing restrictive covenants.
Accordingly, in the event of any such breach, the Corporation shall, in addition
to the termination of this Agreement and any remedies available to the
Corporation at law, be entitled to obtain equitable relief in the form of an
injunction precluding Executive from continuing such breach.
9. PROPRIETARY INFORMATION.
-----------------------
A. Executive hereby acknowledges that the Corporation may, from time
to time during the Employment Period, disclose to Executive confidential
information pertaining to the Corporation's business and affairs, technology,
research and development projects and client base, including (without
limitation) financial information concerning clients and prospective business
opportunities. All information and data, whether or not in writing, of a private
or confidential nature concerning the business, technology or financial affairs
of the Corporation and its clients (collectively, "Proprietary Information") is
and shall remain the sole and exclusive property of the Corporation. By way of
illustration, but not limitation, Proprietary Information shall include all
trade secrets, research and development projects, financial records, business
plans, personnel data, computer programs and client lists and accounts relating
to the business operations, technology or financial affairs of the Corporation,
other similar items indicating the source of the Corporation's revenue, all
information pertaining to the salaries, duties and performance ratings of the
Corporation's employees and all financial information relating to the
Corporation's clients and their proposed or contemplated business transactions.
B. Executive shall not, at any time during or after such Employment
Period, disclose to any third party or directly or indirectly make use of any
such Proprietary Information, other than in connection with the Corporation's
business and affairs.
C. All files, letters, memoranda, reports, records, data or other
written, reproduced or other tangible manifestations of the Proprietary
Information, whether created by Executive or others, to which the Executive has
access during the Employment Period shall be used by Executive only in the
performance of her duties hereunder. All such materials (whether written,
printed or otherwise reproduced or recorded) shall be returned by Executive to
the Corporation immediately upon the termination of the Employment Period or
upon any earlier request by the Corporation, without Executive retaining any
copies, notes or excerpts thereof.
D. Executive's obligation not to disclose or use Proprietary
Information shall also extend to any and all information, records, trade
secrets, data and other tangible property of the Corporation clients or any
other third parties who may .have disclosed or entrusted the same to the
Corporation or Executive in connection with the Corporation's business
operations.
7.
<PAGE>
E. Executive's obligations under this Paragraph 9 shall continue in
effect after the termination of her employment with the Corporation, whatever
the reason or reasons for such termination, and the Corporation shall have the
right to communicate with any future or prospective employer of Executive
concerning Executive's continuing obligations under this Paragraph 9.
10. TERMINATION OF EMPLOYMENT.
-------------------------
A. The Corporation, acting by majority vote of the Board, may
terminate Executive's employment under this Agreement at any time for any
reason, with or without cause, by giving at least sixty (60) days prior written
notice of such termination to the Executive. However, such sixty (60)-day notice
requirement shall not apply to the termination of Executive's employment for
Cause under Paragraph C below. If such termination notice is given to Executive,
the Corporation may, if it so desires, immediately relieve Executive of some or
all of her duties.
B. Executive may terminate her employment under this Agreement at
anytime by giving the Corporation at least sixty (60) days prior written notice
of such termination.
C. The Corporation, acting by majority vote of the Board, may at any
time, upon written notice, terminate the Executive's employment with the
Corporation hereunder for Cause. Such termination shall be effective Immediately
upon such notice. For purposes of this Agreement, termination for Cause shall
mean the termination of the Executive's employment for any of the following
reasons: (i) Executive's conviction of a felony or her embezzlement of the
Corporation's funds, (ii) a material breach by Executive of one or more of her
obligations under Paragraph 7, 8 or 9 of this Agreement, (iii) any intentional
misconduct by Executive which has a materially adverse effect upon the
Corporation's business or reputation, (iv) Executive's material dereliction of
the major duties, functions and responsibilities of her executive position after
written warning from the Corporation or (v) a material breach by Executive of
any of Executive's fiduciary obligations as an officer of the Corporation.
However, prior to any termination of Executive's employment for a Cause event
defined in clauses (ii) through (v), the Corporation shall give written notice
to Executive of the actions or omissions deemed to constitute the Cause event,
and Executive shall have a period of thirty (30) days in which to cure the
specified default in her performance.
D. Upon the termination of Executive's employment for any reason
during the Employment Period, Executive shall be paid all salary and unused
vacation earned through the date of such termination. The following provisions
shall govern the treatment of Executive's outstanding stock options and unvested
shares upon her termination of employment:
8.
<PAGE>
- If Executive' s employment is terminated for Cause
or should Executive voluntarily resign from employment (other
than in connection with an event which constitutes grounds for an
Involuntary Termination), then all vesting in Executive's
outstanding stock options and unvested shares shall cease at the
time of such termination.
- If there is an Involuntarily Termination of
Executive's employment, then the provisions of Paragraph 12 of
this Agreement shall be controlling.
- Executive shall not have more than a three (3)-month
period (twelve (12)-months in the event of death or disability)
following the termination of her employment for any reason in
which to exercise any outstanding options for the Corporation's
common stock which are vested and exercisable at the time of such
termination of employment.
PART TWO -- SEVERANCE BENEFITS
11. BENEFIT ENTITLEMENT. Executive shall be entitled to receive
--------------------
the severance benefits specified in Paragraph 12 in the event of an
Involuntarily Termination (as such term is defined in Paragraph 4.D) during the
Employment Period. Under no circumstances shall any severance benefits be
payable pursuant to this Part Two if Executive's employment is terminated for
Cause (as such term is defined in Paragraph 10.C).
12. NATURE OF SEVERANCE BENEFITS. The severance benefits payable
-----------------------------
to Executive under this Part Two shall consist of the following:
(a) Salary Continuation. Executive shall receive salary
--------------------
continuation payments, at the monthly rate of base salary in effect for her
under Paragraph 3 at the time of her Involuntary Termination, for a period of
six (6) months. Such salary continuation payments shall be made at semi-monthly
intervals on the 15th and last day of each calendar month and shall be subject
to all applicable withholding requirements as set forth in Paragraph 3.D.
(b) Incentive Compensation. Executive shall be entitled to fifty
-----------------------
percent (50%) of the dollar amount of any incentive compensation which would
have actually become payable to her on the basis of the Corporation's financial
performance for the fiscal year in which such Involuntary Termination occurs,
had she continued in employ through the end of that fiscal year. Payment shall
be made within ninety (90) days after the close of such fiscal year.
(c) Health Care Coverage. Continued health care coverage under
---------------------
the Corporation's medical plan shall be provided, without charge, to Executive
and her eligible dependents upon her election to receive such continued health
care coverage under Internal Revenue Code Section 4980B ("COBRA"). Such
Corporation-paid coverage shall continue until
9.
<PAGE>
the earlier of (i) the expiration of the six (6)-month period measured from the
--------
effective date of her Involuntary Termination or (ii) the first date on which
Executive is covered under another employer's health benefit program without
exclusion for any pre-existing medical condition. Any additional health care
coverage to which Executive and her dependents may be entitled under COBRA
following the period of such Corporation-paid coverage shall be at Executive's
sole cost and expense.
(d) Partial Option Acceleration. The vesting schedules in
----------------------------
effect under Paragraph 4.C for the shares of Common Stock purchased or
purchasable under the stock options granted to Executive under Paragraph 4 will
be accelerated by six (6) months. Executive shall have until the earlier of (i)
-------
the expiration of the option term or (ii) the end of the three (3)-month period
following the date of such Involuntary Termination in which to exercise her
options for any or all of those vested option shares.
The benefits provided Executive under Paragraph 10 or Paragraph 11
are the only severance benefits to which Executive is entitled upon the
termination of her employment with the Corporation, and no other benefits shall
be provided to Executive by the Corporation pursuant to any other severance plan
or program of the Corporation.
13. CESSATION OF SEVERANCE BENEFITS. In the event Executive breaches
-------------------------------
any of her obligations under Paragraph 7, 8 or 9 of this Agreement, no further
severance benefits under this Part Two shall become due and payable to her
14. DEATH. Should Executive die before she receives the full amount
-------
of salary continuation payments to which she may become entitled under Part Two
of this Agreement, then the balance of such payments shall be made, on the due
dates hereunder had Executive survived, to the executors or administrators of
her estate.
PART THREE - MISCELLANEOUS PROVISIONS
15. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
----------------------
inure to the benefit of, and shall be binding upon, the Corporation, its
successors and assigns, and the Executive, the personal representative of her
estate and her heirs and legatees.
16. GENERAL CREDITOR STATUS. The benefits to which Executive may
-----------------------
become entitled under Part Two of this Agreement shall be paid, when due, from
the Corporation's general assets, and no trust fund, escrow arrangement or other
segregated account shall be established as a funding vehicle for such payments.
Accordingly, Executive's right (or the right of the executors or administrators
of Executive's estate) to receive such benefits shall at all times be that of a
general creditor of the Corporation and shall have no priority over the claims
of other general creditors.
10.
<PAGE>
17. NOTICES.
-------
A. Any and all notices, demands or other communications required or
desired to be given hereunder by any party shall be in writing and shall be
validly given or made to another party if served either personally or if
deposited in the United States mail, certified or registered, postage prepaid,
return receipt requested. If such notice, demand or other communication shall be
served personally, service shall be conclusively deemed made at the time of such
personal service. If such notice, demand or other communication is given by
mail, such notice shall be conclusively deemed given forty-eight (48) hours
after the deposit thereof in the United States mail addressed to the party to
whom such notice, demand or other communication is to be given as hereinafter
set forth.
To the Corporation: Digital Island
353 Sacramento Street
Suite 1520
San Francisco, California 94111
Attention' Marcello Gumucio
To Executive: Ruann Ernst
28525 Matadero Creek Lane
Los Altos Hills, CA 94022
B. Any party hereto may change its address for the purpose of
receiving notices, demands and other communications as herein provided by a
written notice given in the manner aforesaid to the other party hereto.
18. GOVERNING DOCUMENT. This Agreement constitutes the entire
-------------------
agreement and understanding of the Corporation and Executive with respect to the
terms and conditions of Executive's employment with the Corporation and the
payment of severance benefits and supersedes all prior and contemporaneous
written or verbal agreements and understandings between Executive and the
Corporation relating to such subject matter. This Agreement may only be amended
by written instrument signed by Executive and an authorized officer of the
Corporation. Any and all prior agreements, understandings or representations
relating to the Executive's employment with the Corporation are hereby
terminated and cancelled in their entirety and are of no further force or
effect.
19. GOVERNING LAW. The provisions of this letter agreement will be
--------------
construed and interpreted under the laws of the State of California applicable
to agreements executed and to be wholly performed within the State of
California. If any provision of this Agreement as applied to any party or to any
circumstance should be adjudged by a court of competent jurisdiction to be void
or unenforceable for any reason, the invalidity of that provision shall in no
way affect (to the maximum extent permissible by law) the application of such
provision under circumstances different from those adjudicated by the court, the
application of any other provision of this Agreement, or the enforceability or
invalidity of this Agreement as a whole.
11.
<PAGE>
Should any provision of this Agreement become or be deemed invalid, illegal or
unenforceable in any jurisdiction by reason of the scope, extent or duration of
its coverage, then such provision shall be deemed amended to the extent
necessary to conform to applicable law so as to be valid and enforceable or, if
such provision cannot be so amended without materially altering the intention of
the parties, then such provision will be stricken and the remainder of this
Agreement shall continue in full force and effect.
20. REMEDIES. All rights and remedies provided pursuant to this
---------
Agreement or by law shall be cumulative, and no such right or remedy shall be
exclusive of any other. A party may pursue any one or more rights or remedies
hereunder or may seek damages or specific performance in the event of another
party's breach hereunder or may pursue any other remedy by law or equity,
whether or not stated in this Agreement.
21. ARBITRATION. Any and all disputes between Executive and the
------------
Corporation which arise out of Executive's employment under the terms of this
Agreement shall be resolved through final and binding arbitration. This shall
include, without limitation, disputes relating to this Agreement, Executive's
employment by the Corporation or the termination thereof, claims for breach of
contract or breach of the covenant of good faith and fair dealing, and any
claims of discrimination or other claims under Title VII of the Civil Rights Act
of 1964, the Age Discrimination in Employment Act, the Americans With
Disabilities Act, the California Fair Employment and Housing Act, or any other
federal, state or local law or regulation now in existence or hereinafter
enacted and as amended from time to time concerning in any way the subject of
Executive's employment with the Corporation or its termination. The only claims
not covered by this Agreement are claims for benefits under the workers'
- ---
compensation or unemployment insurance laws, which will be resolved pursuant to
those laws. Binding arbitration will be conducted in San Francisco, California
in accordance with the rules and regulations of the American Arbitration
Association. Each party will split the cost of the arbitration filing and
hearing fees, and the cost of the arbitrator; each side will bear its own
attorneys' fees, that is, the arbitrator will not have authority to award
attorneys' fees unless a statutory section at issue in the dispute authorizes
------
the award of attorneys' fees to the prevailing party, in which case the
arbitrator has authority to make such award as permitted by the statute in
question. Executive understands and agrees that the arbitration shall be instead
of any civil litigation and that this means that she is waiving her right to a
jury trial as to such claims. The parties further understand and agree that the
arbitrator's decision shall be final and binding to the fullest extent permitted
by law and enforceable by any court having jurisdiction thereof.
23. COUNTERPARTS. This Agreement may be executed in more than one
-------------
counterpart, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
SIGNATURES ON NEXT PAGE
12.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment
Agreement as of the day and year written above.
DIGITAL ISLAND
By: /s/ [SIGNATURE ILLEGIBLE]^^
------------------------------------
Title: Chairman
------------------------------------
/s/ Ruann F. Ernst
------------------------------------
RUANN ERNST, EXECUTIVE
13.
<PAGE>
EXHIBIT 10.6
[LOGO OF DIGITAL ISLAND APPEARS HERE]
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of February 3,
1997 between Digital Island, Inc., a California corporation (the "Company"), and
Allan Leinwand ("Employee").
In consideration of the mutual covenants and conditions set forth herein,
the parties hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee in the capacity of
Chief Technical Officer (CTO). Employee accepts such employment and agrees to
perform such services as are customary to such office and as shall from time to
time be assigned to him by the Board of Directors. As a condition to such
employment, Employee will complete, execute and deliver to the Company the
Nondisclosure and Assignment of Inventions Agreement in the form attached hereto
as Exhibit A.
2. TERM. The employment hereunder shall be for a period of 3 year,
commencing on February 3, 1997 (the "Term of Employment"), unless earlier
terminated as provided in Section 4. Employee's employment will be on a full-
time basis requiring the devotion of such amount of his productive time as is
necessary for the efficient operation of the business of the Company.
3. COMPENSATION
3.1. SALARY. Dining the Term of Employment, Employee shall be
entitled to an annual salary of$105,000, payable (less required withholdings) no
less frequently than twice monthly. In addition to annual salary, Employee will
be eligible for a bonus of $10,000 per quarter based on successful achievement
of agreed upon objectives.
3.2. OTHER BENEFITS. During the Term of Employment, Employee and
their family shall be entitled to such medical, disability and life insurance
coverage and such vacation, sick leave and holiday benefits, if any, as are made
available to the Company's top executive personnel, all in accordance with the
Company's benefits program in effect from time to time.
3.3. REIMBURSEMENT OF EXPENSES. During the Term of Employment,
Employee shall be entitled to be reimbursed for reasonable expenses incurred by
Employee in connection with and reasonably related to the furtherance of the
Company's business.
1
<PAGE>
3.4. INCENTIVE STOCK OPTIONS (ISO). The Company will offer the
employee a qualified option to purchase 240,000 shares of Class C stock at a
exercise price of $.10 per share vesting over four years under the following
conditions. In lieu of forgiving employee's current option which has vested
66,667 shares employee will vest immediately 66,667 shares in the qualified
option. The remaining 173,333 shares will vest 2% per month of continuous
employment until fully vested over 50 months.
4. TERMINATION
4.1. TERMINATION EVENTS. The employment hereunder will terminate upon
the occurrence of any of the following events:
(i) Employee voluntarily terminates the employment at
Employee's option, which Employee may do at any time, with at least thirty (30)
days advance notice, with or without stating any reason therefor;
(ii) Employee dies;
(iii) the Company, by written notice to Employee or
Employee's personal representative, terminates Employee due to the inability of
Employee to perform the duties assigned to Employee hereunder by reason of
injury, physical or mental illness or other disability, which, in the reasonable
judgment of the Board of Directors of the Company, prevents Employee from
satisfactorily performing such duties for a continuous period exceeding 365
days; or
(iv) Employee is discharged by the Board of Directors of the
Company for cause. As used in this Agreement, the term "cause" includes any act
of gross negligence, willful misconduct or dishonesty by Employee in the
performance of his duties hereunder; habitual non-performance of duties after
warning and an opportunity to correct; willful refusal to contribute to the
well-being of the company; or Employee's conviction of (or pleading guilty or
nolo contendere to) a felony or any misdemeanor involving dishonesty or moral
- ---- ----------
turpitude; prodded, however, that prior to terminating Employee for cause, the
Company shall give written notice to Employee generally outlining the grounds on
which cause is based, and Employee shall have a period of ten (10) days
thereafter to respond either verbally or in writing to the Board of Directors'
findings.
(v) The company discharges the employee upon thirty (30)
day's prior written notice for any lawful reason.
4.2 EFFECTS OF TERMINATION. Upon termination of Employee's
employment hereunder, (i) the Company will promptly pay Employee all
compensation owed to Employee and unpaid through the date of termination, and
(ii) neither Employee nor the Company shall have further obligations hereunder
to the other, except that Employee's obligations under the Nondisclosure and
Assignment of Inventions Agreement attached hereto as Exhibit A will continue to
the extent there specified.
2
<PAGE>
4.3 SEVERANCE. Upon termination of Employee's employment pursuant to
paragraph 4.1 (v) above, then, as additional consideration for past services to
the corporation, the employee shall receive one hundred percent (100%) of the
employee's then current annual base salary, in one installment, payable within
10 days of the employee's last day of employment with Employer.
5. GENERAL PROVISIONS
5.1. ASSIGNMENT. Employee shall not assign or delegate any of his
rights or obligations under this Agreement.
5.2. ENTIRE AGREEMENT. This Agreement contain the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
and all prior agreements between the parties relating to such subject matter.
5.3. MODIFICATIONS. This Agreement may be changed or modified only by
an agreement in writing signed by both parties hereto.
5.4. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
inure to the benefit of, and be binding upon, the Company and its successors and
assigns and Employee and Employee's legal representative, heirs, legatees,
distributees, assigns and transferees by operation of law, whether or not any
such person shall have become a party to this Agreement and have agreed in
writing to join and be bound by the terms and conditions hereof.
5.5. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California as such laws
are applied to agreements among California residents entered into and performed
entirely within California.
5.6. SEVERABILITY. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions shall nevertheless continue in full force and effect.
5.7. FURTHER ASSURANCES. The parties will execute such further
instruments and take such further action as may be reasonably necessary to carry
out the intent of this Agreement
5.8. NOTICES. Any notices or other communications required or
permitted hereunder shall be in writing and shall be deemed received by the
recipient when delivered personally or, if mailed, five (5) days alter the date
of deposit in the United States mail, certified or registered, postage prepaid
and addressed, in the case of the Company, to 1132 Bishop St., Suite 1001,
Honolulu, Hawaii, 96813, and in the case of Employee, to the address shown for
Employee on the signature page hereof, or to such other address as either party
may later specify by at least ten (10) days advance written notice delivered to
the other party in accordance herewith.
5.9. CAPTIONS. Section headings used in this Agreement are for
convenience of reference only and shall not be considered a part of this
Agreement.
3
<PAGE>
5.10. NO WAIVER. The failure of either party to enforce any provision
of this Agreement shall not be construed as a waiver of that provision, nor
prevent that party thereafter from enforcing that provision or any other
provision of this Agreement.
5.11. ENFORCEMENT. If any action at law or in equity or any
arbitration is brought to enforce or interpret the terms of this Agreement or to
protect the rights obtained hereunder, the prevailing party shall be entitled to
recover its reasonable attorneys' fees, costs and other expenses in addition to
any other relief to which it may be entitled.
5.12. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Employee have executed this Agreement,
effective as of the day and year first above written.
COMPANY EMPLOYEE
Digital island, Inc. Allan Leinwand
a California corporation --------------------------------
By: /s/ Ron Higgins Address:
------------------------------- 2064 Green St
Name: Ron Higgins --------------------------------
------------------------
SF California 94123
Title: CEO --------------, -----
-----------------------
4
<PAGE>
EXHIBIT A
---------
NONDISCLOSURE AND ASSIGNMENT OF INVENTIONS AGREEMENT
In exchange for my becoming employed as an employee or engaged as a
consultant by Digital Island, Inc. or its subsidiaries, affiliates or successors
(collectively, "Company"), or my employment or engagement being continued by the
Company, I hereby agree as follows:
1. I will perform such duties or services as may be designated by the
Company from time to time. During my period of employment or engagement by the
Company (collectively referred to herein as "employment"), I will devote my best
efforts to the interests of the Company and, without the prior written consent
of the Company, will not engage in any activities that might be detrimental to
the best interests of the Company.
2. Without further compensation, I hereby agree promptly to disclose to
the Company, and I hereby assign and agree to assign to the Company or its
designee, my entire right, title and interest in and to all Inventions (as
defined below) which (a) pertain to any line of business activity of the
Company, or (b) are aided by the use of time, material or facilities of the
Company, whether or not during working hours. As used in this Agreement, the
term "Inventions" means designs, devices, trademarks, discoveries, development
formulae, processes, patterns, compilations, manufacturing techniques, trade
secrets, inventions, improvements, ideas or works of authorship, including all
rights to obtain, register, perfect and enforce these proprietary interests.
3. No rights are hereby conveyed in Inventions, if any, made by me prior
to my employment with the Company which are identified in the List of Inventions
attached hereto as Attachment I and made a part of this Agreement, which
attachment contains no confidential information. In addition, this Agreement
does not apply to an Invention which qualifies fully under the provisions of
Section 2870 of the California Labor Code, which provides as follows:
Any provision in an employment agreement which provides that an employee
shall assign or offer to assign any of his or her rights in an invention to
his or her employer shall not apply to an invention for which no equipment,
supplies, facility, or trade secret information of the employer was used
and which was developed entirely on the employee's own time, and (a) which
does not relate (1) to the business of the employer or (2) to the
employer's actual or demonstrably anticipated research or development, or
(b) which does not result from any work performed by the employee for the
employer. Any provision which purports to apply to such an invention is to
that extent against the public policy of this state and is to that extent
void and unenforceable.
I agree to disclose all Inventions made by me in confidence to the Company
to permit a determination as to whether or not the Inventions should be the
property of the Company.
1
<PAGE>
4. I agree to perform, during and after my employment, all acts deemed
necessary or " desirable by the Company to permit and assist it, at its expense,
in obtaining and enforcing the full benefits, enjoyment, rights and title
throughout the world in the Inventions hereby assigned to the Company as set
forth in paragraph 2 above. Such acts may include, but are not limited to,
execution of documents and assistance or cooperation in legal proceedings.
5. I agree to hold in confidence and not directly or indirectly to use or
disclose, either during or after termination of my employment with the Company,
any Confidential Information (as defined below) I obtain or create during the
period of my employment, whether or not during working hours, except to the
extent authorized by the Company, until such Confidential Information becomes
generally known. I agree not to make copies of such Confidential Information
except as authorized by the Company. Upon termination of my employment or upon
an earlier request of the Company I will return or deliver to the Company all
tangible forms of such Confidential Information in my possession or control,
including but not limited to drawings, specifications, documents, records,
devices, models or arty other material and copies or reproductions thereof. As
used in this Agreement, the term "Confidential Information" means information
pertaining to arty aspect of the Company's business which is either information
not known by actual or potential competitors of the Company or is proprietary
information of the Company or its customers or suppliers, whether of a technical
nature or otherwise.
6. I represent that my performance of all the terms of this Agreement and
as an employee of or consultant to the Company does not and will not breach any
agreement to keep in confidence proprietary information, knowledge or data
acquired by me in confidence or in trust prior to my employment with the
Company, and I will not disclose to the Company, or induce the Company to use,
any confidential or proprietary information or material belonging to any
previous employer or others. I agree not to enter into any agreement either
written or oral in conflict with the provisions of this Agreement.
7. I agree that, during the term of my employment and for a period of one
year thereafter, I will not solicit or encourage any employee of the Company to
terminate his or her employment with the Company or to accept employment with
any subsequent employer with whom I am affiliated in any way.
8. This agreement (a) shall survive my employment by the Company, (b)
does not in any way restrict my fight or the fight of the Company to terminate
my employment, with or without cause (although such fights may be restricted by
applicable employment agreements, if any), (c) inures to the benefit of
successors and assigns of the Company, and (d) is binding upon my heirs and
legal representatives.
9. I certify that, to the best of my information and belief, I am not a
party to any other agreement which will interfere with my full compliance with
this Agreement.
10. In the event that any of the terms or provisions herein shall violate
any statutory provisions or may be otherwise unlawful or inoperative, it is the
intent and desire of the parties
2
<PAGE>
that this Agreement operate and be in full force and effect insofar as it does
not violate the statutory provision or is otherwise lawful and that this
Agreement be carded out as far as possible in a manner consistent with its tenor
and effect.
11. I CERTIFY AND ACKNOWLEDGE THAT I HAVE CAREFULLY READ ALL OF THE
PROVISIONS OF THIS AGREEMENT AND THAT I UNDERSTAND AND WILL FULLY AND FAITHFULLY
COMPLY WITH SUCH PROVISIONS.
DIGITAL ISLAND,INC EMPLOYEE
By: Ron Higgins Allan Leinwand
---------------------------- ---------------------------
Name: Ron Higgins Allan Leinwand
--------------------------- ---------------------------
Title: CEO
--------------------------
3
<PAGE>
Attachment 1
------------
Nondisclosure and
Assignment of Inventions Agreement
For: Allan Leinwand
LIST OF INVENTIONS or PUBLICATIONS
----------------------------------
Leinwand, A. and Fang, K., Network Management: A Practical Perspective.
--------------------------------------------
Addison-Wesley Publishing Company, Reading, MA., 1993. ISBN 0-201-52771-5.
Leinwand, A. and Fang Conroy, K., Network Management: A Practical Perspective,
-------------------------------------------
2/nd/ edition. Addison-Wesley Publishing Company, Reading, MA., 1996. ISBN
- -------------
0-201-60999-1.
Work in progress with Bruce Pinsky. Tentative title: The Basics of the Cisco
-----------------------
IOS. Under contract with MacMillan Computer Publishing USA.
- ---
INITIALS
Employee: /s/ [SIGNATURE ILLEGIBLE]^^
-------------------------
Company: [ILLEGIBLE]^^
-----------
1
<PAGE>
EXHIBIT 10.7
[LOGO OF DIGITAL ISLAND APPEARS HERE]
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of May 5,
1997 by Digital Island, Inc., a California corporation and Michael Sullivan
("Employee").
In consideration of the mutual covenants and conditions contained in this
Agreement, the parties agree as follows:
1. AT WILL EMPLOYMENT. The Company hereby employees Employee in the
------------------
capacity of Vice President Finance. The parties agree that employment at the
Company is at will and may be terminated by either the Company or Employee at
any time with or without cause and with or without notice. Employee acknowledges
that Employee has no right to be employed for a specific term and no right to
insist on specific grounds for termination. Employee acknowledges and agrees
that the at will nature of this Agreement extends to all employment decisions
and that any change in the terms and conditions of employment, including without
limitation work assignments, production standards, job responsibilities,
compensation and promotions, shall be at the Company's sole discretion.
2.a. COMPENSATION AND EXPENSES. Employee shall be entitled to a monthly
-------------------------
salary of $10,000, payable (less required withholdings) no less frequently than
twice monthly. In addition to your base salary, you will be eligible for a
minimum incentive bonus of $5,000 per quarter paid quarterly based on the
achievement of mutually agreed upon corporate objectives. This bonus will be
guaranteed for the first quarter of employment. The Company will, in accordance
with the Company's policy in effect from time to time, reimburse Employee for
all approved business expenses incurred by Employee in connection with the
performance of Employee's duties.
2.b. INCENTIVE STOCK OPTIONS (ISO). The Company will offer the employee
------------------------------
a qualified option to purchase 50,000 shares of Digital Island at the initial
ISO price of $.40. This option will be vested over 50 months with an initial 12
month employment requirement. At the end of the first 12 months of employment,
you will vest 24% and then 2% per month thereafter. In the event the Board of
Directors elects to offer you the position of Chief Financial Officer, you will
be entitled to receive an additional option grant of 50,000 shares with the same
vesting start date as your original grant.
<PAGE>
2.c. OTHER BENEFITS. During the Term of Employment, Employee shall be
---------------
entitled to such medical and disability coverage and such vacation, sick leave
and holiday benefits, if any, as are made available to the Company's personnel,
all in accordance with the Company's benefits program in effect from time to
time. You will also be entitled to all future benefits awarded the executive
management team.
3. COMPANY'S TRADE SECRETS: In performance of Employee's job duties as
-----------------------
may be designated by the Company from time to time, Employee will be exposed to
the Company's Trade Secrets. "Trade Secrets" means information or material that
is commercially valuable to the Company and not generally known in the industry.
This includes:
(a) any and all versions of the Company's proprietary computer
software (including source code and object code), hardware, firmware and
documentation;
(b) technical information concerning the Company's products and
services, including product data and specifications, diagrams, flow charts,
drawings, test results, know-how, processes, inventions, research projects and
product development;
(c) information concerning the Company's business, including cost
information, profits, sales information, accounting and unpublished financial
information, business plans, markets and marketing methods, customer lists and
customer information, purchasing techniques, supplier lists and supplier
information and advertising strategies;
(d) information concerning the Company's employees, including their
salaries, strengths, weaknesses and skills;
(e) information submitted by the Company's customers, suppliers,
employees, consultants or co-venturers with the Company for study, evaluation or
use; and
(f) any other information not generally known to the public which,
if misused or disclosed, could reasonably be expected to adversely affect the
Company's business.
4. NONDISCLOSURE OF TRADE SECRETS: Employee will keep the Company's Trade
------------------------------
Secrets (and Trade Secrets of any person or company contracting with the
Company), whether or not prepared or developed by Employee, in the strictest
confidence. Employee will not use or disclose such secrets to others without the
Company's written consent, except when necessary to perform Employee's job.
Employee agrees that any customer, publisher or other third party who provides
confidential information to the Company is an intended third party beneficiary
of this provision. However, Employee shall have no obligation to treat as
confidential any information which:
(a) was in Employee's possession or known to Employee, without an
obligation to keep it confidential, before such information was disclosed to
Employee by the Company;
2
<PAGE>
(b) is or becomes public knowledge through a source other than
Employee and through no fault of Employee's;
(c) is or becomes lawfully available to Employee from a source other
than the Company; or
(d) is disclosed pursuant to a requirement of a governmental agency
or as otherwise required by any court of competent jurisdiction.
5. NO CONFLICTING OBLIGATIONS. Employee's performance of this Agreement
--------------------------
and as an employee of the Company does not and will not breach any agreement to
keep in confidence proprietary information, knowledge or data acquired by
Employee prior to Employee's employment with the Company. Employee will not
disclose to the Company, or induce the Company to use, any confidential or
proprietary information or material belonging to any previous employer or other
person or entity. Employee is not a party to any other agreement which will
interfere with Employee's full compliance with this Agreement. Employee will not
enter into any agreement, whether written or oral, in conflict with the
provisions of this Agreement.
6. RETURN OF MATERIALS: When Employee's employment with the Company
-------------------
ends, for whatever reason, Employee will promptly deliver to the Company all
originals and copies of all documents, records, software programs, media and
other materials containing any of the Company's Trade Secrets. Employee will
also return to the Company all equipment, files, software programs and other
personal property belonging to the Company or to any of its customers.
7. CONFIDENTIALITY OBLIGATION SURVIVES EMPLOYMENT: Employee's obligation
----------------------------------------------
to maintain the confidentiality and security of the Company's Trade Secrets
continues even after Employee's employment with the Company ends and continues
for so long as such material remains a Trade Secret.
8. COMPUTER PROGRAMS ARE WORKS MADE FOR HIRE: Company may ask, as part
-----------------------------------------
of Employee's job duties, Employee to create, or contribute to the creation of,
computer programs, audiovisual works, documentation, artwork and other
copyrightable works (collectively called "Work Product"). Employee agrees that
any and all Work Product shall be "works made for hire" and that the Company
shall own all the copyright rights in such works. Employee retains no rights to
use the Work Product or the Developments and agrees not to challenge the
validity of the ownership by the Company of the Work Product or the
Developments. IF AND TO THE EXTENT ANY SUCH MATERIAL DOES NOT SATISFY THE LEGAL
REQUIREMENTS TO CONSTITUTE A WORK MADE FOR HIRE, EMPLOYEE HEREBY ASSIGNS ALL
RIGHT, TITLE AND INTERESTS TO ALL EMPLOYEE'S COPYRIGHT AND OTHER INTELLECTUAL
PROPERTY RIGHTS IN THE WORK PRODUCT TO THE COMPANY.
9. DISCLOSURE OF DEVELOPMENTS: While Employee is employed by the
--------------------------
Company, Employee will promptly inform the Company of the full details of all
Employee's works of
3
<PAGE>
authorship, new or useful art, inventions, discoveries, findings, improvements,
designs, innovations and ideas (collectively called "Developments"), whether or
not the Developments are patentable, copyrightable or otherwise protectable,
that Employee conceives, completes or reduces to practice (whether individually
or in collaboration with others) and which:
(a) relate to the Company's present or prospective business, or
actual or demonstrably anticipated research and development; or
(b) result from any work Employee does using any equipment,
facilities, materials, Trade Secrets or personnel of the Company; or
(c) result from or are suggested by any work that Employee may do for
the Company.
10. ASSIGNMENT OF DEVELOPMENTS: Employee hereby assigns to the Company or
--------------------------
the Company's designee, Employee's entire fight, title and interest in all of
the following, that Employee conceives or make (whether alone or with others)
while employed by the Company:
(a) all Developments;
(b) all copyrights, Trade Secrets, trademarks and mask work rights in
Developments; and
(c) all patent applications filed and patents granted on any
Developments, including those in foreign countries.
11. WAIVER OF RIGHTS. In the event Employee has any fight in and to the
----------------
Work Product or Developments that cannot be assigned to the Company, Employee
hereby unconditionally and irrevocably (a) waives the enforcement of all such
fights, and all claims and causes of action of any kind with respect to any of
the foregoing against the Company, its distributors and customers, whether now
known or hereafter to become known, and (b) agrees, at the request and expense
of the Company and its respective successors and assigns, to consent to, and to
join in, any action to enforce such fights or to procure a waiver of such rights
from the holders of such fights.
12. LICENSE. In the event Employee has any fights in and to the Work
-------
Product or the Developments that cannot be assigned to the Company and cannot be
waived, Employee hereby grants to the Company, and its respective successors and
assigns, an exclusive, worldwide, royalty-free license during the term of the
fights to reproduce, distribute, modify, publicly perform and publicly display,
with the fight to sublicense and assign such fights in and to the Work Product
or the Developments including, without limitation, the fight to use in any way
whatsoever the Work Product or the Developments. Each of Company's clients,
customers and business partners is an intended third party beneficiary of this
provision and may independently enforce Employee's obligations hereunder.
4
<PAGE>
13. EXECUTION OF DOCUMENTS: Both while employed by the Company and
----------------------
afterwards, Employee agrees to execute and aid in the preparation of any papers
that the Company may consider necessary or helpful to obtain or maintain any
patents, copyrights, trademarks or other proprietary rights at the Company's
expense.
14. APPOINTMENT OF ATTORNEY-IN-FACT. In the event that the Company is
-------------------------------
unable for any reason whatsoever to secure Employee's signature to any lawful
and necessary document required to apply for or execute any patent, copyright or
other applications with respect to any of the Work Product or the Developments
(including improvements, renewals, extensions, continuations, divisions or
continuations in part hereof), Employee hereby irrevocably appoints the Company
and its duly authorized officers and agents as Employee's agents and attorneys-
in-fact to execute and file any such application and to do all other lawfully
permitted acts to further the prosecution and issuance of patents, copyrights or
other rights thereon with the same legal force and effect as if executed by
Employee.
15. CONFLICT OF INTEREST: During Employee's employment by the Company,
--------------------
Employee will not engage in any business activity competitive with the Company's
business activities.
16. NONINTERFERENCE WITH COMPANY EMPLOYEES: While employed by the Company,
--------------------------------------
Employee will not:
(a) induce, or attempt to induce, any Company employee to quit the
Company's employ;
(b) recruit or hire away any Company employee; or
(c) hire or engage any Company employee or former employee whose
employment with the Company ended less than six months before the date of such
hiring or engagement.
17. ENFORCEMENT: Employee agrees that in the event of a breach or
-----------
threatened breach of this Agreement, money damages would be an inadequate remedy
and extremely difficult to measure. Employee agrees, therefore, that the Company
shall be entitled to an injunction to restrain Employee from such breach or
threatened breach. Nothing in this Agreement shall be construed as preventing
the Company from pursuing any remedy at law or in equity for any breach or
threatened breach.
18. ASSIGNMENT. This Agreement may be assigned by the Company. Employee
----------
may not assign or delegate Employee's duties under this Agreement without the
Company's prior written approval. This Agreement shall be binding upon
Employee's heirs, successors, and permitted assignees.
19. GOVERNING LAW: This Agreement is made and shall be construed and
-------------
enforced in accordance with the laws of the State of California.
5
<PAGE>
20. ARBITRATION: In the event of any dispute in connection with this
-----------
Agreement, the Parties agree to resolve the dispute by binding arbitration in
San Francisco, California, under the Commercial Arbitration Rules of the
American Arbitration Association ("AAA"), with a single arbitrator familiar with
software development disputes appointed by the AAA. In the event of any dispute,
the prevailing party shall be entitled to its reasonable attorneys' fees and
costs from the other party, whether or not the matter is litigated or arbitrated
to a final judgment or award.
21. CHOICE OF FORUM. The parties hereby submit to the jurisdiction of, and
---------------
waive any venue objections against, the United States District Court for the
Northern District of California and the Superior and Municipal Courts of the
State of California, San Francisco County, in any litigation arising out of this
Agreement.
22. SEVERABILITY: If any provision of this Agreement is determined to be
------------
invalid or unenforceable, the remainder shall be unaffected and shall be
enforceable against both the Company and Employee.
23. ENTIRE AGREEMENT: This Agreement supersedes and replaces all prior
----------------
agreements or understandings, oral or written, between the Company and Employee,
except for any prior confidentiality agreements.
24. MODIFICATION: This Agreement may not be modified except by a writing
------------
signed both by the Company and Employee.
25. EMPLOYEE REVIEW AND RECEIPT OF AGREEMENT. Employee acknowledges that
----------------------------------------
Employee has carefully read and considered all provisions of this Agreement and
agrees that all of the restrictions set forth herein are fair and reasonably
required to protect the Company's interests. Employee acknowledges that Employee
has received a copy of this Agreement as signed by Employee.
26. NOTICE PURSUANT TO STATE LAW: Employee acknowledges that Employee has
----------------------------
been notified of its fights, if any, under California Labor Code Section 2870,
"Employment Agreements Assignment of Rights," and that Employee has had a full
and fair opportunity to read the provisions of Section 2870, a copy of which is
attached hereto as Exhibit A. Employee understands that this Agreement does not
---------
apply to any invention that qualifies fully under the provisions of Section
2870. This section shall serve as written notice to Employee as required by
California Labor Code Section 2872.
6
<PAGE>
27. PRIOR DEVELOPMENTS: As a matter of record, Employee has identified all
------------------
prior developments ("Prior Developments") that have been conceived or reduced to
practice or learned by Employee, alone or jointly with others, before Employee's
employment with the Company, which Employee desires to remove from the operation
of this Agreement. The Prior Developments are listed on attached Exhibit B.
---------
Employee represents and warrants that this list is complete. If there is no such
list, Employee represents that it has made no such Prior Developments at the
time of signing this Agreement.
Michael Sullivan
/s/ Michael J. Sullivan
---------------------------
Date: 6/30/97 Employee's Signature
------------------
Michael Sullivan
---------------------------
Typed or Printed Name
DIGITAL ISLAND, INC,:
/s/ [SIGNATURE ILLEGIBLE]^^
---------------------------
Date:___________________ Signature
___________________________
Typed or Printed Name
CEO
---------------------------
Title
7
<PAGE>
EXHIBIT A
California Labor Code Section 2870 provides as follows:
(a) Any provision in an employment agreement that provides that an employee
shall assign, or offer to assign, any of his or her rights in an invention to
his or her employer shall not apply to an invention that the employee developed
entirely on his or her own time without using the employer's equipment,
supplies, facilities, or trade secret information except for those inventions
that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
<PAGE>
EXHIBIT B
PRIOR DEVELOPMENTS
------------------
[LIST OF ALL PRIOR DEVELOPMENTS; IF BLANK WRITE "NONE"]
<PAGE>
EXHIBIT 10.8
353 SACRAMENTO STREET OFFICE LEASE
BETWEEN
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY,
A MASSACHUSETTS CORPORATION
("LANDLORD")
AND
DIGITAL ISLAND
A CALIFORNIA CORPORATION
"TENANT"
DATED AS OF APRIL 8, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1. PREMISE................................................. 1
SECTION 2. TERM.................................................... 1
SECTION 3. USE, NUISANCE OR HAZARD................................. 2
SECTION 4. RENT.................................................... 3
SECTION 5. OPERATING EXPENSES...................................... 4
SECTION 6. SERVICES TO BE PROVIDED BY LANDLORD..................... 8
SECTION 7. REPAIRS AND MAINTENANCE BY LANDLORD..................... 9
SECTION 8. REPAIRS AND CARE OF BUILDING BY TENANT.................. 10
SECTION 9. TENANT'S EQUIPMENT AND INSTALLATIONS; EXCESS UTILITIES.. 10
SECTION 10. FORCE MAJEURE.......................................... 11
SECTION 11. MECHANIC'S AND MATERIALMAN'S LIENS..................... 11
SECTION 12. INSURANCE.............................................. 12
SECTION 13. QUIET ENJOYMENT........................................ 13
SECTION 14. TENANT IMPROVEMENT ALLOWANCE........................... 13
SECTION 15. ALTERATIONS............................................ 13
SECTION 16. FURNITURE. FIXTURES AND PERSONAL PROPERTY.............. 15
SECTION 17. TAXES.................................................. 15
SECTION 18. ASSIGNMENT AND SUBLETTING.............................. 16
SECTION 19. FIRE AND CASUALTY...................................... 17
SECTION 20. CONDEMNATION........................................... 18
SECTION 21. INDEMNIFICATION........................................ 19
SECTION 22. DEFAULT BY TENANT ..................................... 20
SECTION 23. LIEN FOR RENT.......................................... 23
SECTION 24. RIGHT TO RELOCATE...................................... 23
SECTION 25. ATTORNEYS' FEES........................................ 23
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 26. NON-WAIVER................................... 24
SECTION 27. RULES AND REGULATIONS........................ 24
SECTION 28. ASSIGNMENT BY LANDLORD....................... 24
SECTION 29. LIABILITY OF LANDLORD........................ 24
SECTION 30. SUBORDINATION AND ATTORNMENT................. 24
SECTION 31. HOLDING OVER................................. 25
SECTION 32. SIGNS........................................ 26
SECTION 33. HAZARDOUS SUBSTANCES......................... 26
SECTION 34. COMPLIANCE WITH LAWS AND OTHER REGULATIONS... 27
SECTION 35. GOVERNING LAW; SEVERABILITY.................. 27
SECTION 36. NOTICES...................................... 28
SECTION 37. OBLIGATIONS OF SUCCESORS, PLURALITY, GENDER.. 28
SECTION 38. ENTIRE AGREEMENT............................. 29
SECTION 39. SECTION CAPTIONS............................. 29
SECTION 40. CHANGES...................................... 29
SECTION 41. AUTHORITY.................................... 29
SECTION 42. BROKERAGE.................................... 29
SECTION 43. ADDITIONS TO LEASE........................... 30
</TABLE>
EXHIBIT A - LOCATION OF PREMISES
EXHIBIT B - RULES AND REGULATIONS
EXHIBIT C - TENANT IMPROVEMENT WORK
ii
<PAGE>
BASIC LEASE INFORMATION
353 SACRAMENTO STREET
Lease Date: April 8, 1997
Landlord: John Hancock Mutual Life Insurance Company,
a Massachusetts corporation
Address of c/o The Galbreath Company
Landlord: 353 Sacramento Street, Suite 320
San Francisco, CA 94111
Tenant: Digital Island,
a California corporation
Address of Tenant: 353 Sacramento Street, Suite 1520
San Francisco, CA 94111
Contact for Tenant: Attn: Ron Higgins
Contact for Landlord: Melody Hanhan
353 Sacramento Street Building Manager
Tenant's Address
Prior to Occupancy: 1139 Bishop Sweet, Suite 1001
Honolulu, HI 96813
Attn: Ron Higgins
Section 1:
Premises: Suite 1520, 15th floor
The Building: 353 Sacramento Street
San Francisco, CA 94111
Building Rentable
Area (Office and
Retail Space): 251,777 square feet
Building Rentable.
Area (Office Space): 241,683 square feet
Premises Rentable
Area: 6,132 square feet
1
<PAGE>
Section 2:
Lease Term: 5 years
Term Commencement Date The date Landlord delivers the Premises to Tenant
Scheduled Term Commencement for
Phase I portion: Approximately May 15, 1997
Scheduled Term Commencement for
Phase 2 portion: Approximately July 1, 1997
Term Expiration Date: May 30, 2002
Section 3:
Use: General office purposes
Section 4:
P.S.F. Annual Monthly Minimum Annual Minimum
Year Rental Rental Rental
---- ------ ------ ------
*First $29.00 $14,819 $177,828
Second $30.00 $15,330 $183,960
Third $31.00 $15,841 $190,092
Fourth $32.00 $16,352 $196,224
Fifth $33.00 $16,863 $202,356
*Until the Phase 2 portion of the Premises is delivered to Tenant the
Monthly Minimum Rental is $7,566.60.
Security Deposit: $200,000 (See Section 4.6)
Section 5:
**Tenant's Expense Share: 2.54%
Tenant's Tax Share: 2.44%
**Until the Phase 2 portion of the Premises is delivered to Tenant,
Tenant's Expense Share is 1.30% and Tenant's Tax share is 1.24%
<PAGE>
Section 42:
Landlord's Broker: The Galbreath Company
Tenant's Broker: CB Commercial
The foregoing Basic Lease Information is hereby incorporated into and made
a part of this Lease. Each reference in this Lease to any of the Basic Lease
Information shall mean the information set forth above. In the event of a
conflict between any Basic Lease Information and the Lease, the Lease shall
control.
3
<PAGE>
353 SACRAMENTO STREET
OFFICE LEASE AGREEMENT
This Lease Agreement ("LEASE") is made and entered into as of April 8,
1997, by and between JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a Massachusetts
corporation ("Landlord"), and DIGITAL ISLAND, a California Corporation
("TENANT")
Section I. Premises
1.1 Subject to all of the terms and conditions set forth in this Lease,
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord those
certain premises (the "LEASED PREMISES"), as described in attached Exhibit A
---------
The Leased Premises are part of the office building known as 353 Sacramento
Street (the "BUILDING"), located in San Francisco California. As used herein the
term "BUILDING" includes the Building, the underlying land and all improvements
thereon and appurtenances thereto. The Premises and the Building contain the
rentable square footage set forth in the Basic Lease Information (calculated
pursuant to the American National Standard method adopted by the Building Owners
and Managers Association International). The Building, the land and improvements
under and surrounding the Building and designated from time to time by Landlord
as laud or common areas appurtenant to the Building, together with utilities,
facilities; drives, walkways and other amenities appurtenant to or servicing the
Building are herein sometimes collectively called the "REAL PROPERTY." Tenant is
hereby granted the right to the non-exclusive use of the common corridors and
hallways, stairwells, elevators, electrical and telephone closets, restrooms and
other public or common areas; provided, however, that the maximum in which the
public and common areas are maintained and operated shall be at the sole
discretion of Landlord and the use thereof shall be subject to such rules,
regulations and restrictions as Landlord may make from time to time. Tenant
shall also have the right to the non-exclusive use of the loading dock of the
Building without charge, which use shall also be subject to such rules,
regulations and restrictions as Landlord may establish or alter at any time or
from time to time during the term hereof. Landlord reserves the right to make
alterations or additions to or to change the location of elements of the Real
Property and the common areas thereof.
1.2 The term "RENTABLE AREA" shall be computed by measuring from the
inside surface of the exterior glass of the outer building walls, to the center
of corridor walls, and to the center of all partitions which separate the Leased
Premises from adjoining areas, plus Tenant's pro rata portion of areas common to
all tenants of the Building including, without limitation, corridors, lobbies,
rest rooms, public areas, mechanical, electrical, telephone, janitorial or
equipment room, closet or space, and spaces within the entire Building. Elevator
shafts shall be excluded in computing Rentable Area.
SECTION 2. TERM
2.1 This Lease shall remain in effect for a term (the "INITIAL TERM")
commencing on the date Landlord delivers the Premises to Tenant as provided in
attached Exhibit C (which date is herein referred to as the "COMMENCEMENT DATE")
---------
and expiring at 6:00 P.M. on the Expiration Date specified in the Basic Lease
Information (the "EXPIRATION DATE") unless sooner terminated or extended as
provided in this Lease. The earlier of the Expiration Date or the date this
Lease is terminated is herein referred to as
1
<PAGE>
the "TERMINATION DATE". The Premises will be delivered to Tenant in two phases,
Phase 1 (consisting of approximately 3131 square feet) and Phase 2 (consisting
of approximately 3001 square feet). The estimated delivery date for each of
Phase 1 and Phase 2 is set forth in the Basic Lease Information.
2.2 Tenant accepts the Leased Premises in its "as is" condition, as of the
date hereof subject only to Landlord's obligations under Exhibit C. Except as
----------
provided in Exhibit C. Landlord shall have no obligation to modify or improve
--------
the Leased Premises and shall not be liable for any claims or damages arising in
connection with any modifications or improvements.
SECTION 3. USE, NUISANCE OR HAZARD
3.1 The Leased Premises shall be used and occupied by Tenant solely for
general office purposes and for no other purposes without Landlord's prior
written consent which consent may be given or withheld in Landlord's sole
discretion.
3.2 Tenant shall not use, occupy or permit the use or occupancy of the
Leased Premises for any purpose which Landlord, in its reasonable discretion,
deems to be illegal, immoral or dangerous; permit any public or private
nuisance; do or permit any act or thing which may disturb the quiet enjoyment of
any other tenant or occupancy of the Building; keep any substance or carry on or
permit any operation which might introduce offensive odors or conditions into
other portions of the Building; use any apparatus which might make undue noise
or set up vibrations in or about the Building; permit anything to be done which
would increase the premiums paid by Landlord for fire and extended coverage
insurance on the Building or its contents or cause a cancellation of any
insurance policy covering the Building or any part thereof or any of its
contents; or permit anything to be done which is prohibited by or which shall in
any way conflict with any Law (as defined in Section 34). Should Tenant do any
of the above without the prior written consent of Landlord, it shall constitute
an Event of Default (as defined in Section 22) and Landlord shall be entitled to
exercise any of its rights and remedies under this Lease or at law or in equity.
3.3 Without limiting the generality of the foregoing, Tenant shall
promptly comply with all requirements of the Americans with Disabilities Act and
the regulations promulgated thereunder in effect from time to time ("ADA
REQUIREMENTS") relating to the conduct of Tenant's business. Tenant shall have
exclusive responsibility for compliance with ADA Requirements pertaining to the
interior of the Premises, including the design and construction of the access
thereto and egress therefrom. Landlord shall have responsibility for compliance
with ADA Requirements which affect the common areas of the Building, subject to
Tenant's obligation to pay for its share of the expense of such compliance
pursuant To Section 5 of this Lease. Tenant shall comply promptly with any
direction of any governmental authority having jurisdiction which imposes any
duty upon Tenant or Landlord with respect to the Premises or with respect to the
use or occupation thereof, and Tenant agrees to furnish Landlord with a copy of
any such direction promptly after receipt of the same. In addition, Tenant shall
comply with any reasonable plan adopted by Landlord which is designed to fulfill
the requirements of any Laws, including ADA Requirements.
Should compliance by Tenant with this Section require Landlord's consent
pursuant to Section 15.1, Tenant shall promptly seek such consent, provide the
assurances and documents required
2
<PAGE>
by Section 15.1 and, following receipt of such consent, promptly comply with the
provisions of Section 15.1 and this Section 3.3.
If Tenant fails to comply with ADA Requirements as required in this Section
3.3, then, after notice to Tenant, Landlord may comply or cause such compliance,
in which case Tenant shall reimburse Landlord upon demand for Landlord's costs
incurred in connection therewith.
SECTION 4. RENT
4.1 Tenant shall pay to Landlord an initial base annual rental ("BASE
RENT") in the amount specified in the Basic Lease Information. Reference to
"BASE RENT" shall refer both to the initial Base Rent and the adjustment thereto
specified in the Basic Lease Information. The Base Rent shall be due and
payable, without notice, in twelve equal installments ("MONTHLY RENT") by check
or money order, in advance, on or before the first day of each calendar month.
In addition to the Base Rent, Tenant shall pay any and all other sums of money
as shall be become due and payable by Tenant as set forth in this Lease
("ADDITIONAL RENT"). The Monthly Rent and/or Additional Rent are sometimes
collectively called the "RENT" and shall be paid when due in lawful money of the
United States without demand, deduction, abatement or offset at the address
specified in the Basic Lease Information or such other place as Landlord may
designate from time to time. All Rent and any other charges due and unpaid as of
the Termination Date shall be deemed due and payable on the Termination Date
and, if unpaid as of such date, shall sin-rive the Termination Date. Landlord
expressly reserves the right to apply the payment of Base Rent to any other
items of Rent that are not paid by Tenant.
4.2 Notwithstanding the above, in the event any Rent or other amounts
owing under this Lease are not paid within five days after the due date, then
Landlord and Tenant agree that Landlord will incur additional administrative
expenses, the amount of which will be difficult, if not impossible, to determine
Accordingly, in addition to such required payment, Tenant shall pay to Landlord,
upon demand, an additional one time late charge ("LATE CHARGE"), as Additional
Rent, for any such late payment in the amount often percent of the amount of
such late payment. Failure to pay any applicable Late Charge shall be deemed a
Monetary Default (as defined in Section 22). Provision for the Late Charge shall
be in addition to all other rights and remedies available to Landlord under this
Lease, at law or in equity, and shall not be construed as liquidated damages or
limiting Landlord's remedies in any manner. Failure to charge or collect such
Late Charge in connection with any one or more such late payments shall not
constitute a waiver of Landlord's right to charge and collect such Late Charges
in connection with any other or similar or like late payments.
4.3 If the Term commences on a date other than the first day of a calendar
month or terminates on a date other than the last day of a calendar month, the
Rent for such partial months shall be prorated to the actual number of days the
Lease is in effect for said partial months.
4.4 All Rents and any other amounts payable by Tenant to Landlord, if not
paid when due, shall bear interest from the date due until paid at the rate of
interest publicly announced from time to time by Bank of America National Trust
and Savings Association in San Francisco as its Reference Rate (the "REFERENCE
RATE") plus four percent per annum, but not in excess of the maximum legal rate
permitted by law. Failure to charge or collect such interest in connection with
any one or more such late
3
<PAGE>
payments shall not constitute a waiver of Landlord's right to charge and collect
such interest in connection with any other or similar or like late payments.
4.5 If Tenant fails to timely make two consecutive payments of Monthly
Rent or makes two (2) consecutive payments of Money Rent which are returned to
Landlord by Tenant's financial institution for insufficient funds, Landlord may
require, by giving written notice to Tenant, that all future payments of Rent
shall be made in cashier's check or money order. The above is in addition to any
other remedy of Landlord under this Lease, at law or in equity.
4.6 The first payment of Monthly Rent shall be due and payable upon the
execution of this Lease by Tenant, which sum shall be applied to the Base Rent
for the first month of the Term. Additionally, Tenant shall pay to Landlord the
security deposit (the "SECURITY DEPOSIT") in the amount specified in the Basic
Lease Information as security for Tenant's faithful performance of all of the
terms, covenants, conditions and obligations required to be performed by Tenant
hereunder. Without waiving any of Landlord's other rights and remedies under
this Lease, but after notice and expiration of any cure period (if required
under Section 22), Landlord may apply any part or all of the Security Deposit to
remedy any failure by Tenant to repair or maintain the Leased Premises or to
perform any other term, covenants or conditions contained in this Lease or to
compensate Landlord for damages incurred in connection with any event of default
by Tenant under this Lease. If Landlord so applies the Security Deposit, Tenant
shall within ten days after demand from Landlord restore the Security Deposit to
the full amount required hereunder. Failure of Tenant to do so shall be a
default under this Lease. Landlord's application of the Security Deposit shall
in no event be construed as in any way limiting Tenant's liability or obligation
with respect to any such default. If Tenant has kept and performed all terms,
covenants and conditions of this Lease, Landlord will, within thirty days
following termination of this Lease, return the Security Deposit to Tenant or
the last permitted assignee of Tenant's interest hereunder at the Termination
Date. Landlord shall not be required to keep the Security Deposit separate from
its general funds, and Tenant shall not be entitled to interest on the Security
Deposit. No trust or fiduciary relationship is created by this Lease between
Landlord and Tenant with respect to the Security Deposit. If the Security
Deposit is in the form of a letter of credit, the letter of credit shall conform
to the Letter of Credit Requirements provided by Landlord to Tenant and shall be
drawable at a location in the San Francisco Bay Area.
SECTION 5. ADDITIONAL RENT; OPERATING EXPENSES AND APPLICABLE TAXES
5.1 As used in this Lease, the following terms have the meanings
hereinafter set forth:
(a) "EXPENSE BASE YEAR" and "TAX BASE YEAR" shall mean calendar year 1997.
(b) "EXPENSE COMPARISON YEAR" shall mean each successive calendar year
after the Expense Base Year during the Lease Term.
(c) "TAX COMPARISON YEAR" shall mean each successive calendar year after
the Tax Base Year during the Lease Term.
(d) "TENANT'S EXPENSE SHARE" shall mean the percentage of Operating
Expenses set forth in the Basic Lease Information. Tenant's Expense Share was
calculated by dividing the rentable area of the
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Premises by the total rentable area of the office space in the Building. In the
event either the rentable area of the Premises and/or the total rentable area of
the office space in the Building is changed, Tenant's Expense Share shall be
appropriately adjusted, and, as to the Expense Year in which such change occurs,
Tenant's Expense Share for such year shall be prorated for the periods before
and after such change on the basis of the number of days during such Expense
Year.
(e) "TENANT'S TAX SHARE" shall mean the percentage of Applicable Taxes set
forth in the Basic Lease Information. Tenant's Tax Share was calculated by
dividing the rentable area of the Premises by the total rentable area of the
office and retail space in the Building. In the event either the rentable area
of the Premises or the total rentable area of the office and retail space in the
Building is changed, Tenants Tax Share shall be appropriately adjusted, and, as
to the Tax Year in which such change occurs, Tenant's Tax Share for such year
shall be prorated for the periods before and after such change on the basis of
the number of days during such Tax Year.
(f) "OPERATING EXPENSES" shall mean any and all costs and expenses paid or
incurred by Landlord in connection with the operation, maintenance, management,
repair and replacement of the Real Property. By way of illustration but not
limitation, Operating Expenses shall include the following: (i) the cost of air
conditioning, electricity, steam, heating, water, mechanical, ventilating,
sanitary and storm drainage (including provision of services, maintenance,
repair and replacement), the cost of environmental surcharges imposed by any
government entity, escalator and elevator systems and all other utilities and
the cost of supplies and equipment and maintenance and service contracts in
connection therewith; (ii) the cost of repairs and general maintenance and
cleaning, including all goods, services and supplies purchased by Landlord in
connection therewith; (iii) the cost of fire, extended coverage, boiler,
sprinkler, public liability, property damage, loss of rent, earthquake and other
insurance on or coveting operations of the Building, including such other
endorsements as Landlord may desire, all in such amounts as Landlord may
reasonably determine, and the cost of any losses payable by Landlord as a
deductible; (iv) wages, salaries and other labor costs, including uniforms,
taxes, insurance, retirement, medical and other employee benefits; (v)
reasonable fees, charges and other costs, including management fees, consulting
fees, legal fees and accounting fees, of all independent contractors engaged by
Landlord or reasonably charged by Landlord if Landlord or its affiliate(s)
perform management services in connection with the Real Property, and the costs
of supplying, replacing and cleaning employee uniforms; (vi) the cost of
licenses, permits and inspections and the cost of contesting the validity or
applicability of any governmental enactments which may affect Operating
Expenses; (vii) the cost of window coverings, carpeting and other wall or floor
coverings furnished by Landlord from time to time in public corridors and common
areas; (viii) the amount of reasonable reserves established for anticipated
expenditures; (ix) the cost of repairs, changes, alterations or improvements of
any kind to the Building (collectively, "CHANGES") in a good faith effort to
comply with the requirements of any Laws, the entire cost of such changes ("CODE
COSTS") to be deemed Operating Expenses in the year in which they accrue or are
paid by Landlord, at Landlord's option, except that if Landlord's accountants
determine that any portion of Code Costs must be. capitalized rather than
expensed, then each year Landlord shall include in Operating Expenses only the
properly chargeable portion of capitalized Code Costs during such year based on
a determination of the useful life of the Changes for which the Code Costs were
incurred together with interest on the unamortized balance at the rate of
interest publicly announced from time to time by Bank of America National Trust
and Savings Association in San Francisco, California as its Reference Rate (the
"B OF A REFERENCE RATE") and two percentage points; (x) the cost of any capital
improvements made to the Building after completion of its construction as a
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labor-saving or energy conservation device or to effect other economies in the
operation or maintenance of the Building, or made to the Building after the date
of this Lease that are required under any governmental law or regulation that
was not applicable to the Building at the time that permits for the construction
thereof were obtained, to be capitalized if appropriate under clause (ix); and
(xi) management fees paid by Landlord to third parties or to management
companies owned by, or management divisions of, Landlord for management services
directly rendered to the Building.
For purposes of computing Tenant's Expense Share pursuant to this Section
5.1, Operating Expenses for the entire Building that are not, in Landlord's sole
discretion, allocable or chargeable solely to either the office or retail space
of the Building shall be allocated between and charged to the office and retail
space of the Building on an equitable basis as determined by landlord.
For purposes of this Lease, Operating Expenses shall not include Applicable
Taxes covered under clause (g) below, depreciation on the improvements contained
in the Building (except as provided above), the cost of capital improvements
(except as provided above). The computation of Operating Expenses, and whether a
particular item must be capitalized or expensed, shall be consistent with
generally accepted real estate accounting practices.
(g) "APPLICABLE TAXES" shall mean all taxes, assessments and charges levied
on or with respect to the Building, the Real Property, or any personal property
of Landlord used in the operation thereof and payable by Landlord. Applicable
Taxes shall include, without limitation, all general real property taxes and
general and special assessments; fees, assessments or charges for transit,
police, fire, housing, other governmental services, or purported benefits to the
Building; service payments in lieu of taxes; and any tax, fee or excise on the
act of entering into this Lease or on the use or occupancy of the Building or
any part thereof, or on the rent payable under any lease or in connection with
the business of renting space in the Building, that are now or hereafter levied
on or assessed against Landlord by, or payable by Landlord as a result of, the
requirements oft he United States of America, the State of California, or any
political subdivision, public corporation, district or other political or public
entity, and shall also include any other tax, fee or other excise, however
described, that may be levied or assessed as a substitute for, or as an addition
to, in whole or in part, any other taxes. Applicable Taxes shall not include
franchise, transfer, inheritance or capital stock taxes or income taxes measured
by the net income of Landlord from all sources, unless, due to a change in the
method of taxation, any of such taxes are levied or assessed against Landlord as
a substitute for, in whole or in part, any other tax which would otherwise
constitute an Applicable Tax. Applicable Taxes shall also include reasonable
legal fees, costs and disbursements incurred in connection with proceedings to
contest, determine or reduce Applicable Taxes. Notwithstanding anything to the
contrary in this Lease, in the event that any Applicable Taxes are payable, or
may at the option of the taxpayer be paid in installments, such Applicable Taxes
shall be deemed to have been paid in installments, regardless of the method of
actual payment by Landlord, and Tenant's share of such Applicable Taxes shall
only include those installments which would become due and payable during the
Term.
5.2 If, with respect to any Expense Comparison Year, the Operating
Expenses shall be higher than the Operating Expenses for the Expense Base Year,
Tenant shall pay to Landlord, as Additional Rent, Tenant's Expense Share of any
such increase in Operating Expenses in the manner provided herein. If, with
respect to any Tax Comparison Year, the Applicable Taxes shall be higher than
the
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Applicable Taxes for the Tax Base Year, Tenant shall pay to Landlord as
Additional Rent Tenant's Tax Share of any such increase in Applicable Taxes in
the manner provided herein.
5.3 The payments contemplated under Section 5.2 shall be made as follows:
(a) During each month of each Comparison Year, Tenant shall pay to
Landlord, with each installment of Monthly Rent, such amounts as are reasonably
estimated by Landlord to be one-twelfth (1/12th) of the amounts payable pursuant
to Section 5.2 with respect to each of the Tax Comparison Year and the Expense
Comparison Year, provided, however, that Landlord may, by written notice to
Tenant, reasonably revise its estimates for such year and subsequent payments
during the Comparison Year shall be based upon such revised estimates.
(b) With reasonable promptness after the end of each Tax and/or Expense
Comparison Year, Landlord shall deliver to Tenant a statement setting forth the
actual Operating Expenses and Applicable Taxes for the Comparison Year, a
comparison with the Operating Expenses and Applicable Taxes for the Base Year
and a comparison of any mounts payable under Section 5.2 with the estimated
payments made by Tenant. If the amounts payable under Section 5.2 are less than
the estimated payments made by Tenant with respect to such Comparison Year, the
statement shall be accompanied by a refund of the excess by Landlord to Tenant,
or, at Landlord's election, a notice that Landlord shall credit the excess to
the next succeeding monthly installments of the Monthly Rent. If the amounts
payable under Section 5.2 are more than the estimated payments made by Tenant
with respect to such Comparison Year, Tenant shall pay the deficiency to
Landlord within ten days after delivery of such statement. Statements provided
by Landlord shall be final and binding upon Tenant, if Tenant fails to contest
the same within ninety days after the date of delivery to Tenant.
5.4 If the Expiration Date shall occur on a date other than the first or
last day of a Comparison Year, Tenant's Tax Share and Tenant's Expense Share for
such Comparison Year shall be prorated according to the ratio that the number of
days during said Comparison Year that the Lease was in effect bears to 365.
5.5 Notwithstanding anything to the contrary in this Lease, if during any
Expense Base Year or Expense Comparison Year the Building is less than 95%
occupied, for the purposes of computing Tenant's share of Operating Expenses for
said year, those Operating Expenses which vary based upon occupancy levels shall
be adjusted as though the Building were 95% occupied; provided, however, in no
event shall the aggregate amount billed by Landlord to all tenants in the
Building exceed the actual Operating Expenses for said year.
5.6 Tenant shall reimburse Landlord upon demand for any and all taxes
required to be paid by Landlord (subject to the same exclusions provided for in
Section 5.2(g) in connection with Applicable Taxes), whether or not now
customary or within the contemplation of the parties hereto, when:
(a) Said taxes are measured by or reasonably attributable to the cost or
value of Tenant's equipment, furniture, fixtures and other personal property
located in the Premises or by the cost or value of any above Building Standard
Alterations made in or to the Leased Premises by or for Tenant, regardless of
whether title to such improvements shall be vested in Tenant or Landlord;
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(b) Said taxes are measured by or reasonably attributable to the Base Rent
and/or Additional it, Rent payable hereunder, or either of them, including,
without limitation, any gross income tax or excise tax levied by any
governmental entity (local, state or federal), with respect to the receipt of
such Base Rent and/or Additional Rent;
(c) Said taxes are assessed upon or with respect to the possession,
leasing, operation, management, maintenance, alteration, repair, use or
occupancy by Tenant of the Premises or any portion thereof; or
(d) Said taxes are assessed upon this transaction or any document to which
Tenant is a party creating or transferring any interest or an estate in the
Leased Premises.
The portion of any taxes payable by Tenant pursuant to this Section 5.6 and
other tenants of the Building pursuant to similar provisions in their leases
shall be excluded from Applicable Taxes for purpose of computing Tenant's Tax
Share thereof.
5.7 In the event that it shall not be lawful for Tenant to reimburse
Landlord for the items specified in Section 5.6, the Monthly Rent payable to
Landlord under this Lease shall be increased to net Landlord the same net rent
after imposition of any such tax upon Landlord as would have been payable to
Landlord if any such tax had not been imposed.
SECTION 6. SERVICES TO BE PROVIDED BY LANDLORD
6.1 Subject to Section 5 above, Landlord shall furnish to Tenant, while
occupying the Leased Premises, the following services:
(a) Electrical facilities to furnish sufficient power for
building standard lighting and customary and usual office machinery in the
Leased Premise's, such as typewriters, calculating machines, personal
computers, and other machines of similar electrical consumption, but not
including any item of electrical equipment which requires electricity in
excess of the building standard. Tenant shall pay to Landlord monthly, as
billed, such charges as may be separately metered (the cost of such meter
and its installation shall be borne by Tenant) or as Landlord's engineer
may compute for any electrical service in excess of that stated above;
(b) Water for lavatory and drinking purposes at those points of
supply provided for general use of all tenants in the Building;
(c) Air conditioning and heating as reasonably required for
comfortable use and occupancy under ordinary office conditions during
reasonable and customary office hours, as determined by Landlord; and
(d) Replacement of all standard fluorescent bulbs in all areas
and all incandescent bulbs in public areas, rest room areas, and
stairwells. Routine maintenance and
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electric lighting service for all public areas of the Building in a manner
and to the extent deemed by Landlord to be standard.
6.2 Landlord shall not be liable for any loss or damage arising or alleged
to arise in connection with the failure, stoppage or interruption of any such
services; nor shall the same be construed as an eviction of Tenant, result in an
abatement of Rent, entitle Tenant to any reduction in Rent, or relieve Tenant
from the operation of any covenant or condition of this Lease. Landlord reserves
the right to temporarily discontinue such services or any of them at such times
as may be necessary or appropriate by reason of accident, unavailability of
employees, repairs, alterations, or improvements, or strikes, lockouts, riots,
acts of God or any other happening or occurrence beyond the reasonable control
of Landlord. In the event of any such failure, stoppage or interruption of
services, Landlord shall use reasonable diligence to have the same restored.
Neither diminution nor shutting off of light or air or both nor any other effect
on the Building by any structure erected or condition now or subsequently
existing on lands adjacent to the Building shall affect this Lease, abate Rent,
or otherwise impose any liability on Landlord.
6.3 Landlord shall have the right to reduce heating, cooling or lighting
within the Leased Premises and in the public area in the Building as required by
any mandatory fuel or energy-saving program. Landlord shall be entitled to
cooperate voluntarily in a reasonable manner with the efforts of national, state
or local governmental bodies or of' suppliers of utilities in reducing energy or
other resources consumption. Landlord's acts under this Section 6.3 shall not
affect this Lease, abate Rent or otherwise impose any liability on Landlord.
6.4 Unless otherwise provided by Landlord, Tenant shall separately arrange
with the applicable local public authorities or utilities, as the case may be,
for the furnishing of and payment for all telephone services as may be required
by Tenant in the use of the Leased Premises. Tenant shall directly pay for such
telephone services, including the establishment and connection thereof, at the
rates charged for such services by said authority or utility. The failure of
Tenant to obtain or to continue to receive such services for any reason
whatsoever shall not relieve Tenant of any of its obligations under this Lease.
6.5 The above services are the only services which Landlord shall be
required to provide to Tenant. Without limiting the foregoing, Landlord shall
not be required to provide, and Tenant expressly waives, any right to receive,
any security services with respect to the Leased Premises or the Building. It is
expressly understood and agreed that Landlord shall have no liability to Tenant
for injury or losses due to theft or burglary caused by unauthorized persons in
the Building.
SECTION 7. REPAIRS AND MAINTENANCE BY LANDLORD
7.1 Landlord shall provide for the cleaning and maintenance of the public
portions of the Building in keeping with the ordinary standard for office
buildings similar to the Building as a pan of Operating Expenses. Unless
otherwise expressly stipulated herein, Landlord shall not be required to make
any improvements or repairs of any kind or character to the Leased Premises
during the Term, except such repairs as may be required to the exterior walls,
corridors, windows, roof and other structural elements and equipment of the
Building, and such additional maintenance as may be necessary because of the
damage caused by persons other than Tenant, its agents, employees, licensees or
invitees.
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7.2 Landlord, or Landlord's officers, agents and representatives (subject
to any security regulations imposed by any governmental authority) shall have
the right to enter all parts of the Leased Premises at all reasonable hours to
inspect, make repairs, alterations, and additions to the Building or the Leased
Premises which Landlord may deem necessary or desirable, to make repairs to
adjoining spaces, to cure any Event of Default of Tenant that Landlord elects to
cure, to show the Leased Premises to prospective Tenants, or to provide any
service which it is obligated or elects to furnish to Tenant. Tenant shall not
be entitled to any abatement or reduction of Rent by mason of Landlord's right
of entry. Landlord shall have the right to enter the Leased Premises at any time
and by any means in the case of an emergency. Tenant hereby waives and releases
its right to make repairs at Landlord's expenses under Sections 1932(1), 1941
and 1942 of the California Civil Code or under any similar law, statute or
ordinance now or subsequently in effect.
SECTION 8. REPAIRS AND CARE OF BUILDING BY TENANT
8.1 If the Building or any portion of the Building, including without
limitation, the elevators, boilers, engines, pipes and other apparatus, or
elements of the Building (or any of them) used for the purpose of climate
control of the Building or operating the elevators, or if the water pipes,
drainage pipes, electric lighting or other equipment of the Building or the roof
or outside walls of the Building or the Leased Premises' improvements including
without limitation, the carpet, wall covering, doors and woodwork, become
damaged or are destroyed through negligence, carelessness or misuse by Tenant,
its agents, employees, licensees or invitees, or through it or them, then the
cost of the necessary repairs, replacements or alterations shall be borne by
Tenant who shall promptly pay the same on demand to Landlord as Additional Rent.
Landlord shall have the exclusive right, but not the obligation, to make any
repairs necessitated by such damage.
8.2 At its sole cost and expense, Tenant shall repair or replace any
damage or injury done to the Building, or any part of the Building, caused by
Tenant, Tenant's agents, employees, licensees or invitees which Landlord elects
not to repair. Tenant shall not injure the Building or the Leased Premises and
shall maintain the Leased Premises in a clean, attractive condition and in good
repair. If Tenant fails to keep the Leased Premises in such good order,
condition and repair as required under this Lease to Landlord's reasonable
satisfaction, Landlord may restore the Leased Premises to such good order and
condition and make such repairs without liability to Tenant for any loss or
damage that may accrue to Tenant's property or business by reason of the same,
and upon completion, Tenant shall pay to Landlord, as Additional Kent, upon
demand, the cost of restoring the Leased Premises to such good order and
condition and of the making of such repairs plus an additional charge of fifteen
percent (15%) thereof. Upon the Termination Date, Tenant shall surrender and
deliver up the Leased Premises to Landlord in the same condition as existed at
the Commencement Date, excepting only ordinary wear and tear and damage arising
from any cause not required to be repaired by Tenant. Upon the Termination Date,
Landlord shall have the right to reenter and take possession of the Leased
Premises.
SECTION 9. TENANT'S EQUIPMENT AND INSTALLATIONS; EXCESS UTILITIES
Except for desk or table mounted typewriters, calculating machines,
personal computers, and other similar office equipment, Tenant shall not install
within the Leased Premises any fixtures, equipment, facilities or other
improvements without the specific written consent of Landlord. Tenant
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shall not, without Landlord's prior written consent, use heat generating
machines other than normal fractional horsepower office machines, or equipment
or lighting other than building standard lights in the Leased Premises which may
affect the temperature otherwise maintained by the air conditioning system or
increase the electricity or water normally furnished for the Leased Premises. If
such consent is given, Landlord shall have the right to install supplementary
air conditioning units or other facilities in the Leased Premises, and the cost
thereof, including the cost of installation, operation and maintenance,
increased wear and tear on existing equipment and other similar charges, shall
by paid by Tenant to Landlord upon billing by Landlord. Said costs shall include
the cost of electrical metering or surveying necessary 1o determine the
additional operating cost attributable to the supplementary equipment. Landlord
shall also have the light to impose reasonable additional charges (payable by
Tenant to Landlord upon billing) by reason of Tenant's off-hours or additional
use of utilities or services, for the use of non-standard machine, s, equipment
or lighting, and because of the carelessness of Tenant or the nature of Tenant's
business. Tenant shall not, without Landlord's prior written consent, install
additional lighting or equipment requiring electric current to be supplied to
the Leased Pries in excess of the building standard. If such consent is given,
Tenant shall pay to Landlord upon billing for the cost of such excess
consumption.
SECTION 10. FORCE MAJEURE
Landlord shall not be liable for, and Tenant shall not be entitled to any
reduction of the Base Rent or Additional Rent by reason of, Landlord's failure
to furnish any of the services or utilities described in this Lease such failure
is caused by acts of God, accident, breakage, repairs, strikes, lockouts or
other labor disturbances or disputes of any character, interruption of service
by suppliers thereof, unavailability of materials or labor, or by any other
cause, similar or dissimilar, beyond the reasonable control of Landlord, or by
rationing or restrictions on the use of said services and utilities due to
energy shortages or other causes, or the making of repairs, alterations or
improvements to the Leased Premises or Building, whether or not any of the above
result from acts or omissions of Landlord. Furthermore, Landlord shall not be
liable under any circumstances for a loss of or injury to property or for injury
to or interference with Tenant's business, including, without limitation, loss
of profits, however occurring, through or in connection with or incidental to
failure to furnish any of the foregoing services or utilities, and Tenant shall
not be relieved of its obligation to pay the full Base Rent or Additional Rent
by reason of the same.
SECTION 11. MECHANIC'S SAD MATERIALMAN'S LIENS
11.1 Tenant shall not suffer or permit any mechanic's or materialman's
lien to be filed against the Leased Premises or any portion of the Building by
reason of work, labor, services, or materials supplied or claimed to have been
supplied to Tenant. Nothing in this Lease shall be deemed or construed in any
way as constituting the consent or request of Landlord, expressed or implied, by
inference or otherwise, for any contractor, subcontractor, laborer or
materialman to perform any labor or to furnish any materials or to make any
specific improvement, alteration or repair of or to the Leased Premises or any
portion of the Building, nor of giving the Tenant any right, power or authority
to contract for, or permit the rendering of, any services or the furnishing of
any materials that could give rise to the filing of any mechanic's or
materialman's lien against the Leased Premises or any portion of the Building.
Landlord shall have the right at all times to post and keep posted on the Leased
Premises any notices which it deems necessary for protection from such liens.
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11.2 If any such mechanic's or materialman's lien shall at any time be
filed against the Leased Premises or any portion of the Building as the result
of any act or omission of Tenant, Tenant covenants that it shall, within ten
(10) days after Tenant has notice of the claim for lien, procure the discharge
thereof by payment or by giving security or in such other manner as may be
required or permitted by law or which .shall otherwise satisfy Landlord. If
Tenant fails to take such action, Landlord, in addition to any other right or
remedy it may have, may take such action as may be reasonably necessary to
protect its interests. Any amounts paid by Landlord in connection with such
action and all reasonable legal and other expenses of Landlord incurred in
connection with the same, in. eluding reasonable attorney's fees, court costs
and other necessary disbursements shall be repaid by the Tenant to the Landlord
on demand.
SECTION 12. INSURANCE
12.1 Landlord shall maintain during the Term a commercial (comprehensive)
insurance policy (written on an occurrence, not claims made, basis) including
coverage for contractual liability, public liability and property damage in a
commercially reasonable amount, as determined by Landlord, covering the
Building. Landlord may maintain during the Term a policy of insurance insuring
the Building against loss or damage due to fire and other casualties covered by
a standard "all risk" coverage policy. Such coverage in such amounts as Landlord
may from time to time determine may include the risks of lightning, vandalism
and malicious mischief, and, at the option of Landlord, the risks of earthquakes
and additional hazards, a rental loss endorsement and one or more loss payee
endorsements in favor of the holders of any mortgages or deeds of trust
encumbering the interest of Landlord in the Building or the ground or underlying
lessors. The parties acknowledge that the premiums for insurance specified in
Section 12.1 are Operating Expenses, as defined in Section 5.
12.2 At its own expense, Tenant shall maintain during the Term a
commercial (comprehensive) liability insurance policy (written on an occurrence,
not claims made, basis), including coverage for contractual liability, public
liability and property damage in the amount of Two Million and 00/100 Dollars
($2,000,000.00) per person and per occurrence for personal injuries or deaths of
persons occurring in or about the Leased Premises.
12.3 At its own expertise, Tenant shall maintain during the Term "all
risk" casualty insurance for the full replacement value of all Alterations and
all of Tenant's Property and other items in the Premises.
12.4 At its own expense, Tenant shall maintain during the Term workers'
compensation insurance and all such other insurance as may be required by
applicable Laws.
12.5 All such insurance shall: (i) name Landlord, and any oilier party
which Landlord so specifies, as additional insureds; (ii) specifically cover the
liability assumed by Tenant under this Lease; (iii) be issued by an insurance
company which has a general policy holder's rating of not less than "A", and a
financial rating of not less than Class "X", in the most current edition of
Best's Insurance Reports, and is licensed to do business in the State of'
California; (iv) be primary insurance as to all claims thereunder; (v) provide
that said insurance shall not be canceled or coverage changed unless thirty (30)
days' prior written notice shall have been given to Landlord, any other named
insured and the holders of any mortgages or deeds of trust referred to above;
and (vi) shall not eliminate cross-liability and shall
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contain a severability of interest clause. Tenant shall deliver certificates
thereof to Landlord on or before the Commencement Date and at least thirty days
before the expiration dates thereof. In the event Tenant shall fail to procure
such insurance, or to deliver such certificates, Landlord may, without waiving
any of its rights or remedies, procure such policies for the account of Tenant,
and the cost thereof shall be paid to Landlord as Additional Rent within five
days after delivery to Tenant of bills therefor. Tenant's compliance with the
provisions of this Section 12 shall in no way limit Tenant's liability under any
of the other provisions of this Lease. The limits of insurance required to be
maintained by Tenant hereunder shall not be a limitation on any obligation of
Tenant, including Tenant's indemnification obligations under Section 21 below.
Not more frequently than once every two years, Landlord may require Tenant to
increase the amount of liability insurance coverage if, in the opinion of
Landlord's lender or insurance consultant, the amount of such coverage is not
then adequate.
12.6 Landlord and Tenant shall have their respective insurance companies
issuing property damage insurance waive any rights of subrogation that such
companies may have against Landlord or Tenant, as the case may be, so long as
the insurance carried by Landlord and Tenant, respectively, is not invalidated
thereby. As long as such waivers of subrogation are contained in their
respective insurance policies, Landlord and Tenant hereby waive any right that
either may have against the other on account of any loss or damage to their
respective property to the extent such loss or damage is insured under policies
of insurance for fire and all risk coverage, theft, public liability, worker's
compensation or other similar insurance.
SECTION 13. QUIET ENJOYMENT
Provided Tenant has performed all its obligations under this Lease,
including but not limited to the payment of Rent and all other sums due
hereunder, Tenant shall peace, ably and quietly hold and enjoy the Leased
Premises for the Term, without hindrance by Landlord, subject to the provisions
and conditions set forth in this Lease.
SECTION 14. TENANT IMPROVEMENT ALLOWANCE
Landlord shall construct or install in the Leased Premises the improvements
(the "TENANT IMPROVEMENT WORK") as specified in, and in accordance with the
provisions of attached Exhibit C. Landlord shall provide an allowance (the
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"TENANT IMPROVEMENT ALLOWANCE") in the amount specified in Exhibit C. The
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Tenant Improvement Allowance shall be applied to the actual costs of the Tenant
Improvement Work. Any costs of the Tenant Improvement Work in excess of the
Tenant Improvement Allowance shall be paid by Tenant.
SECTION 15. ALTERATIONS
15.1 Tenant shall not make or allow to be made any alterations, physical
additions, or improvements in or to the Leased Premises (collectively,
"ALTERATIONS") without first obtaining Landlord's written consent in each
instance, which consent may be given or withheld in Landlord's sole discretion.
At the time of said request, Tenant shall submit to Landlord plans and
specifications of the proposed Alterations. Landlord shall have a period of not
less than sixty days therefrom in which to review and approve or disapprove said
plans. Tenant shall pay upon demand the reasonable costs of Landlord's review of
such plans and specifications, not to exceed One Thousand Dollars ($1,000.00).
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The contractor or person selected by Tenant to make such Alterations must be
approved in writing by Landlord prior to commencement of any work. Such
contractor or person shall carry insurance in forms and amounts reasonably
satisfactory to Landlord and shall at all times be subject to Landlord's rules
and regulations while in the Building. All Alterations shall be performed in
full compliance with plans and specifications approved by Landlord, all
applicable Laws and the requirements of the Board of Underwriters, Fire Rating
Bureau or similar body. All Alterations shall be performed at Tenant's sole cost
and expense (including reasonable costs for Landlord's supervision, not to
exceed 5% of the project's cost), at such time and in such manner as Landlord
may designate, and shall be promptly completed in a good and workmanlike manner.
Tenant shall reimburse Landlord's review and supervision costs within thirty
days after receipt of Landlord's invoice(s) therefor. Landlord's approval of the
plans, specifications and working drawings for Tenant's Alterations shall create
no responsibility or liability on the part of Landlord for their completeness,
design sufficiency, or compliance with all applicable Laws.
15.2 Tenant shall give to Landlord at least fifteen business days' prior
written notice of commencement of construction of any Alterations. Landlord
shall have the right to require that (a) any contractor hired by .Tenant shall,
prior to commencing work in the Leased Premises, provide Landlord with a
performance bond and labor and materials payment bond in the amount of the
contract price for the work, naming Landlord and Tenant (and any other persons
designated by Landlord) as co-obligees, and that (b) any such contractor employ
such labor as necessary to avoid any delay in or interruption to the progress of
work under in the Leased Premises or elsewhere in the Building due to union
picket lines. Tenant's contractors shall not use any portion of the common areas
of the Building for performance of the work unless the written consent of
Landlord is first obtained. The granting or withholding of such consent shall be
at Landlord's sole discretion.
15.3 All Alterations, whether made by Tenant or Landlord or at either's
expense, including, without limitation, all Tenant Improvement Work and all
carpeting and fixtures of any kind, shall become a part of the Building
immediately upon installation in the Leased Premises, and shall be and remain
the property of Landlord, except for trade fixtures, office supplies and
moveable furniture and furnishings placed on the Premises by Tenant that are
removable without damage to the Building or the Leased Premises, which shall be
subject to Section 16. Notwithstanding any other provisions of this Lease, upon
Landlord's written request made within thirty days prior to the expiration or
termination of this Lease, Tenant at Tenant's sole cost and expense shall
promptly remove any Alterations or Tenant Improvement Work, designated by
Landlord to be removed and repair any damage to the Promises or the Building
resulting from such removal.
15.4 Tenant shall be responsible for the entire cost of the Alterations
and Tenant Improvement Work (subject to Landlord's obligation to fund the Tenant
Improvement Allowance), including any cost or expense of Landlord, relating to
the interior of the Leased Premises, on account of the need to comply with the
ADA (as defined in Section 34) or other Laws. Under no circumstances shall
Landlord be responsible to Tenant or any third party for determining whether the
Alterations comply with all applicable Laws, including the ADA, regardless of
whether Tenant must obtain Landlord's approval of the Alterations or the plans
and specifications therefor as a condition to making them.
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15.5 Should any construction, alteration, addition, improvements or
decoration of the Leased Premises by Tenant interfere with harmonious labor
relations in the Building, all such work shall be halted immediately by Tenant
until such time as construction can proceed without such interference.
SECTION 16. FURNITURE, FIXTURES AND PERSONAL PROPERTY
16.1 Tenant, at its sole cost and expense, may remove its trade fixes,
office supplies and moveable office furniture and equipment not attached to the
Building or Leased Premises provided:
(a) such removal is made prior to the Termination Date;
(b) no Event of Default exists at the time of such removal; and
(c) Tenant promptly repairs all damage caused by such removal.
16.2 If Tenant does not remove its trade fixtures, office supplies and
moveable furniture and equipment prior to the Termination Date (unless prior
arrangements have been made with Landlord and Landlord has agreed in writing to
permit Tenant to leave such items in the Leased Premises for an agreed period),
then, in addition to its other remedies at law or in equity, Landlord shall have
the right to have such items removed and stored at Tenant's sole cost and
expense and all damage to the Building or the Leased Premises resulting from
said removal shall be repaired at Tenant's cost. Any such items not removed
prior to the Termination Date, shall, at Landlord's option, subject to
applicable Laws, become the property of Landlord upon the Termination Date, and
Tenant shall not have any further rights with respect thereto or reimbursement
therefor.
16.3 All furnishings, Fixtures, equipment, effects and property of every
kind, nature and description of Tenant and of all persons claiming by, through
or trader Tenant which, during the Term or any occupancy of the Leased Premises
by Tenant or anyone claiming under Tenant, may be on the Leased Premises or
elsewhere in the Building shall be at the sole risk and hazard of Tenant If the
whole or any part thereof is destroyed or damaged by fire, water or otherwise,
or by the leakage or bursting of water pipes, steam pipes, or other pipes, by
theft, or from any other cause, no part of said loss or damage is to be charged
to or be borne by Landlord.
SECTION 17. TAXES
During the Term, Tenant shall pay, prior to delinquency, all business and
other taxes, charges, notes, duties and assessments levied, and rates or fees
imposed, charged, or assessed against or in respect of Tenant's occupancy of the
Leased Premises or in respect of the personal property, trade fixtures,
furnishings, equipment, and all other personal property of Tenant contained in
the Building, and shall hold Landlord harmless from and against all payment of
such taxes, charges, notes, duties, assessments, rates, and fees. Tenant shall
cause said fixtures, furnishings, equipment, and other personal property to' be
assessed and billed separately from the real and personal property of Landlord.
In the event any or all of Tenant's fixtures, furnishings, equipment, and other
personal property shall be assessed and taxed with Landlord's real property,
Tenant shall pay to Landlord Tenant's share of such taxes within ten days after
delivery to Tenant by Landlord of a statement in writing setting forth the
amount of such taxes applicable to Tenant's property.
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SECTION 18. ASSIGNMENT AND SUBLETTING
18.1 Neither Tenant nor Tenant's legal representatives nor successors in
interest by operation of law or other shall assign this Lease or sublease the
Leased Premises or any part thereof or mortgage, pledge or hypothecate its
leasehold interest, nor make any attempt to do so, without the prior express
written consent of Landlord. Any such attempt shall be void, of no effect, and
constitute an Event of Default This prohibition against assigning or subletting
shall be construct to include a prohibition against any assignment or subletting
by operation of law. The voluntary or other surrender of this Lease by Tenant or
a mutual cancellation hereof shall not work a merger and shall, at the option of
Landlord, terminate all or any existing subleases or may, at the option of
Landlord, operate as an assignment to Landlord of Tenant's interest in any or
all such subleases.
18.2 The following shall constitute a prohibited assignment subject to
Section 18.1 a sale, transfer, pledge or hypothecation by Tenant of all or
substantially all of its assets or all or substantially all of its stock, if
Tenant's stock is publicly traded; a merger of Tenant with another corporation;
the sale, transfer, pledge or hypothecation of fifty percent or more of Tenant's
stock if Tenant's stock is not publicly waded; or the sale, transfer, pledge or
hypothecation of fifty percent or more Tenant's beneficial ownership interest if
Tenant is a partnership; provided, however, that Landlord's consent shall not be
required for the assignment of the Lease or subletting of the Leased Premises to
a Permitted Affiliate. For purposes hereof, the term "Permitted Affiliate" means
a subsidiary of Tenant with an independent net worth as of the date of the
proposed assignment or subletting equal to or greater than the net worth of
Tenant as of the date hereof.
18.3 If Tenant should desire to assign this Lease or sublease the Leased
Premises or any portion thereof, Tenant shall give Landlord written notice of
such desire to make such assignment or effect such sublease. At the time of
giving such notice, Tenant shall provide Landlord with a copy of the proposed
assignment or sublease document, and such information as Landlord may reasonably
request concerning the proposed sublessee or assignee to assist Landlord in
making an informed judgment regarding the financial condition, reputation,
operation and general desirability of the proposal sublessee or assignee.
Landlord shall then have a period of thirty days following receipt of such
notice within which to notify Tenant in writing of Landlord's election to:
(a) terminate this Lease as to the space so affected as of the
date specified by Tenant, in which event Tenant shall be relieved of all
obligations accruing under this Lease after the termination as to the
Leased Premises or such portion, after paying all Rent due as of the
Termination Date, or
(b) permit Tenant to assign or sublet the Lease Premises or such
portion, or
(c) refuse to consent to Tenant's assignment or subleasing of the
Leased Premises or such portion and to continue this Lease in full force
and effect as to the entire Leased Premises.
If Landlord should fail to notify Tenant of its election within the thirty
day period, Landlord shall be deemed to have elected option (c). In the
event of any approved assignment or subletting, the rights of
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any such assignee or sublessee shall be subject to all of the terms, conditions
and provisions of this Lease, including without limitation, restrictions on use
and the covenant to pay Rent. If Landlord, approves the proposed assignment or
sublease, Tenant may, not later than ninety days thereafter, enter into such
assignment or sublease with the proposed assignee or sublessee upon the terms
and conditions set forth in the notice provided to Landlord, and 50% of the
Excess Rent received by Tenant shall be paid to Landlord as and when received by
Tenant. For purposes hereof "EXCESS RENT" means any rent or other consideration
received by Tenant in excess of (i) the Base Rent and Additional Rent payable
hereunder (or the amount thereof proportionate to the portion of the Leased
Premises subject to such sublease in the case of a sublease of a portion of the
Premises) and (ii) reasonable brokerage commissions incurred in connection with
such sublease or assignment. No such consent to or recognition of any such
assignment or subletting shall constitute a release of Tenant or any guarantor
of Tenant's performance from further performance by Tenant or such guarantor of
covenants undertaken to be performed by Tenant. Tenant and/or such guarantor
shall remain liable and responsible for all Rent and other obligations of Tenant
under this Lease. Consent by Landlord to a particular assignment, sublease or
other transaction shall not be deemed a consent to any other or subsequent
transaction. Whether or not Landlord consents to any assignment, sublease or
other transaction, Tenant shall pay any reasonable attorneys' fees incurred by
Landlord in connection with such transaction. All documents utilized by Tenant
to evidence any subletting or assignment for which Landlord's consent has been
requested, shall be subject to prior approval by Landlord or its attorney. If
any consideration payable to Tenant by any sublessee, assignee, licensee or
other transferee exceeds the Rent, then Tenant shall pay to Landlord all such
excess within ten days following receipt by Tenant.
18.4 If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code, 11 U.S.C. Section 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 such monies or other consideration not
paid or delivered to Landlord shall be held in trust for the benefit of Landlord
and shall be promptly paid or delivered to Landlord. Any person or entity to
whom this Lease is so assigned shall be deemed, without further act or deed, to
have assumed all of the obligations arising under this Lease as of the date of
such assignment. Upon demand therefor, any such assignee shall execute and
deliver to Landlord an instrument confirming such assumption. In no event shall
Tenant have any right to sublet or assign if there exists any default under this
Lease.
18.5 Notwithstanding the above, any consents required by Landlord under
this Section 18 shall not be unreasonably withheld or untimely delayed.
SECTION 19. FIRE AND CASUALTY
19.1 If the Leased Premises or any part thereof shall be damaged by fire
or other casualty, Tenant shall give prompt written notice to Landlord. If (i)
in Landlord's reasonable opinion the insurance proceeds available to Landlord
are not insufficient for restoration, or (ii) in Landlord's reasonable opinion
the Building shall be so damaged by fire or other casualty that substantial
alteration or reconstruction of the Building shall be required (whether or not
the Leased Premises shall have been damaged by such fire or other casualty), or
(iii) if any mortgagee under a mortgage or deed of trust covering the Building
requires that the insurance proceeds payable as a result of said fire or other
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casualty be used to retire the mortgage debt; then Landlord, at its option, may
terminate this Lease by notifying Tenant in writing of such termination within
sixty days after the date of such damage or casualty, in which event the Rent
shall be abated proportionately as of the date of such damage, based upon the
extent the Leased Premises are rendered unfit for occupancy.
19.2 If Landlord does not elect to terminate this Lease as provided in
Section 19.1, and if repairs have not been commenced within ninety days from the
date of such damage and thereafter completed within nine months (excluding
delays caused by force majeure events, as described in Section 10), then Tenant
may terminate this Lease upon thirty days written notice to Landlord; provided,
however, that if Landlord completes repairs within thirty days' after receipt of
Tenant's termination notice (or such longer period of time as it reasonably
required because the delays were due to force majeure events), then Tenant's
exercise of its termination right shall be void and this Lease shall continue in
effect
19.3 To the extent of the insurance proceeds available to Landlord
therefor, Landlord shall repair and restore the Building and/or the Leased
Premises to substantially the same condition in which they were immediately
prior to the fire or other casualty, except that Landlord shall not be required
to rebuild, repair or replace any part of Tenants Alterations, trade fixtures,
office supplies and materials, furniture and equipment. Landlord shall not be
liable for any inconvenience, annoyance, or injury done to the business of
Tenant resulting in any way from such damage or the repair thereof, except
Landlord shall allow Tenant an equitable reduction of Rent during the time and
to the extent the Leased Premises are unfit for occupancy, save for Tenant's
fault or negligence described in Section 19.4.
19.4 If the Leased Premises or the Building shall be totally or partially
damaged by fire or other casualty resulting from the fault or negligence of
Tenant, or its agents, employees, licensees, or invitees, such damage shall be
repaired by and at the expense of Tenant (to the extent that such destruction or
damage is not covered by the fire and extended coverage insurance carried by
Landlord as provided in Section 12), under the direction and supervision of
Landlord, and Rent shall continue without abatement.
19.5 The provisions of this Lease, including this Section 19, constitute
an express agreement between Landlord and Tenant with respect to any and all
damage to, or destruction of, all or any part of the Leased Premises, the
Building or any other portion of the Real Property, and any statute or
regulation of the State of California, including without limitation, Sections
1932(2) and 1933(4) of the California Civil Code, with respect to any rights or
obligations concerning damage or destruction in the absence of an express
agreement between the parties and any other statute or regulation, now or
subsequently in effect, shall have no application to this Lease or any damage or
destruction to all or any part of the Premises, the Building or any other
portion of the Real Property. Tenant hereby specifically waives all rights to
terminate this Lease under said Civil Code sections or any similar provisions of
law.
SECTION 20. CONDEMNATION
20.1 If any part of the Leased Premises or the Building is taken by
exercise of the power of eminent domain, or by conveyance in lieu thereof,
Landlord may elect to terminate this Lease upon written notice to Tenant within
thirty days after the date of such taking or transfer in lieu thereof or to
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continue the same in effect. All compensation awarded for any taking (or the
proceeds of private sale in lieu thereof) of the Leased Premises or the Building
shall be the property of Landlord, and Tenant hereby assigns its interest in any
such award to Landlord; provided, however, Landlord shall have no interest in
any award made to Tenant for the taking of Tenant's personal property or moving
expenses if a separate award for such items is made to Tenant. If this Lease is
terminated under this Section 20. l, Rent shall be payable up to the date that
possession is taken by the condemning authority, Landlord shall refund to Tenant
any prepaid unaccrued Rent less any sum then owing by Tenant to Landlord, and
Tenant shall have no claim against Landlord for the value of any unexpired
portion of the Term.
20.2 In the event of a taking of any portion of the Leased Premises, or a
conveyance in lieu thereof, and if this Lease is not terminated by Landlord as
provided above, then this Lease shall automatically terminate as to the portion
of the Leased Premises so taken as of the earlier of the date of vesting of
title or the date possession is taken by the condemning authority, and the Base
Rent as well as the Additional Rent shall be apportioned according to the ratio
that the remaining Rentable Area of the Leased Premises bears to the total
original Rentable Area of the Leased Premises. Tenant hereby waives any and all
rights it might otherwise have pursuant to Section 1265.130 of California Code
of Civil Procedure or any similar provisions of Laws now or subsequently in
effect.
20.3 In the event of temporary taking of all or any portion of the Leased
Premises for a period of ninety days or less, then this Lease shall not
terminate but the Base Rent and the Additional Rent shall be abated for the
period of such taking in proportion to the ratio that the remaining Rentable
Area of the Leased Premises bears to the total Rentable Area of the Leased
Premises. Landlord shall be entitled to receive the entire award made in
connection with any such temporary taking.
SECTION 21. INDEMNIFICATION
21.1 Landlord shall not be liable to Tenant for and Tenant hereby waives
all claims against Landlord for damage to any property or injury, illness or
death of any person in, upon, or about the Leased Premises, the Building or the
Real Property arising at any time and from any cause whatsoever except to the
extent caused by the gross negligence or willful misconduct of Landlord or its
employees or agents. Without limiting the generality of the foregoing, Landlord
shall not be liable for any damage or damages of any nature whatsoever to
persons or property caused by explosion, fire, theft or breakage, by sprinkler,
drainage or plumbing systems, by failure for any cause to supply adequate
drainage, by the intention of any public utility or service, by steam, gas,
water, rain or other substances leaking, issuing or flowing into any part of the
Leased Premises, by natural occurrence, acts of a public enemy, riot, strike,
insurrection, war, court order, requisition or order of governmental body or
authority, or for any damage or inconvenience which may arise through repair,
maintenance or alteration of any part of the Building, or by anything done or
omitted to be done by any tenant, occupant or person in the Building. In
addition, Landlord shall not be liable for any loss or damage for which Tenant
is required to insure or for any loss or damage resulting from any construction,
alterations or repair by Landlord or by others.
21.2 Tenant shall defend, with counsel approved by Landlord, all actions
against Landlord, any partner, trustee, stockholder, officer, director, employee
or beneficiary of Landlord, holders of mortgages secured by the Leased Premises
or the Building and any other party having an interest therein ("INDEMNIFIED
PARTIES") with respect to, and shall pay, protect, indemnify and save harmless,
to the
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extent permitted by law, all Indemnified Parties from and against, any and all
liabilities, losses damages, costs, expenses (including reasonable attorneys'
fees and expenses), causes of action, suits, claims, demands or judgments of any
nature (i) to which any Indemnified Party is subject because of its estate or
interest in the Leased Premises or the Building or the Real Property, or (ii)
arising from (1) injury to or death of' any person, or damage to or loss of
property, on the Leased Premises, the Building or the Real Property, or on
adjoining sidewalks, streets or ways; or connected with the use, condition or
occupancy of any thereof (except to the extent caused by the gross negligence or
willful misconduct of Landlord or its agents or employees), (2) any violation by
Tenant in the observance or performance of its obligations under this Lease, or
(3) any act, fault, omission, or other misconduct of Tenant or its agents,
contractors, licenses, sublessees or invitees. Tenant shall use and occupy the
Leased Premises and other facilities of the Building at its own risk, and hereby
releases the Indemnified Parties from any and all claims for any damage or
injury to the fullest extent permitted by law.
21.3 The provisions of this Section 21 shall survive the expiration or
sooner termination of this Lease.
SECTION 22. DEFAULT BY TENANT
22.1 The term "EVENT OF DEFAULT" refers to the occurrence of any one or
more of the following:
(a) failure of Tenant to pay when due any sum required to be
paid hereunder (a "MONETARY DEFAULT")
(b) failure of Tenant, after ten (10) days Written notice, to
perform any of Tenant's obligations, covenants or agreements except a
Monetary Default;
(c) if Tenant, or any guarantor of Tenant's obligations under
this Lease (a "GUARANTOR"), admits in writing that it cannot meet its
obligations as they become due; or is declared insolvent according to any
law; or assignment of Tenant's or Guarantor's property is made for the
benefit of creditors; or a receiver or trustee is appointed for Tenant or
Guarantor or its property; or the interest of Tenant or Guarantor under
this Lease is levied on under execution or other legal process; or any
petition is filed by or against Tenant or Guarantor to declare Tenant
bankrupt or to delay, reduce or modify Tenant's debts or obligations; or
any petition is fried or other action taken to reorganize or modify
Tenant's or Guarantor's capital structure, if Tenant is a corporation or
other entity; provided that, any involuntary levy, execution, legal process
or petition filed against Tenant or Guarantor shall not constitute an Event
of Default provided Tenant or Guarantor shall vigorously contest the same
by appropriate proceedings and shall remove or vacate the same within sixty
days from the date of its creation, service or filing;
(d) the abandonment of the Leased Premises by Tenant, which
shall mean that Tenant has vacated the Leased Premises for ten consecutive
days, whether or not Tenant is in Monetary Default; or that Tenant, in the
judgment of Landlord, is vacating the Leased Premises by removing fracture
and fixtures;
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(e) the discovery by Landlord that any financial statement given
by Tenant or any of its assignees, subtenants or successors-in-interests,
or Guarantors, was materially false; or
(f) if Tenant or any Guarantor shall die, cease to exist as a
corporation or partnership or be otherwise dissolved or liquidated or
become insolvent, or shall make a transfer in fraud of creditors.
22.2 Upon the occurrence of any Event Default by Tenant, Landlord may at
any time thereafter, without limiting Landlord in the exercise of any right or
remedy which Landlord may have under this Lease, at law or in equity by mason of
such Event of Default:
(a) Terminate this Lease and recover from Tenant as provided by
California Civil Code Section 1951.2: (i) the worth at the time of award of
the unpaid rent and other amounts which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the Term after the time
of award exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided; and (iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to
perform its obligations under this Lease. or which, in the ordinary course
of things, would be likely to result therefrom. The "worth at the time of
award" of the amount referred to in (iii) shall be computed by discounting
such mount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%). For purposes of
computing unpaid rent which would have accrued and become payable under
this Lease pursuant to the provisions of this subsection (a), unpaid rent
shall consist of the sum of the unpaid Base Rent and the Additional Rent as
reasonably estimated by Landlord for the balance of the Term; or
(b) Continue this Lease in effect and enforce all of its rights
and remedies under this Lease, as provided by California Civil Code Section
1951.4, including the right to recover Base Rent and Additional Rent as
they become due, for so long as Landlord does not terminate Tenant's right
to possession; provided, however, if Landlord elects to exercise its
remedies described in this subsection (b) and Landlord does not terminate
this Lease, and if Tenant requests Landlord's consent to an assignment of
this Lease or a sublease of the Leased Premises at such time as Tenant is
in default, Landlord shall not unreasonably withhold its consent to such
assignment or sublease. Acts of maintenance or preservation, efforts to
relet the Leased Premises, or the appointment of a receiver upon Landlord's
initiative to protect its interest under this Lease, shall not constitute a
termination of Tenant's right to possession; or
(c) With or without terminating this Lease, to reenter the
Leased Premises and remove all persons and property from the Leased
Premises. Such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Tenant. No such reentry
shall constitute an election to terminate this Lease unless a written
notice of such intention is given to Tenant or unless the termination
thereof is decreed by a court of competent jurisdiction. In addition to its
other rights under this Lease, Landlord shall have the right, even though
tenant is in default and has abandoned the Leased premises, (i) to maintain
this Lease in
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effect and not terminate Tenant's right to possession, and (ii) to enforce
its rights and remedies under this Lease, including the right to recover
Base Rent and Additional Rent as they become due under this Lease.
22.3 If Tenant fails to make any payment or cure any Event of Default
hereunder within the time permitted, Landlord, without being under any
obligation to do so and without thereby waiving such Event of Default, may make
the payment and/or remedy the Event of Default for the account of Tenant (and
enter the Leased Premises for such purpose), and Tenant shall pay Landlord, upon
demand, all reasonable costs, expenses and disbursements plus fifteen percent
(15%) overhead cost, incurred by Landlord in connection with such payment or
cure.
22.4 Nothing contained in this Section 22 shall limit or prejudice the
right of Landlord to prove and obtain as liquidate damages in any bankruptcy,
insolvency, receivership, reorganization or dissolution proceeding, an amount
equal to the maximum allowed by applicable Law, whether or not such amount is
greater, equal to or less than the amounts recoverable, either as damages or
Rent, referred to in any of the preceding provisions of this Section 22.
Notwithstanding anything contained in this Section 22 to the contrary, any such
proceeding or action involving bankruptcy, insolvency, reorganization,
arrangement assignment for the benefit of creditors, or appointment of a
receiver or trustee, shall be considered to be an Event of Default only when
such proceeding, action or remedy shall be taken or brought by or against the
then holder of the leasehold estate under this Lease or the guarantor under a
Guaranty of this Lease.
22.5 In connection with an Event of Default Tenant shall also be liable
and shall pay to Landlord, in addition to any sums provided to be paid above,
broker's fees incurred by Landlord in connection with reletting the whole or any
part of the Leased Premises, the costs of removing and storing Tenant's or other
occupants' property, the costs of repairing, altering, remodeling, or otherwise
putting the Leased Premises into condition acceptable to a new tenant or
tenants, and all reasonable expenses incurred by Landlord in enforcing or
defending Landlord's rights and/or remedies, including reasonable attorneys'
fees whether suit was actually filed or not.
22.6 Landlord is entitled to accept, receive, in check or money order,
and deposit any payment made by Tenant for any reason or purpose or in any
amount whatsoever, and apply them at Landlord's option to any obligation of
Tenant, and such amounts shall not constitute payment of any amount owed except
that to which Landlord has applied them. No endorsement or statement on any
check or letter of Tenant shall be deemed an accord and satisfaction or
recognized for any purpose whatsoever. The acceptance of any such check or
payment shall be without prejudice to Landlord's rights to recover any and all
amounts owed by Tenant and shall not be deemed to cure any other default nor
prejudice Landlord's rights to pursue any other available remedy.
22.7 Landlord shall not be in default unless Landlord fails to perform
obligations required of Landlord within thirty days after written notice thereof
from Tenant to Landlord, and after the notice and other requirements of Section
36 have been meg provided that, if such default cannot reasonably be cured
within thirty days then Landlord shall not be in default if it commences to cure
the default within the thirty day period and continues diligently to complete
the cure within a reasonable time. Any such notice of default shall specify the
obligation Landlord has allegedly failed to perform, and shall identify the
Lease provision containing such obligation. If, by reason of the occurrence of
any of the events
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specified in Section 10 hereof, Landlord is unable to fulfill or is delayed in
fulfilling any of Landlord's obligations under this Lease or any collateral
instrument, no such inability or delay shall constitute an actual or
constructive eviction, in whole or in pan, or entitle Tenant to any abatement or
diminution of Base Rent or Additional Rent, or relieve Tenant from any of its
obligations under this Lease, or impose any liability upon Landlord or its
agents by reason of inconvenience or annoyance to Tenant or by mason of injury
to or interruption of Tenant's business, loss of profits, or otherwise. Tenant
hereby waives and releases its right to terminate this Lease under Section
1932(1) of the California Civil Code or under may similar law, statute or
ordinance now or hereafter in effect
SECTION 23. LIEN FOR RENT
To secure the payment of all Rent and the faithful performance of all the
other covenants of this Lease to be performed by Tenant, Tenant hereby gives to
Landlord an express contract lien on and first security interest in and to all
property, equipment, machinery, trade fixtures, chattels and merchandise
("LIEN") which may be placed in the Leased Premises and also upon all proceeds
of any insurance which may accrue to Tenant by reason of damage to or
destruction of any such property, and agrees that this Lease shall constitute a
security agreement with respect thereto. All exemption laws are hereby waived by
Tenant. This Lien is given in addition to any statutory liens and shall be
cumulative thereto. Tenant agrees to execute from time to time at the request of
Landlord UCC-1 Financing Statements referencing this security agreement in a
form satisfactory to Landlord, and to file originals of such statements with the
clerk of the cities or towns where (i) the Leased Premises are located, and (ii)
Tenant maintains its principal business office or residence, or wherever else
such statements would ordinarily be filed to protect creditor's rights under
California law. In addition to all other rights of Landlord under this Lease,
upon Tenant's default, Landlord shall have all of the remedies of a secured
party with respect to said property, equipment, machinery, trade fixtures,
chattels and merchandise.
SECTION 24. RIGHT TO RELOCATE
Notwithstanding anything herein to the contrary, Landlord shall in all
cases retain the right and power to relocate Tenant upon thirty (30) days'
written notice within the Building in such space which is comparable in size and
location and suited to Tenant's use, such right and power to be exercised
reasonably. Landlord shall not be liable or responsible for any claims, damages
or liabilities in connection with or occasioned by such relocation. Landlord's
reasonable exercise of such right and power shall include, but not be limited
to, a relocation to consolidate the Rentable Area occupied in order to provide
Landlord's services more efficiently or a relocation to provide contiguous
vacant space for a prospective tenant. If Landlord shall exercise said option,
the substituted premises shall hereafter be deemed for the purposes hereof, the
"LEASED PREMISES" hereunder, and a new amended Exhibit A showing the new Leased
----------
Premises will be substituted for the original Exhibit A attached hereto.
----------
Landlord agrees to pay the Tenant's reasonable expenses to move its furniture,
fixtures and equipment to such substituted Leased Premises and for reprinting
stationary and business cards.
SECTION 25. ATTORNEYS' FEES
If either party commences litigation against the other in connection with
this Lease, the parties hereby waive any right to a trial by jury. In the event
of such litigation, the prevailing party shall be entitled to recover from the
other party such costs and reasonable attorneys' fees as may have been
23
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incurred. Further, if for any reason Landlord consults legal counsel or
otherwise incurs any costs or expenses as a result of its rightful attempt to
enforce the provisions of this Lease, even though no litigation is commenced, or
if commenced is not pursued to final judgment, Tenant shall pay to Landlord, in
addition to all other amounts for which Tenant is obligated, all of Landlord's
reasonable costs and expenses incurred in connection with any such acts,
including reasonable attorneys fees.
SECTION 26. NON-WAIVER
Neither acceptance of any payment by Landlord from Tenant nor failure by
Landlord to complain of any action, non-action, or default of Tenant shall
constitute a waiver of any of Landlord's rights. Time is of the essence with
respect to the performance of every obligation of Tenant under this Lease.
Waiver by Landlord of any right in connection with any Event of Default shall
not constitute a waiver of such right or remedy or any other right or remedy
arising in connection with either a subsequent Event of Default with respect to
the same obligation or any other obligation. No right or remedy of Landlord or
covenant, duty, or obligation of Tenant shall be deemed waived by Landlord
unless such waiver is in writing, signed by Landlord or Landlord's duly
authorized agent.
SECTION 27. RULES AND REGULATIONS
Tenant shall comply with the rules and regulations set forth in Exhibit B.
---------
Landlord shall have the right at all times to change such rules and regulations
or to amend them in any manner as-may be deemed advisable by Landlord, all of
which changes and amendments shall be sent by Landlord to Tenant in writing.
Tenant shall thereafter comply with the changed or amended rules and
regulations. Landlord shall have no liability to Tenant for any failure of any
other tenants of the Building to comply with such rules and regulations.
SECTION 28. ASSIGNMENT BY LANDLORD
Landlord shall have the right to transfer, in whole or in part, all its
rights and obligations under this Lease and in the Leased Premises and the
Building.
SECTION 29. LIABILITY OF LANDLORD
The obligations of Landlord under this Lease shall be binding upon Landlord
and its successors and assigns and any furore owner of the Building only with
respect to events occurring during its and their respective ownership of the
Building. In addition, Tenant shall look solely to Landlord's interest in the
Building for recovery of any judgment against Landlord arising in connection
with this Lease, it being agreed that neither Landlord nor any successor or
assign of Landlord nor any future owner of the Building, nor any trustee,
director, officer, employee, beneficiary, partner, shareholder, or agent of any
of the foregoing shall ever be personally liable for any such judgment.
SECTION 30. SUBORDINATION AND ATTORNMENT
At Landlord's option, this Lease shall be subordinate to any mortgage, deed
of trust (now or subsequently placed upon the Building), ground lease,
declaration of covenants (subsequently placed upon the Building) regarding
maintenance and use of any areas contained in any portion of the Building,
24
<PAGE>
and to any and all advances made under any mortgage or deed of trust and to all
renewals, modifications, consolidations, replacements and extensions of the
same. With respect to any of the above documents, Tenant agrees that no
documentation other than this Lease shall be required to evidence the
subordination. Any holder of a mortgage or deed of trust may elect, by written
notice to Tenant, to make this Lease superior to the lien of its mortgage or
deed of trust, in which case this Lease shall automatically be deemed prior to
such mortgage or deed of trust, whether this Lease is dated earlier or later
than the date of the mortgage or deed of trust or the date the same was
recorded. Tenant shall execute such documents as may be required to evidence the
subordination or to make this Lease prior to the lien of any mortgage or deed of
trust, as the case may be. By failing to do so within five days after written
demand, Tenant does hereby make, constitute and irrevocably appoint Landlord as
Tenant's attorney-in-fact to do so. This power of attorney is coupled with an
interest. Tenant hereby attorns to all successor owners of the Building, whether
or not such ownership is acquired as a result of a sale through foreclosure of a
deed of trust or mortgage, or other. Notwithstanding the above, Tenant shall be
obligated to subordinate its leasehold interest to any mortgage, deed of trust,
ground lease or declaration of covenants now or subsequently placed upon the
Building only if the holder of such mortgage or deed of trust or the landlord
under such ground lease or the declarant under such declaration of covenants
will grant to Tenant a nondisturbance agreement, using the form of document then
being employed by such holder, landlord or declarant for such purposes, which
will provide that Tenant, notwithstanding any default of Landlord, shall have
the right to remain in possession of the Leased Premises in accordance with this
Lease for so long as Tenant shall not be in default under this Lease.
Additionally, at such time or times as Landlord may request, upon not less than
five days' prior written request by Landlord, Tenant shall sign and deliver to
Landlord a certificate stating whether this Lease is in full force and effect;
whether any amendments or modifications exist; whether there are any Events of
Default; and such other information and agreements as may be reasonably
requested. Any such statement delivered pursuant to this Section may be relied
upon by Landlord and by any prospective purchaser of all or any portion of
Landlord's interest, or a holder or prospective holder of any mortgage or deed
of trust encumbering the Building. Tenant's failure to deliver such statement
within such time shall constitute an Event of Default and shall conclusively be
deemed to be an admission by Tenant of the matters set forth in the request for
an estoppel certificate.
SECTION 31. HOLDING OVER
In the event Tenant, or any party claiming under Tenant, retains possession
of the Leased Premises after the Termination Date, the possession shall be an
unlawful detainer. No tenancy or interest shall result from such possession, and
such parties shall be subject to immediate eviction and removal. Tenant or any
such party shall pay Landlord, as Rent for the period of such holdover, an
amount equal to one hundred fifty percent (150%) of the Rent otherwise provided
for in this Lease during the time of holdover. Tenant also shall be liable for
any and all damages sustained by Landlord as a result of such holdover. Tenant
shall vacate the Leased Premises and deliver the Leases Premises to Landlord
immediately upon Tenant's receipt of notice from Landlord to so vacate. The Rent
during such holdover period shall be payable to Landlord on demand. No holding
over by Tenant, whether with or without Landlord's consent, shall operate to
extend this Lease.
25
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SECTION 32. SIGNS
No sign, symbol or identifying marks shall be put upon the Building or the
Real Property, or in the halls, elevators, staircases, entrances, parking areas
or upon the doors or walls, without Landlord's prior written approval, which may
be given or withheld in Landlord's sole discretion Should such approval be
granted, the signs or lettering shall conform in all respects to the sign and/or
lettering criteria established by Landlord. Landlord, at Landlord's sole cost
and expense, reserves the right to change the door plaques as Landlord deems
reasonably desirable.
SECTION 33. HAZARDOUS SUBSTANCES
With respect to Tenant's use of the Building, Tenant at all times, at its
own cost and expense, shall comply with all Laws relating to the use, analysis,
production, storage, sale, disposal or transportation of any hazardous materials
("HAZARDOUS SUBSTANCE LAWS"), including, without limitation, oil or petroleum
products or their derivatives, solvents, PCB's, explosive substances, asbestos,
radioactive materials or waste, and any other toxic, ignitable, reactive,
corrosive, contaminating or pollution materials ("HAZARDOUS SUBSTANCES") which
now or in the future are subject to any governmental regulation.
Tenant shall not use, generate, store or dispose of any Hazardous
Substances in or on the Leased Premises or the Building (except to the extent
and in the quantities any such Hazardous Substances are commonly used for
general office purposes and then only in strict accordance with all Hazardous
Substance Laws. Except in emergencies or as otherwise required by Law, Tenant
shall not take any remedial action in response to the presence or release of any
Hazardous Substances on or about the Building without first giving written
notice of the same to Landlord. Tenant shall not enter into any settlement
agreement, consent decree or other compromise with respect to any claims
relating to any Hazardous Substances in any way connected with the Building
without first notifying Landlord of Tenant's intention to do so and affording
Landlord the opportunity to participate in any such proceedings.
Landlord shall have the right at all reasonable times to (i) inspect the
Leased Premises, (ii) conduct tests and investigations to determine whether
Tenant is in compliance with the above provisions, and (iii) request lists of
all Hazardous Substances used, stored or located on the Leased Premises by
Tenant. All costs and expenses incurred by Landlord in connection with any
environmental investigation shall be paid by Landlord (and may be included in
Operating Expenses), except that if any such environmental investigation shows
that Tenant has failed to comply with the provisions of this Section, or that
the Building or the Real Property (including surrounding soil and any underlying
or adjacent groundwater) have become contaminated due to the operations or
activities in any way attributable to Tenant, then all of the costs and expenses
of such investigation shall be paid by Tenant. Tenant's indemnity under-Section
21 shall specifically extend to all liability, including all foreseeable and
unforeseeable consequential damages, directly or indirectly arising out of the
use, generation, disposal or storage of Hazardous Substances by Tenant,
including without limitation the costs of any required repair, cleanup or
detoxification and the preparation of any closure or other required plans,
whether such action is required or necessary prior to or following the
termination of this Lease, to the full extent that such action is proximately
caused by the use, generation, storage, or disposal of Hazardous Substances by
Tenant. Neither the written consent by Landlord to the use, generation,
26
<PAGE>
disposal or storage of Hazardous Substances by Tenant nor the strict compliance
by Tenant with all Hazardous Substances Laws shall excuse Tenant from its
indemnity obligation.
In the event Tenant's occupancy or conduct of business in or on the Leased
Premises, whether or not Landlord has consented to the same, results in any
increase in premiums for the insurance carried from time to time by Landlord
with respect to the Building, Tenant shall pay any such increase in premiums as
Rent within ten days after bills for the additional premiums shall be rendered
by Landlord. In determining whether increased premiums are a result of Tenant's
use or occupancy of the Leased Premises, a schedule issued by the organization
computing the insurance rate on the Building showing the various components of
such rate, shall be conclusive evidence of the several items and charges which
make up such rate. Tenant shall promptly comply with all reasonable requirements
of the insurance authority or of any insurer now or subsequently in effect
relating to the Leased Premises.
Landlord hereby discloses to Tenant that a Phase I Environmental Site
Assessment and Limited Asbestos Survey and Hazard Assessment were performed on
the Property by Hygienetics, Inc. of Emeryville, California in 1990.
Hygienetics, Inc. supplemented the Limited Asbestos Survey in June, 1991 and
March, 1995. Such surveys and assessment revealed 13 samples of vinyl tile floor
mastic, and two samples of vinyl floor files, in the Building, which contained
asbestos and revealed the presence of limited quantities of hazardous and toxic
substances such as cleaning materials, lead and acid batteries in the basement
and diesel fuel storage tanks. Complete copies of the Site Assessment and
Asbestos Surveys are available for inspection in the Building management office.
Except as disclosed in the Site Assessment and Asbestos Surveys, Landlord has no
actual knowledge of Hazardous Substances in the Building that must be removed in
order for the Building to comply with Environmental Laws in effect as of the
date of this Lease. Tenant has had the opportunity, prior to execution and
delivery of this Lease, to make such further investigation and inquiry about
such matters as Tenant deems appropriate and Tenant accepts the Premises with
knowledge of the risks that may be associated with the presence of all materials
or conditions disclosed in such surveys and assessment.
SECTION 34. COMPLIANCE WITH LAWS AND OTHER REGULATIONS
At its sole cost and expense, Tenant shall promptly comply with all laws,
statutes, ordinances, decrees, orders, and governmental roles, regulations or
requirements now in force or which may hereafter become in force, of federal,
state, county, and municipal authorities, including but not limited to the
Americans with Disabilities Act (the "ADA"), with the requirements of any board
of fire underwriters or other similar body now or hereafter constituted, and
with any occupancy certificate issued pursuant to any law by any public officer
or officers, which impose any duty upon Landlord or Tenant, insofar as any
thereof relate to or affect the condition, use, alteration or occupancy of the
Leased Premises (collectively "LAWS"). Landlord's approval of Tenant's plans for
any improvements shall create no responsibility or liability on the part of
Landlord for their completeness, design sufficiency, or compliance with Laws.
SECTION 35. GOVERNING LAW; SEVERABILITY
This Lease shall be construed in accordance with the laws of the State of
California. If any provision of this Lease or the application of it to any
person or circumstance shall be invalid or unenforceable to any extent, it shall
be adjusted, if possible, rather than voided, in order to achieve the
27
<PAGE>
intent of the parties. In any event, the remainder of this Lease and the
application of such provision to the other persons or circumstances shall not be
affected thereby and shall be enforced to the greatest extent permitted by law.
This Lease shall Ix: construed as though the covenants between Landlord and
Tenant are independent Tenant hereby expressly waives the benefit of any statute
to the contrary and agrees that if Landlord fails to perform its obligations set
forth heroin, Tenant shall not be entitled to make any repairs or perform any
acts hereunder at Landlord's expense or to any set-off of the rent or other
amounts owing hereunder against Landlord.
SECTION 36. NOTICES
All notices, demands, statements or communications (collectively,
"NOTICES") given or required to be given by either party to the other hereunder
shall be in writing, shall be sent by nationally recognized overnight courier
service, or United States certified or registered mail, postage prepaid, return
receipt requested, or delivered personally addressed as follows:
TO THE LANDLORD: John Hancock Mutual Life Insurance Company
c/o The Galbreath Company
353 Sacramento Street
San Francisco, CA 94111
Attn: Melody Hanhaa
with a copy to: John Hancock Mutual Life Insurance Company
Attn Investment Officer Real Estate Investment Group
200 Clarendon St. Floor T-53
Boston, MA 02117
TO THE TENANT: Digital Island
353 Sacramento Street, Suite 1520
San Francisco, CA 94104
Attn: Ken Higgins
Any Notice will be deemed given upon the date actually received. If Tenant
is notified of the identity and address of the holder of any mortgage or deed of
trust given by Landlord, or any ground or underlying lessor, Tenant shall give
to such holder or ground or underlying lessor written notice of any default by
Landlord under the terms of this Lease by registered or certified mail, and such
holder or ground or underlying lessor shall be given a reasonable opportunity to
cure such default prior to Tenant's exercising any termination remedy available
to Tenant. Such addresses may be changed from time to time by either party
serving notice as provided above.
SECTION 37. OBLIGATIONS OF SUCCESSORS, PLURALITY, GENDER
Landlord and Tenant agree that all the provisions hereof are to be
construed as covenants and agreements as though the words imparting such
covenants were used in each paragraph hereof, and that, except as restricted by
the provisions hereof, shall bind and inure to the benefit of the parties
hereto, their respective heirs, legal representatives, successors and assigns.
If the rights of Tenant hereunder are owned by two or more parties or two or
more parties are designated herein as Tenant, then all such
28
<PAGE>
parties shall be jointly and severally liable for the obligations of Tenant
hereunder. Whenever the singular or plural number, masculine or feminine or
neuter gender is used herein, it shall equally include the other.
SECTION 38. ENTIRE AGREEMENT
This Lease and any attached addenda or exhibits constitute the entire
agreement between Landlord and Tenant. No prior or contemporaneous written or
oral or representations shall be binding. This Lease shall not be amended,
changed or extended except by written instrument signed by Landlord and Tenant.
SECTION 39. SECTION CAPTIONS
Section captions are for Landlord's and Tenant's convenience only, and
neither limit nor amplify the provisions of this Lease.
SECTION 40. CHANGES
Tenant shall consent to a modification of this Lease requested by any
mortgagee or beneficiary under a deed of trust as long as the modification does
not increase Tenant's costs or substantially change Tenant's rights and
obligations.
SECTION 41. AUTHORITY
All rights and remedies of Landlord under this Lease, or those which may be
provided by law, may be exercised by Landlord in its own name individually, or
in its name by its agent, and all legal proceedings for the enforcement of any
such rights or remedies, including actions for Rent, unlawful detains, and any
other legal or equitable proceedings, may be commenced and prosecuted to final
judgment and be executed by Landlord in its own name individually or in its name
by its agent. Landlord and Tenant each represent to the other that each has full
power and authority to execute this Lease and to make and perform the agreements
herein contained. Tenant expressly stipulates that any rights or remedies
available to Landlord, either by the provisions of this Lease or otherwise, may
be enforced by Landlord in its own name individually or in its name by its agent
or principal.
SECTION 42. BROKERAGE
Landlord and Tenant hereby warrant to each other that they have had no
dealings with any real estate broker or agent in connection with the negotiation
of this Lease, excepting only the real estate brokers or agents specified in the
Basic Lease Information, and that they know of no other real estate broker or
agent who is entitled to a commission in connection with this Lease. Each party
shall defend, indemnify and hold the other party harmless from and against all
claims, actions, loss, cost, damage, expense and liability (including without
limitation reasonable attorneys' fees and court costs) with respect to any
leasing commission or equivalent compensation alleged to be owing on account of
the indemnifying party's dealings with any real estate broker or agent other
than that specified herein. Additionally, Tenant acknowledges and agrees that
Landlord shall have no obligation for payment of any brokerage fee or similar
compensation to any person with whom Tenant has dealt or may in the
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future deal with respect to leasing of any additional or expansion space in the
Building or renewals or extensions of this Lease.
SECTION 43. ADDITIONS TO LEASE
Exhibits "A" through "C" are attached hereto and incorporated in this Lease
for all purposes and are hereby acknowledged by both panics to this Lease.
IN WITNESS WHEREOF, Landlord and Tenant, acting herein through duly
authorized individuals, have caused this Lease to be executed in multiple
counterparts, each of which shall have the force and effect of an original as of
the date first above written
TENANT: DIGITAL ISLAND,
a California corporation
By: /s/ [SIGNATURE ILLEGIBLE]^^
----------------------------
Name: /s/ [SIGNATURE ILLEGIBLE]^^
----------------------------
Title:
---------------------------
TAX ID OR TAX EXEMPT NO.______________
LANDLORD: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY,
a Massachusetts, corporation
By: /s/ Meliha E. Amour
-----------------------------
Meliha E. Amour
Its: Investment Officer
30
<PAGE>
LEASE EXHIBIT A (MAP)
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT B
---------
Rules and Regulations
353 Sacramento Street Building
**********************************
1. Tenant shall not alter any lock or install any new or additional
locks or bolts on any doors or windows of the Leased Premises without obtaining
Landlord's written consent. Tenant shall bear the cost of any lock changes or
repairs required by Tenant. Two keys will be furnished by Landlord for the
Leased Premises, and any additional keys required by Tenant must be obtained
from Landlord at a reasonable cost to be established by Landlord. Upon
termination of the Lease, all keys to the Building and the Leased Premises shall
be surrendered to Landlord.
2. All doors opening to public corridors shall be kept closed at all
times except for normal ingress to and egress from the Leased Premises.
3. Landlord reserves the right to close and keep locked all entrance
and exit doors of the Building during such hours as are customary for comparable
buildings in the City of San Francisco. Tenant and its employees and agents
shall ascertain that the Building doors are securely closed and locked when
leaving the Premises after normal business hours. When entering or leaving the
Building after normal business hours Tenant and its employees and agents may be
required to sign the Building Register. Access to the Building may be refused
unless the person seeking access has proper identification or a previously
arranged pass. Landlord and its agents shall in no event be liable for damages
for any error with regard to the admission to or exclusion from the Building of
any person. In the event of invasion, mob riot, public excitement, or other
commotion, Landlord reserves the right to prevent access to the Building by any
means Landlord deems appropriate for the protection of life and property.
4. No furniture, freight or equipment of any kind shall be brought
into the Building without prior written notice to Landlord. All moving of the
same into or out of the Building shall be scheduled with Landlord and done only
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 property brought into the Building. Landlord may require safes and other
heavy objects to stand on supports to properly distribute the weight. All damage
done to any pan of the Building, its contents, occupants or visitors by the
moving or maintenance of such safes or other property shall be the sole
responsibility of Tenant.
5. No furniture, packages, supplies, equipment or merchandise shall
be received in the Building or carried up or down in the elevators, except
between such hours and in such elevator as shall be designated by Landlord.
<PAGE>
6. Landlord shall have the right to control and operate the public
portions of the Building, the public facilities, the heating and air
conditioning, and any other facilities furnished for the common use of tenants,
in such manner as is customary for comparable buildings in the City of San
Francisco.
7. Landlord shall furnish heating and air conditioning from 8:00
a.m. to 6:00 p.m., Monday through Friday. In the event Tenant requires heating
and air conditioning during off hours, Saturdays, Sundays, or holidays,
Landlord, on 24 hours' prior written notice from Tenant, shall provide such
services at an hourly rate to be established by Landlord from time to time.
8. Tenant shall apply to the Building office for any work or
maintenance to be provided by Landlord. Employees of Landlord shall not perform
any work other than their regular duties except when so directed by Landlord.
9. Tenant shall not disturb, solicit, or canvass any occupant of the
Building and shall cooperate with Landlord or Landlord's agent to prevent same.
10. The toilet rooms, 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. The expense
of any breakage, stoppage or damage resulting from the violation of this rule by
Tenant or its employees, agents and invitees shall be borne by Tenant
11. Tenant shall not overload the floor of the Leased Premises, nor
mark, drive nails or screws, or drill into the partitions, woodwork or plaster
or in any way deface the Leased Premises or any part thereof without Landlord's
prior written consent.
12. No vending machine or machines of any description other than
fractional horsepower office machines shall be installed, maintained or operated
upon the Leased Premises without Landlord's prior written consent; provided
that, Tenant may install art work, white boards and similar items, so long as
Tenant patches any significant holes resulting from such installation.
13. Tenant shall not use or keep in or on the Leased Premises of the
Building any kerosene, gasoline or other inflammable or combustible fluid or
material. Tenant shall not use, keep or permit to be used or kept foul or
noxious substances in or on the Leased Premises, or permit or allow the Leased
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, or
vibrations, or interfere in any way with other tenants or persons having
business in the Building.
14. Tenant shall not use any heating or air conditioning equipment
other than that supplied by Landlord without Landlord's prior written consent.
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<PAGE>
15. Tenant shall not bring into or keep within the Building or the
Leased Premises any animals, birds, bicycles or other vehicles.
16. No cooking shall be done or permitted by any Tenant on the Leased
Premises, nor shall the Leased Premises be used for the storage of merchandise
(other than business samples), for lodging, or for any improper purposes.
Notwithstanding the foregoing, Underwriters' Laboratory-approved equipment may
be used in the Lease Premises for brewing coffee, tea, hot chocolate and similar
beverages, and microwave heating of already prepared foodstuffs, provided that
such use is in accordance with all applicable Federal, state and city laws,
codes, ordinances, rules and regulations.
17. Introduction of telephone wires to the Leased Premises and the
location of telephone, call boxes and other office equipment affixed to the
Leased Premises shall be subject to Landlord's prior written approval, which
shall not be unreasonably withheld or delayed.
18. Landlord reserves the right to exclude or expel from the Building
any person who, in Landlord's sole judgment, appears under the influence of
liquor or drugs, or who violates these rules and regulations.
19. Landlord shall have the right, exercisable without notice and
without liability to Tenant, to change the name and street address of the
Building.
20. Tenant shall not employ or admit any person or persons other than
Landlord's janitor for the purpose of cleaning or maintaining the Leased
Premises unless agreed to in writing by Landlord. Any damage to the Leased
Premises caused by Tenant or its employees or agents while engaged in the
cleaning or maintaining of the Leased Premises shall be Tenant's sole
responsibility. Janitorial service shall include ordinary dusting and cleaning
and shall not include cleaning of carpets or rugs, except normal vacuuming, nor
moving of furniture or other special services. Landlord shall in no way be
responsible to Tenant for any loss of or damage to property on the Leased
Premises caused by the janitorial service, but Landlord shall use commercially
reasonable efforts to pursue rights and remedies available against such
janitorial service.
21. Tenant and its employees and agents shall not loiter in the
entrances or corridors, nor in any way obstruct the sidewalks, lobby, halls,
stairways or elevators, and shall use the same only for ingress to and egress
flora the Leased Premises.
22. Tenant shall not waste electricity, water or air conditioning.
Tenant shall cooperate fully with Landlord to ensure the most effective
operation of the Building's heating and air conditioning, and shall not adjust
any controls.
23. Tenant shall store all trash and garbage within the interior of
the Leased Premises. No material shall be placed in trash boxes or receptacles
if disposal in the ordinary and customary manner in the City of San Francisco
would violate any applicable law or
3
<PAGE>
ordinance. All trash, garbage and refuse disposal shall occur only through
entryways and elevators provided for such purposes at times designated by
Landlord.
24. Tenant shall comply with all safety, fire protection and
evacuation procedures and regulations established by Landlord or any
governmental agency.
25. Tenant shall assume all responsibility for protecting the Leased
Premises from theft, robbery and pilferage, including without limitation
preventing entry to the Leased Premises by unauthorized persons.
26. Landlord may waive any one or more of these Rules and Regulations
for the benefit of any particular tenant or tenants, but no such waiver by
Landlord shall be construed as a waiver of such Rules and Regulations in favor
of any other tenant or tenants, nor prevent Landlord from thereafter enforcing
any such Rules and Regulations against any or all tenants of the Building.
27. Landlord reserves the right to make other reasonable rules and
regulations as in its judgment may from time to time be needed for security or
for the preservation of good order, and Tenant shall abide by all such rules and
regulations.
*****
4
<PAGE>
EXHIBIT C
TENANT IMPROVEMENT WORK
This Exhibit C is incorporated in and is part of that certain Lease dated
as of April 8, 1997 (the "LEASE"). Terms defined in the Lease shall have the
same meaning when used herein.
1. PREPARATION OF DRAWINGS
A. DRAWINGS. The space plan prepared by Huntsman Associates has been
approved by Landlord and Tenant and is incorporated herein and
attached to the Lease as Exhibit A. Further detailed working drawings
and specifications (the "WORKING DRAWINGS") as required for
construction of the tenant improvement work (the "TENANT IMPROVEMENT
WORK") in the Leased Premises shall be prepared by Landlord as soon as
practicable.
B. APPROVAL OF THE WORKING DRAWINGS. Within five (5) business days after
Landlord's submission to Tenant of the Working Drawings, Tenant shall
give Landlord written notice of its approval or disapproval of same.
Tenant's approval shall not be unreasonably withheld or delayed
provided that the Working Drawings are consistent with building
standards. If the Working Drawings ate not approved by Tenant, Tenant
shall in its notice of disapproval state specifically all corrections
or changes requested, all of which must be consistent with building
standards.
C. CONSTRUCTION. Upon Tenant's approval of the Working Drawings, Landlord
shall proceed diligently to perform the Tenant Improvement Work as
soon as practicable in accordance with the Working Drawings, current
building standards for labor and materials, and all applicable codes
and regulations.
2. COMPUTER AND TELEPHONE EQUIPMENT. Landlord, at Tenant's request, will allow
Tenant, its employees or other installation personnel, access to the Leased
Premises for the purposes of installing telephone and computer lines,
cables and equipment. Tenant agrees to coordinate its installation of
telephones and computer equipment so as not to delay or increase the costs
of Landlord's performance of the Tenant Improvement Work.
3. PAYMENT OF THE COSTS OF THE TENANT IMPROVEMENT WORK. Landlord shall pay the
costs for design and construction of the Tenant Improvement Work in an
amount not to exceed $85,848. Any costs in excess of $85,848 shall be paid
by Tenant within ten (10) days after receipt of Landlord's invoice
therefor. If the costs of the Tenant Improvement Work are reasonably
estimated by Landlord to exceed $85,848, then Tenant shall deposit with
Landlord the amount of such excess as reasonably estimated by Landlord
prior to commencement of the Tenant Improvement Work Any amount deposited
by Tenant in excess of the amount by which the actual costs of the Tenant
Improvement Work exceed $85,848 shall be credited by Landlord to the next
payment of Rent due under the Lease.
4. DELIVERY OF PREMISE AND COMMENCEMENT OF LEASE TERM. When the Tenant
Improvement Work to be done by Landlord pursuant to this Exhibit C has been
substantially completed (i.e.,
<PAGE>
subject to normal "punch-list" items) for each of the Phase 1 and Phase 2
portions of' the Leased Premises, Landlord shall provide written notice of
such event to Tenant and that portion of the Leased Premises shall be
immediately inspected by Tenant's representative and accepted in writing as
to whether the Tenant Improvement Work has been performed according to the
Working Drawings and building standards; provided, however, that there
shall be no withholding of acceptance if the Tenant Improvement Work to be
done is substantially completed such that there would be no interference
with Tenant's use or occupancy of the Leased Premises caused by any such
incomplete work.
If the Tenant Improvement Work has been substantially but not entirely
complete, Tenant's representative shall accept the Phase I or Phase 2
portion of the Leased Premises, as applicable, and give Landlord a written
punchlist of such items necessary to complete, which items Landlord agrees
in writing should be included on such punchlist are herein called the
"PUNCHLIST ITEMS". Landlord shall promptly complete the Punchlist Items.
Tenant shall be conclusively deemed to have agreed that Landlord has
performed all its obligations with respect to the Tenant Improvement Work
except only as to the Punchlist Items.
Upon Tenant's acceptance of the Tenant Improvement Work for each of the
Phase I and Phase 2 portions of the Leased Premises, as applicable, that
portion of the Leased Premises shall be deemed "Ready for Occupancy" and
possession thereof deemed delivered to Tenant for all purposes of the
Lease.
5. PERFORMANCE OF THE TENANT IMPROVEMENT WORK. Landlord warrants that all
Tenant Improvement Work shall be completed in compliance with the Working
Drawings and building standard materials and techniques. Except for the
warranty continued in the previous sentence, no other warranties or
representations are made by Landlord concerning the tenant improvements.
6. EXTRAS. All extras or changes made to the Tenant Improvement Work after the
Working Drawings have been accepted shall be made only by a writing signed
by both parties.
7. REMEDIES UPON BREACH. In the event of any breach by Tenant of the
provisions of this Exhibit C, Landlord, upon thirty (:30) days' written
notice to Tenant as provided in the Lease (which notice shall be in lieu of
any notice required by the laws of the State of California, unless
California law provides for a longer period), may elect to treat Such
breach as a default under the Lease which shall entitle Landlord to any of
the rights and remedies provided thereunder.
8. TENANT'S REPRESENTATIVE. Tenant has designated MARK NICHOLS as its sole
representative with respect the matters set forth in this Exhibit C, who
shall full authority and responsibility to act on behalf to Tenant as
required in this Exhibit C. If MARK NICHOLS shall not be available for
inspection of the Leased Premises as provided in Paragraph 4 above, Tenant
shall provide an authorized representative within one day after said notice
to inspect and who shall have Tenant's authority to accept the Leased
Premises at that time.
9. LANDLORD'S REPRESENTATIVE. Landlord has designated Melody Hanhan as its
representative with respect to the matters set forth in the Exhibit C, who
shall have the full authority and responsibility to act on behalf of the
Landlord as required in this Exhibit C.
<PAGE>
[DEMOLITION PLAN APPEARS HERE]
<PAGE>
[CONSTRUCTION/FINISH PLAN APPEARS HERE]
<PAGE>
[POWER & SIGNAL PLAN APPEARS HERE]
<PAGE>
[REFLECTED CEILING PLAN APPEARS HERE]
<PAGE>
DEMOLITION LEGEND
DEMOLITION NOTES
SHEET NOTES
<PAGE>
CONSTRUCTION LEGEND
SHEET NOTES
DOOR SCHEDULE
HARDWARE GROUPS
DOOR AND HARDWARE NOTES
<PAGE>
FINISH LEGEND
FINISH KEYNOTES
REFLECTED CEILING LEGEND
REFLECTED CEILING KEYNOTES
REFLECTED CEILING NOTES
POWER AND SIGNAL LEGEND
POWER AND SIGNAL KEYNOTES
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Digital Island, Ltd., incorporated in the United Kingdom.
2. Digital Island, B.V.i.o., incorporated in the Netherlands.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 19, 1999,
relating to the financial statements of Digital Island, Inc., which appears in
such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
April 23, 1999
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