<PAGE>
As filed with the Securities and Exchange Commission on December 9, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
DIGITAL ISLAND, INC.
(Exact Name of Registrant as Specified in its Charter)
--------------
<TABLE>
<S> <C> <C>
Delaware 4813 68-0322824
(Primary Standard Industrial (I.R.S. Employer Identification
(State of Incorporation) Classification Code) Number)
</TABLE>
45 Fremont Street, Suite 1200
San Francisco, CA 94105
(415) 738-4100
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
--------------
Ruann F. Ernst
Chief Executive Officer
Digital Island, Inc.
45 Fremont Street, Suite 1200
San Francisco, CA 94105
(415) 738-4100
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
<TABLE>
<S> <C>
Curtis L. Mo, Esq. Lawrence C. Weeks, Esq.
Rod J. Howard, Esq. Ronn S. Davids, Esq.
Andrew R. Hull, Esq. Riordan & McKinzie
Brobeck, Phleger & Harrison LLP 5743 Corsa Avenue, Suite 116
Two Embarcadero Place, 2200 Geng Road Westlake Village, CA 91362
Palo Alto, CA 94303 (818) 706-1800
(650) 424-0160
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public: At the
Effective Time of the Merger of a wholly-owned subsidiary of the Registrant
with and into Sandpiper Networks, Inc., which shall occur as soon as
practicable after the Effective Date of this Registration Statement, and the
satisfaction or waiver of all conditions to the closing of such Merger.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, please 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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Amount Maximum Aggregate Amount of
Securities to to be Offering Price Offering Registration
be Registered Registered(1) Per Share Price(2) Fee(3)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.001 per
share 24,573,160 N/A $7,635.93 $2.02
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon the maximum number of shares of the Registrant's common stock
expected to be issued in connection with the merger, calculated as the
product of (a) 22,907,765, the aggregate number of shares of Sandpiper
Networks, Inc. capital stock outstanding on November 12, 1999 and shares
issuable pursuant to outstanding warrants prior to the date the merger is
expected to be consummated and (b) an exchange ratio of 1.0727 shares of
the Registrant's common stock for each share of Sandpiper common stock.
(2) Estimated solely for purposes of calculating the registration fee required
by Section 6(b) of the Securities Act and calculated pursuant to Rule
457(f)(2) under the Securities Act. Pursuant to Rule 457(f)(2) under the
Securities Act, because Sandpiper has accumulated capital deficit, the
proposed maximum aggregate offering price of the Registrant's common stock
was calculated as the sum of : (a) $2,331.70, one-third of the aggregate
par value of 6,972,665 outstanding shares of Sandpiper common stock and
22,425 shares of Sandpiper common stock issuable pursuant to outstanding
warrants at November 12, 1999, (b) $3,295.33, one-third of the aggregate
par value of 9,607,141 outstanding shares of Sandpiper Series A preferred
stock and 278,840 shares of Sandpiper Series A preferred stock issuable
pursuant to outstanding warrants at November 12, 1999, and (c) $2,008.90 ,
one-third of the aggregate par value of 4,820,628 outstanding shares of
Sandpiper Series B preferred stock and 1,206,066 shares of Sandpiper Series
B preferred stock issuable pursuant to outstanding warrants at November 12,
1999.
(3) Pursuant to Rule 457(b), under the Securities Act, the full amount of the
registration fee is offset by the filing fee of $246,074.57 previously paid
by the Registrant in connection with the filing of preliminary proxy
materials on Schedule 14A on November 19, 1999.
--------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+This joint proxy statement/prospectus and the information contained herein is +
+subject to completion or amendment. A registration statement relating to +
+these securities has been filed with the Securities and Exchange Commission. +
+These securities may not be sold nor may offers to buy be accepted until the +
+time the registration statement becomes effective. This joint proxy +
+statement/prospectus shall not constitute an offer to sell or the +
+solicitation of any offer to buy nor shall there be any sale of these +
+securities in any state in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities law of +
+any such state. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated December 9, 1999
DIGITAL ISLAND, INC.
45 Fremont Street, Suite 1200
San Francisco, CA 94105
(415) 738-4100
December , 1999
Dear Digital Island Stockholders:
I am writing to you today about our proposed merger with Sandpiper Networks,
Inc. This merger will create a combined company to offer comprehensive network
solutions for Internet-based marketing, sales, fulfillment and support
applications worldwide.
In the merger, each share of Sandpiper capital stock will be exchanged for
1.0727 shares of Digital Island common stock, par value $0.001 per share. We
expect to issue approximately 24.5 million shares of our common stock in the
merger. Digital Island common stock is traded on the Nasdaq National Market
under the symbol "ISLD," and closed at $114.94 per share on December 8, 1999.
The merger is described more fully in this joint proxy statement/prospectus.
You will be asked to vote upon the issuance of shares of Digital Island
common stock pursuant to a merger agreement with Sandpiper, at a special
meeting of Digital Island stockholders to be held on December 28, 1999 at
8:30 a.m., local time, at 45 Fremont Street, 11th floor, San Francisco,
California. The merger cannot be consummated unless the holders of a majority
of the shares of Digital Island common stock present in person or by proxy and
entitled to vote at the special meeting approve the issuance of these shares.
Only stockholders who hold shares of Digital Island common stock at the close
of business on November 29, 1999 will be entitled to vote at the special
meeting.
We are very excited by the opportunities we envision for the combined
company. Your board of directors has determined that the terms and conditions
of the merger are fair to you and in your best interests, and unanimously
recommends that you approve the issuance of the shares of Digital Island common
stock in connection with the merger.
This joint proxy statement/prospectus provides detailed information about the
two companies and the merger. Please give all of this information your careful
attention. In particular, you should carefully consider the discussion in the
section entitled "Risk Factors" beginning on page 16 of this joint proxy
statement/prospectus.
Holders of over 45% of the outstanding common stock of Digital Island as of
October 24, 1999 have entered into voting agreements with Sandpiper whereby
they have agreed to vote all of their Digital Island common stock "FOR" the
issuance of shares of Digital Island common stock pursuant to the merger
agreement and have appointed representatives of Sandpiper as proxies to vote
their Digital Island common stock at the meeting.
Your vote is very important regardless of the number of shares you own. To
vote your shares, you may use the enclosed proxy card or attend the special
stockholders meeting. To approve the issuance of shares of Digital Island
common stock pursuant to the merger agreement, you MUST vote "FOR" the proposal
by following the instructions stated on the enclosed proxy card. We urge you to
vote FOR this proposal, a necessary step in the merger of Digital Island and
Sandpiper.
Sincerely,
/s/ Ruann F. Ernst
Ruann F. Ernst
Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of this transaction or the Digital
Island common stock to be issued in the merger, or determined if this joint
proxy statement/prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
This joint proxy statement/prospectus is dated December , 1999, and was
first mailed to Digital Island stockholders on or about December , 1999.
<PAGE>
DIGITAL ISLAND, INC.
45 Fremont Street, Suite 1200
San Francisco, CA 94105
(415) 738-4100
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON December 28, 1999
----------------
We will hold a special meeting of stockholders of Digital Island, Inc., a
Delaware corporation, at 8:30 a.m., local time, on December 28, 1999 at 45
Fremont Street, 11th floor, San Francisco, California:
1. To consider and vote upon a proposal to approve the issuance of
shares of common stock, par value $0.001 per share, of Digital Island
pursuant to a merger agreement among Digital Island, Sandpiper Networks,
Inc. and Beach Acquisition Corp., a wholly owned subsidiary of Digital
Island, under which Sandpiper will become a wholly owned subsidiary of
Digital Island,
2. To grant the Digital Island board of directors discretionary
authority to adjourn the special meeting to solicit additional votes for
approval of the share issuance, and
3. To transact such other business as may properly come before the
special meeting or any adjournment or postponement.
Only Digital Island stockholders of record at the close of business on
November 29, 1999 are entitled to notice of and to vote at the special meeting
or any adjournment or postponement.
For more information about the merger, the merger agreement and related
matters, please review the accompanying joint proxy/prospectus.
By Order of the Board of Directors
/s/ T.L. Thompson
T.L. Thompson
Secretary
San Francisco, California
December , 1999
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. TO
ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, WE URGE
YOU TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN
THE POSTAGE-PAID ENVELOPE PROVIDED, OR CALL THE TOLL-FREE TELEPHONE NUMBER
OR USE THE INTERNET BY FOLLOWING THE INSTRUCTIONS INCLUDED WITH YOUR PROXY
CARD, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON. YOU
MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL
MEETING. YOU MAY VOTE IN PERSON AT THE SPECIAL MEETING EVEN IF YOU HAVE
RETURNED A PROXY.
<PAGE>
SANDPIPER NETWORKS, INC
225 West Hillcrest Drive, Suite 250
Thousand Oaks, CA 91360
(805) 370-2100
December , 1999
Dear Sandpiper Shareholders:
I am writing to you today about our proposed merger with Digital Island,
Inc. This merger will create a combined company to offer comprehensive network
solutions for Internet-based marketing, sales, fulfillment and support
applications worldwide.
In the merger, each share of Sandpiper capital stock will be exchanged for
1.0727 shares of Digital Island common stock. Digital Island expects to issue
approximately 24.5 million shares of its common stock in the merger. Digital
Island common stock is traded on the Nasdaq National Market under the trading
symbol "ISLD," and closed at $114.94 per share on December 8, 1999. The merger
is described more fully in this joint proxy statement/prospectus.
Sandpiper has scheduled a special meeting of the Sandpiper shareholders to
vote on the matters described in this document. You will be asked to vote upon
the merger at a special meeting of Sandpiper shareholders to be held on
December 28, 1999 at 9:00 a.m., local time, at 225 West Hillcrest Drive, Suite
250, Thousand Oaks, California. At the special meeting, you will be asked to
(i) approve and adopt the merger agreement, and (ii) approve the merger.
The merger cannot be consummated unless the merger agreement and the merger
are approved by the affirmative vote of (i) the holders of record of at least a
majority of the outstanding shares of Sandpiper common stock and preferred
stock, voting together as a single class, (ii) the holders of record of at
least a majority of the outstanding shares of (a) Sandpiper common stock,
voting as a separate class, and (b) Sandpiper preferred stock, voting as a
separate class. Only shareholders who hold shares of Sandpiper common stock or
preferred stock at the close of business on December 3, 1999 will be entitled
to vote at the special meeting.
We are very excited by the opportunities we envision for the combined
company. Your board of directors has determined that the terms and conditions
of the merger are fair to you and in your best interests, and unanimously
recommends that you approve the merger agreement and the merger.
This joint proxy statement/prospectus provides detailed information about
the two companies and the merger. Please give all of this information your
careful attention. In particular, you should carefully consider the discussion
in the section entitled "Risk Factors" beginning on page 16 of this joint proxy
statement/prospectus.
Holders owning approximately 76% of the outstanding capital stock of
Sandpiper as of October 24, 1999 have entered into a shareholder agreement with
Digital Island and Sandpiper whereby they have agreed to vote all of their
Sandpiper capital stock "FOR" the merger agreement and the merger; accordingly,
shareholder approval is assured.
<PAGE>
To vote your shares, you may use the enclosed proxy card or attend the
special stockholders meeting. To approve the merger agreement and the merger
and, you MUST vote "FOR" the proposals by following the instructions stated on
the enclosed proxy card. If you do not vote at all, it will, in effect, count
as a vote against the merger. We urge you to vote FOR this proposal, a
necessary step in the merger of Sandpiper and Digital Island. Pursuant to a
shareholder agreement between Digital Island and certain shareholders of
Sandpiper, we are assured of receiving the requisite votes in favor of the
merger agreement and the merger.
Sincerely,
/s/ Leo Spiegel
Leo Spiegel
President and Chief Executive
Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of this transaction or the Digital
Island common stock to be issued in the merger, or determined if this joint
proxy statement/prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
This joint proxy statement/prospectus is dated December , 1999, and was
first mailed to Sandpiper shareholders on or about December , 1999.
<PAGE>
SANDPIPER NETWORKS, INC
225 West Hillcrest Drive, Suite 250
Thousand Oaks, CA 91360
(805) 370-2100
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON December 28, 1999
----------------
We will hold a special meeting of stockholders of Sandpiper Networks, Inc.,
a California corporation, at 9:00 a.m., local time, on December 28, 1999 at 225
West Hillcrest Drive, Suite 250, Thousand Oaks, California:
1. To consider and vote upon a proposal to approve and adopt the merger
agreement among Digital Island, Inc., Beach Acquisition Corp. and Sandpiper
Networks, Inc., under which each outstanding share of Sandpiper capital
stock will be converted into the right to receive 1.0727 shares of Digital
Island common stock, and Sandpiper will become a wholly owned subsidiary of
Digital Island, and to approve the merger; and
2. To transact such other business as may properly come before the
special meeting or any adjournment or postponement.
Only Sandpiper shareholders of record at the close of business on December
3, 1999 are entitled to notice of and to vote at the special meeting or any
adjournment or postponement.
For more information about the merger, the merger agreement and related
matters, please review the accompanying joint proxy/prospectus.
By Order of the Board of Directors
/s/ Thomas Govreau
Thomas Govreau
Secretary
Thousand Oaks, California
December , 1999
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. TO
ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, WE URGE
YOU TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN
THE POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY IN THE MANNER
DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT
HAS BEEN VOTED AT THE SPECIAL MEETING. YOU MAY VOTE IN PERSON AT THE
SPECIAL MEETING EVEN IF YOU HAVE RETURNED A PROXY.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................... 1
SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS............................ 2
The Companies............................................................ 2
The Merger............................................................... 2
United States Federal Income Tax Consequences of the Merger.............. 2
Ability to Sell Digital Island Stock After the Merger.................... 3
Dissenters' Rights....................................................... 3
Opinion of Digital Island's Financial Advisor............................ 3
Recommendations of the Boards of Directors............................... 4
Shareholder and Stockholder Approvals.................................... 4
Interests of Officers and Directors in the Merger........................ 4
Conditions to Completion of the Merger................................... 5
Restrictions on Alternative Transactions................................. 6
Termination of the Merger Agreement...................................... 6
Termination Fee and Expenses............................................. 6
Indemnification by Sandpiper Shareholders and Escrow of Shares........... 7
Anticipated Accounting Treatment of the Merger........................... 7
Compliance with Antitrust Laws........................................... 7
Recent Developments...................................................... 7
DIVIDEND POLICIES.......................................................... 9
DIGITAL ISLAND SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA.............. 10
SANDPIPER SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA................... 11
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA........................ 12
COMPARATIVE PER SHARE DATA................................................. 14
MARKET PRICE INFORMATION................................................... 15
Recent Closing Prices.................................................... 15
RISK FACTORS............................................................... 16
Risks Related to the Merger.............................................. 16
Risks Related to Digital Island.......................................... 20
Risks Related to Sandpiper............................................... 28
Risks Related to the Industry of Digital Island and Sandpiper............ 34
FORWARD-LOOKING STATEMENTS IN THIS JOINT PROXY STATEMENT/PROSPECTUS........ 40
THE SPECIAL MEETINGS....................................................... 41
General.................................................................. 41
Date, Time and Place..................................................... 41
Matters to be Considered at the Special Meetings......................... 41
Record Dates............................................................. 42
Voting of Proxies........................................................ 42
Votes Required........................................................... 43
Quorum; Abstentions and Broker Non-Votes................................. 43
Solicitation of Proxies and Expenses..................................... 44
Board Recommendations.................................................... 44
THE MERGER................................................................. 45
Background of the Merger................................................. 45
Joint Reasons for the Merger; Recommendations of Boards of Directors..... 47
Opinion of Digital Island's Financial Advisor............................ 51
Interests of Officers and Directors in the Merger........................ 56
Excess Parachute Payments................................................ 58
Regulatory Approvals..................................................... 59
Material Federal Income Tax Considerations............................... 59
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
<S> <C>
Anticipated Accounting Treatment......................................... 61
Dissenters' Rights....................................................... 61
Listing of Digital Island Common Stock to be Issued in the Merger........ 63
Restrictions on Sale of Shares by Affiliates of Digital Island and
Sandpiper............................................................... 63
Operations Following the Merger.......................................... 64
THE MERGER AGREEMENT AND RELATED AGREEMENTS................................ 65
The Merger............................................................... 65
Effective Time........................................................... 65
Conversion of Sandpiper Shares in the Merger............................. 65
Sandpiper Stock Plan..................................................... 65
Fractional Shares........................................................ 66
The Exchange Agent....................................................... 66
Exchange of Sandpiper Stock Certificates for Digital Island Stock
Certificates............................................................ 66
Transfers of Ownership................................................... 66
Distributions with Respect to Unexchanged Shares......................... 66
Representations and Warranties........................................... 67
Merger Integration Committee............................................. 69
Sandpiper's Conduct of Business Before Completion of the Merger.......... 69
Digital Island's Conduct of Business Before Completion of the Merger..... 71
No Solicitation of Takeover Proposals by Sandpiper....................... 72
No Solicitation of Certain Contingent Business Combination Transactions
by Digital Island....................................................... 72
Additional Agreements of Sandpiper and Digital Island.................... 73
Director and Officer Indemnification..................................... 74
Conditions to the Merger................................................. 74
Termination of the Merger Agreement...................................... 76
Payment of Costs and Expenses; Termination Fees.......................... 76
Extension, Waiver and Amendment of the Merger Agreement.................. 77
Escrow and Indemnification............................................... 77
Related Agreements....................................................... 78
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.......................... 82
COMPARISON OF THE RIGHTS OF STOCKHOLDERS OF DIGITAL ISLAND AND SHAREHOLDERS
OF SANDPIPER.............................................................. 86
Comparison of Authorized and Outstanding Capital Stock................... 86
Comparison of Rights of Common Stock..................................... 86
Comparison of Rights and Preferences of Preferred Stock.................. 87
Comparison of Stockholder Rights Under Delaware and California Law....... 88
BUSINESS OF DIGITAL ISLAND................................................. 95
Overview................................................................. 95
Industry Background...................................................... 95
The Digital Island Solution.............................................. 96
Business Strategy........................................................ 97
Network Architecture..................................................... 98
Services................................................................. 100
Customers................................................................ 101
Sales and Marketing...................................................... 102
Customer Support......................................................... 102
Competition.............................................................. 103
Intellectual Property Rights............................................. 103
Government Regulation.................................................... 104
Employees................................................................ 107
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
<S> <C>
Facilities.............................................................. 108
Legal Proceedings....................................................... 108
DIGITAL ISLAND SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............ 109
DIGITAL ISLAND MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................ 110
Overview................................................................ 110
Fiscal Years Ended September 30, 1999 and 1998.......................... 111
Quarterly Results of Operations......................................... 112
Liquidity and Capital Resources......................................... 113
Recent Accounting Pronouncements........................................ 114
Year 2000 Compliance.................................................... 114
Qualitative and Quantitative Disclosure About Market Risk............... 116
BUSINESS OF SANDPIPER..................................................... 117
Sandpiper Networks...................................................... 117
Industry Background..................................................... 117
The Sandpiper Solution.................................................. 118
The Sandpiper Strategy.................................................. 120
Services................................................................ 120
Customers............................................................... 120
Strategic Relationships................................................. 120
Network Deployment and Operations....................................... 121
Technology.............................................................. 122
Research and Development................................................ 123
Sales and Marketing..................................................... 124
Competition............................................................. 124
Intellectual Property and Licensing..................................... 125
Employees............................................................... 125
Facilities.............................................................. 125
Legal Proceedings....................................................... 125
SANDPIPER SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA................. 126
SANDPIPER MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 127
Overview................................................................ 127
Revenues................................................................ 128
Gross Profit............................................................ 128
Operating Expenses...................................................... 129
Quarterly Results of Operations......................................... 130
Liquidity and Capital Resources......................................... 130
Year 2000............................................................... 131
Recent Accounting Pronouncements........................................ 132
Quantitative and Qualitative Disclosures About Market Interest Rate
Sensitivity............................................................ 133
Exchange Rate Sensitivity............................................... 133
MANAGEMENT OF DIGITAL ISLAND.............................................. 134
Officers, Directors and Senior Management............................... 134
Director Compensation................................................... 137
Classified Board........................................................ 137
Board Committees........................................................ 138
Compensation Committee Interlocks and Insider Participation............. 138
DIGITAL ISLAND EXECUTIVE COMPENSATION AND OTHER INFORMATION............... 139
Summary of Cash and Certain Other Compensation.......................... 139
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
<S> <C>
Stock Options and Stock Appreciation Rights............................... 140
Aggregated Option/SAR Exercises and Fiscal Year-End Values................ 141
Employee Benefit Plans.................................................... 141
Employment Contracts and Change of Control Arrangements................... 146
Limitation of Liability and Indemnification............................... 147
CERTAIN TRANSACTIONS RELATING TO DIGITAL ISLAND............................. 148
Preferred Stock Financings................................................ 148
Investors' Rights Agreement............................................... 149
Employment and Indemnification Agreements................................. 149
Director Arrangements and Stockholder Notes............................... 149
Officer Loans............................................................. 149
E*TRADE Agreements........................................................ 150
PRINCIPAL STOCKHOLDERS OF DIGITAL ISLAND.................................... 151
PRINCIPAL SHAREHOLDERS OF SANDPIPER......................................... 154
DESCRIPTION OF DIGITAL ISLAND CAPITAL STOCK................................. 156
Common Stock.............................................................. 156
Preferred Stock........................................................... 156
Anti-Takeover, Limited Liability and Indemnification Provisions........... 156
Transfer Agent and Registrar.............................................. 158
EXPERTS..................................................................... 159
LEGAL MATTERS............................................................... 159
WHERE YOU CAN FIND MORE INFORMATION......................................... 159
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................. F-1
ANNEX A--MERGER AGREEMENT AND EXHIBITS...................................... A-1
ANNEX B--FAIRNESS OPINION................................................... B-1
ANNEX C--DISSENTER'S RIGHTS................................................. C-1
</TABLE>
iv
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are the companies proposing the merger?
A: Digital Island and Sandpiper are merging to provide comprehensive network
services for globalizing e-business applications. By combining Digital
Island's global network capabilities, hosting and application services with
Sandpiper's comprehensive content delivery network, we expect that the
combined company will be able to provide a global commerce platform for
content delivery services, rich media services, hosting, applications
services and professional services.
Q: What will Sandpiper shareholders receive in the merger?
A: If the merger is completed, Sandpiper shareholders will receive 1.0727
shares of Digital Island common stock for each share of Sandpiper capital
stock they own. Digital Island will not issue fractional shares of common
stock. Instead of a fractional share, Sandpiper shareholders will receive
cash based on the market price of Digital Island common stock.
Q: When do you expect to complete the merger?
A: We are working to complete the merger in the winter of 1999/spring of 2000.
Because the merger is subject to governmental and other regulatory
approvals, however, we cannot predict the exact timing.
Q: Should Sandpiper shareholders send in their stock certificates now?
A: No. After we complete the merger, Digital Island will send instructions to
Sandpiper shareholders explaining how to exchange their shares of Sandpiper
common stock for the appropriate number of shares of Digital Island common
stock.
Q: Should Digital Island stockholders send in their stock certificates?
A: No. Digital Island stockholders will continue to own their shares of Digital
Island common stock after the merger and should continue to hold their stock
certificates.
Q: How do I vote?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at the special stockholders
meeting. You may also attend the meeting in person instead of submitting a
proxy. If your shares are held in "street name" by your broker, your broker
will vote your shares only if you provide instructions on how to vote. You
should follow the directions provided by your broker regarding how to
instruct your broker to vote your shares.
Q: Can I change my vote after mailing my proxy?
A: Yes. You may change your vote by delivering a signed notice of revocation or
a later-dated, signed proxy card to the corporate secretary of Digital
Island or Sandpiper, as appropriate, before the appropriate stockholder
meeting, or by attending the stockholder meeting and voting in person.
Q: Are there risks I should consider in deciding whether to vote for the
merger?
A: Yes. We have set out under the heading "Risk Factors" beginning on page 16
of this joint proxy statement/prospectus a number of risk factors that you
should consider.
Q: Who can I call with questions?
A: If you are a Sandpiper shareholder with questions about the merger, please
call Sandpiper's chief financial officer, Thomas R. Govreau, at (805) 370-
2130.
If you are a Digital Island stockholder with questions about the merger,
please call Traci M. McCarty or Christine Belonogoff at Digital Island's
investor relations firm, The Financial Relations Board at (415) 986-1591.
<PAGE>
SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS
The following summary highlights selected information from this joint proxy
statement/prospectus and may not contain all of the information that is
important to you. You should carefully read this entire joint proxy
statement/prospectus, including the appendices, and the other documents we
refer to for a more complete understanding of the merger.
The Companies
DIGITAL ISLAND, INC.
45 Fremont Street, Suite 1200
San Francisco, CA 94105
(415) 738-4100
Digital Island offers a global network and related services for companies
that are using the Internet to deploy key business applications worldwide.
Digital Island's services make it easier for companies to globalize their
operation and to provide a higher quality of service and more functions than in
the public Internet. Digital Island's global private network and expert
services enable customers to effectively deploy and manage global applications
by combining the reliability, performance and broad range of functions
available in private intranets operated by individual companies for their own
users, with the global access of the public Internet. Digital Island's
customers, which include multinational corporations such as Autodesk, Cisco
Systems, E*TRADE Group and National Semiconductor, use Digital Island's
services and proprietary technology to facilitate the deployment of a wide
variety of applications, including electronic commerce, online customer
service, software, document and multimedia distribution, sales force automation
and online training.
SANDPIPER NETWORKS, INC.
225 West Hillcrest Drive, Suite 250
Thousand Oaks, CA 91360
(805) 370-2100
Sandpiper is a leading provider of Internet content delivery services that
significantly improve website performance, reliability and scalability.
Sandpiper's solution is designed to improve website performance and reliability
by delivering content from a globally distributed server network, that
intelligently avoids Internet congestion, and serves content closer to users.
Sandpiper's customers include AOL, Blue Mountain Arts, CNBC.com, Intuit,
Microsoft and PBS.org. In addition, Sandpiper recently entered into agreements
with a number of strategic partners, including AOL, Inktomi, Microsoft, NBC,
RealNetworks and Vignette.
The Merger (See page 45)
Sandpiper and Digital Island have entered into a merger agreement that
provides for the merger of Sandpiper and a newly formed subsidiary of Digital
Island. Sandpiper will be the surviving corporation and will become a wholly
owned subsidiary of Digital Island. Shareholders of Sandpiper will become
stockholders of Digital Island following the merger, and each share of
Sandpiper capital stock will be exchanged for 1.0727 shares of Digital Island
common stock. We urge you to read the merger agreement, which is attached as
Annex A to this joint proxy statement/prospectus, carefully and in its
entirety.
United States Federal Income Tax Consequences of the Merger (See page 59)
Sandpiper and Digital Island intend that the merger will qualify as a
reorganization within the meaning of the Internal Revenue Code. If the merger
qualifies as a reorganization, Sandpiper shareholders will generally not
recognize gain or loss for United States federal income tax purposes upon the
receipt of Digital Island common stock in the merger, although Sandpiper
shareholders will recognize gain or loss upon the receipt of
2
<PAGE>
any cash instead of a fractional share of Digital Island common stock. It is a
condition to completion of the merger that Sandpiper and Digital Island each
receive a legal opinion from its counsel that the merger will constitute a
reorganization within the meaning of the Internal Revenue Code.
Tax matters are very complicated and the tax consequences of the merger to
you will depend upon the facts of your situation. You should consult your own
tax advisors for a full understanding of the tax consequences of the merger to
you.
Ability to Sell Digital Island Stock After the Merger (See page 63)
All shares of Digital Island common stock that Sandpiper shareholders
receive in connection with the merger will be freely transferable unless the
holder is considered an "affiliate" of either Digital Island or Sandpiper for
purposes of the Securities Act. Shares of Digital Island common stock held by
these affiliates may be sold only under a registration statement or exemption
under the Securities Act.
In addition, in connection with the merger, Digital Island stockholders
holding approximately 45% of the outstanding common stock of Digital Island and
Sandpiper shareholders holding approximately 76% of the outstanding capital
stock of Sandpiper, have entered into reciprocal market standoff agreements
pursuant to which they have agreed not to sell their shares of Digital Island
common stock from the time of the merger until the earliest to occur of :
. the sale by Digital Island of Digital Island common stock for its own
account in a bona fide, firm commitment underwritten public offering
pursuant to a registration statement under the Securities Act;
. July 15, 2000;
. the effective date of a merger of Digital Island with or into another
corporation in which fifty (50%) or more of the voting power of Digital
Island is disposed of, or the sale of all or substantially all of the
assets of Digital Island; or
. such other date, and with such limitations, as may be approved by
unanimous vote of the board of directors of Digital Island.
The form of market standoff letter agreement is attached as an exhibit to
the shareholder agreement and voting agreement attached as exhibits to the
merger agreement in Annex A to this joint proxy statement/prospectus.
Dissenters' Rights (See page 61)
Shareholders of Sandpiper who do not vote in favor of the merger agreement
and the merger and who otherwise comply with the requirements of the California
Corporations Code relating to dissenters' rights will be entitled to receive an
amount in cash equal to the fair market value of their Sandpiper capital stock.
The fair market value of shares of Sandpiper may be more or less than the value
of Digital Island common stock to be paid to the other Sandpiper shareholders
in the merger. Dissenting Sandpiper shareholders must precisely follow specific
procedures to exercise this right, or the right may be lost. These procedures
are described in this joint proxy statement/prospectus, and the relevant
provisions of California law are attached as Annex C to this joint proxy
statement/prospectus.
Opinion of Digital Island's Financial Advisor (See page 51)
In deciding to approve the merger, Digital Island's board of directors
considered the opinion issued by its financial advisor, Bear, Stearns & Co.,
Inc. Bear Stearns opined that the share exchange ratio was fair from a
financial point of view to Digital Island. The full text of the written opinion
of Bear Stearns, dated October 23, 1999, is attached as Annex B to this joint
proxy statement/prospectus. You should read this opinion in its entirety.
3
<PAGE>
Recommendations of the Boards of Directors (See page 47)
The Sandpiper and Digital Island boards of directors each have determined
that the terms and conditions of the merger are fair to, and in the best
interests of, its company's shareholders and stockholders, respectively. The
Sandpiper board unanimously recommends that Sandpiper shareholders vote FOR
approval of the merger agreement and the merger, and the Digital Island board
unanimously recommends that Digital Island stockholders vote FOR issuing the
shares of Digital Island common stock required to be issued in the merger.
Shareholder and Stockholder Approvals (See page 43)
Sandpiper Shareholders
The holders of a majority of the outstanding shares of Sandpiper common
stock and preferred stock, each voting as a separate class, must approve the
merger agreement and the merger. Sandpiper shareholders are entitled to cast
one vote per share of Sandpiper capital stock owned at the close of business on
December 3, 1999. Under a shareholder agreement in the form attached as an
exhibit to the merger agreement in Annex A to this joint proxy
statement/prospectus, Sandpiper shareholders owning approximately 76% of
Sandpiper's common stock and preferred stock outstanding as of October 24,
1999, excluding any shares issuable upon the exercise of options, have agreed
to vote all of their shares of Sandpiper common stock or preferred stock for
approval of the merger agreement and the merger; accordingly, such approvals
are assured.
Digital Island Stockholders
The holders of a majority of the shares of Digital Island common stock
entitled to vote and that are present or represented by proxy at the Digital
Island meeting must approve the issuance of Digital Island common stock in the
merger. Digital Island stockholders are entitled to cast one vote per share of
Digital Island common stock owned at the close of business on November 29,
1999. Under a voting agreement in the form attached as an exhibit to the merger
agreement in Annex A to this joint proxy statement/prospectus, Digital Island
stockholders owning approximately 45% of Digital Island's common stock
outstanding as of October 24, 1999, excluding any shares issuable upon the
exercise of options, have agreed to vote all of their shares of Digital Island
common stock for approval of the issuance of Digital Island common stock in the
merger.
Interests of Officers and Directors in the Merger (See page 56)
When considering the recommendation of the Sandpiper board, Sandpiper
shareholders should be aware that directors and officers of Sandpiper have the
following interests in the merger that may be different from, or in addition
to, those of Sandpiper shareholders:
. As of December 3, 1999, the executive officers and directors of Sandpiper
owned an aggregate of 5,833,541 shares of Sandpiper common stock, of
which 1,682,519 shares are unvested and subject to repurchase by
Sandpiper at a repurchase price of $0.07 per share pursuant to restricted
stock purchase agreements. Additionally, as of such date the executive
officers and directors of Sandpiper held options to purchase an aggregate
of 630,000 shares of Sandpiper common stock, of which 605,417 are
unvested. If the merger is completed, all of the 858,917 unvested shares
issued to Leo Spiegel, the chief executive officer and a director of
Sandpiper, pursuant to a restricted stock purchase agreement will,
subject to certain conditions, vest free from such repurchase rights in
two equal portions in March and November 2000, respectively. All of the
unvested shares held by Messrs. Swart, Farber, Govreau and Lachman will
vest in full upon the termination of such individual's employment or
service following the merger.
. Upon completion of the merger, Digital Island and Sandpiper will enter
into employment agreements with the following executive officers of
Sandpiper: Leo Spiegel, Andrew Swart, and David Farber. Digital Island
will also enter into a sixty day retention agreement with Thomas Govreau.
4
<PAGE>
. Digital Island has agreed to honor and not modify any rights to
indemnification or exculpation from liabilities for acts or omissions
occurring at or prior to the consummation of the merger as existed at the
time the merger agreement was signed in favor of officers and directors
of Sandpiper and its subsidiaries as provided in their respective
charters or bylaws as in effect at the time the merger agreement was
signed.
. The merger agreement provides that, upon completion of the merger, the
board of directors of Digital Island shall consist of four designees of
Digital Island, three designees of Sandpiper and two mutually acceptable
outside directors. The parties plan to identify this board slate prior to
mailing of this joint proxy statement/prospectus.
As a result, Sandpiper's directors and officers may be more likely to vote
to approve the merger than Sandpiper shareholders generally.
When considering the recommendation of the Digital Island board, Digital
Island stockholders should be aware that Charlie Bass, a director of Digital
Island, owns 71,429 shares of Sandpiper Series A preferred stock and holds a
warrant to purchase up to an additional 14,286 shares of Sandpiper Series A
preferred stock. As a result, Mr. Bass may be more likely, in his capacity as a
director of Digital Island or shareholder of Sandpiper, to vote to approve the
issuance of Digital Island common stock pursuant to the merger than Digital
Island stockholders generally.
Conditions to Completion of the Merger (See page 74)
We will complete the merger only if we satisfy or agree to waive several
conditions, some of which are:
. the merger agreement and the merger must be approved by Sandpiper's
shareholders, and the issuance of Digital Island common stock in the
merger must be approved by Digital Island's stockholders;
. any agreements or arrangements that may constitute excess parachute
payments under Section 280G of the Internal Revenue Code must have been
approved by such number of Sandpiper shareholders as is required under
applicable law;
. all necessary consents, approvals and authorizations from governmental
entities must be obtained except where a failure to obtain the consent,
approval or authorization could not be reasonably expected to have a
material adverse effect on Digital Island or Sandpiper;
. no court of competent jurisdiction or governmental entity has issued or
entered any order, writ, injunction or decree making the merger illegal
or otherwise preventing its completion;
. we must receive opinions from each of our tax counsels stating that the
merger will qualify as a tax-free reorganization;
. our representations and warranties in the merger agreement must be true
and correct except where failures to be true and correct could not
reasonably be expected to have a material adverse effect on the other
party or, in the case of Sandpiper, on the surviving corporation; and
. Leo Spiegel, Andrew Swart and David Farber, currently executive officers
of Sandpiper, must have accepted employment by Digital Island and their
employment and non-competition agreements with Digital Island must be in
full force and effect.
If either of us waives any conditions, we will consider the facts and
circumstances at that time and determine whether completion of the merger
requires a resolicitation of proxies.
5
<PAGE>
Restrictions on Alternative Transactions (See page 72)
The merger agreement prohibits Sandpiper and Digital Island from soliciting
or participating in discussions with third parties about transactions
alternative to the merger. However, Digital Island is not prohibited from
taking a position regarding certain unsolicited tender offers, exchange offers
or takeover proposals in accordance with the fiduciary duties of Digital
Island's board. For a more complete description of those instances where
Digital Island may engage in alternative transactions, see "No Solicitation of
Transactions by Digital Island" on page 72.
Termination of the Merger Agreement (See page 76)
We may mutually agree to terminate the merger agreement at any time before
the merger is completed. The merger agreement may also be terminated by either
of us for several other reasons, some of which are:
. if the merger is not completed, without the fault of the terminating
party, by May 31, 2000;
. if the conditions to completion of the merger would not be satisfied
because of either (a) a breach of an agreement in the merger agreement by
the other party or (b) a breach of a representation or warranty in the
merger agreement by the other party, if the breaching party does not cure
the breach within 20 business days after receiving notice of the breach
from the other party;
. if the Digital Island stockholders do not approve the issuance of Digital
Island common stock at the Digital Island special meeting; or
. if the Sandpiper shareholders do not approve the merger agreement, the
merger and the related transactions at the Sandpiper special meeting.
The merger agreement may be terminated by Digital Island if the following
occurs:
. Sandpiper's board withdraws or modifies in a manner adverse to Digital
Island its recommendation as to the merger agreement or the merger; or
. Sandpiper fails to comply with the nonsolicitation provisions of the
merger agreement, which are discussed in more detail on page 72.
The merger agreement may be terminated by Sandpiper if the following occurs:
. Digital Island's board withdraws or modifies in a manner adverse to
Sandpiper its recommendation as to the merger agreement or the merger; or
. Digital Island fails to comply with the nonsolicitation provisions of the
merger agreement, which are discussed in more detail on page 72.
Termination Fee and Expenses (See page 76)
Each party shall pay its own costs and expenses incurred in connection with
the merger, whether or not the merger is consummated. However, in the event of
certain terminations of the merger agreement, including those related to a
prohibited alternative transaction, then the party at fault shall promptly pay
the other party the sum of $5 million, and, if the prohibited alternative
transaction is consummated within twelve months after the termination of the
merger agreement, the party at fault shall pay the additional sum of $25
million.
6
<PAGE>
Indemnification by Sandpiper Shareholders and Escrow of Shares (See pages 77
and 78)
Under the merger agreement, Sandpiper shareholders are required to indemnify
Digital Island for damages, including as a result of any breach, default or
misrepresentation regarding any representation, warranty, covenant or agreement
given or made by Sandpiper in or pursuant to:
. the merger agreement;
. any schedule or exhibit to the merger agreement;
. any agreement entered into by Sandpiper and Digital Island in connection
with the merger agreement; and
. any certificates delivered to Digital Island in connection with the
merger.
To secure the indemnification obligation of Sandpiper shareholders, an
escrow fund comprised of ten percent (10%) of the shares of Digital Island
common stock issued in the merger to Sandpiper shareholders will be
established. No indemnification claim may be made by Digital Island until the
aggregate amount of indemnification claimed exceeds $2,000,000 and then only to
the extent that the aggregate amount claimed exceeds $2,000,000. If the merger
is completed, recovery from the escrow fund will be the sole and exclusive
remedy, absent fraud, intentional misrepresentation or willful breach. In
general, the escrow period will terminate on the first anniversary of the
completion of the merger.
The indemnification provisions are set forth in the section entitled "Escrow
and Indemnification" in the merger agreement attached to this joint proxy
statement/prospectus in Annex A and the form of escrow agreement attached as an
exhibit to the merger agreement in Annex A.
Anticipated Accounting Treatment of the Merger (See page 61)
Digital Island intends to treat the merger as a purchase transaction for
accounting and financial reporting purposes, which means that Digital Island
will treat Sandpiper as a separate entity for periods prior to the closing, and
thereafter, as a wholly owned subsidiary of Digital Island.
Compliance with Antitrust Laws (See page 59)
The merger is subject to United States antitrust laws. We have made the
required filings with the Department of Justice and Federal Trade Commission.
The applicable waiting period expired on December 5, 1999. The Department of
Justice and Federal Trade Commission, as well as a state or private person, may
challenge the merger at any time before or after its completion.
Recent Developments
Strategic Alliance with SRI International
Effective November 22, 1999, Digital Island and SRI International, a
California nonprofit public benefit corporation, entered into an agreement
pursuant to which Digital Island will obtain ownership of certain SRI
International proprietary materials. In consideration of this intellectual
property transfer, Digital Island has agreed to pay $6,000,000 to SRI
International. Additionally, pursuant to the agreement, Digital Island has the
option to obtain consulting services from SRI International for an additional
$4,000,000. Payments for the SRI International proprietary materials and the
consulting services shall be made in shares of Digital Island common stock. SRI
International, however, may select to receive up to $1,000,000 of the
$6,000,000 intellectual property purchase payment in cash.
7
<PAGE>
Strategic Alliance with Sun Microsystems and Inktomi
On December 7, 1999, Digital Island entered into a memoranda of
understanding with Sun Microsystems, Inc. and Inktomi Corporation providing for
a joint strategic relationship. Under the relationship, Digital Island has
agreed to purchase, over a two year period, up to $150 million of Sun servers,
storage operating systems and server software, using Inktomi network caching
applications. The total purchase would consist of 5,000 Sun servers. Sun and
Inktomi also agreed to participate and invest in joint marketing and sales
activities with Digital Island to support broadband and streaming media content
delivery over the Internet. Sun agreed to provide $100 million of lease
financing for the acquisition of the equipment, consisting of:
. a $30 million initial line of credit;
. a $30 million line of credit available in nine months upon meeting
certain working capital maintenance and financing milestones; and
. a $40 million line of credit available in fifteen months upon meeting
certain additional working capital maintenance and financing milestones.
For extending this lease financing, Digital Island agreed to grant Sun
warrants to purchase up to $10 million of Digital Island Common Stock in three
tranches corresponding on a pro rata basis with the above three lines of
credit; the warrants will be exercisable at the five-day average trading price
preceding the grant dates, and will expire in 48 months (in the case of the
first warrant) and 36 months (in the case of the second and third warrant). The
lease financing facility and the marketing and sales alliance are subject, in
part, to definitive documentation.
In connection with the alliance, Sun has agreed to make a $20 million
investment, and Inktomi has agreed to make a $6 million investment, in Digital
Island common stock at a price per share equal to the lesser of the average
closing price of the common stock as quoted on the Nasdaq National Market for
the ten trading days before December 7, 1999 or for the five trading days
before closing of the investment. Sun and Inktomi have agreed to not sell or
otherwise dispose of such shares until the first anniversary of their purchase.
The Sun investment is conditioned, among other things, upon customary
governmental approvals and the Inktomi investment is conditioned upon
consummation of the Sun investment.
8
<PAGE>
DIVIDEND POLICIES
Neither Digital Island nor Sandpiper has ever declared or paid cash
dividends on shares of its common stock. Holders of Sandpiper's Series A
preferred stock and Series B preferred stock are entitled to receive dividends
at rates determined by the Sandpiper board of directors out of funds legally
available therefor, payable when and as declared by the Sandpiper board of
directors. Sandpiper has never declared or paid dividends on shares of its
preferred stock.
Digital Island currently intends to retain all of its earnings to finance
the development and expansion of its business and therefore does not intend to
declare or pay cash dividends on its common stock in the foreseeable future.
The Digital Island board, in its discretion, will determine whether to declare
and pay dividends in the future. Any future declaration and payment of
dividends will depend upon:
. Digital Island's results of operations;
. Digital Island's earnings and financial condition;
. contractual limitations;
. cash requirements;
. future prospects;
. applicable law; and
. other factors deemed relevant by Digital Island's board of directors.
9
<PAGE>
DIGITAL ISLAND
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(In thousands, except share and per share data)
The following summary historical consolidated financial information should
be read in conjunction with Digital Island's consolidated financial statements
and related notes and Digital Island's "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The consolidated statement of
operations information for each of the years in the three year period ended
September 30, 1999, and the balance sheet data at September 30, 1998 and 1999,
are derived from Digital Island's financial statements that have been audited
by PricewaterhouseCoopers LLP, independent accountants, included elsewhere in
this filing. The statement of operations data for the years ended September 30,
1995 and 1996, and the balance sheet data at September 30, 1995, 1996, and
1997, are derived from Digital Island's audited financial statements that are
not included in this filing. Historical results are not necessarily indicative
of the results to be expected in the future.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1995 1996 1997 1998 1999
------- ------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue.................. $ -- $ -- $ 218 $ 2,343 $ 12,431
Total costs and
expenses................ 7 26 5,594 19,458 64,918
Loss from operations..... (7) (26) (5,376) (17,116) (52,487)
Net loss................. $ (10) $ (27) $ (5,289) $ (16,764) $ (50,938)
======= ======= ========= ========= ==========
Basic and diluted loss
per share............... $ (0.04) $ (0.10) $ (3.53) $ (7.50) $ (4.58)
======= ======= ========= ========= ==========
Shares used in basic and
diluted loss per share
calculation............. 275,000 275,000 1,497,711 2,236,452 11,127,462
</TABLE>
<TABLE>
<CAPTION>
September 30,
------------------------------------
1995 1996 1997 1998 1999
---- ----- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............... $ 7 $ 344 $ 4,584 $ 5,711 $ 43,315
Investments............................. -- -- 1,983 10,123 31,691
Working capital......................... 5 76 4,613 12,883 59,506
Total assets............................ 93 432 9,223 22,617 107,648
Long-term obligations, including current
portion................................ -- -- 705 3,992 11,092
Total stockholders' equity.............. $ 86 $ 84 $ 6,265 $ 15,490 $ 79,218
</TABLE>
10
<PAGE>
SANDPIPER NETWORKS
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated financial data should be read
in conjunction with Sandpiper's consolidated financial statements and related
notes and Sandpiper's "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The consolidated statement of operations
data for each of the two years ended December 31, 1998 and 1997 (no operating
activities occurred from December 26, 1996 (inception) to December 31, 1996)
and the consolidated balance sheet data at December 31, 1998 and 1997, are
derived from the consolidated financial statements of Sandpiper which have been
audited by Ernst & Young, independent accountants. The summary financial data
for the nine month periods ended September 30, 1999 and 1998 and as of
September 30, 1999 and 1998 have been derived from Sandpiper's unaudited
financial statements and in the opinion of Sandpiper's management include all
adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results of operations and financial position of
Sandpiper for those periods in accordance with generally accepted accounting
principles. Historical results are not necessarily indicative of the results to
be expected in the future.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------------------ -------------------------
1997 1998 1998 1999
----------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues................. $ -- $ 5,700 $ -- $ 242,954
Cost of revenues......... -- 1,695,057 850,200 2,641,767
----------- ----------- ----------- ------------
Gross profit............. -- (1,689,357) (850,200) (2,398,813)
----------- ----------- ----------- ------------
Operating expenses:
Marketing and selling
expenses, net........... -- 1,272,441 547,203 4,056,155
Product development
expenses, net........... 1,159,715 1,382,635 1,121,722 1,820,986
General and
administrative
expenses................ 28,149 876,093 677,626 1,480,912
Amortization of deferred
compensation............ -- -- -- 580,827
----------- ----------- ----------- ------------
Total operating
expenses................ 1,187,864 3,531,169 2,346,551 7,938,880
Operating loss........... (1,187,864) (5,220,526) (3,196,751) (10,337,693)
Interest income, net..... 19,325 126,374 125,418 287,671
Provision for income
taxes................... -- -- 800 2,856
----------- ----------- ----------- ------------
Net loss................. $(1,168,539) $(5,094,152) $(3,072,133) $(10,052,878)
=========== =========== =========== ============
Basic and diluted net
loss per share.......... $ (0.23) $ (0.79) $ (0.48) $ (1.46)
=========== =========== =========== ============
Pro forma basic and
diluted net loss per
share................... $ (0.32) $ (0.60)
=========== ============
Weighted average number
of shares used in
computing basic and
diluted net loss per
share................... 5,095,658 6,418,159 6,354,306 6,872,465
Weighted average number
of shares used in
computing pro forma
basic and diluted net
loss per share.......... 16,021,472 16,856,112
<CAPTION>
December 31, September 30,
------------------------ -------------------------
1997 1998 1998 1999
----------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash
equivalents............. $ 5,728,826 $ 603,812 $ 2,583,048 $ 10,853,468
Working capital.......... 5,342,053 98,466 1,988,706 7,810,700
Total assets............. 5,774,176 1,824,720 3,893,036 17,750,798
Long term obligations.... -- 1,300,586 792,945 1,666,173
Redeemable preferred
stock................... 6,552,920 6,674,442 6,674,442 28,101,208
Shareholders' deficit.... (1,167,539) (6,150,308) (4,169,602) (15,475,754)
</TABLE>
11
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
In the table below, we provide you summary unaudited pro forma combined
financial data to give effect to the proposed merger of Digital Island and
Sandpiper as if the merger had been completed on October 1, 1998 for statement
of operations purposes and on September 30, 1999 for balance sheet purposes.
This summary unaudited pro forma combined financial data should be read in
conjunction with the separate historical financial statements and accompanying
notes of Digital Island and of Sandpiper, which are incorporated in this joint
proxy statement/prospectus. You should not rely on the summary unaudited pro
forma combined financial information as an indication of the results of
operations or financial position that would have been achieved if the
transaction had taken place earlier.
The summary unaudited pro forma combined financial information gives effect
to the proposed merger of Digital Island and Sandpiper on a purchase accounting
basis. The Digital Island and Sandpiper unaudited pro forma combined balance
sheet data assume that the merger of Digital Island and Sandpiper took place on
September 30, 1999, and combines the Digital Island historical consolidated
balance sheet with Sandpiper's historical consolidated balance sheet as of this
date. The Digital Island and Sandpiper unaudited pro forma combined statements
of operations data assume that the merger of Digital Island and Sandpiper took
place as of the beginning of the period presented and combines Digital Island's
historical consolidated statements of operations data for the year ended
September 30, 1999 and Sandpiper's historical consolidated statements of
operations data for the 12-month period ended September 30, 1999. This
presentation is consistent with the periods expected to be combined after the
date of the closing of the merger.
The summary unaudited pro forma combined financial data are presented for
illustrative purposes only and are not necessarily indicative of the combined
financial position or results of operations of future periods or the results
that actually would have been realized had the entities been a single entity
during this period. The summary unaudited pro forma combined financial data as
of September 30, 1999 and for the year then ended, is derived from the
unaudited pro forma condensed combined financial statements included elsewhere
in this joint proxy statement/prospectus and should be read in conjunction with
those statements and the related notes. See "Unaudited Pro Forma Condensed
Combined Financial Statements."
12
<PAGE>
DIGITAL ISLAND AND SANDPIPER
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended
September 30, 1999
------------------
<S> <C>
Unaudited Pro Forma Combined Statement of Operations
Data:
Revenue................................................. $ 12,680
Total costs and expenses................................ 274,241
Loss from operations.................................... (261,561)
Net loss................................................ (259,729)
----------
Basic and diluted net loss per share.................... $ (14.15)
----------
Shares used in basic and diluted loss per share
calculation............................................ 18,354,758
<CAPTION>
September 30, 1999
------------------
<S> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................... $ 54,168
Investments............................................. 31,691
Working capital......................................... 52,017
Total assets............................................ 912,265
Long-term obligations, including current portion........ 13,808
Total stockholders' equity.............................. 863,410
</TABLE>
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<PAGE>
COMPARATIVE PER SHARE DATA
The following tables reflect (a) the historical net loss and book value per
share of Digital Island common stock and the historical net income and book
value per share of Sandpiper common stock in comparison with the unaudited pro
forma net loss and book value per share after giving effect to the proposed
merger of Digital Island with Sandpiper and (b) the equivalent historical net
loss and book value per share attributable to 1.0727 shares of Digital Island
common stock that will be received for each share of Sandpiper capital stock in
the merger. The pro forma information assumes that for purposes of reporting
combined information, historical financial information of Sandpiper will be
restated to conform with Digital Island's fiscal year-end of September 30. The
information presented in the following tables should be read in conjunction
with the unaudited pro forma condensed combined financial statements included
in this joint proxy statement/prospectus and the historical consolidated
financial statements and related notes of Digital Island and Sandpiper.
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Digital Island Historical Per Share:
Net loss per share--basic and diluted............................ $ (4.58)
Book value per share(1).......................................... $ 2.20
Sandpiper Historical Per Share:
Net loss per share--basic and diluted............................ $ (1.67)
Book value per share(1).......................................... $ (2.21)
Digital Island and Sandpiper Pro Forma Combined Per Share:
Net loss per Digital Island share--basic and diluted............. $(14.15)
Net loss per equivalent Sandpiper share--basic and diluted(2).... $(15.18)
Book value per Digital Island share(1)........................... $ 24.02
Book value per equivalent Sandpiper share(2)..................... $ 25.77
</TABLE>
- --------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at September 30,
1999. The pro forma combined book value per share is computed by dividing
pro forma stockholders' equity by the pro forma number of shares of common
stock outstanding at September 30, 1999.
(2) The Sandpiper equivalent pro forma combined per share amounts are
calculated by multiplying the Digital Island combined pro forma share
amounts by the exchange ratio of 1.0727.
14
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MARKET PRICE INFORMATION
Digital Island's common stock has traded on the Nasdaq National Market under
the symbol "ISLD" since June 29, 1999. The following table sets forth the range
of high and low sales prices reported on the Nasdaq National Market for Digital
Island common stock for the periods indicated.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Fiscal 1999
Third Quarter............................................ $ 20.50 $ 8.66
Fourth Quarter........................................... $ 40.44 $12.75
Fiscal 2000
First Quarter (through December 8, 1999)................. $114.94 $20.44
</TABLE>
There is no established public trading market for Sandpiper's common stock.
Recent Closing Prices
As of October 22, 1999, the last trading day before announcement of the
proposed merger, the closing price per share on the Nasdaq National Market of
Digital Island common stock was $23. On December 8, 1999, the latest
practicable trading day before the printing of this joint proxy
statement/prospectus, the closing price per share of Digital Island common
stock was $114.94.
Because the market price of Digital Island common stock is subject to
fluctuation, the market value of the shares of Digital Island common stock that
Sandpiper shareholders will receive in the merger may increase or decrease
prior to and following the merger. We urge you to obtain current market
quotations for Digital Island common stock. We cannot assure you as to the
future prices for Digital Island common stock.
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<PAGE>
RISK FACTORS
By voting in favor of the merger, Sandpiper shareholders will be choosing to
invest in Digital Island common stock. An investment in Digital Island common
stock involves a high degree of risk. In addition to the other information
contained in this joint proxy statement/prospectus, investors in Digital Island
common stock should carefully consider the following risk factors. If any of
the following risks actually occur, the business and prospects of Sandpiper or
Digital Island may be seriously harmed. In this case, the trading price of
Digital Island common stock may decline, and you may lose all or part of your
investment.
Risks Related To The Merger
Sandpiper shareholders will receive a fixed number of shares of Digital Island
common stock and as a result, they will bear all the market risk of a decrease
of the value of Digital Island shares issued in the merger.
Upon the merger's completion, each share of Sandpiper capital stock will be
exchanged for 1.0727 shares of Digital Island common stock. There will be no
adjustment for changes in the market price of Digital Island common stock. In
addition, neither Sandpiper nor Digital Island may terminate the merger
agreement or "walk away" from the merger or resolicit the vote of its
shareholders or stockholders solely because of changes in the market price of
Digital Island common stock. Accordingly, the specific dollar value of Digital
Island common stock that Sandpiper shareholders will receive upon the merger's
completion will depend on the market value of Digital Island common stock when
the merger is completed and may decrease from the date you submit your proxy.
The share price of Digital Island common stock is by nature subject to the
general price fluctuations in the market for publicly traded equity securities
and has experienced significant volatility. We urge you to obtain recent market
quotations for Digital Island common stock. We cannot predict or give any
assurances as to the market price of Digital Island common stock at any time
before or after the completion of the merger.
If we do not successfully integrate Sandpiper's operations and personnel or
effectively manage the combined company, we may not achieve the benefits of the
merger and may lose key personnel and customers.
We entered into the merger agreement with the expectation that the merger
will result in significant benefits. Achieving the benefits of the merger
depends on the timely, efficient and successful execution of a number of post-
merger events, including integrating the operations and personnel of the two
companies. We will need to overcome significant obstacles, however, in order to
realize any benefits or synergies from the merger. The successful execution of
these post-merger events will involve considerable risk and may not be
successful. Furthermore, Sandpiper's principal offices are located in Thousand
Oaks, California while Digital Island's principal offices are located in San
Francisco, California. There are currently plans to relocate Sandpiper's
principal offices to San Francisco, California. However, in order for the
merger to be successful, we must successfully integrate Sandpiper's operations
and personnel with Digital Island's operations and personnel. Our failure to
complete the integration successfully could result in the loss of key personnel
and customers.
If we fail to cross-market successfully our products or develop new products,
we will not increase or maintain our customer base or our revenues.
We initially intend to offer our products and services to each other's
customers. We cannot assure you that either of our respective customers will
have any interest in the other company's products and services. The failure of
these cross-marketing efforts would diminish the benefits realized by this
merger.
In addition, we intend after the merger to develop new products and services
that combine the knowledge and resources of the Digital Island and Sandpiper
businesses. We cannot offer any assurances that these products or services will
be successful or that we can successfully integrate or realize the anticipated
benefits of
16
<PAGE>
the merger. As a result, we may not be able to increase or maintain our
customer base. We cannot assure you that the transactions or other data in
Sandpiper's database will be predictive or useful in other sales channels,
including systems integrators, web site designers and Internet service
providers. To date, the companies have not thoroughly investigated the
obstacles, technological, market-driven or otherwise, to developing and
marketing these new products and services in a timely and efficient way. We
cannot assure you that we will be able to overcome the obstacles in developing
new products and services, or that there will be a market for the new products
or services we develop after the merger. A failure or inability like this could
have a material adverse effect on the combined company's business, financial
condition and operating results or could result in loss of key personnel. In
addition, the attention and effort devoted to the integration of the two
companies will significantly divert management's attention from other important
issues, and could seriously harm the combined company.
If the costs associated with the merger exceed the benefits realized, Digital
Island may experience increased losses.
If the benefits of the merger do not exceed the costs associated with the
merger, including any dilution to Digital Island's stockholders resulting from
the issuance of shares in connection with the merger, Digital Island's
financial results could be adversely affected, including increased losses.
If we do not successfully integrate Sandpiper or the merger's benefits do not
meet the expectations of financial or industry analysts, the market price for
Digital Island's common stock may decline.
The market price of Digital Island common stock may decline as a result of
the merger if:
. the integration of Digital Island and Sandpiper is unsuccessful;
. Digital Island does not achieve the perceived benefits of the merger as
rapidly or to the extent anticipated by financial or industry analysts;
or
. the effect of the merger on Digital Island's financial results is not
consistent with the expectations of financial or industry analysts.
Sandpiper's officers and directors have conflicts of interest that may
influence them to support or approve the merger.
The directors and officers of Sandpiper participate in arrangements and have
continuing indemnification against liabilities that provide them with interests
in the merger that are different from, or in addition to, yours. The directors
and officers of Sandpiper could therefore be more likely to vote to approve the
merger agreement than if they did not hold these interests. Sandpiper
shareholders should consider whether these interests may have influenced these
directors and officers to support or recommend the merger.
For example:
. The Sandpiper board, in connection with approving the merger, approved
the accelerated vesting of shares of Sandpiper common stock subject to
repurchase rights of Sandpiper held by certain officers of Sandpiper.
. Upon the effectiveness of the merger, certain current officers of
Sandpiper will enter into employment agreements with Digital Island
pursuant to which such officers will receive base salaries ranging from
$170,000 to $240,000 and will become eligible to receive an annual bonus
and severance payments if terminated by Digital Island prior to the
expiration of the term of the employment agreement. Certain of the
employment agreements also provide for the grant of options to purchase
shares of Digital Island's common stock at the time of effectiveness of
the merger.
17
<PAGE>
. Because the number of shares of Digital Island's common stock outstanding
is larger than the number of shares of Sandpiper capital stock
outstanding, certain officers, directors and affiliates of Sandpiper who
receive shares of Digital Island's common stock in the merger may be
allowed to sell or transfer a greater number of shares in a single
transaction than would be possible prior to the merger pursuant to the
volume restrictions of Rule 144 of the Securities Act.
. Digital Island has agreed to cause the surviving corporation in the
merger to indemnify each present and former Sandpiper officer and
director against liabilities arising out of his or her service as an
officer or director.
See "The Merger Agreement and Related Agreements--Related Agreements--
Employment Agreements" and "The Merger--Interests of Officers and Directors in
the Merger."
Failure to complete the merger could negatively impact Sandpiper's operating
results and its ability to enter into an alternative transaction.
If the merger is not completed for any reason, Sandpiper may be subject to a
number of material risks, including the following:
. Sandpiper may be required to pay Digital Island an aggregate of $30.0
million in termination fees; and
. Sandpiper's costs related to the merger, such as legal and accounting
fees, must be paid even if the merger is not completed.
If the merger is terminated and Sandpiper's board of directors determines to
seek another merger or business combination, there can be no assurance that it
will be able to find a partner willing to pay an equivalent or more attractive
price than the price to be paid in the merger. In addition, while the merger
agreement is in effect, Sandpiper is prohibited from soliciting, initiating or
encouraging or entering into extraordinary transactions, such as a merger, sale
of assets or other business combination, with any party other than Digital
Island. As a result of this prohibition, Sandpiper will be precluded from
discussing potential transactions should the merger not occur, and may lose an
opportunity for a transaction with another potential partner at a favorable
price if the merger is not completed.
Uncertainties associated with the merger may cause Sandpiper customers to delay
or defer decisions concerning Sandpiper or may cause Sandpiper to lose
customers.
Sandpiper customers may, in response to the announcement of the merger,
delay or defer decisions concerning Sandpiper. Any delay or deferral in those
decisions by Sandpiper customers could have a material adverse effect on
Sandpiper's business. For example, Sandpiper could experience a decrease in
expected revenue as a consequence of the uncertainties associated with the
merger.
Uncertainties associated with the merger may cause Sandpiper to lose key
personnel.
Current and prospective Sandpiper employees may experience uncertainty about
their future roles with Digital Island until Digital Island's strategies with
regard to Sandpiper are announced or executed. Any uncertainty may adversely
affect Sandpiper's ability to attract and retain key management, sales,
marketing and technical personnel.
If Digital Island does not effectively manage the integration of acquired
companies other than Sandpiper, it could disrupt its business and cause
increased losses.
As a part of its business strategy, Digital Island expects to enter into
additional business combinations and acquisitions. Acquisition transactions
require a significant commitment of resources and are accompanied by a number
of risks, including:
. the difficulty of assimilating the operations and personnel of the
acquired companies;
18
<PAGE>
. the potential disruption of Digital Island's ongoing business and
distraction of management;
. the difficulty of incorporating acquired technology and rights into
Digital Island's products and services;
. unanticipated expenses related to technology integration;
. the maintenance of uniform standards, controls, procedures and policies;
. the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
. potential unknown liabilities associated with acquired businesses.
The combined company may not succeed in addressing these risks or any other
problems encountered in connection with these potential business combinations
and acquisitions, which could disrupt Digital Island's business and cause
increased losses.
Method of accounting for the merger may delay profitability of Digital Island.
The merger will be accounted for under the "purchase" method of accounting,
meaning that the purchase price for Sandpiper must be allocated to the acquired
assets and assumed liabilities of Sandpiper. The combined company's
profitability is expected to be delayed beyond the time frame in which Digital
Island or Sandpiper, as independent entities, may have otherwise achieved
profitability because of the use of the purchase method of accounting. Any
amount allocated to goodwill, preliminarily estimated at approximately $971
million, must be amortized ratably over five years. Additionally, the merger
may result in an in-process research and development charge recorded in the
quarter the merger is completed and deducted from net income in determining the
profitability of Digital Island for that quarter. Digital Island has not yet
completed an evaluation of Sandpiper's in-process research and development
projects to determine the amount, if any, of the charge.
Issuance of additional shares of Digital Island may reduce the Digital Island
stock price.
In connection with the merger, Digital Island estimates that approximately
24.5 million newly-issued shares of Digital Island common stock will be issued
to current Sandpiper shareholders. The issuance of Digital Island common stock
in the merger will reduce Digital Island's earnings per share, if any. This
dilution could reduce the market price of Digital Island common stock unless
and until the combined company achieves revenue growth or cost savings and
other business economies sufficient to offset the effect of this issuance.
There can be no assurance that Digital Island will achieve revenue growth, cost
savings or other business economies or that you will achieve greater returns as
a Digital Island stockholder than as a Sandpiper shareholder. In addition, the
immediate availability of this substantial number of additional shares of
Digital Island common stock for sale in the market could decrease the per share
market price of Digital Island common stock.
Shares eligible for future sale in the open market could depress the Digital
Island stock price.
Sales of substantial amounts of Digital Island common stock (including
shares issued upon the exercise of outstanding options and warrants) in the
public market following the merger, or the appearance that a large number of
shares is available for sale, could depress the market price for Digital
Island's common stock. The number of shares of common stock available for sale
in the public market is limited by agreements under which Digital Island and
its executive offices, directors and certain other holders of outstanding
shares of common stock and options and warrants to purchase common stock have
agreed not to sell or otherwise dispose of any of their shares until December
26, 1999. In addition, Digital Island stockholders holding approximately 45% of
the outstanding common stock of Digital Island and Sandpiper shareholders
holding approximately 76% of the outstanding capital stock of Sandpiper, have
agreed not to sell their shares of Digital Island common stock from the time of
the merger until the earliest to occur of (a) the sale by Digital Island of
Digital Island common stock for its own account in a bona fide, firm commitment
underwritten public offering
19
<PAGE>
pursuant to a registration statement under the Securities Act, (b) July 15,
2000, (c) the effective date of a merger of Digital Island with or into another
corporation in which fifty (50%) or more of the voting power of Digital Island
is disposed of, or the sale of all or substantially all of the assets of
Digital Island; or (d) such other date, and with such limitations, as may be
approved by unanimous vote of the board of directors of Digital Island.
Furthermore, the holders of approximately 25 million restricted shares of
Digital Island stock are entitled to certain rights with respect to
registration of such shares for sale in the public market. If these holders
sell in the public market, such sales could have a material adverse effect on
the market price of Digital Island's common stock. In addition to the adverse
effect a price decline could have on holders of Digital Island's common stock,
that decline would likely impede Digital Island's ability to raise capital
through the issuance of additional shares of common stock or other equity
securities. See "Digital Island Shares Eligible for Future Sale" and "Certain
Transactions--Investors' Rights Agreement."
Risks Related To Digital Island
Digital Island has a short operating history upon which to base your investment
decision.
Digital Island's limited operating history makes it difficult for it to
predict future results of operations, and makes it difficult to evaluate
Digital Island or its prospects. Digital Island was incorporated in 1994, and
began offering its global applications network services in January 1997. Prior
to such time, Digital Island was engaged in activities unrelated to its current
operations, and as a result, the results of operations for such periods are not
comparable to its results of operations for 1997 or any subsequent periods.
Digital Island has incurred operating losses since its inception and expects
future operating losses for the foreseeable future.
The revenue and income potential of Digital Island's business and market is
unproven. From inception, Digital Island has experienced operating losses,
negative cash flow from operations and net losses in each quarterly and annual
period. For the fiscal year ended September 30, 1998, its operating loss,
negative cash flow from operations and net loss were $17.1 million, $15.7
million and $16.8 million, respectively. For the fiscal year ended September
30, 1999, its operating loss, negative cash flow from operations and net loss
were $52.5 million, $39.7 million and $50.9 million, respectively. As of
September 30, 1999, Digital Island had an accumulated deficit of approximately
$73.1 million.
Currently, Digital Island anticipates making significant investments in its
network infrastructure and product development as well as its sales and
marketing programs and personnel. For example, Digital Island has substantially
increased the level of its anticipated capital expenditures for network
expansion, facilities and related costs over the next 12 months to
approximately $80.0 million to $100.0 million; this increased level of
anticipated capital expenditures will require significant additional financing,
as further described in Digital Island's "Management Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." Therefore, Digital Island believes that it will continue to
experience significant losses on a quarterly and annual basis for the
foreseeable future. You must consider Digital Island and its prospects in light
of the risks and difficulties encountered by companies in new and rapidly
evolving markets. Digital Island's ability to address these risks depends on a
number of factors which include its ability to:
. market its brand name effectively to companies in its target markets;
. provide reliable and cost-effective services to attract and retain its
target customers;
. continue to grow its infrastructure to accommodate new Internet
developments and increase utilization of its network to maintain and
increase its ability to service new and existing customers; and
. expand its channels of distribution to increase its presence in its
target markets.
Digital Island may not be successful in meeting these challenges and
addressing these risks and uncertainties. If Digital Island is unable to do so,
its business will not be successful and the value of your investment in Digital
Island will decline.
20
<PAGE>
Although Digital Island has experienced growth in revenues in recent
periods, this growth rate may not be indicative of future operating results.
Digital Island may never be able to achieve or sustain profitability.
Digital Island's operating results may fluctuate in future periods which may
cause volatility or a decline in the price of its stock.
Due to a variety of factors, Digital Island expects to experience
significant fluctuations in its future results of operations, and shortfalls in
revenue may cause significant variations in its operating results in any
quarter. Such fluctuations may cause the price of Digital Island's stock to
fall. Factors, many of which are out of Digital Island's control, that could
cause its operating results to fluctuate and its stock price to fall include:
. demand for and market acceptance of its products and services may decline
or fail to increase enough to offset Digital Island's costs;
. introductions of new products and services or enhancements by Digital
Island and its competitors may increase Digital Island's costs or make
its existing products or services obsolete;
. the prices Digital Island can charge its customers may decline due to
price competition with its competitors;
. utilization of Digital Island's global network may increase beyond its
capacity and Digital Island may incur expenses to increase such capacity;
. continuity of its service and network availability could be interrupted,
reducing revenue;
. the availability and cost of bandwidth may reduce Digital Island's
ability to increase bandwidth as necessary, reducing Digital Island's
revenue;
. the timing of customer installations and the timing of expansion of
Digital Island's network infrastructure may vary from quarter to quarter;
. the mix of products and services Digital Island sells may change and the
new mix may generate less revenue;
. the timing and magnitude of Digital Island's capital expenditures,
including costs relating to the expansion of operations, may vary from
quarter to quarter;
. bandwidth used by customers may fluctuate from quarter to quarter
affecting Digital Island's profits from such customers; and
. conditions specific to the Internet industry and other general economic
factors may affect the prices Digital Island can charge or the expenses
it incurs.
In addition, a relatively large portion of Digital Island's expenses are
fixed in the short-term, particularly with respect to telecommunications
capacity, depreciation, real estate, interest and personnel, and therefore its
results of operations are particularly sensitive to fluctuations in revenues.
Due to the foregoing, Digital Island believes that period-to-period comparisons
of its operating results are not necessarily meaningful and that such
comparisons cannot be relied upon as indicators of future performance. See
Digital Island's "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Quarterly Results of Operations."
Digital Island must offer services priced above the overall cost of bandwidth,
and any failure to do so will jeopardize its operating results.
If Digital Island does not obtain adequate bandwidth capacity on acceptable
terms and realize appropriate customer volume for such bandwidth, it will not
achieve positive gross profit. Digital Island purchases its bandwidth capacity
on a fixed-price basis in advance of the sale of its services for such
bandwidth. Digital Island sells its services, by contract, on the basis of
actual usage. Digital Island's bandwidth costs currently are exceeding its
revenues from the sale of services, which results in negative gross profit. In
the future, it must obtain enough bandwidth to meet its projected customer
needs, and it must realize adequate volume from its customers to support and
justify such bandwidth capacity and expense.
21
<PAGE>
Digital Island expects that its cost to obtain bandwidth capacity for the
transport of data over its 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. Digital Island expects the
prices it charges for data transported over its 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 it addresses. As a result,
Digital Island's historical revenue rates are not indicative of future revenue
based on comparable traffic volumes. If Digital Island fails to accurately
predict the decline in costs of bandwidth or, in any event, if Digital Island
is unable to sell its services at acceptable prices relative to its bandwidth
costs, or if it fails to offer additional services from which it can derive
additional revenues, Digital Island's revenues will decrease and its business
and financial results will suffer.
Digital Island's data replication (mirroring) and storage (caching) business
is attractive to customers primarily because these services eliminate a
significant portion of the cost of transporting data by deploying data in close
proximity to the end users. To the extent bandwidth costs decrease, the prices
Digital Island may charge for these services will decrease as well. If the cost
of bandwidth decreases in excess of Digital Island's expectations, the value of
these services could be substantially reduced, which would harm Digital
Island's business and financial results.
Digital Island must retain and expand its customer base or else it will
continue to be unprofitable.
Digital Island currently incurs costs greater than its revenues, and needs
to increase customer revenue in order to become profitable. Digital Island
incurs significant fixed costs to purchase its bandwidth capacity and maintain
its network. Digital Island also has payroll and other working capital needs.
If Digital Island is unable to retain or grow its customer base, it will not be
able to increase its sales and revenues or create economies of scale to offset
its fixed and other operating costs. Digital Island's 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 Digital Island's services; and
. Digital Island's ability to effectively market such services.
To attract new customers Digital Island intends to significantly increase
its sales and marketing expenditures. However, Digital Island's efforts might
not result in more sales as a result of the following factors:
. Digital Island may be unsuccessful in implementing its marketing
strategies;
. Digital Island 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 Digital Island's network infrastructure could lead to
significant costs and disruptions which could reduce its revenues and harm its
business and financial results.
Digital Island's business is dependent on providing its customers with fast,
efficient and reliable network services. To meet these customer requirements it
must protect its network infrastructure against damage from:
. human error;
. fire;
. natural disasters;
. power loss;
22
<PAGE>
. telecommunications failures; and
. similar events.
Despite precautions taken by Digital Island, the occurrence of a natural
disaster or other unanticipated problems at one or more of its data centers
could result in service interruptions or significant damage to equipment.
Digital Island has experienced temporary service interruptions in the past, and
it could experience similar interruptions in the future.
Any failure of Digital Island's telecommunications providers to provide
required data communications capacity to Digital Island could result in
interruptions in its services.
Digital Island's operations are dependent upon data communications capacity
provided by third-party telecommunications providers. Any failure of such
telecommunications providers to provide the capacity Digital Island requires
may result in a reduction in, or termination of, services to its customers.
This could cause Digital Island to lose customers or fees charged to such
customers, and Digital Island's business and financial results could suffer.
Future customer warranty claims based on service failures could exceed Digital
Island's insurance coverage.
Digital Island's customer contracts currently provide limited service level
warranties related to the availability of service on a 24 hours a day, seven
days per week basis, except for certain scheduled maintenance periods, and for
packet losses. This warranty is limited to a credit for a limited amount for a
period of time for disruptions in Internet transmission services and/or certain
levels of packet losses. To date, Digital Island has had no material expense
related to such service level warranties. Should Digital Island incur
significant obligations in connection with system downtime, Digital Island's
liability insurance may not be adequate to cover such expenses. Although
Digital Island's 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, Digital Island may be found liable, and, in such event, such damages
may exceed its liability insurance.
Digital Island's failure to make timely upgrades to increase the capacity of
its network may reduce demand for its services.
Due to the limited deployment of Digital Island's services to date, the
ability of its network to connect and manage a substantially larger number of
customers at high transmission speeds is as yet unknown. Digital Island's
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 Digital Island. In
addition, as customers' usage of bandwidth increases, Digital Island will need
to make additional investments in its infrastructure to maintain adequate
downstream data transmission speeds, the availability of which may be limited
or the cost of which may be significant. Upgrading Digital Island's
infrastructure may cause delays or failures in its network. As a result,
Digital Island's network may be unable to achieve or maintain a sufficiently
high capacity of data transmission as usage by its customers increases. Digital
Island's failure to achieve or maintain high capacity data transmission could
significantly reduce demand for its services, reducing its revenues and causing
its business and financial results to suffer.
Digital Island cannot accurately predict the size of its market, and if its
market does not grow as it expects, Digital Island's revenues will be below its
expectations and its business and financial results will suffer.
Digital Island is a new company engaging in a developing business with an
unproven market. Accordingly, Digital Island cannot accurately estimate the
size of its market or the potential demand for its services. If Digital
Island's customer base does not expand or if there is not widespread acceptance
of Digital Island's
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<PAGE>
products and its services, its business and prospects will be harmed. For the
fiscal year ended September 30, 1999, it had 83 billing customers, of which
one, E*TRADE, accounted for approximately 35% of its revenues. Digital Island
believes that its potential to grow and increase its market acceptance depends
principally on the following factors, some of which are beyond its control:
. the effectiveness of its marketing strategy and efforts;
. its product and service differentiation and quality;
. the extent of its network coverage;
. its ability to provide timely, effective customer support;
. its distribution and pricing strategies as compared to its competitors;
. its industry reputation; and
. general economic conditions such as downturns in the computer or software
markets.
Digital Island will require significant additional capital, which it may not be
able to obtain.
The expansion and development of Digital Island's business will require
significant capital in the future to fund its operating losses, working capital
needs and capital expenditures. Digital Island may not be able to obtain future
equity or debt financing on satisfactory terms or at all. Digital Island's
failure to generate sufficient cash flows from sales of services or to raise
sufficient funds may require it to delay or abandon some or all of its
development and expansion plans or otherwise forego market opportunities. In
addition, Digital Island's credit agreements contain covenants restricting its
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 Digital Island to pledge assets
as security for borrowings thereunder. Digital Island's inability to obtain
additional capital on satisfactory terms may delay or prevent the expansion of
its business, which could cause its business and financial results to suffer.
Digital Island's principal capital expenditures and lease payments include
the purchase, lease and installation of network equipment such as switches,
routers, servers and storage devices. Digital Island's working capital is
primarily comprised of accounts receivable, accounts payable and accrued
expenses. The timing and amount of Digital Island's future capital requirements
may vary significantly depending on numerous factors, including regulatory,
technological, competitive and other developments in its industry. Due to the
uncertainty of these factors, Digital Island's actual revenues and costs may
vary from expected amounts, possibly to a material degree, and such variations
are likely to affect its future capital requirements. See Digital Island's
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Rapid growth in Digital Island's business could strain its resources and harm
its business and financial results.
The planned expansion of Digital Island's operations will place a
significant strain on its management, financial controls, operations systems,
personnel and other resources. Digital Island expects that its customers
increasingly will demand additional information and reports with respect to the
services it provides. To handle these demands and enable future traffic growth,
Digital Island must develop and implement an automated customer service system.
In addition, if Digital Island is successful in implementing its marketing
strategy, Digital Island also expects the demands on its network infrastructure
and technical support resources to grow rapidly, and it may experience
difficulties responding to customer demand for its services and providing
technical support in accordance with its customers' expectations. Digital
Island expects 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. Digital Island may not be able to keep pace
with any growth, successfully implement and maintain its
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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 its evolving and increasingly competitive industry. If
Digital Island is unable to manage growth effectively, it may lose customers or
fail to attract new customers and its business and financial results will
suffer. See Digital Island's "Business--Business Strategy."
Digital Island could lose customers and expose the company to liability if
breaches of its network security disrupt service to its customers or jeopardize
the security of confidential information stored in its computer systems.
Despite the implementation of network security measures, Digital Island's
network infrastructure is vulnerable to computer viruses, break-ins and similar
disruptive problems caused by its customers or Internet users. Any of these
acts could lead to interruptions, delays or cessation in service to Digital
Island's customers and subscribers. Furthermore, such inappropriate use of the
network by third parties could also potentially jeopardize the security of
confidential information stored in its computer systems and its customers
computer systems, which may result in liability to and may also deter potential
customers. Although Digital Island intends to continue to implement industry-
standard security measures, any measures it implements 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 its
customers that could cause its business and financial results to suffer.
The integration of key new employees and officers into Digital Island's
management team has interfered, and will continue to interfere, with its
operations.
Digital Island has recently hired a number of key employees and officers
including its chief financial officer, vice president of sales and vice
president of corporate development, each of whom has been with Digital Island
for less than a year. To integrate into Digital Island, such individuals must
spend a significant amount of time learning its business model and management
system, in addition to performing their regular duties. Accordingly, the
integration of new personnel has resulted and will continue to result in some
disruption to Digital Island's ongoing operations. If Digital Island fails to
complete this integration in an efficient manner, its business and financial
results will suffer.
Digital Island must retain and attract key employees or else it may not grow or
be successful.
Digital Island is highly dependent on key members of its management and
engineering staff, including, without limitation, its 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
Digital Island's business objectives. Furthermore, recruiting and retaining
qualified technical personnel to perform research, development and technical
support work is critical to its success. If Digital Island's business grows, it
will also need to recruit a significant number of management, technical and
other personnel for its business. Competition for employees in Digital Island's
industry is intense. Digital Island may not be able to continue to attract and
retain skilled and experienced personnel on acceptable terms. See Digital
Island's "Business--Employees" and "Management."
Digital Island depends on a limited number of third party suppliers for key
components of its network infrastructure, and the loss of one or more suppliers
may slow its growth or cause it to lose customers.
Digital Island is dependent on other companies to supply key components of
its infrastructure, including bandwidth capacity leased from telecommunications
network providers and networking equipment that, in the quantities and quality
demanded by it, are available only from sole or limited sources. While Digital
Island has entered into various agreements for carrier line capacity, any
failure to obtain additional capacity, if required, would impede the growth of
its business and cause its financial results to suffer. The routers and
switches used in its infrastructure are currently supplied primarily by Cisco
Systems. Digital Island purchases these
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components pursuant to purchase orders placed from time to time, it does not
carry significant inventories of these components and it has 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 impede the growth
of its business and cause its financial results to suffer. In addition, any
failure of Digital Island's 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 Digital Island in its communications infrastructure could
cause its business and financial results to suffer.
Digital Island's failure to adequately protect its proprietary rights may harm
its competitive position.
Digital Island relies on a combination of copyrights, trademark, service
mark and trade secret laws and contractual restrictions to establish and
protect proprietary rights in its products and services. However, Digital
Island will not be able to protect its intellectual property if it is unable to
enforce its rights or if it does not detect unauthorized use of its
intellectual property.
Although Digital Island has filed a patent application with respect to its
TraceWare technology with the United States Patent and Trademark Office, such
application is pending and Digital Island currently has no patented technology
that would preclude or inhibit competitors from entering its market. Moreover,
none of Digital Island's technology is patented abroad, nor does it currently
have any international patent applications pending. Digital Island cannot be
certain that any pending or future patent applications will be granted, that
any future patent will not be challenged, invalidated or circumvented, or that
rights granted under any patent that may be issued will provide competitive
advantages to Digital Island.
Digital Island has applied for trademarks and service marks on certain terms
and symbols that it believes are important for its business. In addition, it
generally enters into confidentiality or license agreements with its employees
and consultants and with its customers and corporations with whom Digital
Island has strategic relationships, and Digital Island attempts to maintain
control over access to and distribution of its software documentation and other
proprietary information. However, the steps Digital Island has taken to protect
its technology or intellectual property may be inadequate. Digital Island's
competitors may independently develop technologies that are substantially
equivalent or superior to Digital Island's. Moreover, in other countries where
Digital Island does business, there may not be effective legal protection of
patents and other proprietary rights that Digital Island believes are important
to Digital Island's business. See Digital Island's "Business--Intellectual
Property Rights."
Digital Island may be unable to license necessary technology and it may be
subject to infringement claims by third parties.
Digital Island's commercial success will also depend in part on not
infringing the proprietary rights of others and not breaching technology
licenses that cover technology used in its products. It is uncertain whether
any third party patents will require Digital Island to develop alternative
technology or to alter its products or processes, obtain licenses or cease
activities that infringe on third party's intellectual property rights. If any
such licenses are required, Digital Island may not be able to obtain such
licenses on commercially favorable terms, if at all. Digital Island's failure
to obtain a license to any technology that it may require to commercialize its
products and services could cause its business and prospects to suffer.
Litigation, which could result in substantial cost to Digital Island, may also
be necessary to enforce any patents issued or licensed to it or to determine
the scope and validity of third party proprietary rights. See Digital Island's
"Business--Intellectual Property Rights."
Digital Island is subject to risks associated with entering into joint
ventures, including inconsistent goals and exposure to unknown liabilities and
unexpected obligations.
Digital Island's strategy is to pursue international expansion through
relationships and joint ventures with local Internet service providers and
telecommunications carriers in other countries. Digital Island may not have a
majority interest or control of the governing body of any such local operating
joint venture. In any such joint
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venture in which Digital Island 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 of
Digital Island. The risk also will be present that a joint venture partner may
be unable to meet its economic or other obligations and that Digital Island may
be required to fulfill those obligations. In addition, in any joint venture in
which Digital Island does not have a majority interest, it may not have control
over the operations or assets of such joint venture. Digital Island 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. Digital Island's failure to establish these
relationships may cause Digital Island to lose customers or slow its growth and
its business and financial results would suffer.
Acquisitions Digital Island makes could disrupt its business and harm its
financial condition.
Digital Island intends to make investments in other complementary companies,
products and technologies in the future. In the event of any future purchases,
Digital Island could:
. issue stock that would dilute the ownership of its then existing
shareholders, including investors who purchase common stock in this
offering;
. incur debt;
. assume liabilities;
. incur amortization expenses related to goodwill and other intangible
assets; or
. incur large and immediate write-offs.
These purchases also involve numerous risks, including:
. problems integrating the operations, technologies or products purchased
with those Digital Island already has;
. unanticipated costs;
. diversion of management's attention from Digital Island's core business;
. adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which Digital Island has no or
limited prior experience; and
. potential loss of key employees, particularly those of the purchased
organizations.
Digital Island has anti-takeover defenses that could delay or prevent a
takeover that stockholders may consider favorable.
Certain provisions of Digital Island's 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, its
board of directors is divided into three classes to serve staggered three-year
terms, Digital Island may authorize the issuance of up to 10,000,000 shares of
"blank check" preferred stock, Digital Island's stockholders may not take
actions by written consent and its stockholders are limited in their ability to
make proposals at stockholder meetings. See Digital Island's "Description of
Capital Stock" for a further discussion of these provisions.
Digital Island stock will likely be subject to substantial price and volume
fluctuations due to a number of factors, some of which are beyond Digital
Island's 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 Digital Island's common stock
without regard to its operating performance. In addition, Digital Island's
operating results may be below the expectations of public market analysts and
investors. If this were to occur, the market price of Digital Island's common
stock would likely significantly decrease.
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Risks Related To Sandpiper
Sandpiper has a limited operating history, which may limit your ability to
evaluate its business.
Sandpiper commenced operations in December 1996 and introduced its service
in September 1998, and therefore has a limited operating history. This may
limit your ability to evaluate its prospects and performance, and an investment
in its common stock, due to:
. its limited historical financial data;
. its unproven potential to generate profits; and
. its limited experience in addressing emerging trends that may affect
Sandpiper's business.
You should consider Sandpiper's prospects in light of the risks, expenses
and difficulties it may encounter as an early stage company in the new and
rapidly evolving market for Internet content delivery solutions. As a result of
such risks, expenses and difficulties, Sandpiper may not be able to:
. successfully market its content delivery solution;
. maintain and expand its market share in the highly competitive market for
Internet content delivery solutions;
. timely and effectively introduce new services and service enhancements
that are responsive to the needs of its customers; and
. attract, train and retain qualified sales, technical and customer support
personnel.
Sandpiper discusses these and other risks in more detail below.
Sandpiper has a history of losses, expects continuing losses and may never
achieve profitability.
Sandpiper has never been profitable. Sandpiper has incurred significant
losses since inception and expects to continue to incur significant losses for
the foreseeable future. Sandpiper reported a net loss of approximately $5.1
million for the year ended December 31, 1998, and approximately $10.1 million
for the nine months ended September 30, 1999. As of September 30, 1999,
Sandpiper had an accumulated deficit of $15.5 million. Sandpiper cannot be
certain that its revenue will grow or that it will achieve sufficient revenue
to achieve profitability. Sandpiper's failure to significantly increase its
revenue would seriously harm its business and operating results. Sandpiper's
operating expenses are largely based on anticipated revenue trends, and a high
percentage of its expenses are, and will continue to be, fixed in the short
term. In addition, Sandpiper expects to continue to incur significant and
increasing sales and marketing, product development, administrative and other
expenses, including fees to obtain access to bandwidth for the transport of
data over its network. As a result, Sandpiper will need to generate
significantly higher revenues to achieve and maintain profitability. If
Sandpiper's revenue grows more slowly than it anticipates or if its operating
expenses increase more than it expects or cannot be reduced in the event of
lower revenue, Sandpiper's business will be materially and adversely affected.
Sandpiper's quarterly financial performance is likely to be unpredictable in
the future.
Sandpiper's revenue and operating results will vary significantly from
quarter to quarter due to a number of factors, many of which are outside of its
control. The primary factors that may affect Sandpiper include the following:
. the timing and size of sales of its services;
. changes in its pricing policies or the pricing policies of its
competitors;
. the length of the sales cycle and implementation periods for its
services;
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. increases in the prices of, and the availability of, the products and
services it purchases, including bandwidth;
. new product and service introductions and enhancements by its competitors
and Sandpiper itself;
. its ability to attain and maintain quality levels for its services;
. costs related to acquisitions of technology or businesses; and
. general economic conditions as well as those specific to the Internet and
related industries.
In addition, Sandpiper's quarterly operating results have been, and are
likely to continue to be, influenced by seasonal fluctuations in its sales.
Because its sales have grown in each quarter since its inception, these
fluctuations may not be apparent from its historical financial statements.
However, Sandpiper believes that its sales and sales growth from period to
period have been, and will continue to be, affected by the seasonal demand for
Sandpiper's services from its customers, which will be in turn primarily
dependent upon the demand for their services from their customers. For example,
Sandpiper believes that Internet usage will continue to peak, at least in the
next several years, in the fourth quarter of each calendar year as a result of
the increase in e-commerce transactions resulting from the holiday season. As a
result, Sandpiper anticipates that its revenue may peak in the first quarter of
each calendar year due to the nature of its deferred billing cycles. Due to the
above factors, Sandpiper believes that quarter-to-quarter comparisons of its
operating results are not a good indication of its future performance.
Sandpiper's business will suffer if it does not anticipate and meet specific
customer requirements.
In general, Sandpiper enters into 12-month contracts with its customers to
provide Internet content delivery services. These contracts typically include
specific performance requirements, including the features provided,
reliability, processing speed and similar requirements. In addition,
Sandpiper's current and prospective customers may require features and
capabilities that its current service offering does not have. To achieve market
acceptance for its service, it must effectively and timely anticipate and adapt
to customer requirements and offer services that meet customer demands.
Sandpiper's failure to offer services that satisfy customer requirements would
seriously harm its business, results of operations and financial condition.
Sandpiper intends to continue to invest in technology development. The
development of new or enhanced services is a complex and uncertain process that
requires the accurate anticipation of technological and market trends.
Sandpiper may experience design, manufacturing, marketing and other
difficulties that could delay or prevent the development, introduction or
marketing of new services as well as enhancements. The introduction of new or
enhanced services also requires that Sandpiper manage the transition from older
services in order to minimize disruption in customer ordering patterns and
ensure that it can deliver services to meet anticipated customer demand.
Sandpiper's inability to effectively manage this transition would materially
adversely affect its business, results of operations and financial condition.
Sandpiper's business will suffer if it is not able to scale its network as
demand increases.
Sandpiper has had only limited deployment of its Internet content delivery
service to date, and Sandpiper cannot be certain that its network can connect
and manage a substantially larger number of customers at high transmission
speeds. Sandpiper may not be able to scale its network to expected customer
levels while maintaining superior performance. In addition, as customers' usage
of bandwidth increases, Sandpiper will need to make additional investments in
its infrastructure to maintain adequate downstream data transmission speeds.
Sandpiper cannot assure you that it will be able to make these investments
successfully or at an acceptable cost. Upgrading Sandpiper's infrastructure may
cause delays or failures in its network. As a result, in the future Sandpiper's
network may be unable to achieve or maintain a sufficiently high transmission
capacity. Sandpiper's failure to achieve or maintain high capacity data
transmission could significantly reduce demand for its service, reducing its
revenue and causing its business and financial results to suffer.
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A limited number of customers will account for a high percentage of Sandpiper's
revenue, and the loss of a key customer would adversely affect its revenues and
be perceived as a loss of momentum in its business.
Sandpiper expects that a small number of its customers will account for a
substantial portion of its revenues for the foreseeable future. As a result of
this concentration of Sandpiper's customer base, a loss of or decrease in
business from one or more of these customers would materially adversely affect
its revenues, business and prospects. Similarly, if Sandpiper's customers are
unsuccessful in competing for end users in their own intensely competitive
markets or experience other financial or operating difficulties, its revenues,
business and prospects would be materially adversely affected. Potential
customers of Sandpiper and public market analysts or investors may perceive any
loss of a customer as a loss of momentum in Sandpiper's business, which may
adversely affect future opportunities to sell its products and services and
cause its stock price to decline. Also, Sandpiper cannot be sure that its major
customers, individually or as a group, will continue to generate revenues in
any future period.
Sandpiper's operating results may fluctuate because the sales cycle for its
services is long.
To date, Sandpiper's customers have taken a long time to evaluate its
services, and many people within its customers' organizations have been
involved in the process. Along with Sandpiper's distribution partners, it
spends a significant amount of time educating and providing information to its
prospective customers regarding the use and benefits of Sandpiper's services.
Even after purchase, Sandpiper's customers tend to deploy Footprint and its
other services slowly and deliberately, depending on the skill set of the
customer, the size of the deployment, the complexity of the customer's network
environment, and the quantity of hardware and the degree of hardware
configuration necessary to deploy its services. The long sales and
implementation cycles for Sandpiper's services may cause license revenues and
operating results to vary significantly from period to period.
Because Sandpiper's Internet content delivery service is complex and is
deployed in complex environments, it may have errors or defects that could
seriously harm Sandpiper's business.
Sandpiper's Internet content delivery service is highly complex and is
designed to be deployed in very large and complex networks. Because of the
nature of Sandpiper's service, it can only fully test it when it is fully
deployed in very large networks with high traffic. As of October 1, 1999,
Sandpiper's network of Sun SPARC servers were located across 25 distinct
networks in more than five countries worldwide. Sandpiper and its customers
have from time to time discovered errors and defects in its software. In the
future, there may be additional errors and defects in Sandpiper's software that
may adversely affect its service. If Sandpiper is unable efficiently to fix
errors or other problems that may be identified, it could experience:
. loss of or delay in revenue and loss of market share;
. loss of customers;
. failure to attract new customers or achieve market acceptance;
. diversion of development resources;
. loss of reputation and credibility;
. increased service costs; and
. legal actions by Sandpiper's customers.
Sandpiper's business will suffer if it does not respond rapidly to
technological changes.
The market for Internet content delivery services is likely to be
characterized by rapid technological change, frequent new product introductions
and changes in customer requirements. Sandpiper may be unable to
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respond quickly or effectively to these developments. If existing or
prospective competitors introduce products, services or technologies that are
better than Sandpiper's or that gain greater market acceptance, or if new
industry standards emerge, Sandpiper's service may become obsolete, which would
materially and adversely affect its business, results of operations and
financial condition.
In developing Sandpiper's service, it has made, and will continue to make,
assumptions about the standards that its customers and competitors may adopt.
If the standards adopted are different from those which Sandpiper has chosen to
support, market acceptance of its service may be significantly reduced or
delayed and its business will be seriously harmed. In addition, the
introduction of services or products incorporating new technologies and the
emergence of new industry standards could render Sandpiper's existing service
obsolete.
Sandpiper's brand is not well-known, and failure to develop brand recognition
could hurt its ability to compete effectively.
To successfully execute Sandpiper's strategy, it must strengthen its brand
awareness. If Sandpiper does not build its brand awareness, its ability to
realize its strategic and financial objectives could be hurt. Many of
Sandpiper's competitors and potential competitors have well-established brands
associated with the provision of Internet services. To date, Sandpiper's market
presence has been limited principally to the Atlanta, Boston, Chicago, Dallas,
London, Los Angeles, New York, San Francisco and Washington, D.C. metropolitan
areas. To date, Sandpiper has attracted its existing customers primarily
through a relatively small sales force, word of mouth, and targeted media
advertising. In order to build Sandpiper's brand awareness, it intends to
significantly increase its marketing efforts, which may not be successful, and
it must continue to provide high quality services. As part of Sandpiper's brand
building efforts, it expects to increase its marketing budget substantially as
well as its marketing activities, including advertising, tradeshows, direct
response programs and new launch events. Sandpiper may not succeed as planned.
Sandpiper is dependent on certain members of its senior management, the loss of
whom would negatively affect its business.
Sandpiper's future success depends in large part on the continued services
of its senior management and key personnel. In particular, Sandpiper is highly
dependent on the services of Leo Spiegel, its chief executive officer and
president, David Farber, its chief technology officer, and Andrew Swart, its
vice president of engineering. Sandpiper does not have employment contracts
with any member of its senior management. Any loss of the services of Messrs.
Spiegel, Farber or Swart, other members of senior management or other key
personnel would negatively affect Sandpiper's business.
Any failure of Sandpiper's network infrastructure could lead to significant
costs and disruptions that could reduce its revenue and harm its business,
financial results and reputation.
Sandpiper's business is dependent on providing its customers with fast,
efficient and reliable Internet content delivery. To meet these customer
requirements, Sandpiper must protect its network infrastructure, including in
particular its network operations center, against damage from:
. human error;
. physical or electronic security breaches;
. fire, earthquake, flood and other natural disasters;
. power loss;
. sabotage and vandalism; and
. similar events.
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Despite precautions Sandpiper has taken, the occurrence of a natural
disaster or other unanticipated problems at its network operations center or at
one or more of its servers or server clusters could result in service
interruptions or significant damage to equipment. Sandpiper provides a service
guarantee that its networks will deliver Internet content 24 hours a day, seven
days a week, 365 days a year. If Sandpiper does not provide this service, the
customer does not pay for its services on that day. Any widespread loss of
services would reduce Sandpiper's revenue, and could harm its business,
financial results and reputation.
If any of Sandpiper's strategic alliances terminate, then its business could be
adversely affected.
Sandpiper entered into a strategic alliance with AOL in April 1999 and with
Microsoft in August 1999. Under each of these agreements, Sandpiper seeks to
jointly develop technology, services and/or products with its strategic
alliance partners. Sandpiper may not be successful in developing these
products. The AOL agreement expires in December 2001, and the agreement with
Microsoft expires in August 2002. Each agreement may be terminated by either
party if the other party materially breaches the agreement. A termination of,
or significant adverse change in, Sandpiper's relationship with AOL or
Microsoft could have a material adverse effect on its business.
Sandpiper's business will suffer if it fails to manage its growth properly.
Since Sandpiper's inception, it has continued to increase the scope of its
operations and has grown its headcount substantially. Sandpiper's total number
of employees has grown from 41 as of January 1, 1999 to 86 as of October 31,
1999. This growth has placed, and Sandpiper's anticipated growth will continue
to place, a significant strain on its management systems and resources.
Sandpiper plans to continue to hire a significant number of key officers and
other employees this year and to increase significantly its operating expenses
to fund greater levels of engineering and development, expand its sales and
marketing operations, broaden its customer support capabilities and develop new
distribution channels.
Sandpiper has recently hired and plans to hire in the near future a number
of key employees and officers. To be integrated into Sandpiper, these
individuals must spend a significant amount of time learning its business model
and management system, in addition to performing their regular duties.
Accordingly, the integration of new personnel has resulted and will continue to
result in some disruption to ongoing operations. If Sandpiper fails to complete
this integration in an efficient manner, its business and financial results
will suffer.
Sandpiper's historical revenue rates may not be indicative of future revenue
rates because the rates it charges for its services may decline over time.
Sandpiper expects that its cost to obtain bandwidth capacity for the
transport of data over its 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. Sandpiper expects the prices it
charges for data transported over its 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 it addresses. As a result,
Sandpiper's historical revenue rates are not indicative of future revenue based
on comparable traffic volumes. If Sandpiper fails to accurately predict the
decline in the costs of bandwidth or, in any event, if Sandpiper is unable to
sell its services at acceptable prices relative to its bandwidth costs, or if
Sandpiper fails to offer additional services from which it can derive
additional revenue, its revenue will decrease and Sandpiper's business and
financial results will suffer.
Sandpiper has limited sales and marketing experience, and its business will
suffer if it does not expand its direct and indirect sales organizations and
its customer service and support operations.
Sandpiper currently has limited sales and marketing experience. Sandpiper's
limited experience may restrict its success in commercializing its service.
Sandpiper's service requires a sophisticated sales effort targeted at a limited
number of key people within its prospective customers' organizations. This
sales effort
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requires the efforts of trained sales personnel. Sandpiper needs to expand its
marketing and sales organization in order to increase market awareness of its
services to a greater number of organizations and generate increased revenue.
Sandpiper is in the process of developing its direct sales force and plans to
hire additional qualified sales personnel. Competition for these individuals is
intense, and Sandpiper might not be able to hire the kind and number of sales
personnel it needs. In addition, Sandpiper believes that its future success is
dependent upon its ability to establish successful relationships with a variety
of distribution partners. If Sandpiper is unable to expand its direct and
indirect sales operations, it may not be able to increase market awareness or
sales of its service, which may prevent it from achieving and maintaining
profitability.
Similarly, the complexity of Sandpiper's service and the difficulty of
implementing it requires highly trained customer service and support personnel.
Hiring such personnel is very competitive in Sandpiper's industry because there
is a limited number of people available with the necessary technical skills and
understanding of its market. Once Sandpiper hires them, they require extensive
training in Sandpiper's Internet content delivery service. If Sandpiper is
unable to expand its customer service and support organization and train them
as rapidly as necessary, Sandpiper may not be able to increase sales of its
service, which would seriously harm its business.
Sandpiper could incur substantial costs defending its intellectual property
from infringement or a claim of infringement.
Other companies, including Sandpiper's competitors, may obtain patents or
other proprietary rights that would prevent, limit or interfere with
Sandpiper's ability to make, use or sell its service. As a result, Sandpiper
may be found to infringe on the proprietary rights of others. In the event of a
successful claim of infringement against Sandpiper and its failure or inability
to license the infringed technology, Sandpiper's business and operating results
would be significantly harmed. Companies in the Internet market are
increasingly bringing suits alleging infringement of their proprietary rights,
particularly patent rights. Any litigation or claims, whether or not valid,
could result in substantial costs and diversion of resources. Intellectual
property litigation or claims could force Sandpiper to do one or more of the
following:
. cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
. obtain a license from the holder of the infringed intellectual property
right, which license, if available at all, may not be available on
reasonable terms; and
. redesign products or services.
If Sandpiper is forced to take any of the foregoing actions, its business
may be seriously harmed. Sandpiper expects that its insurance may not cover
potential claims of this type or may not be adequate to indemnify it for all
liability that may be imposed.
Sandpiper's failure to protect its intellectual property rights could adversely
affect its ability to compete.
Sandpiper's success and ability to compete are substantially dependent upon
its internally developed technology, which it protects through a combination of
patent, copyright, trade secret and trademark law. Sandpiper generally enters
into confidentiality or license agreements with its employees, consultants and
strategic affiliates, and generally controls access to and distribution of its
software, documentation and other proprietary information. Despite Sandpiper's
efforts to protect Sandpiper's proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use its products and technology.
Policing unauthorized use of Sandpiper's products is difficult, and it cannot
be sure that the steps it has taken will prevent misappropriation of its
technology, particularly in foreign countries where the laws may not protect
proprietary rights as fully as in the United States.
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Sandpiper may be subject to regulation, taxation, enforcement or other
liabilities in unexpected jurisdictions.
Sandpiper provides its Internet content delivery service to customers
located throughout the United States and in several foreign countries. As a
result, Sandpiper may be required to qualify to do business, or be subject to
tax or other laws and regulations, in these jurisdictions even if it does not
have a physical presence or employees or property in these jurisdictions. The
application of these multiple sets of laws and regulations is uncertain, but
Sandpiper could find it is subject to regulation, taxation, enforcement or
other liability in unexpected ways, which could materially adversely affect its
business, financial condition and results of operations.
Risks Related To The Industry Of Digital Island And Sandpiper
We may not be able to compete in our market since it is highly competitive and
has many more established competitors, and we may lose market share as a
result.
Our market is highly competitive and this competition could harm our ability
to sell our services and products on prices and terms favorable to us. Some of
our current or potential competitors have the financial resources to withstand
substantial price competition, and many may be able to respond more quickly
than we can to new or emerging technologies and changes in customer
requirements. Moreover, many of our competitors have more extensive customer
bases, broader customer relationships and broader industry alliances that they
could use to their advantage in competitive situations, including relationships
with many of our current and potential customers. In particular, certain
Sandpiper competitors have strategic alliances with entities that have entered
into similar alliances with Sandpiper, including Microsoft.
There are few substantial barriers to entry and we expect that we will face
additional competition from existing competitors and new market entrants in the
future. We compete against information technology and Internet outsourcing
firms, national and regional Internet service providers, and global, regional
and local telecommunications companies.
Digital Island's competitors include companies such as Metromedia/AboveNet
Communications, Inc., AT&T Corp., Exodus Communications, Inc., GTE Corporation,
MCI WorldCom, Inc. and Qwest. Many of our competitors have substantially
greater financial, technical and marketing resources, larger customer bases,
longer operating histories, greater name recognition and more established
relationships in the industry than we do. Our larger competitors may be able to
provide customers with additional benefits in connection with their Internet
systems and network solutions, including reduced communications costs. As a
result, these companies may be able to price their products and services more
competitively than we can and respond more quickly than us to new or emerging
technologies and changes in customer requirements. If we are unable to compete
successfully against our current or future competitors, we may lose market
share, and our business and prospects would suffer.
As competition in the Internet content delivery market continues to
intensify, new solutions will come to market. Sandpiper is aware of at least
one company, Akamai Technologies, Inc., that competes directly with its
Footprint solution platform. Sandpiper also believes that it may face
competition from other providers of competing Internet content delivery
services, including networking hardware and software manufacturers, content
distribution providers, traditional hardware manufacturers, telecommunications
providers, software database companies, and large diversified software and
technology companies. Some of these competitors may bundle their services with
other software or hardware in a manner that may discourage website owners from
purchasing any service Sandpiper offers or Internet service providers from
installing its servers. In addition, if those third party telecommunications
providers upon which Sandpiper is currently dependent for transmission capacity
determine to compete with Sandpiper in the Internet content delivery market,
their refusal to provide it with capacity, at the points of presence required
in order to deploy Sandpiper's network and service its customers efficiently,
could result in a degradation or termination of service to certain of its
customers. As a result, Sandpiper could lose customers or fees charged to such
customers, and its business and financial results could suffer.
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In addition, no assurances can be given that the Internet content delivery
market will develop in a way that Sandpiper currently anticipates. For example,
while Sandpiper currently intends to offer its customers the most comprehensive
solution available in the marketplace today, there currently exists an array of
competitors that offer partial solutions to the problems that Sandpiper intends
to address, and a number of these companies have been and are likely to
continue to be quite successful. Examples of products and services that address
Internet performance problems include Internet content delivery services and
streaming content delivery services, as well as equipment and software based
solutions such as caching, load balancers and server switches. Sandpiper cannot
assure you that these solutions will not remain more cost effective than its
service or will not continue to be the service of choice for many of its
potential customers.
Increased competition could result in:
. price and revenue reductions and lower profit margins;
. increased cost of service from telecommunications providers;
. loss of customers or failure to obtain additional customers; and
. loss of market share.
Any one of these could materially and adversely affect Sandpiper's business,
financial condition and results of operations.
Our market changes rapidly due to changing technology and evolving industry
standards. If we do not adapt to meet the sophisticated needs of our customers,
our business and prospects will suffer.
The market for our services is characterized by rapidly changing technology,
evolving industry standards and frequent new service introductions. Digital
Island's and Sandpiper's future success will depend to a substantial degree on
our ability to offer services that incorporate leading technology, address the
increasingly sophisticated and varied needs of our current and prospective
customers and respond to technological advances and emerging industry standards
and practices on a timely and cost-effective basis. You should be aware that:
. our technology or systems may become obsolete upon the introduction of
alternative technologies;
. we may not have sufficient resources to develop or acquire new
technologies or to introduce new services capable of competing with
future technologies or service offerings; and
. the price of the services provided by us is expected to decline as
rapidly as the cost of any competitive alternatives.
We may not be able to effectively respond to the technological requirements
of the changing market. To the extent we determine that new technologies and
equipment are required to remain competitive, the development, acquisition and
implementation of such technologies and equipment are likely to continue to
require significant capital investment by us. Sufficient capital may not be
available for this purpose in the future, and even if it is available,
investments in new technologies may not result in commercially viable
technological processes and there may not be commercial applications for such
technologies. However, if we do not develop and introduce new products and
services and achieve market acceptance in a timely manner, our business and
prospects may suffer.
Our business and prospects depend on demand for and market acceptance of the
Internet and its infrastructure development.
The increased use of the Internet for retrieving, sharing and transferring
information among businesses, consumers, suppliers and partners, and for
Internet content delivery services has only begun to develop in recent years.
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
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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 market acceptance of new interactive
technologies;
. emergence of a viable and sustainable market for Internet content
delivery services;
. the development of technologies that facilitate interactive communication
between organizations; and
. increases in user bandwidth.
If the market for Internet content delivery services or the Internet as a
commercial or business medium does not develop, or develops more slowly than
expected, our business, results of operations and financial condition will be
seriously harmed.
Specifically, even if Internet content delivery services market does
develop, services that Sandpiper currently offers or may offer in the future
may not achieve widespread market acceptance. Failure of Sandpiper's current
and planned services to operate as expected could delay or prevent their
adoption. If Sandpiper's target customers do not adopt, purchase and
successfully deploy its current and planned services, its revenue will not grow
significantly and its business, results of operations and financial condition
will be seriously harmed. Sandpiper has not taken any steps to mitigate the
risks associated with reduced demand for its existing Internet content delivery
services.
Liability laws are unsettled in our industry and potential liability associated
with information disseminated through our network could harm our business and
prospects.
The law relating to the liability of online services companies and Internet
access providers for communications and commerce carried on or disseminated
through their networks is currently unsettled. The most recent session of the
United States Congress resulted in Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union recently enacted its own privacy regulations, and is currently
considering copyright legislation that may extend the right of reproduction
held by copyright holders to include the right to make temporary copies for any
reason. 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, the growth and development of the market for
online commerce may prompt calls for more stringent consumer protection laws,
both in the United States and abroad, which may impose additional burdens on
companies conducting business online. Some countries, such as China, regulate
or prohibit the transport of telephony data in their territories. The
imposition upon us and other Internet network providers of potential liability
for information carried on or disseminated through our systems could require us
to implement measures to reduce our exposure to such liability, which may
require the expenditure of substantial resources, or to discontinue some of our
service or product offerings. Our ability to limit the types of data or content
distributed through our network is limited. Failure to comply with such
regulation in a particular jurisdiction could result in fines or penalties or
the termination of our service in such jurisdiction. The increased attention
focused upon liability issues as a result of these lawsuits and legislative
proposals could impact the growth of Internet use. Our professional liability
insurance may not be adequate to compensate or may not cover us in the event we
become liable for information carried on or disseminated through our networks.
Any costs not covered by insurance incurred as a result of such liability or
asserted liability could harm our business and prospects.
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Risks associated with operating in international markets could restrict our
ability to expand globally and harm our business and prospects.
We market and sell our network services and products in the United States
and internationally. While the United States represented the majority of our
revenues for fiscal year 1999, we expect the percentage of international sales
to increase over time. We expect to commit significant resources to expand our
international sales and marketing activities throughout year 2000. However, we
may not be able to successfully market, sell, deliver and support our
networking services and products internationally. Furthermore, we may not be
able to maintain or increase market demand for our services, which may harm our
business. However, we may not be able to successfully market, sell, deliver and
support our networking services and products internationally. We presently
conduct our international sales through local subsidiaries in the United
Kingdom, Switzerland, Germany, the Netherlands, Japan, Malaysia and China and
through distributor relationships with third parties in countries where we have
no physical presence. Our failure to manage our international operations
effectively could limit the future growth of our business, increase our costs,
lengthen our sales cycle and require significant management attention. There
are certain risks inherent in conducting our business internationally, such as:
. changes in telecommunications regulatory requirements could restrict our
ability to deliver services to our international customers;
. export restrictions, tariffs, differing regulatory regimes and other
trade barriers could impede us from adequately equipping our network
facilities;
. challenges in recruiting, retaining, and managing qualified staff who
understand the highly technical aspects of our business could hinder our
ability to grow and compete;
. differing technology standards across countries may impede our ability to
integrate our product offerings across international borders;
. our United States centered accounting operations have limited
international collection experience and we could have longer accounts
receivable payment cycles and difficulties in collecting accounts
receivable in foreign jurisdictions;
. political and economic instability in international markets could lead to
appropriation of our physical assets, impeding our ability to deliver our
services to customers and harming our financial results;
. protectionist laws and business practices favoring local competition may
give unequal bargaining leverage to key vendors in countries where
competition is scarce, significantly increasing our operating costs;
. increased expenses associated with marketing services in foreign
countries;
. potentially adverse tax consequences, including restrictions on the
repatriation of earnings due to unfavorable changes in tax laws or our
physical presence in foreign countries; and
. the risks related to the recent global economic turbulence and adverse
economic circumstances in Asia.
Any of these risks could harm our international operations. For example,
some European countries already have laws and regulations related to content
distributed on the Internet and technologies used on the Internet that are more
strict than those currently in force in the United States. Furthermore, there
is an on-going debate in Europe as to the regulation of certain technologies we
use, including caching and mirroring. The European Parliament has recently
adopted a directive relating to the reform of copyright in the European
Community which will, if made into law, restrict caching and mirroring. Any or
all of these factors could cause our business and prospects to suffer. In
addition, we may not be able to obtain the necessary telecommunications
infrastructure in a cost-effective manner or compete effectively in
international markets. See Digital Island's "Business--Business Strategy" and
"--Government Regulation."
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Foreign exchange fluctuations could decrease our revenues or cause us to lose
money, especially since we do not hedge against currency fluctuations.
Although, to date, all of our customers have paid for our services in U.S.
dollars, we currently pay some of our suppliers in foreign currencies which
subjects us to currency fluctuation risks. For fiscal 1998 and fiscal 1999,
costs denominated in foreign currencies were nominal and we had no foreign
currency losses during those periods. However, we believe that in the future an
increasing portion of our revenues and costs will be denominated in foreign
currencies. In particular, we expect that with the introduction of the Euro, an
increasing portion of our international sales may be Euro-denominated.
Fluctuations in the value of the Euro or other foreign currencies may cause our
business and prospects to suffer. We currently do not engage in foreign
exchange hedging activities and, although we have not yet experienced any
material losses due to foreign currency fluctuation, our international revenues
are currently subject to the risks of foreign currency fluctuations and such
risks will increase as our international revenues increase.
Year 2000 computer complications could disrupt our operations and harm our
business.
The "year 2000 issue" is the result of computer systems and programs using
two digits rather than four to identify a given year. Computer systems or
programs that have date sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations or other computer errors causing
disruptions of operations. The potential for failures encompasses all aspects
of our business, including our services, suppliers and customers. These
failures could cause, among other things, disruptions in our operations and a
temporary inability to engage in normal business activities.
The year 2000 issue creates significant risks for us including:
. potential warranty or other claims arising from our services;
. damage to our reputation;
. litigation costs;
. impairment of the systems we use to run our business; and
. impairment of the systems used by our suppliers and customers.
Although we believe our products are year 2000 compliant, we may see an
increase in warranty and other claims as a result of the year 2000 issues
arising from undetected defects or the non-compliance of the suppliers upon
whom we rely.
We believe that the most reasonably likely worst-case year 2000 scenario is
the non-compliance of the third-party telecommunications carriers, vendors and
other significant suppliers upon whom we depend for transmission capacity. If
these providers do not achieve year 2000 compliance, we cannot be certain that
we will have sufficient transmission capacity to continue our service without
interruption. However, in the event that any of our other suppliers do not
achieve year 2000 compliance in a timely manner, and we are unable to replace
them with alternate sources, our business and financial results would also be
harmed.
In addition, virtually all businesses face year 2000 compliance issues and
may require hardware and software upgrades or modifications to their computer
systems and applications. Companies owning and operating these systems may plan
to devote a substantial portion of their information systems' spending to fund
these upgrades and modifications and divert spending away from Internet content
delivery solutions as the year 2000 approaches. Such changes in customers'
spending patterns may reduce our revenues for the next few quarters. Please see
Digital Island's and Sandpiper's "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Compliance" for
information on their state of readiness, potential risks and contingency plans
regarding the year 2000 issue.
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Government regulation and legal uncertainties could limit our business or slow
our growth.
Our services include the transmission of data over public telephone lines.
These transmissions are subject to the regulatory authority of the Federal
Communications Commission and the state public utility commissions. However, to
date, neither the FCC nor the state public utility commissions has elected to
exercise such authority. Our services could be affected by changes in federal
and state law or regulation in the telecommunications arena, especially changes
relating to telecommunications markets in general and the Internet in
particular. Such changes could directly or indirectly affect our costs, limit
usage or subscriber-related information, and increase the likelihood or scope
of competition from Regional Bell Operating Companies or other
telecommunications companies.
As our services become available over the Internet in foreign countries, and
as we facilitate sales by our customers to end users located in such foreign
countries, these foreign jurisdictions may decide that we are required to
qualify to do business in the particular foreign country. Such decisions could
subject us to taxes and other costs. It is also possible that claims could be
made against online service companies and Internet service providers under
foreign law for defamation, negligence, copyright or trademark infringement, or
other theories based on the nature and content of the materials disseminated
through their networks.
Implementation of any future changes in law or regulation, including those
discussed herein, could cause our business and prospects to suffer. Our
business and prospects may also be harmed by the imposition of certain tariffs,
duties and other import restrictions on facilities and resources that we obtain
from non-domestic suppliers. As a result, changes in law or regulation in the
United States or elsewhere could cause our business and prospects to suffer.
For a more detailed discussion of the possible risks associated with changes in
law or regulation, please see Digital Island's "Business--Government
Regulation."
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FORWARD-LOOKING STATEMENTS IN THIS JOINT PROXY STATEMENT/PROSPECTUS
This joint proxy statement/prospectus contain forward-looking statements
within the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995 with respect to Digital Island's and Sandpiper's financial
conditions, results of operations and businesses and the expected impact of the
merger on Digital Island's financial performance. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions indicate forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to risks
and uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements. In evaluating the
merger, you should carefully consider the discussion of risks and uncertainties
in the immediately preceding section entitled "Risk Factors."
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THE SPECIAL MEETINGS
General
Digital Island
We are furnishing this joint proxy statement/prospectus to Digital Island
stockholders in connection with the solicitation of proxies by the Digital
Island board of directors for use at the special meeting of stockholders of
Digital Island to be held on December 28, 1999, and any adjournment or
postponement.
This joint proxy statement/prospectus is first being furnished to Digital
Island stockholders on or about December , 1999.
Sandpiper
We are furnishing this joint proxy statement/prospectus to Sandpiper
shareholders in connection with the solicitation of proxies by the Sandpiper
board of directors for use at the special meeting of shareholders of Sandpiper
to be held on December 28, 1999, and any adjournment or postponement.
This joint proxy statement/prospectus is first being furnished to Sandpiper
shareholders on or about December , 1999. This joint proxy
statement/prospectus is also furnished to Sandpiper shareholders as a
prospectus in connection with the issuance by Digital Island of shares of
Digital Island common stock as contemplated by the merger agreement.
Date, Time and Place
Digital Island
The special meeting will be held on December 28, 1999 at 8:30 a.m., local
time, at 45 Fremont Street, 11th floor, San Francisco, California.
Sandpiper
The special meeting will be held on December 28, 1999 at 9:00 a.m., local
time, at 225 West Hillcrest Drive, Suite 250, Thousand Oaks, California.
Matters to be Considered at the Special Meetings
Digital Island
At the Digital Island special meeting and any adjournment or postponement,
Digital Island stockholders will be asked:
. to consider and vote upon the approval of the issuance of Digital Island
common stock as contemplated by the merger agreement;
. to grant the Digital Island board of directors discretionary authority to
adjourn the special meeting to solicit additional votes for approval of
the share issuance; and
. to transact such other business as may properly come before the special
meeting.
Sandpiper
At the Sandpiper special meeting and any adjournment or postponement,
Sandpiper shareholders will be asked:
. to consider and vote upon the approval and adoption of the merger
agreement pursuant to which Sandpiper will become a wholly owned
subsidiary of Digital Island and the outstanding shares of
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Sandpiper capital stock, other then shares held by shareholders who
perfect their dissenters' rights under California law, will be converted
into the right to receive shares of Digital Island common stock, and to
approve the merger; and
. to transact such other business as may properly come before the special
meeting.
Record Dates
Digital Island
Digital Island's board has fixed the close of business on November 29,
1999, as the record date for determining of Digital Island stockholders
entitled to notice of and to vote at the special meeting.
Sandpiper
Sandpiper's board has fixed the close of business on December 3, 1999, as
the record date for determining of Sandpiper shareholders entitled to notice
of and to vote at the special meeting. At the close of business on that date,
7,005,236 shares of Sandpiper common stock, 9,607,141 shares of Sandpiper
Series A preferred stock and 4,820,628 shares of Sandpiper Series B preferred
stock were outstanding and entitled to vote at the special meeting. Each
holder of Sandpiper common stock and Sandpiper preferred stock on that date
will be entitled to one vote for each share held.
Voting of Proxies
Digital Island
We request that Digital Island stockholders complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to Digital Island. Brokers holding shares in "street name"
may vote the shares only if the beneficial stockholder provides instructions
on how to vote. Brokers will provide beneficial owners instructions on how to
direct the brokers to vote the shares. All properly executed proxies that
Digital Island receives prior to the vote at the special meeting, and that are
not revoked, will be voted in accordance with the instructions indicated on
the proxies. If no direction is indicated, the proxies will be voted (A) to
approve the issuance of shares of Digital Island as contemplated by the merger
agreement, and (B) to approve the proposal to grant the board discretionary
authority to adjourn the special meeting. Digital Island's board does not
currently intend to bring any other business before the special meeting.
Digital Island's board is unaware of any other matters that are to be brought
before the special meeting. If other business properly comes before the
special meeting or any postponement or adjournment, the proxies will vote in
accordance with their own judgment.
Stockholders may revoke their proxies at any time prior to its use:
. by delivering to the Secretary of Digital Island a signed notice of
revocation or a later-dated, signed proxy; or
. by attending the special meeting and voting in person.
Attendance at the special meeting does not in itself constitute the
revocation of a proxy.
Sandpiper
If you complete, date, sign and return a proxy, the persons named as
proxyholders therein will vote your shares as you indicate on the proxy. If
you do not specify on the proxy how to vote your shares, the proxy holders
will vote your shares in favor of the merger agreement and the merger. The
inspector of elections appointed for the meeting will separately tabulate
affirmative and negative votes and abstentions. Abstentions will have the same
effect as negative votes.
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You may revoke your proxy before it is voted by filing with Sandpiper's
corporate secretary a written notice of revocation or a duly executed proxy
bearing a later date. You may also revoke your proxy by attending the meeting
and voting in person. Attending the meeting will not, by itself, revoke a
proxy.
Votes Required
Digital Island
As of the close of business on November 29, 1999, there were 35,999,068
shares of Digital Island common stock outstanding and entitled to vote. The
holders of a majority of the shares of Digital Island common stock entitled to
vote and that are present or represented by proxy at the Digital Island meeting
must (A) approve the issuance of Digital Island common stock in the merger, and
(B) approve the proposal to grant the board discretionary authority to adjourn
the special meeting. Digital Island stockholders have one vote per share of
Digital Island common stock owned on the record date.
As of November 29, 1999, directors and executive officers of Digital Island
and their affiliates beneficially owned an aggregate of 3,869,429 shares of
Digital Island common stock (exclusive of any shares issuable upon the exercise
of options) or approximately 10.7% of the shares of Digital Island common stock
outstanding on that date. The directors and executive officers of Digital
Island have indicated their intention to vote their shares of Digital Island
common stock in favor of the issuance of the shares of Digital Island common
stock as contemplated by the merger agreement. As of November 29, 1999,
directors and executive officers of Sandpiper owned no shares of Digital Island
common stock.
Sandpiper
The merger cannot be completed unless the merger agreement and the merger
are approved by the affirmative vote or consent of each of (i) the holders of
record of at least a majority of the outstanding shares of Sandpiper common
stock, voting as a separate class, and (ii) the holders of record of at least a
majority of the outstanding shares of Sandpiper preferred stock, voting as a
separate class.
At December 3, 1999, executive officers, directors and affiliates of
directors of Sandpiper owned approximately 70% of the outstanding shares of
Sandpiper common stock, assuming full conversion of all Sandpiper preferred
stock into shares of Sandpiper common stock.
The directors and executive officers of Sandpiper have indicated their
intention to vote their shares of Sandpiper common stock in favor of the merger
agreement, the merger, and related transactions. Under a shareholder agreement
in the form attached as an exhibit to the merger agreement in Annex A to this
joint proxy statement/prospectus, certain directors, executive officers and
other shareholders of Sandpiper owning approximately 76% of Sandpiper's capital
stock outstanding as of October 24, 1999, excluding any shares issuable upon
the exercise of options, have agreed to vote all of their shares of Sandpiper
capital stock for approval of the merger agreement, the merger and related
transactions. As of December 3, 1999, Charlie Bass, a director of Digital
Island, owned 71,429 shares of Sandpiper capital stock and also holds a warrant
to purchase up to an additional 14,246 shares of Sandpiper capital stock. As of
December 3, 1999, no other directors or executive officers of Digital Island
owned any shares of Sandpiper capital stock. See "The Merger--Interests of
Officers and Directors in the Merger."
In accordance with the terms of the shareholder agreement, we are assured of
receiving the requisite votes in favor of the merger agreement and the merger.
Quorum; Abstentions and Broker Non-Votes
Digital Island
The required quorum for the transaction of business at the special meeting
is a majority of the shares of Digital Island common stock issued and
outstanding on the record date. Abstentions and broker non-votes each
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will be included in determining the number of shares present and voting at the
meeting for the purpose of determining the presence of a quorum. Brokers
holding shares for beneficial owners cannot vote on the actions proposed in
this joint proxy statement/prospectus without the owners' specific
instructions. Accordingly, Digital Island stockholders are urged to return the
enclosed proxy card marked to indicate their vote. Broker non-votes will not be
included in vote totals and will have no effect on the outcome of the votes on
the issuance of the shares in the merger or the proposal to grant the board
discretionary authority to adjourn the special meeting. Abstentions, however,
will have the same effect as a vote against these proposals.
Sandpiper
The required quorum for the transaction of business at the special meeting
is a majority of the shares of Sandpiper capital stock issued and outstanding
on the record date. Abstentions will be included in determining the number of
shares present and voting at the meeting for the purpose of determining the
presence of a quorum. Abstentions will have the same effect as a vote against
these proposals.
Solicitation of Proxies and Expenses
Digital Island and Sandpiper will each bear its own expenses in connection
with the solicitation of proxies for their special meetings, except that each
will pay one-half of all printing and filing costs and expenses incurred in
connection with the registration statement and this joint proxy
statement/prospectus. In addition to solicitation by mail, the directors,
officers and employees of Digital Island and Sandpiper may each solicit proxies
from their stockholders and shareholders by telephone, facsimile, e-mail or in
person. No additional compensation will be paid to these individuals for any
such services. Brokerage houses, nominees, fiduciaries and other custodians
will be requested to forward soliciting materials to beneficial owners of
Digital Island common stock and will be reimbursed for their reasonable
expenses incurred in sending proxy materials to beneficial owners.
Board Recommendations
Digital Island
The Digital Island board of directors has determined that the merger
agreement and the merger are fair to, and in the best interests of, Digital
Island and its stockholders. Accordingly, the board of directors has
unanimously approved the merger agreement and unanimously recommends that
stockholders vote for approval of the issuance of shares of Digital Island
common stock as contemplated by the merger agreement.
The matters to be considered at the special meeting are of great importance
to Digital Island stockholders. Accordingly, Digital Island stockholders are
urged to read and carefully consider the information presented in this joint
proxy statement/prospectus, and to complete, date, sign and promptly return the
enclosed proxy in the enclosed postage-paid envelope.
Digital Island stockholders should not send any stock certificates with their
proxy cards.
Sandpiper
The Sandpiper board of directors unanimously has approved the merger
contemplated by the merger agreement and has determined that (i) the merger
agreement and the merger are advisable and in the best interests of Sandpiper
and its shareholders and (ii) the consideration to be paid to holders of
Sandpiper common stock and Sandpiper preferred stock in the merger is fair to
such holders. After careful consideration, the Sandpiper board of directors
unanimously recommends that you vote "FOR" the merger agreement and the merger.
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THE MERGER
This section of the joint proxy statement/prospectus describes material
aspects of the proposed merger, including the merger agreement. While we
believe that the description covers the material terms of the merger and the
related transactions, this summary may not contain all of the information that
is important to Digital Island stockholders and Sandpiper shareholders. You
should read the merger agreement and the other documents we refer to carefully
and in their entirety for a more complete understanding of the merger.
Background of the Merger
As one of its core strategies for continued growth, Digital Island
continually evaluates acquisitions of, or combinations with, complementary
businesses. In September 1999, Digital Island identified Sandpiper's Internet
content delivery services, as well as strategic relationships and brand
awareness, as complementary to Digital Island's content distribution efforts.
As a result, Digital Island determined that it should approach Sandpiper to
evaluate a potential partnership.
On September 18, 1998 Credit Suisse First Boston entered into an engagement
letter with Sandpiper, which entitled Credit Suisse First Boston to receive a
fee and to act as exclusive financial adviser to Sandpiper in the event of a
business combination between Sandpiper and another company. In addition, Credit
Suisse First Boston has from time to time provided financial advisory services
to Digital Island in connection with other possible transactions. In view of
Credit Suisse First Boston's relationship with both Sandpiper and Digital
Island, Credit Suisse First Boston was asked by Digital Island and Sandpiper to
act in an intermediary capacity in connection with the parties' discussions
rather than as financial adviser to either party exclusively. Pursuant to
separate engagement letters with Sandpiper and Digital Island, each dated
October 8, 1999, Credit Suisse First Boston agreed to act in an intermediary
capacity in connection with the merger. As part of such engagement letters,
Digital Island, Sandpiper and Credit Suisse First Boston agreed to a new fee
arrangement to replace the fee arrangement under Credit Suisse First Boston's
old engagement letter with Sandpiper.
At the request of Digital Island, and with Sandpiper's consent, Credit
Suisse First Boston arranged a meeting between the two parties on September 21,
1999 at Digital Island's San Francisco headquarters. Present at the meeting
were Ruann Ernst, president and chief executive officer of Digital Island,
Chris Albinson, vice president of corporate development for Digital Island, Leo
Spiegel, president and chief executive officer of Sandpiper, Scott Yara, vice
president of marketing at Sandpiper, and a representative of Credit Suisse
First Boston. At the outset of the meeting, Digital Island and Sandpiper
entered into mutual nondisclosure agreements. In addition, both parties made
general presentations covering corporate strategic directions, products and
strategic partnerships. The parties also discussed, on a preliminary basis, the
potential for a combination of Digital Island and Sandpiper.
At a regularly scheduled Digital Island executive committee meeting on
September 23, 1999, attended by Ms. Ernst, Mr. Albinson, and T.L. Thompson,
chief financial officer of Digital Island and Charlie Bass, Marcelo Gumicio,
Cliff Higgerson, Shahan Soghikian, and David Spreng from Digital Island's board
of directors and a representative from Brobeck, Phleger & Harrison, outside
legal counsel to the Company, there was a discussion, on a preliminary basis,
of the potential benefits to Digital Island of a merger with Sandpiper.
On October 1, 1999, Ms. Ernst, Mr. Albinson, and Mr. Thompson of Digital
Island met with Mr. Spiegel and Thomas Govreau, chief financial officer of
Sandpiper at Credit Suisse First Boston's offices in Palo Alto, California.
Also attending the meeting were representatives from Credit Suisse First
Boston. The parties discussed the historical and projected financial results,
organizational issues, potential synergies and potential cultural and technical
integration issues that would result from a combination of Digital Island and
Sandpiper. In addition, the parties agreed upon a timeline and schedule for due
diligence meetings to further explore the potential for a merger of the two
companies.
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During the meeting on October 1, 1999 Sandpiper disclosed its intent to file
a registration statement for an initial public offering of its common stock
before the end of calendar 1999, which Digital Island management viewed as a
strategic alternative for Sandpiper to a merger with Digital Island, and which
contributed in part to Digital Island management's decision to move ahead
quickly with the exploration of a potential merger with Sandpiper.
Working with Credit Suisse First Boston, Mr. Albinson developed a term sheet
outlining the major terms of a merger of the two companies. That term sheet was
sent to Mr. Spiegel on October 8, 1999. The term sheet proposed a stock-for-
stock merger at a fixed exchange rate to be determined. There were to be no
collars or walk away provisions. For tax purposes, the transaction was to be
treated as a tax-free reorganization. For accounting purposes, the transaction
was to be treated as a purchase. Mutual exclusivity arrangements pertained for
a period of two weeks from signing preventing each party from negotiating a
merger, sale or similar transaction with any third party.
In the period between October 5, 1999 and October 14, 1999, a series of
meetings were held at Sandpiper's offices in Thousand Oaks, California and at
Digital Island's facilities in San Francisco and Santa Clara, California
between marketing, financial, operations, and technical executives of both
companies for the purpose of conducting due diligence.
On October 8, 1999, Ms. Ernst, Mr. Albinson, and Mr. Thompson held a
conference call with members of the Digital Island board of directors to review
developments on the merger. The Digital Island board approved the engagement of
Bear Stearns to provide financial advisory services to Digital Island in
connection with a potential transaction with Sandpiper. Also on October 8,
1999, both Sandpiper and Digital Island engaged Credit Suisse First Boston to
act as intermediary between Digital Island and Sandpiper to facilitate a
combination of the two parties.
On October 9, 1999, the Sandpiper board of directors held a special meeting.
The meeting covered the proposed terms of the merger, a review of due diligence
results, and the schedule for proceeding.
On October 10, 1999, Mr. Thompson phoned a representative of Bear Stearns to
discuss the proposed transaction and to retain their services as financial
advisor.
On October 12, 1999, the management of Sandpiper met to review the due
diligence results, the proposed terms of the merger and the schedule to
complete the transaction.
On October 14, 1999, Ms. Ernst, Mr. Albinson, and Mr. Thompson held a
conference call with members of the Digital Island board of directors and
representatives from Bear Stearns. Ms. Ernst reported on overall transaction
progress. Mr. Albinson reviewed the results of Digital Island's due diligence
review of Sandpiper and the principal proposed deal terms. The representatives
from Bear Stearns reported on their financial analysis to date.
On October 15, 1999 at the San Francisco offices of Brobeck, Phleger &
Harrison LLP, a meeting was held attended by Ms. Ernst, Mr. Spiegel, Mr.
Albinson, Mr. Thompson, Mr. Govreau, and several directors of both companies.
Representatives from Bear Stearns and Credit Suisse First Boston attended. Also
attending for part of the meeting were certain other members of the management
teams of both companies. Mr. Spiegel and Ms. Ernst reviewed the market
opportunity for a combined company and the business and strategic rationale for
merging the companies. The meeting was informational in content, and no actions
or decisions were taken.
On October 16, 1999 a draft merger agreement and other transaction documents
were circulated by Brobeck, Phleger & Harrison LLP.
From October 17, 1999 to October 23, 1999, members of the Digital Island and
Sandpiper management teams, together with their respective legal advisors and
representatives of Credit Suisse First Boston, held extensive negotiations
regarding the terms and conditions of the definitive agreements relating to the
proposed
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transaction. During this same period, Ms. Ernst and Mr. Spiegel had extensive
negotiations on the organization of the combined companies and the definition
of the integration plan for the merger.
On October 22, 1999, the board of directors of Sandpiper met and unanimously
approved the merger, the merger agreement and related documentation, subject to
satisfactory resolution of items relating to terms that remained under
negotiation in the merger agreement, as discussed at that meeting.
On October 23, 1999, the board of directors of Digital Island held a special
meeting. Also attending were representatives from Brobeck and Bear Stearns. A
representative from Brobeck outlined the directors' legal duties and
responsibilities in connection with considering the merger and reviewed the
principal terms of the merger agreement and related agreements. A
representative from Bear Stearns summarized the material financial analyses
that it performed with respect to the proposed merger. Bear Stearns then
delivered its oral opinion to the Digital Island board that, as of October 23,
1999, the proposed share exchange ratio was fair from a financial point of view
to Digital Island stockholders. Bear Stearns subsequently confirmed its oral
opinion by delivery of a written opinion to the same effect, dated October 23,
1999, which sets forth assumptions made, matters considered and limitations on
the review undertaken in connection with the opinion.
Following those presentations, Digital Island's board engaged in a
discussion of the business, financial and legal terms of the proposed merger,
the strategic benefits of the combination, the terms and conditions of the
proposed merger agreement and the analyses and opinion of Bear Stearns.
Following the discussion, the Digital Island board unanimously approved the
merger agreement and related agreements, and the issuance of Digital Island
common stock in the merger, subject to final negotiation of open issues and
definitive documentation. In addition, the Digital Island board determined to
recommend that Digital Island stockholders approve issuance of shares of
Digital Island common stock in the merger.
Also on October 23, 1999, Ms. Ernst reviewed with the compensation committee
of the Digital Island board certain employment contract issues related to the
merger.
Following the Digital Island board meeting on October 23 and on October 24,
Digital Island and Sandpiper, and their respective legal and financial
advisors, worked towards resolving outstanding details and finalizing the
definitive merger agreement and related documents. Sandpiper and Digital Island
entered into the merger agreement as of October 24, 1999. Also on October 24,
certain shareholders of Sandpiper entered into the shareholder agreement with
Sandpiper and Digital Island and certain stockholders of Digital Island entered
into the voting agreement with Sandpiper. On October 25, 1999, Digital Island
and Sandpiper issued a joint press release announcing the proposed business
combination.
Joint Reasons for the Merger; Recommendations of Boards of Directors
The Digital Island and Sandpiper boards of directors unanimously concluded
that the merger and merger agreement were advisable and fair to, and in the
best interests of, the stockholders of their respective companies. They
concluded that the combined company following the merger would have the
potential to realize long-term improved operating and financial results and a
stronger competitive position. Potential mutual benefits identified by the
boards of directors include:
. the creation of a strong market position in the content delivery network
services market by combining Digital Island's global network and related
services with Sandpiper's proven Internet content delivery services;
. the complementary business models and customer bases of Digital Island
and Sandpiper, providing an opportunity to offer a broader range of
complementary products to both new and existing customers;
. the immediate international network reach of the combined company,
enhancing the ability to sell bundles of products and services across an
increased customer base;
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<PAGE>
. the increased capitalization of the combined company, allowing for
increased access to capital markets and potentially reducing the cost of
capital;
. the synergies of the combined company, including improved market position
through expanded product offerings, global reach and expanded network
coverage, the ability to offer one-stop network outsourcing solutions and
the ability to offer new, innovative application services solutions; and
. the creation of a combined company with an experienced management team
that has the breadth and depth to effectively lead and manage the
combined company's growth.
Digital Island's Reasons for the Merger; Recommendation of the Board of
Directors of Digital Island
The board of directors of Digital Island unanimously concluded that the
merger was advisable and fair to, and in the best interests of, Digital Island
and its stockholders and determined to recommend that the Digital Island
stockholders approve the issuance of the shares of Digital Island common stock
in the merger.
Digital Island's board of directors reviewed a number of factors in
evaluating the merger, including, but not limited to, the following:
. historical information concerning Digital Island's and Sandpiper's
businesses, financial performance and condition, operations, technology
and management;
. Digital Island's management's view of the financial condition, results of
operations and businesses of Digital Island and Sandpiper before and
after giving effect to the merger and the Digital Island board's
determination of the merger's effect on stockholder value;
. current financial market conditions and historical stock market prices,
volatility and trading information of Digital Island common stock;
. the determination of Sandpiper's senior management to enter new
employment agreements and non-competition and non-disclosure agreements
to be effective upon consummation of the merger;
. the opinion of Bear Stearns that, as of the date of its opinion and
subject to the assumptions made, matters considered and limitations of
the review undertaken in connection with the opinion as set forth in the
opinion, the share exchange ratio in the merger was fair from a financial
point of view to Digital Island stockholders;
. the belief that the proposed terms of the merger agreement and the stock
option agreement were reasonable;
. the expected impact of the merger on Digital Island's customers and
employees; and
. results of the due diligence investigation of Sandpiper conducted by
Digital Island's management, accountants and outside legal counsel.
The Digital Island board of directors also identified and considered a
number of potentially negative factors in its deliberations concerning the
merger including the following:
. the risk that the potential benefits of the merger may not be realized;
. the possibility that the merger may not be consummated, even if approved
by Digital Island's and Sandpiper's stockholders;
. the risk of management and employee disruption associated with the
merger, including the risk that despite the efforts of the combined
company, key technical, sales and management personnel might not remain
employed by the combined company; and
. other applicable risks described in this joint proxy statement/prospectus
under "Risk Factors."
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Digital Island's board of directors concluded that, on balance, the merger's
potential benefits to Digital Island and its stockholders outweighed the
associated risks. This discussion of the information and factors considered by
Digital Island's board of directors is not intended to be exhaustive. In view
of the variety of factors considered in connection with its evaluation of the
merger, Digital Island's board did not find it practicable to, and did not
quantify or otherwise assign relative weight to, the specific factors
considered in reaching its determination.
For the reasons discussed above, Digital Island's board of directors has
determined the merger agreement and the merger to be advisable and fair to, and
in the best interests of, Digital Island's stockholders. In connection with the
merger, Digital Island's board of directors unanimously recommends approval of
the issuance of shares of Digital Island common stock as contemplated by the
merger agreement.
Sandpiper's Reasons for the Merger; Recommendation of the Board of Directors
of Sandpiper
In addition to the anticipated joint benefits described above, Sandpiper's
board of directors believes that the following are additional reasons the
merger will be beneficial to Sandpiper and for shareholders of Sandpiper to
vote for approval of the merger agreement and the merger:
. the merger provides Sandpiper shareholders with the opportunity to
receive an amount of Digital Island shares, in a tax-free exchange, which
based on the Digital Island share price at the time of signing of the
merger agreement, represented a significant premium over the most recent
price at which Sandpiper sold shares of its capital stock;
. Sandpiper shareholders will have the ability to continue to participate
in the growth of the business conducted by Digital Island and Sandpiper
after the merger and to benefit from the potential appreciation in the
value of Digital Island common shares;
. the liquidity afforded the Sandpiper shareholders upon exchange of their
shares in Sandpiper, which are not publicly traded, for their shares in
Digital Island, which are publicly traded; and
. the greater liquidity anticipated to be afforded to Sandpipers
shareholders upon the closing of the merger as compared to the closing of
Sandpiper's own previously proposed initial public offering because a
larger number of shares of Digital Island are anticipated to be
outstanding after the merger than would be outstanding after a Sandpiper
initial public offering and the resulting likelihood of greater trading
volume and increased coverage by investment research and analyst reports.
In reaching its decision to approve the merger agreement and the proposed
merger, the Sandpiper board of directors consulted with Sandpiper's management,
as well as with its legal and financial advisors, and considered a number of
factors, including the following:
. historical information concerning Digital Island's and Sandpiper's
respective businesses, financial performance and condition, operations,
technology, management and competitive position;
. Sandpiper management's view as to the financial condition, results of
operations and businesses of Digital Island and Sandpiper before and
after giving effect to the merger based on management due diligence and
publicly available financial estimates for Digital Island. The Sandpiper
board of directors believed that, in light of, among other things, market
and industry conditions and the potential synergy and compatibility
between Sandpiper and Digital Island, the long-term financial condition,
results of operations, prospects and competitive position of the combined
company would be better than the long-term financial condition, results
of operations, prospects and competitive position of Sandpiper on a stand
alone basis;
. current financial market conditions and historical stock market prices,
volatility and trading information of Digital Island common stock;
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. the belief that the terms of the merger agreement, including the
representations, warranties and covenants, the conditions to the parties'
respective obligations, are reasonable in light of the entire
transaction;
. the impact of the merger on Sandpiper's customers and employees; and
. results of the due diligence investigation of Digital Island conducted by
Sandpiper's management, accountants and outside legal counsel.
The Sandpiper board of directors also considered a number of potentially
negative factors in its deliberations concerning the merger. The negative
factors considered by the Sandpiper board of directors included:
. the risk to Sandpiper's shareholders that the value to be received in the
merger could decline significantly from the indicated value on the date
of the merger agreement due to potential declines in the trading price of
Digital Island common stock, which has been volatile since Digital
Island's initial public offering;
. the risk that the potential benefits of the merger may not be realized;
. the possibility that the merger might not be completed in a timely manner
and the effect of the public announcement on:
-Sandpiper's ability to expand its existing strategic relationships and
attract new strategic partners;
-Sandpiper's ability to attract and retain key management, sales and
marketing and technical personnel; and
-the progress of potential and actual strategic relationships with third
parties who may view working with Digital Island differently than
working with Sandpiper;
. the risk of management and employee disruption associated with the
merger, including the risk that despite the efforts of the combined
company, key technical, sales and management personnel might not remain
employed by the combined company; and
. various other applicable risks described in this joint proxy
statement/prospectus under "Risk Factors."
The Sandpiper board also considered what alternatives existed to the merger,
including reviewing the prospects for Sandpiper as an independent company. In
light of the factors described above, the Sandpiper board determined that the
value and benefits available to Sandpiper shareholders from the merger exceeded
the potential they might realize from Sandpiper continuing as an independent
company.
The foregoing discussion of the information and factors considered by the
Sandpiper board is not intended to be exhaustive but is believed to include all
material factors considered by Sandpiper's board. In view of the complexity and
wide variety of information and factors, both positive and negative, considered
by the Sandpiper board, it did not find it practical to quantify, rank or
otherwise assign relative or specific weights to the factors considered. In
addition, the Sandpiper board did not reach any specific conclusion with
respect to each of the factors considered, or any aspect of any particular
factor, but, rather, conducted an overall analysis of the factors described
above, including discussions with Sandpiper's management and legal and
financial advisors. In considering the factors described above, individual
members of the Sandpiper may have given different weight to different factors.
The Sandpiper board considered all these factors as a whole and believed the
factors supported its determination to approve the merger. After taking into
consideration all of the factors set forth above, Sandpiper's board concluded
that the merger was advisable fair to, and in the best interests of, Sandpiper
and its shareholders and that Sandpiper should proceed with the merger.
The Sandpiper board has unanimously determined that the merger was advisable
and fair to, and in the best interest of, Sandpiper and its shareholders and
unanimously recommends that you vote for the approval and adoption of the
merger agreement.
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Opinion of Digital Island's Financial Advisor
Digital Island retained Bear Stearns to act as its financial advisor in
connection with the merger. Bear Stearns delivered its written opinion, dated
October 23, 1999, to the Digital Island board of directors to the effect that,
and based upon and subject to the assumptions, limitations and qualifications
set forth therein, the exchange ratio of 1.0727 shares of Digital Island common
stock for each share of Sandpiper capital stock outstanding immediately prior
to the merger was fair, from a financial point of view, to the holders of
Digital Island common stock.
The full text of the Bear Stearns opinion, which sets forth a description of
the assumptions made, general procedures followed, matters considered and
limitations on the review undertaken, is attached as Annex B to this joint
proxy statement/prospectus. Holders of Digital Island common stock are urged to
read the Bear Stearns opinion carefully in its entirety, especially with regard
to the assumptions made and matters considered by Bear Stearns, as well as the
limitations on the information considered and analysis presented. The summary
of the Bear Stearns opinion set forth in this document is qualified in its
entirety by reference to the full text of the opinion.
The Bear Stearns opinion, intended for the benefit and use of the Digital
Island board of directors, did not constitute a recommendation to the Digital
Island board of directors in connection with the merger agreement or the merger
and does not constitute a recommendation to any holder of Digital Island common
stock as to how to vote on the issuance of shares of Digital Island common
stock in connection with the merger agreement and the merger. Bear Stearns is
not expressing any opinion as to the price or range of prices at which Digital
Island common stock may trade subsequent to the consummation of the merger. The
Bear Stearns opinion is necessarily based upon economic, monetary, market and
other conditions, and the information made available to it, as of the date of
such opinion.
The exchange ratio and the form of consideration were determined by arm's-
length negotiations between Digital Island and Sandpiper and were not based on
any recommendation by Bear Stearns. Except as noted below, no limitations were
imposed by Digital Island on Bear Stearns with respect to the investigation
made or the procedures followed by Bear Stearns in rendering the Bear Stearns
opinion.
In arriving at the Bear Stearns opinion, Bear Stearns, among other things:
. reviewed a draft of the merger agreement in substantially final form
dated October 21, 1999;
. reviewed Digital Island's Registration Statement on Form S-1 dated June
29, 1999 and its Quarterly Report on Form 10-Q for the period ended June
30, 1999;
. reviewed Sandpiper's audited financial statements for the years ended
December 31, 1998 and December 31, 1997 and interim unaudited statements
through August 31, 1999;
. reviewed a draft Registration Statement on Form S-1 prepared by Sandpiper
dated October 13, 1999;
. reviewed certain operating and financial information relating to
Sandpiper's business and prospects, including projections, prepared and
provided to Bear Stearns by Digital Island management (the "Sandpiper
Projections");
. reviewed certain estimates of cost savings and other combination benefits
or synergies expected to result from the merger, prepared and provided by
Digital Island management (the "Combination Benefits");
. met with certain members of Sandpiper's senior management to discuss
Sandpiper's business, operations, historical and projected financial
results and future prospects;
. reviewed certain operating and financial information relating to Digital
Island's business and prospects, including projections prepared and
provided to Bear Stearns by Digital Island management (the "Digital
Island Projections" and, together with the Sandpiper Projections, the
"Projections");
. met with certain members of Digital Island's senior management to discuss
Digital Island's business, operations, historical and projected financial
statements and future prospects;
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. reviewed the historical prices, valuation parameters and trading volumes
of shares of Digital Island common stock;
. reviewed publicly available financial data, stock market performance data
and valuation parameters of companies which Bear Stearns deemed generally
comparable to Digital Island and Sandpiper;
. performed discounted cash flow analyses based on the Projections and the
Combination Benefits furnished to Bear Stearns; and
. conducted such other studies, analyses, inquiries and investigations as
were deemed appropriate.
In connection with its review, and with the consent of Digital Island, Bear
Stearns did not assume any responsibility for, and did not undertake any
independent verification of, any of the information reviewed by or provided to
it and relied on its being complete and accurate in all material respects. In
addition, Bear Stearns did not make or receive any independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of Digital
Island or Sandpiper, nor was Bear Stearns furnished with any such evaluation or
appraisal.
With respect to the Projections, Combination Benefits and contemplated tax
and accounting impacts relied upon or provided to Bear Stearns, it assumed, at
the direction of Digital Island, that they had been reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of Digital Island as to the future performance of Digital Island and
Sandpiper and that they will be achieved in the amounts and at the times
specified therein. Therefore, Bear Stearns did not make any independent
assessment of the assumptions contained therein. Bear Stearns was not provided
with, nor was it asked to obtain, any financial forecasts, estimates,
projections, pro forma financial effects and calculations of cost savings or
synergies prepared by the management of Sandpiper. At the direction of Digital
Island, in rendering the Bear Stearns opinion, Bear Stearns relied upon the
Sandpiper Projections prepared by Digital Island management and provided to
Bear Stearns. Bear Stearns also assumed, with Digital Island's consent, that:
. Digital Island and Sandpiper will comply with all the material terms and
conditions of the merger agreement and all applicable laws and
regulations;
. the merger will be consummated in accordance with the terms thereof and
that Sandpiper will become a wholly owned subsidiary of Digital Island;
and
. the merger will be afforded purchase treatment under generally accepted
accounting principles in the United States.
Bear Stearns has also relied upon the representations of Digital Island in
respect of the tax treatment of the merger. Other than as described herein,
Digital Island did not place any limitations on Bear Stearns regarding the
procedures to be followed and the factors to be considered in rendering the
Bear Stearns opinion.
In arriving at the Bear Stearns opinion, Bear Stearns did not assign any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments based upon its experience in providing such opinions and
on then-existing economic, monetary, market and other conditions as to the
significance of each analysis and factor. Bear Stearns believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered, without considering all of the analyses
and factors, could create a misleading or incomplete view of the processes
underlying the Bear Stearns opinion. In its analyses, Bear Stearns, at Digital
Island's direction and with Digital Island's consent, made numerous assumptions
with respect to industry performance, general business conditions and other
matters, many of which are beyond the control of Digital Island, Sandpiper or
Bear Stearns. Any assumed estimates implicitly contained in the Bear Stearns
opinion or relied upon by it in rendering the Bear Stearns opinion, are not
necessarily reflective of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein. Any estimates relating to the value of a business or securities do not
purport to be appraisals or necessarily reflections of the prices at which
companies or securities may actually be sold.
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Bear Stearns is an internationally recognized investment banking firm which,
as part of its investment banking business, regularly engages in the evaluation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements and valuations for estate,
corporate and other purposes. The Digital Island board of directors selected
Bear Stearns on the basis of its experience and independence. Bear Stearns has
previously rendered investment banking and financial advisory services to
Digital Island in connection with Digital Island's initial public offering, for
which Bear Stearns received customary compensation. In the ordinary course of
its business, Bear Stearns may actively trade the equity and debt securities of
Digital Island for its own account or for accounts of its customers and,
accordingly, Bear Stearns may at any time hold a long or short position in such
securities.
Pursuant to the terms of the engagement letter between Digital Island and
Bear Stearns dated October 19, 1999, Digital Island agreed to pay to Bear
Stearns: (a) a success fee of $2,500,000 upon consummation of the merger and
(b) upon the earlier of (x) the execution by Digital Island and Sandpiper of a
definitive agreement or (y) the rendering by Bear Stearns of a fairness
opinion, from a financial point of view, of the consideration for the merger, a
cash fee of $625,000, which will be credited against the success fee. In
addition, Digital Island has agreed to reimburse Bear Stearns for all out-of-
pocket expenses incurred by it in connection with the proposed transaction,
including fees and disbursements of its legal counsel. Digital Island has also
agreed to indemnify Bear Stearns against specific liabilities in connection
with its engagement, including liabilities under the federal securities laws.
The following is a summary of the material valuation, financial and
comparative analyses performed by Bear Stearns in arriving at the Bear Stearns
opinion dated October 23, 1999.
Discounted Cash Flow Analysis of Combined Company. Bear Stearns performed a
discounted cash flow analysis on the after-tax cash flows of Digital Island on
a stand-alone basis and on a pro forma basis giving effect to the merger with
Sandpiper based on the Projections and Combination Benefits provided to Bear
Stearns by Digital Island. After-tax cash flows for the five-year period
beginning January 1, 2000 and ending on December 31, 2004 were calculated as
after-tax earnings before depreciation and amortization less changes in working
capital and capital expenditures. Bear Stearns calculated a terminal value for
Digital Island on a stand-alone basis and on a pro forma basis by applying to
projected earnings before interest, taxes, depreciation and amortization
("EBITDA") in 2004 a range of multiples of 12.0x to 16.0x for Digital Island on
a stand-alone basis and of 14.0x to 18.0x for Digital Island on a pro forma
basis. Bear Stearns' determination of the appropriate ranges of multiples was
based on comparisons of multiples for certain selected Internet-related
companies with growth rates generally similar to Digital Island's and
Sandpiper's at the end of the projected period and on Bear Stearns' general
experience in valuing companies. In addition, Bear Stearns compared the
expected perpetual growth rates in after-tax cash flow with those implied by
the selected multiples. Weighted average costs of capital ranging from 16.0% to
20.0% were chosen based on several assumptions regarding factors such as the
inflation rate, interest rates and the inherent business risk of the combined
company.
The discounted cash flow analysis of Digital Island on a stand-alone basis
generated per share equity values ranging from a low of $34.67 per share
(assuming a 12.0x multiple and a 20.0% weighted average cost of capital), to a
mid-point of $44.55 per share (assuming a 14.0x multiple and a 18.0% weighted
average cost of capital), to a high of $55.96 per share (assuming a 16.0x
multiple and a 16.0% weighted average cost of capital). The discounted cash
flow analysis of Digital Island on a pro forma basis generated per share equity
values ranging from a low of $40.30 per share (assuming a 14.0x multiple and a
20.0% weighted average cost of capital), to a mid-point of $50.36 per share
(assuming a 16.0x multiple and a 18.0% weighted average cost of capital), to a
high of $61.96 per share (assuming a 18.0x multiple and a 16.0% weighted
average cost of capital).
Bear Stearns compared the range of per share equity values for Digital
Island on a pro forma basis to the range of per share equity values for Digital
Island on a stand-alone basis, in each case assuming a mid-point weighted
average cost of capital of 18%. The premium/(discount) of the per share equity
value for Digital
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Island on a pro forma basis compared to the per share equity value for Digital
Island on a stand-alone basis at certain points in the analysis are set forth
in the following table:
<TABLE>
<CAPTION>
EBITDA terminal multiples for
Digital Island on a pro forma basis
-----------------------------------
14.0x 16.0x 18.0x
----------- ----------- -----------
<S> <C> <C> <C> <C>
EBITDA terminal multiples 12.0x $ 6.05 $ 12.42 $ 18.80
for Digital Island on a stand-
alone basis 14.0x $ (0.56) $ 5.82 $ 12.19
16.0x $ (7.16) $ (0.79) $ 5.59
</TABLE>
The following table sets forth the premiums/(discounts) in the table above
as a percentage of the per share value for Digital Island on a stand-alone
basis at certain points in the analysis, in each case assuming a mid-point
weighted average cost of capital of 18%:
<TABLE>
<CAPTION>
EBITDA terminal multiples
for Digital Island on a pro forma basis
---------------------------------------
14.0x 16.0x 18.0x
------------- ------------- -------------
<S> <C> <C> <C> <C>
EBITDA terminal
multiples 12.0x 15.9 % 32.7 % 49.6%
for Digital Island on a
stand-alone basis 14.0x (1.3)% 13.1 % 27.4%
16.0x (14.0)% (1.5)% 10.9%
</TABLE>
Illustrative Value Creation Analysis Based on Trading Multiples of
Comparable Companies. Bear Stearns noted that, based on the implied enterprise
value of Digital Island on a pro forma basis as of October 21, 1999, the
implied multiple of estimated pro forma 2001 revenue was 6.7x. The implied
enterprise value was calculated by adding the pro forma debt of the combined
company to the pro forma market capitalization of the combined company on a
fully-diluted basis (based on Digital Island's closing stock price on October
21, 1999 and based on the number of shares to be issued to the Sandpiper
shareholders pursuant to the exchange ratio), and subtracting cash and cash
equivalents from that amount.
Bear Stearns calculated a range of implied values of Digital Island common
stock on a pro forma basis by applying a range of multiples of estimated 2001
revenue and estimated cost savings. The multiples of estimated 2001 revenue
ranged from 4.7x to 10.0x, which range was based on (i) Digital Island's
current trading multiple of estimated 2001 revenue (4.7x), (ii) the implied
multiple of estimated 2001 revenue (6.7x) and (iii) an assumed high multiple of
estimated 2001 revenue (10.0x). Bear Stearns analyzed the implied values
against a range of potential annual cost savings from $0 to $10.0 million in
increments of $2.5 million, which cost savings were capitalized at a multiple
of 20.0x. The range of implied pro forma values of Digital Island common stock
based on these multiples and potential annual cost savings are set forth in the
following table:
<TABLE>
<CAPTION>
Multiple of 2001E
revenue
--------------------
Cost Savings (in $ millions) 4.7x 6.7x 10.0x
---------------------------- ------ ------ ------
<S> <C> <C> <C>
$0.0................................................... $15.35 $21.13 $31.02
2.5................................................... 16.09 21.86 31.75
5.0................................................... 16.82 22.60 32.49
7.5................................................... 17.56 23.33 33.22
10.0................................................... 18.29 24.07 33.96
</TABLE>
The following table sets forth the percentage premium or discount of the
implied values set forth in the above table to the closing price of $21.13 of
Digital Island common stock on October 21, 1999, two business days prior to the
date of the Bear Stearns opinion:
<TABLE>
<CAPTION>
Multiple of 2001E revenue
-------------------------------
Cost Savings (in $ millions) 4.7x 6.7x 10.0x
---------------------------- --------- -------- ---------
<S> <C> <C> <C>
$0.0........................................ (27.3)% 0.0% 46.8%
2.5........................................ (23.9) 3.5 50.3
5.0........................................ (20.4) 7.0 53.8
7.5........................................ (16.9) 10.4 57.3
10.0........................................ (13.4) 13.9 60.8
</TABLE>
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<PAGE>
Bear Stearns compared the implied multiple of estimated 2001 revenues of
Digital Island on a pro forma basis to trading multiples of estimated 2001
revenues, based on publicly available information, including estimates in
published third party research reports, of 22 selected data hosting, Internet
access, commerce enablers, Internet infrastructure and Internet service
provider companies (based on closing stock prices as of October 15, 1999)
which, in Bear Stearns' judgment, were comparable to the operations of the
combined company for purposes of this analysis. Because Sandpiper is not a
publicly-trade company, no trading multiples were available with respect to it.
The companies included:
<TABLE>
<CAPTION>
Commerce Internet Internet Service
Data Hosting Internet Access Enablers Infrastructure Providers
- ------------ --------------- -------- -------------- ----------------
<S> <C> <C> <C> <C>
Exodus Communications, Inc. Excite/@Home Broadvision RealNetworks PSINet Inc.
Internap Covad Verisign Inktomi Verio Inc.
Digex Northpoint Marimba F5 Concentric Network
Globix Corp. Rhythms Packateer Foundry Corporation
NetConnections Inc. Vignette
NAS Akamai
Technologies Inc.
</TABLE>
Bear Stearns compared the implied multiple of 6.7x estimated pro forma 2001
revenue for Digital Island on a pro forma basis to the trading multiples of the
comparable companies. The following table sets forth the arithmetic means of
the trading multiples of estimated 2001 revenues for each of the above groups
of companies:
<TABLE>
<CAPTION>
Implied multiple of
2001E revenues
-------------------
<S> <C>
Data hosting........................................... 17.1x
Internet access........................................ 10.0x
Commerce enablers...................................... 21.9x
Internet infrastructure................................ 29.3x
Internet service provides.............................. 4.1x
</TABLE>
While Bear Stearns determined that the comparable companies are comparable
in some respects, none is comparable in all respects. Of the groups of
companies in the above table, Bear Stearns deemed the Internet infrastructure
companies to be the most comparable to Digital Island.
Relative Contribution Analysis. Bear Stearns also performed an analysis of
the relative contributions by Digital Island and Sandpiper to the pro forma
combined company with respect to projected 1999 to 2004 revenues and projected
2002 to 2004 EBITDA based upon the Projections and Combination Benefits
provided by Digital Island. Bear Stearns compared this analysis to the relative
contributions to combined enterprise value by Digital Island and Sandpiper.
Based on the closing price of Digital Island common stock on October 21, 1999
and the number of shares to be issued to the Sandpiper shareholders pursuant to
the exchange ratio, Digital Island would contribute 57.0% of the combined
enterprise value and Sandpiper would contribute 43.0% of the combined
enterprise value.
The following table sets forth the relative contributions to projected
revenues during the periods indicated by Digital Island and Sandpiper:
<TABLE>
<CAPTION>
1999E 2000E 2001E 2002E 2003E 2004E
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Digital Island........................ 96.6% 84.0% 80.3% 74.1% 67.2% 60.5%
Sandpiper............................. 3.4% 16.0% 19.7% 25.9% 32.8% 39.5%
</TABLE>
55
<PAGE>
The following table sets forth the relative contributions to projected
EBITDA, without giving effect to projected Combination Benefits, by Digital
Island and Sandpiper:
<TABLE>
<CAPTION>
2002E 2003E 2004E
----- ----- -----
<S> <C> <C> <C>
Digital Island.......................................... 84.6% 73.4% 64.0%
Sandpiper............................................... 15.4% 26.6% 36.0%
</TABLE>
The following table sets forth the relative contributions to projected
EBITDA giving effect to projected cost savings by Digital Island and Sandpiper
and the relative contribution to EBITDA by the projected Combination Benefits:
<TABLE>
<CAPTION>
2002E 2003E 2004E
----- ----- -----
<S> <C> <C> <C>
Digital Island.......................................... 68.1% 69.5% 61.2%
Sandpiper............................................... 12.5% 25.1% 34.4%
Combination Benefits.................................... 19.4% 5.4% 4.4%
</TABLE>
Bear Stearns noted that Digital Island's relative contribution to pro forma
combined revenue and EBITDA (both with and without the Combination Benefits)
exceeded its contribution to pro forma combined enterprise value in each year
throughout the projected period. However, Bear Stearns noted that such
unfavorable comparisons diminished substantially over time due to the higher
growth rates of revenue and EBITDA inherent in the Sandpiper Projections. In
addition, Bear Stearns believes that less emphasis should be placed on this
relative contribution analysis than on other analyses herein due to the
material differential between the trading multiple of Digital Island and
trading multiples of companies comparable to Sandpiper.
Other Analyses. Bear Stearns conducted such other analyses as it deemed
necessary, including reviewing historical and projected financial and operating
data for Digital Island and Sandpiper.
Interests of Officers and Directors in the Merger
Concurrently with the effectiveness of the merger, Digital Island and
Sandpiper plan to enter into employment agreements with Leo Spiegel, Andrew
Swart and David Farber, all current employees of Sandpiper. The proposed term
of Mr. Spiegel's employment agreement is through November 24, 2000 unless
terminated earlier by Digital Island, and the term of Mr. Swart's and Mr.
Farber's employment agreements is for one year following the closing the
merger, unless terminated earlier by Digital Island. Pursuant to the employment
agreements, Mr. Spiegel's annual base salary will be $240,000 with an annual
bonus target of $48,000, and he will participate in all employee benefit plans
for which he is eligible. Each of Mr. Swart's and Mr. Farber's annual base
salary will be $170,000 with an annual bonus target of $50,000, and each will
participate in all employee benefit plans for which he is eligible.
If the employee is terminated without cause during the term of the
employment agreement, the employee is eligible to receive his base salary as a
severance payment until the earlier of one year following the closing of the
merger (or until November 24, 2000 in the case of Mr. Spiegel) or the date the
employee begins employment with another employer. Mr. Swart's and Mr. Farber's
employment agreements also provide for the grant to each of a stock option for
150,000 shares of Digital Island's common stock, which will vest over 50 months
of successive employment with Digital Island, subject to acceleration in the
event of a change in control. See "The Merger Agreement and Related
Agreements--Related Agreements--Employment Agreements."
Digital Island entered into a retention agreement with Thomas Govreau for a
sixty day period following the closing of the merger. During the retention
period, Mr. Govreau's monthly rate of base salary will be $11,040. At the end
of the retention period, Mr. Govreau is eligible to receive salary continuation
payments at the monthly rate of base salary in effect at that time for a six
month period.
56
<PAGE>
As of December 3, 1999, the executive officers and directors of Sandpiper
owned an aggregate of 5,833,541 shares of Sandpiper common stock, of which
1,682,519 shares are unvested and subject to repurchase by Sandpiper at a
repurchase price of $0.07 per share pursuant to restricted stock purchase
agreements. Additionally, as of such date the executive officers and directors
of Sandpiper held options to purchase an aggregate of 630,000 shares of
Sandpiper common stock, of which 605,417 are unvested.
If the merger is completed, all of the 858,917 unvested shares (determined
as of October 31, 1999) issued to Mr. Spiegel pursuant to a restricted stock
purchase agreement will vest free from such repurchase rights in two equal
portions on March 24 and November 24, 2000. In the event that Mr. Spiegel is
terminated by Digital Island without cause, all of his shares will vest in full
at that time. All of the unvested shares, including 298,096 shares each with
respect to Mr. Swart and Mr. Farber and 100,894 shares with respect to
Ronald Lachman, a director of Sandpiper (determined as of October 31, 1999),
issued to Messrs. Swart, Farber and Lachman pursuant to restricted stock
purchase agreements will immediately vest free from such repurchase rights in
the event that such individual's employment or service with Digital Island is
terminated following the merger. All 116,250 unvested shares (determined as of
October 31, 1998) issued to Thomas Govreau pursuant to a restricted stock
purchase agreement will vest free from such repurchase rights upon his
continuation of employment with Digital Island for a period of sixty days
following the effective date of the merger.
Any accelerated vesting of the shares held by Messrs. Swart, Farber and
Lachman is in accordance with the original terms of their restricted stock
purchase agreements, which provided for such full acceleration upon the
individual's termination following a transaction such as the merger. Mr.
Spiegel's agreement provided for full acceleration upon a transaction such as
the merger, but he has agreed to amend his agreement to conform to the terms
described above. The accelerated vesting of Mr. Govreau's shares is in
accordance with the terms of his retention agreement with Digital Island. Each
of these individuals agreed to waive any acceleration resulting from the merger
unless the acceleration was approved by the shareholders of Sandpiper pursuant
to Section 280G of the Internal Revenue Code, and the shareholders gave their
approval on December 8, 1999.
Directors of Sandpiper and their affiliates will be subject (other than with
respect to the surrender of Sandpiper capital stock in exchange for Digital
Island's common stock pursuant to the merger) to certain volume limitations
imposed by Rule 144 under the Securities Act which restrict the number of
shares of Digital Island common stock held following the merger that each may
transfer at any given time.
Charlie Bass, a director of Digital Island, owns 71,429 shares of Sandpiper
Series A preferred stock and also holds a warrant to purchase up to an
additional 14,286 shares of Sandpiper Series A preferred stock. As a result,
Mr. Bass may be more likely, in his capacity as a director of Digital Island or
shareholder of Sandpiper, to vote to approve the issuance of Digital Island
common stock pursuant to the merger than Digital Island stockholders generally.
57
<PAGE>
Excess Parachute Payments
Each of the Sandpiper executives named below acquired Sandpiper common stock
under agreements which give Sandpiper the right to repurchase their shares at
the original $0.07 purchase price paid by the shareholder, upon any termination
of such executive's employment (in the case of Mr. Lachman, upon a termination
of service as a director). Each agreement provides that the shares will vest
free from this repurchase right, prorated during a stated period, if the
executive continues to provide services to Sandpiper. Mr. Spiegel's agreement
originally provided that all of the shares would vest free of Sandpiper's
repurchase right upon any merger, reorganization or sale of substantially all
of the assets of Sandpiper (this would include the merger). Mr. Spiegel waived
this acceleration and his shares will now vest in accordance with the revised
vesting schedule summarized below. The vesting acceleration provisions for
Mr. Swart, Mr. Farber and Mr. Lachman will remain in effect in accordance with
their original terms, as summarized below. The following table sets forth the
number of currently unvested Sandpiper shares, and the number of shares of
Digital Island which will be received in the merger and will be subject to such
acceleration, for each of these executives:
<TABLE>
<CAPTION>
Number of
Currently Unvested Number of
Sandpiper Shares Digital Island
(determined as of Shares Subject
Name Position October 31, 1999) to Acceleration
- ---- -------- ------------------ ---------------
<S> <C> <C> <C>
Leo Spiegel............. President and CEO 858,917 921,360
Andrew Swart............ VP Engineering and Co-Founder 298,096 319,767
David Farber............ Chief Technology Officer and Co-Founder 298,096 319,767
Ronald Lachman.......... Director and Co-Founder 100,894 108,229
Thomas Govreau.......... Chief Financial Officer 116,250 124,701
</TABLE>
The particular vesting acceleration provisions which will be in effect for
the unvested shares of Digital Island common stock these executives will
receive for their unvested Sandpiper shares in the merger may be summarized as
follows:
. Mr. Spiegel:
--Revised Vesting Schedule. Fifty percent (50%) of his unvested Digital
Island shares will vest if he continues his employment with Digital
Island through March 24, 2000. The remaining fifty percent (50%) of
his unvested shares will vest if he continues his employment with
Digital Island through November 24, 2000.
--Acceleration upon Termination of Employment. All of his unvested
shares will immediately vest should his employment be terminated by
Digital Island without cause or should he terminate his employment
for good reason within one year after the merger.
. Messrs. Swart, Farber and Lachman:
--Should the employment of any of these executives terminate for any
reason following the merger, then any unvested Digital Island shares
received by that executive in the merger will, to the extent those
shares remain unvested at the time of such termination, immediately
vest.
. Mr. Govreau:
--Mr. Govreau will enter into a retention agreement with Digital Island
under which he will agree to continue in employment with Digital
Island for a period of at least sixty days following the effective
date of the merger. Upon his completion of that retention period, all
of the Digital Island shares he receives in exchange for his unvested
Sandpiper shares in the merger will vest.
The number of shares potentially subject to accelerated vesting in
accordance with these vesting acceleration provisions is at sufficiently high
levels for each of the named Sandpiper executives that any actual
58
<PAGE>
accelerated vesting of those shares could have triggered an excess parachute
payment under Internal Revenue Code Section 280G. In such event, the value of
any accelerated vesting, as determined under applicable federal tax laws and
regulations, would have triggered adverse tax consequences for both the
executive and Digital Island, to the extent that value exceeded the average W-2
wages which the named executive received from Sandpiper for the five calendar
years (or such lesser number of calendar years of actual employment with
Sandpiper) immediately preceding the calendar year in which the merger occurs
(the "Excess Parachute Payment"). The adverse tax consequences which would have
resulted from such an Excess Parachute Payment may be summarized as follows:
. The executive would have incurred a 20% excise tax on the Excess
Parachute Payment attributable to the accelerated vesting of his
shares. This excise tax would have been in addition to any federal
and state income taxes which the executive might otherwise have
incurred in connection with the vesting of the shares.
. Digital Island would not have been entitled to any income tax
deduction it may have otherwise been eligible for with respect to the
Excess Parachute Payment.
However, these adverse tax consequences will be avoided because the vesting
acceleration described above has, in accordance with the requirements of
Internal Revenue Code Section 280G and the applicable regulations thereunder,
been approved by Sandpiper shareholders holding more than 75% of the total
voting power of all of Sandpiper's outstanding voting shares (excluding shares
held by Messrs. Spiegel, Swart, Farber, Govreau and Lachman). As part of that
shareholder approval process, Messrs. Spiegel, Swart, Farber, Govreau and
Lachman each agreed that none of their shares would have vested on an
accelerated basis, had the requisite 75% shareholder approval not been
obtained.
Regulatory Approvals
The merger is subject to U.S. antitrust laws. We have made the required
filings with the Department of Justice and the Federal Trade Commission. The
applicable waiting period expired on December 5, 1999. The Department of
Justice and the Federal Trade Commission, as well as a state or private person,
may challenge the merger at any time before or after its completion. Neither
Digital Island nor Sandpiper is aware of any other material governmental or
regulatory approval required for completion of the merger, other than
compliance with applicable corporate law of Delaware and California.
Material Federal Income Tax Considerations
The following discussion describes the material United States federal income
tax consequences of the exchange of shares of Sandpiper capital stock for
Digital Island common stock pursuant to the merger that are generally
applicable to holders of Sandpiper capital stock. Riordan & McKinzie, legal
counsel to Sandpiper, is of the opinion that the following discussion
accurately describes such material United States federal income tax
consequences. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended, or Code, existing and proposed
Treasury regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or
may not be retroactive, could alter the tax consequences to Sandpiper
shareholders as described below.
Sandpiper shareholders should be aware that this discussion does not address
all United States federal income tax considerations that may be relevant to
particular Sandpiper shareholders in light of their particular circumstances,
such as shareholders who are dealers in securities or foreign currency, who are
subject to the alternative minimum tax provisions of the Code, who are foreign
persons, who do not hold their Sandpiper capital stock as capital assets, who
hold their Sandpiper capital stock as part of a straddle, pledge against
currency risk, constructive sale or conversion transaction, or who acquired
their shares in connection with stock option or stock purchase plans or in
other compensatory transactions. In addition, the following discussion does not
address the tax consequences of the merger under foreign, state or local tax
laws, the tax consequences of other transactions effectuated prior or
subsequent to, or concurrently with, the merger (whether or not any such
transactions are undertaken in connection with the merger), including without
limitation any transaction in
59
<PAGE>
which shares of Sandpiper capital stock are acquired or shares of Digital
Island common stock are disposed of,
or the tax consequences of the assumption by Digital Island of the Sandpiper
options. Accordingly, Sandpiper shareholders are urged to consult their own tax
advisors as to the specific tax consequences to them of the merger, including
the applicable united states federal, state, local and foreign tax
consequences.
The merger is intended to constitute a reorganization within the meaning of
the Code. Provided that the merger qualifies as a reorganization, then, subject
to the limitations and qualifications referred to below, the merger will
generally result in the following United States federal income tax consequences
to the Sandpiper shareholders:
. No gain or loss will be recognized by holders of Sandpiper capital stock
upon their receipt of Digital Island common stock in exchange for
Sandpiper capital stock in the merger (except to the extent of cash
received in lieu of fractional shares of Digital Island common stock).
. The aggregate tax basis of the Digital Island common stock received by
Sandpiper shareholders in the merger, together with any tax basis
attributable to fractional shares deemed to be disposed of, will be the
same as the aggregate tax basis of the Sandpiper capital stock
surrendered in exchange therefor.
. The holding period of the Digital Island common stock received by each
Sandpiper shareholder in the merger will include the period for which the
Sandpiper capital stock surrendered in exchange therefor was considered
to be held.
. Cash payments received by holders of Sandpiper capital stock in lieu of
fractional shares of Digital Island common stock will be treated as if
such fractional shares of Digital Island common stock had been issued in
the merger and then redeemed by Digital Island. A Sandpiper shareholder
receiving cash in lieu of a fractional share of Digital Island common
stock will recognize gain or loss upon such payment measured by the
difference, if any, between the amount of cash received and such
shareholder's basis in such fractional share.
The parties have not and will not request a ruling from the Internal Revenue
Service as to the tax consequences of the merger. The consummation of the
merger is conditioned upon Sandpiper's receipt of an opinion from Riordan &
McKinzie and Digital Island's receipt of an opinion from Brobeck, Phleger &
Harrison LLP, to the effect that the merger will constitute a reorganization
within the meaning of the Code. Sandpiper shareholders should be aware that the
tax opinions do not bind the Internal Revenue Service, and the Internal Revenue
Service is therefore not precluded from successfully asserting a contrary
position. The tax opinions will be subject to certain assumptions and
qualifications, including but not limited to the truth and accuracy of certain
representations made by Digital Island and Sandpiper.
A successful Internal Revenue Service challenge to the reorganization status
of the merger would result in Sandpiper shareholders recognizing taxable gain
or loss with respect to each share of Sandpiper capital stock surrendered equal
to the difference between the shareholder's basis in such share and the fair
market value as of the completion of the merger of the Digital Island common
stock received in exchange. In such event, a shareholder's aggregate basis in
the Digital Island common stock so received would equal the fair market value
of such stock, and the shareholder's holding period for such stock would begin
the day after the merger.
Tax Consequences of the Escrow. Under the merger agreement, 10% of the
aggregate number of shares of Digital Island common stock issuable in the
merger will be placed in escrow. The return of any escrow shares to Digital
Island in satisfaction of an indemnifiable claim should not result in the
recognition of gain or loss to the holders of escrow shares. The return of any
escrow shares to Digital Island should be characterized as an adjustment to the
exchange terms of the merger agreement. Accordingly, the basis of each share of
Digital Island common stock received in the merger by holders of escrow shares
would be adjusted. Shareholders of Sandpiper are urged to consult their tax
advisors regarding the tax consequences to them of the transfer of the escrow
shares.
Backup withholding with respect to cash paid instead of fractional shares of
Digital Island common stock. Certain non-corporate Sandpiper shareholders may
be subject to backup withholding at a 31% rate on cash payments received
instead of fractional shares of Digital Island common stock. Backup withholding
will
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<PAGE>
not apply, however, to a Sandpiper shareholder who (a) furnishes a correct
taxpayer identification number and certifies that he, she or it is not subject
to backup withholding on the substitute Form W-9 or successor form included in
the letter of transmittal to be delivered to Sandpiper shareholders following
the date of the merger, (b) provides a certification of foreign status on Form
W-8 or successor form or (c) is otherwise exempt from backup withholding.
Anticipated Accounting Treatment
Digital Island intends to treat the merger as a purchase for accounting and
financial reporting purposes, which means that Digital Island will treat
Sandpiper as a separate entity for periods prior to the closing and,
thereafter, as a wholly owned subsidiary of Digital Island.
Dissenters' Rights
The following summary of the statutory procedure to be followed by a
dissenting Sandpiper shareholder in order to exercise his, her or its
Dissenters' Rights under Chapter 13 of the California Corporations Code, or
CCC, is not a complete statement of the law relating to Dissenters' Rights and
is qualified in its entirety by reference to the full text of Chapter 13 of the
CCC. This discussion and Chapter 13 of the CCC should be reviewed carefully by
any Sandpiper shareholder who wishes to exercise statutory Dissenters' Rights
or who wishes to preserve the right to do so, since failure to comply with the
procedures set forth in Chapter 13 of the CCC will result in the loss or waiver
of Dissenters' Rights. A copy of Chapter 13 of the CCC is attached as Annex C
to this joint proxy statement/prospectus and is incorporated herein by
reference.
If the merger is approved by the required vote of Sandpiper shareholders,
each Sandpiper shareholder who does not vote in favor of the merger and who
follows the procedures set forth in Chapter 13 of the CCC will be entitled to
exercise dissenters' rights under the CCC and thereby have Sandpiper shares
purchased by Sandpiper for cash at the fair market value of the Sandpiper
shares. A failure to vote affirmatively against the merger will not constitute
a waiver of dissenters' rights set forth in Chapter 13 of the CCC. Any
Sandpiper shares as to which such dissenters' rights are exercised will not be
converted into the right to receive shares of Digital Island common stock but
instead will be converted into the right to receive such consideration as may
be determined to be due with respect to such Sandpiper shares pursuant to the
CCC.
Upon approval of the merger, a shareholder of Sandpiper on the record date
for such approval may, by complying with the provisions of Chapter 13 of the
CCC, require Sandpiper to purchase for cash at fair market value the shares
owned by such holder and that were not voted to approve and adopt the merger
agreement and approve the merger. The fair market value of Sandpiper shares
will be determined as of the day before the first announcement of the terms of
the proposed merger, excluding any appreciation or depreciation in consequence
of the proposed merger (i.e., valuing the Sandpiper shares as if the merger had
not occurred) but adjusted for any stock split, reverse stock split or stock
dividend that becomes effective thereafter.
Shares of Sandpiper capital stock must satisfy each of the following
requirements to qualify as dissenting shares under California law:
. the shares of Sandpiper capital stock must have been outstanding on the
record date;
. the shares of Sandpiper capital stock must not have been voted in favor
of the merger;
. the holder of such shares of Sandpiper capital stock must make a written
demand that Sandpiper repurchase such shares of Sandpiper capital stock
at fair market value; and
. the holder of such shares of Sandpiper capital stock must submit share
certificates for endorsement.
Within ten days after the date of the approval of the merger, Sandpiper must
mail a notice of the approval of the merger to each shareholder who has not
voted to approve and adopt the merger, together with a statement of the price
determined by Sandpiper to represent the fair market value of the Sandpiper
shares, a
61
<PAGE>
brief description of the procedure to be followed in order for the shareholder
to pursue dissenters' rights, and a copy of Sections 1300 to 1304 of Chapter 13
of the CCC. The statement of price by Sandpiper constitutes an offer by
Sandpiper to purchase all properly dissenting shares at the stated amount.
In order to exercise rights as a dissenting shareholder, within 30 days
after the date on which notice of the approval of the merger by the outstanding
shares of Sandpiper capital stock is mailed to dissenting shareholders,
Sandpiper must receive a dissenting shareholder's written demand that Sandpiper
repurchase such dissenting shareholder's dissenting shares setting forth the
number and class of dissenting shares held of record by such dissenting
shareholder that the dissenting shareholder demands that Sandpiper purchase,
and a statement of what the dissenting shareholder claims to be the fair market
value of the dissenting shares as of the day before the announcement of the
proposed merger. The statement of fair market value in such demand by the
dissenting shareholder constitutes an offer by the dissenting shareholder to
sell the dissenting shares at such price to Sandpiper. Such holder must also
submit to Sandpiper, within 30 days after the date on which notice of the
approval by the outstanding shares was mailed to shareholders, share
certificates representing any dissenting shares that the dissenting shareholder
demands that Sandpiper purchase, so that such dissenting shares may either be
stamped or endorsed with the statement that the shares are dissenting shares or
exchanged for certificates of appropriate denomination so stamped or endorsed.
If the dissenting shareholder and Sandpiper agree that the shares qualify as
dissenting shares and agree upon the price of the shares, the dissenting
shareholder will be entitled to the agreed upon price plus the legal rate of
interest on judgments from the date of such agreement, to be paid to the
dissenting shareholder within the later of 30 days after the date of such
agreement or 30 days after any statutory or contractual conditions to the
consummation of the merger are satisfied or waived subject to surrender, by the
dissenting shareholder, of his, her or its certificates representing the
dissenting shares to Sandpiper.
If the dissenting shareholder and Sandpiper fail to agree upon the fair
market value of the dissenting shares or whether the shares qualify as
dissenting shares, the dissenting shareholder may file a complaint in
California superior court within six months after the date on which notice of
the approval of the merger is mailed to shareholders requesting that the court
determine the fair market value of the dissenting shares and/or whether the
shares qualify as dissenting shares. California law provides, among other
things, that a dissenting shareholder may not withdraw the demand for payment
of the fair market value of dissenting shares unless Sandpiper consents to such
request for withdrawal.
Under the provisions of Section 500 and following and Section 1306 of the
CCC, a California corporation is legally prohibited from purchasing shares of
stock through the payment of cash or other property, even if all dissenters'
rights conditions are fulfilled, unless the corporation satisfies certain
financial conditions. Due to these legal restrictions, Sandpiper may not
legally be able to repurchase all or any dissenting shares of the dissenting
shareholders for cash following the merger.
To the extent that the above-mentioned provisions of the CCC prohibit cash
payments to holders of dissenting shares who exercise and perfect their
dissenters' rights, such dissenting shareholders will become creditors of
Sandpiper for an amount equal to the fair market value of their shares as to
which the dissenters' rights are perfected plus interest accrued thereon at the
legal rate on judgments until the date of payment. The rights of such
dissenting shareholders, however, will be subordinate to the rights of all
other creditors of Sandpiper in any liquidation proceeding.
Dissenting shareholders considering seeking appraisal should be aware that
the fair market value of their shares of capital stock, as determined under
Chapter 13 of the CCC, could be more than, the same as or less than the amount
that would be paid to them pursuant to the merger agreement. The costs and
expenses of the appraisal proceeding will be determined by the court and
assessed against Sandpiper unless the court determines that the dissenting
shareholder did not act in good faith in demanding payment of the fair market
value of his, her or its shares, in which case such costs and expenses may be
assessed against the dissenting shareholder.
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If any Sandpiper shareholder who demands the purchase of his, her or its
shares under Chapter 13 of the CCC fails to perfect, or effectively withdraws
or loses his, her or its right to such purchase, the shares of such holder will
be converted into a right to receive the applicable merger consideration with
respect thereto in accordance with the terms of the merger agreement.
Dissenting shares lose their status as dissenting shares and the holders of
dissenting shares cease to be dissenting shareholders and cease to be entitled
to require Sandpiper to purchase their shares if:
. the merger is abandoned;
. the shares are transferred prior to their submission for the required
endorsement or are surrendered for conversion into shares of another
class in accordance with the amended and restated articles of
incorporation of Sandpiper;
. the dissenting shareholder and Sandpiper do not agree upon the status of
the shares as dissenting shares or do not agree on the purchase price,
but neither Sandpiper nor the shareholder files a complaint or intervenes
in a pending action within six months after mailing of the notice of
approval of the merger; or
. with Sandpiper's consent, the shareholder delivers to Digital Island a
written withdrawal of such shareholder's demand for purchase of his, her
or its shares.
Except as expressly limited by provisions of California law pertaining to
dissenters' rights, holders of dissenting shares, continue to have all the
rights and privileges incident to their shares until the fair market value of
their shares is agreed upon or determined.
Failure to follow the steps required by Chapter 13 of the CCC for perfecting
Dissenters' Rights may result in the loss of such rights (in which event a
shareholder will be entitled to receive the applicable merger consideration
with respect to such dissenting shares in accordance with the merger
agreement). In view of the complexity of the provisions of Chapter 13,
Sandpiper shareholders who are considering objecting to the merger should
consult their own legal advisors.
For more information on the rights of Sandpiper shareholders, see
"Comparison of Rights of Stockholders of Digital Island and Shareholders of
Sandpiper" beginning on page 86.
Listing of Digital Island Common Stock to be Issued in the Merger
The filing of an application with the Nasdaq National Market for the listing
of the shares of Digital Island common stock to be issued in the merger and the
shares of Digital Island common stock to be reserved for issuance in connection
with the assumption of outstanding Sandpiper stock options is a condition to
the consummation of the merger.
Restrictions on Sale of Shares by Affiliates of Digital Island and Sandpiper
The shares of Digital Island common stock to be issued in connection with
the merger will be registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares of Digital Island
common stock issued to any person who is deemed to be an affiliate of either
Digital Island or Sandpiper at the time of the special meetings. Persons who
may be deemed to be affiliates include individuals or entities that control,
are controlled by, or are under common control of either Digital Island or
Sandpiper and may include some of the officers, directors, or principal
stockholders or shareholders of Digital Island or Sandpiper. Affiliates may not
sell their shares of Digital Island common stock acquired in connection with
the merger except under:
. an effective registration statement under the Securities Act covering the
resale of those shares;
. an exemption under paragraph (d) of Rule 145 under the Securities Act; or
. another applicable exemption under the Securities Act.
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In addition, Digital Island stockholders holding approximately 45% of the
outstanding common stock of Digital Island and Sandpiper shareholders holding
approximately 76% of the outstanding capital stock of Sandpiper, have agreed
not to sell their shares of Digital Island common stock from the time of the
merger until the earliest to occur of :
. the sale by Digital Island of Digital Island common stock for its own
account in a bona fide, firm commitment underwritten public offering
pursuant to a registration statement under the Securities Act;
. July 15, 2000;
. the effective date of a merger of Digital Island with or into another
corporation in which fifty (50%) or more of the voting power of Digital
Island is disposed of, or the sale of all or substantially all of the
assets of Digital Island; or
. such other date, and with such limitations, as may be approved by
unanimous vote of the board of directors of Digital Island.
The market standoff agreements are discussed in more detail in "The Merger
Agreement and Related Agreements--Market Standoff Agreements."
Digital Island's registration statement on Form S-4, of which this joint
proxy statement/prospectus forms a part, does not cover the resale of shares of
Digital Island common stock to be received by affiliates in the merger.
Operations Following the Merger
The merger agreement provides that, upon completion of the merger, the board
of directors of Digital Island shall consist of four designees of Digital
Island, who shall be Ruann Ernst, Cliff Higgerson, Marcelo Gumucio and Shahan
Soghikian; three designees of Sandpiper, who shall be Leo Spiegel, Robert
Kibble and G. Bradford Jones; and two mutually acceptable outside directors,
one of whom shall be Christos Cotsakos and the other of whom shall be mutually
agreed to at a later date. Upon completion of the merger, the shareholders of
Sandpiper will become stockholders of Digital Island, and their rights as
stockholders will be governed by Digital Island's certificate of incorporation,
Digital Island's bylaws and the laws of the State of Delaware.
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THE MERGER AGREEMENT AND RELATED AGREEMENTS
The following is a brief summary of the material provisions of the merger
agreement and related agreements, copies of which are attached as Annex A to
this joint proxy statement/prospectus and incorporated by reference in this
joint proxy statement/prospectus. We urge you to read the merger agreement and
the related agreements in their entirety for a more complete description of the
merger. In the event of any discrepancy between the terms of the merger
agreement or other agreements and the following summary, the applicable
agreement will control.
The Merger
Sandpiper will merge with Beach Acquisition Corp., a newly formed, wholly
owned subsidiary of Digital Island, following:
. the approval and adoption of the merger agreement and the merger by the
shareholders of Sandpiper;
. the approval of the issuance of Digital Island common stock in the merger
by the stockholders of Digital Island;
. the receipt of all necessary governmental consents, authorizations,
filings, approvals and registrations; and
. the satisfaction or waiver of the other conditions to the merger.
Sandpiper will be the surviving corporation and will become a wholly owned
subsidiary of Digital Island following the merger.
Effective Time
Digital Island and Sandpiper are working toward completing the merger as
soon as possible and hope to complete the merger before the first quarter of
calendar year 2000. Because the merger is subject to governmental and other
regulatory approvals, however, we cannot predict the exact timing.
Conversion of Sandpiper Shares in the Merger
At the effective time, each outstanding share of Sandpiper capital stock
(other than shares, if any, held by persons who have perfected, and not
withdrawn or otherwise forfeited dissenters' or appraisal rights under
California law) will automatically be converted into the right to receive
1.0727 shares of Digital Island common stock. The number of shares of Digital
Island common stock issuable in the merger will be proportionately adjusted:
. for any stock split, reverse split, stock dividend, reorganization,
recapitalization or similar event with respect to Sandpiper capital stock
or Digital Island common stock effected between the date of the merger
agreement and the completion of the merger; or
. if prior to the completion of the merger, the number of shares of
Sandpiper capital stock or Digital Island common stock, each outstanding
on a fully diluted basis, exceeds the number disclosed or permitted to be
issued by either party under the merger agreement.
Sandpiper Stock Plan
At the effective time, each outstanding option to purchase shares of
Sandpiper common stock issued under Sandpiper's 1997 Stock Plan will be assumed
by Digital Island regardless of whether the option is exercisable. Each
Sandpiper stock option assumed by Digital Island will continue to have the same
terms, and be subject to the same conditions, that were applicable to the
option immediately prior to the effective time, except that:
. each Sandpiper stock option will be exercisable for shares of Digital
Island common stock;
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. the number of whole shares of Digital Island common stock issuable upon
exercise of any given Sandpiper option will be determined by multiplying
1.0727 by the number of shares of Sandpiper common stock underlying the
option, rounded down to the next whole number; and
. the per share exercise price of any given option will be determined by
dividing the exercise price of the option immediately prior to the
effective time by 1.0727, rounded up to the next whole cent.
The parties intend for the Sandpiper stock options assumed by Digital Island
to qualify as incentive stock options to the extent the Sandpiper stock options
qualified as incentive stock options prior to the effective time.
Fractional Shares
No fractional shares of Digital Island common stock will be issued in
connection with the merger. Instead Sandpiper shareholders will receive an
amount of cash, in lieu of a fraction of a share of Digital Island common
stock, equal to the product of (A) this fraction multiplied by (B) the average
of the closing bid prices for a share of Digital Island common stock as quoted
on the Nasdaq National Market for the twenty trading days prior to the date on
which the effective time occurs.
The Exchange Agent
Digital Island is required to make available to its transfer agent, or
another institution selected by Digital Island and reasonably acceptable to
Sandpiper, promptly after the effective time:
. certificates representing the shares of Digital Island common stock to be
exchanged for shares of Sandpiper capital stock (less the number of
shares, if any, of Digital Island common stock to be deposited into the
escrow fund); and
. cash in an amount sufficient to pay for fractional shares and any
dividends or distributions that holders of Sandpiper common stock may be
entitled to receive under the merger agreement.
Exchange of Sandpiper Stock Certificates for Digital Island Stock Certificates
Promptly after the effective time, Digital Island will cause to be mailed to
each Sandpiper shareholder of record a letter of transmittal and instructions
for surrendering his, her or its Sandpiper stock certificates in exchange for
Digital Island stock certificates (less the number of shares, if any, to be
deposited in the escrow fund on the holder's behalf) and cash in lieu of
fractional shares.
Sandpiper shareholders should not submit their stock certificates for
exchange until they have received the letter of transmittal and instructions
referred to above.
Digital Island stockholders should not submit their stock certificates for
exchange.
Transfers of Ownership
Digital Island will issue a Digital Island stock certificate or a check in
lieu of a fractional share in a name other than the name registered for the
surrendered Sandpiper stock certificate only if the exchange agent is given all
documents required, including documents:
. to show and effect the unrecorded transfer of ownership; and
. to show that any applicable stock transfer taxes have been paid or that
such tax is not payable.
Distributions with Respect to Unexchanged Shares
Sandpiper shareholders are not entitled to receive any dividends or other
distributions on Digital Island common stock with a record date after the
merger is completed until they have surrendered their Sandpiper stock
certificates in exchange for Digital Island stock certificates.
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Subject to applicable law, if there is any dividend or other distribution on
Digital Island common stock with a record date after the merger, former
Sandpiper shareholders will receive, only following surrender of their
Sandpiper stock certificates, the dividend or other distribution payable with
respect to the whole shares of Digital Island common stock issued in exchange
for their Sandpiper stock certificates, without interest.
Representations and Warranties
Digital Island and Sandpiper each made a number of representations and
warranties in the merger agreement about their authority to enter into the
merger agreement and to consummate the other transactions contemplated by the
merger agreement and about aspects of their business, financial condition,
structure and other facts pertinent to the merger.
Sandpiper's representations and warranties included the following topics:
. Sandpiper's organization, qualification to do business and good standing;
. Sandpiper's capitalization;
. Sandpiper's corporate power to enter into, and its authorization of, the
merger agreement and the transactions contemplated by the merger
agreement, subject only to approval of the merger by Sandpiper's
shareholders;
. the effect of the merger agreement and the merger on obligations of
Sandpiper;
. Sandpiper's possession of consents and permits required in connection
with the merger agreement and transactions contemplated by the merger
agreement;
. Sandpiper's financial statements;
. changes in Sandpiper's business since September 30, 1999;
. the absence of undisclosed liabilities;
. litigation involving Sandpiper;
. restrictions on Sandpiper's business activities;
. possession of, and compliance with, permits and governmental
authorizations required to conduct Sandpiper's business;
. Sandpiper's title to the properties it owns and leases;
. intellectual property used or owned by Sandpiper;
. environmental laws that apply to Sandpiper;
. Sandpiper's tax liabilities and returns;
. Sandpiper's employee benefit plans;
. the effect of the merger on agreements between Sandpiper and its
directors and employees;
. matters relating to Sandpiper's employees;
. the absence of indebtedness between directors, officers, employees or
agents of Sandpiper and Sandpiper;
. Sandpiper's insurance;
. Sandpiper's compliance with applicable laws, rules and regulations of
governmental entities;
. the accuracy and completeness of Sandpiper's corporate minute books;
. Sandpiper's accounts receivable;
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. Sandpiper's customers and suppliers;
. Sandpiper's material contracts and obligations;
. the absence of any breach of Sandpiper's material contracts and
obligations;
. the effect of the year 2000 on Sandpiper's business, products and
services;
. Sandpiper's compliance with applicable export control laws;
. Sandpiper's scheduled product releases;
. that Sandpiper delivered or made available true and complete copies of
each material document requested in writing by Digital Island or its
counsel;
. the execution and delivery of the shareholder agreements, irrevocable
proxies and market standoff agreements;
. the percentage vote of Sandpiper shareholders required to approve the
merger, the merger agreements, and related transactions;
. the unanimous approval of the merger agreement and the merger by
Sandpiper's board of directors;
. the treatment of the merger as a tax-free reorganization;
. the accuracy of the information included in this joint proxy
statement/prospectus;
. Sandpiper's affiliates;
. Sandpiper's brokers' and finders' fees in connection with the merger; and
. the completeness of Sandpiper's representations and warranties.
Digital Island's representations and warranties included the following
topics:
. Digital Island's organization, qualification to do business and good
standing;
. Digital Island's capitalization;
. Digital Island's corporate power to enter into, and its authorization of,
the merger agreement and the transactions contemplated by the merger
agreement;
. the effect of the merger agreement and the merger on obligations of
Digital Island;
. Digital Island's possession of consents and permits required in
connection with the merger agreement and transactions contemplated by the
merger agreement;
. Digital Island's financial statements;
. Digital Island's filings and reports with the Securities and Exchange
Commission;
. changes in Digital Island's business since June 30, 1999;
. the absence of undisclosed liabilities;
. litigation involving Digital Island;
. restrictions on Digital Island's business activities;
. intellectual property used or owned by Digital Island;
. the effect of the merger on agreements between Digital Island and its
directors or employees;
. Digital Island's principal contracts and obligations;
. the percentage vote of Digital Island's stockholders required to approve
the issuance of Digital Island common stock in the merger and the
execution and delivery of the voting agreements;
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. the approval of the Digital Island board of directors.
. the accuracy of the information included in this joint proxy
statement/prospectus;
. the treatment of the merger as a tax-free reorganization;
. Digital Island's brokers' and finders' fees in connection with the
merger;
. access to true and complete copies of each material document requested in
writing by Sandpiper or its counsel; and
. the completeness of Digital Island's representations and warranties.
The representations and warranties in the merger agreement are lengthy,
detailed and not easily summarized. We urge Sandpiper shareholders and Digital
Island stockholders to read carefully the articles in the merger agreement
entitled "Representations and Warranties of Company" and "Representations and
Warranties of Parent."
Merger Integration Committee
Sandpiper and Digital Island have established a merger integration committee
consisting of seven members, four of whom are members of the Digital Island
board of directors designated by Digital Island and three of whom are members
of the Sandpiper board of directors designated by Sandpiper. The purpose of the
merger integration committee is to plan for the integration of Sandpiper and
Digital Island following the consummation of the merger and to assist in
carrying out various provisions of the merger agreement, including approval of
proposals by the parties to take actions that would otherwise be prohibited or
restricted by the merger agreement. All determinations of the merger
integration committee shall be made on the basis of what is in the best
interests of Digital Island and Sandpiper as a combined company following the
consummation of the merger.
Sandpiper's Conduct of Business Before Completion of the Merger
Sandpiper has agreed that, until the completion or termination of the
merger, unless Digital Island consents in writing or unless otherwise approved
by a majority of the merger integration committee, Sandpiper and its
subsidiaries will conduct their businesses in the ordinary course of business
in substantially the manner conducted prior to the date of the merger
agreement, or as otherwise contemplated in Sandpiper's budget for October 1,
1999 through June 30, 2000 as furnished to Digital Island. Sandpiper has also
agreed to, and cause its subsidiaries to, pay debts and taxes when due, pay or
perform other obligations when due, and use reasonable efforts consistent with
past practice and policies to preserve intact its present business
organizations, keep available the services of its present officers and key
employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with
it.
Except as expressly contemplated by the merger agreement or the other
agreements related thereto, Sandpiper has further agreed, until the completion
or termination of the merger, unless Digital Island consents in writing or
unless otherwise approved by a majority of the merger integration committee
(including the approval of at least one member thereof designated by Digital
Island), Sandpiper and its subsidiaries will not do, cause or permit any of the
following:
. amend, modify, alter or rescind its charter, bylaws or organizational
documents;
. declare or pay dividends or make any other distribution on its capital
stock, or split, combine or reclassify any of its capital stock, or
repurchase or otherwise acquire any shares of its capital stock except
from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service;
. grant any options or other rights to acquire securities (except grants of
options in the ordinary course of business consistent with past practice,
exercisable for a total of not more than 1,333,000 shares of
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Sandpiper common stock), or accelerate, amend or change the exercisability
or vesting of options or authorize cash payments in exchange for any
options;
. propose or actually issue, deliver or sell or purchase any shares of its
capital stock or securities convertible or subscriptions, rights,
warrants, options or similar agreements or commitments to acquire shares
of its capital stock, other than pursuant to the exercise of options or
warrants outstanding and disclosed as of the date of the merger agreement
and option grants permitted under the merger agreement;
. enter into or modify, terminate or violate material contracts other than
in the ordinary course of business consistent with past practice;
. transfer to any person or entity any rights to Sandpiper's intellectual
property other than in the ordinary course of business consistent with
past practice;
. enter into or amendment of any agreements with any other party granting
exclusive marketing or other exclusive rights with respect to Sandpiper's
products or technology;
. sell, lease or otherwise dispose or encumber any material (individually
or in the aggregate) properties or assets other than sales, leases or
licenses of products in the ordinary course of business;
. incur or guarantee any indebtedness, issue or sell any debt security or
guarantee any debt securities of others, except in accordance with
Sandpiper's budget as furnished to Digital Island;
. enter into any operating lease, except in accordance with Sandpiper's
budget as furnished to Digital Island;
. pay, discharge or satisfy any claim, liability or obligation arising
other than in the ordinary course of business, except in accordance with
Sandpiper's budget as furnished to Digital Island;
. make any capital expenditures, capital additions or capital improvements,
except in accordance with Sandpiper's budget as furnished to Digital
Island;
. materially reduce the amount of any material insurance coverage provided
by existing insurance policies;
. terminate or waive any right of substantial value, other than in the
ordinary course of business;
. adopt or amend any employee benefit plan or stock purchase or option
plan, elect or appoint any new director, or hire any new officer level
employee, pay any special bonus or remuneration to any employee or
director or, other than in the ordinary course of business consistent
with past practice, increase the salaries or wage rates of employees;
. grant any severance arrangements or termination pay to any officer or
director or to any other employee except payments made pursuant to
written agreements outstanding on the date of the merger agreement and
specifically identified and provided to Digital Island prior to the date
of the merger agreement;
. commence any lawsuit, other than (a) for the collection of bills, (b)
where Sandpiper, after consulting with Digital Island, in good faith
determines that failure to commence litigation would result in material
impairment of a valuable aspect of its business, or (c) for a breach of
the merger agreement;
. acquire or agree to acquire, in any manner, any other entity, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to Sandpiper's business, taken as a
whole;
. make or change any material tax elections, change any accounting method
in respect of taxes, file or amend any material tax return, enter into
any closing arrangement, settle any material claim or assessment in
respect of taxes, or consent to any extension or waiver of the limitation
period applicable to any claim or assessment in respect of taxes;
. fail to give all notices and other information required to be given to
employees, any collective bargaining unit representing employees and any
applicable government authority under any applicable law in connection
with the merger;
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. revalue any assets, including without limitation writing down the value
of inventory or writing off notes or accounts receivable other than in
the ordinary course of business;
. change domain names or fail to renew existing domain name registrations
on a timely basis; or
. authorize, agree to take or take any action described in the bullet
points above or any action that would (a) make materially untrue or
materially incorrect any of the representations or warranties of
Sandpiper in the merger agreement or prevent it from performing or
causing it not to perform its covenants in the merger agreement in any
material respect, (b) result in any of the conditions to the merger as
set forth in the merger agreement not being satisfied or in violation of
the merger agreement or any related agreement, except in every case, as
may be required by applicable law, or (c) materially adversely impair the
ability of Sandpiper to consummate the merger or the transactions
contemplated by the merger agreement.
Digital Island's Conduct of Business Before Completion of the Merger
Digital Island has agreed that, until the completion or termination of the
merger, unless Sandpiper consents in writing or unless otherwise approved by a
majority of the merger integration committee, and except further as required by
the fiduciary duties of the Digital Island board of directors, Digital Island
and its subsidiaries will conduct their businesses in the ordinary course of
business in substantially the manner conducted prior to the date of the merger
agreement or as otherwise contemplated in Digital Island's fiscal year 2000
plan.
Except as expressly contemplated by the merger agreement or the other
agreements related thereto, Digital Island has further agreed, until the
completion or termination of the merger unless Sandpiper consents in writing or
unless otherwise approved by a majority of the merger integration committee
(including the approval of at least one member thereof designated by
Sandpiper), Digital Island and its subsidiaries will not do, cause or permit
any of the following:
. authorize, agree to take or take any action described in the bullet
points below or any action that would (a) make materially untrue or
materially incorrect any of the representations or warranties of Digital
Island in the merger agreement or prevent it from performing or causing
it not to perform its covenants in the merger agreement in any material
respect (b) result in any of the conditions to the merger as set forth in
the merger agreement not being satisfied or in violation of the merger
agreement or any related agreement, except in every case, as may be
required by applicable law, or (c) materially adversely impair the
ability of Sandpiper to consummate the merger or the transactions
contemplated by the merger agreement.
. amend, modify, alter or rescind its charter, bylaws or organizational
documents;
. declare or pay dividends or make any other distribution on its capital
stock, or split, combine or reclassify any of its capital stock, or
repurchase or otherwise acquire any shares of its capital stock except
from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service;
. transfer to any person or entity any rights to Digital Island's
intellectual property other than in the ordinary course of business
consistent with past practice;
. sell, lease or otherwise dispose or encumber any material (individually
or in the aggregate) properties or assets other than sales, leases or
licenses of products in the ordinary course of business;
. make or change any material tax elections, change any accounting method
in respect of taxes, file or amend any material tax return, enter into
any closing arrangement, settle any material claim or assessment in
respect of taxes;
. change domain names or fail to renew existing domain name registrations
on a timely basis; or
. grant any options or other rights to acquire securities (except grants of
options in the ordinary course of business consistent with past practice,
exercisable for a total of not more than 2,000,000 shares of
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Digital Island common stock), or accelerate, amend or change the
exercisability or vesting of options or authorize cash payments in
exchange for any options;
. propose or actually issue, deliver or sell or purchase any shares of its
capital stock or securities convertible or subscriptions, rights,
warrants, options or similar agreements or commitments to acquire shares
of its capital stock, other than pursuant to the exercise of options or
warrants outstanding and disclosed as of the date of the merger agreement
and option grants permitted under the merger agreement or pursuant to a
permitted acquisition; or
. acquire or agree to acquire by merging or consolidating with any entity,
or by purchasing a substantial portion of the assets thereof, or by any
other manner.
The agreements related to the conduct of business of Sandpiper and Digital
Island in the merger agreement are lengthy, detailed and not easily summarized.
We urge Sandpiper shareholders and Digital Island stockholders to carefully
read the article in the merger agreement entitled "Conduct Prior to the
Effective Time."
No Solicitation of Takeover Proposals by Sandpiper
Until the merger agreement is terminated or as otherwise provided in the
merger agreement, Sandpiper has agreed that neither it nor its subsidiaries nor
any of their respective officers, directors, employees or representatives will
take any of the following actions, directly or indirectly:
. solicit, initiate, encourage or agree to any "company takeover proposal"
by a third party; or
. engage in any negotiations concerning, or disclose any nonpublic
information relating to Sandpiper or any of its subsidiaries to, allow
access to any of their properties, books or records to or have
discussions with any person relating to a company takeover proposal or
otherwise facilitate any effort or attempt to make or implement a company
takeover proposal.
A "company takeover proposal" includes any offer or proposal for, or any
indication of interest in:
. a merger or other business combination involving Sandpiper;
. the acquisition of 10% or more of Sandpiper's outstanding capital stock,
or a material portion of the assets of Sandpiper (other than the
transactions contemplated by the merger agreement with Digital Island);
or
. any other transaction inconsistent with the consummation of the
transactions contemplated by the merger agreement with Digital Island.
Sandpiper has agreed to provide Digital Island prompt notice and detailed
information of any company takeover proposal it receives. In addition, Digital
Island and Sandpiper have agreed that Digital Island shall be entitled, in
addition to any other remedies to which it may be entitled, to seek an
injunction or injunctions to prevent breaches of the section of the merger
agreement entitled "No Solicitation by Company."
No Solicitation of Certain Contingent Business Combination Transactions by
Digital Island
Until the merger agreement is terminated or as otherwise provided in the
merger agreement, Digital Island has agreed that neither it nor its
subsidiaries nor any of their respective officers, directors, employees or
representatives will take any of the following actions, directly or indirectly:
. solicit, initiate, encourage or agree to any "parent takeover proposal"
by a third party; or
. engage in any negotiations concerning, or disclose any nonpublic
information relating to Digital Island or any of its subsidiaries to,
allow access to any of their properties, books or records to or have
discussions with any person relating to a parent takeover proposal or
otherwise facilitate any effort or attempt to make or implement a parent
takeover proposal.
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A "parent takeover proposal" means any offer or proposal for, or any
indication of interest in any of the following types of transactions that is
conditioned on the denial by the stockholders of Digital Island of the issuance
of shares of Digital Island common stock to Sandpiper shareholders pursuant to
the merger agreement with Sandpiper:
. a merger or other business combination involving Digital Island;
. the acquisition of a majority of Digital Island's outstanding capital
stock, or all or substantially all of the assets of Digital Island; or
. any other transaction inconsistent with the consummation of the
transactions contemplated by the merger agreement with Sandpiper.
The Digital Island board of directors is not prohibited, however, from
taking and disclosing to Digital Island's stockholders a position with respect
to a tender or exchange offer under Rules 14d-9 and 14e-2(a) under the Exchange
Act not made in violation of the merger agreement. The Digital Island board of
directors may also provide information in connection with, and negotiate
concerning, an unsolicited, bona fide parent takeover proposal (as defined
above) if the Digital Island board of directors:
. concludes in good faith, after considering applicable state law, on the
basis of written advice from independent outside legal counsel, that
failure to take such action would not be a proper exercise of the
fiduciary duties of Digital Island's board of directors to its
stockholders under applicable law; and
. shall have determined in the exercise of its fiduciary duties to Digital
Island stockholders (taking into account the advice of Digital Island's
independent financial advisor) that the parent takeover proposal provides
materially greater value to Digital Island or its stockholders than the
merger.
Digital Island has agreed to provide Sandpiper prompt notice and detailed
information of any "parent takeover proposal" it receives. In addition,
Sandpiper and Digital Island have agreed that Sandpiper shall be entitled, in
addition to any other remedies to which it may be entitled, to seek injunctions
to prevent breaches of the section of the merger agreement entitled "No
Solicitation by Parent."
Additional Agreements of Sandpiper and Digital Island
Each of Sandpiper and Digital Island has further agreed, among other things
specifically identified in the merger agreement:
. that the mutual confidentiality agreement executed by each party shall
continue in full force and effect;
. to notify the other promptly of any event or occurrence not in the
ordinary course of business, and of any event which could have a material
adverse effect on the other;
. to provide reasonable access to the other to its facilities, records and
all other information as the other may reasonably request;
. subject to compliance with applicable law, to confer on a regular and
frequent basis with one or more representatives of the other to report
material operational matters and the general status of ongoing
operations;
. to make all necessary filings and obtain any consents and approvals as
may be required in connection with the merger agreement and the merger;
and
. to consult with each other and obtain prior approval of the other before
issuing any press release or making any other public disclosure regarding
the merger agreement or the transactions contemplated thereby, except as
may be required by law or by obligations of Digital Island pursuant to
any listing agreement with any national securities exchange or the
National Association of Securities Dealers after consultation with
Sandpiper.
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Director and Officer Indemnification
The merger agreement provides that, after the completion of the merger,
Digital Island shall honor and not modify any rights to indemnification or
exculpation from liabilities for acts or omissions occurring at or prior to the
consummation of the merger as existed at the time the merger agreement was
signed in favor of officers and directors of Sandpiper and its subsidiaries as
provided in their respective charters or bylaws as in effect at the time the
merger agreement was signed.
Conditions to the Merger
Digital Island's and Sandpiper's obligations to complete the merger and the
related transactions are subject to the satisfaction or waiver of each of the
following conditions before completion of the merger:
. the merger agreement and the merger must have been approved by the
affirmative vote of the holders of record of more than 50% of the issued
and outstanding shares of Sandpiper common stock and each series of
Sandpiper preferred stock, each voting as a separate class, and the
Digital Island share issuance must be approved by Digital Island's
stockholders;
. any agreements or arrangements that may constitute excess parachute
payments under Section 280G of the Internal Revenue Code must have been
approved by such number of Sandpiper shareholders as is required under
applicable law;
. no order, writ, injunction or decree is in force that makes the merger
illegal or otherwise prohibits completion of the merger;
. all consents, approvals and authorization legally required to consummate
the merger and the other transactions contemplated by the merger
agreement must have been obtained from all governmental entities,
including such approvals, waivers and consents as may be required under
the antitrust laws;
. Digital Island, Sandpiper, the escrow agent and the Sandpiper
shareholders' agent must have entered into the escrow agreement; and
. the registration statement relating to the issuance of shares of Digital
Island common stock as contemplated by the merger agreement must have
been declared effective by the Securities and Exchange Commission, or
alternatively, the shares of Digital Island common stock to be issued in
the merger shall be exempt from registration under the Securities Act of
1933, as amended, by reason of Section 3(a)(10) or Section 4(2) thereof;
Sandpiper's obligations to complete the merger are subject to the
satisfaction or waiver of each of the following additional conditions before
completion of the merger, any of which may be waived, in writing, by Sandpiper:
. Digital Island's representations and warranties must be true and correct
when made and as of the closing of the merger, except where failures to
be true and correct could not reasonably be expected to have a material
adverse effect on Digital Island;
. Digital Island must have complied in all material respects with all of
its covenants in the merger agreement, except, in the case of covenants
of Digital Island identified in the sections of the merger agreement
entitled "General Conduct of Business" and "Conduct of Parent," where the
failure to perform or comply with such covenants could not reasonably be
expected to have a material adverse effect on Digital Island;
. Sandpiper must receive a certificate executed on behalf of Digital Island
by its president and chief financial officer to the effect that the
conditions set forth in the immediately preceding bullet points have been
satisfied;
. all third-party consents or approvals required under any principal
contract of Digital Island in connection with the merger must be
obtained, if the failure to obtain such consent or approval could
reasonably be expected to have a material adverse effect on Sandpiper or
the surviving corporation;
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. no proceedings by a governmental entity seeking to prevent the merger are
pending and no injunctions or restraints seeking to limit or restrict
Digital Island's conduct or operation of the business of Sandpiper
following the merger are in effect;
. Sandpiper must have received a legal opinion from Digital Island's legal
counsel, Brobeck, Phleger & Harrison LLP, dated the closing date, in
substantially the form attached as an exhibit to the merger agreement;
and
. Sandpiper must have received the opinion of its legal counsel, Riordan &
McKinzie, dated the closing date, to the effect that the merger will
constitute a reorganization within the meaning of Section 368(a) of the
Code.
Digital Island's and Beach Acquisition Corp.'s obligations to complete the
merger are subject to the satisfaction or waiver of each of the following
additional conditions before completion of the merger, any of which may be
waived, in writing, by Digital Island:
. Sandpiper's representations and warranties must be true and correct when
made and as of the closing of the merger, except where failures to be
true and correct could not reasonably be expected to have a material
adverse effect on Sandpiper or the surviving corporation;
. Sandpiper must have complied in all material respects with all of its
covenants in the merger agreement, except, in the case of covenants of
Sandpiper identified in the sections of the merger agreement entitled
"General Conduct of Business" and "Conduct of Company," where the failure
to perform or comply with such covenants could not reasonably be expected
to have a material adverse effect on Sandpiper or the surviving
corporation;
. Digital Island must receive a certificate executed on behalf of Sandpiper
by its president and chief financial officer to the effect that the
conditions set forth in the immediately preceding bullet points have been
satisfied;
. all third-party consents or approvals required under any material
contract of Sandpiper or its subsidiaries in connection with the merger
must be obtained, if the failure to obtain such consent or approval could
reasonably be expected to have a material adverse effect on Sandpiper,
Digital Island or the surviving corporation;
. no proceedings by a governmental entity seeking to prevent the merger
shall be pending and no injunctions or restraints seeking to limit or
restrict Digital Island's conduct or operation of the business of
Sandpiper following the merger shall be in effect;
. Digital Island must have received a legal opinion from Sandpiper's legal
counsel, Riordan & McKinzie, dated the closing date, in substantially the
form attached as an exhibit to the merger agreement;
. Digital Island must have received the opinion of its legal counsel,
Brobeck, Phleger & Harrison LLP, dated the closing date, to the effect
that the merger will constitute a reorganization within the meaning of
Section 368(a) of the Code;
. each of the employment and non-competition agreements executed by the
employees of Sandpiper specifically identified in the merger agreement
must be in full force and effect; and
. Sandpiper must, prior to the completion of the merger, provide Digital
Island with a certificate from the Secretary of State of California and
the California Franchise Tax Board as to Sandpiper's good standing and
payment of all applicable taxes, and such other customary certificates
and closing documents reasonably requested by Digital Island.
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Termination of the Merger Agreement
The merger agreement may be terminated at any time before the completion of
the merger, whether before or after approval of the matters presented in
connection with the merger by the shareholders of Sandpiper, as summarized
below:
. the merger agreement may be terminated by mutual consent; or
. the merger agreement may also be terminated by either Digital Island or
Sandpiper if the conditions to completion of the merger would not be
satisfied because of either (a) a breach of an agreement or obligation in
the merger agreement by the other party or (b) a breach of a
representation or warranty of the other party in the merger agreement,
and such breach shall not have been cured within 20 business days
following receipt of written notice by the non-breaching party.
In addition, the merger agreement may be terminated by either Digital Island
or Sandpiper under any of the following circumstances:
. if the merger is not completed, without the fault of the terminating
party, by May 31, 2000;
. if a final court or governmental order prohibiting the merger is issued
and is not appealable;
. if the Digital Island stockholders do not approve the issuance of Digital
Island common stock at the Digital Island special meeting; or
. if the Sandpiper shareholders do not approve the merger agreement and the
merger at the Sandpiper special meeting.
The merger agreement may be terminated by Digital Island if the following
occurs:
. the Sandpiper board of directors shall have omitted, withdrawn or
modified its recommendation of the merger agreement or the merger in a
manner adverse to Digital Island or recommended, endorsed, accepted or
agreed to a company takeover proposal or shall have resolved to do any of
the foregoing. These actions by Sandpiper would also be a breach of
Sandpiper's obligations under the merger agreement.
The merger agreement may be terminated by Sandpiper if the following occurs:
. the Digital Island board of directors shall have omitted, withdrawn or
modified its recommendation of the merger agreement or the merger in a
manner adverse to Sandpiper or recommended, endorsed, accepted or agreed
to a parent takeover proposal or shall have resolved to do any of the
foregoing.
Payment of Costs and Expenses; Termination Fees
Subject to the termination fees set forth below, all costs and expenses
incurred in connection with the merger agreement, the related agreements and
the transactions contemplated thereby, including the fees and expenses of
advisers, accountants and legal counsel, will be paid by the party incurring
the expense.
Sandpiper's Termination Fee Obligations
In addition to any other remedies Digital Island may have, Sandpiper is
required to promptly pay Digital Island a fee of $5,000,000 (and an additional
fee of $25,000,000 if a company takeover proposal is consummated within twelve
months of the termination of the merger agreement) if any of the following
occur:
. If a company takeover proposal is made and not withdrawn before the
Sandpiper shareholder meeting, and the Sandpiper shareholders fail to
approve the merger agreement, and:
-- Digital Island terminates the merger agreement because the Sandpiper
board of directors has omitted, withdrawn or modified its
recommendation of the merger agreement or the merger in a manner
adverse to Digital Island or recommended, endorsed, accepted or agreed
to a company takeover proposal or has resolved to do any of the
foregoing; or
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-- Either Digital Island or Sandpiper terminates the merger agreement due
to the failure to obtain the required approval of Sandpiper
shareholders at the Sandpiper shareholder meeting.
. Sandpiper breaches a representation or warranty in the merger agreement
after a company takeover proposal has been made, the breach is not cured
within 20 business days following Sandpiper's receipt of written notice
of the breach, and Digital Island terminates the merger agreement on the
basis of the breach.
Digital Island's Termination Fee Obligations
In addition to any other remedies Sandpiper may have, Digital Island is
required to promptly pay Sandpiper a fee of $5,000,000 (and an additional fee
of $25,000,000 if a parent takeover proposal is consummated within twelve
months of the termination of the merger agreement) if any of the following
occur:
. If a parent takeover proposal is publicly announced and not publicly
withdrawn before the Digital Island stockholder meeting and the Digital
Island stockholders fail to approve the issuance of Digital Island common
stock in connection with the merger, and:
-- Sandpiper terminates the merger agreement because the Digital Island
board of directors' has omitted, withdrawn or modified its
recommendation of the merger agreement or the merger in a manner
adverse to Sandpiper or recommended, endorsed, accepted or agreed to a
parent takeover proposal or has resolved to do any of the foregoing; or
-- either Sandpiper or Digital Island terminates the merger agreement due
to the failure to obtain the required approval of Digital Island
stockholders at the Digital Island stockholder meeting.
. Digital Island breaches a representation or warranty in the merger
agreement after a parent takeover proposal has been made, the breach is
not cured within 20 business days following Digital Island's receipt of
written notice of the breach, and Sandpiper terminates the merger
agreement on the basis of the breach.
Extension, Waiver and Amendment of the Merger Agreement
Digital Island and Sandpiper may amend the merger agreement before
completion of the merger, but after the Sandpiper shareholders adopt the merger
agreement, no change may be made to the amount or type of consideration into
which Sandpiper common stock will be converted.
Either Digital Island or Sandpiper may, in writing, extend the other's time
for the performance of any of the obligations or other acts under the merger
agreement, waive any inaccuracies in the other's representations and warranties
and waive compliance by the other with any of the agreements or conditions
contained in the merger agreement.
Escrow and Indemnification
Under the merger agreement, Sandpiper shareholders are required to indemnify
and hold harmless Digital Island and certain related parties from and against
any and all losses, costs, damages, liabilities and expenses arising out of any
misrepresentation, breach of or default in any of the representations,
warranties, covenants and agreement given or made by Sandpiper in or pursuant
to the merger agreement, any schedule or exhibit to the merger agreement, any
agreement entered into by Sandpiper and Digital Island in connection with the
merger agreement and any certificate delivered to Digital Island in connection
with the merger.
To secure the indemnification obligation of Sandpiper shareholders, an
escrow fund comprised of ten percent (10%) of the shares of Digital Island
common stock issued in the merger to Sandpiper shareholders will be
established. No indemnification claim may be made by Digital Island until the
aggregate amount of indemnification claimed exceeds $2,000,000 and then only to
the extent that the aggregate amount claimed
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exceeds $2,000,000. If the merger is consummated, recovery from the escrow fund
will be the sole and exclusive remedy, absent fraud, intentional
misrepresentation or willful breach.
The shareholders' agent will have sole and exclusive power to act and bind
Sandpiper shareholders in all maters relating to the escrow. Initially, Thomas
R. Govreau will act as the shareholders' agent.
The escrow period will terminate on the following dates: (a) for matters
expected to be encountered and resolved in the audit of Digital Island's
financial statements for its fiscal year ending September 30, 2000, the earlier
of the first anniversary of the closing date or the date on which Digital
Island publishes the combined audited financial statements of Digital Island
and Sandpiper for such fiscal year and (b) for all other matters, the first
anniversary of the closing date. If necessary to satisfy any unsatisfied claims
relating to facts and circumstances existing prior to the expiration of the
escrow period, a portion of the escrow shares may be retained in the escrow
fund until such claims are resolved.
The indemnification provisions are set forth in the section entitled "Escrow
and Indemnification" in the merger agreement attached to this joint proxy
statement/prospectus in Annex A and the form of escrow agreement attached as an
exhibit to the merger agreement in Annex A. You should read these documents
carefully for a full understanding of the escrow and indemnification
provisions.
Related Agreements
Declaration of Registration Rights
Digital Island has agreed, by way of a declaration of registration rights
for the benefit of Sandpiper shareholders, to grant customary demand and
piggyback registration rights covering the shares of Digital Island common
stock to be issued in the merger, upon the same terms as Digital Island's
existing Amended and Restated Investors' Rights Agreement. The declaration of
registration rights provides that if at any time Digital Island shall determine
to register any of its equity securities for its own account or for the account
of certain other holders of Digital Island common stock in an underwritten
public offering, Digital Island must give notice to the holders and at the
holders' written request pursuant to proper notice, include in the registration
and underwriting all registrable securities, subject to limitation by the
managing underwriter of such registration. The rights of all of the holders
under the declaration of registration rights terminate on July 15, 2006. In
addition, the right of any holder to receive notification and to participate in
any registration terminates at such time as such holder (a) owns less than 1%
of the outstanding Digital Island common stock and (b) could sell all of the
registrable securities held by such holder in any one three-month period
pursuant to Rule 144 under the Securities Act. The form of declaration of
registration rights is attached as an exhibit to the merger agreement attached
as Annex A to this joint proxy statement/prospectus.
Escrow Agreement
Under the merger agreement, 10% of the total number of shares of Digital
Island common stock issuable in the merger will be placed in escrow and shall
be available to compensate Digital Island pursuant to the indemnification
obligations of the shareholders of Sandpiper. Only shares issuable to Sandpiper
shareholders who are parties to the shareholder agreement will be placed in the
escrow fund. The escrow fund shall be governed by the terms of the merger
agreement and the escrow agreement. The escrow agreement is attached as an
exhibit to the merger agreement attached as Annex A to this joint proxy
statement/prospectus.
Digital Island Voting Agreements and Irrevocable Proxies
Concurrently with the execution of the Merger agreement, stockholders of
Digital Island holding approximately 45% of the Digital Island common stock
issued and outstanding as of October 24, 1999 entered into a voting agreement,
pursuant to which the Digital Island stockholders agreed to vote their
respective shares of Digital Island common stock in favor of the issuance of
Digital Island common stock in the merger and in favor of any matter that could
reasonably be expected to facilitate the merger and the other transactions
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contemplated by the merger agreement, and against any "acquisition proposal"
(which is defined as any proposal, plan or offer to acquire all or any
substantial part of the business, assets or capital stock of Digital Island, or
to liquidate Digital Island or otherwise distribute to the stockholders of
Digital Island all or any substantial part of the business, assets or capital
stock of Sandpiper), or other transaction or occurrence which if publicly
proposed and offered to Sandpiper and its stockholders (or any of them) would
be the subject of an acquisition proposal, or a "frustrating transaction" (as
defined below). In addition, the Digital Island stockholders granted an
irrevocable proxy to the directors of Sandpiper, or any other designee of
Sandpiper, as the sole and exclusive attorneys and proxies to vote all shares
of Digital Island common stock held by the Digital Island stockholders in the
manner required by the voting agreement. The Digital Island Proxy is limited in
scope to these matters. The forms of voting agreement and the Digital Island
irrevocable proxy are attached as an exhibit to the merger agreement attached
as Annex A to this joint proxy statement/prospectus.
The voting agreement also provides that the Digital Island stockholders who
are party to the agreement shall not (a) sell, transfer, pledge, assign or
otherwise dispose of or encumber (including by gift), or consent to any such
transfer of, any shares of Digital Island common stock held by such Digital
Island stockholders or any interest therein or enter into any contract, option,
or other arrangement (including any profit sharing or other derivative
arrangement) with respect to the Digital Island common stock held by them with
any person other than pursuant to the merger agreement, unless prior to any
such transfer the transferee enters into and is bound by a voting agreement
with Sandpiper on terms substantially identical to the terms of the voting
agreement, or (b) enter into any voting arrangement, whether by proxy, voting
agreement or otherwise, in connection with, directly or indirectly, any
amendment of Digital Island's certificate of incorporation or bylaws or other
proposal, action or transaction involving Digital Island or any of its
subsidiaries, which amendment or other proposal, action or transaction would or
could reasonably be expected to prevent or materially impede, interfere with,
hinder or delay the consummation of the merger or any of the other transactions
contemplated by the merger agreement (collectively, "frustrating
transactions"), in each case until the earlier of (x) the effective time of the
merger or (y) the valid termination of the merger agreement in accordance with
its terms.
Sandpiper Shareholder Agreements and Irrevocable Proxies
Also concurrently with the execution of the Merger agreement, shareholders
of Sandpiper holding approximately 76% of the Sandpiper capital stock issued
and outstanding as of October 24, 1999 entered into a shareholder agreement,
pursuant to which the Sandpiper shareholders agreed to vote their respective
shares of Sandpiper capital stock in favor of the merger agreement, the merger
and the transactions contemplated thereby. The shareholder agreement has terms
substantially parallel to the Digital Island voting agreement. In connection
with the shareholder agreement, the Sandpiper shareholders who are party to the
agreement granted an irrevocable proxy to the directors of Digital Island, or
any other designee of Digital Island, with terms substantially parallel to the
Digital Island irrevocable proxy. The forms of shareholder agreement and
Sandpiper irrevocable proxy are attached as an exhibit to the merger agreement
attached as Annex A to this joint proxy statement/prospectus.
Market Standoff Agreements
In connection with the execution of the Digital Island voting agreement and
the Sandpiper shareholder agreement, the Digital Island stockholders and
Sandpiper shareholders party to those agreements entered into reciprocal market
standoff letter agreements providing that, from the time of the merger until
the earliest to occur of (a) the sale by Digital Island of Digital Island
common stock for its own account in a bona fide, firm commitment underwritten
public offering pursuant to a registration statement under the Securities Act,
(b) July 15, 2000, (c) the effective date of a merger of Digital Island with
or into another corporation in which fifty (50%) or more of the voting power of
Digital Island is disposed of, or the sale of all or substantially all of the
assets of Digital Island; or (d) such other date, and with such limitations, as
may be approved by unanimous vote of the board of directors of Digital Island,
the Digital Island stockholders and the Sandpiper shareholders agreed not
directly or indirectly to (x) issue, sell or otherwise dispose of or transfer
any shares of Digital Island common stock or any securities convertible into or
exchangeable or exercisable for Digital Island common stock, or (y) enter into
any swap or any other agreement or any transaction that transfers, in whole or
in part, directly or indirectly, the economic consequence of ownership of the
Digital Island common stock or any
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securities convertible into or exchangeable for the Digital Island stock. The
form of market standoff letter agreement is attached as an exhibit to the
merger agreement attached as Annex A to this joint proxy statement/prospectus.
Employment Agreements
Concurrently with the effectiveness of the merger, Digital Island and
Sandpiper plan to enter into employment agreements with Leo Spiegel, Andrew
Swart, and David Farber. Under the terms of the proposed employment agreements,
Mr. Swart and Mr. Farber each agree to remain with Digital Island for a period
of one year from the closing of the merger unless Digital Island terminates
them earlier. In Mr. Spiegel's case, he agrees to remain with Digital Island
until November 24, 2000 unless Digital Island terminates him earlier.
If the employee's employment is terminated by Digital Island "without cause"
prior to the end of the one-year period following the closing of the merger (or
prior to November 24, 2000 in Mr. Spiegel's case), then the employee will be
entitled to receive his base salary as a severance payment until the earlier of
(1) one year after the termination of his employment or (2) the date the
employee begins employment with another employer. If the employment is
terminated for "cause" prior to the end of the one-year period following the
closing of the merger (or prior to November 24, 2000 in Mr. Spiegel's case),
then the employee will be paid all salary, bonus and benefits earned through
the date of termination of employment, but nothing else.
As to Mr. Swart and Mr. Farber, "cause" shall mean the employee's
termination as a result of: (a) the employee's failure to perform the duties of
his position after receipt of a written warning; (b) engaging in serious
misconduct; (c) being convicted of a felony; (d) committing an act of fraud
against, or the misappropriation of property belonging to, Digital Island; or
(e) material breach of the employment agreement or the confidentiality or
proprietary information agreement between the employee and Digital Island.
In Mr. Spiegel's case, a termination for "cause" shall mean a termination
for any of the following reasons: (a) willful and repeated failure or refusal
to comply in any material respect with reasonable directives from the CEO which
are consistent with his job responsibilities and stature, provided that such
failure or refusal continues for 45 days after written notice is given to him
describing such failure or refusal in reasonable detail and stating the
company's intention to terminate his employment if such continues, (b)
conviction of a felony which has a material adverse impact on Digital Island or
(c) the intentional and known unauthorized use or disclosure of the
confidential proprietary information of Digital Island or any Digital Island
subsidiary, including Sandpiper after the merger, which has a material adverse
impact on Digital Island. Mr. Spiegel will also be entitled to severance as
provided for above if he terminates his employment for "good reason" before
November 24, 2000. A termination for "good reason" shall mean a termination by
him of his employment for any of the following reasons: (x) diminution of
responsibilities consistent with his position of president as agreed upon at
the time of merger, after providing notice to the CEO and allowing for
reasonable opportunity to cure the diminution of responsibilities; (y) change
in title or reporting relationship; or (z) involuntary relocation from his
principal place of employment in San Diego, California.
As of October 31, 1999, Mr. Spiegel held 858,917 shares of common stock,
issued pursuant to a restricted stock purchase agreement, which are subject to
repurchase by Sandpiper at $0.07 per share upon a termination of his
employment. Although his restricted stock purchase agreement provided that all
of these shares would vest free of this repurchase right upon certain events
such as the merger, in connection with his employment agreement described
above, Mr. Spiegel waived these acceleration rights and instead agreed that 50%
of his unvested shares would vest on March 24, 2000 and the balance on November
24, 2000, unless he terminates his employment without "good reason" or is
terminated by Sandpiper for "cause" prior to vesting. This accelerated vesting
schedule, together with the accelerated vesting of common stock of certain
other Sandpiper executives, was approved by the Sandpiper shareholders pursuant
to Section 280G of the Internal Revenue Code on December 8, 1999.
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Mr. Swart and Mr. Farber will each be granted a stock option for 150,000
shares of Digital Island's common stock following the closing of the merger.
The option will vest over 50 months of successive employment with Digital
Island. In the event of a change in control following the closing of the
merger, the employee's option will accelerate in full unless the acquiring
company assumes the option. If the employee's employment is terminated by the
employee or by the acquiring company upon or within eighteen (18) months
following a change in control but more than twelve months (12) after the date
the employee commences employment with Digital Island, the employee's option
will immediately vest and become exercisable for all the shares at the time
subject to that option.
A "change in control" shall mean any of the following transactions effecting
a change in ownership or control of Digital Island:
(a) a merger, consolidation or reorganization approved by the Digital
Island's shareholders in which securities representing more than fifty
percent (50%) of the total combined voting power of Digital Island's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(b) any shareholder-approved transfer or other disposition of all or
substantially all of Digital Island's assets in complete liquidation or
dissolution of Digital Island, or
(c) the acquisition, directly or indirectly by any person or related
group of persons (other than Digital Island or a person that directly or
indirectly controls, is controlled by, or is under common control with,
Digital Island), of beneficial ownership (within the meaning of Rule 13d-3
of the Securities Exchange Act of 1934, as amended) of securities
possessing more than fifty percent (50%) of the total combined voting power
of Digital Island's outstanding securities pursuant to a tender or exchange
offer made directly to Digital Island's shareholders.
The employment agreements contain non-competition provisions that require
each employee during his employment and continuing until the latter of (1) one
year after the Closing Date (or November 24, 2000 in Mr. Spiegel's case) or (2)
one year after the date of termination, to not render any services to any
content distribution company that operates networks which serve content in one
or two ways to multiple devices distributed throughout deployed networks of
distributed servers (including without limitation Adero, Akamai, Real Broadcast
Networks, Exodus, AT&T) in the United States or throughout the world.
Non-Disclosure Agreements
Concurrently with the execution of employment agreements, Leo Spiegel,
Andrew Swart, and David Farber will be required to execute non-disclosure
agreements with Digital Island. The non-disclosure agreements require the
employee:
(i) during his employment and thereafter, not to divulge or disclose
any confidential information of Digital Island without the written consent
of Digital Island; and
(ii) during his employment and for one year thereafter, not to engage,
individually or on behalf of other persons, in soliciting any employees or
consultants of Digital Island to leave their employment with Digital Island
or any affiliate, in order to accept a position of any kind with another
employer.
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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements have been
prepared to give effect to the merger, to be accounted for using the purchase
method of accounting. These financial statements reflect certain assumptions
deemed probable by management regarding the Merger (e.g., that share
information used in the unaudited pro forma information approximates actual
share information at the effective date). No adjustments to the unaudited pro
forma combined financial statements have been made to account for different
possible results in connection with the foregoing, as management believes that
the impact on such information of varying outcomes, individually or in the
aggregate, would not be material.
The unaudited pro forma combined balance sheet as of September 30, 1999
gives effect to the merger as if it had occurred on September 30, 1999, and
combines the historical consolidated balance sheet of Digital Island and the
historical unaudited consolidated balance sheet of Sandpiper as of such date.
The unaudited pro forma combined statement of operations for the year ended
September 30, 1999 combines the historical consolidated statement of operations
of Digital Island for the year ended September 30, 1999 with the unaudited
historical consolidated results of operations of Sandpiper for the twelve-month
period ended September 30, 1999. The historical pro forma information assumes
that for purposes of reporting combined information, the historical
consolidated financial information of Sandpiper will be restated to conform
Sandpiper's fiscal year-end of December 31 to Digital Island's fiscal year-end
of September 30.
The total purchase price of approximately $983.5 million consists of
approximately 24.5 million shares of Digital Island's common stock with an
estimated fair value of $856.6 million, 5.0 million vested and unvested stock
options with an estimated fair value of $111.7 million, and estimated direct
transaction costs of approximately $15.3 million. The fair value of Digital
Island's common stock was determined as the average market price from October
21, 1999 to October 27, 1999, which includes two days prior and two days
subsequent to the public announcement of the merger. The fair value of the
common stock options was estimated using the Black Scholes model with the
following weighted-average assumptions: risk-free interest rate of 5.8%,
expected life of 4 years, expected dividend rate of 0%, and volatility of 80%.
The total purchase price is expected to be allocated to intangible assets,
including goodwill, and amortized over five years. In addition, it is expected
that following the merger, the combined company will incur additional costs,
which cannot currently be estimated, associated with the integration of the
operations of the two companies.
The unaudited pro forma combined financial statements are based on estimates
and assumptions. These estimates and assumptions are preliminary and have been
made solely for purposes of developing this pro forma information. Unaudited
pro forma combined financial information is presented for illustrative purposes
only and is not necessarily indicative of the combined financial position or
results of operations of future periods or the results that actually would have
been realized had the entities been a single entity during this period. These
unaudited pro forma combined financial statements are based upon the respective
historical consolidated financial statements of Digital Island and Sandpiper
and notes thereto, included elsewhere in this joint proxy statement/prospectus
and should be read in conjunction with those statements and the related notes.
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DIGITAL ISLAND, INC. AND SANDPIPER NETWORKS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(in thousands)
September 30, 1999
<TABLE>
<CAPTION>
Digital
Island, Sandpiper Pro forma Pro forma
Inc. Networks, Inc. adjustments combined
--------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents............. $ 43,315 $ 10,853 $ -- $ 54,168
Investments.............. 31,691 -- -- 31,691
Accounts receivable,
net..................... 3,557 121 -- 3,678
Restricted cash.......... 763 -- -- 763
Prepaid expenses and
other................... 1,825 296 -- 2,121
--------- -------- --------- ---------
Total current assets... 81,151 11,270 -- 92,421
Property and equipment,
net....................... 25,273 6,047 -- 31,320
Intangible assets.......... -- -- 786,866 (1) 786,866
Other assets............... 1,224 434 -- 1,658
--------- -------- --------- ---------
Total assets......... $ 107,648 $ 17,751 $ 786,866 $ 912,265
========= ======== ========= =========
LIABILITIES, REDEEMABLE
PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY
(DEFICIT)
-----------------------
Current liabilities:
Bank borrowings.......... $ 801 $ 39 $ -- $ 840
Capital lease
obligations............. 3,916 1,011 -- 4,927
Accounts payable......... 8,621 2,015 -- 10,636
Accrued liabilities...... 4,931 394 -- 5,325
Accrued transaction
costs................... -- -- 15,300 (1) 15,300
Cash overdraft........... 3,058 -- -- 3,058
Deferred revenue......... 318 -- -- 318
--------- -------- --------- ---------
Total current
liabilities........... 21,645 3,459 15,300 40,404
Bank borrowings, less
current portion........... 314 45 -- 359
Capital lease obligations,
less current portion...... 6,061 1,621 -- 7,682
Deferred revenue........... 410 -- -- 410
--------- -------- --------- ---------
Total liabilities...... 28,430 5,125 15,300 48,855
========= ======== ========= =========
Redeemable convertible
preferred stock........... -- 28,101 (28,101) --
Stockholders' equity
(deficit):
Convertible preferred
stock................... -- -- -- --
Common stock............. 36 4,413 25 (1) 4,474
Additional paid-in
capital................. 156,791 -- 996,358 (1) 1,153,149
Deferred compensation.... (4,033) (3,572) -- (7,605)
Stockholder note
receivable.............. (514) -- -- (514)
Accumulated deficit...... (73,062) (16,316) (196,716)(1) (286,094)
--------- -------- --------- ---------
Total stockholders'
equity (deficit)...... 79,218 (15,475) 799,667 863,410
--------- -------- --------- ---------
Total liabilities,
redeemable preferred
stock, and
stockholders' equity
(deficit)........... $ 107,648 $ 17,751 $ 786,866 $ 912,265
========= ======== ========= =========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements
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DIGITAL ISLAND, INC. AND SANDPIPER NETWORKS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(in thousands, except share and per share data)
Year Ended September 30, 1999
<TABLE>
<CAPTION>
Digital Sandpiper Pro forma Pro forma
Island, Inc. Networks, Inc. adjustments combined
------------ -------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues................ $ 12,431 $ 249 $ $ 12,680
Costs and expenses:
Cost of revenue....... 29,496 3,346 32,842
Sales and marketing... 16,010 4,592 20,602
Product development... 6,357 2,357 8,714
General and
administrative....... 9,848 1,731 11,579
Amortization of
intangible assets.... 196,716(1) 196,716
Stock compensation
expense.............. 3,207 581 3,788
---------- ---------- -------- ----------
Total costs and
expenses........... 64,918 12,607 196,716 274,241
---------- ---------- -------- ----------
Loss from operations.... (52,487) (12,358) (196,716) (261,561)
---------- ---------- -------- ----------
Interest income, net.... 1,551 286 1,837
---------- ---------- -------- ----------
Loss before income
taxes.................. (50,936) (12,072) (196,716) (259,724)
Provision for income
taxes.................. 2 3 5
---------- ---------- -------- ----------
Net loss................ $ (50,938) $ (12,075) (196,716) $ (259,729)
Basic and diluted net
loss per share......... $ (4.58) $ (1.67) $ (14.15)
Weighted average shares
outstanding used in per
share calculation...... 11,127,462 7,227,296 18,354,758
Pro forma basic and
diluted net loss per
share.................. $ (2.02) $ (0.59) $ (5.70)
Weighted average shares
outstanding used in per
share calculation...... 25,233,080 20,335,742 45,568,822
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) The total purchase price of approximately $983.5 million consists of
approximately 24.5 million shares of Digital Island's common stock with an
estimated fair value of $856.6 million, 5.0 million vested and unvested stock
options with an estimated fair value of $111.7 million, and estimated direct
transaction costs of approximately $15.3 million. The total purchase price is
expected to be allocated to intangible assets, including goodwill, and
amortized over five years. One year of estimated amortization of goodwill and
other intangible assets is included. The transaction costs consist of fees for
investment bankers, attorneys, accountants, financial printing, and other
related costs.
The following table reconciles the number of shares used in the pro forma
loss per share computations for year ended September 30, 1999 to the numbers
set forth in Digital Island's and Sandpiper's historical statements of
operations:
<TABLE>
<CAPTION>
Shares used in basic and diluted per share computation:
-------------------------------------------------------
<S> <C>
Historical Sandpiper.............................................. 6,737,481
Exchange ratio.................................................... 1.0727
----------
7,227,296
Historical Digital Island......................................... 11,127,462
----------
Combined.......................................................... 18,354,758
==========
Historical pro forma Sandpiper(1)................................. 18,957,530
Exchange ratio.................................................... 1.0727
----------
20,335,742
Historical pro forma Digital Island(1)............................ 25,233,080
----------
Pro forma combined................................................ 45,568,822
==========
</TABLE>
- --------
(1) Historical pro forma Digital Island and Sandpiper weighted average share
amounts are computed using the weighted average number of common shares
outstanding, adjusted to include the pro forma effects of the conversion of
preferred stock to common stock as if the conversion had occurred on October
1, 1998, or at the date of original issuance, if later.
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<PAGE>
COMPARISON OF THE RIGHTS OF STOCKHOLDERS OF DIGITAL ISLAND
AND SHAREHOLDERS OF SANDPIPER
The rights of Sandpiper's shareholders are governed by its amended and
restated articles of incorporation, its amended and restated bylaws and the
laws of the State of California. The rights of Digital Island's stockholders
are governed by its restated certificate of incorporation, its amended and
restated bylaws and the laws of the State of Delaware. After the completion of
the merger, Sandpiper shareholders will become Digital Island stockholders and
will be governed by Digital Island's restated certificate of incorporation, its
amended and restated bylaws and the laws of the State of Delaware.
The following is a summary of the material differences between the rights of
holders of Digital Island common stock and the rights of holders of Sandpiper
capital stock at the date hereof. These differences arise from differences
between the Delaware General Corporation Law, or DGCL, and the California
Corporations Code, or CCC, and between the respective corporate charters and
bylaws of Digital Island and Sandpiper. This summary is not a complete
comparison of rights that may be of interest to you, and you should therefore
read the full text of the states' corporate statutes and the respective
corporate charters and bylaws of Digital Island and Sandpiper. For information
as to how these documents may be obtained, see "Where You Can Find More
Information" on page 159.
Comparison of Authorized and Outstanding Capital Stock
Digital Island
The authorized capital stock of Digital Island consists of 100,000,000
shares of common stock, par value $0.001 per share, and 10,000,000 shares of
preferred stock, par value $0.01 per share. As of November 29, 1999, 35,999,068
shares of Digital Island common stock were outstanding and no shares of Digital
Island preferred stock were outstanding.
Sandpiper
The authorized capital stock of Sandpiper consists of 40,000,000 shares of
common stock par value $0.001 per share, 9,885,981 shares of Series A preferred
stock par value of $0.001 per share, and 6,026,694 shares of Series B preferred
stock par value $0.001 per share. As of December 3, 1999, there were 7,005,236
shares of common stock outstanding, 9,607,141 shares of Series A preferred
stock outstanding, and 4,820,628 shares of Series B preferred stock
outstanding.
Comparison of Rights of Common Stock
Digital Island
Holders of common stock are entitled to one vote per share. The holders of
common stock are entitled to receive dividends when and as declared by the
board of directors out of funds legally available for the payment of dividends.
The holders of common stock do not have any cumulative voting rights,
preemptive rights, conversion rights, redemption rights or similar 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 Digital Island, if any, remaining after the payment of all liabilities to
its creditors and on the liquidation preference payable to any outstanding
class or series of preferred stock. The rights, preferences and privileges of
holders of common stock are subject to the rights of any series of preferred
stock that may be issued in the future.
Sandpiper
Holders of Sandpiper common stock are entitled to one vote per share.
Subject to the preferences of the holders of preferred stock, the holders of
common stock are entitled to receive dividends as may be declared from time to
time by the Sandpiper board of directors. The holders of common stock have no
preemptive rights, conversion rights, redemption rights or other rights.
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Comparison of Rights and Preferences of Preferred Stock
Digital Island Preferred Stock
There are currently no shares of preferred stock outstanding, and Digital
Island has no current plans to issue shares of preferred stock. However, if the
board of directors of Digital Island issues preferred stock in the future, this
may have the effect of delaying or preventing a change in control of Digital
Island, may discourage bids for Digital Island's 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.
Sandpiper Preferred Stock
When the merger becomes effective, the holders of Sandpiper preferred stock
will become holders of Digital Island common stock. By approving the merger,
the holders of preferred stock will relinquish the following rights, privileges
and preferences:
Dividend Preference. Holders of Sandpiper preferred stock are entitled to
dividends when and as declared by the Sandpiper board of directors.
Liquidation Preference. In the event of a liquidation, dissolution or
winding up of Sandpiper, the holders of Series A preferred stock are entitled
to receive $0.70 per share and the holders of Series B preferred stock are
entitled to receive $4.46 per share, plus any declared but unpaid dividends on
the shares of preferred stock, prior and in preference to any distribution of
assets or funds of Sandpiper to the holders of common stock.
After the liquidation preference has been paid to the holders of preferred
stock, any remaining assets of Sandpiper legally available for distribution
will be distributed in the following order: (a) on a pro rata basis among the
holders of common stock until they have received $0.70 per share, plus all
declared and unpaid dividends; (b) on a pro rata basis among the holders of
common stock and Series A preferred stock (on an as-converted basis), until
they have received a total of $4.46 per share, plus all declared and unpaid
dividends, and (c) on a pro rata basis among holders of common stock and
preferred stock (on an as-converted basis).
Conversion Rights. Holders of preferred stock may convert their stock into
shares Sandpiper common stock at any time.
Automatic Conversion. Each share of preferred stock automatically converts
into a share of Sandpiper common stock upon the closing of an initial public
offering at a price per share of not less than $5.00 per share and with an
aggregate offering price of at least $10,000,000.
Voting Rights. The holders of preferred stock are entitled to the number of
votes equal to the number of shares of common stock that the preferred stock is
convertible into as of the record date. The holders of preferred stock have the
same voting rights as the holders of common stock, except with respect to the
election of directors or as otherwise required by the Sandpiper articles of
incorporation or by law.
Election of Directors. The holders of preferred stock, voting together as a
single class, are entitled to elect 3 members to the Sandpiper board of
directors. The holders of common stock are entitled to elect all remaining
members to the board of directors.
Redemption. Sandpiper cannot redeem the preferred stock, unless, after
November 17, 2004, the holders of a majority of the preferred stock then
outstanding demand that Sandpiper repurchase all outstanding shares of
preferred stock for their original purchase price.
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<PAGE>
Protective Provisions. As long as 500,000 shares of preferred stock remain
outstanding, Sandpiper must obtain the approval of the holders of preferred
stock convertible into at least a majority of the common stock into which all
outstanding shares of preferred stock are convertible, before taking any of the
following acts:
. enter into a merger or reorganization (except with a wholly owned
subsidiary), a sale of control transaction or sell or otherwise dispose
of all or substantially all of its assets;
. change the authorized number of shares of its common or preferred stock;
. change the size of the board of directors;
. purchase or redeem any shares of common stock;
. declare or pay any dividends; or
. permit a subsidiary to sell shares of stock to a third party.
In addition to any class vote required by law or the Sandpiper articles of
incorporation, as long as 500,000 shares of each of the Series A preferred
stock or Series B preferred stock remain outstanding, Sandpiper must obtain the
approval of a majority of the holders of the outstanding shares of the affected
class of preferred stock before Sandpiper may take any of the following acts:
. alter or change the rights, preferences or privileges of the Series A
Preferred Stock or the Series B Preferred Stock; or
. create any new class or series of stock or convertible securities having
rights, preferences or privileges superior to or on parity with the
shares of the Series A preferred stock or Series B preferred stock.
Also, in addition to any class vote required by law or the Sandpiper
articles of incorporation, as long as 500,000 shares of Series B preferred
stock remain outstanding, Sandpiper must obtain the approval of a majority of
the outstanding shares of Series B preferred stock before it may take any
action that results in any acquisition if the terms of the acquisition do not
provide for certain distributions to the holders of Series B preferred stock
and a certain number of significant holders of Series B preferred stock have
voted against such acquisition.
A liquidation, dissolution or winding up of Sandpiper includes a merger or
other form of corporate reorganization, or a sale of all or substantially all
of the assets of Sandpiper in which the shareholders of Sandpiper do not own a
majority of the outstanding shares of the surviving corporation.
Contractual Rights. Certain contractual rights presently possessed by
holders of Sandpiper preferred stock will cease to exist after the merger.
These rights include information rights, registration rights, rights of
representation on the Sandpiper board of directors, rights to attend meetings
of the Sandpiper board of directors and other rights granted by Sandpiper in
connection with its capital financing.
Comparison of Stockholder Rights Under Delaware and California Law
Stockholder Approval of Certain Business Combinations
Delaware. Digital Island is subject to Section 203 of the DGCL, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless:
. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. 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 (a) by persons who are
directors and also officers and (b) by
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employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer; or
. on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combinations to include:
. any merger or consolidation involving the corporation and any interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
Although Digital Island may elect not to be governed by Section 203, the
board of directors intends that the company be governed by Section 203. Digital
Island believes that most Delaware corporations have availed themselves of the
protections of the statute and have not opted out of Section 203. Digital
Island believes that Section 203 will encourage any potential acquiror to
negotiate with its board of directors. Section 203 also might have the effect
of limiting the ability of a potential acquiror to make a two-tiered bid for
Digital Island in which all stockholders would not be treated equally.
Shareholders should note, however, that the application of Section 203 to
Digital Island will give the board the power to reject a proposed business
combination, even though a potential acquiror may be offering a substantial
premium for the shares of Digital Island stock over the then-current market
price. Section 203 would also discourage certain potential acquirors unwilling
to comply with its provisions.
California. California law requires that holders of common stock receive
common stock in a merger of the corporation with the holder of more than fifty
percent (50%) but less than ninety percent (90%) of the target's common stock
or its affiliate unless all of the target company's shareholders consent to the
transaction. This provision of California law may have the effect of making a
"cash-out" merger by a majority shareholder more difficult to accomplish.
Although Delaware law does not parallel California law in this respect, under
some circumstances Section 203 does provide similar protection to shareholders
against coercive two-tiered bids for a corporation in which the stockholders
are not treated equally.
Corporate Charter and Bylaw Provisions
The Digital Island certificate of incorporation and bylaws include
provisions that may have the effect of discouraging, delaying or preventing a
change of 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.
Unless discussed below, Sandpiper's articles of incorporation and bylaws
contain no comparable provisions.
Classified Board of Directors. A classified board is one on which a certain
number, but not all, of the directors are elected on a rotating basis each
year. Delaware law permits a corporation to have a classified board of
directors, where the directors can be divided into as many as three classes
with staggered terms of office, with only one class of directors standing for
election each year.
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<PAGE>
Digital Island's certificate of incorporation and bylaws provide for its
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. The Sandpiper charter and bylaws do not
provide for a classified board.
Supermajority Voting Requirements. Digital Island's certificate of
incorporation requires the approval of the holders of at least 66 2/3% of the
combined voting power of our stockholders to effect certain amendments to the
certificate of incorporation with respect to the bylaws, directors, stockholder
meetings and indemnification. Digital Island's bylaws may be amended by either
a majority of the board of directors, or by stockholders the approval of at
least 66 2/3% of the outstanding shares of stock entitled to vote.
Special Meetings of Stockholders. Digital Island's bylaws provide that
special meetings of stockholders of Digital Island may be called only by the
board of directors, or by the Chairman of its board of directors or our
President. The bylaws of Sandpiper provide that special meetings of the
shareholders may be called only by the board of directors, by the chairman of
the board, by the president, or by one or more shareholders entitled to cast
10% or more of the votes at that meeting.
No Stockholder Action by Written Consent. Digital Island's 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. The bylaws of Sandpiper allow shareholder action by written
consent.
Notice Procedures. Digital Island's bylaws establish advance notice
procedures with regard to all stockholder proposals to be brought before
meetings of stockholders, including proposals relating to the nomination of
candidates for election as directors, the removal of directors and amendments
to Digital Island's 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 Digital Island's Secretary not less than
120 days prior to the meeting. The notice must contain certain information
specified in the bylaws. The bylaws of Sandpiper require that advance notice
regarding the subject of any special meeting called by any qualified
shareholder or shareholders, be delivered to the chairman of the board, the
president, any vice president or the secretary of the corporation at least 60
days before any such meeting.
Other Anti-Takeover Provisions. See Digital Island's "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.
Removal of Directors. Under Delaware law, any director or the entire board
of directors (in circumstances where the corporation does not have a classified
board or cumulative voting) may be removed with or without cause with the
approval of a majority of the outstanding shares entitled to vote at an
election of directors. Because Digital Island has a classified board, the
directors may only be removed for cause.
California. Under California law, any director or the entire board of
directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote; however, no individual
director may be removed (unless the entire board is removed) if the number of
votes cast against such removal would be sufficient to elect the director under
cumulative voting.
Indemnification and Limitation of Liability
California and Delaware have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with certain exceptions, a
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<PAGE>
corporation to adopt charter provisions eliminating the liability of a director
to the corporation or its shareholders for monetary damages for breach of the
director's fiduciary duty. There are nonetheless certain differences between
the laws of the two states respecting indemnification and limitation of
liability which are summarized below.
Delaware. The Digital Island certificate of incorporation eliminates the
liability of directors to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permissible under Delaware law, as such law exists currently and as it may be
amended in the future. Under Delaware law, such provision may not eliminate or
limit director monetary liability for: (a) breaches of the director's duty of
loyalty to the corporation or its stockholders; (b) acts or omissions not in
good faith or involving intentional misconduct or knowing violations of law;
(c) the payment of unlawful dividends or unlawful stock repurchases or
redemptions; or (d) transactions in which the director received an improper
personal benefit. Such limitation of liability provisions also may not limit a
director's liability for violation of, or otherwise relieve us or our directors
from the necessity of complying with federal or state securities laws, or
affect the availability of nonmonetary remedies such as injunctive relief or
rescission.
California. The Sandpiper Articles of Incorporation eliminate the liability
of directors to the fullest extent permissible under California law. California
law does not permit the elimination of monetary liability where such liability
is based on: (a) acts or omissions or intentional misconduct or knowing and
culpable violation of law; (b) acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders or that
involve the absence of good faith on the part of the director; (c) receipt of
an improper personal benefit; (d) acts or omissions that show reckless
disregard for the director's duty to the corporation or its shareholders, where
the director in the ordinary course of performing a director's duties should be
aware of a risk of serious injury to the corporation or its shareholders; (e)
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the corporation and its
shareholders; (f) transactions between the corporation and a director who has a
material financial interest in such transaction; and (g) liability for improper
distributions, loans or guarantees.
Director Indemnification Compared. California law requires indemnification
when the individual has defended successfully the action on the merits while
Delaware law requires indemnification whether there has been a successful
defense on the merits or otherwise. Delaware law generally permits
indemnification of expenses, including attorneys' fees, actually and reasonably
incurred in the defense or settlement of a derivative or third-party action,
provided there is a determination by a majority vote of disinterested
directors, by independent legal counsel or by a majority vote of the
stockholders that the person seeking indemnification acted in good faith and in
a manner reasonably believed to be in best interests of the corporation.
Without court approval, however, no indemnification may be made in respect of
any derivative action in which such person is adjudged liable for negligence or
misconduct in the performance of his or her duty to the corporation. Delaware
law requires indemnification of expenses when the individual being indemnified
has successfully defended any action, claim, issue or matter therein, on the
merits or otherwise. Expenses incurred by an officer or director in defending
an action may be paid in advance, under Delaware law and California law, if
such director or officer undertakes to repay such amounts if it is ultimately
determined that he or she is not entitled to indemnification. In addition, the
laws of both states authorize a corporation's purchase of indemnity insurance
for the benefit of its officers, directors, employees and agents whether or not
the corporation would have the power to indemnify against the liability covered
by the policy.
A California corporation can provide rights to indemnification beyond those
provided under California law to the extent such additional indemnification is
authorized in the corporation's articles of incorporation. If such
indemnification is authorized, rights to indemnification may be provided
pursuant to side agreements or by-law provisions which make mandatory the
permissive indemnification provided by California law. Sandpiper's articles of
incorporation permit indemnification beyond that expressly mandated by
California law and limit director monetary liability to the extent permitted by
California law.
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Delaware law also permits a Delaware corporation to provide indemnification
in excess of that provided by statute. In contrast to California law, Delaware
law does not require authorizing provisions in the certificate of
incorporation. Limitations on indemnification may be imposed by a court based
on principles of public policy.
Inspection of Shareholder List
Both California and Delaware law allow any shareholder to inspect the
shareholder list for a purpose reasonably related to such person's interest as
a shareholder. California law provides, in addition, for an absolute right to
inspect and copy the corporation's shareholder list by persons holding an
aggregate of five percent (5%) or more of the corporation's voting shares, or
shareholders holding an aggregate of one percent (1%) or more of such shares
who have made certain filings with the Securities and Exchange Commission.
Delaware law also provides for inspection rights as to a list of stockholders
entitled to vote at a meeting within a ten day period preceding a stockholders'
meeting for any purpose germane to the meeting. However, Delaware law contains
no provisions comparable to the absolute right of inspection provided by
California law to certain large shareholders.
Dividends and Repurchases of Shares
California law dispenses with the concepts of par value of shares as well as
statutory definitions of capital, surplus and the like. The concepts of par
value, capital and surplus exist under Delaware law.
Delaware. Delaware law permits a corporation to declare and pay dividends
out of surplus or, if there is no surplus, out of net profits for the fiscal
year in which the dividend is declared and/or for the preceding fiscal year as
long as the amount of capital of the corporation following the declaration and
payment of the dividend is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. In addition, Delaware law generally
provides that a corporation may redeem or repurchase its shares only if the
capital of the corporation is not impaired and such redemption or repurchase
would not impair the capital of the corporation.
California. Under California law, a corporation may not make any
distribution to its shareholders unless either: (a) the corporation's retained
earnings immediately prior to the proposed distribution equal or exceed the
amount of the proposed distribution; or (b) immediately after giving effect to
such distribution, the corporation's assets (exclusive of goodwill, capitalized
research and development expenses and deferred charges) would be at least equal
to 1 1/4 times its liabilities (not including deferred taxes, deferred income
and other deferred credits), and the corporation's current assets would be at
least equal to its current liabilities (or 1 1/4 times its current liabilities
if the average pre-tax and pre-interest expense earnings for the preceding two
fiscal years were less than the average interest expense for such years). Such
tests are applied to California corporations on a consolidated basis.
Shareholder Voting
Both California and Delaware law generally require that a majority of the
shareholders of both acquiring and target corporations approve statutory
mergers.
Delaware. Delaware law does not require a stockholder vote of the surviving
corporation in a merger (unless the corporation provides otherwise in its
certificate of incorporation) if: (a) the merger agreement does not amend the
existing certificate of incorporation; (b) each share of stock of the surviving
corporation outstanding immediately before the effective date of the merger is
an identical outstanding share after the merger and; (c) either no shares of
common stock of the surviving corporation and no shares, securities or
obligations convertible into such stock are to be issued or delivered under the
plan of merger, or the authorized unissued shares or shares of common stock of
the surviving corporation to be issued or delivered under the plan of merger
plus those initially issuable upon conversion of any other shares, securities
or obligations to be
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issued or delivered under such plan do not exceed twenty percent (20%) of the
shares of common stock of such constituent corporation outstanding immediately
prior to the effective date of the merger.
California. California law contains a similar exception to its voting
requirements for reorganizations where shareholders or the corporation itself,
or both, immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than 83.3% (or five-sixths)
of the voting power of the surviving or acquiring corporation or its parent
entity.
Appraisal Rights
Under both California and Delaware law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal rights which may entitle the dissenting
shareholder to receive cash equal to the fair market value of his or her shares
in lieu of the consideration he or she would otherwise receive in the
transaction.
Delaware. Under Delaware law, such fair market value is determined exclusive
of any element of value arising from the accomplishment or expectation of the
merger or consolidation, and such appraisal rights are not available: (a) with
respect to the sale, lease or exchange of all or substantially all of the
assets of a corporation; (b) with respect to a merger or consolidation by a
corporation the shares of which are either listed on a national securities
exchange or are held of record by more than 2,000 holders if such stockholders
receive only shares of the surviving corporation or shares of any other
corporation that are either listed on a national securities exchange or held of
record by more than 2,000 holders, plus cash in lieu of fractional shares of
such corporations; or (c) to stockholders of a corporation surviving a merger
if no vote of the stockholders of the surviving corporation is required to
approve the merger under Delaware law.
California. The limitations on the availability of appraisal rights under
California law are different from those under Delaware law. Shareholders of a
California corporation whose shares are listed on a national securities
exchange generally do not have such appraisal rights unless the holders of at
least five percent (5%) of the class of outstanding shares claim the right or
the corporation or any law restricts the transfer of such shares. Appraisal
rights are also unavailable if the shareholders of a corporation or the
corporation itself, or both, immediately prior to the merger will own
immediately after the reorganization equity securities constituting more than
83.3% (or five-sixths) of the voting power of the surviving or acquiring
corporation or its parent entity. California law generally affords appraisal
rights in sale of asset reorganizations.
Dissolution
Under California law, shareholders holding fifty percent (50%) or more of
the total voting power may authorize a corporation's dissolution, with or
without the approval of the corporation's board of directors, and this right
may not be modified by the articles of incorporation. Under Delaware law,
unless the board of directors approves the proposal to dissolve, the
dissolution must be unanimously approved by all the stockholders entitled to
vote thereon. Only if the dissolution is initially approved by the board of
directors may the dissolution be approved by a simple majority of the
outstanding shares of the corporation's stock entitled to vote. In the event of
such a board-initiated dissolution, Delaware law allows a Delaware corporation
to include in its certificate of incorporation a supermajority (greater than a
simple majority) voting requirement in connection with dissolutions. Digital
Island's certificate of incorporation contains no such supermajority voting
requirement.
Interested Director Transactions
Under both California and Delaware law, certain contracts or transactions in
which one or more of a corporation's directors has an interest are not void or
voidable because of such interest, provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain minor exceptions, the conditions are
similar under California and Delaware law.
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Shareholder Derivative Suits
California law provides that a shareholder bringing a derivative action on
behalf of a corporation need not have been a shareholder at the time of the
transaction in question, provided that certain tests are met. Under Delaware
law, a stockholder may bring a derivative action on behalf of the corporation
only if the stockholder was a stockholder of the corporation at the time of the
transaction in question or if his or her stock thereafter devolved upon him or
her by operation of law. California law also provides that the corporation or
the defendant in a derivative suit may make a motion to the court for an order
requiring the plaintiff shareholder to furnish a security bond. Delaware does
not have a similar bonding requirement.
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BUSINESS OF DIGITAL ISLAND
Overview
Digital Island offers a global network and related services for companies
that are using the Internet to deploy key business applications worldwide.
Digital Island's services make it easier for companies to globalize their
operation and to provide a higher quality of service and more functions than in
the public Internet. Digital Island targets corporations that are increasingly
relying on the Internet to conduct business but are constrained by its
unreliability, slow performance and limited range of functions. Digital
Island's global private network and expert services enable customers to
effectively deploy and manage global applications by combining the reliability,
performance and broad range of functions available in private intranets
operated by individual companies for their own users, with the global access of
the public Internet. Digital Island also offers service level guarantees,
customized billing, security services to protect the integrity of data
transmissions, network management and other high quality services designed to
improve the applications deployed on Digital Island's network. Digital Island's
customers, which include multinational corporations such as Autodesk, Cisco
Systems, E*TRADE Group and National Semiconductor, use Digital Island's
services and proprietary technology to facilitate the deployment of a wide
variety of electronic commerce applications, including online marketing and
sales customer service, software, document and multimedia distribution and
online training. As of September 30, 1999, Digital Island had contracts with
111 customers, of which 83 were deployed and generating revenues.
Digital Island developed its global network to help companies globalize
their applications. It operates Web sites and Internet applications, manages
computer servers and maintains networking equipment for its customers in its
state-of-the-art network data centers, and provides network management
expertise to its customers for their own network data centers. The business
applications delivered through Digital Island's network services are accessed
globally in the same way as any Web site, but with a significant difference:
these business applications are highly available and are designed to operate
substantially faster and with a greater range of functions than sites that rely
solely on the public Internet.
Digital Island's global network consists of a centralized high-speed private
network which acts as a backbone connecting five strategically located data
centers in Hong Kong, Honolulu, London, New York City and Santa Clara,
California. This core network architecture connects over dedicated lines
directly to local Internet service providers in 21 countries. This enables
Digital Island's customers to transmit Internet traffic seamlessly over Digital
Island's network with dedicated capacity and to connect directly to
international users through local Internet service providers. Digital Island
also helps its customers distribute content over the Internet by replicating
(mirroring) and storing (caching) their applications in multiple locations
close to their end-users. This allows Digital Island's customers to benefit
from the lower overall cost of data storage versus transport and to provide a
better online experience for their end-users. For example, Digital Island Local
Content Managers enable Digital Island to help customers store text, graphics,
software, audio/video streams and other bandwidth intensive files which are
repeatedly accessed in specific geographic regions.
Digital Island's services are designed to allow customers to outsource
Internet activities to Digital Island, thereby transferring to Digital Island
the burden of attracting and retaining scarce technical staff and adopting
continuously changing technologies, while lowering their operating costs and
speeding deployment.
Industry Background
The Internet continues to experience rapid growth and expansion as an
important global medium for communications and electronic business.
International Data Corporation, known as IDC, has estimated that the total
number of Internet users in the world reached approximately 69 million in 1997
and will increase to approximately 319 million in 2002, a 36% compound annual
growth rate. As the numbers of Internet users has grown, enterprises have
increasingly viewed the Internet as an opportunity to interact rapidly with a
larger number of geographically distributed offices, employees, customers,
suppliers and partners. Many enterprises
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that focus solely on delivering services over the Internet have emerged as well
as offline businesses that have implemented Internet sites incorporating e-
commerce applications. As the Internet has emerged as a strategic component of
business, investment in Internet services has begun to increase dramatically.
According to IDC, the demand for U.S. Internet and e-commerce services was $2.9
billion in 1997 and is expected to grow to $22.1 billion by 2002, a 50%
compound annual growth rate.
Increasing Reliance on Internet Business Applications. As use of the
Internet grows, enterprises are increasing the breadth and depth of their
Internet product and service offerings. Businesses have begun to use the
Internet for an expanding variety of commercial applications, including online
marketing and sales, customer service, software and document and multimedia
distribution, electronic commerce and online training. For many enterprises,
loss of the availability of such business-critical applications often results
in loss of revenue and impairment of customer good will. As a result,
enterprises are increasingly demanding that their networks deliver fast,
consistent, reliable, secure and relevant end user experiences globally, 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
private corporate wide area networks.
Inherent Problems with the Internet/Need for a Robust Global Solution. The
public Internet infrastructure was designed for applications requiring limited
communications bandwidth capacity and was not designed with the quality
necessary for core business uses such as electronic commerce. For enterprises
requiring global solutions, the U.S.-centric nature of the public Internet
results in poor response times, particularly for applications requiring large
file transfers, instantaneous interaction between networked users and overseas
transport. This occurs because data transmittal between countries must travel
through telecommunications lines in the U.S. where the Internet originated and
where most of its infrastructure is still located, and make a large number of
connections through various regional and national Internet service providers
before reaching its destination. Data packets often become lost in the transfer
process, especially for data-intensive transfers involving large software
downloads, multimedia document distribution and audio or video content. The
response time for users is also often slow.
Trend Toward Outsourcing of Internet Operations. In seeking to address the
performance issues of the public Internet, enterprises have increasingly found
that investing in the resources and personnel required to maintain in-house
private networks is cost-prohibitive and extremely difficult given the shortage
of technical talent and risk of technological obsolescence. With the failure of
in-house solutions to address their needs, today's enterprises have
increasingly sought third party providers to support their Internet
applications deployment, operations and ongoing maintenance. Regional and
national Internet service providers, however, often fail to provide an adequate
solution because they lack the geographically distributed network capability
necessary to deliver content globally using replication and caching
technologies, which are becoming increasingly important as the Internet usage
and bandwidth demand increase. IDC estimates that corporate spending on web
hosting services will increase from approximately $414 million in 1997 to $11.8
billion by 2002, a 95% compound annual growth rate. Enterprises are
increasingly seeking companies that combine intelligent networking, regional
hosting services and geographically dispersed content distribution to deploy
the enterprise's applications closer to the end-user.
The Digital Island Solution
Digital Island offers a global private network and related services for
companies that need worldwide deployment of key business applications over the
Internet. Digital Island's solution provides the following key advantages:
Global Connectivity and Availability. The Digital Island Global IP
Applications Network currently has connection point in 21 countries in Asia,
Europe, North America, South America and Australia. It believes that this
global reach provides its customers with local access to the majority of
existing Internet users.
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High Performance and Scalability. The Digital Island Global IP Applications
Network bypasses the primary congestion points of the public Internet to
provide fast, consistent performance for its customers. By routing and managing
Internet traffic over a centralized high-speed network directly between its
strategic, globally distributed data centers and local points of presence, its
solution avoids transmission of data over multiple routers and switches
(systems that relay data in networks) and network access points (locations at
which Internet service providers exchange traffic) in the public Internet,
thereby substantially reducing transmission time and improving network security
and performance. Digital Island's network architecture is reliable, can scale
to many users and enables a consistent end user experience independent of time
of day and geography.
Local Content Management. Digital Island owns and operates a growing number
of Digital Island Local Content Managers in high volume markets around the
world. It has created "digital warehouses" where it helps customers readily
store text, graphics, software, audio/video and other bandwidth intensive 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). It currently operates Digital Island Local
Content Manager sites in Brazil, Germany, Japan, Singapore, Netherlands, Hong
Kong, France, Australia, the U.S., and the United Kingdom and plans to continue
its current expansion program.
Cost-Effective Outsourcing Solution. Digital Island's customers directly
benefit from the significant investments of technical expertise and other
resources that it has made to develop its 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. Digital Island's
solution allows customers to address shortages of technical resources and
continuously changing technologies, while substantially lowering the
application deployment and operational costs of new Internet applications.
Digital Island believes that its solutions and economies of scale are
significantly more cost-effective than most in-house alternatives.
Innovative Solutions. Digital Island believes that, as a result of its
advanced network architecture and highly experienced product development team,
it is able to provide a unique set of value-added product offerings. For
example, it offers open, reserved and managed bandwidth products that enable
its customers to allocate their bandwidth purchases according to their changing
needs. In addition, its proprietary technology enables it to bill its customers
according to the number of bits of data transmitted over its network,
geographic destination of transmission and time of day, as opposed to
traditional flat-rate billing. This allows Digital Island to provide more
flexible service pricing, and benefits the customer by more accurately
correlating network cost to actual network utilization by geography.
TraceWare(TM) technology is a geographic atlas of the Internet. This software
maps an Internet address to a country where the user resides in with over 90%
accuracy. Customers are currently using TraceWare for a range of applications.
For example, Financial Times uses TraceWare to target ad banner services
specifically to different geographic regions. Digital River adopted TraceWare
in its fraud detection algorithms which help it reduce losses from credit card
by detecting the country where the user is accessing the system and matching
this information against known credit card history and user address. TraceWare
also has applications in helping to create flexible pricing plans, localization
of content and currency, assistance in fraud detection, authentication and
compliance with export regulations and the enhancement of other applications
deployed across Digital Island's network.
Business Strategy
Digital Island's objective is to be the leader in offering network services
for globalizing Internet business applications. In order to achieve this
objective, it is implementing a business strategy focused on the following key
elements:
Target Multinational Corporations. Digital Island has designed its network
to address the sophisticated needs of multinational customers, who are
increasingly relying on the Internet to conduct business and require
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consistent levels of high performance and reliability. It primarily targets
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. Digital Island has tailored
its services to enhance the performance of its customers in electronic commerce
and services, such as digital media distribution. The Digital Island Global IP
Applications Network has connection points in 21 countries worldwide, providing
its customers with access to a significant majority of existing Internet users,
and it plans to expand its global reach through additional connection points in
the future.
Expand Customer Relationships. Digital Island plans to extend its leadership
in the market for global Internet application services by continuing to expand
its base of customers. By integrating other Internet services into the Digital
Island Global IP Applications Network, and by providing high-quality customer
support, Digital Island believes that businesses will increasingly rely on it
for their Internet business needs, which in turn should enhance customer
retention and increase demand for both application services and network usage.
For example, Autodesk initially used Digital Island's 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 Digital Island's services to key
subsidiaries.
Develop Additional Network Services. Digital Island seeks to be a leader in
designing and deploying a global business network that enables customers to
capture the benefits of ubiquitous access to applications and the performance
and range of functions of private intranets operated by individual companies
for their own users. It is committed to investing resources to implement new
Internet technology and services that will allow its customers to optimize
their deployment and operation of applications globally. To this end, it
collaborates with providers of leading Internet technologies to develop and
deploy proprietary technologies in order to enhance its service offerings and
to address its customers' evolving needs. Some of Digital Island's 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 its TraceWare technology that enables customers to identify the
source of Internet traffic. The Digital Island Local Content Managers enable
customers to readily store files which are repeatedly accessed within specific
geographical regions. Digital Island believes that continuing leading edge
innovation is the key to differentiating Digital Island's products and services
in the long term.
Expand Strategic Relationships. Digital Island believes that strategic
relationships should enhance its ability to reach new customers. Potential
partners include system integrators, software vendors and application service
providers that provide network equipment and services to companies. Further,
strategic relationships with its customers in its target markets, such as with
E*TRADE, bring not only a high level of understanding of the specific needs of
that market but also credibility and visibility with potential new customers.
Digital Island is also targeting partners which can enhance its ability to
develop and deliver new application services. Through these relationships it
hopes to leverage these enterprises' research and development expertise to cost
effectively develop new network services.
Expand Global Sales Capabilities. Digital Island targets its customers
predominately through a direct sales channel complimented by a range of
external alliances and channels. It currently has 79 professionals in its sales
organization in offices in the U.S., Asia and Europe and intends to grow its
sales organization substantially over the next year. Its Global Partner Program
is targeted at increasing the effectiveness of its direct channel. In addition
to co-marketing, it has a growing number of sales channel partners which
represent its products and services either as a sales agent or a reseller.
Network Architecture
The Digital Island Intelligent Network consists of an asynchronous transfer
mode, or ATM, backbone that connects five geographically dispersed data
centers. This ATM backbone router core is a centralized high-speed network that
connects to local Internet service providers in 21 countries forming a
distributed network architecture that minimizes the number of separate
transmissions, necessary to transmit data, resulting in greater
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speed and reliability for our customers' end-users. Digital Island's five
distributed data centers permit it to disseminate information reliably on a
global basis and, using its sophisticated data tracking capability, allows it
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 Brazil, Singapore, Hong Kong, France, Australia, Japan, Germany, South
Africa, the United Kingdom and all three U.S. data centers. Digital Island
believes its architecture is superior to traditional networks for the
distribution of applications because of its manageability, ability to scale to
many users and connectivity over dedicated lines to local Internet service
providers and network service providers through dedicated connection points.
Digital Island currently has direct connections in 21 countries with one or
more local Internet service providers, providing customers with direct access
to local markets worldwide. Currently, it purchases transit from AT&T, GTE,
Sprint and MCI WorldCom in the United States and has established transport
relationships in 7 other countries, giving it a total of 28 different direct
points of connection to the Internet. Unlike traditional peering relationships,
these network service providers carry the Internet traffic of its customers
without any reciprocal transit agreement. While Digital Island pays a fee to
the network service providers for this arrangement, it gives Digital Island
access to thousands of Internet service providers without the obligation of
carrying traffic originating outside of its network. Both the Santa Clara and
New York data centers have direct connections through circuits with each of the
four network service providers. In addition to the U.S., it has established
private Internet connection relationships in 20 other countries as listed
below:
<TABLE>
<S> <C> <C>
Australia Israel South Korea
Brazil Japan Sweden
Canada Mexico Switzerland
China Netherlands Taiwan
France Russia United Kingdom
Germany Singapore Italy
Spain South Africa
</TABLE>
In China, Digital Island has connections in both Hong Kong and Beijing. With
28 different connection points to the Internet, Digital Island believes it
offers its customers one of the most diverse, redundant and reliable networks
for the deployment of business applications globally.
Digital Island currently has state-of-the-art network operations centers in
Honolulu, Hawaii and London, UK. Each center provides real time end-to-end
monitoring of our network 24 hours per day, seven days a week, 365 days per
year and operate as fully redundant network operation sites. The network
operations center helps it to ensure the efficient and reliable performance of
its network, enabling it 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 it to schedule and
conduct maintenance with minimal interferences to the network. In addition to
the two network operations centers, Digital Island maintains a Level 2 Support
Center located in San Francisco. Level 2 Support acts as an escalation point
for each of the primary network operations centers as well as a third redundant
location capable of managing the worldwide network.
Digital Island currently leases 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 it
in achieving competitive pricing, provides it with diversity of routes and
redundancy and provides access to multiple sources of bandwidth on different
cable systems globally. Digital Island's lease contract term with a carrier is
typically one year, which allows it to benefit from declining bandwidth costs
over time. In some cases the term may
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extend to three years where Digital Island determines there is a significant
cost advantage implicit in such arrangement or that the route served by such
line is bandwidth constrained.
Services
Digital Island offers a family of services designed to allow companies to
deploy their Internet applications globally without developing or acquiring
their own global network hosting centers or content management capability.
Digital Island's services are especially suited to Internet applications
requiring a high performance end user experience which is consistent and
reliable when downloading files (e.g., software, documentation and video
clips), downloading graphic-intensive web content or engaging in real-time
transactions (e.g., transaction clearing and video conferencing) across a range
of access speeds. Digital Island works with each of its customers to optimize
cost and performance requirements. Its content hosting, mirroring and caching
services allow customer applications to be replicated throughout the network to
lower costs and improve response times and its transport services guarantee
bandwidth into local markets. Digital Island's network engineering team
provides its customers with global networking expertise and consultation in the
design and deployment of their applications on the Digital Island Global IP
Applications Network. Digital Island also provides 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.
Digital Island currently offers service level guarantees, customized
billing, network security services, network management and other application
services designed to improve the performance of applications deployed on its
network. Digital Island plans to continue to develop or acquire extensions to
its application services to fuel ongoing product and service delivery. For
example, Digital Island believes that its proprietary TraceWare technology,
which is not yet commercially released, enables its customers to identify the
source of Internet protocol requests as well as the destinations of Internet
traffic. This technology will be predominantly used for targeted advertising
and local language content delivery.
Application Hosting and Content Distribution Services
Digital Island's 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
its data centers) appear to be located in every country where it has a
connection point. Leveraging its network architecture and technologies, Digital
Island's application hosting services provide end users globally with what it
believes, based on its past experience, to be fast, reliable and seamless
access to its customers' content. Each of its data centers has state-of-the-art
power management, security, and fire suppression systems. Customers have access
to its network operations center and its 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.
Digital Island operates two production-ready environments: Sun Solaris(TM) and
Windows NTTM operating on Compaq servers. Digital Island hosts these servers,
as well as servers provided by its customers, in its 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 Digital Island's customers to
outsource day-to- day hardware maintenance, while allowing its customers' IT
staff unhindered access to perform any needed system administration functions.
This package includes services from Digital Island's data center personnel for
hardware management and repair plus access to its network infrastructure.
Digital Island's centrally managed network architecture provides optimized
routing, resulting in the uptime, performance, and reliability required by its
customers.
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Co-location Package. This allows Digital Island's customers to house their
own servers in one of its data centers, and provides a secure environment
designed to deliver maximum uptime for the server plus access to its Global IP
Applications Network.
Globeport. For customers choosing to maintain content at their own data
centers, Digital Island will arrange dedicated connections from the client's
site to its closest point of presence. This package includes network services
enabling Digital Island's customers to extend their reach globally.
Network Services
Digital Island offers a range of network services to be used with its
Application Hosting and Content Distribution Services:
Open Bandwidth. Customers pay a minimum monthly fee for access to Digital
Island's network and are charged based on actual usage (per gigabit) above
these minimum levels. Customers may also pay for services based on distance
traveled. Customers can generate utilization reports which allow them to
determine usage flows by country.
Reserved Bandwidth. Reserved Bandwidth is a network service that guarantees
a minimum throughput level, expressed in kilobytes per second to a specified
connection point. Digital Island's customer is billed for a pre-specified
minimum amount of data transfer to that specified connection point. Unlike
other methods of relaying Internet traffic such as frame relay services,
Digital Island's 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 Digital Island's 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.
Streaming Services. Digital Island offers a full range of encoding and
streaming services targeted for on demand audio and video delivery of
audio/video content. Through a strategic partnership with RealNetworks and
Inktomi, Digital Island has deployed a global streaming network fully capable
of delivering audio/video streams in over 10 countries. Backed by unmatched
service level agreements, this service will continue to be expanded through the
support of additional media formats and geographies.
Professional Services
Digital Island augments its primary product and service offerings with a
range of professional service options for customers. Professional services
include helping its customers to provide security on their networks, making
recommendations for network equipment and consulting as to Internet application
deployment.
Customers
Digital Island primarily targets leading customers in industries which are
early adopters of Internet technologies, such as the financial services,
technology, media and other Internet-centric sectors. Within Digital Island's
target markets, it has tailored its services to enhance the performance of its
customers in electronic commerce, electronic services and electronic
fulfillment, such as digital media distribution. Digital Island's customers use
its services and proprietary technology to facilitate the deployment of
commercial applications, including electronic commerce, online customer
service, software distribution, multimedia document distribution, sales
management and distance learning. As of September 30, 1999, Digital Island had
contracts with 111 customers including Autodesk, Cisco Systems, E*TRADE,
Mastercard International, National Semiconductor and Novell.
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Sales and Marketing
Digital Island's sales and marketing strategy is designed to target
multinational businesses that depend on the Internet for core business
operations.
To reach these enterprises, Digital Island utilizes a multi-tiered channel
approach. In North America, it primarily relies on direct sales and augments
this effort with resellers, agents or co-marketing partners where appropriate.
In Europe, Asia and Latin America, Digital Island is hiring direct sales
personnel and developing agents and reseller channels. Digital Island's channel
partners also provide services to it in the form of connectivity to local
backbones or service providers and router installation/repair.
Digital Island is actively seeking to increase its sales and distribution
capabilities globally. Currently, most of its sales are derived from the
efforts of its direct sales force. Digital Island has begun developing indirect
sales channels targeting content developers (such as firms that develop web
sites), system integrators, consulting companies, suppliers and international
Internet service providers. As of September 30, 1999, it had five channel
partners in Europe and Asia to whom it pays commissions to refer customers.
Digital Island's 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
its products and services. These activities include product strategy and
definition, pricing, competitive analysis, product launches, channel program
development and product life cycle management. Digital Island stimulates
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 its web site. Digital Island's public relations focuses on
cultivating industry analyst and media relationships with the goal of securing
broad media coverage and recognition as a leader and innovator in global
Internet application deployment.
While it has not entered into any material partnering arrangements, a key
element of its marketing strategy includes identifying and partnering with
component suppliers, customers and other application service companies. It has
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
Digital Island seeks to provide superior customer service by understanding
the technical requirements and business objectives of its customers and
fulfilling their needs proactively on an individual basis. By working closely
with the customer, it seeks to optimize the performance of its 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, Digital Island provides technical advice to customers
in order to help them understand their Internet applications related needs and
how its products and services can provide solutions for particular needs.
During the installation phase, it assigns a support team led by its 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 its network operation centers, which are 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. Digital Island's
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 it employs network engineers who collaborate with customers to
design and maintain their application across the network. Digital Island's
network engineers are trained on Windows NT, Solaris and
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other UNIX platforms, as well as Cisco routers and switches, and they serve as
the escalation path to resolve customer problems. Digital Island also employs a
team of network backbone engineers that constantly monitor the network design
and effectiveness to optimize performance for customers, rerouting and
redesigning their applications as conditions require.
Competition
Digital Island's market is highly competitive. There are few substantial
barriers to entry and it expects that it will face additional competition from
existing competitors and new market entrants in the future. The principal
competitive factors in this market include Internet system engineering
expertise, customer service, network capability, reliability, quality of
service and ability to scale to many users, broad geographic presence, brand
name recognition, technical expertise and range of functions, the variety of
services offered, the ability to maintain and expand distribution channels,
price, the timing of introductions of new services, network security, financial
resources and conformity with industry standards. It may not have the resources
or expertise to compete successfully in the future.
Digital Island's 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.
Digital Island's competitors may operate in one or more of these areas and
include companies such as AboveNet Communications, Inc., AT&T Corp., Exodus
Communications, Inc., GTE Corporation, MCI WorldCom, Inc. and business units of
Frontier GlobalCenter, Inc. In particular, Exodus and GlobalCenter provide
services that are directly competitive with services that it provides.
Many of Digital Island's 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 it does. As a result, these competitors may be able to develop
and expand their network infrastructures and service offerings more quickly,
adapt to new or emerging technologies and changes in customer requirements more
quickly, take advantage of acquisition and other opportunities more readily,
devote greater resources to the marketing and sale of their products and adopt
more aggressive pricing policies than it 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 its 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 Digital Island's
services. Digital Island may not be able to offset the effects of any such
price reductions. In addition, it believes that the businesses in which it
competes are likely to encounter consolidation in the near future, which could
result in increased price and other competition that could cause its business
and prospects to suffer.
Intellectual Property Rights
Digital Island relies on a combination of copyright, trademark, service mark
and trade secret laws and contractual restrictions to establish and protect
proprietary rights in its products and services. Although it has filed a patent
application with respect to its TraceWare technology with the United States
Patent and Trademark Office, such application is pending and it currently has
no patented technology that would preclude or inhibit competitors from entering
its market. In addition, it has registered the mark "Digital Island" with the
Patent and Trademark Office, and it has a pending trademark application for the
mark "TraceWare" with the Patent and Trademark Office. Its "Digital Island"
mark is either registered or pending in several foreign countries. It has
entered into confidentiality and invention assignment agreements with its
employees, and nondisclosure
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agreements with its suppliers, distributors and appropriate customers in order
to limit access to and disclosure of its proprietary information. These
contractual arrangements or the other steps that it takes to protect its
intellectual property may not be sufficient to prevent misappropriation of its
technology or to deter independent third-party development of similar
technologies. The laws of foreign countries may not protect its products,
services or intellectual property rights to the same extent as do the laws of
the United States.
To date, Digital Island has not been notified that its products infringe the
proprietary rights of third parties, but third parties may in the future claim
that its current or future products infringe upon their proprietary rights. It
expects that participants in its markets will be increasingly subject to
infringement claims as the number of products and competitors in its industry
segment grows. Any such claim, whether meritorious or not, could be time
consuming, result in costly litigation, cause product installation delays or
require it to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to it, or at
all. As a result, any such claim could harm its business and prospects.
Government Regulation
Federal Regulation. The FCC does not currently regulate network software or
computer equipment-related services that transport data or voice messages on
telecommunications facilities, except when provided by any of the Regional Bell
Operating Companies. However, Digital Island provides network services
including transmitting data over public telephone lines, and those
transmissions are governed to some extent by federal regulatory policies
establishing charges and terms for wireline communications. Operators of those
types of networks that provide access to regulated transmission facilities only
as part of a data services package currently are not subject to direct
regulation as "telecommunications carriers" by the FCC or any other federal
agency, other than regulations generally applicable to businesses.
The absence of direct FCC regulation reflects, in part, the status of
Internet services as a relatively recent phenomenon. The federal legal and
regulatory framework for such services is therefore in its nascent state of
development.
The evolving state of federal law and regulation is reflected in the FCC's
April 10, 1998 Report to Congress. In the April 1998 Report, the FCC discussed
whether Internet service providers should be classified as telecommunications
carriers, and, on that basis, be required to contribute to the Universal
Service Fund which was created by federal statute and funded by interstate
telecommunications carriers for the purpose of ensuring that all segments of
the population of the United States have access to basic telecommunications
services. The report concluded that Internet access service which the FCC
defined as an offering combining computer processing, information storage,
protocol conversion, and routing transmissions is an "information service"
under the Telecommunications Act of 1996 and thus not subject to regulation. In
contrast, the FCC found that the provision of transmission capabilities to
Internet service providers and other information service providers does
constitute "telecommunications services" under the Telecommunications Act of
1996. Consequently, parties providing those latter services are presently
subject to FCC regulation (and the corresponding Universal Service Fund
obligations).
New federal laws and regulations may be adopted in the future that would
subject the provision of Digital Island's Internet services to government
regulation. Legislative initiatives currently being considered in Congress, for
example, may require taxation of Internet-related services like those that it
offers or impose access charges on Internet service providers. Any new laws
regarding the Internet, particularly those that impose regulatory or financial
burdens, could cause its business and prospects to suffer. It cannot predict
the impact, if any, that any future changes in law or regulation may have on
its business.
Certain changes in federal law and regulations could cause Digital Island's
business and prospects to suffer. Changes of particular concern include those
that directly or indirectly affect the regulatory status of Internet services,
increase the cost telecommunications services (including the application of
access charges or Universal Service Fund contribution obligations to Internet
services), or increase the competition from the
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RBOCs and other telecommunications companies. It cannot predict the impact, if
any, that such legislative or regulatory changes may have on its 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, it could
be required to comply with:
. FCC entry or exit regulations;
. tariff filing, reporting, fee, and record-keeping requirements;
. marketing restrictions;
. access charge obligations; and
. contributions to the Universal Service Fund obligations.
Any one or more of those changes could adversely impact Digital Island's
ability to provide services. The FCC could similarly conclude that providing
Internet transport or telephony services over an Internet protocol-based
network is subject to regulation. For example, the FCC currently has ongoing
proceedings in which it is considering whether to regulate certain
transmissions provided via the Internet, such as services functionally
equivalent to traditional two-way voice telephony. Such determination could
cause its business and prospects to suffer.
Another major and unresolved regulatory issue concerns the obligation of
information service providers, including Internet service providers, to pay
access charges to Incumbent Local Exchange Carriers. A proceeding initiated by
the FCC in December 1996 that raises the issue whether Incumbent Local Exchange
Carriers, which are local telephone companies that began providing service
prior to the enactment of the Telecommunications Act of 1996, can assess
interstate access charges on information service providers, including Internet
service providers. Unlike basic services, enhanced services, which the FCC has
concluded are synonymous with information services and include Internet access
services, are exempt from interstate access charges. The FCC has reaffirmed
that information service providers are exempt from access charges, and a United
States Court of Appeals has affirmed this decision by the FCC.
Another major regulatory issue concerns Internet-based telephony. In its
April 1998 Report, the FCC observed that Internet protocol telephony appears to
be a telecommunications service rather than an unregulated information service.
The FCC explained that it would determine on a case-by-case basis whether to
regulate the service and thereby require providers of Internet protocol
telephony to contribute to the Universal Service Fund. The ultimate resolution
of Internet protocol telephony issues could negatively impact the regulatory
status, cost and other aspects of Digital Island's service offerings.
Another major and unresolved regulatory proceeding that could affect the
benefit and cost of Digital Island's service offerings (to the extent it
becomes involved in the exchange of communications traffic) involves reciprocal
compensation. Reciprocal compensation relates to the fees paid by one carrier
to terminate traffic on another carrier's network. In July 1997, the FCC was
asked to determine whether Competitive Local Exchange Carriers (local telephone
companies that provide service in competition with Incumbent Local Exchange
Carriers) that serve Internet service providers are entitled to reciprocal
compensation under the Telecommunications Act of 1996 for calls originated by
customers of an Incumbent Local Exchange Carriers to an Internet service
provider served by a Competitive Local Exchange Carriers within the same local
calling area. Prior to the time the FCC addressed the issue, every state that
addressed the issue from an intrastate perspective (at least 29 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.
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Digital Island could also be harmed by federal (as well as state) laws and
regulations relating to the liability of on-line services companies and
Internet access providers for information carried on or disseminated through
their networks. Several private lawsuits seeking to impose such liability upon
on-line services companies and Internet access providers are currently pending.
In addition, legislation has been enacted and new legislation has imposed
liability for the transmission of, or prohibits the transmission of certain
types of, information on the Internet, including sexually explicit and gambling
information. The United States Supreme Court has already held unconstitutional
certain sections of the Communications Decency Act of 1996 that, among other
provisions, proposed to impose criminal penalties on anyone distributing
"indecent" material to minors over the Internet. Congress subsequently enacted
legislation that imposes both criminal and civil penalties on persons who
knowingly or intentionally make available materials through the Internet that
are "harmful" to minors. However, the new law generally excludes from the
definition of "person" Internet service providers that are not involved in the
selection of content disseminated through their networks. Congress also enacted
legislation recently that limits liability for online copyright infringement.
That latter law includes exemptions which enable Internet service providers to
avoid copyright infringement if they merely transmit material produced and
requested by others. It is possible that other laws and regulations could be
enacted in the future that would place copyright infringement liability more
directly on Internet service providers. The imposition of potential liability
on Digital Island and other Internet access providers for information carried
on or disseminated through their systems could require it to implement measures
to reduce its exposure to such liability, which may in turn require it to
expend substantial resources or to discontinue service or product offerings.
The increased attention to liability issues as a result of lawsuits and
legislative action, could similarly impact the growth of Internet use. While it
carries professional liability insurance, such insurance may not be adequate to
compensate claimants or may not cover Digital Island in the event it becomes
liable for information carried on or disseminated through its networks. Any
costs not covered by insurance incurred as a result of such liability or
asserted liability could cause its business and prospects to suffer.
State Regulation. The proliferation of Internet use in the past several
years has prompted state legislators and regulators to consider the adoption of
laws and regulations to govern Internet usage. Much of the legislation that has
been proposed to date may, if enacted, handicap further growth in the use of
the Internet. It is possible that state legislatures and regulators will
attempt to regulate the Internet in the future, either by regulating
transactions or by restricting the content of the available information and
services. While state public utility commissions generally have declined to
directly regulate enhanced or information services, some states have continued
to regulate particular aspects of enhanced services in limited circumstances,
such as where they are provided by local telecommunications carriers. Moreover,
the public utility commissions of several states continue to consider potential
regulation of such service. Enactment of such legislation or adoption of such
regulations could cause Digital Island's business and prospects to suffer.
Another area of adverse potential state regulation concerns taxes. The
United States Congress recently enacted a three-year moratorium on new state
and local taxes on the Internet (those not generally imposed or actually
enforced prior to October 1, 1998) as well as on taxes that discriminate
against commerce through the Internet. Congress also established an advisory
commission to study and make recommendations on the federal, state and local
taxation of Internet-related commerce. These recommendations are due to
Congress by April 2000 and could serve as the basis for additional legislation.
Previous to the enactment of the tax moratorium a significant number of bills
had been introduced in state legislatures that would have taxed commercial
transactions on the Internet. Future laws or regulatory changes that lead to
state taxation of Internet transactions could cause Digital Island's 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 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
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circumstances created by Internet commerce or whether the evolution of such
laws will cause Digital Island's business and prospects to suffer.
State legislators and regulators have also sought to restrict the transition
or limit access to certain materials on the Internet. For example, in the past
several years, various state legislators have sought to limit or prohibit:
. certain communications between adults and minors;
. anonymous and pseudonymous use of the Internet;
. on-line gambling; and
. the offering of securities on the Internet.
Enforcement of such limitations or prohibitions in some states could affect
transmission in other states. State laws and regulations that restrict access
to such materials on the Internet could inadvertently block access to other
permissible sites. Digital Island cannot predict the impact, if any, that any
future laws or regulatory changes in this area may have on its 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 Digital Island's 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 Digital
Island's business and prospects to suffer. Its 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 Digital Island's services become available over the
Internet in foreign countries, and as it facilitates sales by its customers to
end users located in such foreign countries, these foreign jurisdictions may
decide that it is required to qualify to do business in the particular foreign
country or to obtain permits or licenses to provide permits or licenses to
provide value- added network services. Such decisions could subject it to taxes
and other costs and could result in its 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 Digital Island's
business, could cause its business and prospects to suffer.
Employees
As of September 30, 1999, Digital Island had 267 employees, including 117
people in sales and marketing, 56 people in engineering, 68 people in
operations and 26 people in finance and administration. It believes that its
future success will depend in part on its continued ability to attract, hire
and retain qualified personnel. The competition for such personnel is intense,
and there can be no assurance that it will be able to identify, attract and
retain such personnel in the future. None of its employees is represented by a
labor union, and management believes that its employee relations are good.
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Facilities
Digital Island currently has the following facilities: its corporate
headquarters in San Francisco, and data centers in Honolulu, Santa Clara
(California), New York City, Hong Kong, and London. In addition, it has sales
offices in Boston, New York City, Minneapolis, Chicago, Philadelphia, Dallas,
Houston, St. Louis, Atlanta, Reston (Virginia), Japan, Malaysia, the
Netherlands, Switzerland and the United Kingdom.
Legal Proceedings
Digital Island is not party to any material legal proceedings.
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DIGITAL ISLAND
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(in thousands, except share and per share data)
The following selected historical consolidated financial information should
be read in conjunction with Digital Island's consolidated financial statements
and related notes and Digital Island's "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The consolidated statement of
operations information for each of the years in the three year period ended
September 30, 1999, and the balance sheet data at September 30, 1998 and 1999,
are derived from our financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants, included elsewhere in this
filing. The statement of operations data for the years ended September 30, 1995
and 1996, and the balance sheet data at September 30, 1995, 1996, and 1997, are
derived from our audited financial statements that are not included in this
filing. Historical results are not necessarily indicative of the results to be
expected in the future.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1995 1996 1997 1998 1999
------- ------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue.................... $ -- $ -- $ 218 $ 2,343 $ 12,431
Total costs and expenses... 7 26 5,594 19,458 64,918
Loss from operations....... (7) (26) (5,376) (17,116) (52,487)
Net loss................... $ (10) $ (27) $ (5,289) $ (16,764) $ (50,938)
------- ------- --------- --------- ----------
Basic and diluted loss
per share............... $ (0.04) $ (0.10) $ (3.53) $ (7.50) $ (4.58)
======= ======= ========= ========= ==========
Shares used in basic and
diluted loss per share
calculation............. 275,000 275,000 1,497,711 2,236,452 11,127,462
</TABLE>
<TABLE>
<CAPTION>
September 30,
------------------------------------
1995 1996 1997 1998 1999
---- ----- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................ $ 7 $ 344 $ 4,584 $ 5,711 $ 43,315
Investments.............................. -- -- 1,983 10,123 31,691
Working capital.......................... 5 76 4,613 12,883 59,506
Total assets............................. 93 432 9,223 22,617 107,648
Long-term obligations, including current
portion................................. -- -- 705 3,992 11,092
Total stockholders' equity............... $ 86 $ 84 $ 6,265 $ 15,490 $ 79,218
</TABLE>
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DIGITAL ISLAND MANAGEMENT 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. Digital Island's 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 joint proxy statement/prospectus.
Overview
Digital Island offers a global network and related services for companies
that are using the Internet to deploy key business applications worldwide. It
targets corporations that are increasingly relying on the Internet to conduct
business but are constrained by the unreliability, slow performance and limited
range of functions of the public Internet. The Digital Island Global IP
Applications Network and its services enable customers to effectively deploy
and manage global Internet applications by combining the reliability,
performance and broad range of functions of private intranets with the global
access of the public Internet. It also offers service level guarantees,
customized billing, security services, network management and other application
services designed to improve the performance of applications deployed on its
network.
Digital Island did not begin offering its Global IP Applications Network
services until January 1997; prior to such time it was engaged in activities
unrelated to its current operations and, accordingly, comparisons for the
period ended September 30, 1997 are not meaningful and have not been made.
Since inception, it has incurred net losses and experienced negative cash flow
from operations. It expects to continue to operate at a net loss and to
experience negative cash flows at least through the year 2000. Its ability to
achieve profitability and positive cash flow from operations will be dependent
upon its ability to grow its revenues substantially and achieve other operating
efficiencies.
Digital Island derives its 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. It currently
sells its 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
Digital Island's network operations. Digital Island leases lines under
contracts of one year or more. The leasing of transoceanic lines comprises the
largest component of its telecommunications expense, with additional costs
arising from leasing local circuits between its data centers and points of
presence in the United States and international markets. In the future, it
expects to increase the size and number of circuits leased based on increases
in network volume and geographic expansion. The cost of its network operations
is comprised primarily of data centers, equipment maintenance, personnel and
related costs associated with the management and maintenance of the network.
Some options granted and common stock issued from May 1, 1998 to June 30,
1999 have been considered to be compensation. Total deferred compensation
associated with such equity transactions as of September 30, 1999 amounted to
$7.7 million. These amounts are being amortized over the vesting periods of
such securities. Of the total deferred compensation, $487,000 was amortized in
the year ended September 30, 1998 and $3.2 million was amortized in the year
ended September 30, 1999. Digital Island expects amortization of $2.4 million
and $1.2 million in the years ending September 30, 2000 and 2001, respectively,
relating to these grants.
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Fiscal Years Ended September 30, 1999 and 1998
Revenue. Revenue increased to $12.4 million for the year ended September 30,
1999 from $2.3 million for the year ended September 30, 1998. The increase in
revenue was due primarily to an increase in the number of billing customers to
83 from 31.
Cost of Revenue. Cost of revenue increased to $29.5 million for the year
ended September 30, 1999 from $9.0 million for the year ended September 30,
1998. The increase in cost of revenue was due to $17.5 million of spending for
additional network capacity and $3.0 million in recruitment and compensation
costs relating to the addition of network operations personnel.
Sales and Marketing. Sales and marketing expenses increased to $16.0 million
for the year ended September 30, 1999 from $4.8 million for the year ended
September 30, 1998. This increase was due to $10.6 million of growth in
personnel and related costs and $0.6 million of program expenses.
Product Development. Product development expenses increased to $6.3 million
for the year ended September 30, 1999 from $1.7 million for the year ended
September 30, 1998. This increase was due to $3.7 million in growth of
personnel and related costs and $0.9 million of costs arising from new product
initiatives, including TraceWare, mirroring and caching technologies.
General and Administrative. General and administrative expenses increased to
$9.8 million for the year ended September 30, 1999 from $3.4 million for the
year ended September 30, 1998. This increase was due to $2.4 million of
depreciation of network equipment, $2.4 million of growth in personnel and
related expenses, and $1.6 million office facility expenses, legal and
accounting fees and other administrative related expenses.
Interest Income, net. Interest income, net, increased to $1.6 million for
the year ended September 30, 1999 from $354,000 for the year ended September
30, 1998. This increase was due to a higher average cash balance as a result of
the proceeds of the issuance of shares of Digital Island's preferred stock, and
also common stock in its initial public offering.
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Quarterly Results of Operations
The following tables set forth certain unaudited statements of operations
data for the eight quarters ended September 30, 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
------------------------------------------------------------------------
Dec. Mar. June Sept. Dec. Mar. Sept.
31, 31, 30, 30, 31, 31, June 30, 30,
1997 1998 1998 1998 1998 1999 1999 1999
------- ------- ------- ------- ------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 277 $ 414 $ 725 $ 927 $ 1,385 $ 2,411 $ 3,700 $ 4,935
Costs and expenses:
Cost of Revenue....... 1,961 2,065 2,267 2,746 2,923 4,827 8,055 13,691
Sales and Marketing... 860 927 1,296 1,764 2,046 3,125 4,525 6,314
Product development... 214 357 538 585 843 1,167 1,853 2,494
General and
Administrative....... 531 632 902 1,326 1,260 1,703 2,469 4,416
Stock compensation
expense.............. -- -- 132 355 346 680 1,248 933
------- ------- ------- ------- ------- ------- -------- --------
Total cost and
expenses........... 3,566 3,981 5,135 6,776 7,418 11,502 18,150 27,848
Loss from operations.... (3,289) (3,567) (4,410) (5,849) (6,033) (9,091) (14,450) (22,913)
Other income (expense),
net.................... 45 19 123 166 96 160 387 908
------- ------- ------- ------- ------- ------- -------- --------
Loss before income
taxes.................. (3,244) (3,548) (4,287) (5,683) (5,937) (8,931) (14,063) (22,005)
------- ------- ------- ------- ------- ------- -------- --------
Provision for income
taxes.................. -- 1 -- 1 2 -- -- --
------- ------- ------- ------- ------- ------- -------- --------
Net loss............ $(3,244) $(3,549) $(4,287) $(5,684) $(5,939) $(8,931) $(14,063) $(22,005)
======= ======= ======= ======= ======= ======= ======== ========
</TABLE>
Digital Island expects to experience significant fluctuations in its future
results of operations due to a variety of factors, many of which are outside of
its control, including:
. demand for and market acceptance of its products and services may decline
or fail to increase enough to offset its costs;
. introductions of new products and services or enhancements by Digital
Island and its competitors may increase its costs or make its existing
products or services obsolete;
. the prices it can charge its customers may decline due to price
competition with its competitors;
. utilization of its global network may increase beyond its capacity and it
may incur expenses to increase such capacity;
. continuity of its service and network availability could be interrupted,
reducing revenue;
. the availability and cost of bandwidth may reduce its ability to increase
bandwidth as necessary, reducing its revenue;
. the timing of customer installations and the timing of expansion of its
network infrastructure may vary from quarter to quarter;
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. the mix of products and services it sells may change and the new mix may
generate less revenue;
. the timing and magnitude of its capital expenditures, including costs
relating to the expansion of operations may vary from quarter to quarter;
. bandwidth used by customers may fluctuate from quarter to quarter
affecting its profits from such customers; and
. conditions specific to the Internet industry and other general economic
factors may affect the prices it can charge or the expenses it incurs.
In addition, a relatively large portion of Digital Island's expenses are
fixed in the short-term, particularly with respect to telecommunications
capacity, depreciation, real estate and interest expenses and personnel, and
therefore its results of operations are particularly sensitive to fluctuations
in revenues. Due to the foregoing factors, Digital Island believes that period-
to-period comparisons of its 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 its initial public offering on June 29, 1999, Digital
Island financed its 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. Digital Island raised $63.1
million in net proceeds from its initial public offering. At September 30,
1999, Digital Island had cash and cash equivalents and short-term investments
of $75.0 million.
Net cash used in Digital Island's operating activities for fiscal 1999 was
$39.7 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 $35.6 million
for fiscal 1999 and was comprised primarily of equipment purchases of $14.3
million and investments of $52.2 million in commercial paper with maturities of
less than one year, which was offset by proceeds from investments which matured
of $31.5 million. Net cash provided by financing activities was $112.9 million
and was related primarily to the issuance of Digital Island's Series E
Preferred Stock and its initial public offering.
Digital Island has a $750,000 revolving line of credit with a commercial
bank for the purpose of financing equipment purchases. As of September 30,
1999, $323,000 was outstanding thereunder. The loan contains standard covenants
including minimum working capital, minimum tangible net worth, debt to equity
ratio and financial reporting requirements. Interest on borrowings thereunder
accrues at the lender's prime rate plus 0.75% (which was 9.00% at September 30,
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.
Digital Island also has 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 September 30, 1999, approximately
$230,000 was outstanding under the revolving credit facility, and approximately
$562,000 was outstanding under equipment loan facilities. No further amounts
may be borrowed under the equipment loan facilities. Advances under the line of
credit are limited to a percentage of our recurring contract revenue. The loan
contains standard covenants, including minimum working capital, minimum
tangible net worth, debt to equity ratio and financial reporting requirements.
Interest on borrowings thereunder accrues at the lender's prime rate plus 0.25%
(which was 8.50% at September 30, 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 9.00% at September 30, 1999. The loans mature
at various times in 2001. Between October 1, 1998 and January 31, 1999, Digital
Island did not comply with the minimum tangible net worth and financial
reporting covenants. However, Digital Island obtained waivers for all covenant
violations. Digital Island has complied with all covenants since January 31,
1999. Additionally, Digital Island has several lease lines of credit. Total
borrowings under these lease lines of credit were $10.0 million at September
30, 1999.
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The execution of Digital Island's business plan will require substantial
additional capital to fund Digital Island's operating losses, working capital
needs, sales and marketing expenses, lease payments and capital expenditures.
In order to rapidly improve its competitive position, Digital Island
anticipates making up to approximately $80.0 million to $100.0 million of
capital expenditures for network expansion, facilities and related costs in the
next 12 months. This substantial increase in the level of Digital Island's
anticipated capital expenditures will require up to $100.0 million to $150.0
million of additional financing. Digital Island intends to consider its 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 its operations. Digital Island's capital
requirements may change based upon technological and competitive developments.
In addition, several factors may affect its capital requirements:
. demand for its services or its anticipated cash flow from operations
being less than expected;
. its development plans or projections proving to be inaccurate;
. its engaging in acquisitions or other strategic transactions; or
. its accelerating deployment of its network services or otherwise altering
the schedule of its expansion plan.
Other than the current bank note payable and lease financing, Digital Island
has no present commitments or arrangements assuring it of any future equity or
debt financing, and there can be no assurance that any such equity or debt
financing will be available to it on favorable terms, or at all. If it does not
obtain additional financing, it believes that its 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, or AICPA, issued Statement
of Position No. 98-1, or 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, Digital Island
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, or 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 Digital Island have not capitalized such costs, the adoption of
SOP 98-5 is not expected to have a material impact on its consolidated
financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, or 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, 2000. Digital Island does not believe the
adoption of SFAS 133 will have a material effect on its 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, computer systems and
software that fail to recognize the proper date at the end of this year
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may suffer major system failures or miscalculations. If Digital Island or its
key third party suppliers fail to achieve year 2000 compliance, it may
experience operating difficulties, including impaired ability to transport data
over its network and impaired ability to bill for its services. It recognizes
the need to ensure that its operations will not be adversely affected by year
2000 software failures. It is assessing the potential overall impact of the
impending century change on its operations.
Based on Digital Island's assessment to date, it believes the current
versions of its software products and services are year 2000 compliant, that
is, they are capable of adequately distinguishing 21st century dates from 20th
century dates. However, its products are generally integrated into enterprise
systems involving sophisticated hardware and complex software products, which
may not be year 2000 compliant. It 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 it has 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 it 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 its part for year 2000-related damages, including consequential
damages, could cause its business and financial results to suffer. In addition,
it believes 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 Digital Island. To the extent that year 2000 issues
cause significant delay in, or cancellation of, decisions to purchase its
products or services, its business and financial results could suffer.
Digital Island has formulated a contingency plan should it or any of its key
third parties sustain business interruptions caused by year 2000 problems. It
is reviewing its 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, it has not encountered any material year 2000 problems with
its computer systems, applications or any other equipment which might be
subject to these problems. In addition, it received an independent third-party
evaluation of the year 2000 compliance of its network equipment and carriers in
March 1999 and of its computer systems and applications in October 1999. It
will continue to monitor year 2000 compliance for our new products and services
as they arise throughout the remainder of the year.
Digital Island's plan for the year 2000 calls for compliance verification of
external vendors supplying software and information systems to it and
communication with significant suppliers to determine their ability to
remediate their own year 2000 issues. As part of its assessment, it is
evaluating the level of validation it will require of third parties to ensure
their year 2000 readiness. In the event that any of these third parties cannot
timely provide it with products, services or systems that meet the year 2000
requirements, it may incur unexpected expenses to remedy any problems. These
expenses could potentially include purchasing replacement hardware or software.
In addition, its business and its ability to deliver its 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 its 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 its
business, results of operations and financial condition. These costs and the
timing in which it plans to complete its year 2000 modification and testing
processes are based on its management's estimates. Digital Island may not be
able to remediate all significant year 2000 problems on a timely basis. Its
remediation efforts may involve significant time and expense, and could cause
its business and prospects to suffer.
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Qualitative and Quantitative Disclosure About Market Risk
Digital Island develops global network and related services and sell such
services in North America, Asia and Europe. As a result, its financial results
could be affected by factors such as changes in foreign currency exchange rates
or weak economic conditions in foreign markets. As all sales are currently made
in U.S. dollars, a strengthening of the dollar could make its services less
competitive in foreign markets. It does not use derivative instruments to hedge
its foreign exchange risks. Its interest income is sensitive to changes in the
general level of U.S. interest rates, particularly since the majority of its
investments are in short-term instruments. Due to the nature of its short-term
investments, it has concluded there is no material market risk exposure.
Therefore, no quantitative tabular disclosures are required.
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BUSINESS OF SANDPIPER
Sandpiper Networks
Sandpiper provides Internet content delivery services. Sandpiper's solution
is designed to improve website performance, reliability and scalability by
delivering content from a globally distributed server network, that
intelligently avoids Internet congestion, and serves content closer to users.
Sandpiper's customers include Blue Mountain Arts, CNBC.com, Intuit, Microsoft,
PBS.org and Value America. In addition, Sandpiper recently entered into
agreements with a number of strategic partners, including AOL, Inktomi,
Microsoft, RealNetworks and Vignette.
Industry Background
Use of the Internet has grown rapidly in recent years. This growth has been
driven by a number of factors, including the growing installed base of powerful
personal computers, faster and cheaper access capabilities, an increasing
selection of network-enabled applications, and the emergence of media-rich
content and electronic commerce-enabling technologies. International Data
Corporation, or IDC, predicts Internet users will grow from approximately 142
million at the end of 1998 to approximately 502 million by the end of 2003. IDC
also expects the number of computers and other devices accessing the World Wide
Web to grow from approximately 150 million at the end of 1998 to approximately
722 million by the end of 2003.
As a result of this growing use, the Internet has become an important global
communications and commerce medium, and represents a compelling opportunity for
enterprises to interact in new and different ways with their customers,
suppliers, partners and employees. IDC expects worldwide e-commerce sales to
grow from approximately $50 billion at the end of 1998 to approximately $1.3
trillion by the end of 2003. Given this significant opportunity, Internet
operations are becoming mission-critical for Internet-based and most other
mainstream businesses. Companies are responding to this opportunity by
increasing their investments in Internet operations and enhancing the breadth
and depth of content offered on their websites.
Historically, websites primarily contained text and simple graphics. Today,
organizations are seeking to differentiate themselves by offering richer,
multimedia content in an increasing variety of forms. For example, some
organizations want to cover high profile events on-line, and create an
interactive experience for end users who want to access complex graphics, sound
files, live video streams and other forms of content. Others want to offer on-
demand event coverage containing both video and audio feeds that can be played
live, or archived for play at another desired time. And some want to offer
dynamic, customized applications, such as personalized web pages that feature
customized real-time stock quotes, personalized news feeds, targeted
advertising or premium service offerings that require authentication for
access. The effective delivery of this increasingly complex content requires
significantly greater bandwidth, a distributed computing infrastructure, and
enhanced network capabilities.
The Internet, a network of hundreds of interconnected, separately
administered public and private networks, was not originally designed to handle
either the large traffic levels or the vast array of content types being
transmitted today. The Internet provides any-to-any connectivity, but does not
intelligently monitor and optimize the distribution of media-rich content.
Organizations cannot predict or control the network path that their data will
travel over the Internet and are unable to avoid network congestion or
bottlenecks that degrade performance. Thus, organizations face challenges in
predicting and controlling the quality of their end-users' experience. This
problem is exacerbated during the peak periods of network usage and bursts in
traffic volumes that result from news and other significant one-time events.
For companies conducting business over the Internet, poor website
performance, such as slow downloads or site crashes, can create dissatisfied
users and result in lost revenue opportunities. In June 1999, Jupiter
Communications concluded that if website response time did not meet users'
expectations, 37% of those users visited an alternative website. And for 24% of
these dissatisfied users, the decision to use an alternative website
was permanent. In December 1998, Zona Research Group estimated that e-commerce
revenue was being lost at
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the rate of $362 million per month, and perhaps as much as $4.35 billion per
year, due to loading failures and unacceptable download times. Thus, it has
become critical for organizations to continually expand and enhance their
Internet capabilities, in order to manage the infrastructure requirements of
their increasing content and to deliver a superior website experience for their
end users.
Sandpiper views all creators and distributors of content as "content
providers." Content providers have had only limited options available to ensure
high website performance. Current options include web-hosting, in-house
developed solutions, caching and broadband technologies. These options have
been limited in their ability to provide content providers with a complete
solution for their website performance problems.
. Web-hosting. Some organizations have attempted to address these problems
by locating their servers in hosted Internet networks, which generally
only provide access to the hosting network's servers. However, these
offerings focus more on expanding network capacity, rather than
addressing how to optimally route content across the Internet.
. In-house Developed Solutions. Some organizations have built their own
Internet content delivery systems. However, this approach requires a
significant ongoing investment of both capital and technical personnel,
is generally incapable of handling unpredictable network demands, and is
often an inefficient use of a content provider's overall resources.
. Caching. Caching is a technology that stores frequently requested
information in proximity to users, thereby reducing the amount of
Internet traffic. However, if organizations create new content, caching
does not enable them to send this new content out across the network;
instead, they must generally wait for that information to be requested
again before the update will be cached. Furthermore, organizations
typically cannot be guaranteed placement in the cache. Finally, caching
does not enable organizations to efficiently collect end user, buying and
usage patterns and other demographic data.
. Broadband Technologies. Many content providers are hoping that broadband
technologies being introduced will improve content delivery speed.
However, while these technologies may solve delivery speed over the
"local loop" segment of an end user's Internet connection, they only
increase the network capacity and computing requirements of content
providers.
Organizations typically want to focus on content development rather than
content delivery, and want to outsource solutions for their content delivery.
Sandpiper believes that content providers are increasingly seeking a
comprehensive, flexible outsourced solution that significantly enhances website
performance and reliability, offers control and manageability of content,
provides a scalable, cost-effective solution, and offers Internet broadcasting
and production capabilities.
The Sandpiper Solution
Sandpiper addresses the needs of content providers by providing a
comprehensive set of services for content delivery. Sandpiper's solution is
designed to improve website performance and reliability by moving content
closer to end-users from a globally distributed server network that
intelligently avoids Internet congestion. Based upon Sandpiper's patent-pending
Adaptive Content Distribution technology, Sandpiper's content delivery network
is able to monitor Internet traffic conditions in real-time, so that network
bottlenecks can be intelligently avoided, and content can be efficiently
routed.
Sandpiper believes that its solution provides the following benefits to its
customers:
. Comprehensive Outsourced Scalable Solution for Content
Distribution. Sandpiper allows customers to easily outsource more of
their content delivery needs, which enables them to focus on their
content development. By employing Sandpiper's solution, Sandpiper's
customers can avoid the capital and administrative expense of building,
operating and maintaining their own content delivery systems, and do not
need to commit the extra resources needed to scale their solution in
order to manage unpredictable network demands. In addition, Sandpiper's
solution includes streaming media production, Internet broadcasting and
other complementary services.
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. Flexible and Global Solution. Sandpiper's variable pricing structure
allows customers to subscribe on an annual or event basis. Customers pay
based on their bandwidth usage. Customers who subscribe on an annual
basis have the option to modify their service, daily or otherwise, should
their requirements change. Additionally, Sandpiper's customers can take
advantage of Sandpiper's extensive global infrastructure, which is
deployed through 25 distinct networks across five countries.
. Improved Website Performance for Multiple Content Types. Sandpiper's
solution significantly increases the speed at which websites deliver
content to end users. By intelligently avoiding Internet congestion and
moving content closer to users, Sandpiper's solution can improve content
delivery speed by two and in some cases up to ten times. Sandpiper's
solution supports a broad array of rich media types, including Hyper Text
Markup Language, or HTML, complex graphics such as images and logos,
dynamic content for personalized web pages, on-line event coverage
utilizing streaming audio and video media, and authenticated content for
premium service offerings. Sandpiper believes that maximizing both
website performance and the types of content that Sandpiper can deliver
enables content providers to deliver more media-rich content. Sandpiper
believes that this attracts more end users and generates more page views,
and ultimately results in increased advertising and e-commerce revenues.
. Protection of Customer Brand Identity. The unique architecture of
Sandpiper's solution enables customers to maintain the brand identity of
their websites, because our content delivery solution is transparent to
the end user. For example, Sandpiper does not make a material change to
Sandpiper's customer's universal resource locator, or URL. Therefore,
customers do not experience any brand degradation if they outsource their
content delivery to Sandpiper. Sandpiper believes that due to the
investments that Sandpiper's customers typically make to create and
manage their brand identity, the virtual transparency of Sandpiper's
solution is extremely important.
In addition to these benefits, Sandpiper's solution includes the following
technological features, which Sandpiper believes enables it to deliver a more
comprehensive solution than those offered by others:
. Open Architecture and Value-Added Services. Sandpiper's open architecture
enables customers to easily integrate their existing application and
publishing environment with Sandpiper's global network, providing users
with a cost-effective, scalable, and open solution. Sandpiper offers an
application programmers' interface, or API, that enables the integration
of Sandpiper's solution with other value-added services and applications,
whether created by Sandpiper, customers or third parties. Content
providers benefit from several third party applications that have been
integrated into Sandpiper's content delivery network. These applications
enable services such as global ad-delivery, turnkey publishing networks,
advanced reporting services, broadcast quality streaming services, and
content transformation services.
. Manageability and Flexibility. Sandpiper's solution enables content
providers to manage and control the content that they distribute. When
customers change any of their content, they have the capability to update
across Sandpiper's delivery network instantly. Sandpiper's solution also
enables customers to collect end-user usage patterns and other
demographic data. Sandpiper's solution requires no additional hardware,
software or technical personnel, can generally be deployed in less than a
day, and requires little or no maintenance.
. Reliability and Availability. Sandpiper's scalable, fault-tolerant
network consists of a number of enterprise class server clusters located
around the world. Sandpiper's clusters typically are configured with
fail-over switches, high-end Sun SPARC servers and RAID disk arrays, with
extensive storage capabilities and interconnected in a redundant
configuration. If one server should fail for any reason, other servers in
the cluster are available to provide the identical information and
functionality. Footprint also provides wide-area failover capability, so
if one entire cluster fails, it redirects users to a different cluster
site. Sandpiper manages this network on a 24x7 basis through its Network
Operations Center.
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The Sandpiper Strategy
Sandpiper's objective is to become the leading provider of comprehensive
global content delivery solutions. Key elements of Sandpiper's strategy are:
Provide a Comprehensive Solution for All Content Types. Sandpiper intends to
support the widest range of content types in order to provide our customers
with a comprehensive outsourced solution and the ability to maximize their
website performance improvements. Sandpiper currently supports the delivery of
multiple content types, such as graphics, HTML, streaming media, authenticated
content and dynamic content. Sandpiper will continue to develop technologies to
support new content types as they develop in order to provide our customers
with the most comprehensive content delivery solution available in the market.
Add Services and Applications to Sandpiper's Platform. Sandpiper plans to
provide additional applications and services that complement our content
delivery platform in order to adapt to changing customer requirements and
market conditions.
Leverage Sandpiper's Partnerships to Facilitate Broad Market
Acceptance. Sandpiper expects to expand upon its existing strategic
relationships in order to establish Sandpiper's solution as the de facto
industry standard for Internet content delivery. Sandpiper has established
strategic relationships with a number of industry leaders, including AOL,
Inktomi, Microsoft, Real Networks and Vignette. Sandpiper anticipates that it
will enter into relationships with other strategic partners that can help
validate Sandpiper's content delivery solution and provide Sandpiper with
access to new markets and customers.
Expand Sandpiper's Geographic Coverage and Distribution Channels. Sandpiper
intends to expand its network operations both domestically and internationally
in order to improve its network's performance by establishing relationships
with additional network service providers. Sandpiper plans to enhance its
direct sales effort. For example, Sandpiper recently opened a sales office in
the United Kingdom and established a European sales organization. In addition,
Sandpiper plans to develop its indirect sales channels worldwide by entering
into agreements with new partners that will enable them to market and sell
Sandpiper's services.
Services
Sandpiper's Internet content delivery services are a new type of
subscription-based service that improves speed, reliability and scalability of
even the most sophisticated websites. Sandpiper's infrastructure approach is to
optimize the delivery of web content by replicating it through a global network
of servers. Sandpiper has developed software that monitors Internet traffic and
delivers content quickly by avoiding Internet bottlenecks. Subscriptions for
Sandpiper's content delivery services are based on network usage. Sandpiper's
content delivery service adds value by serving multiple content types,
providing an open architecture to allow easy integration to other complementary
technologies and offering comprehensive publishing and management tools.
Customers
Our customers include many of the Internet's leading content providers such
as AOL, Blue Mountain Arts, CNBC.com, Intuit, Microsoft, PBS.org and Value
America.
Strategic Relationships
Sandpiper has developed strategic relationships with companies such as
Alteon WebSystems, AOL, Inktomi, Microsoft, NBC, Real Networks, Sun
Microsystems, Times Mirror and Vignette. Sandpiper believes that these
strategic relationships, and others that we intend to develop in the future,
will assist Sandpiper's penetration of the Internet content delivery market,
enhance the capabilities of Sandpiper's solution, increase the visibility of
Sandpiper's brand, and improve access to additional sales channels, customers
and markets.
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Significant investments that have been made by certain of Sandpiper's
strategic partners are described below:
<TABLE>
<CAPTION>
Investment
(millions) Description
---------- -----------
<C> <C> <S>
America Online Corporation.. $3.0 Interactive services, web brands,
Internet technologies and e-commerce
services
Inktomi Corporation......... 2.0 Scalable software applications for
large-scale networks, including
network products and portal services
NBC......................... 2.0 Media distribution
Times Mirror Corporation.... 2.0 Media distribution
</TABLE>
Certain of Sandpiper's strategic relationships are described below:
America Online. AOL is the world's leader in interactive services, Web
brands, Internet technologies, and e-commerce services. In April 1999 Sandpiper
entered into a strategic relationship with AOL, allowing Sandpiper to deploy
servers directly inside the AOL Network and allowing AOL to refer its content
partners to Sandpiper to optimize delivery of those partners' content outside
of the AOL network. In August 1999, Sandpiper deployed streaming media servers
inside the AOL Network. These installations provide high-quality content
delivery and streaming media services to AOL's more than approximately 19
million subscribers. Sandpiper's customers can update their content that is
stored in AOL caches, and receive accurate AOL traffic reports, through the
coupling of AOL's caching servers into Sandpiper's network.
Inktomi. In May 1999, Sandpiper entered into a strategic relationship with
Inktomi, the leading provider of Internet infrastructure software and services.
Sandpiper works with Inktomi to provide content delivery solutions to Internet
content providers, Internet access providers and Internet hosting companies. As
a result of this non-exclusive relationship, Sandpiper is now able to integrate
Inktomi's caching software, Traffic Server, into Sandpiper's solution. Through
this relationship, Sandpiper is now able to make available to its customers
what it believes is the industry's most advanced caching technology. As Inktomi
adds additional features to its caching software, Sandpiper will have the
opportunity to integrate such features into our solution. We have also engaged
in joint sales, marketing, and development activities with Inktomi.
Microsoft. In September 1999, Sandpiper entered into a strategic
relationship with Microsoft, the leading provider of Internet streaming media
technologies. Sandpiper is integrating Windows Media Technologies into
Sandpiper's content delivery solution, and is working with Microsoft to build
the Internet's first million-user streaming network. Sandpiper also joined
Microsoft's Windows Media Broadband Jumpstart program, a consortium of more
than 30 companies focused on accelerating the availability of broadband media
to the Internet community at-large. As part of Sandpiper's agreement, Microsoft
has also agreed to purchase Sandpiper's streaming services, and has selected us
as their content delivery partner for Windowsmedia.com. Sandpiper will engage
in joint sales and marketing activities with Microsoft, and will have the
opportunity to incorporate additional Microsoft technologies into Sandpiper's
solution.
Network Deployment and Operations
Sandpiper's network consists of two major components:
Server Network. Sandpiper has deployed a worldwide network of powerful
servers, which are deployed through 25 distinct networks across five countries.
Sandpiper's network currently offers over 8 gigabits of bandwidth and 4.5
terabytes of storage. The sites where Sandpiper deploys its servers are chosen
for their geographic and network topological proximity to Internet users. By
serving Sandpiper's customers' content from locations closer to end users,
Sandpiper can deliver a higher quality end-user experience, both in terms of
performance and reliability.
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Sandpiper's sites are comprised of one or more server clusters, each of
which consists of two to sixteen servers. A high-performance network switch
provides load balancing and fail-over support for each cluster.
Sandpiper's servers are a combination of high-end Sun SPARC servers with one
gigabyte of main memory and a minimum of 40 gigabytes of reliable disk storage.
Sandpiper also serves Microsoft's streaming technology using similarly
configured Intel Pentium-based servers running Windows NT. Sandpiper also
deploys remote console/remote power control devices to permit complete remote
control of Sandpiper's server clusters from its network operations center.
Sandpiper has servers deployed at the following geographic sites:
<TABLE>
<S> <C> <C>
Arlington, VA Herndon, VA Reston, VA
Burbank, CA Irvine, CA San Jose, CA
Cambridge, MA London, UK Santa Clara, CA
Charlestown, MA Los Angeles, CA Seattle, WA
Chicago, IL Melbourne, Australia Sunnyvale, CA
Dallas, TX New York, NY Tokyo, Japan
Dulles, VA Palo Alto, CA Vienna, VA
Frankfurt, Germany Pasadena, CA
</TABLE>
Network Operations Center. Sandpiper's network operations center is staffed
on a continuous basis (24x7) and enables Sandpiper to respond promptly to
customer inquiries or network events that require manual intervention. The
center is comprised of high-end servers that are connected to the Internet via
dedicated redundant high-speed access lines. Sandpiper uses a comprehensive
suite of automated monitoring and reporting tools, providing real-time
visibility into the stability of Sandpiper's network and Sandpiper's customers'
web sites. Sandpiper employs procedures that enable Sandpiper to ensure that
the appropriate levels of technical support can be applied to any problem
within a few minutes, at any time of the day or night.
To ensure uninterrupted operation of Sandpiper's network operations center,
Sandpiper's facilities have extensive back-up power capabilities. Sandpiper
also has redundant access to our network through multiple Internet access
providers. In the event of a catastrophic failure, backup functions can be
established from one of several alternate sites.
Technology
The proprietary technologies that Sandpiper deploys throughout its network
incorporate the following:
Network Mapping and Sensing. Sandpiper has developed a map of the Internet's
topology that can identify where a user is connected to the Internet. This map
is updated regularly to take into account changes in traffic routing policies
that the major Internet access providers make from time to time. For
efficiency, Sandpiper organizes related users into groups, where the sizes of
the groups depend on the characteristics of the network in which they reside
and the routing relationships among such networks. Sandpiper's network map also
contains proprietary network topology and routing policy information, some of
which is provided to Sandpiper by its network partners.
Real Time Monitoring and Content Routing. Sandpiper's software continuously
monitors the state of the Internet, and develops estimates of the speed of
delivery of content among all of Sandpiper's servers and the tens of thousands
of user address groups that Sandpiper has identified. This performance
information is gathered by more than 200 probes located around the world, and
accurately identifies current points of network congestion and failure,
enabling Sandpiper to route Sandpiper's customer's traffic around hot spots and
black holes that have become commonplace in the Internet.
Sandpiper's software also continuously monitors the availability of all of
its servers, in order to ensure that the best site for a user, from a network
performance perspective, also has sufficient resources to handle
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additional traffic. This information is used for global load balancing, and
prevents an individual site from becoming overloaded if its neighboring sites
are suffering from network problems. Sandpiper tracks all critical server
resources such as CPU utilization, number of concurrent sessions, disk space,
and local bandwidth in order to efficiently utilize Sandpiper's content
delivery system.
Application Programming Interface. Sandpiper has developed the industry's
first open content delivery platform, and have developed an API to create a
plug-in interface to our network. This extensible framework will enable
Sandpiper to quickly incorporate new third party technologies into Sandpiper's
network. Through Sandpiper's API, customers, technology vendors, and Internet
access providers can obtain our key content delivery technologies and develop
value-added service offerings.
Cache Coupling. Caching servers that store frequently requested information
are being deployed widely by Internet access providers as a means of reducing
bandwidth costs and improving their end user performance. From a content
provider's perspective, caching has historically presented several challenges,
especially with respect to issues such as stale content and traffic reporting.
Sandpiper's cache coupling technology addresses these concerns, and enables
Sandpiper's customers to control, manage and monitor the content that they
place inside the caches of Internet access providers. Sandpiper's technology
enables all types of caches (including those of Inktomi, Network Applications,
Cache Flow and Squid) deployed by Internet access providers to become servers
within Sandpiper's network.
Content Delivery Management. Sandpiper's customers require comprehensive
control over the content delivered from its servers. Sandpiper's service
includes technology that enables its customers to manage their content in many
ways, including publishing management tools, logs and statistics. Sandpiper's
technology enables its customers to efficiently ensure that only fresh content
is served to end users, no matter how often the content on their website may
change.
Sandpiper's customers also take advantage of Sandpiper's ability to serve
HTML resources. As a result, Sandpiper's customers need the ability to track
the traffic metrics (hit counts) from the delivery of those pages. Sandpiper's
service automatically accumulates the traffic logs generated by each customer,
and makes summary or detailed log information available to the subscriber on
demand.
Sandpiper's service allows subscribers to monitor the status of their
content as it is being delivered by Sandpiper's network. Sandpiper's software
tools continuously report key utilization statistics that can be made available
to Sandpiper's customers on a real-time basis.
Research and Development
Sandpiper believes that strong product development capabilities are
essential to its strategy of enhancing its core technology, developing
additional applications incorporating that technology, and maintaining the
competitiveness of its service offerings. Sandpiper has invested significant
time and resources in creating a structured process for undertaking all product
development projects. This involves all functional groups and all levels within
Sandpiper and is designed to provide the framework for defining and addressing
the steps, tasks and activities to bring service concepts and development
projects to market successfully. In addition, Sandpiper has actively recruited
key computer scientists, engineers and software developers with expertise and
degrees in the areas of Internet content delivery and has complemented these
individuals by hiring senior management with extensive backgrounds in the
Internet network infrastructure, enterprise software and related Internet
industries. Through this mix of personnel, Sandpiper strives to create and
maintain an environment of rapid innovation and service release.
Since inception, Sandpiper has focused its research and development efforts
on developing and enhancing the content delivery technology. Sandpiper is
currently working to add features and new functionality to its existing
services. Sandpiper's research and development expenses totaled $4.4 million
since inception. As of October 31, 1999, Sandpiper had 22 individuals engaged
in research and development efforts.
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Sales and Marketing
Sandpiper sells its services through both direct and indirect sales
channels. Currently, Sandpiper's sales efforts focus upon the Internet's 500
most visited websites, websites with rich content, and companies with
substantial global operations and distribution requirements.
Sandpiper maintains its own direct sales force in order to introduce and
inform prospective customers and partners about its services. Region managers
are assigned to various geographic territories and are responsible for direct
and indirect sales within those territories. Region managers are supported by
sales engineers, inside sales personnel and an administrative staff. At October
31, 1999, Sandpiper had 21 employees in its direct sales organization.
Sandpiper is also expanding its direct international sales efforts. For
example, Sandpiper recently opened a sales office in the United Kingdom, and
established a European sales organization.
Additionally, Sandpiper has developed multiple partner programs for web
developers, hosting companies and other Internet access providers which enable
these companies to either bundle and resell Sandpiper's services directly to
their customers, or to refer their customers to Sandpiper. Partners who resell
Sandpiper's services directly to their customers have the option of maintaining
full account control, including billing and collection, and can use their own
brand names, together with Sandpiper's, when they sell Sandpiper's services.
Sandpiper's marketing organization is dedicated to supporting its sales
efforts, promoting its name and services, and generally increasing public
awareness of the services Sandpiper offers. Sandpiper marketing efforts include
public relations, which has resulted in recognition in numerous industry and
financial publications, public speaking and conference participation, and
extensive print advertising.
Competition
Sandpiper competes in a market that is new, intensely competitive, highly
fragmented and rapidly evolving. Sandpiper competes primarily with companies
offering products and services that partially address Internet performance
problems, including companies that provide web-hosting and caching.
Sandpiper believes that it competes primarily on the basis of a number of
factors, including:
. performance of Sandpiper's service, including speed of delivery,
reliability, capability during unanticipated network demands, and global
content delivery capabilities;
. the ability to address multiple content types;
. the ability to protect a customer's brand identity;
. price; and
. the ease of implementation and use of Sandpiper's service.
In addition, with respect to Sandpiper's direct competitors such as Akamai
Technologies, Inc., Sandpiper believes that price plays an increased role in
customers' decision-making processes.
Many of Sandpiper's competitors have longer operating histories, greater
name recognition and substantially greater financial, technical and marketing
resources than we do. Some of Sandpiper's current or potential competitors have
the financial resources to withstand substantial price competition, and many
may be able to respond more quickly than Sandpiper can to new or emerging
technologies and changes in customer requirements. Moreover, many of
Sandpiper's competitors have more extensive customer bases, broader customer
relationships and broader industry alliances that they could use to their
advantage in competitive situations, including relationship with many of
Sandpiper's current and potential customers.
Increased competition could result in, among other things, price and revenue
reductions, increased costs, loss of customers and loss of market share, any of
which could materially and adversely affect Sandpiper's business, financial
condition and operations.
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Intellectual Property and Licensing
Sandpiper's success and ability to compete are dependent on its ability to
develop and maintain the proprietary aspects of its technology and operate
without infringing on the proprietary rights of others. Sandpiper relies and
expects to rely on a combination of patent, trademark, trade secret and
copyright laws and contractual restrictions to protect the proprietary aspects
of its technology. These legal protections afford only limited protection for
Sandpiper's technology. Sandpiper has no patents, but has filed patent
applications with the United States Patent and Trademark Office with respect to
its Internet content delivery service.
Sandpiper seeks to limit disclosure of its intellectual property by
requiring employees and consultants with access to its proprietary information
to execute confidentiality agreements with Sandpiper and by restricting access
to its source code. Due to rapid technological change, Sandpiper believes that
factors such as the technological and creative skills of its personnel, new
product developments and enhancements to existing products are more important
than the various legal protections of Sandpiper's technology to establishing
and maintaining a technology leadership position. Despite our efforts to
protect Sandpiper's proprietary rights, unauthorized parties may attempt to
copy aspects of Sandpiper's products or to obtain and use information that
Sandpiper regards as proprietary. The laws of many countries do not protect
Sandpiper's proprietary rights to as great an extent as do the laws of the
United States. Litigation may be necessary in the future to enforce Sandpiper's
intellectual property rights, to protect Sandpiper's trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. Any such resulting
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on Sandpiper's business, operating results
and financial condition. There can be no assurance that Sandpiper's means of
protecting Sandpiper's proprietary rights will be adequate or that Sandpiper's
competitors will not independently develop similar technology. Any failure by
Sandpiper to meaningfully protect its property could have a material adverse
effect on Sandpiper's business, operating results and financial condition.
Employees
As of October 31, 1999, Sandpiper had a total of 86 full-time employees. Of
these employees, 22 were engaged in research and development, 27 in sales and
marketing, 17 in customer support and network operations, seven in professional
services, and 13 in finance, business development and administration. None of
Sandpiper's employees is represented by a labor union. Sandpiper has not
experienced any work stoppages and it considers its relations with its
employees to be good. Sandpiper expects to hire a significant number of key
officers and other employees this year.
Sandpiper's future performance depends in significant part upon the
continued service of its key technical, sales and senior management personnel,
none of whom is bound by an employment agreement requiring service for any
defined period of time. The loss of the services of one or more of Sandpiper's
key employees could have a material adverse effect on Sandpiper's business,
financial condition and results of operations. Sandpiper's future success also
depends on its continuing ability to attract, train and retain highly qualified
technical, sales and managerial personnel. Competition for such personnel is
intense, and there can be no assurance that Sandpiper can retain its key
personnel in the future.
Facilities
Sandpiper's principal executive offices are located in Thousand Oaks,
California, in a 13,000 square foot facility under a lease expiring in March
2005. Sandpiper believes that its facilities will need to be expanded within
the next 12 months. However, Sandpiper may not be able to lease additional
space on commercially reasonable terms or at all.
Legal Proceedings
Sandpiper currently is not subject to any material legal proceedings.
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SANDPIPER SELECTED FINANCIAL DATA
The following selected historical consolidated financial data should be read
in conjunction with Sandpiper's consolidated financial statements and related
notes and Sandpiper's "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The consolidated statement of operations
data for each of the two years ended December 31, 1998 and 1997 (no operating
activities occurred from December 26, 1996 (inception) to December 31, 1996)
and the consolidated balance sheet data at December 31, 1998 and 1997, are
derived from the consolidated financial statements of Sandpiper which have been
audited by Ernst & Young, independent accountants. The selected financial data
for the nine month periods ended September 30, 1999 and 1998 and as of
September 30, 1999 and 1998 have been derived from Sandpiper's unaudited
financial statements and in the opinion of Sandpiper's management include all
adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results of operations and financial position of
Sandpiper for those periods in accordance with generally accepted accounting
principles. Historical results are not necessarily indicative of the results to
be expected in the future.
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
------------------------ ---------------------------------
1997 1998 1998 1999
----------- ----------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $ -- $ 5,700 $ -- $ 242,954
Cost of revenues........ -- 1,695,057 850,200 2,641,767
----------- ----------- --------------- ----------------
Gross profit............ -- (1,689,357) (850,200) (2,398,813)
----------- ----------- --------------- ----------------
Operating expenses:
Marketing and selling
expenses, net........ -- 1,272,441 547,203 4,056,155
Product development
expenses, net........ 1,159,715 1,382,635 1,121,722 1,820,986
General and
administrative
expenses............. 28,149 876,093 677,626 1,480,912
Amortization of deferred
compensation........... -- -- -- 580,827
----------- ----------- --------------- ----------------
Total operating
expenses........... 1,187,864 3,531,169 2,346,551 7,938,880
----------- ----------- --------------- ----------------
Operating loss.......... (1,187,864) (5,220,526) (3,196,751) (10,337,693)
Interest income, net.... 19,325 126,374 125,418 287,671
Provision for income
taxes.................. -- -- 800 2,856
----------- ----------- --------------- ----------------
Net loss.............. $(1,168,539) $(5,094,152) $(3,072,133) $ (10,052,878)
=========== =========== =============== ================
Basic and diluted net
loss per share......... $ (0.23) $ (0.79) $ (0.48) $ (1.46)
=========== =========== =============== ================
Pro forma basic and
diluted net loss per
share.................. $ (0.32) $ (0.60)
=========== ================
Weighted average
number of shares used
in computing basic
and diluted net loss
per share............ 5,095,658 6,418,159 6,354,306 6,872,465
Weighted average
number of shares used
in computing pro
forma basic and
diluted net loss per
share................ 16,021,472 16,856,112
<CAPTION>
December 31, September 30,
------------------------ ---------------------------------
1997 1998 1998 1999
----------- ----------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 5,728,826 $ 603,812 $ 2,583,048 $ 10,853,468
Working capital......... 5,342,053 98,466 1,988,706 7,810,700
Total assets............ 5,774,176 1,824,720 3,893,036 17,750,798
Long term obligations... -- 1,300,586 792,945 1,666,173
Redeemable preferred
stock.................. 6,552,920 6,674,442 6,674,442 28,101,208
Shareholders' deficit... (1,167,539) (6,150,308) (4,169,602) (15,475,754)
</TABLE>
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SANDPIPER MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes included elsewhere in this prospectus,
including the "Unaudited Pro Forma Financial Statements." This discussion
contains forward-looking statements based on current expectations, which
involve risks and uncertainties. Actual results and the timing of certain
events could differ materially from the forward-looking statements as a result
of a number of factors, including those referred to in the section entitled
"Risk Factors."
Overview
Sandpiper provides Internet content delivery services. Sandpiper's solution
is designed to improve website performance, reliability and scalability by
delivering content from a globally distributed server network that
intelligently avoids Internet congestion and serves content closer to users.
Sandpiper was incorporated in December 1996 and began offering its service
in September 1998. From December 1996 to September 1998, Sandpiper had no
revenues. Sandpiper's operations consisted primarily of startup activities,
including the development of its core technology and network infrastructure,
the recruiting of personnel, and the raising of capital. Since launching its
service, Sandpiper has continued these operating activities and has also
focused on building sales momentum, cultivating partnering and other strategic
relationships, promoting its brand name and establishing network and customer
service operations. Sandpiper's cost of sales and operating expenses have
increased significantly since inception. This trend reflects the costs
associated with Sandpiper's formation, as well as increased efforts to promote
its brand, build market awareness, attract new customers, recruit personnel,
build operating infrastructure and develop its network and the associated
systems that Sandpiper uses to monitor the activities of its customers'
websites and the general conditions of the Internet.
Sandpiper has incurred significant losses since inception and, as of
September 30, 1999, had an accumulated deficit of $15.5 million. Sandpiper
expects operating losses and negative cash flow to continue for the foreseeable
future. Sandpiper anticipates its losses will increase significantly from
current levels, because it expects to incur additional costs and expenses
related to brand development, marketing and other promotional activities, the
expansion of its content delivery network, and the development of relationships
with certain strategic business partners.
Sandpiper derives its revenue from the sale of its content delivery services
under contracts with terms typically ranging from three to 12 months. Sandpiper
recognizes revenue based on fees for the amount of Internet content delivered
through its services. Generally speaking, customers pay based on their
bandwidth usage. Customers who subscribe on an annual basis have the option to
modify their service, daily or otherwise, should their requirements change.
Because of the increased cost of international connectivity, there is a
separate international pricing structure for Sandpiper's subscribers that is
similar to the pricing structure for its domestic subscribers. Revenue is
recognized over the period that services are provided, and generally begin in
the month for which such services are billed, which generally occurs 30 days
after such services have begun.
To date, most of Sandpiper's direct sales have been in North America, but
Sandpiper expects that revenue from customers based outside the United States
will increase in future periods. In particular, Sandpiper plans to develop its
indirect sales channels worldwide by entering into agreements with new partners
that will enable them to market and sell its services. Sandpiper expects that
revenue from indirect sales channels will increase in future periods, and that
a small number of customers will account for a substantial portion of its
revenues for the foreseeable future. While Sandpiper is seeking to diversify
its customer base, there can be no assurance that these efforts will be
successful.
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Sandpiper has a limited operating history on which to base an evaluation of
its business and prospects. You must consider its prospects in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly companies in a new and rapidly
evolving market such as content delivery services. Such risks for Sandpiper
include, but are not limited to, an evolving and unpredictable business model,
and management of growth. To address these risks, Sandpiper must, among other
things, maintain and expand its customer base, implement and successfully
execute its business and marketing strategy, continue to develop and upgrade
its technology and systems that it uses to deliver customers' content, provide
superior customer service, respond to competitive developments and attract,
retain and motivate qualified personnel. Sandpiper cannot assure that it will
be successful in addressing such risks, and its failure to do so could have a
material adverse effect on its business, prospects, financial condition and
results of operations.
Options granted in the fiscal year ended December 31, 1998, and the nine
months ended September 30, 1999 have been considered to be compensatory.
Deferred compensation associated with such options for the year ended December
31, 1998 was not material and no deferred compensation was recorded. Deferred
compensation associated with such options for the nine months ended September
30, 1999 amount to $4.2 million. Of this amount, $581,000 million was charged
to operations for the nine months ended September 30, 1999, and $3.6 million
will be amortized over the vesting periods of the applicable options through
September 30, 2003. Through September 30, 1999, Sandpiper granted options to
purchase an aggregate of 1.6 million shares of Sandpiper common stock at
exercise prices ranging from $1.00 to $5.00 per share. Sandpiper granted most
of these options to new employees.
As of September 30, 1999, Sandpiper had $17.9 million of federal and state
net operating loss carry forwards for tax reporting purposes available to
offset future taxable income. Such net operating loss carry forwards expire at
various dates beginning in 2004 to the extent that they are not utilized. In
addition, as of September 30, 1999, Sandpiper had $0.2 million of federal and
state research tax credit carry forwards that expire beginning in 2013.
Sandpiper has not recognized any benefit from the future use of loss or credit
carry forwards for these periods or for any other periods, since inception.
Management's evaluation of all available evidence for assessing realizability
of the tax benefits of such loss carry forwards indicates that the underlying
assumptions of future profitable operations contain risks that do not provide
sufficient assurance to recognize the tax benefits currently. Furthermore,
utilization of the tax loss carryforwards may be subject to significant
utilization limitations which may inhibit the ability to use carryforwards in
the future.
Revenues
Revenues as reported for the nine months ended September 30, 1999 increased
to $242,954 from $5,700 in the year ended December 31, 1998. The increase in
revenue is attributable to the commercial introduction of Sandpiper's service
to customers in September 1998.
Gross Profit
Gross profit for the nine months ended September 30, 1999 decreased to a
$2.4 million gross deficit from a gross deficit of approximately $1.7 million
for the fiscal year ended December 31, 1998. The gross deficit resulted from
the initial installation of Sandpiper's test network in early 1998 and the
installation of Sandpiper's operating network in July 1998, in anticipation of
the introduction of its service in September 1998. Gross profit is affected by
the cost of revenues, which consists primarily of bandwidth cost, rack space
rentals for the servers at Internet access providers' facilities, depreciation
of network equipment and internal labor costs associated with the managing of
Sandpiper's network.
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Operating Expenses
Marketing and sales. Marketing and sales expenses consist of salaries and
related expenses associated with implementing Sandpiper's sales and marketing
programs, public relations expenses and advertising expenses. During the nine
months ended September 30, 1999, marketing and sales expenses increased to
approximately $4.1 million from approximately $1.3 million for the fiscal year
ended December 31, 1998, primarily as a result of the establishment of both
functions during 1998 to prepare for and direct the launch of Sandpiper's
service in 1998 and the launch of a significant marketing campaign in the third
quarter of 1999. Sandpiper believes that the development of both the domestic
and international sales functions for its service and the associated need to
develop the marketplace for this new service is critical to its success. As a
result, Sandpiper expects that these expenses will continue to increase in
absolute dollars in future periods.
Product development. Product development expenses consist primarily of
salaries and related expenses associated with the development, testing,
deployment and enhancement of Sandpiper's technology and network. These costs
increased to approximately $1.8 million for the nine months ended September 30,
1999 from approximately $1.4 million for the fiscal year ended December 31,
1998, primarily as a result of adding additional personnel to the product
development team during the latter half of 1998. Sandpiper believes that
continued investment in product development is critical to attaining its
strategic objectives and, as a result, expects product development expenses to
increase significantly in absolute dollars in future periods.
General and administrative expenses. General and administrative expenses
consist of salaries and related expenses for executive and administrative
personnel, facilities expenses, professional services expenses, travel and
other general corporate expenses. General and administrative expenses increased
to $1.5 million during the nine months ended September 30, 1999 from
approximately $0.9 million for the fiscal year ended December 31, 1998. This
increase was primarily attributable to increased headcount and related expenses
associated with the hiring of additional personnel, and increased professional
services expenses. Sandpiper expects general and administrative expenses to
increase in absolute dollars as it expands its staff and incurs additional
costs related to the growth of its business.
Interest income (expense), net. Interest income (expense), net, consists of
earnings on Sandpiper's cash and cash equivalents, net of interest expense
attributable to lease and term debt associated with the financing of Sandpiper
assets, primarily network equipment. Net interest income increased to $287,671
for the nine months ended September 30, 1999 from $126,374 for the fiscal year
ended December 31, 1998, and was primarily attributable to earnings on higher
average cash and cash equivalent balances during 1998.
Income taxes. As of September 30, 1999, Sandpiper had $17.9 million of net
operating loss carryforwards for federal and state income tax purposes, which
expire beginning in 2004. Sandpiper has provided a full valuation allowance on
the deferred tax asset, consisting primarily of net operating loss
carryforwards, because of uncertainty regarding its realizability. Changes in
the ownership of Sandpiper's common stock, as defined in the Internal Revenue
Code of 1986, as amended, may restrict the utilization of such carryforwards.
See Note 4 of the notes to Sandpiper's financial statements.
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Quarterly Results of Operations
The following tables set forth certain unaudited quarterly statement of
operations data of Sandpiper, on an unaudited combined basis, for the seven
quarters ended September 30, 1999. This unaudited quarterly information has
been derived from Sandpiper unaudited financial statements and, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods covered. The quarterly data should be read in conjunction with
Sandpiper financial statements and related notes. The operating results for any
quarter are not necessarily indicative of the operating results for any future
period.
<TABLE>
<CAPTION>
March 31, June 30, Sept. Dec. 31, March June 30, Sept. 30,
1998 1998 30, 1998 1998 31, 1999 1999 1999
--------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sandpiper:
Revenues............... $ -- $ -- $ -- $ 5,700 $ 36,726 $ 74,689 $ 131,539
Operating loss......... (83,668) (234,967) (531,565) (698,067) (593,973) (616,165) (1,188,675)
Operating margin....... -- -- -- (12,247%) (1,617%) (825%) (904%)
</TABLE>
Sandpiper's revenue and operating results will vary significantly from
quarter to quarter due to a number of factors, many of which are outside of its
control and any of which may cause its stock price to fluctuate. The primary
factors that may affect Sandpiper's revenue and operating results include the
following:
. the timing and size of sales of its services;
. changes in its pricing policies or the pricing policies of its
competitors;
. the length of the sales cycle and implementation periods for its
services;
. increases in the prices of, and the availability of, the products and
services it purchases, including bandwidth;
. new product and service introductions and enhancements by its competitors
and itself;
. its ability to attain and maintain quality levels for its services;
. costs related to acquisitions of technology or businesses; and
. general economic conditions as well as those specific to the Internet and
related industries.
In addition, Sandpiper's quarterly operating results have been, and are
likely to continue to be, influenced by seasonal fluctuations in its sales.
Because its sales have grown in each quarter since inception, these
fluctuations may not be apparent from its historical financial statements.
However, Sandpiper believes that its sales and sales growth from period to
period have been, and will continue to be, affected by the seasonal demand for
its services from its customers, which will be in turn primarily dependent upon
the demand for their services from their customers. For example, Sandpiper
believes that Internet usage will continue to peak, at least in the next
several years, in the fourth quarter of each calendar year as a result of the
increase in e-commerce transactions resulting from the holiday season. As a
result, Sandpiper anticipates that its revenue may peak in the first quarter of
each calendar year due to the nature of its deferred billing cycles.
Due to the above factors, Sandpiper believes that quarter-to-quarter
comparisons of its operating results are not a good indication of its future
performance. It is likely that in some future quarters, Sandpiper's operating
results may be below the expectations of public market analysts and investors.
Liquidity and Capital Resources
Since inception, Sandpiper has financed its operations primarily through
private sales of preferred stock that, through October 31, 1999, have totaled
$28.1 million.
Net cash used in operating activities was $6.6 million in the nine months
ended September 30, 1999, $4.8 million in the year ended December 31, 1998, and
$0.9 million in the year ended December 31, 1997. Net
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cash used in operating activities for each of these periods primarily consisted
of net losses, partially offset by increases in depreciation and amortization
of deferred compensation. The significant increase in working capital during
the fiscal year ended December 31, 1998 was primarily due to significant growth
in Sandpiper's operations.
Net cash used in investing activities was $6.4 million in the nine months
ended September 30, 1999, $1.5 million in the year ended December 31, 1998, and
$0.04 million in the year ended December 31, 1997. Net cash used in investing
activities for each of these periods primarily consisted of purchases of
equipment and systems, including computer equipment, fixtures and furniture.
Net cash provided by financing activities was $23.2 million in the nine
months ended September 30, 1999, $1.2 million in the year ended December 31,
1998, and $6.7 million in the year ended December 31, 1997. Net cash provided
by financing activities during the nine months ended September 30, 1999
primarily consisted of proceeds of $21.4 million from the issuance of preferred
stock, during the fiscal year ended December 31, 1998 primarily consisted of
proceeds of $1.1 million from the financing of capital expenditures under
capital lease agreements, and during the year ended December 31, 1997,
primarily consisted of proceeds of $6.6 million from the issuance of preferred
stock.
As of September 30, 1999, Sandpiper had $10.9 million of cash and cash
equivalents. As of that date, Sandpiper's principal commitments consisted of
obligations outstanding under operating leases. Although Sandpiper has no
material commitments for capital expenditures, Sandpiper anticipates a
substantial increase in its capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure and personnel.
Sandpiper currently anticipates that its available funds will be sufficient
to meet its anticipated needs for working capital through the expected
completion of the merger with Digital Island. Sandpiper cannot be certain that
additional financing will be available to it on favorable terms when required,
or at all.
Year 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. Sandpiper uses software, computer technology and other services
internally developed and provided by third-party vendors that may fail due to
the year 2000 phenomenon. For example, Sandpiper is dependent on the financial
institutions involved in processing its customers' payments for Internet
services and third parties that host its servers. It is also dependent on
telecommunications vendors to maintain its network to deliver content through
its network on behalf of its customers.
Sandpiper has reviewed the year 2000 compliance of its internally developed
proprietary software. This review included testing to determine how its systems
will function at and beyond the year 2000. Since inception, Sandpiper has
internally developed substantially all of the systems for the operation of its
network. These systems include the software used to provide its distribution
and monitoring functions on its network, as well as back-up capabilities. Based
upon its assessment, Sandpiper believes that its internally developed
proprietary software is year 2000 compliant.
Sandpiper has assessed the year 2000 readiness of its third-party supplied
software, computer technology and other services, which include software for
use in its accounting, database and security systems. The failure of such
software or systems to be year 2000 compliant could have a material negative
impact on Sandpiper's corporate accounting functions and the operation of its
network. As part of the assessment of the year 2000 compliance of these
systems, Sandpiper has sought assurances from these vendors that their
software, computer technology and other services are year 2000 compliant. Based
upon the results of this assessment, Sandpiper developed and completed, as
necessary, a remediation plan with respect to third-party software, third-party
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<PAGE>
vendors and computer technology and services that may fail to be year 2000
compliant. The failure of Sandpiper's software and computer systems and of its
third-party suppliers to be year 2000 complaint would have a material adverse
effect on Sandpiper.
The year 2000 readiness of the general infrastructure necessary to support
Sandpiper's operations is difficult to assess. For instance, Sandpiper depends
on the integrity and stability of the Internet to provide its services.
Sandpiper also depends on the year 2000 compliance of the computer systems and
financial services used by its bandwidth providers and its customers. Thus, the
infrastructure necessary to support its operations consists of a network of
computers and telecommunications systems located throughout the world and
operated by numerous unrelated entities and individuals, none of which has the
ability to control or manage the potential year 2000 issues that may impact the
entire infrastructure. Sandpiper's ability to assess the reliability of this
infrastructure is limited and relies solely on generally available news
reports, surveys and comparable industry data. Based on these sources,
Sandpiper believes most entities and individuals that rely significantly on the
Internet are carefully reviewing and attempting to remediate issues relating to
year 2000 compliance, but it is not possible to predict whether these efforts
will be successful in reducing or eliminating the potential negative impact of
year 2000 issues. A significant disruption in the ability of consumers to
reliably access the Internet or portions of it would have an adverse effect on
demand for Sandpiper's services and would have a material adverse effect on
Sandpiper.
At this time, Sandpiper has not yet developed a contingency plan to address
situations that may result if Sandpiper or its vendors are unable to achieve
year 2000 compliance because Sandpiper currently does not believe that such a
plan is necessary. The cost of developing and implementing such a plan, if
necessary, could be material. Any failure of Sandpiper's material systems, its
vendors' material systems or the Internet to be year 2000 compliant could have
material adverse consequences for Sandpiper. Such consequences could include
difficulties in operating Sandpiper's network effectively, taking customer
orders, making content deliveries or conducting other fundamental parts of its
business.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position, or SOP No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires entities to capitalize certain costs related to internal-use software
once certain criteria have been met. Sandpiper expects that the adoption of SOP
No. 98-1 will not have a material impact on its financial position or results
of operations. Sandpiper adopted SOP No. 98-1 effective January 1, 1999.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. Sandpiper expects that the adoption of SOP No. 98-5 will not have a
material impact on its financial position or results of operations. Sandpiper
adopted SOP No. 98-5 effective January 1, 1999.
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. FAS No. 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments, as well as other hedging
activities. Because Sandpiper does not currently hold any derivative
instruments and does not engage in hedging activities, it expects that the
adoption of FAS No. 133 will not have a material impact on its financial
position or results of operations. Sandpiper adopted FAS No. 133 effective
January 1, 1999.
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Quantitative and Qualitative Disclosures About Market Interest Rate Sensitivity
The primary objective of Sandpiper's investment activities is to preserve
principal while at the same time maximizing the income it receives from its
investments without significantly increasing risk. Some of the securities that
Sandpiper has invested in may be subject to market risk. This means that a
change in prevailing interest rates may cause the principal amount of the
investment to fluctuate. For example, if Sandpiper holds a security that was
issued with a fixed interest rate at the then-prevailing rate and the
prevailing interest rate later rises, the principal amount of its investment
will probably decline. To minimize this risk, Sandpiper maintains its portfolio
of cash equivalents and short-term investments in a variety of securities,
including commercial paper, money market funds and government and non-
government debt securities. In general, money market funds are not subject to
market risk because the interest paid on such funds fluctuates with the
prevailing interest rate. In addition, Sandpiper invests in relatively short-
term securities. As of September 30, 1999, all of Sandpiper's investments
mature in less than one year. See Note 2 to the notes to Sandpiper's financial
statements.
Exchange Rate Sensitivity
Sandpiper operates primarily in the United States, and all sales to date
have been made in U.S. dollars. Accordingly, Sandpiper has had no material
exposure to foreign currency rate fluctuations.
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MANAGEMENT OF DIGITAL ISLAND
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 November 30,
1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ruann F.
Ernst(1)(4)(5)......... 53 Chief Executive Officer, President and Director
T.L. Thompson........... 53 Chief Financial Officer
Chris Albinson.......... 32 Vice President of Corporate Development
Paul Evenson............ 39 Vice President of Operations
Allan Leinwand.......... 33 Vice President of Engineering and Chief Technology Officer
Bruce Pinsky............ 36 Vice President of Solutions Engineering and Chief Information Officer
Michael T. Sullivan..... 48 Vice President of Finance
Rick Schultz............ 41 Vice President North American Sales
Tim Wilson.............. 40 Vice President of Marketing and International Sales
Charlie Bass(2)......... 57 Director
Christos Cotsakos(4).... 50 Director
Marcelo A.
Gumucio(2)(3)(4)....... 61 Director
Cliff Higgerson (1)(3).. 57 Director
Shahan Soghikian(1)..... 40 Director
David Spreng............ 37 Director
</TABLE>
- --------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
(4) Member of Nominating Committee
(5) Member of Special Stock Option Committee
Upon consummation of the merger, Leo S. Spiegel, who is currently the
president and chief executive officer of Sandpiper, will become the president
and director of Digital Island, and Scott Darling, Eric Shepcaro and Andrew
Swart, who are officers of Sandpiper, will become vice president of
professional services, vice president of international and channel sales and
vice president of software engineering, respectively, of Digital Island.
The merger agreement provides that, upon completion of the merger, the board
of directors of Digital Island shall consist of four designees of Digital
Island, who shall be Ruann Ernst, Cliff Higgerson, Marcelo Gumucio and Shahan
Soghikian; three designees of Sandpiper, who shall be Leo Spiegel, Robert
Kibble and G. Bradford Jones; and two mutually acceptable outside directors,
one of whom shall be Christos Cotsakos and the other of whom shall be mutually
agreed to at a later date.
Each director will hold office for the term described below in "--Classified
Board" and until such director's successor is elected and qualified or until
such director's earlier resignation or removal. Each officer serves at the
discretion of the board of directors of Digital Island.
Ruann F. Ernst has served as president and chief executive officer and as a
director since June 1998. Prior to joining Digital Island, Ms. Ernst served
with Hewlett Packard, a computer equipment and services company, for over ten
years, most recently as general manager of the Financial Services Business
Unit. Ms. Ernst has also served as Director, Medical Computing Services
Division and Assistant Professor, Medicine and Computer Science at The Ohio
State University and as a Congressional Fellow in the Office of Technology
Assessment. Ms. Ernst serves on the board of directors of The Institute for the
Future, Phoenix International and Advanced Fibre Communications, Inc. Ms. Ernst
holds a B.S. in Mathematics, a Masters Degree in Computer Science and a Ph.D.
in Technology and Organizational Change from The Ohio State University.
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Leo S. Spiegel has served as Sandpiper's president and chief executive
officer and as a director of Sandpiper since January 1998. From February 1996
to January 1998, Mr. Spiegel served as senior vice president and chief
technology officer of Donnelley Enterprise Solutions, Inc., an information
management firm. From June 1995 to February 1996, Mr. Spiegel serves as a
senior vice president of Donnelley Business Services, a subsidiary of R.R.
Donnelley and Sons Company. From May 1991 to June 1995, Mr. Spiegel was the
executive vice president and chief technology officer of LANSystems, a network
utilities software developer and international systems integration firm which
he co-founded. Mr. Spiegel holds a B.A. from the University of California, San
Diego.
T.L. Thompson has served as chief financial officer since January 1999. Mr.
Thompson served as chief financial officer of Narrowline, an Internet marketing
firm, from October 1996 to November 1998. From 1989 to 1996 he served in
various financial capacities at Ziff-Davis Publishing Company, most recently as
vice president of business development. Mr. Thompson holds a B.S. in Economics
and an M.B.A. from Northwestern University.
Chris Albinson has served as vice president of corporate development since
September 1999. From 1993 to August 1999 Mr. Albinson served as assistant vice
president at Newbridge Networks Corp., manufacturer of digital electronic
network products. Mr. Albinson holds an M.B.A. from the University of Western
Ontario.
Paul Evenson has served as vice president of operations since November 1998.
From 1996 to 1998, Mr. Evenson served as vice president of sales and operations
at Westech Communications, Inc., a communications services firm. From 1986 to
1996, Mr. Evenson served as vice president of information technology at
Montgomery Securities, an investment banking firm. Mr. Evenson studied
Engineering at Oregon State University.
Scott Darling has served as Sandpiper's vice president of business
development and professional services since May 1999. Mr. Darling has over 18
years of management consulting and business development expertise with such
firms as Andersen Consulting, Price Waterhouse and MCI Systemhouse. Most
recently, Mr. Darling was the managing director for the Worldwide Consumer
Products and Retail and Financial Services vertical practices at MCI
Systemhouse with a heavy focus on e-commerce and web enablement services. Mr.
Darling holds a B.S. in Economics and Business Administration from the
University of Nebraska and an M.B.A. from Colorado State University.
Allan Leinwand has served as vice president of engineering and chief
technology officer of Digital Island since January 1997 and as a director from
January 1997 to February 1999. Prior to joining Digital Island, from August
1990 to February 1997, Mr. Leinwand served as manager, consulting engineer at
Cisco Systems, a network equipment provider, where he designed and deployed
global internetworks for large corporations, governments and institutions. Mr.
Leinwand also served as a network design and implementation engineer at Hewlett
Packard from 1988 to 1990. Mr. Leinwand holds a B.S. in Computer Science from
the University of Colorado, Boulder.
Bruce Pinsky has served as vice president of solutions engineering and chief
information officer since March 1997. From August 1992 to March 1997, Mr.
Pinsky worked in Customer Engineering and Global Support Engineering for Cisco
Systems. Mr. Pinsky holds a B.S. in Computer Science from California State
University, Hayward.
Michael T. Sullivan has served as vice president of finance since May 1997
and served as chief financial officer from October 1997 to January 1999. From
July 1993 to May 1996 Mr. Sullivan served as vice president of operations and
chief financial officer for Tut Systems, a network equipment provider.
Mr. Sullivan holds a B.S. in Business Administration from the University of
California, Berkeley. Mr. Sullivan is a certified public accountant.
Rick Schultz has served as vice president of north american sales since
March 1999. From December 1995 to February 1999, Mr. Schultz served as vice
president of sales at Pacific Bell Network Integration, a subsidiary
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of Pacific Bell, a telecommunications company. Mr. Schultz also held various
senior management positions at AT&T from June 1980 to November 1995 in sales,
product management and sales management. Mr. Schultz holds a B.S. in Commerce
from De Paul University and an M.B.A. from the University of San Francisco.
Eric Shepcaro has served as Sandpiper's vice president of sales since
January 1998. Mr. Shepcaro has more than 20 years of technical sales and
marketing experience. Prior to joining Sandpiper, Mr. Shepcaro spent over 17
years at Sprint Corporation. Most recently, he served as vice president of
sales engineering and application support, where he led the organization
responsible for technical sales, business development, network engineering,
program, management, and service implementation for business and government
customers. Mr. Shepcaro holds a B.S. in Business from the State University of
New York at Albany and an M.B.A. from San Francisco State University.
Andrew Swart has served as Sandpiper's vice president of engineering since
January 1998 and as a director of Sandpiper since December 1996. Mr. Swart also
served as Sandpiper's president and chief executive officer from December 1996
to January 1998. From November 1994 to December 1996, Mr. Swart was a managing
director of Sandpiper Consulting LLC. Mr. Swart holds a B.S. in Management
Information Systems from the University of Texas at Dallas.
Tim Wilson has served as vice president of marketing and international sales
since March 1998. From January 1996 to March 1998, Mr. Wilson served as general
manager within the Business Communications Systems Division of Lucent
Technologies, a telecommunications equipment supplier. Mr. Wilson also served
as executive director and general manager of the Business Communications
Systems Division of AT&T Australia from November 1993 to December 1995. From
August 1983 to October 1993, Mr. Wilson held several management positions in
engineering, sales and marketing at AT&T Corp. and AT&T Bell Laboratories. Mr.
Wilson holds a B.A. in Physics from Bowdoin College and an M.B.A. from the
Fuqua School of Business at Duke University.
Charlie Bass has served as a director since March 1997. Dr. Bass is trustee
of The Bass Trust, general partner of Bass Associates and a consulting
professor of Electrical Engineering at Stanford University. He is also chairman
of the board of directors of Meridian Data, Inc., Socket Communications, Inc.
and SoloPoint, Inc. and serves on the board of directors of several private
communications companies. Prior to co-founding Ungermann-Bass in 1979, Dr. Bass
was at Zilog, Inc., and prior to the formation of Zilog, Inc. in 1975, he was
on the Electrical Engineering and Computer Sciences faculty at the University
of California at Berkeley from 1972 to 1975. Dr. Bass holds a Ph.D. in
Electrical Engineering from the University of Hawaii where he participated in
the Aloha System research in radio frequency-based computer networks.
Christos Cotsakos has served as a director of Digital Island since July
1998. Mr. Cotsakos joined E*TRADE, an online financial services company, in
March 1996 as the president and chief executive officer and as a director.
Before joining E*TRADE, he served as president, chief operating officer, co-
chief executive officer and a director of AC Nielsen Inc., a marketing research
company. Prior to joining AC Nielsen, Mr. Cotsakos spent 19 years with Federal
Express Corporation, where he held a number of senior executive positions. In
addition to E*TRADE, Mr. Cotsakos serves on the boards of directors of Fox
Entertainment Group, Inc., National Processing, Inc., Omega Research, Inc. and
Critical Path, Inc., as well as several private companies. A decorated Vietnam
veteran, he received a B.A. from William Paterson College and an M.B.A. from
Pepperdine University. Mr. Cotsakos is currently pursuing a Ph.D. degree in
economics at the University of London.
Marcelo A. Gumucio has served as a director since January 1998, and served
as chairman of the board of directors from January 1998 until May 1998. He is
the managing partner of Gumucio Burke & Associates, a private investment firm.
In April 1996, Mr. Gumucio joined Micro Focus PLC, an enterprise software
provider, as its chief executive officer. He had served as a non-executive
director of Micro Focus' board of directors since January 1996. Prior to
joining Micro Focus, from 1992 to 1996, Mr. Gumucio was president, chief
executive officer and chairman of the board of directors of Memorex Telex NV.
Mr. Gumucio's professional
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<PAGE>
experience in the computer and communications industry spans almost 30 years
and includes senior management positions at Cray Research, Inc., Northern
Telecom Limited, Memorex Corporation and Hewlett- Packard Company. Mr. Gumucio
serves on the board of directors of BidCom Inc., E-Stamp Corporation and Burr
Brown Corporation. Mr. Gumucio graduated cum laude with a B.S. in mathematics
from the University of San Francisco in 1961. He received an M.S. in applied
mathematics and operations research in 1963 from the University of Idaho, where
he was named a National Science Fellow and graduated with honors. In 1982, he
graduated from the Harvard Business School Advanced Management Program.
Cliff Higgerson has served as a director since March 1997. Mr. Higgerson has
over 20 years experience with venture capital investments. Prior to forming
Communications Ventures II in the summer of 1997, he was a general partner of
Vanguard Venture Partners, where he has been since 1993 and where he continues
to manage several portfolio companies. His 25 years of involvement in the
communications field include research, consulting, planning, investment
banking, and venture capital. Mr. Higgerson serves on the board of directors of
Advanced Fibre Communications, Inc., Ciena Corp. and Digital Microwave Corp.,
as well as several private companies. Mr. Higgerson holds a B.S. in electrical
engineering and an M.B.A. from the Haas School of Business at the University of
California at Berkeley.
Shahan Soghikian has served as a director since February 1999. Mr. Soghikian
has over nine years experience with venture capital investments and is a
general partner of Chase Capital Partners, where he has been since 1990, and
where he develops, executes and monitors investments in private companies.
Mr. Soghikian serves on the board of directors of two private companies, Nextec
Applications, Inc. and AFS Holdings. Mr. Soghikian graduated with a B.A. in
Biology from Pitzer College and an M.B.A. from Anderson School of Business at
the University of California at Los Angeles.
David Spreng has served as a director since July 1997. Mr. Spreng has over
10 years of venture capital investment experience, primarily in communications,
and served as president of IAI Ventures, the private equity arm of Investment
Advisers, Inc. from 1992 until September 1998, when Mr. Spreng became the
managing member of the general partners of the successor in interest to IAI
Ventures and IAI, the Crescendo Funds and its management company. Mr. Spreng
serves on the board of directors of Tut Systems, Inc. and several private
companies. Mr. Spreng graduated from the University of Minnesota with a B.S. in
Accounting.
Director Compensation
Digital Island's 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
Digital Island's 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 Digital Island's 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
Digital Island's 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 Digital Island's board of
directors will be elected each year. 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 Digital Island's "Description of Capital Stock--Antitakeover
Effects of Provisions of Certain Charter Provisions, Bylaws and Delaware Law."
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Board Committees
The executive committee of Digital Island's 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 Digital
Island's interests, and manages Digital Island's business when the full board
of directors is not in session. Digital Island's 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.
The audit committee of Digital Island's board of directors consists of
Marcelo Gumucio and Cliff Higgerson. The audit committee reviews Digital
Island's 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 Digital Island's annual audit and other
services provided by Digital Island's independent auditors.
The compensation committee of Digital Island's 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 Digital Island's officers and employees and administers
Digital Island's employee benefit plans including the grant of options under
those plans.
The nominating committee of Digital Island's board of directors consists of
Christos Cotsakos, Ruann Ernst and Marcelo Gumucio. The nominating committee
makes recommendations to the board of directors concerning candidates for
directorships.
The special stock option committee of Digital Island's board of directors
consists solely of Ruann Ernst. The special stock option committee has the
authority, separate from the compensation committee, to make discretionary
option grants to eligible individuals other than officers or non-employee
members of the board of directors.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee of Digital Island's 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 Digital Island's board of
directors or Digital Island's compensation committee of the board of directors.
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DIGITAL ISLAND 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 Digital Island's chief executive officer and
Digital Island's four other executive officers whose salary and bonus for
services rendered in all capacities to Digital Island for the fiscal year ended
September 30, 1999 exceeded $100,000. For a list of Digital Island's current
executive officers and certain members of senior management, see "Management."
The options listed in the following table were originally granted under
either Digital Island's 1997 stock option and incentive plan or Digital
Island's 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."
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
---------------------------------- ------------
Number of
Securities
Other Annual Underlying
Name and Principal Position(s) Year Salary Bonus Compensation Options
------------------------------ ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Ruann F. Ernst...................................... 1999 $185,961 $64,250 $24,620(1) 1,044,159
President and Chief Executive Officer
Allan Leinwand...................................... 1999 163,333 44,000 -- 323,000
Chief Technology Officer
Ron Higgins (2)..................................... 1999 150,000 40,000 -- 400,000
Chairman of the Board of Directors
Tim Wilson.......................................... 1999 180,446 51,250 -- 280,000
Vice President of Marketing and International Sales
Paul Evenson........................................ 1999 146,635 27,222 -- 200,000
Vice President of Operations
</TABLE>
- --------
(1) Consists of reimbursement of rent for Ms. Ernst's apartment in San
Francisco, California.
(2) Mr. Higgins served as President and Chief Executive Officer of Digital
Island from February 1994 until June 1998 and Chairman of the Board of
Directors from June 1998 to September 1999.
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Stock Options and Stock Appreciation Rights
The following table sets forth information regarding option grants to each
of the named executive officers during the fiscal year ended September 30,
1999. No stock appreciation rights were granted to the named executive officers
during the 1999 fiscal year.
Stock Option Grants in Fiscal Year 1999
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed
Percentage Annual Rates
Number of of Total of Stock Price
Securities Options Appreciation
Underlying Granted to Exercise for Option Term
Options Employees Price Per Expiration -------------------
Name Granted (#) in 1999 Share ($/Sh) Date 5% 10%
---- ----------- ---------- ------------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ruann F. Ernst.......... 250,000 10.4% $4.25 3/18/09 $668,201 $1,693,351
Allan Leinwand.......... 35,000 1.5% 4.25 3/18/09 93,548 237,069
Ron Higgins............. -- -- -- -- -- --
Tim Wilson.............. 40,000 1.7% 3.50 10/16/08 88,045 223,124
Tim Wilson.............. 100,000 4.1% 4.25 3/18/09 267,280 677,341
Paul Evenson............ 150,000 6.2% 3.50 10/26/08 330,170 836,715
Paul Evenson............ 50,000 2.1% 4.25 3/18/09 133,640 338,670
</TABLE>
The exercise price per share of each option was determined by Digital
Island's board of directors in its good faith judgment and generally reflects
its best estimate of the fair value of Digital Island's common stock on the
date of each grant, taking into account factors such as Digital Island's
operating performance, recent sales of securities, and market conditions.
Each option has a maximum term of 10 years, subject to earlier termination
upon the optionee's cessation of service with Digital Island. Ms. Ernst was
granted an option for 250,000 shares with an exercise price of $4.25 per share.
The first 234,373 shares, subject to her options, will vest in a series of 45
successive equal monthly installments upon her completion of each month of
service over the 45-month period measured from March 18, 1999, and the
remaining 15,627 shares will vest in a series of 3 successive equal monthly
installments over the 3-month period measured from December 18, 2002. The
option granted to Mr. Leinwand for 35,000 shares began to vest starting March
18, 1999 in 48 successive equal monthly installments. The option granted Mr.
Wilson for 40,000 shares is vested for 9,600 shares on October 16, 1999, and
vests in a series of 38 successive equal monthly installments upon his
completion of service measured from October 16, 1999. The option Mr. Wilson was
granted for 100,000 shares began to vest starting March 18, 1999 in
48 successive equal monthly installments. The option granted Mr. Evenson for
150,000 shares is vested for 36,000 shares on October 26, 1999 and vests in a
series of 38 successive equal monthly installments upon his completion of
service measured from October 29, 1999. The option Mr. Evenson was granted for
50,000 shares began to vest starting October 26, 1999 in 48 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.
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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, 1999 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,
1999, and no stock appreciation rights were outstanding at the close of such
year. In the following table, "Value Realized" is equal to the difference
between the fair value of the shares at the time of exercise ($9.90 per share)
and the exercise price paid for the shares and the "Value of Unexercised In-
The-Money Options at Year-End" is based upon the fair value per share at the
close of the 1999 fiscal year ($26.00 per share) less the exercise price
payable per share.
Aggregated Option Exercises in 1999 and Year-End Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired on Value Options at Year-End at Year-End
Exercise Realized ------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ruann F. Ernst.......... 133,332 $1,119,989 392,076 418,751 $9,519,925 $9,657,837
Allan Leinwand.......... 163,733 1,555,464 14,775 144,492 361,396 3,528,289
Ron Higgins............. 216,000 2,052,000 42,333 141,667 1,083,725 3,626,675
Tim Wilson.............. 53,249 445,307 49,649 177,102 1,134,256 4,152,129
Paul Evenson............ -- -- -- 200,000 -- 4,462,500
</TABLE>
Employee Benefit Plans
1999 Stock Incentive Plan
Digital Island's 1999 stock incentive plan is the successor equity incentive
program to Digital Island's 1998 stock option/stock issuance plan which was the
successor equity incentive program to Digital Island's 1997 stock option and
incentive plan. The 1999 stock incentive plan became effective on June 29,
1999, the effective date of Digital Island's initial public offering. All
outstanding options under Digital Island's predecessor plan were at that time
incorporated into the 1999 stock incentive plan, and no further option grants
will be made under such predecessor plan. The incorporated options will
continue to be governed by their existing terms, unless the plan administrator
elects to extend one or more features of the 1999 stock incentive plan to those
options. Except as otherwise noted below, the incorporated options have
substantially the same terms as will be in effect for grants made under the
discretionary option grant program of the 1999 stock incentive plan.
An initial reserve of 7,544,000 shares of common stock has been authorized
for issuance under the 1999 stock incentive plan. This share reserve consists
of (i) the number of shares estimated to remain available for issuance under
Digital Island's 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 Digital Island's 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;
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. 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 are
administered by the compensation committee. However, a secondary committee of
one or more board members also has concurrent authority to administer those
programs with respect to individuals who are neither officers nor directors.
The compensation committee or secondary committee as plan administrator 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 has the exclusive authority to
make any discretionary option grants or stock issuances to members of the
compensation committee. The compensation committee has 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 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 has the authority to effect the cancellation of
outstanding options under the discretionary option grant program (including
options incorporated from our predecessor plan) in return for the grant of new
options for the same or different number of option shares with an exercise
price per share based upon the fair market value of the common stock on the new
grant date.
Stock appreciation rights are authorized for issuance under the
discretionary option grant program. These rights will provide the holders with
the election to surrender their outstanding options for an appreciation
distribution from us equal to the excess of (a) the fair market value of the
vested shares of common stock subject to the surrendered option over (b) 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 Digital Island's predecessor plan contain any stock
appreciation rights.
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In the event that Digital Island is 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 Digital Island's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The plan administrator has 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 Digital
Island 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
Digital Island's 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 Digital Island's predecessor plan will
immediately vest and become exercisable for all the option shares if Digital
Island is acquired by merger or asset sale, unless the options are assumed by
the successor corporation and Digital Island's repurchase rights with respect
to the unvested shares subject to those options are concurrently assigned to
the successor entity. For some of these options, the board also has the
authority to provide for their cancellation in return for a cash payment to the
option holders in an amount per cancelled option share equal to the excess of
the price to be paid per share of Digital Island's common stock in the
acquisition over the option exercise price payable per share under the
cancelled option. Other of these options contain a special acceleration
feature. Under that feature, should the optionee's service be terminated within
a designated period following an acquisition in which the option is assumed and
Digital Island's repurchase rights are assigned, then the option will vest at
that time and become immediately exercisable for all the option shares, and all
unvested shares held by such individual will also vest at that time. There are
no other change in control provisions currently in effect for the outstanding
options under the predecessor plan. However, the plan administrator will have
the discretion to extend the acceleration provisions of the 1999 stock
incentive plan to any or all of the options outstanding under Digital Island's
predecessor plan.
In the event the plan administrator elects to activate the salary investment
option grant program for one or more calendar years, each executive officer and
other key employee selected for participation may elect, prior to the start of
the calendar year, to reduce his or her base salary for that calendar year by a
specified dollar amount not less than $10,000 nor more than $50,000. Each
selected individual who files this timely election will automatically be
granted, on the first trading day in January of the calendar year for which
that salary reduction is to be in effect, a non-statutory option to purchase
that number of shares of common stock determined by dividing the salary
reduction amount by two-thirds of the fair market value per share of common
stock on the grant date. The option will be exercisable at a price per share
equal to one-third of the fair market value of the option shares on the grant
date. As a result, the total spread on the option shares at the time of grant
(the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the amount
of salary invested in that option. The option will vest and become exercisable
in a series of twelve equal monthly installments over the calendar year for
which the salary reduction is to be in effect.
Under the automatic option grant program, eligible non-employee board
members will receive a series of option grants over their period of board
service. Each individual who first becomes a non-employee board member at any
time at or after the effective date of this offering will receive an option
grant for 15,000 shares of common stock on the date such individual joins the
board, provided such individual has not been in Digital Island's prior employ.
In addition, on the date of each annual stockholders meeting held after the
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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 Digital
Island's employ will be eligible to receive one or more such annual option
grants over their period of board service.
Each automatic grant will have an exercise price per share equal to the fair
market value per share of common stock on the grant date and will have a term
of 10 years, subject to earlier termination following the optionee's cessation
of board service. Each automatic option will be immediately exercisable for all
of the option shares; however, any unvested shares purchased under the 15,000-
share option will be subject to repurchase by Digital Island, at the exercise
price paid per share, should the optionee cease to serve on the board prior to
vesting in those shares. The shares subject to each initial 15,000-share
automatic option grant will vest in a series of six successive equal semi-
annual installments upon the optionee's completion of each month of board
service over the 36 month period measured from the grant date. However, the
shares will immediately vest in full upon certain changes in control or
ownership or upon the optionee's death or disability while a board member. The
shares subject to each annual 5,000-share automatic grant will be fully-vested
when granted. Following the optionee's cessation of board service for any
reason, each option will remain exercisable for a 12-month period and may be
exercised during that time for any or all shares in which the optionee is
vested at the time of such cessation of service.
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 (a) certain changes in the ownership or
control or (b) 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 (a) an acquisition of Digital Island by merger or asset sale or (b)
the successful completion of a tender offer for more than 50% of Digital
Island's outstanding voting stock or a change in the majority of Digital
Island's 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 Digital Island upon the successful completion of a hostile tender offer for
more than 50% of Digital Island's outstanding voting stock. In return for the
surrendered option, the optionee will be entitled to a cash distribution from
Digital Island in an amount per surrendered option share equal to the excess of
(a) the highest price per share of common stock paid in connection with the
tender offer over (b) the exercise price payable for such share.
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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 (a) April 15, 2009, (b) the date on which all
shares available for issuance under the 1999 stock incentive plan have been
issued as fully-vested shares or (c) the termination of all outstanding options
in connection with certain changes in control or ownership.
1999 Employee Stock Purchase Plan
Digital Island's 1999 employee stock purchase plan became effective on June
29, 1999, the date of execution of the underwriting agreement relating to
Digital Island's initial public offering. The plan is designed to allow Digital
Island's eligible employees and those of Digital Island's 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 Digital Island's 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
began on the execution date of the underwriting agreement for Digital Island's
initial public offering 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 (a) the fair market value of the common stock on
the participant's entry date into the offering period or (b) 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 Digital Island's 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 Digital Island be acquired by merger, sale of substantially all
Digital Island's assets or sale of securities possessing more than fifty
percent of the total combined voting power of Digital Island's outstanding
securities, then all outstanding purchase rights will automatically be
exercised immediately prior to the effective date of that acquisition. The
purchase price will be equal to 85% of the lower of (a) the fair market value
per share of common stock on the participant's entry date into the offering
period in which the acquisition occurs or (b) the fair market value per share
of common stock immediately prior to the acquisition. The limitation on the
maximum number of shares purchasable in the aggregate on any one purchase date
will not be in effect for any purchase date attributable to such an
acquisition.
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The plan will terminate on the earlier of (a) the last business day of July
2009, (b) the date on which all shares available for issuance under the plan
shall have been sold pursuant to purchase rights exercised thereunder or (c)
the date on which all purchase rights are exercised in connection with an
acquisition of Digital Island by merger or asset sale.
The board may at any time alter, suspend or discontinue the plan. However,
certain amendments, such as increasing the number of shares reserved for
issuance under the plan, require stockholder approval.
401(k)Plan
Digital Island sponsors the Digital Island, Inc. 401(k) Plan. Employees who
complete three months of service with Digital Island 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.
Digital Island 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
Digital Island in its discretion. In addition, Digital Island 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 Digital Island 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, Digital Island has not made any matching or
discretionary contributions to the 401(k) Plan. Digital Island 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.
Employment Contracts and Change of Control Arrangements
Digital Island has entered into employment agreements with Ms. Ernst, Mr.
Leinwand, Mr. Wilson and Mr. Evenson, each of whom is an officer of Digital
Island. All outstanding options held by the foregoing officers will
automatically vest in full upon an acquisition of Digital Island by merger,
sale of substantially all the assets or sale of more than 50% of its
outstanding voting securities, unless those options are assumed or otherwise
continued in effect by a successor entity or our repurchase rights for any
unvested shares subject to those options are to remain in force following such
acquisition. The exercise price per share of the options below were determined
by Digital Island's board of directors as described in "--Stock Options and
Stock Appreciation Rights."
Ruann F. Ernst. On May 20, 1998, Ruann F. Ernst, Digital Island's chief
executive officer and president, entered into an employment agreement with
Digital Island. 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 Digital Island's board of directors. On
March 1, 1999, Ms. Ernst's annual salary was increased to $200,000. In
connection with her employment agreement Digital Island granted Ms. Ernst
options to purchase up to 794,159 shares of Digital Island's common stock at a
per share exercise price of $1.50 per share.
Allan Leinwand. On February 3, 1997, Allan Leinwand, Digital Island's vice
president of engineering and chief technology officer, entered into an
employment agreement with Digital Island. 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 Digital Island terminate Mr. Leinwand for any
lawful reason, Digital Island 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, Digital Island granted to Mr. Leinwand options to
purchase up to 240,000 shares of Digital Island common stock at a per share
exercise price of $0.40 per share.
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Tim Wilson. On March 16, 1998, Tim Wilson, Digital Island's vice president
of marketing and international sales, entered into an employment agreement with
Digital Island. This agreement provided for an annual salary of $150,000. Mr.
Wilson is also eligible for a discretionary quarterly bonus of up to $12,500.
On March 1, 1999, Mr. Wilson's annual salary was increased to $165,000 and his
discretionary quarterly bonus was increased to $15,000. In connection with his
employment agreement, Digital Island granted Mr. Wilson options to purchase up
to 140,000 shares of Digital Island common stock at a per share exercise price
of $0.90 per share.
Paul Evenson. On October 26, 1998, Paul Evenson, Digital Island's vice
president of operations, entered into an employment agreement with Digital
Island. This agreement provided for an annual salary of $165,000. Mr. Evenson
is also eligible for a discretionary quarterly bonus of up to $10,000. In
connection with his employment agreement, Digital Island granted Mr. Evenson
options to purchase up to 150,000 shares of Digital Island common stock at a
per share exercise price of $3.50 per share.
Limitation of Liability and Indemnification
Digital Island's certificate of incorporation eliminates, to the fullest
extent permitted by Delaware law, liability of a director to Digital Island or
its 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.
Digital Island's certificate of incorporation requires it to indemnify its
directors to the fullest extent permitted by Delaware law. Digital Island has
also entered into indemnification agreements with each of its directors.
Digital Island believes that the limitation of liability provisions in its
certificate of incorporation and indemnification agreements may enhance its
ability to attract and retain qualified individuals to serve as directors. See
Digital Island's "Description of Capital Stock."
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CERTAIN TRANSACTIONS RELATING TO DIGITAL ISLAND
Some of Digital Island's directors, executive officers and affiliates have
entered into transactions with it as follows:
Preferred Stock Financings
Since October 1, 1997 Digital Island has sold 4,283,181 shares of its Series
C preferred stock at a price of $3.45 per share, 2,022,476 shares of its Series
D preferred stock at a price of $5.25 per share and 11,764,706 shares of its
Series E preferred stock at a price of $4.25 per share in a series of private
financings. Digital Island 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 it made
standard representations, warranties, and covenants, and pursuant to which it
provided the purchasers thereunder with registration rights, information
rights, and rights of first refusal, among other provisions standard in venture
capital financings. Each share of preferred stock automatically converted into
one share of Digital Island common stock at its initial public offering, except
that each share of Series D preferred stock converted into 1.088084 shares of
Digital Island's common stock after giving effect to an antidilution adjustment
resulting from the sale of the Series E preferred stock. The purchasers of the
preferred stock included, among others, the following holders of 5% or more of
Digital Island common stock, directors, and entities associated with directors:
<TABLE>
<CAPTION>
Shares of Preferred Stock
Purchased
-----------------------------------
Name Series C Series D Series E
- ---- --------- --------- ---------
<S> <C> <C> <C>
Bass Trust U/D/T dated April 29,
1988(1)................................ 39,420 34,095 27,765
Chase Venture Capital Associates,
L.P.(2)................................ -- -- 2,823,529
The Cotsakos Revocable Trust dated
9/3/87(3).............................. -- 28,571 --
Crescendo II, L.P.(4)................... 289,855(5) 143,429(5) 463,294(5)
Crosspoint Venture Partners............. 289,855 -- 926,824
E*TRADE Group, Inc.(6).................. -- 1,333,334 562,588
FW Ventures III, L.P. .................. -- -- 1,822,353
Marcelo Gumucio......................... 29,000 -- --
Merrill Lynch KECALP.................... -- -- 1,482,824
Tudor Global Trading, Inc. ............. 1,015,000 190,476 744,470
Vanguard V, L.P.(7)..................... 260,870 142,857 --
</TABLE>
- --------
(1) Charlie Bass, a director of Digital Island, is the trustee of the Bass
Trust U/D/T dated April 29, 1998.
(2) Shahan Soghikian, a director of Digital Island, is a general partner of
Chase Venture Capital Associates, L.P.
(3) Christos Cotsakos, a director of Digital Island, is the trustee of The
Cotsakos Revocable Trust dated 9/3/87.
(4) David Spreng, a director of Digital Island, is the managing member of
Crescendo Ventures II, LLC, the general partner of Crescendo II, L.P.
(5) Includes shares held by Eagle Ventures II, LLC pursuant to a parallel
investment agreement with Crescendo.
(6) Mr. Cotsakos, a director of Digital Island, is chairman of the board of
E*TRADE.
(7) Cliff Higgerson, a director of Digital Island, is the general partner of
Vanguard V, L.P.
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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 its preferred stock, the investors acquired certain registration
rights with respect to their capital stock of Digital Island. At any time after
the earlier of (a) February 19, 2001, or (b) one year after Digital Island's
initial public offering, holders of more than two-thirds of the outstanding
stock under the agreement may require Digital Island 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
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 Digital Island proposes to issue equity
securities under the Securities Act for its 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. Digital Island has agreed
to indemnify the investors against certain liabilities in connection with any
registration effected pursuant to the foregoing Investors' Rights Agreement,
including Securities Act liabilities.
Employment and Indemnification Agreements
Digital Island has entered into employment agreements with Ms. Ernst, Mr.
Leinwand, Mr. Wilson and Mr. Evenson who are named executive officers. Digital
Island has also entered into indemnification agreements with each of its other
directors and officers. See Digital Island's "Executive Compensation and Other
Information--Employment Contracts and Change of Control Arrangements," and "--
Limitation of Liability and Indemnification."
Director Arrangements and Stockholder Notes
In February 1998, Digital Island granted a nonstatutory option to purchase a
total of 183,000 shares of its common stock to Marcelo Gumucio, then the
chairman of the Digital Island board of directors and now a director. 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 accrued on outstanding
amounts at 5.61% per annum. Interest was to be repaid in four equal annual
installments commencing February 24, 1999. The entire principal amount was due
and payable in one lump sum on February 24, 2002. In August 1999, Mr. Gumucio
repaid the entire principal amount as well as all accrued interest.
Officer Loans
On April 21, 1999, Ms. Ernst, Digital Island's president and chief executive
officer, and Mr. Higgins, Digital Island's then-chairman of the board, each
delivered a promissory note to it in payment of the exercise price of certain
outstanding stock options they hold under our 1998 stock option/stock issuance
plan. Ms. Ernst delivered a full-recourse promissory note in the principal
amount of $199,998 in payment of the exercise price for 133,332 shares of
Digital Island's 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 Digital Island's common stock. Each note bears interest at
the rate of 7.75% per annum, compounded semi-annually, and is secured by the
purchased shares. Accrued interest is due and payable at successive quarterly
intervals over the four-year term of the note, and the principal balance will
become due and payable in one lump sum at the end of such four-year term.
However, the entire unpaid balance of the note will become due and payable upon
termination of employment or failure to pay any installment of interest when
due. None of the shares serving as security for
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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 Digital Island.
On June 14, 1999, Ms. Ernst borrowed an additional $128,000 from Digital
Island in order to finance the tax liability she incurred in connection with
the exercise of her stock options on April 21, 1999 for 133,332 shares of
Digital Island's common stock. The loan is evidenced by a full-recourse
promissory note with interest at the rate of 7.75% per annum, compounded semi-
annually, and secured by the same 133,332 shares which serve as collateral for
Ms. Ernst's April 21, 1999 promissory note. The terms of her note, including
the due dates for payment of principal and accrued interest and the
acceleration provisions, are substantially the same as the terms in effect for
her April 21, 1999 note.
On July 13, 1999 Chris Albinson, Digital Island's vice president of
corporate development, borrowed $100,000 from Digital Island. The borrowing is
interest-free, and $50,000 of the borrowings is being forgiven ratably over
five years. The remaining $50,000 is due in one lump sum on July 13, 2004.
E*TRADE Agreements
Digital Island has 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 Digital Island's board of directors, is president,
chief executive officer and a director of E*TRADE.
Digital Island believes that all of the transactions set forth above were
made on terms no less favorable to Digital Island than could have been obtained
from unaffiliated third parties. Digital Island intends that all future
transactions, including loans, between Digital Island and its 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
Digital Island than could be obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS OF DIGITAL ISLAND
Digital Island
The following table sets forth certain information as of September 30, 1999
(except as indicated in the footnotes below) with respect to the beneficial
ownership of Digital Island's common stock by:
. each person known by Digital Island to own beneficially more than 5%, in
the aggregate, of the outstanding shares of Digital Island's common
stock,
. the directors and named executive officers of Digital Island who hold
securities of Digital Island, and
. all executive officers and directors of Digital Island as a group.
Unless otherwise indicated, the address for each shareholder is c/o Digital
Island, Inc., 45 Fremont, Suite 1200, San Francisco, California 94105. Except
as indicated by footnote, Digital Island understands that the persons named in
the table below have sole voting and investment power with respect to all
shares shown as beneficially owned by them, subject to community property laws
where applicable. In the table below, "Beneficial Ownership of Shares After the
Merger" reflects the beneficial ownership after giving effect to the additional
shares of Digital Island common stock to be issued to Sandpiper stockholders,
which is 24,573,160 shares. Shares of Digital Island common stock subject to
options, which are currently exercisable or exercisable within 60 days of
September 30, 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. Percentage ownership is based on 35,941,727
shares of Digital Island common stock outstanding as of September 30, 1999.
<TABLE>
<CAPTION>
Beneficial Beneficial
Ownership of Ownership of
Shares Shares
Before the Merger After the Merger
----------------- -----------------
Name of Beneficial Owner Number Percent Number Percent
- ------------------------ --------- ------- --------- -------
<S> <C> <C> <C> <C>
Crosspoint Venture Partners(1)............ 3,246,679 9.0% 3,246,679 5.4%
Chase Venture Capital Associates,
L.P.(2).................................. 2,823,529 7.9% 2,823,529 4.7%
Vanguard V, L.P.(3)....................... 2,561,310 7.1% 2,561,310 4.2%
Crescendo Ventures II, L.P.(4)............ 2,109,212 5.9% 2,109,212 3.5%
E*TRADE Group, Inc.(5).................... 2,013,367 5.6% 2,013,367 3.3%
Tudor Global Trading, Inc.(6)............. 1,966,724 5.5% 1,966,724 3.3%
FW Ventures III, LP(7).................... 1,882,353 5.2% 1,882,353 3.1%
Merrill Lynch KECALP(8)................... 1,482,824 4.1% 1,482,824 2.5%
Ron Higgins(9)............................ 2,116,666 5.9% 2,116,666 3.5%
Ruann F. Ernst(10)........................ 641,032 1.8% 641,032 1.1%
T. L. Thompson............................ -- -- -- --
Paul Evenson(11).......................... 40,353 * 40,353 *
Allan Leinwand(12)........................ 186,899 * 186,899 *
Rick Schultz.............................. -- -- -- --
Michael T. Sullivan(13)................... 95,000 * 95,000 *
Tim Wilson(14)............................ 112,664 * 112,664 *
Chris Albinson............................ -- -- -- --
Charlie Bass(15).......................... 419,283 1.2% 419,283 *
Marcelo A. Gumucio(16).................... 212,000 * 212,000 *
Christos Cotsakos(17)..................... 45,532 * 45,532 *
Cliff Higgerson(18)....................... -- -- -- --
Shahan Soghikian(19)...................... -- -- -- --
David Spreng(20).......................... -- -- -- --
All directors and executive officers as a
group (14 people)(21).................... 3,869,429 10.6% 3,869,429 6.4%
</TABLE>
- --------
* Less than 1%.
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(1) Consists of 1,450,000 shares of Digital Island common stock held directly
by Crosspoint Venture Partners, 869,855 shares of common stock held
directly by Crosspoint Venture Partners 1996 and 926,824 shares of common
stock held directly by Crosspoint Venture Partners LS 1997 (collectively,
with Crosspoint Venture Partners 1996 and Crosspoint Venture Partners, the
"Crosspoint Entities"). The address for the Crosspoint Entities is 2925
Woodside Road, Woodside, California 94062.
(2) Consists of 2,823,529 shares of Digital Island common stock. Mr.
Soghikian, a director of Digital Island, is the general partner of Chase
Capital Partners, the general partner of Chase Venture Capital Associates,
L.P. The address for Chase Venture Capital Associates, L.P. is 50
California Street, Suite 2940, San Francisco, California 94111.
(3) Consists of 2,561,310 shares of Digital Island common stock. Mr.
Higgerson, a director of Digital Island, is the general partner of
Vanguard V, L.P. The address of Vanguard V, L.P. is 505 Hamilton Avenue,
Suite 305, Palo Alto, California 94301.
(4) Consists of 2,109,212 shares of Digital Island common stock held directly
by Eagle Ventures II, LLC and Crescendo II, L.P., (collectively, the
"Crescendo Entities"). Mr. Spreng, a director of Digital Island, is the
president of Eagle Ventures II, LLC and the managing member of Crescendo
Ventures II, LLC, the general partner of Crescendo II, LP. The address for
the Crescendo Entities is 505 Hamilton Avenue, Suite 315, Palo Alto,
California 94301.
(5) Consists of 2,013,367 shares of Digital Island common stock. Mr. Cotsakos,
a director of Digital Island, is chairman of the board and chief executive
officer of E*TRADE Group, Inc. The address of E*TRADE Group, Inc. is Four
Embarcadero Place, 2400 Geng Road, Palo Alto, California 94303.
(6) Consists of 1,966,724 shares of Digital Island common stock held directly
by Raptor Global Fund L.P., Raptor Global Fund Ltd. and Tudor Private
Equity Fund L.P., (collectively, the "Tudor Entities"). The address for
the Tudor Entities is Tudor Global Trading, Inc., 40 Rowes Wharf, Second
Floor, Boston, Massachusetts 02110.
(7) Consists of 1,882,353 shares of Digital Island common stock The address of
FW Ventures III, LP is 2775 Sand Hill Road, Menlo Park, California 94025.
(8) Consists of 1,482,824 shares of Digital Island common stock held directly
by KECALP, Inc., KECALP Inc., as Nominee for Merrill Lynch KECALP
International L.P. 1997 and Merrill Lynch KECALP L.P. 1997, (collectively,
the "Merrill Lynch KECALP Entities"). The address for the Merrill Lynch
KECALP Entities is World Financial Center, North Tower, New York, NY
10281.
(9) Consists of 1,666,000 shares of Digital Island common stock held directly
by Mr. Higgins, 50,666 shares of Digital Island common stock subject to
options exercisable within 60 days of September 30, 1999, 150,000 shares
of Digital Island common stock held directly by the Ron and Sanne Higgins
1998 Irrevocable Trust Agreement f/b/o Dana Espinoza (the "Espinoza
Trust"), 150,000 shares of Digital Island common stock held directly by
the Ron and Sanne Higgins 1998 Irrevocable Trust Agreement f/b/o Nina
Higgins (the "Higgins Trust") and 100,000 shares of Digital Island common
stock held by the Ron and Sanne Higgins 1998 Irrevocable Grandchildren's
Trust Agreement (the "Grandchildren's Trust"). Mr. Higgins is a trustee of
the Espinoza Trust, the Higgins Trust and the Grandchildren's Trust.
(10) Consists of 233,332 shares of Digital Island common stock held directly by
Ms. Ernst and 407,700 shares of Digital Island common stock subject to
options exercisable within 60 days of September 30, 1999.
(11) Consists of 40,353 shares of Digital Island common stock subject to
options exercisable within 60 days of September 30, 1999.
(12) Consists of 163,733 shares of Digital Island common stock held directly by
Mr. Leinwand, and 23,166 shares of Digital Island common stock subject to
options exercisable within 60 days of September 30, 1999.
(13) Consists of 71,000 shares of Digital Island common stock held directly by
Mr. Sullivan and 24,000 shares of Digital Island common stock subject to
options exercisable within 60 days of September 30, 1999.
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(14) Consists of 53,249 shares of Digital Island common stock held directly by
Mr. Wilson, and 59,415 shares of Digital Island common stock subject to
options exercisable within 60 days of September 30, 1999.
(15) Consists of 419,283 shares of Digital Island common 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. Shares after
the merger excludes shares of Sandpiper.
(16) Consists of 212,000 shares of Digital Island common stock.
(17) Consists of 8,888 shares of Digital Island common stock subject to options
exercisable within 60 days of September 30, 1999 and 36,644 shares of
Digital Island common stock held directly by The Cotsakos Revocable Trust
dated September 3, 1987. Excludes 2,013,367 shares of Digital Island
common stock 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 Digital Island common
stock held by E*TRADE Group, Inc. except to the extent of his pecuniary
interest therein. See footnote 5 above.
(18) Excludes 2,561,310 shares of Digital Island common stock 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 the shares of Digital Island common stock held by Vanguard V, L.P.
except to the extent of his pecuniary interest therein. See footnote 3
above.
(19) Excludes 2,823,529 shares of Digital Island common stock 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 Digital Island common stock held by
Chase Venture Capital Associates, L.P. except to the extent of his
pecuniary interest therein. See footnote 2 above.
(20) Excludes 2,109,212 shares of Digital Island common stock 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 Digital Island common stock held by
the Crescendo Entities, except to the extent of his pecuniary interest
therein. See footnote 4 above.
(21) See footnotes 9 through 19 above. Includes options exercisable for 563,522
shares of Digital Island common stock within 60 days of September 30, 1999
under the 1999 stock incentive plan.
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PRINCIPAL SHAREHOLDERS OF SANDPIPER
The following table sets forth information regarding beneficial ownership of
Sandpiper's capital stock before the merger and as of December 3, 1999. The
table also sets forth pro forma information regarding beneficial ownership of
Digital Island common stock by the principal shareholders of Sandpiper
following the merger. The table includes:
. each person who owns beneficially more than 5% of the outstanding shares
of Sandpiper capital stock on an as-converted basis;
. each of Sandpiper's directors, the chief executive officer and other
executive officers whose annual salary and bonus during 1998 exceeded
$100,000; and
. all of Sandpiper's directors and executive officers as a group.
Unless otherwise indicated, the address of each person owning more than 5%
of the outstanding shares of capital stock is c/o Sandpiper Networks, Inc., 225
West Hillcrest Drive, Suite 250, Thousand Oaks, California 91360. Except as
indicated by footnote, to Sandpiper's knowledge, all persons named in the table
below have sole voting and investment power with respect to their shares of
capital stock, except to the extent authority is shared by spouses under
applicable law. Shares of Sandpiper capital stock that are subject to options
or warrants that are currently exercisable or exercisable within 60 days of
December 3, 1999, are deemed outstanding for computing the percentages of the
person holding such options or warrants but are not deemed outstanding for
computing the percentages of any other person. Percentage ownership before the
merger is based on 21,490,434 shares of capital stock outstanding as of
December 3, 1999. Percentage ownership after the merger is based on an
estimated 60,264,885 shares of Digital Island common stock outstanding.
<TABLE>
<CAPTION>
Beneficial
Beneficial Ownership of
Ownership of Digital Island
Sandpiper Shares Common Stock After
Before the Merger the Merger
------------------ ------------------
Name of Beneficial Owner Number Percent Number Percent
------------------------ ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Brentwood Venture Capital(1)
G. Bradford Jones..................... 3,645,469 17.0% 3,910,494 6.5%
Media Technology Ventures, L.P.(2)
Jonathan E. Funk...................... 3,240,417 15.1% 3,475,995 5.8%
Mission Ventures Management Company
LLC(3)
Robert Kibble......................... 2,592,333 12.1% 2,780,795 4.6%
Leo S. Spiegel(4)....................... 1,526,964 7.1% 1,637,974 2.7%
Andrew D. Swart......................... 1,752,575 8.2% 1,879,987 3.1%
David A. Farber(5)...................... 1,766,575 8.2% 1,895,005 3.1%
America Online, Inc.(6)................. 1,322,649 6.0% 1,418,805 2.3%
Attractor Ventures LLC(7)............... 1,227,142 5.7% 1,316,355 2.2%
Ronald Lachman(8)....................... 413,797 1.9% 443,880 *
Deborah Rieman.......................... 70,000 * 75,089 *
All directors and officers as a group
(14 persons)(9)........................ 15,789,213 69.8% 16,937,088 28.0%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding voting
power of all shares of Sandpiper common stock.
(1) Consists of 3,499,651 shares held by Brentwood Associates VIII, L.P., and
145,818 shares held by Brentwood Affiliates Fund, L.P. Mr. Jones is a
general partner or managing member of the general partners of each of these
shareholders, and as such may be deemed to be the beneficial owner of such
shares. Mr. Jones disclaims beneficial ownership of such shares except to
the extent of his pecuniary interest therein. The business address of
Brentwood Venture Capital is 11150 Santa Monica Boulevard, Suite 1200, Los
Angeles, California 90025.
(2) Includes 370,704 shares held by Media Technology Entrepreneurs Fund, L.P.
Mr. Funk is a general partner of Media Technology Ventures, L.P., and Media
Technology Entrepreneurs Fund, L.P., and as such may be
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<PAGE>
deemed to be the beneficial owner of the shares held by each of these
shareholders. Mr. Funk disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest therein. The business address of
Media Technology Ventures, L.P. is 1 First Street, Suite 12, Los Altos,
California 94022.
(3) Consists of 1,967,859 shares held by Mission Ventures, L.P. and 624,474
shares held by Mission Ventures Affiliates, L.P. Mr. Kibble is a managing
member of the general partners of each of these shareholders, and as such
may be deemed to be the beneficial owner of such shares. Mr. Kibble
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein. The business address of Mission Ventures
Management Company LLC is 11512 El Camino Real, Suite 215, San Diego,
California 92130.
(4) Includes 80,000 shares held by Leo S. Spiegel and Jodi K. Spiegel as co-
trustees of the Hunter L. Spiegel Educational Trust, and 80,000 shares
held by Leo S. Spiegel and Jodi K. Spiegel as co-trustees of the Madison
H. Spiegel Educational Trust.
(5) Includes 150,000 shares held by the Farber Irrevocable Trust.
(6) Includes 650,000 shares currently issuable upon the exercise of warrants.
The business address of America Online, Inc. is 22000 AOL Way, Dulles,
Virginia 20166
(7) Includes 1,146,296 shares, 99,078 of which are currently issuable upon
exercise of warrants, held by Attractor LP, and 80,846 shares, 6,988 of
which are currently issuable upon exercise of warrants, held by Attractor
Institutional LP. Attractor Ventures LLC is the general partner of both
Attractor LP and Attractor Institutional LP, and as such has the sole
power to vote and dispose of the shares held by these entities. The
business address of Attractor LP and Attractor Institutional LP is 1 First
Street, Suite 12, Los Altos, California 94022.
(8) Includes 7,143 shares currently issuable upon the exercise of warrants.
(9) Includes 7,143 shares subject to currently exercisable warrants.
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<PAGE>
DESCRIPTION OF DIGITAL ISLAND CAPITAL STOCK
The authorized capital stock of Digital Island consists 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 September 30, 1999, 35,941,727 shares of Digital Island's common stock
were outstanding and held of record by 186 stockholders. After this merger,
approximately 60,500,000 shares will be outstanding, assuming no exercise of
options after September 30, 1999.
Holders of common stock are entitled to receive dividends as may from time
to time be declared by Digital Island's board of directors out of funds legally
available therefor. See "Dividend Policy." Holders of common stock are entitled
to one vote per share on all matters on which the holders of common stock are
entitled to vote and do not have any cumulative voting rights. Holders of
common stock have no preemptive, conversion, redemption or sinking fund rights.
In the event of a liquidation, dissolution or winding up of Digital Island,
holders of common stock are entitled to share equally and ratably in the assets
of the Digital Island, if any, remaining after the payment of all our
liabilities and the liquidation preference of any then outstanding class or
series of preferred stock. The rights, preferences and privileges of holders of
common stock are subject to any series of preferred stock that Digital Island
may issue in the future, as described below.
Preferred Stock
Digital Island's 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 Digital Island's
stockholders. The issuance of preferred stock by Digital Island's board of
directors could adversely affect the rights of holders of its 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
Digital Island's 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, its common stock. Immediately after this offering
there will be no shares of preferred stock outstanding, and Digital Island has
no current plans to issue shares of preferred stock.
Anti-Takeover, Limited Liability and Indemnification Provisions
Effect of Delaware Anti-takeover Statute. Digital Island is subject to
Section 203 of the Delaware General Corporation Law, as amended, or Section
203, which prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless:
. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. 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.
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<PAGE>
Section 203 defines business combinations to include:
. any merger or consolidation involving the corporation and any interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more or the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Certificate of Incorporation and Bylaw Provisions. Digital Island's
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. Digital Island's certificate of
incorporation and bylaws provide for Digital Island's 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. Digital Island's certificate of incorporation
requires the approval of the holders of at least 66 2/3% of Digital
Island's combined voting power to effect certain amendments to the
certificate of incorporation with respect to the bylaws, directors,
stockholder meetings and indemnification. Digital Island's bylaws may be
amended by either a majority of the board of directors, or the holders of a
majority of Digital Island's voting stock, provided that certain amendments
approved by stockholders require the approval of at least 66 2/3% of
Digital Island's combined voting power.
Authorized but Unissued or Undesignated Capital Stock. Digital Island's
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 the completion of the merger, we
will have outstanding approximately 60,300,000 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, Digital Island's 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. Digital Island's bylaws provide that
special meetings of stockholders of Digital Island may be called only by
the board of directors, or by the chairman of Digital Island's board of
directors or its president.
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No Stockholder Action by Written Consent. Digital Island's 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. Digital Island's 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 Digital Island's 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 Digital Island's 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. Digital Island's certificate of
incorporation limits the liability of its directors (in their capacity as
directors but not in their capacity as officers) to Digital Island or its
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 its
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. Digital Island's 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. Digital Island has
entered into indemnification agreements with each of its directors and
executives officers that 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 Digital Island common stock is
BankBoston, N.A.
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EXPERTS
The Financial Statements of Digital Island as of September 30, 1999 and 1998
and for each of the years in the three-year period ended September 30, 1999
included in this joint proxy statement/prospectus have been audited by
PricewaterhouseCoopers LLP, independent auditors, as stated in their report
appearing herein.
The Financial Statements of Sandpiper as of December 31, 1998 and 1997 and
for each of the years in the two-year period then ended included in this joint
proxy statement/prospectus have been audited by Ernst & Young LLP, independent
auditors, as stated in their report appearing herein.
LEGAL MATTERS
The validity of the shares of Digital Island common stock offered by this
joint proxy statement/prospectus and the federal income tax consequences in
connection with the merger will be passed upon for Digital Island by Brobeck,
Phleger & Harrison LLP, Palo Alto, California. Legal matters pertaining to
federal income tax consequences in connection with the merger will be passed
upon for Sandpiper by Riordan & McKinzie, Los Angeles, California.
WHERE YOU CAN FIND MORE INFORMATION
Digital Island files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information Digital Island files at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Digital Island's SEC filings are also available to the public
from commercial document retrieval services and at the Website maintained by
the SEC at www.sec.gov. Digital Island has filed a registration statement to
register with the SEC the Digital Island common stock to be issued to Sandpiper
shareholders in the merger. This joint proxy statement/prospectus is part of
that registration statement. As allowed by SEC rules, this joint proxy
statement/prospectus does not contain all of the information you can find in
the registration statement or the exhibits to the registration statement.
Digital Island has supplied all information contained or incorporated by
reference in this joint proxy statement/prospectus relating to Digital Island,
and Sandpiper has supplied all information contained or incorporated by
reference in this joint proxy statement/prospectus relating to Sandpiper.
If you are a shareholder of Sandpiper and have any questions or require
additional material from Sandpiper, please call Sandpiper's chief financial
officer, Thomas R. Govreau, at Sandpiper at (805) 370-2130 (collect). Copies of
the Sandpiper bylaws and articles of incorporation are available without
charge, upon written or oral request, from Sandpiper, at the following address:
SANDPIPER NETWORKS, INC
Attention: Chief Financial Officer
Suite 250
225 West Hillcrest Drive
Thousand Oaks, CA 91360
(805) 370-2100
If you would like to request documents from Sandpiper, please do so by
December 20, 1999 to ensure that you receive them before the special meeting.
159
<PAGE>
Digital Island stockholders should rely only on the information contained in
or incorporated by reference in this joint proxy statement/prospectus to vote
on the issuance of Digital Island common stock as contemplated by the merger
agreement. Sandpiper shareholders should rely only on the information contained
in or incorporated by reference in this joint proxy statement/prospectus to
vote on the merger agreement and the merger. Neither Digital Island nor
Sandpiper has authorized anyone to provide information that is different from
what is contained in this joint proxy statement/prospectus. This joint proxy
statement/prospectus is dated December , 1999. Shareholders should not assume
that the information contained in this joint proxy statement/prospectus is
accurate as of any other date, and neither the mailing of this joint proxy
statement/prospectus to Digital Island stockholders or Sandpiper shareholders
nor the issuance of Digital Island common stock in the merger shall create any
implication to the contrary.
This joint proxy statement/prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any securities, or the solicitation of a
proxy, in any jurisdiction in which, or to any person to whom, it is unlawful
to make any such offer or solicitation.
160
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO DIGITAL ISLAND, INC. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Digital Island, Inc. Independent Accountants................... F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
INDEX TO SANDPIPER NETWORKS, INC. FINANCIAL STATEMENTS
Report of Sandpiper Networks, Inc. Independent Auditors.................. F-21
Consolidated Balance Sheets as of December 31, 1997 and December 31,
1998.................................................................... F-22
Consolidated Statements of Operations for the Years Ended December 31,
1997 and December 31, 1998.............................................. F-23
Consolidated Statements of Shareholders' Deficit......................... F-24
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997 and December 31, 1998.............................................. F-25
Notes to Consolidated Financial Statements............................... F-26
Consolidated Balance Sheet as of September 30, 1999 (unaudited).......... F-33
Consolidated Statement of Operations for the Nine Months Ended September
30, 1999 (unaudited).................................................... F-34
Consolidated Statements of Shareholders' Deficit (unaudited)............. F-35
Consolidated Statement of Cash Flows for the Nine Months Ended September
30, 1999 (unaudited).................................................... F-36
Notes to Unaudited Consolidated Financial Statements..................... F-37
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Digital Island, Inc. and Subsidiaries:
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. and
Subsidiaries (the Company) at September 30, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1999, 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
October 29, 1999
F-2
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30,
-----------------
1998 1999
------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................. $ 5,711 $ 43,315
Investments............................................... 10,123 31,691
Accounts receivable, net of allowance of $55 and $380
respectively............................................. 662 3,557
Restricted cash........................................... 263 763
Loan receivable........................................... 532 --
Deferred offering costs................................... 132 --
Prepaid expenses and other................................ 152 1,825
------- --------
Total current assets................................... 17,575 81,151
Property and equipment, net................................. 4,938 25,273
Other assets................................................ 104 1,224
------- --------
Total assets........................................... $22,617 $107,648
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Bank borrowings........................................... $ 801 $ 801
Capital lease obligations................................. 756 3,916
Accounts payable.......................................... 2,408 8,621
Accrued liabilities....................................... 716 4,931
Cash overdraft............................................ -- 3,058
Deferred revenue.......................................... 11 318
------- --------
Total current liabilities.............................. 4,692 21,645
Bank borrowings, less current portion....................... 884 314
Capital lease obligations, less current portion............. 1,551 6,061
Deferred revenue............................................ -- 410
------- --------
Total liabilities...................................... 7,127 28,430
======= ========
Commitments (Note 8)
Stockholders' equity:
Series A through E convertible preferred stock, $0.001 par
value: Authorized: 14,000,000 shares in 1998 and no
shares in 1999; issued and outstanding: 13,305,657 shares
in 1998 and no shares in 1999............................ 13 --
Preferred stock, $0.001 par value:
Authorized: no shares in 1998 and 10,000,000 shares in
1999; no shares issued and outstanding.................. -- --
Common stock, $0.001 par value:
Authorized: 30,000,000 shares in 1998, and 100,000,000
shares in 1999; issued and outstanding: 2,519,835 shares
in 1998 and 35,941,727 shares in 1999................... 3 36
Additional paid-in capital............................... 39,182 156,791
Deferred compensation.................................... (1,503) (4,033)
Stockholder note receivable.............................. (110) (514)
Common stock warrants.................................... 29 --
Accumulated deficit...................................... (22,124) (73,062)
------- --------
Total stockholders' equity............................. 15,490 79,218
------- --------
Total liabilities and stockholders' equity............. $22,617 $107,648
======= ========
</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
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Revenue.................................... $ 218 $ 2,343 $ 12,431
Costs and expenses:
Cost of revenue.......................... 2,508 9,039 29,496
Sales and marketing...................... 1,205 4,847 16,010
Product development...................... 378 1,694 6,357
General and administrative............... 1,502 3,392 9,848
Stock compensation expense............... -- 487 3,207
--------- ---------- ----------
Total costs and expenses................. 5,593 19,459 64,918
--------- ---------- ----------
Loss from operations..................... (5,375) (17,116) (52,487)
--------- ---------- ----------
Interest income, net....................... 87 354 1,551
--------- ---------- ----------
Loss before income taxes................. (5,288) (16,762) (50,936)
Provision for income taxes................. 1 2 2
--------- ---------- ----------
Net loss................................. $ (5,289) $ (16,764) $ (50,938)
========= ========== ==========
Basic and diluted net loss per share....... $ (3.53) $ (7.50) $ (4.58)
========= ========== ==========
Weighted average shares outstanding used in
per share calculation..................... 1,497,711 2,236,452 11,127,462
========= ========== ==========
Pro forma basic and diluted net loss per
share..................................... $ (1.39) $ (2.02)
========== ==========
Weighted average shares outstanding used in
pro forma per share calculation........... 12,042,539 25,233,080
========== ==========
</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
(In thousands)
<TABLE>
<CAPTION>
Convertible
Preferred
Stock Common Stock Additional Stockholder Common Total
--------------- -------------- Paid-in Deferred Note Stock Accumulated Stockholders
Shares Amount Shares Amount Capital Compensation Receivable Warrants Deficit Equity
------- ------ ------ ------ ---------- ------------ ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
September 30,
1996.............. 2,000 $ 2 275 $ -- $ 129 $ -- $ -- $ 23 $ (71) $ 83
Common stock
issued for
professional
services.......... -- -- 71 -- 28 -- -- -- -- 28
Conversion of
preferred stock
into common
stock............. (2,000) (2) 2,000 2 -- -- -- -- -- --
Repurchase of
common stock...... -- -- (130) -- (1) -- -- -- -- (1)
Series A preferred
stock issued for
cash, net of
issuance costs of
$17............... 3,342 3 -- -- 3,322 -- -- -- -- 3,325
Series B preferred
stock issued for
cash, net of
issuance costs of
$46............... 3,000 3 -- -- 7,451 -- -- -- -- 7,454
Warrants issued in
connection with
convertible note.. -- -- -- -- -- -- -- 6 -- 6
Conversion of
notes payable into
Series A preferred
Stock............. 658 1 -- -- 657 -- -- -- -- 658
Net loss.......... -- -- -- -- -- -- -- -- (5,289) (5,289)
------- ---- ------ ---- -------- ------- ----- ---- -------- --------
Balances,
September 30,
1997.............. 7,000 7 2,216 2 11,586 -- -- 29 (5,360) 6,264
Series C preferred
stock issued for
cash, net of
issuance costs of
$34............... 4,283 4 -- -- 14,739 -- -- -- -- 14,743
Series D preferred
stock issued for
cash, net of
issuance costs of
$33............... 2,023 2 -- -- 10,583 -- -- -- -- 10,585
Issuance of
stockholder note
in exchange for
common Stock...... -- -- 183 1 110 -- (110) -- -- 1
Common stock
issued for
professional
services.......... -- -- 6 -- 18 -- -- -- -- 18
Common stock
issued for cash
upon exercise of
options........... -- -- 115 -- 156 -- -- -- -- 156
Deferred
compensation in
connection with
issuance of stock
options........... -- -- -- -- 1,990 (1,990) -- -- -- --
Amortization of
deferred
compensation...... -- -- -- -- -- 487 -- -- -- 487
Net loss.......... -- -- -- -- -- -- -- -- (16,764) (16,764)
------- ---- ------ ---- -------- ------- ----- ---- -------- --------
Balances,
September 30,
1998.............. 13,306 13 2,520 3 39,182 (1,503) (110) 29 (22,124) 15,490
Series E preferred
stock issued for
cash, net of
issuance costs of
$2,539............ 11,765 12 -- -- 47,450 -- -- -- -- 47,462
Common stock
issued for cash
upon exercise of
options........... -- -- 829 1 964 -- -- -- -- 965
Deferred
compensation in
connection with
issuance of stock
options........... -- -- -- -- 5,737 (5,737) -- -- -- --
Amortization of
deferred
compensation...... -- -- -- -- -- 3,207 -- -- -- 3,207
Issuance of
stockholder note
in exchange for
common stock...... -- -- 349 -- 286 -- (286) -- -- --
Common stock
issued for cash
upon exercise of
warrants.......... -- -- 95 -- 38 -- -- (29) -- 9
Additional shares
of Series D
preferred stock
issued upon
Conversion........ 178 -- -- -- -- -- -- -- -- --
Conversion of
preferred stock... (25,249) (25) 25,249 25 -- -- -- -- -- --
Issuance of common
stock in public
offering, net of
issuance costs of
$5,858............ -- -- 6,900 7 63,134 -- -- -- -- 63,141
Notes issued to
officers in
exchange for
cash.............. -- -- -- -- -- -- (228) -- -- (228)
Repayment of
stockholder note.. -- -- -- -- -- -- 110 -- -- 110
Net loss.......... -- -- -- -- -- -- -- -- (50,938) (50,938)
------- ---- ------ ---- -------- ------- ----- ---- -------- --------
Balances,
September 30,
1999.............. -- $ -- 35,942 $ 36 $156,791 $(4,033) $(514) $ -- $(73,062) $ 79,218
======= ==== ====== ==== ======== ======= ===== ==== ======== ========
</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
(In thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(5,289) $(16,764) $(50,938)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 158 547 1,735
Amortization of capital lease obligations...... -- 263 1,507
Stock compensation expense..................... -- 487 3,207
Non-cash revenue in connection with barter
agreement..................................... (132) -- --
Debt discount in conjunction with convertible
notes......................................... 29 -- --
Amortization of discounts on investments....... (24) (227) (817)
Professional services in exchange for common
stock......................................... 28 18 --
Loss on disposal of property and equipment..... -- 2 5
Change in operating assets and liabilities:
Accounts receivable............................ (73) (589) (2,895)
Prepaid expenses and other..................... 27 (98) (1,673)
Deferred offering costs........................ -- (132) 132
Accounts payable............................... 1,901 486 6,213
Accrued liabilities............................ 322 394 4,215
Deferred revenue............................... 9 2 717
Other assets................................... (36) (68) (1,138)
------- -------- --------
Net cash used in operating activities........ (3,080) (15,679) (39,730)
------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment.............. (2,128) (1,234) (14,337)
Proceeds from maturities of short-term
investments..................................... 1,000 5,600 31,478
Decrease (increase) in restricted cash........... (384) 121 (500)
Purchases of short-term investments.............. (2,959) (13,513) (52,229)
------- -------- --------
Net cash used in investing activities........ (4,471) (9,026) (35,588)
------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net... 10,779 25,328 47,462
Proceeds from issuance of common stock, net...... -- 156 64,115
Proceeds from issuance of notes payable.......... 308 -- --
Proceeds from bank borrowings.................... 705 647 532
Repayments of bank borrowings.................... -- (199) (570)
Repayments of capital lease obligations.......... -- (100) (1,557)
Repayment of stockholder note receivable......... -- -- 110
Issuance of loans to officers.................... -- -- (228)
Cash overdraft................................... -- -- 3,058
Repurchase of common stock....................... (1) -- --
------- -------- --------
Net cash provided by financing activities.... 11,791 25,832 112,922
------- -------- --------
Net increase in cash and cash equivalents.... 4,240 1,127 37,604
Cash and cash equivalents, beginning of period.... 344 4,584 5,711
------- -------- --------
Cash and cash equivalents, end of period.......... $ 4,584 $ 5,711 $ 43,315
======= ======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest........................... $ 27 $ 129 $ 494
======= ======== ========
Cash paid for income taxes....................... $ 2 $ 2 $ 2
======= ======== ========
Supplemental schedule of noncash investing and
financing activities:
Common stock issued for professional services.... $ 28 $ 18 $ --
======= ======== ========
Receivable on bank borrowings.................... $ -- $ 532 $ --
======= ======== ========
Notes payable converted into preferred stock..... $ 658 $ -- $ --
======= ======== ========
Conversion of preferred stock into common
stock........................................... $ 21 $ -- $ 25
======= ======== ========
Note receivable issued in exchange for common
stock........................................... $ -- $ 110 $ 286
======= ======== ========
Capital lease obligations for equipment.......... $ -- $ 2,406 $ 9,227
======= ======== ========
Non-cash compensation expense.................... $ -- $ 487 $ 3,207
======= ======== ========
</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
1. The Company:
Digital Island, Inc. and Subsidiaries (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.
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:
Principles of Consolidation:
The accompanying consolidated financial statements of the Company include
the accounts of Digital Island, Inc. and its wholly-owned subsidiaries, Digital
Island B.V., Digital Island Ltd., Digital Island (Europe) SA, Digital Island
(Hong Kong), Ltd., and Digital Island (Japan) KK, all of which were established
in fiscal 1999. 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.
Revenue Recognition:
Revenues are comprised primarily of bandwidth charges, equipment co-location
and storage fees, and one-time fees for installation if required to provide
services. 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:
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.
Diluted net loss per share for the years ended September 30, 1997, 1998 and
1999 does not include the effect of 1,583,500, 2,993,765, and 3,847,569 stock
options, respectively, and 95,000, 95,000, and 0 common stock warrants,
respectively, or 7,000,000, 13,305,657, and 0 shares of convertible preferred
stock on an "as if converted" basis, respectively, as the effect of their
inclusion is antidilutive during each period.
F-7
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 the fiscal year or at the date of issuance, if later.
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,
capital leases, accounts payable and accrued liabilities approximate fair value
due to their short maturities.
Investments:
At September 30, 1998 and 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 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 (in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1998 1999
----------------- -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Commercial paper....................... $10,123 $10,125 $31,691 $31,683
</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
F-8
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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,
F-9
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 year ended September 30,
1999, the same four customers accounted for approximately 4%, 35%, 1%, and 4%,
respectively, of all revenues generated by the Company, and 6%, 41%, 0%, and
3%, respectively, of accounts receivable at September 30, 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.
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, as net loss equals comprehensive loss.
Segment Information:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information about
operating segments in financial statements. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. In accordance with the provisions of SFAS No. 131, the Company has
determined that it does not currently have any separately reportable operating
segments. Revenues from foreign operations have been insignificant.
Recently Issued Accounting Pronouncements:
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement
of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires computer
software costs related to internal software that are incurred in the
preliminary project stage should be expensed as incurred. Once the
capitalization criteria of SOP 98-1 have been met, external direct costs of
materials and services consumed in developing or obtaining internal-use
computer software; payroll and payroll-related costs for employees who are
directly associated with and who devote time to the internal-use computer
software project (to the extent of the time spent directly on the project); and
interest costs incurred when developing computer software for internal use
should be capitalized. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. Accordingly, the Company will
adopt SOP 98-1 in its consolidated financial statements for the year ending
September 30, 2000. The adoption of SOP 98-1 is not expected to have a material
effect on the consolidated financial statements of the Company.
F-10
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 2000. 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 (in thousands):
<TABLE>
<CAPTION>
September 30,
--------------
1998 1999
------ -------
<S> <C> <C>
Network equipment............................................ $2,299 $ 7,404
Communications equipment..................................... 194 217
Computer equipment and software.............................. 515 3,316
Furniture, fixtures, and leasehold improvements.............. 491 6,339
Equipment and fixtures under capital leases.................. 2,407 12,189
------ -------
5,906 29,465
Less accumulated depreciation and amortization............... 968 4,192
------ -------
Total property and equipment, net............................ $4,938 $25,273
====== =======
</TABLE>
4. Income Taxes:
For the years ended September 30, 1997, 1998, and 1999, the provision for
income taxes consists of state taxes.
The primary components of the net deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30,
-----------------
1998 1999
------- --------
<S> <C> <C>
Net operating loss carryforwards, federal and state....... $ 8,635 $ 26,999
Accrued employee benefits................................. 61 274
Sales tax................................................. 1 2
Accounts receivable allowance............................. 22 152
Deferred Revenue.......................................... -- 267
Property and equipment.................................... (358) (1,628)
------- --------
8,361 26,066
Less valuation allowance.................................. (8,361) (26,066)
------- --------
$ -- $ --
======= ========
</TABLE>
F-11
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $6.2 million and $17.7 million for the years ended
September 30, 1998 and 1999, 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, 1999, the Company had NOL carryforwards of approximately
$72.0 million for both federal and state income tax purposes. 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 2014 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 (in thousands):
<TABLE>
<CAPTION>
September 30,
--------------
1998 1999
------ ------
<S> <C> <C>
Line of credit............................................... $ 230 $ 230
Revolving credit facility.................................... 579 323
Equipment term facility...................................... 876 562
------ ------
1,685 1,115
Current maturities........................................... (801) (801)
------ ------
Long-term bank borrowings.................................... $ 884 $ 314
====== ======
</TABLE>
On November 21, 1996, the Company entered into a revolving credit agreement
(the "Revolving Agreement") with a commercial lender. The aggregate credit
under the Revolving Agreement was originally $250,000, and was increased to
$750,000 on April 18, 1997. Interest under the Revolving Agreement is 0.75%
over the "Prime Rate" as announced from time to time by the lender. At
September 30, 1998 and 1999, the effective interest rate was 9.25% and 9.00%,
respectively. The weighted average interest rates for the years ended September
30, 1998 and 1999, were 9.25%, and 8.61%, 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, 1998 and
1999 were $579,000 and $323,000, 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. $230,0000 was outstanding
under the line of credit at both September 30, 1998 and 1999. Interest on
borrowings are charged at the lender's prime rate plus 0.25%, which was 8.75%
and 8.50% at September 30, 1998 and 1999, respectively. The weighted average
interest rates for the years ended September 30, 1998 and
F-12
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999 were 8.75% and 8.13%, respectively. Advances under the line of credit can
be repaid and reborrowed at any time until the maturity date of May 31, 2000.
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 1999, $224,000 and $140,000, respectively, was
outstanding related to advances made under Equipment Line A, and $652,000 and
$422,000, 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 9.00% at September 30, 1998 and
1999, respectively. The weighted average interest rates for the years ended
September 30, 1998 and 1999 were 9.25% and 8.61%, 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. On May 31, 1999, the Loan Agreement was
modified yet again to extend the maturity date to May 31, 2000.
The Company did not comply with certain financial covenants 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. Since the date of this most recent waiver the Company has been in
compliance with all covenants.
Interest expense for the years ended September 30, 1997, 1998 and 1999 was
$36,000, $94,000, and $123,000, respectively.
Principal maturities of bank borrowings are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
<S> <C>
2000............................................................... $ 801
2001............................................................... 314
------
$1,115
======
</TABLE>
6. Notes Payable:
Between September 27, 1996 and January 31, 1997, the Company issued three
convertible notes totalling $600,000 to a commercial lender. These notes had a
simple interest rate of 6%. In March 1997, all three notes plus accrued
interest of $8,454 were converted into 608,454 shares of Series A preferred
stock.
Prior to October 1, 1996, the Company had issued a $50,000 convertible note
to a related party. In March 1997, this note was converted into 50,000 shares
of Series A preferred stock.
F-13
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Accrued Liabilities:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
September
30,
-----------
1998 1999
---- ------
<S> <C> <C>
Employee compensation........................................... $596 $2,254
Other accrued liabilities....................................... 120 2,677
---- ------
Total......................................................... $716 $4,931
==== ======
</TABLE>
8. Commitments:
Leases:
The Company leases office space under noncancelable operating leases
expiring through April, 2014. Rent expense for the years ended September 30,
1997, 1998, and 1999, was $137,000, $715,000, and $3.2 million, respectively.
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 (in thousands):
<TABLE>
<CAPTION>
Year ending September 30, Operating Capital
------------------------- --------- -------
<S> <C> <C>
2000..................................................... $ 5,389 $4,531
2001..................................................... 6,506 4,113
2002..................................................... 6,477 2,297
2003..................................................... 6,268 10
2004..................................................... 5,337 --
Thereafter............................................... 20,838 --
------- ------
Total minimum lease payments........................... $50,815 10,951
=======
Less amounts representing interest....................... (974)
------
Present value of minimum lease payments.................. 9,977
Less current portion of capital lease obligations........ (3,916)
------
Long-term portion of capital lease obligations........... $6,061
======
</TABLE>
Carrier Line Agreements:
The Company has entered into various bandwidth capacity agreements with
domestic and foreign carriers. These agreements are generally cancelable and
provide for termination fees if cancelled by the Company prior to expiration.
F-14
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Earnings Per Share:
The following is a reconciliation of the numerator and denominator of basic
and diluted earnings per share ("EPS"):
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Numerator--Basic and Diluted EPS
Net Loss (in thousands)................... $ (5,289) $ (16,764) $ (50,938)
========= ========== ==========
Denominator--Basic and Diluted EPS
Weighted average Common Stock
outstanding.............................. 1,497,711 2,361,010 11,280,534
Common Stock subject to repurchase........ -- (124,558) (153,072)
--------- ---------- ----------
Total weighted average Common Stock
outstanding.............................. 1,497,711 2,236,452 11,127,462
========= ========== ==========
Basic and diluted loss per share............ $ (3.53) $ (7.50) $ (4.58)
========= ========== ==========
Pro forma:
Denominator--Basic and Diluted EPS
Weighted Average Common Stock............. 2,361,010 4,752,354
Conversion of Preferred Stock............. 9,711,087 20,538,798
Conversion of Warrants.................... 95,000 95,000
Common Stock subject to repurchase........ (124,558) (153,072)
---------- ----------
Total weighted average Common Stock
outstanding pro Forma.................... 12,042,539 25,233,080
========== ==========
Basic and diluted pro forma loss per share.. $ (1.39) $ (2.02)
========== ==========
</TABLE>
10. Stockholders' Equity:
In June 1999, the Company completed its initial public offering ("IPO") of
6,000,000 shares of its common stock. Subsequent to the IPO, the underwriters
purchased an additional 900,000 shares to cover over-allotments. The net
proceeds to the Company after deducting underwriting discounts and commissions
and offering expenses, was approximately $63.1 million. In conjunction with the
IPO, all shares of Series A, B, C, D, and E convertible preferred stock were
converted to common stock. Immediately prior to this conversion, an additional
178,138 shares of Series D preferred stock were issued in accordance with
certain anti-dilution provisions. All of these additional shares were converted
into common stock. In addition, all outstanding warrants were exercised prior
to the IPO for 95,000 shares of common stock.
In June 1999, the Company was reincorporated in the state of Delaware.
Pursuant to the reincorporation, each share of common and preferred stock of
the Company's California predecessor entity was 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 increased 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.
F-15
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Convertible preferred stock issued and outstanding prior to the IPO was as
follows:
<TABLE>
<CAPTION>
Liquidation
Shares Issued and Value
Series Designated Outstanding (in thousands)
------ ---------- ----------- -------------
<S> <C> <C> <C>
A.................................... 4,000,000 4,000,000 $ 4,000
B.................................... 3,000,000 3,000,000 $ 7,500
C.................................... 4,300,000 4,283,181 $ 14,777
D.................................... 2,700,000 2,200,614 $ 10,618
E.................................... 11,764,706 11,764,706 $ 50,000
---------- ---------- --------
25,764,706 25,248,501 $ 86,895
========== ========== ========
</TABLE>
11. Stock Plans:
Stock Option Plans:
In January 1997, the Company established the 1997 Stock Option and Incentive
Plan (the "1997 Plan") and reserved up to 1,689,125 shares of common stock
issuable upon exercise of options granted to certain employees, directors, and
consultants. In May 1998, the Company adopted the 1998 Stock Option/Stock
Issuance Plan (the "1998 Plan"). The 1998 Plan was designed to serve as the
successor to the 1997 Plan. Upon adoption of the 1998 Plan the existing share
reserve under the 1997 Plan was transferred to the 1998 Plan, and all
outstanding options under the 1997 Plan were incorporated into the 1998 Plan.
The Company increased the maximum number of shares issuable to a total of
3,833,284. In November 1998, the Company increased the stock option pool by
another 600,000 shares, bringing the total to 4,433,284. This number of shares
was reserved for issuance under the 1998 Plan. In June 1998, concurrent with
the IPO, the Company adopted the 1999 Stock Incentive Plan (the "1999 Plan").
The 1999 Plan was designed 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 shares reserved under that
plan, were 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 2,110,716 shares of common stock were reserved for
issuance. A total of 7,544,000 shares are now reserved for issuance.
Under the terms of the 1999 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. The plan provides that management can grant employees the right
to exercise options prior to vesting. Upon termination of an employee's
employment with the Company for any reason, the Company has the right to
repurchase all or any portion of the unvested shares acquired by the employee
upon exercise of options at a repurchase price that is equal to the exercise
price, within 90 days following the date of termination. At September 30, 1999,
1998, and 1997, 205,700, 254,125, and 0 shares of common stock were subject to
repurchase by the Company.
F-16
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the activity under the 1997 Plan, the 1998 Plan, and the 1999
Plan is as follows (dollars in thousands):
<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.................. 2,412,350 $3.35-$26.00 19,109,274 7.92
Exercised................ (1,178,391) $0.40-$ 9.90 (1,142,950) 0.97
Terminated............... (380,155) $0.40-$10.00 (1,167,204) 3.07
---------- ------------ ----------- -----
Outstanding at September
30, 1999.................. 3,847,569 $0.40-$26.00 $20,358,821 $5.29
========== ============ =========== =====
</TABLE>
The Company accounts for the 1997 Plan, the 1998 Plan, and the 1999 Plan
using the intrinsic value based method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. For financial reporting purposes, the Company has
determined that the deemed fair value on the date of grant of employee stock
options granted between May 1, 1998 and April 21, 1999 was in excess of the
exercise price of the options. Consequently, the Company recorded deferred
compensation of $2.0 million for the year ended September 30, 1998, and an
additional $5.7 million for the year ended September 30, 1999. Of the total
deferred compensation, $487,000 was amortized during the year ended September
30, 1998 and $3.2 million was amortized during the year ended September 30,
1999.
At September 30, 1999 options to purchase 1,541,814 shares of common stock
were exercisable with a weighted average exercise price of $1.60 per share.
At September 30, 1998 and 1999, options to purchase 541,559 and 2,220,080
shares of common stock, respectively, remain available for issuance.
The following summarizes information with respect to stock options
outstanding at September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Prices Exercisable Prices
--------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.40-$0.60......... 561,607 7.49 $ 0.41 166,921 $ 0.40
$0.90-$1.50......... 877,923 8.92 $ 1.43 454,862 $ 1.49
$2.75-$3.35......... 123,905 8.88 $ 3.10 123,905 $ 3.10
$3.50-$4.25......... 1,396,084 9.52 $ 4.02 397,052 $ 3.96
$7.50-$10.00........ 489,300 9.69 $ 9.46 398,683 $ 9.41
$18.875-$20.50...... 331,750 9.82 $20.10 391 $20.21
$23.750-$26.00...... 67,000 9.96 $24.46 -- --
</TABLE>
The following information concerning the Company's 1999 Plan is provided in
accordance with Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation."
F-17
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998 and 1999:
<TABLE>
<CAPTION>
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Risk-free interest rates........ 5.85%-6.86% 4.23%-6.08% 5.80%
Expected life................... 5 years 5 years 4 years
Expected dividend yield......... -- -- --
Expected volatility............. -- -- 80%
</TABLE>
The weighted average fair value for options granted was $0.10, $0.36 and
$1.71 for the years ended September 30, 1997, 1998, and 1999, respectively.
The pro forma net loss for the Company for the years ended September 30,
1997, 1998 and 1999 following the provisions of SFAS 123, was $5.3 million,
$16.8 million and $51.6 million respectively. The pro forma basic and diluted
net loss per share for the years ended September 30, 1997, 1998 and 1999 was
$3.55, $7.53 and $4.63, respectively.
Employee Stock Purchase Plan:
In June 1999, the Company 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 commenced on July 1, 1999. A
total of 300,000 shares is reserved for issuance under the 1999 ESPP. At
September 30, 1999 a total of $581,000 had been withheld from employees for
future purchases under this plan.
12. Stockholder Notes Receivable:
On February 25, 1998, the Company granted a nonstatutory option to purchase
a total of 183,000 shares of the Company's common stock to a director of the
Company (the "Director"). These options were immediately exercisable and the
shares purchased thereunder are subject to repurchase by the Company, with the
right to repurchase expiring in 16 equal quarterly installments. At the time of
the option grant, the Director exercised the option to purchase the entire
183,000 shares of common stock, in exchange for a $109,800 note (the "Note").
The Note was collateralized by the 183,000 shares of common stock and by other
assets of the Director. Under the terms of the note, interest was accrued at
5.61% per annum. Interest was to be repaid in four equal annual installments
commencing February 24, 1999. The entire principal amount was due and payable
in one lump sum on February 24, 2002. In August 1999, the Director extinguished
the Note by paying the full amount of principal and accrued interest. At
September 30, 1999, a total of 114,375 shares of the Director's stock was
subject to repurchase.
On April 20, 1999, executive officers of the Company exercised stock options
to purchase 349,332 shares of common stock in exchange for full-recourse notes.
The total principal amount of these notes is $286,398. The notes bear interest
at the rate of 7.75% per annum, compounded semiannually. Accrued interest is
due and payable at successive quarterly intervals over the four-year term of
the note, and the principal balance will become due and payable in one lump sum
at the end of the four year term. None of the shares purchased with the notes
may be sold unless the principal portion of the note attributable to those
shares, together with the accrued interest on that principal portion, is paid
in full.
F-18
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 14, 1999, one of the executive officers who had exercised options on
April 20, 1999 in exchange for a full-recourse note, borrowed an additional
$128,000 in order to finance the tax liability she incurred in connection with
the exercise of her stock options on April 20, 1999 for 133,332 shares of
common stock. The loan is evidenced by a full-recourse promissory note with
interest at the rate of 7.75% per annum, compounded semi-annually, and secured
by the same 133,332 shares which serve as collateral for the April 20, 1999
promissory note, as well as other assets. The terms of her note, including the
due dates for payment of principal and accrued interest and the acceleration
provisions, are substantially the same as the terms in effect for her April 20,
1999 note.
In July 1999, the Company loaned an officer of the Company $100,000. The
loan is interest free, with $50,000 being forgiven ratably over a period of
five years. At the end of the five year term, the $50,000 portion of the loan
that has not been forgiven is to be repaid in one lump sum. In the event that
the officer's employment terminates during the five year period, the
outstanding unforgiven balance of the loan is to be repaid at the time of the
termination. The amount being forgiven, plus imputed interest are charged to
operations.
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 was equal to $0.10 per share.
The warrants were due to 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. 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. In June 1999, prior to the IPO, the warrants were exercised.
14. Related Party Transactions:
One shareholder also is a significant customer of the Company. For the years
ended September 30, 1997, 1998, and 1999, the Company earned $122,000,
$310,000, and $524,000, respectively, in revenue from sales to this customer,
and had $139,000, and $200,000 in total receivables at September 30, 1998 and
1999, respectively. The Company owed this customer $992,000 and $3.8 million at
September 30, 1998 and 1999, respectively, under terms of the master lease
agreement, and also owed another $94,000 and $68,000, respectively, in other
trade-related payables.
One other significant shareholder is also a customer of the Company. For the
years ended September 30, 1997, 1998, and 1999, the Company earned $43,000,
$458,000, and $4.4 million, respectively, in revenue from sales to this
customer, and had $39,000 and $1.4 million in total receivables at September
30, 1998 and 1999, respectively. In addition, $715,000 of the deferred revenue
balance at September 30, 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
years ended September 30, 1998 and 1999.
F-19
<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Subsequent Events:
In October 1999, options to purchase 32,250 and 446,500 shares of common
stock were granted at exercise prices of $23.3125 and $38.6875 per share,
respectively.
On October 25, 1999, the Company agreed to merge with Sandpiper Networks,
Inc. ("Sandpiper") in a transaction to be accounted for as a purchase. The
merger is subject to approval by stockholders. The terms of the merger call for
1.07 shares of Digital Island, Inc. common stock to be exchanged for each share
of Sandpiper stock. Sandpiper stock options will be assumed by Digital Island,
Inc. at the same ratio. An estimated 24.5 million shares of Digital Island
common stock are to be exchanged.
F-20
<PAGE>
REPORT OF SANDPIPER NETWORKS, INC. INDEPENDENT AUDITORS
The Board of Directors
Sandpiper Networks, Inc.
We have audited the accompanying consolidated balance sheets of Sandpiper
Networks, Inc. as of December 31, 1997 and 1998, and the related consolidated
statements of operations, shareholders' deficit, and cash flows for the years
then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sandpiper
Networks, Inc. at December 31, 1997 and 1998, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
February 3, 1999
Los Angeles, California
F-21
<PAGE>
SANDPIPER NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $ 5,728,826 $ 603,812
Accounts receivable................................ -- 2,176
Prepaid and other current assets................... 2,022 82,301
----------- -----------
Total current assets................................. 5,730,848 688,289
Property and equipment, net.......................... 38,730 1,072,791
Other assets......................................... 4,598 63,640
----------- -----------
Total assets......................................... $ 5,774,176 $ 1,824,720
=========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND SHAREHOLDERS' DEFICIT
-------------------------------
Current liabilities:
Current portion of debt............................ $ 125,000 $ 46,010
Current portion of capital lease obligations....... -- 310,327
Accounts payable................................... 175,023 8,462
Accrued expenses................................... 88,772 225,024
----------- -----------
Total current liabilities............................ 388,795 589,823
Debt, less current portion........................... -- 71,558
Capital lease obligations, less current portion...... -- 639,205
----------- -----------
Total liabilities.................................... 388,795 1,300,586
Series A redeemable convertible preferred stock,
$0.001 par value: 9,599,999 and 10,278,569 shares
authorized as of December 31, 1997 and 1998,
respectively; 9,428,570 and 9,607,141 issued and
outstanding as of December 31, 1997 and 1998,
respectively........................................ 6,552,920 6,674,442
Shareholders' deficit:
Common Stock, $0.001 par value: 30,000,000 shares
authorized as of December 31, 1997 and 1998;
5,095,658 and 6,685,405 issued and outstanding as
of December 31, 1997 and 1998, respectively....... 1,000 112,383
Accumulated deficit................................ (1,168,539) (6,262,691)
----------- -----------
Total shareholders' deficit.......................... (1,167,539) (6,150,308)
----------- -----------
$ 5,774,176 $ 1,824,720
=========== ===========
</TABLE>
See accompanying notes.
F-22
<PAGE>
SANDPIPER NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenues............................................. $ $ 5,700
Cost and expenses:
Cost of revenues................................... -- 1,695,057
Product development................................ 1,159,715 1,382,635
Marketing and sales................................ -- 1,272,441
General and administrative......................... 28,149 876,093
----------- -----------
Total operating expenses............................. 1,187,864 5,226,226
----------- -----------
Operating (loss)..................................... (1,187,864) (5,220,526)
Interest expense..................................... 23,649 29,119
Interest (income).................................... (42,974) (155,493)
----------- -----------
Net (loss)........................................... $(1,168,539) $(5,094,152)
=========== ===========
</TABLE>
See accompanying notes.
F-23
<PAGE>
SANDPIPER NETWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Total
------------------- Accumulated Shareholders'
Shares Amount Deficit Equity (Deficit)
--------- -------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance as of January 1,
1997....................... 5,095,658 $ 1,000 $ -- $ 1,000
Net loss.................. -- -- (1,168,539) (1,168,539)
--------- -------- ----------- -----------
Balance as of December 31,
1997....................... 5,095,658 1,000 (1,168,539) (1,167,539)
Repurchase of Common
Stock.................... (509,566) (35,670) -- (35,670)
Issuance of Common Stock
in connection with
exercise of stock
options.................. 2,099,313 147,053 -- 147,053
Net loss.................. -- -- (5,094,152) (5,094,152)
--------- -------- ----------- -----------
Balance as of December 31,
1998....................... 6,685,405 $112,383 $(6,262,691) $(6,150,308)
========= ======== =========== ===========
</TABLE>
See accompanying notes.
F-24
<PAGE>
SANDPIPER NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Operating activities
Net loss............................................. $(1,168,539) $(5,094,152)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization...................... 3,025 444,257
Changes in operating assets and liabilities:
Accounts receivable............................... -- (2,176)
Prepaid and other current assets.................. (2,022) (80,279)
Accounts payable.................................. 175,023 (166,561)
Accrued expenses.................................. 88,772 136,252
----------- -----------
Net cash used in operating activities................ (903,741) (4,762,659)
----------- -----------
Investing activities
Purchases of property and equipment.................. (41,755) (1,478,317)
Other assets......................................... (4,598) (59,042)
----------- -----------
Net cash used in investing activities................ (46,353) (1,537,359)
----------- -----------
Financing activities
Proceeds from issuance of Common Stock............... -- 147,053
Net proceeds from issuance of Series A redeemable
convertible preferred stock......................... 5,952,920 --
Proceeds from credit line............................ -- 800,000
Proceeds from debt................................... 846,924 117,568
Proceeds from capital lease obligations.............. -- 1,094,453
Repurchase of Common Stock........................... -- (35,670)
Repayment of credit line............................. -- (800,000)
Repayment of debt.................................... (121,924)
Repayment of capital lease obligations............... -- (144,921)
Other financing activities........................... -- (3,479)
----------- -----------
Net cash provided by financing activities............ 6,677,920 1,175,004
----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... 5,727,826 (5,125,014)
Cash and cash equivalents at beginning of year....... 1,000 5,728,826
----------- -----------
Cash and cash equivalents at end of year............. $ 5,728,826 $ 603,812
=========== ===========
Supplemental schedule of non-cash transactions:
Conversion of notes payable to Series A redeemable
convertible preferred stock........................ $ 600,000 $ 125,000
=========== ===========
</TABLE>
See accompanying notes.
F-25
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Sandpiper Networks, Inc. (the "Company") was incorporated in December 1996.
The Company and its wholly owned subsidiary, Sandpiper Leasing Corporation
("SLC") provide a subscription-based service that enables web publishers to
migrate their content onto a professionally managed content delivery network.
The Company's service provides publishers with unlimited scalability and
improved performance by avoiding Internet congestion and intelligently
delivering content closer to end-users. The Company has had limited sales of
products, and its customers are Internet publishing companies, located
principally in the United States.
As of December 31, 1998, the Company has an accumulated deficit of
$6,262,691. The Company anticipates that, in the event that profitability is
not attained, the required funding for expenditures will come from sources such
as additional equity (see Note 11) or debt financing, collaborative
arrangements or partnership agreements. While management believes that any
additional funding required will be available as necessary, there is no
assurance that additional financing will be available and on terms acceptable
to the Company, when required. If additional funding were not available when
needed, the Company would be required to reduce the rate of administrative
costs and research and development expenditures.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingencies at the date of the financial statements, and
affect the reported amount of revenues and expenses during the reporting
period. Actual results could differ from the Company's estimates.
In October 1998, the Company commenced the planned principal operations by
introducing the first service offering through the launch of the Footprint
product. Accordingly, the Company is not presented as a development stage
company in the accompanying financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, SLC. All significant intercompany
accounts have been eliminated.
Stock Split
In 1997, the Company's Board of Directors approved a Common Stock split
whereby each outstanding share of Common Stock was converted into 8.1530496
shares of Common Stock. Such stock split has been retroactively reflected in
the accompanying consolidated financial statements.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash deposits at financial institutions.
The Company places its cash deposits with high credit quality financial
institutions. At times, balances in the Company's cash accounts may exceed the
Federal Deposit Limitation ("FDIC") limit.
F-26
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost and depreciated or amortized over
the estimated useful lives of the assets on a straight-line basis. The
estimated useful lives of the assets are as follows:
<TABLE>
<S> <C>
Equipment....................................................... 3 years
Furniture and fixtures.......................................... 3-5 years
</TABLE>
F-27
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Included in this caption are the following assets:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
------- ----------
<S> <C> <C>
Operations equipment.................................. $ -- $1,069,560
Other property and equipment.......................... 41,755 450,513
------- ----------
41,755 1,520,073
Accumulated depreciation.............................. (3,025) (447,282)
------- ----------
Net property and equipment............................ $38,730 $1,072,791
======= ==========
</TABLE>
Revenue recognition
The Company recognizes subscription revenues over the period the services
are provided.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses for the
year ended December 31, 1998 was $119,432. There were no advertising expenses
in 1997.
Research and Development Expenses
Research and development costs are expensed as incurred.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS 123"), requires that stock awards granted subsequent
to January 1, 1995, be recognized as compensation expense based on their fair
market value at the date of grant. Alternatively, a company may use APB Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25"), and disclose the
pro forma results of operations which would have resulted from recognizing such
rewards at their fair market value. The Company accounts for stock option
grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and, accordingly, does not recognize compensation expense for stock
option grants. Stock Options are granted under the Company's Stock Incentive
Plan with an exercise price equal to the fair market value of the shares at the
date of grant.
2. Credit Arrangements and Long-Term Debt
On February 19, 1998, the Company entered into a $1,000,000 line of credit
with a bank, with a variable rate of interest, based on the bank's lending
rate. Under the terms of the line of credit, up to $750,000 of the credit
facility could be converted to a three-year term loan with similar interest
terms on August 19, 1999, to the extent that Company draws on credit were
supported by capital equipment invoices. At December 31, 1998 no amounts are
extended under this facility.
On August 31, 1998, the Company executed a promissory note with a financial
institution in the amount of $117,568, at a stated interest rate of 7% per
annum, principal and interest due monthly for 36 months and collateralized by
equipment. Aggregate maturities for 1999, 2000 and 2001 are $46,010, $36,816
and $31,743, respectively.
F-28
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Leases
The Company entered into a $1,500,000 equipment lease line of credit
through which non-cancelable capital lease obligations for computers and
equipment were executed during the year ended December 31, 1998. In addition,
the Company entered into a lease agreement for its facilities on January 6,
1999 under non-cancelable operating lease agreements expiring through 2005.
This operating lease provides for free rent and escalations.
Future minimum lease payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Lease Leases
---------- ----------
<S> <C> <C>
1999................................................ $ 174,549 $ 366,643
2000................................................ 299,227 394,729
2001................................................ 318,913 283,273
2002................................................ 322,850 --
2003................................................ 335,974 --
Thereafter.......................................... 395,032 --
---------- ----------
Total minimum lease payments........................ $1,846,545 $1,044,645
==========
Less amounts representing interest.................. 95,113
----------
Present value of lease payments..................... $ 949,532
==========
</TABLE>
At December 31, 1998, computers, software and equipment under capital
leases had an original cost basis and a net book value of $1,094,453 and
$670,263, respectively.
Rent expense was $13,716 and $123,412 for the years ended December 31, 1997
and 1998, respectively.
4. Income Taxes
The deferred income tax assets and liabilities of the Company consist of
the differences between the financial statements and tax basis of assets and
liabilities, and are measured at the current enacted tax rates. The temporary
differences related to the following as of December 31, 1997 and 1998,
respectively, are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating losses and tax credits............. $ 517,236 $ 2,754,031
--------- -----------
Total deferred tax assets.......................... 517,236 2,754,031
Deferred tax liabilities:
Federal benefit for state income taxes........... 31,214 156,025
--------- -----------
Total deferred liabilities......................... 31,214 156,025
--------- -----------
Net deferred tax assets............................ 486,022 2,598,006
Less valuation reserve............................. (486,022) (2,598,006)
--------- -----------
$ -- $ --
========= ===========
</TABLE>
The Company has net operating loss carryforwards for federal and state
income tax purposes of $6,262,691, which begin to expire in 2004. Research tax
credit carryforwards of $248,956 are available for federal and state tax
purposes that expire beginning in 2013. Utilization of the above carryforwards
is subject to utilization limitations that may inhibit the Company's ability
to use carryforwards in the future.
F-29
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Redeemable Convertible Preferred Stock
At December 31, 1998, the Company is authorized to issue up to 10,278,569
shares of redeemable convertible preferred stock which have been designated as
Series A. As of December 31, 1998, 9,607,141 of Series A have been issued.
In January 1999, the shareholders approved an increase to authorized
redeemable convertible preferred stock to 13,697,640, of which 9,885,981 have
been designated as Series A and 3,811,659 have been designated as Series B.
Series A
Series A shares were issued at $0.70 per share and are convertible to one
share of Common Stock. Series A shares are redeemable at $0.70 per share on the
seventh anniversary of the issuance of the first shares issued under this
series (November 17, 2004).
Series B
Series B shares are convertible to one share of Common Stock. Series B
shares are redeemable at $4.46 per share on November 17, 2004.
All Preferred Stock
The redeemable convertible preferred stock contains a liquidation preference
of an amount equal to the price for which such share of redeemable convertible
preferred stock was issued, adjusted for any stock dividends, combinations or
splits with respect to such shares, plus any declared and unpaid dividends on
the redeemable convertible preferred stock.
The redeemable convertible preferred stock is generally convertible at any
time, at the holder's option, into Common Stock based on the conversion ratios
above, subject to future adjustment as defined. The redeemable convertible
preferred stock shall automatically convert into shares of Common Stock upon
the closing of an initial public offering of the Company's Common Stock, if the
per share price of the stock sold in the offering is not less than $5.00 per
share and the aggregate purchase price of the Common Stock sold in the offering
is not less than $10.0 million. The redeemable convertible preferred stock
contains voting rights identical to those of the Common Stock.
6. Convertible Notes Payable
In 1997, in contemplation of the Series A redeemable convertible preferred
stock financing (see Note 5), the Company issued convertible notes payable and
warrants (see Note 8) for $600,000 (the "bridge financing"). In connection with
the close of the Series A redeemable convertible preferred stock financing, the
$600,000 in convertible notes payable were converted into 857,143 shares of
Series A redeemable convertible preferred stock. In addition, during 1997, as
part of the bridge financing, the Company converted accounts payable of
$246,924 to a related party (see Note 11) to a promissory note convertible into
Series A redeemable convertible preferred stock. During 1997, in accordance
with the terms of the agreement, the Company repaid $121,924 of the promissory
note plus interest, and, in 1998, the holder converted the remaining $125,000
to Series A redeemable convertible preferred stock at $0.70 per share.
F-30
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Stock Plan
The 1997 Stock Plan (the "Plan") provides for the grant of both incentive
stock options and non-statutory stock options to employees, directors and
consultants. The exercise price of the incentive stock options must equal or
exceed the fair market value of the Common Stock at the grant date and the non-
statutory stock options may be less than the fair market value of the Common
Stock at the grant date. The incentive stock options generally vest over four
years whereas the non-statutory stock options generally vest after one year.
The Company has allocated 3,599,629 shares for the Plan. All options under the
Plan must be exercised within ten years from the date of grant.
Following is a summary of all stock option activity:
<TABLE>
<CAPTION>
Exercise Number of Shares
Price --------------------------------------------
Per Share Employees Directors Consultants Total
--------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Granted................. $0.07 -- -- 58,499 58,499
Outstanding at
December 31, 1997.... -- -- 58,499 58,499
Granted............... $0.07 3,130,670 70,000 117,474 3,318,144
Exercised............. $0.07 (1,976,545) (70,000) (52,768) (2,099,313)
Canceled.............. (39,978) -- (5,706) (45,684)
----- ---------- ------- ------- ----------
Outstanding at
December 31, 1998.... 1,114,147 -- 117,499 1,231,646
===== ========== ======= ======= ==========
Vested at December 31,
1998................. 147,154 -- 81,445 228,599
===== ========== ======= ======= ==========
</TABLE>
The weighted average exercise price of options granted during the year ended
December 31, 1998 was $0.10 and the weighted average exercise price of options
outstanding at December 31, 1998 was $0.15. The weighted average exercise price
of options canceled during the year ended December 31, 1998 was $0.07 and the
weighted average contractual life for options outstanding at December 31, 1998
was 9.5 years.
Pro forma information regarding net income is required by SFAS No. 123,
Accounting for Stock-Based Compensation, and has been determined as if the
Company has accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a "minimum value" option pricing model with the following
assumptions for 1997 and 1998: risk-free interest rate of 6.0% and 5.4%,
respectively; no dividend yields for either year; and an expected option life
of 1 and 6, respectively. The weighted average fair value of options granted
during 1997 and 1998 was $0.01 per share and $0.02 per share, respectively.
Based on the "minimum value" option pricing model, proforma net loss for the
years ended December 31, 1997 and 1998 would not be materially different from
the amounts of net loss reported in the Company's accompanying statements of
operations.
The "minimum value" option valuation model requires the input of highly
subjective assumptions. Because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The pro forma net loss for the years ended December 31, 1997 and 1998 is not
representative of the pro forma effect on net income in future years, as pro
forma information in future years will reflect the amortization of a larger
number of stock options granted in succeeding years.
F-31
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Warrants
In 1997, in connection with a financing arrangement, the Company issued
warrants to purchase 171,428 shares of the Company's Series A redeemable
convertible preferred stock at $0.70 per share. These warrants expire on March
31, 2003.
In 1998, in connection with a financing arrangement, the Company issued
warrants to purchase 107,412 shares of the Company's Series A redeemable
convertible preferred stock at $0.70 per share. This warrant expires at the
shorter of ten years from the date of grant or five years from the date of an
initial public offering of the Company's Common Stock.
9. Defined Contribution Plan
In 1998, the Company established defined contribution plan for certain
qualified employees as defined in the plan. Participants may contribute up to
the lesser of 6% of pretax compensation subject to certain limitations, or
$6,000. The plan provides for required contributions of 1% to 3% by the Company
as defined in the plan. The Company accrued contribution for the year ended
December 31, 1998 was $10,228.
10. Related Party Transactions
Prior to financing, the Company's operating activities were performed and
funded by Sandpiper Consulting, a Limited Liability Company (the "LLC") owned
by several common stockholders and officers of the Company. These expenditures
were accumulated at cost and converted to a convertible note in the bridge
financing (see Note 6). Subsequent to the bridge financing, LLC continued to
provide services directly to the Company, which were billed at cost and
reimbursed from Company funds. As of December 31, 1998, the Company no longer
obtains services from LLC. Payments to LLC relating to the years ended December
31, 1997 and 1998 were $924,431 (including $168,810 included in accounts
payable) and $212,700, respectively.
The LLC was a holder of 509,566 shares of the Company's Common Stock. Under
an agreement with the investors in the Series A redeemable convertible
preferred stock financing, LLC agreed to hold these shares exclusively for the
benefit of the employees of LLC. During 1998, all LLC employees were
transferred to the Company. As a result, under the terms of the agreement,
these shares were purchased from the LLC for $35,670. Further, during 1998
these shares were allocated to the 1997 Stock Option Plan (see Note 7).
11. Subsequent Event (Unaudited)
On January 29, 1999, the Company effected the first close on the issuance of
Series B redeemable convertible preferred shares (see Note 5). Under the first
closing, 2,242,152 Series B redeemable convertible preferred shares were issued
at $4.46 per share, with total gross proceeds amounting to $9,999,998. The
Company has available another 1,569,507 shares of Series B redeemable
convertible preferred stock available for sale at the same price per share, to
certain specific investors agreed to by the Company and the largest investor
participating in the first close. These additional shares are available for
sale for 90 days following the first closing.
12. Year 2000 Issue (Unaudited)
The Company has developed a plan to modify its information technology, as
necessary, to be ready for the Year 2000. The Company currently expects the
project to be substantially complete by September 1999 and to cost
approximately $50,000. This estimate includes internal costs, but excludes the
costs to upgrade and replace systems in the normal course of business. The
Company does not expect this project to have a significant impact on
operations.
F-32
<PAGE>
SANDPIPER NETWORKS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
September 30, 1999
<TABLE>
<S> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................................ $ 10,853,468
Accounts receivable.............................................. 120,749
Prepaid and other current assets................................. 295,654
------------
Total current assets............................................... 11,269,871
Property and equipment, net........................................ 6,046,531
Other assets....................................................... 434,396
------------
Total assets....................................................... $ 17,750,798
============
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
-----------------------------------------
Current liabilities:
Current portion of debt.......................................... $ 39,126
Current portion of capital lease obligations..................... 1,010,363
Accounts payable................................................. 2,015,180
Accrued expenses................................................. 394,502
------------
Total current liabilities.......................................... 3,459,171
Debt, less current portion......................................... 45,098
Capital lease obligations, less current portion.................... 1,621,075
------------
Total liabilities.................................................. 5,125,344
Series A redeemable convertible preferred stock, $0.001 par value:
9,885,981 shares authorized as of September 30, 1999; 9,607,141
issued and outstanding as of September 30, 1999................... 6,674,442
Series B redeemable convertible preferred stock, $0.001 par value:
6,026,694 shares authorized and 4,820,628 issued and outstanding
as of September 30, 1999.......................................... 21,426,766
Shareholders' deficit:
Common Stock, $0.001 par value: 40,000,000 shares authorized and
6,979,067 issued and outstanding as of September 30, 1999....... 4,413,247
Deferred Compensation............................................ (3,573,432)
Accumulated deficit.............................................. (16,315,569)
------------
Total shareholders' equity......................................... (15,475,754)
------------
$ 17,750,798
============
</TABLE>
See accompanying notes.
F-33
<PAGE>
SANDPIPER NETWORKS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended September 30, 1999
<TABLE>
<S> <C>
Revenues......................................................... $ 242,954
Cost and expenses:
Cost of revenues............................................... 2,641,767
Product development............................................ 1,820,986
Marketing and sales............................................ 4,056,155
General and administrative..................................... 1,480,912
Amortization of deferred compensation.......................... 580,827
------------
Total operating expenses......................................... 10,580,647
------------
Operating (loss)................................................. (10,337,693)
Interest expense................................................. 74,660
Interest (income)................................................ (362,331)
Provision for income taxes....................................... 2,856
------------
Net (loss)....................................................... $(10,052,878)
============
</TABLE>
See accompanying notes.
F-34
<PAGE>
SANDPIPER NETWORKS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Total
Common Stock Shareholders'
-------------------- Deferred Accumulated Equity
Shares Amount Compensation Deficit Deficit
--------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance as of December
31, 1998............... 6,685,405 $ 112,383 $ (6,262,691) $ (6,150,308)
Issuance of Common
Stock in connection
with exercise of
stock options........ 293,662 146,605 146,605
Deferred
Compensation......... 4,154,259 $(4,154,259)
Amortization of
deferred
compensation......... 580,827 580,827
Net loss.............. -- -- -- (10,052,878) (10,052,878)
--------- ---------- ----------- ------------ ------------
Balance as of September
30, 1999............... 6,979,067 $4,413,247 $(3,573,432) $(16,315,569) $(15,475,754)
========= ========== =========== ============ ============
</TABLE>
See accompanying notes.
F-35
<PAGE>
SANDPIPER NETWORKS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended September 30, 1999
<TABLE>
<S> <C>
Operating activities
Net loss......................................................... $(10,052,878)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization................................ 1,043,071
Amortization of deferred compensation........................ 580,827
Changes in operating assets and liabilities:
Accounts receivable........................................ (118,573)
Prepaid and other current assets........................... (213,353)
Accounts payable........................................... 2,006,718
Accrued expenses........................................... 169,478
------------
Net cash used in operating activities............................ (6,584,710)
------------
Investing activities
Purchases of property and equipment.............................. (6,016,812)
Other assets..................................................... (370,756)
------------
Net cash used in investing activities............................ (6,387,568)
------------
Financing activities
Proceeds from issuance of Common Stock........................... 146,605
Net proceeds from issuance of Series B redeemable convertible
preferred stock............................................... 21,426,766
Proceeds from credit line........................................ 300,000
Proceeds from capital lease obligations.......................... 2,080,232
Repayment of credit line......................................... (300,000)
Repayment of debt................................................ (33,344)
Repayment of capital lease obligations........................... (398,326)
------------
Net cash provided by financing activities........................ 23,221,933
------------
Net increase (decrease) in cash and cash equivalents............. 10,249,656
Cash and cash equivalents at beginning of period................. 603,812
------------
Cash and cash equivalents at end of period....................... $ 10,853,468
============
</TABLE>
See accompanying notes.
F-36
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Sandpiper Networks, Inc. (the "Company") was incorporated in December 1996.
The Company and its wholly owned subsidiary, Sandpiper Leasing Corporation
("SLC") provide a subscription-based service that enables web publishers to
migrate their content onto a professionally managed content delivery network.
The Company's service provides publishers with unlimited scalability and
improved performance by avoiding Internet congestion and intelligently
delivering content closer to end-users. The Company has had limited sales of
products, and its customers are Internet publishing companies, located
principally in the United States.
As of September 30, 1999, the Company has an accumulated deficit of
$16,315,569. The Company anticipates that, in the event that profitability is
not attained, the required funding for expenditures will come from sources such
as additional equity or debt financing, collaborative arrangements or
partnership agreements. While management believes that any additional funding
required will be available as necessary, there is no assurance that additional
financing will be available and on terms acceptable to the Company, when
required. If additional funding were not available when needed, the Company
would be required to reduce the rate of administrative costs and research and
development expenditures.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingencies at the date of the financial statements, and
affect the reported amount of revenues and expenses during the reporting
period. Actual results could differ from the Company's estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, SLC. All significant intercompany
accounts have been eliminated.
Stock Split
In 1997, the Company's Board of Directors approved a Common Stock split
whereby each outstanding share of Common Stock was converted into 8.1530496
shares of Common Stock.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash deposits at financial institutions.
The Company places its cash deposits with high credit quality financial
institutions. At times, balances in the Company's cash accounts may exceed the
Federal Deposit Limitation ("FDIC") limit.
F-37
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost and depreciated or amortized over
the estimated useful lives of the assets on a straight-line basis. The
estimated useful lives of the assets are as follows:
<TABLE>
<S> <C>
Equipment....................................................... 3 years
Furniture and fixtures.......................................... 3-5 years
Software........................................................ 2 years
</TABLE>
Included in this caption are the following assets:
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Operations equipment......................................... $ 4,097,400
Operations software licenses................................. 1,963,200
Other property and equipment................................. 1,476,284
-----------
7,536,884
Accumulated depreciation..................................... (1,490,353)
-----------
Net property and equipment................................... $ 6,046,531
===========
</TABLE>
Revenue recognition
The Company recognizes subscription revenues over the period the services
are provided.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense for the nine
months ended September 30, 1999 was $734,894.
Research and Development Expenses
Research and development costs are expensed as incurred.
Stock-Based Compensation
The Company accounts for stock option grants in accordance with APB Opinion
No. 25, Accounting for Stock Issued to Employees, which requires the
recognition of expense when the option price is less than the fair value of the
stock at the date of grant.
The Company generally awards options for a fixed number of shares at an
option price equal to the fair value at the date of grant. The Company has
adopted the disclosure-only provisions of FASB's Statement of Financial
Accounting Standards No. 123, Accounting for Stock Based Compensation ("SFAS
123").
2. Credit Arrangements and Long-Term Debt
On February 19, 1998, the Company entered into a $1,000,000 line of credit
with a bank, with a variable rate of interest, based on the bank's lending
rate. Under the terms of the line of credit, up to $750,000 of the credit
facility could be converted to a three-year term loan with similar interest
terms on August 19, 1999, to the extent that Company draws on credit were
supported by capital equipment invoices. At August 19, 1999 there were no
amounts extended on the facility and the facility expired.
F-38
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On August 31, 1998, the Company executed a promissory note with a financial
institution in the amount of $117,568, at a stated interest rate of 7% per
annum, principal and interest due monthly for 36 months and collateralized by
equipment. Aggregate maturities for 1999, 2000 and 2001 are $46,010, $36,816
and $31,743, respectively.
On August 6, 1999, the Company entered into an equipment lease line for $2.0
million that is available over the 12 months following the date of the lease.
The annual interest rate is 7.24% and the line is payable over 36 months. The
lessor received a warrant for 22,425 shares of the Company's common stock at an
exercise price of $1.00 per share.
3. Leases
The Company entered into a $1,500,000 equipment lease line of credit through
which non-cancelable capital lease obligations for computers and equipment were
executed during the year ended December 31, 1998. In addition, the Company
entered into a lease agreement for its facilities on January 6, 1999 under non-
cancelable operating lease agreements expiring through 2005. This operating
lease provides for free rent and escalations.
Annual future minimum lease payments as of September 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Operating Capital
Lease Leases
---------- ----------
<S> <C> <C>
Fiscal (Calendar) year ended
1999................................................ $ 74,805 $ 291,324
2000................................................ 299,227 1,165,297
2001................................................ 313,007 1,053,841
2002................................................ 322,850 411,546
2003................................................ 332,037
2004................................................ 338,599
Thereafter.......................................... 141,083
---------- ----------
Total minimum lease payments........................ $1,821,608 2,922,008
==========
Less amounts representing interest.................. 256,198
----------
Present value of lease payments..................... $2,665,810
==========
</TABLE>
At September 30, 1999, computers, software and equipment under capital
leases had an original cost basis and a net book value of $3,157,316 and
$2,532,985, respectively.
Rent expense was $197,793 for the nine months ended September 30, 1999.
F-39
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Income Taxes
The deferred income tax assets and liabilities of the Company consist of the
differences between the financial statements and tax basis of assets and
liabilities, and are measured at the current enacted tax rates. The temporary
differences related to the following as of September 30, 1999 are as follows:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Deferred tax assets:
Net operating losses and tax credits........................ $ 4,327,004
-----------
Total deferred tax assets..................................... 4,327,004
Deferred tax liabilities:
Federal benefit for state income taxes........................ 277,694
-----------
Total deferred liabilities.................................... 277,694
-----------
Net deferred tax assets....................................... 4,049,310
Less valuation reserve........................................ (4,049,310)
-----------
$ --
===========
</TABLE>
The Company has net operating loss carryforwards for federal and state
income tax purposes of $17,946,276, which begin to expire in 2004. Research tax
credit carryforwards of $244,195 are available for federal and state tax
purposes that expire beginning in 2013. Utilization of the above carryforwards
is subject to utilization limitations that may inhibit the Company's ability to
use carryforwards in the future.
5. Redeemable Convertible Preferred Stock
At December 31, 1998, the Company is authorized to issue up to 10,278,569
shares of redeemable convertible preferred stock which have been designated as
Series A. As of December 31, 1998, 9,607,141 of Series A have been issued.
In January 1999, the shareholders approved an increase to authorized
redeemable convertible preferred stock to 13,697,640, of which 9,885,981 have
been designated as Series A and 3,811,659 have been designated as Series B.
In April 1999, the shareholders approved an increase to authorized
redeemable convertible preferred stock to 15,912,675, of which 9,885,981 have
been designated as Series A and 6,026,694 have been designated as Series B.
Series A
Series A shares were issued at $0.70 per share and are convertible to one
share of Common Stock. Series A shares are redeemable at $0.70 per share on the
seventh anniversary of the issuance of the first shares issued under this
series (November 17, 2004).
Series B
Series B shares were issued at $4.46 per share and are convertible to one
share of Common Stock. Series B shares are redeemable at $4.46 per share on
November 17, 2004.
F-40
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
All Preferred Stock
The redeemable convertible preferred stock contains a liquidation preference
of an amount equal to the price for which such share of redeemable convertible
preferred stock was issued, adjusted for any stock dividends, combinations or
splits with respect to such shares, plus any declared and unpaid dividends on
the redeemable convertible preferred stock.
The redeemable convertible preferred stock is generally convertible at any
time, at the holder's option, into Common Stock based on the conversion ratios
above, subject to future adjustment as defined. The redeemable convertible
preferred stock shall automatically convert into shares of Common Stock upon
the closing of an initial public offering of the Company's Common Stock, or
change of control if the per share price of the stock sold in the offering is
not less than $5.00 per share and the aggregate purchase price of the Common
Stock sold in the offering is not less than $10.0 million. The redeemable
convertible preferred stock contains voting rights identical to those of the
Common Stock.
6. Convertible Notes Payable
In 1997, in contemplation of the Series A redeemable convertible preferred
stock financing (see Note 5), the Company issued convertible notes payable and
warrants (see Note 8) for $600,000 (the bridge financing). In connection with
the close of the Series A redeemable convertible preferred stock financing, the
$600,000 in convertible notes payable were converted into 857,143 shares of
Series A redeemable convertible preferred stock. In addition, during 1997, as
part of the bridge financing, the Company converted accounts payable of
$246,924 to a related party to a promissory note convertible into Series A
redeemable convertible preferred stock. During 1997, in accordance with the
terms of the agreement, the Company repaid $121,924 of the promissory note plus
interest, and, in 1998, the holder converted the remaining $125,000 to Series A
redeemable convertible preferred stock at $0.70 per share.
7. Deferred Compensation
The Company recorded deferred compensation of $4,154,259 for the period from
inception to September 30, 1999. The amount recorded represents the difference
between the grant price and the deemed fair value of the Company's Common Stock
for share subject to options granted. The amortization of the deferred
compensation will be charged to operations over the vesting period of the
options, which is typically four years. Total amortization recognized was
$580,827 for the nine months ended September 30, 1999.
8. Stock
The 1997 Stock Option Plan (the "Plan") provides for the grant of both
incentive stock options and non-statutory stock options to employees, directors
and consultants. The exercise price of the incentive stock options must equal
or exceed the fair market value of the Common Stock at the grant date and the
non-statutory stock options may be less than the fair market value of the
Common Stock at the grant date. The incentive stock options generally vest over
four years whereas the non-statutory stock options generally vest after one
year. The Company has allocated 7,524,629 shares for the Plan. All options
under the Plan must be exercised within ten years from the date of grant.
F-41
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Following is a summary of all stock option activity:
<TABLE>
<CAPTION>
Exercise Number of Shares
Price Per ------------------------------------------
Share Employees Directors Consultants Total
---------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding at December
31, 1998............... 1,114,147 -- 117,499 1,231,646
Granted................. $1.00-5.00 1,505,250 75,160 1,580,410
Exercised............... $0.07-1.25 (224,885) (68,777) (293,662)
Canceled................ (382,781) -- (31,905) (414,686)
---------- --------- ----- ------- ---------
Outstanding at September
30, 1999............... 2,011,731 -- 91,977 2,103,708
========== ========= ===== ======= =========
Vested at September 30,
1999.................... 1,213,336 -- 177,962 1,410,256
========== ========= ===== ======= =========
</TABLE>
The weighted average exercise price of options granted during the nine
months ended September 30, 1999 was $1.67 and the weighted average exercise
price of options outstanding at September 30, 1999 was $1.20. The weighted
average exercise price of options canceled during the nine months ended
September 30, 1999 was $0.48 and the weighted average contractual life for
options outstanding at September 30, 1999 was 9.07 years.
Pro forma information regarding net income is required by SFAS No. 123,
Accounting for Stock-Based Compensation, and has been determined as if the
Company has accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a "minimum value" option pricing model with the following
assumptions for 1999: risk-free interest rate of 6.0%; no dividend yield; and
an expected option life of 4 years. The weighted average fair value of options
granted during 1999 was $0.29 per share.
Based on the "minimum value" option pricing model, pro forma net loss for
the nine months ended September 30, 1999 would not be materially different from
the amounts of net loss reported in the Company's accompanying statements of
operations.
The "minimum value" option valuation model requires the input of highly
subjective assumptions. Because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The pro forma net loss for the nine months ended September 30, 1999 is not
representative of the pro forma effect on net income in future years, as pro
forma information in future years will reflect the amortization of a larger
number of stock options granted in succeeding years.
9. Warrants
In 1997, in connection with a financing arrangement, the Company issued
warrants to purchase 171,428 shares of the Company's Series A redeemable
convertible preferred stock at $0.70 per share. These warrants expire on March
31, 2003.
In 1998, in connection with a financing arrangement, the Company issued
warrants to purchase 107,412 shares of the Company's Series A redeemable
convertible preferred stock at $0.70 per share. This warrant expires at the
shorter of ten years from the date of grant or five years from the date of an
initial public offering of the Company's Common Stock or a change in control.
F-42
<PAGE>
SANDPIPER NETWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1999, in connection with a financing arrangement, the Company issued
warrants to purchase 956,066 shares of the Company's Series B redeemable
convertible preferred stock at $4.46 per share, and 125,000 shares at $10.00
per share, and 125,000 at $5.00 per share. These warrant expires at five years
from the date of grant.
In 1999, in conjunction with a financing arrangement, the Company issued
warrants to purchase 22,425 shares of the Company's common stock (See note 2).
The warrants expire the earlier of July 2004 or one year after any applicable
lock up period applicable to the Holder after the Company's initial public
offering or a change in control.
10. Defined Contribution Plan
In 1998, the Company established defined contribution plan for certain
qualified employees as defined in the plan. Participants may contribute up to
the lesser of 6% of pretax compensation subject to certain limitations, or
$6,000. The plan provides for required contributions of 1% to 3% by the Company
as defined in the plan. The Company's accrued contribution for the nine months
ended September 30, 1999 was $19,660.
11. Related Party Transactions
Prior to financing, the Company's operating activities were performed and
funded by Sandpiper Consulting, a Limited Liability Company (the "LLC") owned
by several common stockholders and officers of the Company. These expenditures
were accumulated at cost and converted to a convertible note in the bridge
financing (see Note 6). Subsequent to the bridge financing, LLC continued to
provide services directly to the Company, which were billed at cost and
reimbursed from Company funds. As of September 30, 1999, the Company no longer
obtains services from LLC. There were no payments to LLC relating to the nine
months ended September 30, 1999.
The LLC was a holder of 509,566 shares of the Company's Common Stock. Under
an agreement with the investors in the Series A redeemable convertible
preferred stock financing, LLC agreed to hold these shares exclusively for the
benefit of the employees of LLC. During 1998, all LLC employees were
transferred to the Company. As a result, under the terms of the agreement,
these shares were purchased from the LLC for $35,670. Further, during 1998
these shares were allocated to the 1997 Stock Option Plan (see Note 8).
12. Year 2000 Issue
The Company developed a plan to modify its information technology, as
necessary, to be ready for the Year 2000. The Company completed this project at
a total cost of $44,427. This amount includes internal costs, but excludes the
costs to upgrade and replace systems in the normal course of business. This
project did not have a significant impact on operations.
F-43
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
by and among
DIGITAL ISLAND, INC.
BEACH ACQUISITION CORP.
and
SANDPIPER NETWORKS, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I THE MERGER.................................................. A-2
1.1 The Merger...................................................... A-2
1.2 Closing; Effective Time......................................... A-2
1.3 Effect of the Merger............................................ A-2
1.4 Articles of Incorporation; Bylaws............................... A-2
1.5 Directors and Officers.......................................... A-2
1.6 Effect on Capital Stock......................................... A-3
1.7 Surrender of Certificates....................................... A-4
1.8 No Further Ownership Rights in Company Capital Stock............ A-6
1.9 Lost, Stolen or Destroyed Certificates.......................... A-6
1.10 Tax Consequences................................................ A-6
1.11 Withholding..................................................... A-6
1.12 Exemption from Registration; California Permit; Registration
Rights.......................................................... A-6
1.13 Taking of Necessary Action; Further Action...................... A-7
ARTICLE II REPRESENTATIONS AND WARRANTIES OF COMPANY.................. A-7
2.1 Organization, Standing and Power................................ A-7
2.2 Capital Structure............................................... A-8
2.3 Authority....................................................... A-9
2.4 Financial Statements............................................ A-9
2.5 Absence of Certain Changes...................................... A-10
2.6 Absence of Undisclosed Liabilities.............................. A-10
2.7 Litigation...................................................... A-10
2.8 Restrictions on Business Activities............................. A-10
2.9 Governmental Authorization...................................... A-10
2.10 Title to Property............................................... A-11
2.11 Intellectual Property........................................... A-11
2.12 Environmental Matters........................................... A-12
2.13 Taxes........................................................... A-13
2.14 Employee Benefit Plans.......................................... A-14
2.15 Certain Agreements Affected by the Merger....................... A-16
2.16 Employee Matters................................................ A-16
2.17 Interested Party Transactions................................... A-16
2.18 Insurance....................................................... A-16
2.19 Compliance With Laws............................................ A-16
2.20 Minute Books.................................................... A-17
2.21 Accounts Receivable............................................. A-17
2.22 Customers and Suppliers......................................... A-17
2.23 Material Contracts.............................................. A-17
2.24 No Breach of Material Contracts................................. A-18
2.25 Year 2000 Compliance............................................ A-18
2.26 Export Control Laws............................................. A-18
2.27 Product Releases................................................ A-18
2.28 Complete Copies of Materials.................................... A-19
2.29 Shareholder Agreement; Irrevocable Proxies...................... A-19
2.30 Vote Required................................................... A-19
2.31 Board Approval.................................................. A-19
2.32 Tax Treatment................................................... A-19
2.33 Information Statement and Proxy Statement....................... A-19
</TABLE>
A-i
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
2.34 Company Affiliates................................................ A-20
2.35 Brokers' and Finders' Fees........................................ A-20
2.36 Representations Complete.......................................... A-20
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT.................... A-20
3.1 Organization, Standing and Power.................................. A-20
3.2 Capital Structure................................................. A-21
3.3 Authority......................................................... A-21
3.4 SEC Documents; Financial Statements............................... A-22
3.5 Absence of Certain Changes........................................ A-22
3.6 Absence of Undisclosed Liabilities................................ A-23
3.7 Litigation........................................................ A-23
3.8 Restrictions on Business Activities............................... A-23
3.9 Intellectual Property............................................. A-23
3.10 Certain Agreements Affected by the Merger......................... A-24
3.11 Principal Contracts............................................... A-24
3.12 Vote Required; Voting Agreements.................................. A-25
3.13 Board Approval.................................................... A-25
3.14 Information Statement and Proxy Statement......................... A-25
3.15 Tax Treatment..................................................... A-25
3.16 Broker's and Finders' Fees........................................ A-25
3.17 Complete Copies of Materials; Representations Complete............ A-25
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME.......................... A-26
4.1 General Conduct of Business....................................... A-26
4.2 Conduct of Business of Company.................................... A-26
4.3 Conduct of Parent................................................. A-28
4.4 No Solicitation by Company........................................ A-29
4.5 No Solicitation by Parent......................................... A-30
ARTICLE V ADDITIONAL AGREEMENTS......................................... A-31
5.1 Information Statement and Proxy Statement......................... A-31
5.2 Meetings of Securityholders....................................... A-32
5.3 Access to Information............................................. A-33
5.4 Confidentiality................................................... A-33
5.5 Public Disclosure................................................. A-33
5.6 Consents; Cooperation............................................. A-33
5.7 Further Assurances................................................ A-34
5.8 Company Shareholder Agreements.................................... A-35
5.9 Parent Voting Agreements.......................................... A-35
5.10 Blue Sky Laws..................................................... A-35
5.11 Employee Benefit Plans............................................ A-35
5.12 Form S-8.......................................................... A-36
5.13 Listing of Additional Shares...................................... A-36
5.14 Escrow Agreement.................................................. A-36
5.15 Expenses.......................................................... A-36
5.16 Director and Officer Indemnification.............................. A-37
5.17 Preferred Stock; Warrants......................................... A-37
5.18 Board Composition................................................. A-37
</TABLE>
A-ii
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE VI CONDITIONS TO THE MERGER................................... A-37
6.1 Conditions to Obligations of Each Party to Effect the Merger.... A-37
6.2 Additional Conditions to Obligations of Company................. A-38
6.3 Additional Conditions to the Obligations of Parent and Merger
Sub............................................................. A-39
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER......................... A-40
7.1 Termination..................................................... A-40
7.2 Effect of Termination........................................... A-40
7.3 Expenses and Termination Fees................................... A-41
7.4 Amendment....................................................... A-41
7.5 Extension; Waiver............................................... A-42
ARTICLE VIII ESCROW AND INDEMNIFICATION............................... A-42
8.1 Escrow Fund..................................................... A-42
8.2 Indemnification................................................. A-42
8.3 Escrow Period................................................... A-42
8.4 Claims upon Escrow Fund......................................... A-43
8.5 Objections to Claims............................................ A-43
8.6 Resolution of Conflicts; Arbitration............................ A-43
8.7 Shareholders' Agent............................................. A-44
8.8 Actions of the Shareholders' Agent.............................. A-44
8.9 Third-Party Claims.............................................. A-44
ARTICLE IX GENERAL PROVISIONS......................................... A-45
9.1 Non-Survival at Effective Time.................................. A-45
9.2 Notices......................................................... A-45
9.3 Interpretation.................................................. A-46
9.4 Counterparts.................................................... A-46
9.5 Entire Agreement; Nonassignability; Parties in Interest......... A-46
9.6 Severability.................................................... A-46
9.7 Remedies Cumulative............................................. A-46
9.8 Governing Law................................................... A-46
9.9 Rules of Construction........................................... A-47
9.10 Definitions..................................................... A-47
</TABLE>
Exhibits
<TABLE>
<C> <S> <C>
Exhibit A Form of Agreement of Merger
Exhibit B Declaration of Registration Rights
Exhibit C Form of Shareholder Agreement
Exhibit D Form of Shareholder Representation Agreement
Exhibit E Form of Escrow Agreement
Exhibit F Form of Voting Agreement
Exhibit G Form of Opinion of Counsel to Company
Exhibit H Form of Opinion of Counsel to Parent
</TABLE>
A-iii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of October 24, 1999, by and among DIGITAL ISLAND, INC., a
Delaware corporation ("Parent"), BEACH ACQUISITION CORP., a California
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and
SANDPIPER NETWORKS, INC., a California corporation ("Company").
RECITALS
A. The Board of Directors of Company has unanimously (i) determined that it
is advisable and fair to, and in the best interests of, Company and its
shareholders that, upon the terms and subject to the conditions of this
Agreement, Merger Sub merge with and into Company, with Company being the
surviving corporation (the "Merger"), (ii) approved this Agreement, the Merger
and the other transactions contemplated hereby and (iii) determined to
recommend the approval of this Agreement and the Merger by the shareholders of
Company.
B. The Board of Directors of Parent has (i) determined that the Merger is
advisable and fair to, and in the best interests of, Parent and its
stockholders, (ii) approved this Agreement, the Merger and the other
transactions contemplated hereby and (iii) determined to recommend the approval
by the stockholders of Parent of the issuance of shares of common stock, par
value $.001 per share, of Parent ("Parent Common Stock") pursuant to this
Agreement, as required under the rules and requirements of the Nasdaq National
Market.
C. Pursuant to the Merger, among other things, the outstanding shares of
Common Stock, par value $.001 per share ("Company Common Stock"), of Company
shall be converted into the right to receive shares of Parent Common Stock, at
the rate set forth herein.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"), and to cause the Merger to qualify as a
"reorganization" under the provisions of Section 368(a) of the Code.
E. Concurrently with the execution of this Agreement and as an inducement to
Parent and Merger Sub to enter into this Agreement, certain affiliates of
Company have on the date hereof entered into Shareholder Agreements in the form
attached hereto as Exhibit C (the "Shareholder Agreements") pursuant to which
they have agreed, among other things, to vote the shares of Company Common
Stock over which such persons have voting power to approve this Agreement and
the Merger.
F. Concurrently with the execution of this Agreement and as an inducement to
Company to enter into this Agreement, certain affiliates of Parent have on the
date hereof entered into Voting Agreements in the form attached hereto as
Exhibit F (the "Voting Agreements") pursuant to which they have agreed, among
other things, to vote the shares of Parent Common Stock over which such persons
have voting power to approve the issuance of shares of Parent Common Stock
pursuant to this Agreement.
NOW, THEREFORE, in consideration of the foregoing, the respective
representations, warranties, covenants and agreements set forth herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree
as follows:
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ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2 below) and
upon the terms and subject to the conditions of this Agreement, the Agreement
of Merger attached hereto as Exhibit A (the "Agreement of Merger") and the
applicable provisions of the California Corporations Code (the "California
Corporations Code"), Merger Sub shall be merged with and into Company, the
separate corporate existence of Merger Sub shall cease and Company shall
continue as the surviving corporation of the Merger. Company, as the surviving
corporation after the Merger, is hereinafter sometimes referred to as the
"Surviving Corporation."
1.2 Closing; Effective Time. Unless this Agreement shall have been
terminated and the transactions contemplated herein shall have been abandoned
pursuant to Section 7.1, the closing of the Merger (the "Closing") shall take
place as soon as practicable after the satisfaction or, if permissible, waiver
of the conditions set forth in Article VI or at such other time as the parties
hereto may agree (the "Closing Date"). The Closing shall take place at the
offices of Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng
Road, Palo Alto, California, or at such other location as the parties hereto
may agree. On the Closing Date, the parties hereto shall cause the Merger to be
consummated by filing the Agreement of Merger, together with the required
officers' certificates, with the Secretary of State of the State of California,
in accordance with the relevant provisions of the California Corporations Code
(the time of such filing or such later time as may be agreed upon by the
parties as set forth in the Merger Agreement being the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Agreement of Merger and the
applicable provisions of the California Corporations Code. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all
the property, rights, privileges, powers and franchises of Company and Merger
Sub shall vest in the Surviving Corporation, and all debts, liabilities and
duties of Company and Merger Sub shall become the debts, liabilities and duties
of the Surviving Corporation.
1.4 Articles of Incorporation; Bylaws.
(a) At the Effective Time, the Articles of Incorporation of Company, as in
effect immediately prior to the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended as provided
by the California Corporations Code and such Articles of Incorporation;
provided, however, that immediately after the Effective Time the Articles of
Incorporation of the Surviving Corporation shall be amended and restated so as
to read in its entirety like the Articles of Incorporation of Merger Sub with
Article I of the Articles of Incorporation amended to read as follows: "The
name of the corporation is Sandpiper Networks, Inc."
(b) At the Effective Time, the Bylaws of Company, as in effect immediately
prior to the Effective Time, shall be the Bylaws of the Surviving Corporation
until thereafter amended; provided, however, that immediately after the
Effective Time the Bylaws of the Surviving Corporation shall be amended and
restated in their entirety so as to read like the Bylaws of Merger Sub.
1.5 Directors and Officers. At the Effective Time, (a) the directors of
Merger Sub immediately prior to the Effective Time shall be the directors of
the Surviving Corporation, until their respective successors are duly elected
or appointed and qualified, and (b) the officers of Company immediately prior
to the Effective Time shall be the officers of the Surviving Corporation, until
their respective successors are duly elected or appointed and qualified.
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1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of any of the parties hereto or the holders
of any of the following securities:
(a) Conversion of Company Capital Stock. Subject to adjustment pursuant to
Section 1.6(f) below and subject to the other terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and without any
action on the part of the holder of any shares of capital stock of Company
("Company Capital Stock"), each share of Company Capital Stock outstanding
immediately prior to the Effective Time (other than shares, if any, held by
persons who shall have perfected, and not withdrawn or otherwise forfeited at
or prior to the Effective Time, dissenters' or appraisal rights in accordance
with the California Corporations Code ("Dissenting Shares")) shall be converted
into and exchanged for the right to receive 1.0727 shares of Parent Common
Stock (the "Exchange Ratio").
(b) Cancellation of Company Capital Stock Owned by Parent, Merger Sub or
Company. At the Effective Time, all shares of Company Capital Stock that are
owned by Company as treasury stock, and each share of Company Capital Stock (if
any) owned by Parent, Merger Sub or any other direct or indirect wholly owned
subsidiary of Parent or of Company immediately prior to the Effective Time,
shall be canceled and extinguished without any conversion thereof.
(c) Options and Warrants.
(i) At the Effective Time, the Company Stock Option Plan, as amended
(the "Company Stock Option Plan"), and all options outstanding under the
Company Stock Option Plan immediately prior to the Effective Time ("Company
Options"), whether vested or unvested, shall be assumed by Parent and
thereafter constitute the right to receive options to purchase such number
of shares of Parent Common Stock determined in accordance with this Section
1.6(c).
(ii) Each such option so assumed by Parent under this Agreement shall
continue to have, and be subject to, the same terms and conditions set
forth in the Company Stock Option Plan and the applicable stock option
agreement as in effect immediately prior to the Effective Time, except that
(i) such option will be exercisable for that number of whole shares of
Parent Common Stock equal to the product of the number of shares of Company
Common Stock that were issuable upon exercise of such option immediately
prior to the Effective Time multiplied by the Exchange Ratio and rounded
down to the next whole number of shares of Parent Common Stock, and (ii)
the per share exercise price for the shares of Parent Common Stock issuable
upon exercise of such assumed option will be equal to the quotient
determined by dividing the exercise price per share of Company Common Stock
at which such option was exercisable immediately prior to the Effective
Time by the Exchange Ratio, rounded up to the next whole cent.
(iii) At the Effective Time, each warrant to acquire shares of Company
Capital Stock (each a "Company Warrant") outstanding immediately prior to
the Effective Time shall be converted and exchanged for warrants to
purchase such number of shares of Parent Common Stock as shall be equal to
the product of (a) the number of shares of Company Common Stock that were
issuable upon exercise of such Company Warrants immediately prior to the
Effective Time and (b) the Exchange Ratio, such product to be rounded down
to the next whole number of shares of Parent Common Stock. The per share
exercise price of each Company Warrant shall equal the quotient obtained by
dividing (a) the per share exercise price of the Company Warrant at which
such warrant was exercisable immediately prior to the Effective Time by (b)
the Exchange Ratio rounded up to the next whole cent.
(d) Unvested Company Common Stock. If any shares of Company Common Stock
outstanding immediately prior to the Effective Time are unvested or are subject
to a repurchase option, risk of forfeiture or other condition under the Company
Stock Option Plan, any applicable restricted stock purchase agreement, or other
agreement with Company or under which Company has any rights, then (unless such
condition terminates by virtue of the Merger pursuant to the express terms of
such agreement) the shares of Parent Common Stock issued in exchange for such
shares of Company Common Stock will also be unvested and subject to the same
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repurchase option, risk of forfeiture or other condition, and the certificates
representing such shares of Parent Common Stock may accordingly bear any
appropriate legends. Company shall take all action that may be necessary to
ensure that, from and after the Effective Time, Parent is entitled to exercise
any such repurchase option or other right set forth in any such restricted
stock purchase agreement or other agreement.
(e) Capital Stock of Merger Sub. At the Effective Time, each share of common
stock, no par value per share, of Merger Sub ("Merger Sub Common Stock") issued
and outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into and exchanged for one validly issued, fully paid and nonassessable share
of common stock, par value $.001 per share, of the Surviving Corporation. Each
stock certificate of Merger Sub evidencing ownership of any such shares shall
continue to evidence ownership of such shares of capital stock of the Surviving
Corporation.
(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be appropriately
adjusted to reflect the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
Parent Common Stock or Company Capital Stock), reorganization, recapitalization
or other like change with respect to Parent Common Stock or Company Capital
Stock occurring after the date hereof and prior to the Effective Time and of
any increase in the number of shares of Company Common Stock or Parent Common
Stock outstanding resulting from any failure of Section 2.2 or Section 3.2 to
be correct on the date hereof or any failure by Company to comply with its
covenants under Section 4.2 of this Agreement or any failure by Parent to
comply with its covenants under Section 4.3 of this Agreement, so as to provide
Parent and shareholders of Company the same economic effect as contemplated by
this Agreement prior to such stock split, reverse split, stock dividend,
reorganization, recapitalization, like change or increase.
(g) Fractional Shares. No fraction of a share of Parent Common Stock will be
issued, but in lieu thereof each holder of shares of Company Capital Stock who
would otherwise be entitled to a fraction of a share of Parent Common Stock
(after aggregating all fractional shares of Parent Common Stock to be received
by such holder) shall receive from Parent an amount of cash (rounded to the
nearest whole cent) equal to the product of (i) such fraction, multiplied by
(ii) the average of the closing bid prices for a share of Parent Common Stock
as quoted on the Nasdaq National Market for the twenty (20) trading days
immediately preceding (but not including) the last full trading day prior to
date on which the Effective Time occurs (the "Closing Market Value").
(h) Dissenters' Rights. Any Dissenting Shares shall not be converted into
Parent Common Stock but shall instead be converted into the right to receive
such consideration as may be determined to be due with respect to such
Dissenting Shares pursuant to the California Corporations Code. Company agrees
that, except with the prior written consent of Parent, or as required under the
California Corporations Code, it will not voluntarily make any payment with
respect to, or settle or offer to settle, any such purchase demand. Each holder
of Dissenting Shares ("Dissenting Shareholder") who, pursuant to the provisions
of California law, becomes entitled to payment of the fair value for shares of
Company Capital Stock shall receive payment therefor (but only after the value
therefor shall have been agreed upon or finally determined pursuant to such
provisions). If, after the Effective Time, any Dissenting Shares shall lose
their status as Dissenting Shares, Parent shall issue and deliver, upon
surrender by such shareholder of certificate or certificates representing
shares of Company Capital Stock, the number of shares of Parent Common Stock to
which such shareholder would otherwise be entitled under this Section 1.6 less
the number of shares allocable to such shareholder that have been deposited in
the Escrow Fund (as defined below) in respect of such shares of Parent Common
Stock pursuant to Section 1.7 and Article VIII hereof.
1.7 Surrender of Certificates.
(a) Exchange Agent. Parent's transfer agent or another institution selected
by Parent and reasonably acceptable to Company shall act as exchange agent (the
"Exchange Agent") in the Merger.
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(b) Parent to Provide Common Stock and Cash. Promptly after the Effective
Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I, through such reasonable procedures as Parent
may adopt, (i) the shares of Parent Common Stock issuable pursuant to Section
1.6(a) in exchange for shares of Company Capital Stock outstanding immediately
prior to the Effective Time less the number of shares of Parent Common Stock to
be deposited into an escrow fund (the "Escrow Fund") pursuant to the
requirements of Article VIII and (ii) cash in an amount sufficient to permit
payment of cash in lieu of fractional shares pursuant to Section 1.6(g).
(c) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause to be mailed to each holder of record of a certificate or certificates
(the "Certificates") which immediately prior to the Effective Time represented
outstanding shares of Company Capital Stock, whose shares were converted into
the right to receive shares of Parent Common Stock (and cash in lieu of
fractional shares) pursuant to Section 1.6, (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon receipt of the Certificates by the
Exchange Agent, and shall be in such form and have such other provisions as
Parent may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Parent Common Stock (and cash in lieu of fractional shares). Upon surrender
of a Certificate for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by Parent, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Parent Common Stock less the number of shares of Parent Common Stock
to be deposited in the Escrow Fund on such holder's behalf pursuant to Article
VIII hereof and payment in lieu of fractional shares which such holder has the
right to receive pursuant to Section 1.6, and the Certificate so surrendered
shall forthwith be canceled. Until so surrendered, each outstanding Certificate
that, prior to the Effective Time, represented shares of Company Capital Stock
will be deemed from and after the Effective Time, for all corporate purposes,
other than the payment of dividends, to evidence the ownership of the number of
full shares of Parent Common Stock into which such shares of Company Capital
Stock shall have been so converted and the right to receive an amount of cash
in lieu of the issuance of any fractional shares in accordance with Section
1.6. As soon as practicable after the Effective Time, and subject to and in
accordance with the provisions of Article VIII hereof, Parent shall cause to be
distributed to the Escrow Agent (as defined in Article VIII hereof) a
certificate or certificates representing ten percent (10%) of the Merger Shares
which shall be registered in the name of the Escrow Agent as nominee for the
holders of Certificates cancelled pursuant to this Section 1.7. Such shares
shall be beneficially owned by such holders and shall be held in escrow and
shall be available to compensate Parent for certain damages as provided in
Article VIII hereof. To the extent not used for such purposes, such shares
shall be released, all as provided in Article VIII hereof.
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions with respect to Parent Common Stock with a record date after the
Effective Time will be paid to the holder of any unsurrendered Certificate with
respect to the shares of Parent Common Stock represented thereby until the
holder of record of such Certificate shall surrender such Certificate. Subject
to applicable law, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of
Parent Common Stock issued in exchange therefor, without interest, at the time
of such surrender, the amount of any such dividends or other distributions with
a record date after the Effective Time theretofore payable (but for the
provisions of this Section 1.7(d)) with respect to such shares of Parent Common
Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.
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(f) No Liability. Notwithstanding anything to the contrary in this Section
1.7, none of the Exchange Agent, the Surviving Corporation or any party hereto
shall be liable to any person for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(g) Dissenting Shares. The provisions of this Section 1.7 shall also apply
to Dissenting Shares that lose their status as such, except that the
obligations of Parent under this Section 1.7 shall commence on the date of loss
of such status and the holder of such shares shall be entitled to receive in
exchange for such shares the number of shares of Parent Common Stock to which
such holder is entitled pursuant to Section 1.6 hereof.
1.8 No Further Ownership Rights in Company Capital Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Capital Stock in accordance with the terms hereof (including any cash paid in
lieu of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Company Capital Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Company Capital Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Parent Common
Stock (and cash in lieu of fractional shares) as may be required pursuant to
Section 1.6; provided, however, that Parent may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Parent, the Surviving Corporation or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
1.10 Tax Consequences. It is intended by the parties hereto that the Merger
shall constitute a "reorganization" within the meaning of Section 368 of the
Code.
1.11 Withholding. Each of the Surviving Corporation, Parent and the Exchange
Agent shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Company Capital
Stock such amounts, if any, as it is required to deduct and withhold with
respect to the making of such payment under the Code or any provision of state,
local or foreign tax law. To the extent that any amounts are so withheld by the
Surviving Corporation, Parent or the Exchange Agent, as the case may be, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the shares of Company Capital Stock in respect of
which such deduction and withholding was made by the Surviving Corporation,
Parent or the Exchange Agent, as the case may be.
1.12 Exemption from Registration; California Permit; Registration Rights.
(a) The shares of Parent Common Stock to be issued in the Merger will be
issued in a transaction exempt from registration under the Securities Act of
1933, as amended (the "Securities Act"), by reason of Section 3(a)(10) thereof
or, pursuant to Section 1.12(b), pursuant to a registration statement on Form
S-4 or by reason of Section 4(2) of the Securities Act and SEC rules and
regulations promulgated thereunder. Subject to the provisions of Section
5.1(c), the shares of Parent Common Stock to be issued in the Merger will be
qualified under the California Corporations Code, pursuant to Section 25121
thereof, after a fairness hearing has been held pursuant to the authority
granted by Section 25142 of such law, and (if deemed necessary by Parent in its
good faith judgment) such fairness hearing shall also address the assumption by
Parent of all Company Options pursuant to this Agreement. Parent and Company
shall each use all requisite commercially reasonable efforts (i) to file, as
promptly as practicable following the execution and delivery of this Agreement
an application for issuance of a permit pursuant to Section 25121 of the
California Corporations Code to issue such securities (and, if deemed necessary
by Parent in its good faith judgment, to assume such Company Options) (the
"California Permit") and (ii) to obtain the California Permit as promptly as
practicable.
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(b) In the event that the California Permit cannot be obtained within a
reasonable time or without the imposition of burdensome conditions, then, at
Parent's election and with the consent of Company (which shall not be
unreasonably withheld), Parent and Company shall use commercially reasonable
efforts to effect the issuance of the shares of Parent Common Stock to be
issued in the Merger (x) pursuant to a registration statement on Form S-4 or
(y) subject to receipt of all required approvals pursuant to Section 1.12(c),
in a private placement pursuant to Section 4(2) of the Securities Act and SEC
rules and regulations promulgated thereunder, on terms and conditions
(including rights for the registration of such shares on Form S-3) that are
reasonably satisfactory to Parent and Company. The parties hereto acknowledge
and agree that in the event of such a private placement: (i) as a condition to
effecting such issuance as a private placement pursuant to Section 4(2) of the
Securities Act, Parent shall be entitled to obtain from each shareholder of
Company a Shareholder Representation Agreement in the form attached hereto as
Exhibit D (or such other form as shall be reasonably satisfactory to Parent and
Company) and that Parent will be relying upon the representations made by each
shareholder of Company in the applicable Shareholder Representation Agreement
in connection with the issuance of Parent Common Stock to such shareholder,
(ii) the shares of Parent Common Stock so issued pursuant to Section 1.6 will
not be registered under the Securities Act and will constitute "restricted
securities" within the meaning of the Securities Act; and (iii) the
certificates representing the shares of Parent Common Stock shall bear
appropriate legends to identify such privately placed shares as being
restricted under the Securities Act, to comply with applicable state securities
laws and, if applicable, to notice the restrictions on transfer of such shares.
(c) Subject to receipt of all required approvals pursuant to the Amended and
Restated Investors' Rights Agreement (the "Investors' Rights Agreement") dated
as of February 19, 1999 among Parent and the securityholders of Parent
identified therein, at the Closing, Parent shall execute and deliver a
Declaration of Registration Rights in the form attached hereto as Exhibit B.
1.13 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Company, the officers and directors of Company immediately
prior to the Effective Time are fully authorized to take, and will take, all
such lawful and necessary action, so long as such action is not inconsistent
with this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
Except as disclosed in that section of the document of even date herewith
delivered by Company to Parent prior to the execution and delivery of this
Agreement (the "Company Disclosure Schedule") corresponding to the Section of
this Agreement to which any of the representations and warranties specifically
relate or as disclosed in another section of the Company Disclosure Schedule if
it is reasonably apparent on the face of the disclosure that it is applicable
to another Section of this Agreement, Company hereby represents and warrants to
each of Parent and Merger Sub as follows:
2.1 Organization, Standing and Power. Each of Company and its subsidiaries
is a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization. Company has the corporate power
to own its properties and to carry on its business as now being conducted and
as currently proposed to be conducted and is duly qualified to do business and
is in good standing in each jurisdiction in which it is required by law to be
so qualified and in good standing. Company has made available to Parent a true
and complete copy of the certificate or articles of incorporation or other
charter or organizational documents, each as amended, of Company and each of
its subsidiaries. Neither Company nor any of its subsidiaries is in violation
of any of the provisions of its certificate or articles of incorporation or
bylaws or other charter or organizational documents, each as amended. Neither
Company nor any of its subsidiaries
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directly or indirectly owns any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, any equity or similar
interest in, any corporation, partnership, joint venture or other business
association or entity. All of the outstanding shares of capital stock and
voting securities of each of Company's subsidiaries owned, directly or
indirectly, by Company are duly authorized, validly issued, fully paid and
nonassessable, and those shares of capital stock and voting securities of each
of Company's subsidiaries owned by Company, directly or indirectly, are free
and clear of all liens, charges, claims or encumbrances or rights of others.
There are no outstanding subscriptions, options, warrants, puts, calls, rights,
exchangeable or convertible securities or other commitments or agreements of
any character relating to the issued or unissued capital stock or other
securities of any such subsidiary, or otherwise obligating Company or any such
subsidiary to issue, transfer, sell, purchase, redeem or otherwise acquire any
such securities.
2.2 Capital Structure. The authorized capital stock of Company consists
solely of 40,000,000 shares of Company Common Stock, par value $0.001 per
share, of which 6,967,575 shares are issued and outstanding, and 15,912,675
shares of Preferred Stock, par value $0.001 per share, of which 9,885,981
shares have been designated Series A Preferred Stock, 9,607,141 shares of which
are issued and outstanding and of which 6,026,694 shares have been designated
Series B Preferred Stock, 4,820,628 shares of which are issued and outstanding.
There are no other outstanding shares of capital stock or voting securities and
no outstanding commitments to issue any shares of capital stock or voting
securities, other than pursuant to the exercise of warrants to acquire Company
Capital Stock and pursuant to the exercise of Company Options outstanding under
the Company Stock Option Plan. Section 2.2 of the Company Disclosure Schedule
sets forth a true and complete list (including numbers of shares and/or rights)
of holders of Company's capital stock and voting securities, and any persons
with rights to acquire Company's capital stock and voting securities, which
list will be promptly updated from time to time prior to Closing to reflect any
changes thereto (which changes are in any event subject to the restrictions
imposed under Section 4.2 below). All outstanding shares of Company Capital
Stock are duly authorized, validly issued, fully paid and non-assessable and
are free and clear of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof, and are not
subject to preemptive rights or rights of first refusal created by statute, the
Articles of Incorporation or Bylaws, each as amended, of Company or any
agreement to which Company is a party or by which it is bound. Company has
reserved 22,425 shares of Company Common Stock for issuance upon the exercise
of warrants to purchase Company Common Stock with an exercise price of $1.00
per share, Company Warrants to purchase 278,840 shares of Series A Preferred
Stock with an exercise price of $0.70 per share, and Company Warrants to
purchase 1,206,066 shares of Series B Preferred Stock with an exercise price
between $4.46 and $10.00. Company has reserved 7,524,629 shares of Company
Common Stock for issuance pursuant to the Company Stock Option Plan, of which
2,392,975 shares have been issued pursuant to option exercises and 2,677,833
shares are subject to outstanding, unexercised options (of which 728,080 such
shares are vested). Except for (i) the rights created pursuant to this
Agreement, (ii) the outstanding options under the Company Stock Option Plan,
(iii) Company Warrants described above in this Section 2.2, and (iv) Company's
right to repurchase any unvested shares under the Company Stock Option Plan,
there are no other options, warrants, calls, rights, commitments or agreements
of any character to which Company is a party or by which it is bound obligating
Company to issue, deliver, sell, repurchase or redeem, or cause to be issued,
delivered, sold, repurchased or redeemed, any shares of capital stock or voting
securities of Company or obligating Company to grant, extend, accelerate the
vesting of, change the price of, or otherwise amend or enter into any such
option, warrant, call, right, commitment or agreement. Except for this
Agreement, there are no contracts, commitments or agreements relating to
voting, purchase or sale of Company's capital stock or voting securities (x)
between or among Company and any of its securityholders and (y) to Company's
knowledge, between or among any of Company's securityholders. None of the
outstanding options permit any accelerated vesting or exercisability of those
options or the shares of Company Common Stock subject to those options by
reason of the Merger or any other transactions contemplated by this Agreement,
and the terms of the Company Stock Option Plan and the outstanding option
agreements thereunder each permit the Parent's assumption of those options as
options to purchase Parent Common Stock as provided in this Agreement, without
the consent or approval of the holders of those options, Company's
shareholders, or otherwise, and without any acceleration of the options. True
and complete copies of all agreements and instruments relating to or issued
under the Company Stock Option Plan
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have been provided to Parent and such agreements and instruments have not been
amended, modified or supplemented, and there are no agreements to amend, modify
or supplement such agreements or instruments in any case from the form provided
to Parent. All outstanding shares of Company Capital Stock and all Company
Options and warrants to acquire Company Capital Stock from Company were issued
in compliance in all material respects with all applicable federal and state
securities laws. Section 2.2 of the Company Disclosure Schedule sets forth all
notes, bonds, debentures or other evidences of indebtedness of Company,
including the name of the holder, the date of issuance, and the principal
amount and interest rate of each such debt, as well as the aggregate amount
owed to the holder of each such instrument as of September 30, 1999 (including
accrued and unpaid interest, and any premiums).
2.3 Authority. Company has all requisite corporate power and authority to
enter into this Agreement and the other agreements set forth in the exhibits
hereto (the "Ancillary Agreements") to which Company is a party, to perform its
obligations hereunder and thereunder, and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Ancillary Agreements to which Company is a party and the consummation
of the transactions contemplated hereby and thereby have been duly authorized
by all necessary corporate action on the part of Company, subject only to the
approval of the Merger by Company's shareholders as contemplated by Section
6.1(a). Each of this Agreement and the Ancillary Agreements to which Company is
a party has been duly executed and delivered by Company and constitutes the
valid and binding obligation of Company enforceable against Company in
accordance with its terms, except as enforcement may be limited by (i) the
effect of bankruptcy, insolvency, reorganization, receivership,
conservatorship, arrangement, moratorium or other similar laws affecting the
rights of creditors generally, or (ii) the availability of specific
performance, injunctive relief or other equitable remedies and general
principles of equity, regardless of whether considered in a proceeding in
equity or at law. The execution and delivery of this Agreement or any Ancillary
Agreement by Company does not, and the performance of Company's obligations
hereunder or thereunder and the consummation of the transactions contemplated
hereby or thereby will not, conflict with, or result in any violation of, or
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation or acceleration of any obligation or
loss of any benefit, or result in any other consequence, under (i) any
provision of the certificate or articles of incorporation or bylaws or other
charter or organizational documents, each as amended, of Company or any of its
subsidiaries or (ii) any mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Company or any of its subsidiaries or any of their respective properties or
assets, except in the case of clause (i) for any conflicts, violations,
defaults or other occurrences that would not prevent or materially impair or
delay the consummation of the Merger or any of the other transactions
contemplated by this Agreement. No consent, approval, order or authorization
of, or registration, declaration or filing with, any court, administrative
agency or commission, self-regulatory organization or other governmental
authority or instrumentality ("Governmental Entity") is required by or with
respect to Company in connection with the execution and delivery of this
Agreement, the performance of Company's obligations hereunder or thereunder or
the consummation of the transactions contemplated hereby or thereby, except for
(i) the filing of the Agreement of Merger, as provided in Section 1.2, (ii)
such consents, approvals, orders, authorizations, registrations, declarations
and filings as may be required under applicable federal or state securities
laws or the securities laws of any foreign country, and (iii) such filings as
may be required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), and (iv) such other consents, authorizations,
filings, approvals and registrations which, if not obtained or made, would not
prevent or materially alter or delay the Merger or any of the other
transactions contemplated by this Agreement.
2.4 Financial Statements. Company has delivered to Parent the audited
consolidated financial statements (including, without limitation, balance
sheets, statements of operations and statements of cash flows) of Company and
its subsidiaries for the fiscal years ended December 31, 1996, 1997 and 1998,
and the unaudited consolidated financial statements (including, without
limitation, balance sheet, statement of operations and statement of cash flows)
of Company and its subsidiaries as at, and for the nine-month period ended
September 30, 1999 (collectively, the "Company Financial Statements"). The
Company Financial
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<PAGE>
Statements have been prepared in accordance with generally accepted accounting
principles ("GAAP") (except that the financial statements which are not audited
do not have notes thereto) applied on a consistent basis throughout the periods
indicated and with each other. The Company Financial Statements fairly present
the financial condition and operating results of Company as of the dates, and
for the periods, indicated therein, subject to normal and recurring year-end
audit adjustments. Company maintains and will continue to maintain until the
Closing an adequate system of internal financial and accounting controls for
Company and its subsidiaries. There has been no change in Company's accounting
policies since January 1, 1996 except as described in the notes to the Company
Financial Statements.
2.5 Absence of Certain Changes. Since September 30, 1999 (the "Company
Balance Sheet Date"), Company has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance) that has resulted in, or
could reasonably be expected to result in, a Material Adverse Effect on
Company; (ii) any acquisition, sale or transfer of any material asset of
Company or any of its subsidiaries; (iii) any change in accounting methods or
practices (including any change in depreciation or amortization policies or
rates) by Company or any revaluation by Company of any of its or its
subsidiaries' assets; (iv) any declaration, setting aside, or payment of a
dividend or other distribution with respect to the shares of Company, or any
direct or indirect redemption, purchase or other acquisition by Company or any
of its subsidiaries of any of its shares of capital stock or other securities;
(v) any amendment or change to the certificate or articles of incorporation or
bylaws or other charter or organizational documents of Company or any of its
subsidiaries; (vi) any material increase in or modification of the compensation
or benefits payable or to become payable by Company or any of its subsidiaries
to any of its directors or employees, (vii) any acts or omissions of the types
restricted by Section 4.2, or (viii) any negotiation or agreement by Company or
any of its subsidiaries to do any of the things described in the preceding
clauses (i) through (vii) (other than negotiations with Parent and its
representatives regarding the transactions contemplated by this Agreement).
2.6 Absence of Undisclosed Liabilities. None of Company or any of its
subsidiaries has any material obligations or liabilities of any nature (matured
or unmatured, fixed or contingent) other than (i) those set forth or adequately
provided for in the consolidated balance sheet included in the Company
Financial Statements as of the Company Balance Sheet Date (the "Company Balance
Sheet"), (ii) those incurred in the ordinary course of business and not
required to be set forth in the Company Balance Sheet under GAAP, (iii) those
incurred in the ordinary course of business consistent with past practice since
the Company Balance Sheet Date, and (iv) those incurred in connection with the
execution and performance of this Agreement.
2.7 Litigation. There is no private or governmental action, suit,
proceeding, arbitration or to the knowledge of Company, claim or investigation
pending or threatened by or before any agency, court or tribunal, foreign or
domestic, against Company or any of its subsidiaries or any of their respective
properties or officers or directors (in their capacities as such). There is no
judgment, decree or order binding upon or against Company or any of its
subsidiaries, or, to the knowledge of Company, any of their respective
directors or officers (in their capacities as such). As of the date of this
Agreement, there is no action, suit, proceeding, claim, arbitration or other
litigation that Company has pending or threatened against other parties.
2.8 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon Company or any of its subsidiaries
which has or could reasonably be expected to have the effect of prohibiting or
impairing any current or future business practice of Company or any of its
subsidiaries, any acquisition of property by Company or any of its subsidiaries
or the conduct of business by Company or any of its subsidiaries as currently
conducted or as currently proposed to be conducted by Company or any of its
subsidiaries.
2.9 Governmental Authorization. Each of Company and its subsidiaries has
obtained each federal, state, county, local or foreign governmental consent,
license, permit, grant, or other authorization of a Governmental Entity (i)
pursuant to which Company or any of its subsidiaries currently operates or
holds any interest in any of its properties or (ii) that is required for the
operation of the business of Company or any of its subsidiaries or
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the holding of any such interest ((i) and (ii) herein collectively called
"Company Authorizations"), and all of such Company Authorizations are in full
force and effect.
2.10 Title to Property. Company and its subsidiaries have good and
marketable title to all of their respective properties, interests in properties
and assets, real and personal, reflected in the Company Balance Sheet or
acquired after the Company Balance Sheet Date (except properties, interests in
properties and assets sold or otherwise disposed of since the Company Balance
Sheet Date in the ordinary course of business), or with respect to leased
properties and assets, valid leasehold interests in, free and clear of all
mortgages, liens, pledges, charges or encumbrances of any kind or character,
except (i) the lien of current taxes not yet due and payable, (ii) such
imperfections of title, liens and easements as do not and will not materially
detract from or interfere with the current use of the properties subject
thereto or affected thereby, or otherwise materially impair business operations
involving such properties and (iii) liens securing debt which is reflected on
the Company Balance Sheet. The plants, property and equipment of Company and
its subsidiaries that are used in the operations of their respective businesses
are in a state of repair sufficient for Company's and its subsidiaries' current
operations. All properties used in the operations of Company and its
subsidiaries are reflected in the Company Balance Sheet to the extent GAAP
requires the same to be reflected. Section 2.10 of the Company Disclosure
Schedule identifies each parcel of real property owned or leased by Company or
any of its subsidiaries.
2.11 Intellectual Property.
(a) Company and its subsidiaries own, or are licensed or otherwise possesses
legally enforceable rights to use all patents, trademarks, trade names, service
marks, copyrights, domain names and any applications therefor, maskworks, net
lists, schematics, technology, know-how, trade secrets, inventory, ideas,
algorithms, processes, computer software programs or applications (in source
code and/or object code form), and tangible or intangible proprietary
information or material ("Intellectual Property") that are used or proposed to
be used in the business of Company and its subsidiaries as currently conducted
or as proposed to be conducted by Company and its subsidiaries. Neither Company
nor any of its subsidiaries has (i) licensed any of its Intellectual Property
in source code form to any party or (ii) entered into any exclusive agreements
relating to its Intellectual Property with any party.
(b) Section 2.11 of the Company Disclosure Schedule lists (i) all patents
and patent applications and all registered and unregistered trademarks, trade
names and service marks, and all copyrights, domain names and maskworks which
are registered or as to which registration has been applied for, included in
the Intellectual Property, including the jurisdictions in which each such
Intellectual Property right has been issued or registered or in which any
application for such issuance and registration has been filed, (ii) all
material licenses, sublicenses and other agreements as to which Company or any
of its subsidiaries is a party and pursuant to which any person is authorized
to use any Intellectual Property except for Company's standard form non-
exclusive licenses and sublicenses contained in purchase orders, and (iii) all
material licenses, sublicenses and other agreements as to which Company or any
of its subsidiaries is a party and pursuant to which Company or any of its
subsidiaries is authorized to use any third party patents, trademarks or
copyrights, including software ("Third Party Intellectual Property Rights")
which are incorporated in, are, or form a part of any product of Company or any
of its subsidiaries as of the date of this Agreement.
(c) To Company's knowledge, there is no unauthorized use, disclosure,
infringement or misappropriation of any Intellectual Property rights of Company
or any of its subsidiaries, or any Intellectual Property right of any third
party to the extent licensed by or through Company or any of its subsidiaries,
by any third party, including any employee or former employee of Company or any
of its subsidiaries. Neither Company nor any of its subsidiaries has entered
into any agreement to indemnify any other person against any charge of
infringement of any Intellectual Property, other than indemnification
provisions contained in purchase orders or license agreements arising in the
ordinary course of business.
(d) Neither Company nor any of its subsidiaries is, nor will any of them be
as a result of the execution and delivery of this Agreement or the Ancillary
Agreements or the performance of any of their obligations
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under this Agreement or the Ancillary Agreements, in breach of any license,
sublicense or other agreement relating to any Intellectual Property or Third
Party Intellectual Property Rights.
(e) All patents, registered trademarks, service marks and copyrights held by
Company or any of its subsidiaries are valid and subsisting. Neither Company
nor any of its subsidiaries (i) has been sued in any suit, action or proceeding
which involves a claim of infringement of any patents, trademarks, service
marks, copyrights or violation of any trade secret or other proprietary right
of any third party, (ii) has any knowledge that the manufacturing, marketing,
licensing or sale of its products infringes any patent, trademark, service
mark, copyright, trade secret or other proprietary right of any third party or
(iii) has brought any action, suit or proceeding for infringement of
Intellectual Property or breach of any license or agreement involving
Intellectual Property against any third party.
(f) Each of Company and its subsidiaries has secured written assignments
from all consultants and employees who contributed to the creation or
development of Intellectual Property of the rights to such contributions that
Company and its subsidiaries do not already own by operation of law, and
Company has no reason to believe that any such assignment is not valid or
binding.
(g) Each of Company and its subsidiaries has taken reasonable steps
consistent with prevailing industry practice to protect and preserve the
confidentiality of all Intellectual Property not otherwise protected by
patents, patent applications or copyright ("Confidential Information"). All
use, disclosure or appropriation of Confidential Information owned by Company
or any of its subsidiaries by or to a third party has, to the knowledge of
Company, been pursuant to the terms of a written agreement between Company and
such third party. All use, disclosure or appropriation of Confidential
Information not owned by Company or any of its subsidiaries has been pursuant
to the terms of a written agreement between Company and the owner of such
Confidential Information, or is otherwise lawful.
2.12 Environmental Matters.
(a) The following terms shall be defined as follows:
(i) "Environmental Laws" shall mean any federal, state or local laws,
ordinances, codes, regulations, rules, policies and orders that are
intended to assure the protection of the environment, or that classify,
regulate, call for the remediation of, require reporting with respect to,
or list or define air, water, groundwater, solid waste, hazardous or toxic
substances, materials, wastes, pollutants or contaminants.
(ii) "Hazardous Materials" shall mean any toxic or hazardous substance,
material or waste or any pollutant or contaminant, or infectious or
radioactive substance or material, including without limitation, those
substances, materials and wastes defined in or regulated under any
Environmental Laws.
(iii) "Property" shall mean all real property leased or owned by Company
or any of its subsidiaries either currently or in the past.
(iv) "Facilities" shall mean all buildings and improvements on the
Property of Company or any of its subsidiaries.
(b) (i) To the knowledge of Company, no methylene chloride or asbestos is
contained in or has been used at or released from the Facilities; (ii) to the
knowledge of Company, all Hazardous Materials and wastes have been disposed of
in accordance with all Environmental Laws; (iii) neither Company nor any of its
subsidiaries has received any notice (verbal or written) of any noncompliance
of the Facilities or its past or present operations with Environmental Laws;
(iv) no administrative actions or suits are pending or, to the knowledge of
Company, threatened against Company or any of its subsidiaries relating to a
violation of any Environmental Laws; (v) neither Company nor any of its
subsidiaries is a potentially responsible party under the federal Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), or state
analog statute, arising out of events occurring at or prior to the Effective
Time; (vi) neither Company nor any subsidiary has received any written or
verbal notice that there has been in the past, or is now, any Hazardous
Materials on,
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<PAGE>
under or migrating to or from the Facilities or Property; (vii) to Company's
knowledge, there have not been in the past, and are not now, any underground
tanks or underground improvements at, on or under the Property including
without limitation, treatment or storage tanks, sumps, or water, gas or oil
wells; (viii) to Company's knowledge, there are no polychlorinated biphenyls
(PCBs) deposited, stored, disposed of or located on the Property or Facilities
or any equipment on the Property containing PCBs at levels in excess of 50
parts per million; (ix) to Company's knowledge, there is no formaldehyde on the
Property or in the Facilities, nor any insulating material containing urea
formaldehyde in the Facilities, the presence of which could reasonably be
expected to result in a liability to Company; (x) the Facilities and Company's
and its subsidiaries' uses and activities therein have at all times complied
with all Environmental and Safety Laws; and (xi) Company and its subsidiaries
have all the permits and licenses required to be issued under Federal, State or
local laws regarding Environmental and Safety Laws and are in full compliance
with the terms and conditions of those permits.
2.13 Taxes. Company and its subsidiaries, and any consolidated, combined,
unitary or aggregate group for Tax (as defined below) purposes of which Company
is or has been a member, have timely filed all Tax Returns required to be filed
by them and have paid all Taxes shown thereon to be due. The Company Financial
Statements, as of September 30, 1999, reflect any unpaid taxes of Company and
its subsidiaries in periods through such date, to the extent such are shown as
being due on any Tax Returns. Neither Company nor any of its subsidiaries has
accrued any material tax liabilities for periods after September 30, 1999.
There is (i) no claim for Taxes that is a lien against the property of Company
or any of its subsidiaries or is being asserted against Company or any of its
subsidiaries other than liens for Taxes not yet due and payable, (ii) no audit
of any Tax Return of Company or any of its subsidiaries being conducted or
threatened by a Tax authority, (iii) no extension of the statute of limitations
on the assessment of any Taxes granted by Company and currently in effect, and
(iv) no agreement, contract or arrangement to which Company or any of its
subsidiaries is a party that may result in the payment of any amount that would
not be deductible by reason of Sections 280G (other than agreements or
arrangements for which shareholder approval meeting the requirements of
Section 280G(b)(5)(B) will be obtained prior to the Closing) or 404 of the
Code. Company and its subsidiaries have not been and will not be required to
include any material adjustment in Taxable income for any Taxable period (or
portion thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax laws as a result of transactions, events
or accounting methods employed prior to the Merger. Neither Company nor any of
its subsidiaries has filed or will file any consent to have the provisions of
paragraph 341(f)(2) of the Code (or comparable provisions of any state Tax
laws) apply to Company or any of its subsidiaries. Neither Company nor any of
its subsidiaries is now or has ever been a party to any Tax sharing or Tax
allocation agreement. Neither Company nor any of its subsidiaries has filed any
disclosures under Section 6662 or comparable provisions of state, local or
foreign law to prevent the imposition of penalties with respect to any Tax
reporting position taken on any Tax Return. Neither Company nor any of its
subsidiaries has ever been a member of a consolidated, combined or unitary
group of which Company was not the ultimate parent corporation. For purposes of
this Agreement, the following terms have the following meanings: "Tax" (and,
with correlative meaning, "Taxes" and "Taxable") means (i) any net income,
alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax, governmental
fee or other like assessment or charge of any kind whatsoever, together with
any interest or any penalty, addition to tax or additional amount imposed by
any Governmental Entity (a "Tax authority") responsible for the imposition of
any such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period and
(iii) any liability for the payment of any amounts of the type described in (i)
or (ii) as a result of any express or implied obligation to indemnify any other
person. As used herein, "Tax Return" shall mean any return, statement, report
or form (including, without limitation, estimated Tax Returns and reports,
withholding Tax Returns and reports and information reports and returns)
required to be filed with respect to Taxes. Each of Company and its
subsidiaries is in compliance in all material respects with all terms and
conditions of any Tax exemptions or other Tax-sparing agreement or order of a
foreign government, and the consummation of the Merger shall not materially
impair the continued validity and effectiveness of any such Tax exemptions or
other Tax-sparing agreement or order.
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Target and each of its subsidiaries have in their possession receipts for any
Taxes paid to foreign Tax authorities. Neither Target nor any of its
subsidiaries has been a "United States real property holding corporation"
within the meaning of Section 897 of the Code during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code.
2.14 Employee Benefit Plans.
(a) Section 2.14 of the Company Disclosure Schedule contains a true and
complete list, with respect to Company, its subsidiaries and any trade or
business (whether or not incorporated) which is treated as a single employer
with Company (an "ERISA Affiliate") within the meaning of Section 414(b), (c),
(m) or (o) of the Code, of (i) all material employee benefit plans (as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")), (ii) each loan to a non-officer employee in excess of ten
thousand dollars ($10,000), and loans to officers and directors, (iii) any
stock option, stock purchase, phantom stock, stock appreciation right,
supplemental retirement, severance, sabbatical, medical, dental, vision care,
disability, employee relocation, cafeteria benefit (Code Section 125) or
dependent care (Code Section 129), life insurance or accident insurance plans,
programs or arrangements, (iv) all bonus, pension, profit sharing, savings,
deferred compensation or incentive plans, programs or arrangements, (v) other
material fringe or employee benefit plans, programs or arrangements that apply
to senior management of Company and that do not generally apply to all
employees, and (vi) any current or former employment or executive compensation
or severance agreements, written or otherwise, as to which unsatisfied
obligations of Company of greater than ten thousand dollars ($10,000) remain
for the benefit of, or relating to, any present or former employee, consultant
or director of Company or any of its subsidiaries (together, the "Company
Employee Plans").
(b) Company has furnished to Parent a copy of each of the Company Employee
Plans and related plan documents (including trust documents, insurance policies
or contracts, employee booklets, summary plan descriptions and other
authorizing documents, and any employee communications that are materially
inconsistent with the terms of the written Company Employee Plan relating
thereto) and has, with respect to each Company Employee Plan which is subject
to ERISA reporting requirements, provided copies of the Form 5500 reports filed
for the last three plan years. Any Company Employee Plan intended to be
qualified under Section 401(a) of the Code has (i) obtained from the Internal
Revenue Service a favorable determination letter as to its qualified status
under the Code, including all amendments to the Code effected by the Tax Reform
Act of 1986 and subsequent legislation, (ii) has applied to the Internal
Revenue Service for such a determination letter prior to the expiration of the
requisite period under applicable Treasury Regulations or Internal Revenue
Service pronouncements in which to apply for such determination letter and to
make any amendments necessary to obtain a favorable determination, or (iii) has
been established under a standardized prototype plan for which an Internal
Revenue Service opinion letter has been obtained by the plan sponsor and is
valid as to the adopting employer, or (iv) the deadline for filing an
application for a determination letter has not yet expired. Company has also
furnished Parent with the most recent Internal Revenue Service determination or
opinion letter issued with respect to each such Company Employee Plan, and
nothing has occurred since the issuance of each such letter which could
reasonably be expected to cause the loss of the tax-qualified status of any
Company Employee Plan subject to Code Section 401(a). Company has also
furnished Parent with all registration statements and prospectuses prepared in
connection with each Company Employee Plan.
(c) (i) None of the Company Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person; (ii) there has been no
"prohibited transaction," as such term is defined in Section 406 of ERISA and
Section 4975 of the Code, with respect to any Company Employee Plan; (iii) each
Company Employee Plan has been administered in accordance with its terms and in
compliance with the requirements prescribed by any and all statutes, rules and
regulations (including ERISA and the Code), and Company, its subsidiaries and
each ERISA Affiliate have performed all obligations required to be performed by
them under, are not in any material respect in default under or violation of,
and have no knowledge of any material default or violation by any other party
to, any of the Company Employee Plans; (iv) neither Company
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nor any of its subsidiaries or ERISA Affiliates is subject to any liability or
penalty under Sections 4976 through 4980 of the Code or Title I of ERISA with
respect to any of the Company Employee Plans; (v) all material contributions
required to be made by Company or ERISA Affiliate to any Company Employee Plan
have been made on or before their due dates and a reasonable amount has been
accrued for contributions to each Company Employee Plan for the current plan
years; (vi) with respect to each Company Employee Plan, no "reportable event"
within the meaning of Section 4043 of ERISA (excluding any such event for which
the thirty (30) day notice requirement has been waived under the regulations to
Section 4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 or
ERISA has occurred; (vii) no Company Employee Plan is covered by, and neither
Company nor any ERISA Affiliate has incurred or expects to incur any liability
under Title IV of ERISA or Section 412 of the Code; and (viii) each Company
Employee Plan can be amended, terminated or otherwise discontinued after the
Effective Time in accordance with its terms, and applicable law without
liability to Parent (other than the expense associated with full vesting of
employer contributions and the ordinary administrative expenses typically
incurred in a termination event). With respect to each Company Employee Plan
subject to ERISA as either an employee pension plan within the meaning of
Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of
Section 3(1) of ERISA, Company has, in all material respects, prepared in good
faith and timely filed all requisite governmental reports (which were true and
correct as of the date filed) and has, in all material respects, properly and
timely filed and distributed or posted all notices and reports to employees
required to be filed, distributed or posted with respect to each such Company
Employee Plan. No suit, administrative proceeding, action or other litigation
has been brought or, to the knowledge of Company, is threatened, against or
with respect to any such Company Employee Plan, including any audit or inquiry
by the Internal Revenue Service or United States Department of Labor. No
payment or benefit which will or may be made by Company or any of its
subsidiaries to any Employee will be characterized as an "excess parachute
payment" within the meaning of Section 280G(b)(1) of the Code.
(d) With respect to each Company Employee Plan, Company has complied with
(i) the applicable health care continuation and notice provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the
regulations (including proposed regulations) thereunder, (ii) the applicable
requirements of the Family and Medical Leave Act of 1993 and the regulations
thereunder, and (iii) the applicable requirements of the Health Insurance
Portability and Accountability Act of 1996 and the regulations (including
proposed regulations) thereunder.
(e) The consummation of the transactions contemplated by this Agreement or
any Ancillary Agreement in and of themselves will not (i) entitle any current
or former employee of or other service provider to Company, any of its
subsidiaries or any other ERISA Affiliate to severance benefits or any other
payment, except as expressly provided in this Agreement or the Ancillary
Agreements, or (ii) accelerate the time of payment or vesting, or increase the
amount of compensation due any such employee or service provider, except as
provided in Section 2.14 of the Company Disclosure Schedule.
(f) There has been no amendment to, written interpretation or announcement
(whether or not written) by Company, any of its subsidiaries or any other ERISA
Affiliate relating to, or change in participation or coverage under, any
Company Employee Plan which would materially increase the expense of
maintaining such Plan above the level of expense incurred with respect to that
Plan for the most recent fiscal year included in Company's financial
statements.
(g) Neither Company nor any of its subsidiaries currently maintain, sponsor,
participate in or contribute to, nor has any of them ever maintained,
established, sponsored, participated in, or contributed to, any pension plan
(within the meaning of Section 3(2) of ERISA) which is subject to Part 3 of
Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code.
(h) Neither Company, any of its subsidiaries nor any other ERISA Affiliate
is a party to, or has made any contribution to or otherwise incurred any
obligation under, any "multiemployer plan" as defined in Section 3(37) of
ERISA.
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2.15 Certain Agreements Affected by the Merger. Subject to Section 1.6,
neither the execution and delivery of this Agreement or any Ancillary
Agreements nor the performance of any of Company's obligations hereunder or
thereunder or the consummation of the transaction contemplated hereby or
thereby will (i) result in any payment (including, without limitation,
severance, unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any director or employee of Company, (ii) materially increase
any benefits otherwise payable by Company or (iii) result in the acceleration
of the time of payment or vesting of any such benefits.
2.16 Employee Matters. Each of Company and its subsidiaries is in compliance
in all material respects with all currently applicable laws and regulations
respecting employment, discrimination in employment, terms and conditions of
employment, wages, hours and occupational safety and health and employment
practices, and is not engaged in any unfair labor practice. Each of Company and
its subsidiaries has withheld all amounts required by law or by agreement to be
withheld from the wages, salaries, and other payments to employees; and is not
liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing. Neither Company nor any of its subsidiaries
is liable for any payment to any trust or other fund or to any governmental or
administrative authority, with respect to unemployment compensation benefits,
social security or other benefits (other than routine payments to be made in
the normal course of business and consistent with past practice). There are no
material pending claims against Company or any of its subsidiaries under any
workers compensation policy or for long term disability. There are no material
controversies pending or, to the knowledge of Company, threatened, between
Company or any of its subsidiaries, on one hand, and any of their employees, on
the other hand, which controversies have resulted in an action, suit,
arbitration or investigation before any agency, court or tribunal, foreign or
domestic. Neither Company nor any of its subsidiaries is a party to any
collective bargaining agreement or other labor union contract nor does Company
know of any activities of any labor union to organize any such employees. To
Company's knowledge, no employees of Company or any of its subsidiaries are in
violation of any term of any employment contract, patent disclosure agreement,
noncompetition agreement, or any restrictive covenant to a former employer
relating to the right of any such employee to be employed by Company or any of
its subsidiaries because of the nature of the business conducted or presently
proposed to be conducted by Company or any of its subsidiaries or to the use of
trade secrets or proprietary information of others. Except as set forth in
Section 2.16 of the Company Disclosure Schedule, neither Company nor any of its
subsidiaries is a party to or bound by any employment contract with any of its
officers or other employees. No key employee of Company or any of its
subsidiaries, other than any employee whose duties are primarily secretarial or
clerical, has given notice to Company or any of its subsidiaries, nor is
Company otherwise aware, that any such employee intends to terminate his or her
employment with Company or any of its subsidiaries.
2.17 Interested Party Transactions. Neither Company nor any of its
subsidiaries is indebted to any director, officer, employee or agent of Company
or any such subsidiary (except for amounts due as normal salaries and bonuses
and in reimbursement of ordinary expenses), and no such person is indebted to
Company or any of its subsidiaries.
2.18 Insurance. Company and its subsidiaries have policies of insurance and
bonds of the type and in amounts customarily carried by persons conducting
business or owning assets similar to those of Company and its subsidiaries.
There is no material claim pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. All premiums due and payable under all such policies
and bonds have been paid and Company or the applicable subsidiary is otherwise
in compliance with the terms of such policies and bonds. Company has no
knowledge of any threatened termination of, or material premium increase with
respect to, any of such policies.
2.19 Compliance With Laws. Each of Company and its subsidiaries has
complied, and is in compliance, in all material respects with all applicable
federal, state, local, foreign and self-regulatory laws, statutes, rules and
regulations. Each of Company and its subsidiaries has, and is in compliance in
all material respects with, all Company Authorizations necessary to conduct its
business or to own and operate its assets.
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2.20 Minute Books. The minute books of Company and its subsidiaries made
available to Parent contain a fair summary of all meetings or actions by
written consent of directors and shareholders since the time of incorporation
of Company and its subsidiaries, and reflect all transactions referred to in
such minutes accurately in all material respects.
2.21 Accounts Receivable. Subject to any reserves set forth in the Company
Financial Statements, the accounts receivable shown on the Company Financial
Statements represent and will represent bona fide claims against debtors for
sales and other charges, and are not subject to discount except for normal cash
and immaterial trade discounts. The amount carried for doubtful accounts and
allowances disclosed in the Company Financial Statements is sufficient to
provide for any losses which may be sustained on realization of the
receivables.
2.22 Customers and Suppliers. No customer which individually accounted for
more than five percent (5%) of Company's consolidated gross revenues during the
12-month period preceding the date hereof, and no supplier of Company or any of
its subsidiaries, has canceled or otherwise terminated, or made any written
threat to Company or any of its subsidiaries to cancel or otherwise terminates,
its relationship with Company or any of its subsidiaries, or has decreased
materially its services or supplies to Company or any of its subsidiaries in
the case of any such supplier, or its usage of the services or products of
Company or any of its subsidiaries in the case of such customer, and to
Company's knowledge, no such supplier or customer intends to cancel or
otherwise terminate its relationship with Company or any of its subsidiaries or
to decrease materially its services or supplies to Company or any of its
subsidiaries or its usage of the services or products of Company or any of its
subsidiaries, as the case may be.
2.23 Material Contracts. As of the date of this Agreement, except for the
material contracts described in Section 2.23 of the Company Disclosure
Schedule, neither Company nor any of its subsidiaries is a party to or bound by
any material contract or agreement (a "Material Contract"), including without
limitation:
(a) any distributor, sales, advertising, agency or similar contract
involving in the case of any such contract more than $100,000 in payments by or
to Company or any of its subsidiaries;
(b) any continuing contract for the purchase of materials, supplies,
equipment or services involving in the case of any such contract more than
$100,000 over the term of the contract;
(c) any contract that expires or may be renewed at the option of any person
other than Company so as to expire more than one year after the date of this
Agreement;
(d) any trust indenture, mortgage, promissory note, loan agreement or other
contract for the borrowing of money, any currency exchange, commodities or
other hedging arrangement or any leasing transaction of the type required to be
capitalized in accordance with GAAP;
(e) any contract for capital expenditures in excess of $100,000 in the
aggregate;
(f) any contract limiting the freedom of Company or any of its subsidiaries
to engage in any line of business or to compete with any other person as that
term is defined in the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or any confidentiality, secrecy or non-disclosure contract;
(g) any contract pursuant to which Company or any of its subsidiaries is a
lessor of any machinery, equipment, motor vehicles, office furniture, fixtures
or other personal property for more than $100,000 over the term of the
contract;
(h) any contract with any person with whom Company or any of its
subsidiaries does not deal at arm's length within the meaning of the Code; or
(i) any agreement of guarantee, support, indemnification, assumption or
endorsement of, or any similar commitment with respect to, the obligations,
liabilities (whether accrued, absolute, contingent or otherwise) or
indebtedness of any other person.
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2.24 No Breach of Material Contracts. Each of Company and its subsidiaries
has performed all of the material obligations required to be performed by it
and is entitled to all accrued benefits under, and, to Company's knowledge, is
not alleged to be in default in any material respect of any Material Contract.
Each of the Material Contracts is in full force and effect, and there exists no
default or event of default or event, occurrence, condition or act, with
respect to Company or any of its subsidiaries or to Company's knowledge with
respect to the other contracting party, which, with the giving of notice, the
lapse of the time or the happening of any other event or conditions, would
become a default or event of default under any Material Contract. Company has
provided true and complete copies of all Material Contracts to Parent.
2.25 Year 2000 Compliance. "Year 2000 Compliant" (or, as the context may
require, "Year 2000 Compliance") means that any particular hardware or software
will: (i) process date data from at least the years 1900 through 2101, or
involving date information from more than one century, without error,
interruption, malfunction, corruption, ceasing to function, generating
incorrect data or otherwise producing incorrect results or adversely impacting
current or future operations; (ii) maintain functionality with respect to the
introduction, processing and output of records containing dates falling on or
after January 1, 2000; and (iii) support numeric and date transitions from the
twentieth century to the twenty-first century, and back (including, without
limitation, all calculations, aging, reporting, printing, displays, reversals,
disaster and vital records recoveries) without error, interruption,
malfunction, corruption, ceasing to function, generating incorrect data or
otherwise producing incorrect results or adversely impacting current or future
operations.
(a) All of Company's and its subsidiaries' products and services (including
products sold to date, products currently being sold or future products), both
individually and when operating in conjunction with all other systems, products
or services with which they are designed to interface (assuming such other
systems, products or services are Year 2000 Compliant), and all material
computer software and hardware (including, without limitation, microcode,
firmware, system and application programs, files, databases, computer services
and microcontrollers, including those embedded in computer and noncomputer
equipment) contained in Company's and its subsidiaries' products or services
(including products and services sold to date, products and services currently
being sold or future products and services) are Year 2000 Compliant.
(b) All of Company's and its subsidiaries' internal computer systems are,
both individually and in conjunction with all other systems with which they
interface (assuming such other systems, products or services are Year 2000
Compliant), Year 2000 Compliant.
(c) Each of Company and its subsidiaries has made inquiries of its key
suppliers of services and products and, to knowledge of Company, neither
Company nor any of its subsidiaries is relying on the products or services of
any third party whose systems, products or services are not Year 2000
Compliant.
(d) Company does not have any material expenses or other material
liabilities associated with securing Year 2000 Compliance, or making
contingency arrangements to address Year 2000 Compliance issues, with respect
to Company's or its subsidiaries' products or services (including products and
services sold to date, products and services currently being sold or future
products and services), internal computer systems or the computer systems of
Company's or its subsidiaries' key suppliers or customers.
(e) Neither Company nor any of its subsidiaries has made any representations
or warranties specifically relating to the ability of any product or service
sold, licensed, rendered, or otherwise provided by Company or its subsidiaries
in the conduct of its business to be Year 2000 Compliant.
2.26 Export Control Laws. Each of Company and its subsidiaries has conducted
its export transactions in accordance with applicable provisions of United
States export control laws and regulations, including but not limited to the
Export Administration Act and implementing Export Administration Regulations.
2.27 Product Releases. Company has provided Acquiror a schedule of product
releases, which schedule is attached hereto as Section 2.27 of the Company
Disclosure Schedule. Company has a good faith reasonable
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belief that it can achieve the release of products on the schedule described in
Section 2.27 of the Company Disclosure Schedule and is not currently aware of
any change in its circumstances or other fact that has occurred that would
cause it to believe that it will be unable to meet such release schedule.
Notwithstanding the foregoing, Acquiror acknowledges that there may be events
beyond the control of Company that may cause it to be unable to meet such
release schedule and that Company makes no representations with respect
thereto.
2.28 Complete Copies of Materials. Company has delivered or made available
to Parent true and complete copies of each material document that has been
requested in writing by, Parent or its counsel in connection with their legal,
financial and accounting review of Company and its subsidiaries.
2.29 Shareholder Agreement; Irrevocable Proxies. Holders of more than 50% of
the issued and outstanding Company Common Stock, more than 50% of the issued
and outstanding Company Series A Preferred Stock, more than 50% of the issued
and outstanding Company Series B Preferred Stock and more than 50% of the
issued and outstanding Company Capital Stock, have signed and delivered to
Parent Shareholder Agreements in the form of Exhibit C hereto and irrevocable
proxies and market standoff letter agreements in the forms annexed thereto (the
"Irrevocable Proxies" and the "Market Standoff Agreements," respectively) and
have agreed in writing to vote for approval of the Merger and the transactions
contemplated thereby pursuant to such Shareholder Agreements and Irrevocable
Proxies. Schedule 2.29 to this Agreement sets forth the names and number of
shares held by each of the Holders who have signed and delivered such
Shareholder Agreement.
2.30 Vote Required. The affirmative vote of the holders of more than fifty
percent (50%) of the shares of Company Common Stock and each series of Company
Preferred Stock outstanding on the record date set for the Company Shareholders
Meeting is the only vote of the holders of any of Company's Capital Stock
necessary to approve this Agreement, the Merger and the other transactions
contemplated by this Agreement.
2.31 Board Approval. The Board of Directors of Company has unanimously (i)
approved and adopted this Agreement, the Merger and the other transactions
contemplated by this Agreement, (ii) determined that the Merger is advisable
and on terms fair to, and is in the best interests of, the shareholders of
Company and (iii) recommended that the shareholders of Company approve and
adopt this Agreement, the Merger and the other transactions contemplated by
this Agreement.
2.32 Tax Treatment. Neither Company nor, to Company's knowledge, any of its
directors or officers has taken any action that would prevent the Merger from
qualifying as a "reorganization" within the meaning of Section 368(a) of the
Code. Neither Company nor, to Company's knowledge, any of its affiliates or
agents is aware of any agreement, plan or other circumstance that would prevent
the Merger from qualifying as a "reorganization" within the meaning of Section
368(a) of the Code.
2.33 Information Statement and Proxy Statement. The information supplied by
Company for inclusion in the information statement (as amended or supplemented,
the "Information Statement") to be sent to the shareholders of Company in
connection with the meeting of Company's shareholders to consider and vote upon
this Agreement, the Merger and the other transactions contemplated hereby (the
"Company Shareholders Meeting") or in the proxy statement (as amended or
supplemented, the "Proxy Statement") to be sent to the stockholders of Parent
in connection with the meeting of Parent's stockholders to consider and vote
upon the issuance of Parent Common Stock pursuant to this Agreement (the
"Parent Stockholders Meeting") or in any registration statement on Form S-4 or
S-3 pursuant to Section 1.12 of this Agreement, shall not, on the date the
Information Statement (or prospectus in the event of a registration statement
on Form S-4) is first sent to Company's shareholders or on the date the Proxy
Statement is first sent to Parent's stockholders (as the case may be) , at the
time of the Company Shareholders Meeting or the Parent's Stockholders Meeting
(as the case may be), or at the Effective Time, contain any statement which, at
such time, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which they are made, not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to matters to be voted on
at
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the Company Shareholders Meeting or the Parent Stockholders Meeting which has
become false or misleading. If at any time prior to the Effective Time any
event or information should be discovered by Company which should be set forth
in a supplement to the Information Statement or the Proxy Statement, Company
shall promptly inform Parent. Notwithstanding the foregoing, Company makes no
representation, warranty or covenant with respect to any information supplied
by Parent or Merger Sub which is contained in the Information Statement or the
Proxy Statement. The information supplied by Company for inclusion in the
application for issuance of a California Permit pursuant to which the shares of
Parent Common Stock to be issued in the Merger and the Company Options to be
assumed in the Merger will be qualified under the California Corporations Code
(the "Permit Application") shall not at the time the fairness hearing is held
pursuant to Section 25142 of the California Corporations Code and the time the
qualification of such securities is effective under Section 25122 of the
California Corporations Code contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
2.34 Company Affiliates. Section 2.34 of the Company Disclosure Schedule
contains a true and complete list of all persons who, to Company's knowledge,
may be deemed to be an "affiliate" within the meaning of Rule 144 and Rule 145
of the Rules and Regulations of the SEC promulgated under the Securities Act
for purposes of Accounting Series Releases 130 and 135, as amended (each such
person, an "Affiliate" and collectively "Affiliates") of Company.
2.35 Brokers' and Finders' Fees. Company has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby, other
than as set forth in Section 2.35 of the Company Disclosure Schedule. Company
has previously furnished to Parent a complete and correct copy of all
agreements between Company and the financial advisors set forth in Section 2.35
of the Company Disclosure Schedule, pursuant to which such firms would be
entitled to any payment relating to the Merger.
2.36 Representations Complete. None of the representations or warranties
made by Company herein or in any Schedule hereto, including the Company
Disclosure Schedule, or certificate furnished by Company pursuant to this
Agreement, contains or will contain at the Effective Time any untrue statement
of a material fact, or omits or will omit at the Effective Time to state any
material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT
Except as disclosed in that section of the document of even date herewith
delivered by Parent to Company prior to the execution and delivery of this
Agreement (the "Parent Disclosure Schedule") corresponding to the Section of
this Agreement to which any of the following representations and warranties
specifically relate or as disclosed in another section of the Parent Disclosure
Schedule if it is reasonably apparent on the face of the disclosure that it is
applicable to another Section of this Agreement, or as disclosed in the
statements, reports, registration statements (with the prospectus in the form
filed pursuant to Rule 424(b) of the Securities Act), definitive proxy
statements, and other filings filed with the Securities and Exchange Commission
(the "SEC") by Parent on or prior to the date hereof (collectively, the "Parent
SEC Documents"), Parent hereby represents and warrants to Company as follows:
3.1 Organization, Standing and Power. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization. Each of Parent and Merger Sub has the
corporate power and authority to enter into this Agreement and the Ancillary
Agreements, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. Parent has no
material subsidiaries.
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3.2 Capital Structure.
(a) The authorized capital stock of Parent consists 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, of which there were issued and outstanding
as of the close of business on June 30, 1999, 35,935,627 shares of Common Stock
and no shares of Preferred Stock. All outstanding shares of Parent have been
duly authorized, validly issued, fully paid and are nonassessable and free of
any liens or encumbrances other than any liens or encumbrances created by or
imposed upon the holders thereof. The shares of Parent Common Stock to be
issued pursuant to the Merger will be duly authorized, validly issued, fully
paid, and non-assessable. Parent has reserved 7,544,000 shares of Parent Common
Stock for issuance pursuant to the Parent Stock Option Plan, of which 1,476,351
shares have been issued pursuant to option exercises and 3,674,236 shares are
subject to outstanding, unexercised options. As of the date of this Agreement,
no warrants to purchase shares of Parent Common Stock are outstanding. Except
for (i) the rights created pursuant to this Agreement, (ii) the outstanding
options under the Parent's stock option plan, and (iii) Parent's right to
repurchase any unvested shares under its stock option plan, there are no other
options, warrants, calls, rights, commitments or agreements of any character to
which Parent is a party or by which it is bound obligating Parent to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any shares of capital stock or voting securities of
Parent or obligating Parent to grant, extend, accelerate the vesting of, change
the price of, or otherwise amend or enter into any such option, warrant, call,
right, commitment or agreement. Except for this Agreement, there are no
contracts, commitments or agreement relating to voting, purchase or sale of
Parent's capital stock or voting securities (i) between or among Parent and any
of its securityholders, and (ii) to Parent's knowledge, between or among any of
Parent's securityholders. None of the outstanding options permit any
accelerated vesting or exercisability of those options or the shares of Parent
Common Stock subject to those options by reason of the Merger or any other
transactions contemplated by this Agreement. True and complete copies of all
agreements and instruments relating to or issued under Parent's stock option
plan have been provided to Company and such agreements and instruments have not
been amended, modified or supplemented, and there are no agreements to amend,
modify or supplement such agreements or instruments in any case from the form
provided to Company. All outstanding shares of Parent Common Stock and all
Parent options and warrants to acquire Parent Common Stock from Parent were
issued in compliance in all material respects with all applicable federal and
state securities laws.
(b) The authorized capital stock of Merger Sub consists of one thousand
(1,000) shares of common stock, no par value per share ("Merger Sub Common
Stock"), of which 1000 shares are issued and outstanding. Parent owns directly
all the outstanding shares of Merger Sub Common Stock. The outstanding shares
of Merger Sub Common Stock are duly authorized, validly issued, fully paid and
nonassessable and free of any preemptive rights.
3.3 Authority. The execution and delivery of this Agreement and the
Ancillary Agreements and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of each of Parent and Merger Sub, subject only to the approval by
Parent's stockholders of the issuance of the Merger Shares pursuant to this
Agreement (the "Parent Stockholder Approval"). This Agreement and each
Ancillary Agreement has been duly executed and delivered by each of Parent and
Merger Sub, as applicable, and constitutes the valid and binding obligation of
each of them, enforceable against each of them in accordance with its terms,
except as enforcement may be limited by (i) the effect of bankruptcy,
insolvency, reorganization, receivership, conservatorship, arrangement,
moratorium or other laws affecting the rights of creditors generally, or (ii)
the availability of specific performance, injunctive relief or other equitable
remedies and general principles of equity, regardless or whether considered in
a proceeding in equity or at law. The execution and delivery of this Agreement
or any Ancillary Agreement do not, and the performance of Parent's obligations
hereunder or thereunder and the consummation of the transactions contemplated
hereby or thereby will not, conflict with, or result in any violation of, or
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation or acceleration of any obligation or
loss of a benefit, or result in any other consequence, under (i) any provision
of
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the Certificate of Incorporation or Bylaws of Parent or Merger Sub, as amended,
or (ii) any mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Parent, Merger Sub or
their respective properties or assets, except in the case of clause (i) for any
conflicts, violations, defaults or other occurrences that would not (A)
individually or in the aggregate have a Material Adverse Effect on Parent or
any of its subsidiaries or (B) prevent or materially impair or delay the
consummation of the Merger or the other transactions contemplated by this
Agreement. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity, is required by or with
respect to Parent or Merger Sub in connection with the execution and delivery
of this Agreement or any Ancillary Agreement by Parent and Merger Sub, the
performance of Parent's obligations hereunder or thereunder or the consummation
by Parent and Merger Sub of the transactions contemplated hereby or thereby,
except for (i) the filing of the Agreement of Merger, as provided in Section
1.2, (ii) the filing with and clearance by the SEC of the Proxy Statement and
such other consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal or state
securities laws or the securities laws of any foreign country, (iii) such
filings as may be required under the HSR Act, (iv) the filing with the Nasdaq
National Market of a Notification Form for Listing of Additional Shares with
respect to the shares of Parent Common Stock issuable upon conversion of the
Company Capital Stock in the Merger and upon exercise of the options under the
Company Stock Option Plan and warrants assumed by Parent, (v) such other
consents, authorizations, filings, approvals and registrations which, if not
obtained or made, would not have a Material Adverse Effect on Parent and would
not prevent or materially alter or delay any of the transactions contemplated
by this Agreement or the Ancillary Agreements, and (vi) the filing with the SEC
of a registration statement on Form S-8, or other applicable form, covering the
shares of Parent Common Stock issuable pursuant to outstanding options under
the Company Stock Option Plan assumed by Parent.
3.4 SEC Documents; Financial Statements. Parent has made available to
Company, in the form filed with the SEC (including via EDGAR and EDGAR II), the
Parent SEC Documents. As of their respective filing dates, the Parent SEC
Documents complied in all material respects with the requirements of the
Exchange Act and the Securities Act, and none of the Parent SEC Documents
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances in which they were made, not
misleading, except to the extent corrected by a subsequently filed Parent SEC
Document. The financial statements of Parent, including the notes thereto,
included in the Parent SEC Documents (the "Parent Financial Statements") were
complete and correct in all material respects as of their respective dates,
complied as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto as of their respective dates, and have been prepared in all
material respects in accordance with GAAP applied on a basis consistent
throughout the periods indicated and consistent with each other (except as may
be indicated in the notes thereto or, in the case of unaudited statements
included in Quarterly Reports on Form 10-Q or Current Reports on Form 8-K, as
permitted by Form 10-Q or Form 8-K of the SEC). The Parent Financial Statements
fairly present the consolidated financial condition and operating results of
Parent and its subsidiaries at the dates and during the periods indicated
therein (subject, in the case of unaudited statements, to normal and recurring
year-end adjustments).
3.5 Absence of Certain Changes. Since June 30, 1999 (the "Parent Balance
Sheet Date"), Parent has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance) that has resulted in, or
could reasonably be expected to result in, a Material Adverse Effect on Parent;
(ii) any acquisition, sale or transfer of any material asset of Parent or any
of its subsidiaries; (iii) any change in accounting methods or practices
(including any change in depreciation or amortization policies or rates) by
Parent or any revaluation by Parent of any of its or its subsidiaries' assets;
(iv) any declaration, setting aside, or payment of a dividend or other
distribution with respect to the shares of Parent, or any direct or indirect
redemption, purchase or other acquisition by Parent or any of its subsidiaries
of any of its shares of capital stock or other securities, except from former
employees, directors and consultants in accordance with agreements providing
for the repurchase of shares in connection
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with any termination of service to it or its subsidiaries; (v) any amendment or
change to the certificate or articles of incorporation or bylaws or other
charter or organizational documents of Parent or any of its subsidiaries; (vi)
any acts or omissions of the types restricted by Section 4.3, or (vii) any
agreement by Parent or any of its subsidiaries to do any of the things
described in the preceding clauses (i) through (vi) (other than negotiations
with Company and its representatives regarding the transactions contemplated by
this Agreement).
3.6 Absence of Undisclosed Liabilities. Parent has no material obligations
or liabilities of any nature (matured or unmatured, fixed or contingent) other
than (i) those set forth or adequately provided for in the balance sheet
included in Parent's Quarterly Report on Form 10-Q for the period ended June
30, 1999 (the "Parent Balance Sheet"), (ii) those incurred in the ordinary
course of business and not required to be set forth in the Parent Balance Sheet
under GAAP, and (iii) those incurred in the ordinary course of business
consistent with past practice since the Parent Balance Sheet Date which have
not had and could not reasonably be expected to have a Material Adverse Effect
on Parent and (iv) those incurred in connection with the execution and
performance of this Agreement.
3.7 Litigation. There is no private or governmental action, suit,
proceeding, arbitration or, to the knowledge of Parent, claim or investigation
pending or threatened by or before any agency, court or tribunal, foreign or
domestic, against Parent or any of its subsidiaries or any of their respective
properties or officers or directors (in their capacities as such). There is no
judgment, decree or order against Parent or Merger Sub or any of their
respective subsidiaries or, to the knowledge of Parent, any of their respective
directors or officers (in their capacities as such), that could prevent,
enjoin, or materially alter or delay the Merger or any of the other
transactions contemplated by this Agreement or any Ancillary Agreement. Section
3.7 of the Parent Disclosure Schedule contains a true and complete list of all
actions, suits, proceedings, claims, arbitrations or other litigation that
Parent has pending or threatened against other parties as of the date of this
Agreement.
3.8 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon Parent or any of its subsidiaries
which has or could reasonably be expected to have the effect of prohibiting or
impairing any current or future business practice of Parent or any of its
subsidiaries, any acquisition of property by Parent or any of its subsidiaries
or the conduct of business by Parent or any of its subsidiaries as currently
conducted or as currently proposed to be conducted by Parent or any of its
subsidiaries.
3.9 Intellectual Property.
(a) Parent and its subsidiaries own, or are licensed or otherwise possesses
legally enforceable rights to use all Intellectual Property that are used or
proposed to be used in the business of Parent and its subsidiaries as currently
conducted or as proposed to be conducted by Parent and its subsidiaries.
Neither Parent nor any of its subsidiaries has (i) licensed any of its
Intellectual Property in source code form to any party or (ii) entered into any
exclusive agreements relating to its Intellectual Property with any party.
(b) Section 3.9 of the Parent Disclosure Schedule lists (i) all patents and
patent applications and all registered and unregistered trademarks, trade
names, service marks, and copyrights, domain names and maskworks which are
registered or to which registration has been applied for, included in the
Intellectual Property, including the jurisdictions in which each such
Intellectual Property right has been issued or registered or in which any
application for such issuance and registration has been filed, (ii) all
material licenses, sublicenses and other agreements as to which Parent or any
of its subsidiaries is a party and pursuant to which any person is authorized
to use any Intellectual Property except for Parent's standard form non-
exclusive licenses and sublicenses contained in purchase orders, and (iii) all
material licenses, sublicenses and other agreements as to which Parent or any
of its subsidiaries is a party and pursuant to which Parent or any of its
subsidiaries is authorized to use any third party patents, trademarks or
copyrights, including software ("Parent Third Party Intellectual Property
Rights") which are incorporated in, are, or form a part of any product of
Parent or any of its subsidiaries as of the date of this Agreement.
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(c) To Parent's knowledge, there is no unauthorized use, disclosure,
infringement or misappropriation of any Intellectual Property rights of Parent
or any of its subsidiaries, or any Intellectual Property right of any third
party to the extent licensed by or through Parent or any of its subsidiaries,
by any third party, including any employee or former employee of Parent or any
of its subsidiaries. Neither Parent nor any of its subsidiaries has entered
into any agreement to indemnify any other person against any charge of
infringement of any Intellectual Property, other than indemnification
provisions contained in purchase orders or license agreements arising in the
ordinary course of business.
(d) Neither Parent nor any of its subsidiaries is, nor will any of them be
as a result of the execution and delivery of this Agreement or the Ancillary
Agreements or the performance of any of their obligations under this Agreement
or the Ancillary Agreements, in breach of any license, sublicense or other
agreement relating to any Intellectual Property or Parent Third Party
Intellectual Property Rights.
(e) All patents, registered trademarks, service marks and copyrights held by
Parent or any of its subsidiaries are valid and subsisting. Neither Parent nor
any of its subsidiaries (i) has been sued in any suit, action or proceeding
which involves a claim of infringement of any patents, trademarks, service
marks, copyrights or violation of any trade secret or other proprietary right
of any third party, (ii) has any knowledge that the manufacturing, marketing,
licensing or sale of its products infringes any patent, trademark, service
mark, copyright, trade secret or other proprietary right of any third party or
(iii) has brought any action, suit or proceeding for infringement of
Intellectual Property or breach of any license or agreement involving
Intellectual Property against any third party.
(f) Each of Parent and its subsidiaries has secured written assignments from
all consultants and employees who contributed to the creation or development of
Intellectual Property of the rights to such contributions that Parent and its
subsidiaries do not already own by operation of law, and Parent has no reason
to believe that any such assignment is not valid or binding.
(g) Each of Parent and its subsidiaries has taken reasonable steps
consistent with prevailing industry practice to protect and preserve the
confidentiality of all Intellectual Property not otherwise protected by
patents, patent applications or copyright ("Confidential Information"). All
use, disclosure or appropriation of Confidential Information owned by Parent or
any of its subsidiaries by or to a third party has, to the knowledge of Parent,
been pursuant to the terms of a written agreement between Parent and such third
party. All use, disclosure or appropriation of Confidential Information not
owned by Parent or any of its subsidiaries has been pursuant to the terms of a
written agreement between Parent and the owner of such Confidential
Information, or is otherwise lawful.
3.10 Certain Agreements Affected by the Merger. Subject to Section 1.6,
neither the execution and delivery of this Agreement or any Ancillary
Agreements nor the performance of any of Parent's obligations hereunder or
thereunder or the consummation of the transaction contemplated hereby or
thereby will (i) result in any payment (including, without limitation,
severance, unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any director or employee of Parent, (ii) materially increase
any benefits otherwise payable by Parent or (iii) result in the acceleration of
the time of payment or vesting of any such benefits.
3.11 Principal Contracts. Section 3.11 of the Parent Disclosure Schedule
sets forth as of the date of this Agreement principal contracts of Parent (each
a "Principal Contract") relating to: (i) any trust indenture, mortgage,
promissory note, loan agreement or other contract for the borrowing of money,
any currency exchange, commodities or other hedging arrangement or any leasing
transaction of the type required to be capitalized in accordance with GAAP;
(ii) any contract limiting the freedom of Parent or any of its subsidiaries to
engage in any line of business or to compete with any other person or entity,
or any confidentiality, secrecy or non-disclosure contract; (iii) any contract
with any person with whom Parent or any of its subsidiaries does not deal at
arm's length within the meaning of the Code. Each of Parent and its
subsidiaries has performed all of the material obligations required to be
performed by it and is entitled to all accrued benefits under, and, to
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Parent's knowledge, is not alleged to be in default in any material respect of
any Principal Contract. Each of the Principal Contracts is in full force and
effect, and there exists no default or event of default or event, occurrence,
condition or act, with respect to Parent or any of its subsidiaries or to
Parent's knowledge with respect to the other contracting party, which, with the
giving of notice, the lapse of the time or the happening of any other event or
conditions, would become a default or event of default under any Principal
Contract. Parent has made available true and complete copies of all Principal
Contracts to Company.
3.12 Vote Required; Voting Agreements. The affirmative vote of the holders
of more than fifty percent (50%) of the shares of Parent Common Stock
outstanding on the record date set for the Parent Stockholders Meeting is the
only vote of the holders of any of Parent's capital stock necessary to obtain
the Parent Stockholder Approval. Holders of more than forty five percent (45%)
in the aggregate of all of the issued and outstanding shares of Parent Common
Stock as of the date of this Agreement have agreed in writing to vote for the
Parent Stockholder Approval pursuant to the Voting Agreements.
3.13 Board Approval. The Board of Directors of Parent has (i) approved this
Agreement and the issuance of the Merger Shares pursuant to this Agreement,
(ii) determined that the Merger is advisable and on terms fair to, and is in
the best interest of, the stockholders of Parent and (iii) recommended that the
stockholders of Parent approve the issuance of the Merger Shares pursuant to
this Agreement.
3.14 Information Statement and Proxy Statement. The information supplied by
Parent for inclusion in the Information Statement, or in any registration
statement on Form S-4 or S-3 pursuant to Section 1.12 of this Agreement, shall
not, on the date the Information Statement (or prospectus in the event of a
registration statement on Form S-4) is first sent to Company's shareholders or
at the time of the Company Shareholders Meeting, contain any statement which at
such time is false or misleading with respect to any material fact or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which they are made, not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to matters to be voted on
at the Company Shareholders Meeting which has become false or misleading.
Notwithstanding the foregoing, Parent makes no representation, warranty or
covenant with respect to any information supplied by or on behalf of Company
which is contained in the Information Statement. The information supplied by
Parent and Merger Sub for inclusion in the Permit Application shall not, at the
time the fairness hearing is held pursuant to Section 25142 of the California
Corporations Code and the time the qualification of such securities is
effective under Section 25122 of the California Corporations Code, contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.15 Tax Treatment. Neither Parent nor any of its directors or officers has
taken any action that would prevent the Merger from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code. Neither
Parent nor, to Parent's knowledge, any of its affiliates or agents is aware of
any agreement, plan or other circumstance that would prevent the Merger from
qualifying under Section 368(a) of the Code.
3.16 Broker's and Finders' Fees. Parent and Merger Sub have not incurred,
nor will they incur, directly or indirectly, any liability for brokerage or
finders' fees or agents' commissions or investment bankers' fees or any similar
charges in connection with this Agreement or any transaction contemplated
hereby, other than as set forth in Section 3.16 of the Parent Disclosure
Schedule. Parent has previously furnished to Company a complete and correct
copy of all agreements between Parent and the financial advisors set forth in
Section 3.16 of the Parent Disclosure Schedule, pursuant to which such firms
would be entitled to any payment relating to the Merger.
3.17 Complete Copies of Materials; Representations Complete. Parent has
delivered or made available to Company true and complete copies of each
material document that has been requested in writing by, Company or its counsel
in connection with their legal, financial and accounting review of Parent and
its subsidiaries. None of the representations or warranties made by Parent
herein or in any Schedule hereto,
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including the Parent Disclosure Schedule, or certificate furnished by Parent
pursuant to this Agreement contains or will contain at the Effective Time any
untrue statement of a material fact, or omits or will omit (when read in
conjunction with the Parent SEC Documents) at the Effective Time to state any
material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 General Conduct of Business. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Company and Parent (except to the extent expressly
contemplated by this Agreement or as consented to in writing by the other party
or as approved by a majority of the Merger Integration Committee established
pursuant to Section 5.7(d) and except further, in the case of Parent, as
required by the fiduciary duties of the Board of Directors of Parent) shall,
and shall cause each of its subsidiaries to, carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted or as otherwise contemplated by the Company Budget as
defined in Section 4.2(i) below (in the case of Company) or Parent's FY2000
Plan (in the case of Parent). Company further agrees to, and to cause its
subsidiaries to, pay debts and Taxes when due (subject to (i) good faith
disputes over such debts or Taxes and (ii) Parent's consent to the filing of
material Tax Returns if applicable), pay or perform other obligations when due,
and use reasonable efforts consistent with past practice and policies to
preserve intact its present business organizations, keep available the services
of its present officers and key employees and preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it so that its goodwill and ongoing businesses shall be
unimpaired at the Effective Time. Company and Parent shall promptly notify each
other of any event or occurrence not in the ordinary course of its or its
subsidiaries' business, and of any event which could have a Material Adverse
Effect on the other.
4.2 Conduct of Business of Company. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as expressly contemplated by this Agreement or
any Ancillary Agreement, Company shall (and shall cause its subsidiaries to)
not do, cause or permit any of the following without the prior written consent
of Parent or the prior approval of a majority of the Merger Integration
Committee established pursuant to Section 5.7(d) (including the approval of at
least one member thereof designated by Parent):
(a) Charter Documents. Amend, modify, alter or rescind its certificate or
articles of incorporation or bylaws or other charter or organizational
documents;
(b) Dividends; Changes in Capital Stock. Declare or pay any dividends on or
make any other distributions (whether in cash, stock or property) in respect of
any of its capital stock, or split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock, or repurchase or
otherwise acquire, directly or indirectly, any shares of its capital stock
except from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service to it or its subsidiaries;
(c) Stock Option Plans. Grant any options or other rights to acquire
securities of Company (except grants of options to acquire Company Common Stock
in the ordinary course of business consistent with past practice, exercisable
for a total of not more than one million three hundred thirty three thousand
(1,333,000) shares of Company Common Stock), or accelerate, amend or change the
period of exercisability or vesting of options or other rights granted under
its stock plans or authorize cash payments in exchange for any options or other
rights granted under any of such plans;
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(d) Issuance of Securities. Issue, deliver or sell or authorize or propose
the issuance, delivery or sale of, or purchase or propose the purchase of, any
shares of its capital stock or securities convertible into, or subscriptions,
rights, warrants or options to acquire, or other agreements or commitments of
any character obligating it to issue any such shares or other convertible
securities, other than (i) the issuance of shares of Company Common Stock
pursuant to the exercise of Company Options outstanding under the Company Stock
Option Plan (or upon the exercise of warrants to acquire Company Common Stock
from Company outstanding) as of the date of this Agreement and (ii) grants of
options permitted by Section 4.2(c);
(e) Material Contracts. Enter into any material contract or commitment, or
violate, amend or otherwise modify or waive any of the terms of any of its
material contracts, other than in the ordinary course of business consistent
with past practice;
(f) Intellectual Property. Transfer to any person or entity any rights to
its Intellectual Property other than in the ordinary course of business
consistent with past practice;
(g) Exclusive Rights. Enter into or amend any agreements pursuant to which
any other party is granted exclusive marketing or other exclusive rights of any
type or scope with respect to any of its products or technology;
(h) Dispositions. Sell, lease, license or otherwise dispose of or encumber
any of its properties or assets which are material, individually or in the
aggregate, to its business, taken as a whole except for sales, leases or
licenses of products in the ordinary course of business;
(i) Indebtedness. Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities or guarantee any debt
securities of others, except in accordance with Company's budget for October 1,
1999 through June 30, 2000 heretofore furnished to Parent (the "Company
Budget");
(j) Leases. Enter into any operating lease, except in accordance with the
Company Budget;
(k) Payment of Obligations. Pay, discharge or satisfy any claim, liability
or obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise) arising other than in the ordinary course of business other than the
payment, discharge or satisfaction of liabilities reflected or reserved against
in the Company Financial Statements or in accordance with the Company Budget;
(l) Capital Expenditures. Make any capital expenditures, capital additions
or capital improvements except in accordance with the Company Budget;
(m) Insurance. Materially reduce the amount of any material insurance
coverage provided by existing insurance policies;
(n) Termination or Waiver. Terminate or waive any right of substantial
value, other than in the ordinary course of business;
(o) Employee Benefit Plans; New Hires; Pay Increases. Adopt or amend any
employee benefit or stock purchase or option plan, elect or appoint any new
director, or hire any new officer level employee, pay any special bonus or
special remuneration to any employee or director or, other than in the ordinary
course of business consistent with past practice, increase the salaries or wage
rates of its employees;
(p) Severance Arrangements. Grant any severance or termination pay (i) to
any director or officer or (ii) to any other employee except payments made
pursuant to written agreements outstanding on the date hereof, identified
specifically on the Company Disclosure Schedule and furnished to Parent and its
counsel prior to the date hereof;
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(q) Lawsuits. Commence a lawsuit other than (i) for the collection of bills,
(ii) in such cases where it in good faith reasonably determines that failure to
commence suit would result in the material impairment of a valuable aspect of
its business, provided that it consults with Parent prior to the filing of such
a suit, or (iii) for a breach of this Agreement;
(r) Acquisitions. Acquire or agree to acquire, by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets which are material, individually or in the aggregate, to its
business, taken as a whole;
(s) Taxes. Make or change any material election in respect of Taxes, adopt
or change any accounting method in respect of Taxes, file any material Tax
Return or any amendment to a material Tax Return, enter into any closing
agreement, settle any material claim or assessment in respect of Taxes, or
consent to any extension or waiver of the limitation period applicable to any
claim or assessment in respect of Taxes;
(t) Notices. Fail to give all notices and other information required to be
given by Company or any of its subsidiaries to the employees of Company or any
of its subsidiaries, any collective bargaining unit representing any group of
employees of Company, and any applicable government authority under the WARN
Act, the National Labor Relations Act, the Internal Revenue Code, the
Consolidated Omnibus Budget Reconciliation Act, and other applicable law in
connection with the transactions provided for in this Agreement;
(u) Revaluation. Revalue any of its assets, including without limitation
writing down the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business;
(v) Domain Names. Change domain names or fail to renew existing domain name
registrations on a timely basis, or
(w) Other. Take or agree in writing or otherwise to take, any of the actions
described in Sections 4.2(a) through (v) above or (i) any action which would
make any of its representations or warranties contained in this Agreement
materially untrue or materially incorrect, or prevent it from performing or
cause it not to perform its covenants hereunder in any material respect, (ii)
any action that will result in any of the conditions to the Merger as set forth
in Article VI not being satisfied or in violation of any provision of this
Agreement, or any Ancillary Agreement, except, in every case, as may be
required by applicable law, or (iii) any other action that would materially
adversely delay or materially adversely impair the ability of Company to
consummate the Merger or the other transactions contemplated by this Agreement.
4.3 Conduct of Parent. During the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or the
Effective Time, except as expressly contemplated by this Agreement or any
Ancillary Agreement, Parent shall (and shall cause its subsidiaries to) not do,
cause, cause or permit any of the following without the prior written consent
of Company or approval of a majority of the Merger Integration Committee
established pursuant to Section 5.7(d) (including the approval of at least one
member thereof designated by Company):
(a) Certain Actions. Take or agree in writing or otherwise to take, any of
the actions described in Sections 4.3(b) through (j) below, or (i) any action
which would make any of its representations or warranties contained in this
Agreement materially untrue or materially incorrect, or prevent it from
performing or cause it not to perform its covenants hereunder in any material
respect, (ii) any action that will result in any of the conditions to the
Merger as set forth in Article VI not being satisfied or in violation of any
provision of this Agreement or any Ancillary Agreement, except, in every case,
as may be required by applicable law, or (iii) any other action that would
materially adversely delay or materially adversely impair the ability of Parent
to consummate the Merger or the other transactions contemplated by this
Agreement.
(b) Charter Documents. Amend, modify, alter or rescind its certificate or
articles of incorporation or bylaws or other charter or organizational
documents;
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(c) Dividends; Changes in Capital Stock. Declare or pay any dividends on or
make any other distributions (whether in cash, stock or property) in respect of
any of its capital stock, or split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock, or repurchase or
otherwise acquire, directly or indirectly, any shares of its capital stock
except from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service to it or its subsidiaries;
(d) Intellectual Property. Transfer to any person or entity any rights to
its Intellectual Property other than in the ordinary course of business
consistent with past practice;
(e) Dispositions. Sell, lease, license or otherwise dispose of or encumber
any of its properties or assets which are material, individually or in the
aggregate, to its business, taken as a whole except for sales, leases or
licenses of products in the ordinary course of business;
(f) Taxes. Make or change any material election in respect of Taxes, adopt
or change any accounting method in respect of Taxes, file any material Tax
Return or any amendment to a material Tax Return, enter into any closing
agreement, settle any material claim or assessment in respect of Taxes;
(g) Domain Names. Change domain names or fail to renew existing domain name
registrations on a timely basis;
(h) Stock Option Plans. Grant any options or other rights to acquire
securities of Parent (except grants of options to acquire Parent Common Stock
in the ordinary course of business consistent with past practice, exercisable
for a total of not more than two million (2,000,000) shares of Parent Common
Stock), or accelerate, amend or change the period of exercisability or vesting
of options or other rights granted under its stock plans or authorize cash
payments in exchange for any options or other rights granted under any of such
plans;
(i) Issuance of Securities. Issue, deliver or sell or authorize or propose
the issuance, delivery or sale of, or purchase or propose the purchase of, any
shares of its capital stock or securities convertible into, or subscriptions,
rights, warrants or options to acquire, or other agreements or commitments of
any character obligating it to issue any such shares or other convertible
securities, other than the issuance of shares of Parent Common Stock (i)
pursuant to the exercise of Parent Options outstanding under the Parent Stock
Option Plan (or upon the exercise of warrants to acquire Parent Common Stock
from Parent outstanding) as of the date of this Agreement or (ii) pursuant to a
transaction permitted by Section 4.3(j) below;
(j) Acquisitions. Acquire or agree to acquire, by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof.
4.4 No Solicitation by Company.
(a) Company agrees that neither it nor any of its subsidiaries nor any of
their respective officers, directors, employees, agents and representatives,
(including without limitation any investment banker, attorney or accountant
retained by it or any of its subsidiaries) (collectively, "Representatives"),
will, directly or indirectly, initiate, solicit, encourage or otherwise
facilitate any inquiries or the making of any Company Takeover Proposal (as
defined below). Company further agrees that neither it nor any of its
subsidiaries nor any of their Representatives will, directly or indirectly,
engage in any negotiations concerning, or provide any confidential or non-
public information or data to, afford access to the properties, books or
records of Company or any of its subsidiaries to, or have any discussions with,
any person relating to a Company Takeover Proposal, enter into any agreement or
instrument relating to a Company Takeover Proposal or otherwise facilitate any
effort or attempt to make or implement a Company Takeover Proposal. Company
agrees that it will immediately cease and cause to be terminated all existing
activities, discussions or negotiations with any parties heretofore with
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respect to any of the foregoing (if any). Company agrees that it will take the
necessary steps to promptly inform each of its Representatives of the
obligations undertaken in this Section 4.4 and in the Confidentiality Agreement
(as defined in Section 5.4). Company agrees that it will notify Parent promptly
if any inquiries, proposals or offers relating to a Company Takeover Proposal
are received by, any such information is requested from, or any such
discussions or negotiations are sought to be initiated or continued with,
Company or any of its representatives indicating, in connection with such
notice, the name of the person making the inquiry, proposal or offer and the
material terms and conditions of any proposals or offers and thereafter shall
provide Parent with a true and complete copy of such Company Takeover Proposal
communication (if it is in writing) and otherwise keep Parent informed, on a
current basis, on the status and terms of any such proposals or offers and the
status of any such negotiations or discussions. Company also agrees that it
will promptly request each person that has heretofore executed a
confidentiality or non-disclosure agreement in connection with its
consideration of acquiring it or any of its subsidiaries to return to Company
all confidential information heretofore furnished to such person by or on
behalf of it or any of its subsidiaries. At the Closing, Company shall assign
to Parent the non-exclusive right to enforce the rights of Company and its
subsidiaries under any and all confidentiality or non-disclosure agreements
entered into between Company and prospective acquirors of Company or any of its
subsidiaries.
(b) The parties hereto agree that irreparable damage would occur in the
event that the provisions of this Section 4.4 were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
by the parties hereto that Parent shall be entitled to seek an injunction or
injunctions to prevent breaches of this Section 4.4 and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which the
parties may be entitled at law or in equity.
(c) For purposes of this Agreement, "Company Takeover Proposal" means any
offer or proposal for, or any indication of interest in, a merger or other
business combination involving Company or the acquisition of ten percent (10%)
or more of the outstanding shares of capital stock of Company, or a material
portion of the assets of, Company (other than the transactions contemplated by
this Agreement), or any other transaction inconsistent with consummation of the
transactions contemplated hereby.
4.5 No Solicitation by Parent.
(a) Parent agrees that neither it nor any of its subsidiaries nor any of
their respective Representatives, will, directly or indirectly, initiate,
solicit, encourage or otherwise facilitate any inquiries or the making of any
Parent Takeover Proposal (as hereinafter defined). Parent further agrees that
neither it nor any of its subsidiaries nor any of their Representatives will,
directly or indirectly, engage in any negotiations concerning, or provide any
confidential or non-public information or data to, afford access to the
properties, books or records of Parent or any of its subsidiaries to, or have
any discussions with, any person relating to a Parent Takeover Proposal, enter
into any agreement or instrument relating to a Parent Takeover Proposal or
otherwise facilitate any effort or attempt to make or implement a Parent
Takeover Proposal (other than a confidentiality agreement covering the
information contemplated by the following proviso); provided, however, that
nothing contained in this Section 4.5 shall prohibit the Board of Directors of
Parent (i) from complying with Rule 14d-9 or 14e-2(a) promulgated under the
Exchange Act with regard to a tender or exchange offer not made in violation of
this Section 4.5 or (ii) from providing information in connection with, and
negotiating concerning, an unsolicited, bona fide Parent Takeover Proposal if
Parent's Board of Directors (x) shall have concluded in good faith, after
considering applicable state law, on the basis of written advice of independent
outside counsel, that failure to take such action would not be a proper
exercise of the fiduciary duties of Parent's Board of Directors to Parent's
stockholders under applicable law, and (y) shall have in the exercise of such
fiduciary duties to Parent's stockholders determined (taking into account the
advice of Parent's independent financial advisor) that such Parent Takeover
Proposal provides materially greater value to Parent or its stockholders than
the Merger (any such Parent Takeover Proposal being referred to herein as a
"Parent Superior Proposal"). Parent agrees that it will immediately cease and
cause to be terminated all existing activities, discussions or negotiations
with any parties heretofore with respect to any of the foregoing (if any).
Parent agrees that it will take the necessary
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steps to promptly inform each of its Representatives of the obligations
undertaken in this Section 4.5 and in the Confidentiality Agreement (as defined
in Section 5.4). Parent agrees that it will notify Company promptly if any
inquiries, proposals or offers with respect to a Parent Takeover Proposal are
received by, any such information is requested from, or any such discussions or
negotiations are sought to be initiated or continued with, Parent or any of its
Representatives indicating, in connection with such notice, the name of such
person and the material terms and conditions of any proposals or offers and
thereafter shall provide Company with a true and complete copy of such Parent
Takeover Proposal communication (if it is in writing) and otherwise keep
Company informed, on a current basis, on the status and terms of any such
proposals or offers and the status of any such negotiations or discussions.
Parent also agrees that it will promptly request each person that has
heretofore executed a confidentiality or non-disclosure agreement in connection
with its consideration of acquiring it or any of its subsidiaries to return to
Parent all confidential information heretofore furnished to such person by or
on behalf of it or any of its subsidiaries.
(b) The parties hereto agree that irreparable damage would occur in the
event that the provisions of this Section 4.5 were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
by the parties hereto that Company shall be entitled to seek an injunction or
injunctions to prevent breaches of this Section 4.5 and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which the
parties may be entitled at law or in equity.
(c) For purposes of this Agreement, "Parent Takeover Proposal" means any
offer or proposal for, or any indication of interest in, a merger or other
business combination involving Parent or the acquisition of a majority of the
outstanding shares of capital stock of Parent, or all or substantially all of
the assets of Parent, or any other transaction inconsistent with consummation
of the transactions contemplated hereby, that is conditioned on the denial by
Parent stockholders of the Parent Stockholder Approval.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Information Statement and Proxy Statement.
(a) As soon as practicable after the execution of this Agreement, Company
shall prepare, with the cooperation and reasonable assistance of Parent, and
furnish to its shareholders an Information Statement for the shareholders of
Company to approve and adopt this Agreement, the Merger and the other
transactions contemplated by this Agreement. The Information Statement shall
constitute a disclosure document for the offer and issuance of the shares of
Parent Common Stock to be received by the holders of Company Capital Stock in
the Merger and a proxy statement for solicitation of shareholder consent to or
approval of this Agreement, the Merger and the other transactions contemplated
hereby, and may be combined with the Proxy Statement as a joint
proxy/information statement. Parent and Company shall each use its reasonable
best efforts to cause the Information Statement to comply with applicable
federal and state securities laws requirements. Each of Parent and Company
agrees to provide promptly to the other such information concerning it and its
respective affiliates, directors, officers and securityholders as, in the
reasonable judgment of the other party or its counsel, may be required or
appropriate for inclusion in the Information Statement, or in any amendments or
supplements thereto, and to cause its counsel and auditors to cooperate with
the other's counsel and auditors in the preparation of the Information
Statement. Company will promptly advise Parent, and Parent will promptly advise
Company, in writing if at any time prior to the Effective Time either Company
or Parent shall obtain knowledge of any facts that might make it necessary or
appropriate to amend or supplement the Information Statement in order to make
the statements contained or incorporated by reference therein not misleading or
to comply with applicable law. The Information Statement shall contain the
recommendation of the Board of Directors of Company that Company shareholders
approve and adopt this Agreement, the Merger and the other transactions
contemplated by this Agreement, and the conclusion of the Board of Directors
that the terms and
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conditions of the Merger are fair and reasonable and in the best interests of
Company and its shareholders. Anything to the contrary contained herein
notwithstanding, Company shall not include in the Information Statement any
information with respect to Parent or its affiliates or associates, the form
and content of which information shall not have been approved by Parent prior
to such inclusion.
(b) As soon as practicable after the execution of this Agreement, Parent
shall prepare, with the cooperation of Company, and file with the SEC
preliminary proxy materials relating to the Parent Stockholders Meeting and the
vote of the stockholders of Parent on the issuance of the Merger Shares
pursuant to this Agreement. Parent and Company shall each use its reasonable
best efforts to cause the Proxy Statement to comply in all material respects
with the Exchange Act and all other applicable federal and state securities law
requirements. Each of Parent and Company shall, and shall cause its respective
representatives to, fully cooperate with the other such party and its
representatives in the preparation of the Proxy Statement, and shall promptly
provide to the other such information concerning it and its respective
affiliates, directors, officers and securityholders as the other may reasonably
request in connection with the preparation of the Proxy Statement. If at any
time prior to the Effective Time Company or Parent shall become aware of any
fact, event or circumstance that is required to be set forth in an amendment or
supplement to the Proxy Statement, such party shall promptly notify the other
of such fact, event or circumstance and the other parties shall cooperate with
each other in filing with the SEC or any other governmental official and
mailing to Parent stockholders such amendment or supplement. The Proxy
Statement shall contain the recommendation of the Board of Directors of Parent
in favor of the Parent Stockholder Approval; provided, that the Board of
Directors of Parent shall have the right to omit, withdraw or modify such
recommendation in the event that a Parent Superior Proposal has been made and
Parent's Board of Directors has concluded in good faith, after considering
applicable state law, on the basis of written advice of outside counsel, that
inclusion of such recommendation would not be a proper exercise of the Parent's
board of directors' fiduciary duties to Parent's stockholders under applicable
law. Notwithstanding any such omission, withdrawal or modification, Parent
shall convene and hold (and shall take all action otherwise required by this
Agreement to convene and hold) the Parent Stockholders Meeting. Without
limiting the generality of the foregoing, Parent shall use its reasonable best
efforts to respond promptly to any comments made by the SEC with respect to the
Proxy Statement (including each preliminary version thereof) and to clear the
Proxy Statement as promptly as practicable hereafter. As promptly as
practicable after SEC clearance of the Proxy Statement, Parent shall file with
the SEC the definitive Proxy Statement and mail or cause to be mailed the Proxy
Statement to its stockholders.
(c) As soon as practicable after the execution of this Agreement, Parent
shall prepare, with the cooperation of Company, the Permit Application. Parent
and Company shall each use commercially reasonable efforts to cause the Permit
Application to comply with the requirements of applicable federal and state
laws. Each of Parent and Company agrees to provide promptly to the other such
information concerning its business and financial statements and affairs as, in
the reasonable judgment of the providing party or its counsel, may be required
or appropriate for inclusion in the Permit Application, or in any amendments or
supplements thereto, and to cause its counsel and auditors to cooperate with
the other's counsel and auditors in the preparation of the Permit Application.
Company will promptly advise Parent, and Parent will promptly advise Company,
in writing if at any time prior to the Effective Time either Company or Parent
shall obtain knowledge of any facts that might make it necessary or appropriate
to amend or supplement the Permit Application in order to make the statements
contained or incorporated by reference therein not misleading or to comply with
applicable law.
5.2 Meetings of Securityholders.
(a) Company shall promptly after the date hereof take all action necessary
in accordance with California Corporations Code and its Articles of
Incorporation and Bylaws to convene the Company Shareholders Meeting or to
secure the written consent of its shareholders within sixty (60) days of the
date of this Agreement. Company shall consult with Parent regarding the date of
the Company Shareholders Meeting and shall not postpone or adjourn (other than
for the absence of a quorum) the Company Shareholders Meeting without the
consent of Parent. Company shall use its reasonable best efforts to solicit
from shareholders of Company proxies or consent in favor of approval and
adoption of this Agreement, the Merger and the other transactions
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contemplated hereby and shall take all other action necessary or advisable to
secure the vote or consent of securityholders required to effect the Merger and
the other transactions contemplated hereby.
(b) Parent shall promptly after the date hereof take all action necessary in
accordance with Delaware Law and its Certificate of Incorporation and Bylaws to
convene the Parent Stockholders Meeting within sixty (60) days of mailing of
the Proxy Statement to stockholders of Parent and in no event later than May
31, 2000. Parent shall consult with Company regarding the date of the Parent
Stockholders Meeting and shall not postpone or adjourn (other than for the
absence of a quorum) the Parent Stockholders Meeting without the consent of
Company. Parent shall use its reasonable best efforts to solicit from
stockholders of Parent proxies in favor of the Parent Stockholder Approval and
shall take all other action necessary or advisable to secure the vote or
consent of Parent securityholders required to effect the Merger.
5.3 Access to Information.
(a) Each of Parent and Company shall afford the other and its accountants,
counsel and other representatives, reasonable access during normal business
hours during the period prior to the Effective Time to (i) all of their
respective properties, books, contracts, commitments and records, and (ii) all
other information concerning their respective business, properties and
personnel as the other may reasonably request. Each of Parent and Company
agrees to provide to the other and its accountants, counsel and other
representatives copies of internal financial statements, budgets, operating
plans and projections promptly upon request.
(b) Subject to compliance with applicable law, from the date hereof until
the Effective Time, each of Parent and Company shall confer on a regular and
frequent basis with one or more representatives of the other party to report
material operational matters and the general status of ongoing operations.
(c) No information or knowledge obtained in any investigation pursuant to
this Section 5.3 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties
to consummate the Merger.
5.4 Confidentiality. The parties acknowledge that Parent and Company have
previously executed a mutual Confidentiality Agreement dated September 21, 1999
(the "Confidentiality Agreement"), which Confidentiality Agreement shall
continue in full force and effect in accordance with its terms.
5.5 Public Disclosure. Unless otherwise permitted by this Agreement, Parent
and Company shall consult with each other before issuing any press release or
otherwise making any public statement or making any other public (or non-
confidential) disclosure (whether or not in response to an inquiry) regarding
the terms of this Agreement and the transactions contemplated hereby, and
neither shall issue any such press release or make any such statement or
disclosure without the prior approval of the other (which approval shall not be
unreasonably withheld), except as may be required by law or by obligations
pursuant to any listing agreement with any national securities exchange or with
the NASD after consultation with Company.
5.6 Consents; Cooperation. Each of Parent, Merger Sub and Company will, and
will cause their respective subsidiaries to, take all reasonable actions
necessary to comply promptly with all legal requirements which may be imposed
on them with respect to the consummation of the transactions contemplated by
this Agreement and will promptly cooperate with and furnish information to any
party hereto necessary in connection with any such requirements imposed upon
such other party in connection with the consummation of the transactions
contemplated by this Agreement or any Ancillary Agreement and will take all
reasonable actions necessary to obtain (and will cooperate with the other
parties hereto in obtaining) any consent, approval, order or authorization of,
or any registration, declaration or filing with, any Governmental Entity or
other person, required to be obtained or made in connection with the taking of
any action contemplated by this Agreement or any Ancillary Agreement, including
without limitation under the HSR Act. Parent and Company shall have the right
to review in advance, and to the extent practicable each will consult with the
other as to, in each case subject to applicable laws relating to the exchange
of information, all of the information which will appear in any filing made
with, or written materials submitted to, any third party or Governmental Entity
in
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connection with the transactions contemplated by this Agreement. In the event
an injunction or other order shall have been issued which prevents, alters or
delays the Merger or any other transaction contemplated hereby, each party
agrees to use its reasonable best efforts to have such injunction or other
order lifted. Parent and Company and their respective subsidiaries shall
cooperate and use their respective reasonable best efforts to prepare all
documentation, to effect all filings and to obtain all permits, consents,
approvals and authorizations of all third parties and Governmental Entities
necessary to consummate the transactions contemplated by this Agreement or any
Ancillary Agreement, and to consult with the other party with respect to
obtaining such permits, consents, approvals and authorizations. Each of Parent
and Company agrees, upon request, to furnish the other party with all
information concerning itself, its subsidiaries, directors, officers and
shareholders and such other matters as may be reasonably necessary or advisable
in connection with any filing, notice or application made by or on behalf of
such other party or any of its subsidiaries to any third party or Governmental
Entity.
5.7 Further Assurances. Each of the parties to this Agreement shall use its
reasonable best efforts to effect the transactions contemplated hereby and to
fulfill and cause to be fulfilled the conditions to closing under this
Agreement. Without limiting the generality of the foregoing:
(a) Each party hereto, at the reasonable request of another party hereto,
shall execute and deliver such other instruments and do and perform such other
acts and things as may be necessary or desirable for effecting completely the
consummation of this Agreement and the transactions contemplated hereby.
(b) FIRPTA Certificate. Company shall, prior to the Closing Date, provide
Parent with a properly executed FIRPTA Certificate, in form and substance
reasonably acceptable to Parent, which states that shares of capital stock of
Company do not constitute "United States real property interests" under Section
897(c) of the Code, for purposes of satisfying Parent's obligations under
Treasury Regulation Section 1.1445-2(c)(3), and simultaneously with delivery of
such FIRPTA Certificate, Company shall provide to Parent, as agent for Company,
a form of notice to the Internal Revenue Service in accordance with the
requirements of Treasury Regulation Section 1.897-2(h)(2) and in form and
substance reasonably acceptable to Parent along with written authorization for
Parent to deliver such notice form to the Internal Revenue Service on behalf of
Company upon the Closing of the Merger.
(c) Submission of Expenses. Not less than two (2) business days prior to the
Closing Date, Company shall deliver to Parent statements of all fees and
expenses paid or payable by Company in connection with the Merger (including,
without limitation, the fees and expenses of any financial advisors, legal
counsel, accountants or other service providers engaged by Company).
(d) Merger Integration Committee. Promptly after the date of this Agreement,
Parent and Company shall establish a committee (the "Merger Integration
Committee") to plan for the integration of the parties following the Effective
Time and to assist in carrying out certain provisions of this Agreement, as
provided herein. The Merger Integration Committee shall consist of seven
members, four of whom shall be members of the Board of Directors of Parent and
shall be designated by Parent and three of whom shall be members of the Board
of Directors of Company and shall be designated by Company. All determinations
by the Merger Integration Committee shall be made on the basis of what is in
the best interests of Parent and Company as a combined company following the
Effective Time.
(e) Resignation of Directors. The directors of Company in office immediately
prior to the Effective Time shall have resigned as directors of Company
effective as of the Effective Time.
(f) Termination of Certain Company Securityholder Agreements. Company shall,
effective from and after the Effective Time, cause the following agreements to
be terminated and of no further force or effect: (i) the Amended and Restated
Investors Rights Agreement dated as of January 29, 1999, by and among Company
and the investors listed on the signature page thereto, and (ii) the Amended
and Restated Co-Sale Agreement dated as of January 29, 1999 and the individuals
and entities listed on Exhibit A and Exhibit B thereto.
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5.8 Company Shareholder Agreements.
(a) Company shall provide Parent such information and documents as Parent
shall reasonably request for purposes of reviewing the list of Affiliates
contained in Section 2.34 of the Company Disclosure Schedule and promptly
advise Parent of any person who becomes an Affiliate of Company hereafter.
(b) Company shall use its reasonable best efforts to deliver or cause to be
delivered to Parent, concurrently with the execution of this Agreement (and in
any event prior to the time that the Information Statement is mailed to
shareholders of Company), from each Affiliate of Company, an executed
Shareholder Agreement substantially in the form attached hereto as Exhibit C
and an Irrevocable Proxy and Market Standoff Agreements substantially in the
forms attached as an annexes thereto.
(c) Company shall use its reasonable best efforts to deliver or cause to be
delivered to Parent, concurrently with the execution of this Agreement (and in
each case prior to the Effective Time), from each securityholder of Company
(whether or not an Affiliate thereof), an executed Shareholder Representation
Agreement substantially in the form attached hereto as Exhibit D (the
"Shareholder Representation Agreement") and a duly completed Investor
Suitability Questionnaire in the form attached as an annex thereto (an
"Investor Suitability Questionnaire").
(d) Company shall not permit the transfer of any shares of Company Capital
Stock beneficially owned or held of record by any Company shareholder who has
executed a Shareholder Agreement pursuant to Section 5.8(b) above, issue a new
certificate representing any such shares or record the vote with respect to any
such shares unless and until such Company shareholder shall have complied with
the terms of such Shareholder Agreement.
5.9 Parent Voting Agreements. Section 5.9 of the Parent Disclosure Schedule
sets forth those persons who may be deemed to be Affiliates of Parent. Parent
shall provide Company with such information and documents as Company shall
reasonably request for purposes of reviewing such list. Subject to applicable
law, Parent shall use its reasonable best efforts to deliver or cause to be
delivered to Company a duly executed Voting Agreement in the form of Exhibit F
attached hereto from each of the persons identified in Schedule 5.9 as soon as
practicable after the execution hereof (to the extent not executed heretofore).
Parent shall not permit the transfer of any shares of Parent Common Stock
beneficially owned or held of record by any Parent stockholder who has executed
a Voting Agreement pursuant to this Section 5.9, issue a new certificate
representing any such shares or record the vote with respect to any such shares
unless and until such Parent stockholder shall have complied with the terms of
such Voting Agreement.
5.10 Blue Sky Laws. Parent shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Merger Shares in connection with the Merger.
Company shall use its reasonable best efforts to assist Parent as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable in connection with the issuance of the Merger Shares in
connection with the Merger.
5.11 Employee Benefit Plans.
(a) Assumption of Options. Company hereby represents and warrants to Parent
that Schedule 5.11 hereto sets forth a true and complete list as of the date
hereof of all holders of outstanding options under the Company Stock Option
Plan, including the number of shares of Company Capital Stock subject to each
such option, the exercise or vesting schedule, the exercise price per share and
the term of each such option. On the day immediately preceding the Closing
Date, Company shall deliver to Parent an updated Schedule 5.11, current as of
the Closing Date. Consistent with the terms of the Company Stock Option Plan
and the documents governing the outstanding options under such Plan, the Merger
will not terminate any of the outstanding options under the Company Stock
Option Plan or accelerate the exercisability or vesting of such options or the
shares of Parent Common Stock which will be subject to those options upon the
Parent's assumption of the options in the Merger. It is the intention of the
parties that the options assumed by Parent pursuant to
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Section 1.6(c) of this Agreement qualify, to the maximum extent permissible,
following the Effective Time as incentive stock options as defined in Section
422 of the Code to the extent such options qualified as incentive stock options
prior to the Effective Time. Within twenty (20) business days after the
Effective Time, Parent will issue to each person who, immediately prior to the
Effective Time was a holder of an outstanding option under the Company Stock
Option Plan, a document in form and substance reasonably satisfactory to the
Shareholders' Agent (as defined below) evidencing the foregoing assumption of
such option by Parent.
(b) Assignment of Repurchase Options. All outstanding rights of Company
which it may hold immediately prior to the Effective Time to repurchase
unvested shares of Company Common Stock (the "Repurchase Options") shall be
assigned to Parent in the Merger and shall thereafter be exercisable by Parent
upon the same terms and conditions in effect immediately prior to the Effective
Time, except that the shares purchasable pursuant to the Repurchase Options and
the purchase price per share shall be adjusted to reflect the Exchange Ratio.
Except as disclosed in Schedule 5.11, the consummation of the Merger will not
result in the termination of any Repurchase Options or accelerate the vesting
of any shares of Company Common Stock subject to those Repurchase Options.
(c) Employee Service Credit. Company employees who become employed by Parent
upon or immediately following the Closing shall be given full credit for their
Company service under Parent employee benefit plans for purposes of seniority,
eligibility and vesting to the extent allowable by law and not inconsistent
with the applicable plan documents. Parent agrees that for purposes of accrual
of vacation, PTO benefits or other such benefits, Parent will use the effective
date of Company's employees' respective employment with Company. Such Company
employees shall, to the extent then otherwise eligible, be allowed to
participate in Parent's employee stock purchase plan on the first entry date
under such plan following the Closing. Furthermore, to the extent practicable,
Parent shall also administer its medical plans so as to credit Company
employees with amounts that they have paid prior to the Closing toward
satisfying any applicable deductible and "out-of-pocket" maximum applicable
under Parent's medical plans.
(d) Termination of SIMPLE Plan. Unless Parent consents otherwise in writing,
Company shall, immediately prior to the Closing Date, terminate the Company
SIMPLE Plan described in Section 408(p) of the Code (the "Plan"). Company shall
provide to Parent executed resolutions by the Board of Directors of Company
authorizing the termination.
5.12 Form S-8. Parent shall use its reasonable best efforts to file, as soon
as practicable after the Effective Date, a registration statement on Form S-8
covering the shares of Parent Common Stock issuable pursuant to outstanding
options under the Company Stock Option Plan assumed by Parent. As soon as
practicable after the date hereof and prior to the Closing, Company will use
its reasonable best efforts to cause all holders of assumed Company Options to
agree in writing not to exercise their options pursuant to Section 1.6 until
Company has filed a registration statement on Form S-8 in accordance with this
Section. Company shall cooperate with and assist Parent in the preparation of
such registration statement.
5.13 Listing of Additional Shares. As soon as practicable after the Closing,
Parent shall file with the Nasdaq National Market a Notification Form for
Listing of Additional Shares with respect to the shares of Parent Capital Stock
issuable upon conversion of the Company Capital Stock in the Merger and upon
exercise of options and warrants to acquire Company's Capital Stock assumed by
Parent as a result of the Merger.
5.14 Escrow Agreement. At or before the Effective Time, the parties will
cause the Escrow Agent and the Shareholders' Agent to execute the Escrow
Agreement contemplated by Article VIII in substantially the form attached
hereto as Exhibit E, with such reasonable and customary modifications as the
escrow agent thereunder may require (the "Escrow Agreement").
5.15 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement, the Ancillary Agreements
and the transactions contemplated hereby and thereby shall be paid by the party
incurring such expense.
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5.16 Director and Officer Indemnification. Parent agrees not to cause or
allow the Surviving Corporation to modify, and to cause the Surviving
Corporation to honor, any rights to indemnification or exculpation from
liabilities for acts or omissions occurring at or prior to the Effective Time
now existing in favor of the officers and directors of Company and its
subsidiaries as provided in their respective certificates or articles of
incorporation or by-laws, as currently in effect.
5.17 Preferred Stock; Warrants. Company shall use its reasonable best
efforts to (i) ensure that either all of Company's outstanding Preferred Stock
shall have been converted into Company Common Stock in accordance with the
Articles of Incorporation of Company or that the Articles of Incorporation of
Company shall provide that the Merger shall cause a liquidation event with
respect to the Company Preferred Stock and (ii) ensure that all outstanding
warrants have been exercised at or prior to the Effective Time.
5.18 Board Composition. From and after the Effective Time, the Board of
Directors of Parent shall consist of not more than nine (9) members, and shall
initially consist of four (4) members designated by Parent, three (3) members
designated by Company and reasonably acceptable to Parent, and two independent
members mutually designated by Parent and Company, each of whom shall serve
(unless earlier removed in accordance with law) until their respective
successors have been elected or appointed and duly qualified. The persons so
designated who are not already members of the Board of Directors of Parent
shall be duly nominated and elected or appointed as directors of Parent,
effective upon the Effective Time, to serve until their successors are duly
elected or appointed and qualified. Six months after the Effective Time, one of
the four directors designated by Parent and one of the three directors
designated by Company shall resign.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:
(a) Securityholder Approval. This Agreement and the Merger shall have been
duly approved and adopted by the requisite vote of the holders of Company
Capital Stock, and any agreements or arrangements that may result in the
payment of any amount that would not be deductible by reason of Section 280G of
the Code shall have been approved by such number of shareholders of Company as
is required by the terms of Section 280G(b)(5)(B) and shall be obtained in a
manner which satisfies all applicable requirements of such Code Section
280G(b)(5)(B) and the proposed Treasury Regulations thereunder, including
(without limitation) Q-7 of Section 1.280G-1 of such proposed regulations. The
Parent Stockholder Approval shall have been duly obtained.
(b) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal or regulatory restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to
the Merger, which makes the consummation of the Merger illegal. In the event an
injunction or other order shall have been issued, each party agrees to use its
reasonable efforts to have such injunction or other order lifted.
(c) Governmental Approval. Parent, Company and their respective subsidiaries
shall have timely obtained from each Governmental Entity all approvals, waivers
and consents, if any, necessary for consummation of or in connection with the
Merger and the other transactions contemplated hereby, including such
approvals, waivers and consents as may be required under the Exchange Act and
the HSR Act; provided,
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however, that none of the preceding shall be deemed obtained or made for
purposes of satisfying the foregoing condition to Parent's obligation to effect
the Merger if it shall impose a non-customary condition or restriction that
Parent reasonably determines in good faith could reasonably be expected to
result in a Material Adverse Effect on Parent or the Surviving Corporation.
(d) Escrow Agreement. Parent, Company, Escrow Agent and the Shareholders'
Agent shall have entered into the Escrow Agreement.
(e) Issuance of Shares. The fairness hearing shall have been held, and the
terms of the Merger shall have been determined to be fair, by the Commissioner
of Corporations of the State of California and the California Permit shall have
been issued by the State of California or a registration statement on Form S-4
with respect to the shares of Parent Common Stock issuable pursuant to Section
1.6(a) shall have been declared effective by the SEC and no stop order with
respect thereto shall be in effect. In the alternative, each of the
shareholders of Company who is an "accredited investor" shall have delivered an
executed copy of the Shareholder Representation Agreement, and the parties
shall be reasonably satisfied that the shares of Parent Common Stock to be
issued in connection with the Merger pursuant to Section 1.6(a) are issuable
without registration pursuant to Section 4(2) of the Securities Act and SEC
rules and regulations promulgated thereunder and shall be coupled with Form S-3
registration rights reasonably acceptable to Parent and Company. If the shares
of Parent Common Stock issuable pursuant to Section 1.6(a) have not been
registered on Form S-4, the Declaration of Registration Rights in substantially
the form of Exhibit B hereto shall have been approved pursuant to the
Investors' Rights Agreement and shall be in full force and effect.
6.2 Additional Conditions to Obligations of Company. The obligations of
Company to consummate and effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by Company:
(a) Representations, Warranties and Covenants. (i) The representations and
warranties of Parent and Merger Sub in this Agreement shall be true and correct
in all respects on and as of the Effective Time as though such representations
and warranties were made on and as of the Effective Time (other than
representations and warranties expressly made as of an earlier date, which
shall have been so true and correct as of such earlier date), except where the
failure to be true and correct could not reasonably be expected, either
individually or in the aggregate, to have a Material Adverse Effect on Parent,
and (ii) Parent in all material respects shall have performed and complied with
all covenants, obligations and conditions of this Agreement and Ancillary
Agreements required to be performed and complied with by it as of or prior to
the Effective Time (except, in the case of the covenants of Parent in Section
4.1 and Section 4.3, where the failure to perform or comply with such covenants
could not reasonably be expected to have a Material Adverse Effect on Parent).
(b) Certificate of Parent. Company shall have been provided with a
certificate executed on behalf of Parent by its President and its Chief
Financial Officer to the effect that the condition set forth in Section 6.2(a)
has been satisfied.
(c) Third Party Consents. Company shall have been furnished with evidence
satisfactory to it of the consent or approval of those persons whose consent or
approval shall be required in connection with the Merger under any Principal
Contract of Parent or any of its subsidiaries or otherwise, the failure of
which to obtain could reasonably be expected to have a Material Adverse Effect
on Parent or the Surviving Corporation.
(d) Injunctions or Restraints on Merger and Conduct of Business. No
proceeding brought by any Governmental Entity, domestic or foreign, seeking to
prevent the consummation of the Merger shall be pending. In addition, no
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting Parent's conduct or operation of
the business of Company, following the Merger shall be in effect, nor shall any
proceeding brought by any Governmental Entity, domestic or foreign, seeking the
foregoing be pending.
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(e) Legal Opinion. Company shall have received a legal opinion from Parent's
legal counsel, Brobeck, Phleger & Harrison LLP, in substantially the form of
Exhibit H.
(f) Tax Opinion. Company shall have received a written opinion of company's
legal counsel, Riordan & McKinzie LLP, dated as of the Closing Date, to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and such opinion shall not have been withdrawn. In
rendering such opinion, counsel shall be entitled to rely upon, among other
things, reasonable assumptions as well as representations of Parent, Merger Sub
and Company.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, by Parent:
(a) Representations, Warranties and Covenants. (i) The representations and
warranties of Company in this Agreement shall be true and correct in all
respects on and as of the Effective Time as though such representations and
warranties were made on and as of the Effective Time (other than
representations and warranties expressly made as of an earlier date, which
shall have been so true and correct as of such earlier date), except where the
failure to be true and correct could not reasonably be expected, either
individually or in the aggregate, to have a Material Adverse Effect on Company
or the Surviving Corporation and (ii) Company in all material respects shall
have performed and complied with all covenants, obligations and conditions of
this Agreement and the Ancillary Agreements to which it is a party required to
be performed and complied with by it as of or prior to the Effective Time
(except, in the case of the covenants of Company in Section 4.1 and Section
4.2, where the failure to perform or comply with such covenants could not
reasonably be expected to have a Material Adverse Effect on Company or the
Surviving Corporation).
(b) Certificate of Company. Parent shall have been provided with a
certificate executed on behalf of Company by its President and Chief Financial
Officer to the effect that the condition set forth in Section 6.3(a) has been
satisfied.
(c) Third Party Consents. Parent shall have been furnished with evidence
satisfactory to it of the consent or approval of those persons whose consent or
approval shall be required in connection with the Merger under any Material
Contract of Company or any of its subsidiaries or otherwise, the failure of
which to obtain could reasonably be expected to have a Material Adverse Effect
on Parent, Company or the Surviving Corporation.
(d) Injunctions or Restraints on Merger and Conduct of Business. No
proceeding brought by any Governmental Entity, domestic or foreign, seeking to
prevent the consummation of the Merger shall be pending. In addition, no
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting Parent's conduct or operation of
the business of Company, following the Merger shall be in effect, nor shall any
proceeding brought by any Governmental Entity, domestic or foreign, seeking the
foregoing be pending.
(e) Legal Opinion. Parent shall have received a legal opinion from Company's
legal counsel, Riordan & McKinzie LLP, in substantially the form of Exhibit G.
(f) Tax Opinion. Parent shall have received a written opinion of Parent's
legal counsel, Brobeck, Phleger & Harrison LLP, dated as of the Closing Date to
the effect that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code, and such opinion shall not have been withdrawn.
In rendering such opinion, counsel shall be entitled to rely upon, among other
things, reasonable assumptions as well as representations of Parent, Merger Sub
and Company.
(g) Employment and Non-Competition Agreements. Each of the Employment and
Non-Competition Agreements executed and delivered by employees of Company set
forth on Schedule 6.3(h) contemporaneously with the execution and delivery of
this Agreement shall be in full force and effect.
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(h) Certificates. Company shall, prior to the Closing Date, provide Parent a
certificate from the Secretary of State of California and the California
Franchise Tax Board as to Company's good standing and payment of all applicable
taxes, and such other certificates and closing documents as are reasonably
requested by Parent and customary for transactions of the type contemplated
hereby.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. At any time prior to the Effective Time, whether before or
after approval of the matters presented in connection with the Merger by the
shareholders of Company, this Agreement may be terminated:
(a) by mutual consent duly authorized by the Boards of Directors of Parent
and Company;
(b) by either Parent or Company, if the Closing shall not have occurred on
or before May 31, 2000 (provided, that the right to terminate this Agreement
under this Section 7.1(b) shall not be available to any party whose action or
failure to act has been the cause or resulted in the failure of the Merger to
occur on or before such date and such action or failure to act constitutes a
material breach of this Agreement);
(c) by Parent, if (i) Company shall breach any representation, warranty,
obligation or agreement hereunder in a manner causing conditions precedent to
the Closing not to be satisfied and such breach shall not have been cured
within twenty (20) business days of receipt by Company of written notice of
such breach, provided that the right to terminate this Agreement by Parent
under this Section 7.1(c)(i) shall not be available to Parent where Parent is
at that time in material breach of this Agreement, or (ii) the Board of
Directors of Company shall have omitted, withdrawn or modified its
recommendation of this Agreement or the Merger in a manner adverse to Parent or
recommended, endorsed, accepted or agreed to a Company Takeover Proposal or
shall have resolved to do any of the foregoing (it being acknowledged that such
action would constitute a breach of this Agreement);
(d) by Company, if (i) Parent shall breach any representation, warranty,
obligation or agreement hereunder in a manner causing conditions precedent to
the Closing not to be satisfied and such breach shall not have been cured
within twenty (20) business days following receipt by Parent of written notice
of such breach, provided that the right to terminate this Agreement by Company
under this Section 7.1(d)(i) shall not be available to Company where Company is
at that time in material breach of this Agreement, or (ii) the Board of
Directors of Parent shall have omitted, withdrawn or modified its
recommendation of this Agreement or the Merger in a manner adverse to Company
or recommended or endorsed a Parent Takeover Proposal or shall have resolved to
do any of the foregoing;
(e) by Parent if (i) any permanent injunction or other order of a court or
other competent authority preventing the consummation of the Merger shall have
become final and nonappealable, (ii) if any required approval of the
shareholders of Company shall not have been obtained by reason of the failure
to obtain the required vote upon a vote held at a duly held meeting of
shareholders or at any adjournment thereof, or (iii) the Parent Stockholder
Approval is not obtained at the Parent Stockholders Meeting or at any
adjournment thereof; or
(f) by Company if (i) any permanent injunction or other order of a court or
other competent authority preventing the consummation of the Merger shall have
become final and nonappealable, (ii) if any required approval of the
shareholders of Company shall not have been obtained by reason of the failure
to obtain the required vote upon a vote held at a duly held meeting of
shareholders or at any adjournment thereof, or (iii) the Parent Stockholder
Approval is not obtained at the Parent Stockholders Meeting or at any
adjournment thereof.
7.2 Effect of Termination. In the event of termination of this Agreement as
provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent or
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Company or their respective officers, directors, securityholders or affiliates,
except as provided in Section 7.3 and/or except to the extent that such
termination results from the breach by a party hereto of any of its
representations, warranties or covenants set forth in this Agreement involving
fraud, intentional misrepresentation or willful misconduct; provided that the
provisions of Section 5.4 (Confidentiality), Section 7.3 (Expenses and
Termination Fees) and this Section 7.2 shall remain in full force and effect
and survive any termination of this Agreement.
7.3 Expenses and Termination Fees.
(a) Subject to Sections 7.3(b) and 7.3(c), whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement,
the Ancillary Agreements and the transactions contemplated hereby and thereby
(including, without limitation, the fees and expenses of its advisers,
accountants and legal counsel) shall be paid by the party incurring such
expense.
(b) In the event that (i) Parent shall terminate this Agreement pursuant to
Section 7.1(c)(ii) or (ii) this Agreement shall be terminated by Parent
pursuant to Section 7.1(e)(ii) or by Company pursuant to Section 7.1(f)(ii), in
either case following a failure of Company's shareholders to approve this
Agreement and, prior to the time of the Company Shareholders Meeting, a Company
Takeover Proposal shall have been made which at the time of the Company
Shareholders Meeting shall not have been definitively withdrawn by the third
party making such proposal, or (iii) Parent shall terminate this Agreement
pursuant to Section 7.1(c)(i) and prior to the breach giving rise to such
termination a Company Takeover Proposal shall have been made, then, in any such
event, in addition to any other remedies Parent may have, Company shall
promptly pay to Parent the sum of five million dollars ($5,000,000), and in the
event that a Company Takeover Proposal is consummated within twelve months
after such termination of this Agreement, Company shall pay to Parent the
additional sum of twenty-five million dollars ($25,000,000) upon the
consummation of such Company Takeover Proposal.
(c) In the event that (i) Company shall terminate this Agreement pursuant to
Section 7.1(d)(ii), or (ii) this Agreement shall be terminated by Parent
pursuant to Section 7.1(e)(iii), or by Company pursuant to Section 7.1(f)(iii),
following a failure of Parent stockholders to grant the Parent Stockholder
Approval and, prior to the time of the Parent Stockholders Meeting, a Parent
Takeover Proposal shall have been publicly announced which shall not have been
publicly and definitively withdrawn by the third party making such proposal, or
(iii) Company shall terminate this Agreement pursuant to Section 7.1(d)(i) and
prior to the breach giving rise to such termination a Parent Takeover Proposal
shall have been publicly announced, then, in any such event, in addition to any
other remedies Company may have, Parent shall promptly pay to Company the sum
of five million dollars ($5,000,000), and, in the event that a Parent Takeover
Proposal is consummated within twelve months after such termination of this
Agreement, Parent shall pay to Company the additional sum of twenty-five
million dollars ($25,000,000) upon the consummation of such Parent Takeover
Proposal. In the event that a Parent Takeover Proposal is publicly announced
and is thereafter withdrawn, the fact of such withdrawal shall be communicated
to Parent stockholders a reasonable time before the Parent Stockholders
Meeting, and the Parent Stockholders Meeting shall, if necessary, be adjourned
or postponed for a reasonable period to permit dissemination of such
information to Parent stockholders, withdrawal of proxies that may have been
affected by the announcement or pendency of such Parent Takeover Proposal and
resolicitation and submission of new proxies in favor of the Parent Stockholder
Approval.
7.4 Amendment. The boards of directors of the parties hereto may cause this
Agreement to be amended at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto; provided that an amendment made
subsequent to approval of the Merger by the shareholders of Company shall not
(i) alter or change the amount or kind of consideration to be received on
conversion of the Company Capital Stock, (ii) alter or change any term of the
Articles of Incorporation of the Surviving Corporation to be effected by the
Merger, or (iii) alter or change any of the terms and conditions of the
Agreement if such alteration or change would materially adversely affect the
holders of Company Capital Stock.
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7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto or
(iii) waive compliance with any of the agreements or conditions for the benefit
of such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party.
ARTICLE VIII
ESCROW AND INDEMNIFICATION
8.1 Escrow Fund. As soon as practicable after the Effective Time, ten
percent (10%) of the Merger Shares issued at the Closing or to which holders of
Company Capital Stock are entitled to receive by virtue of the Merger (the
"Escrow Shares") shall be registered in the name of, and be deposited with,
State Street Bank and Trust Company (or another institution selected by Parent
with the reasonable consent of Company) as escrow agent (the "Escrow Agent"),
such deposit (together with interest and other income thereon) to constitute
the Escrow Fund and to be governed by the terms set forth herein and in the
Escrow Agreement attached hereto as Exhibit E. The Escrow Fund shall be
available to compensate Parent pursuant to the indemnification obligations of
the shareholders of Company.
8.2 Indemnification. Subject to the limitations set forth in this Article
VIII, the shareholders of Company will indemnify and hold harmless Parent and
its officers, directors, agents and employees, and each person, if any, who
controls or may control Parent within the meaning of the Securities Act
(hereinafter referred to individually as an "Indemnified Person" and
collectively as "Indemnified Persons") from and against any and all losses,
costs, damages, liabilities and expenses arising from claims, demands, actions,
causes of action, including, without limitation, reasonable legal fees, net of
any recoveries by Parent under existing insurance policies or indemnities from
third parties (collectively, "Damages") arising out of any misrepresentation or
breach of or default in any of the representations, warranties, covenants and
agreements given or made by Company in or pursuant to this Agreement, the
Company Disclosure Schedules or any exhibit or schedule to this Agreement,
including any agreement entered into by Parent and Company in connection with
this Agreement and any certificates delivered pursuant to Article VI hereof.
The Escrow Fund shall be security for this indemnity obligation subject to the
limitations in this Agreement. Parent and Company each acknowledge that such
Damages, if any, would relate to unresolved contingencies existing at the
Effective Time, which if resolved at the Effective Time would have led to a
reduction in the total number of shares Parent would have agreed to issue in
connection with the Merger. If the Merger is consummated, recovery from the
Escrow Fund shall be the sole and exclusive remedy under this Agreement for any
breach or default in connection with any of the representations, warranties,
covenants or agreements set forth in this Agreement or any exhibit hereto,
absent fraud, intentional misrepresentation or willful breach. Nothing in this
Agreement shall limit the liability (i) of Company for any breach of any
representation, warranty or covenant if the Merger is not consummated, or (ii)
of any Company shareholder in connection with any breach by such shareholder of
the Shareholder Representation Agreement, the Shareholder Agreement or the
Irrevocable Proxy. No claim for indemnification after the Effective Time shall
be made under this Article VIII unless and until aggregate Damages (including
Damages pursuant to all prior claims) exceed two million dollars ($2,000,000),
and then only to the extent that aggregate Damages exceed such amount.
8.3 Escrow Period. The Escrow Period shall terminate upon the following
dates: (a) for matters expected to be encountered and resolved in the audit of
Parent's financial statements for its fiscal year ending September 30, 2000,
the earlier of the first anniversary of the Closing Date or the date on which
Parent publishes the combined audited financial statements of Parent and
Company for the fiscal year which includes the Closing Date and (b) for all
other matters, the first anniversary of the Closing Date; provided, however,
that a portion of the Escrow Shares, which is necessary to satisfy any
unsatisfied claims specified in any Officer's
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Certificate theretofore delivered to the Escrow Agent prior to termination of
the Escrow Period with respect to facts and circumstances existing prior to
expiration of the Escrow Period, shall remain in the Escrow Fund until such
claims have been resolved. Parent shall deliver to the Escrow Agent a
certificate specifying the Effective Time.
8.4 Claims upon Escrow Fund. Upon receipt by the Escrow Agent on or before
the last day of the Escrow Period of a certificate signed by any officer of
Parent (an "Officer's Certificate"), setting forth the estimate of Damages and
specifying in reasonable detail the individual items of such Damages included
in the amount so stated, the date each such item was paid, or properly accrued
or arose, and the nature of the misrepresentation, breach of warranty or claim
to which such item is related, the Escrow Agent shall, subject to the
provisions of Section 8.5 and 8.6 below, deliver to Parent out of the Escrow
Fund, as promptly as practicable, Parent Common Stock or other assets held in
the Escrow Fund having a value equal to such Damages. For the purpose of
compensating Parent for its Damages pursuant to this Agreement, the Parent
Common Stock in the Escrow Fund shall be valued at the Closing Market Value
(the "Escrow Value").
8.5 Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such Officer's Certificate
shall be delivered to the Shareholders' Agent (defined in Section 8.7 below)
and for a period of twenty (20) days after such delivery to the Shareholders'
Agent of such Officer's Certificate, the Escrow Agent shall make no delivery of
Parent Common Stock or other property pursuant to Section 8.4 hereof unless the
Escrow Agent shall have received written authorization from the Shareholders'
Agent to make such delivery. After the expiration of such twenty (20) day
period, the Escrow Agent shall make delivery of the Parent Common Stock or
other property in the Escrow Fund in accordance with Section 8.4 hereof,
provided that no such payment or delivery may be made if the Shareholders'
Agent shall object in a written statement to the claim made in the Officer's
Certificate, and such statement shall have been delivered to the Escrow Agent
and to Parent prior to the expiration of such twenty (20) day period.
8.6 Resolution of Conflicts; Arbitration.
(a) In case the Shareholders' Agent shall so object in writing to any claim
or claims by Parent made in any Officer's Certificate, Parent shall have ten
(10) days after receipt by the Escrow Agent of an objection by the
Shareholders' Agent to respond in a written statement to the objection of the
Shareholders' Agent. If after such ten (10) day period there remains a dispute
as to any claims, the Shareholders' Agent and Parent shall attempt in good
faith for ten (10) days to agree upon the rights of the respective parties with
respect to each of such claims. If the Shareholders' Agent and Parent should so
agree, a memorandum setting forth such agreement shall be prepared and signed
by both parties and shall be furnished to the Escrow Agent. The Escrow Agent
shall be entitled to rely on any such memorandum and shall distribute the
Parent Common Stock or other property from the Escrow Fund in accordance with
the terms thereof.
(b) If no such agreement can be reached after good faith negotiation, either
Parent or the Shareholders' Agent may, by written notice to the other, demand
arbitration of the matter unless the amount of the damage or loss is at issue
in pending litigation with a third party, in which event arbitration shall not
be commenced until such amount is ascertained or both parties agree to
arbitration; and in either such event the matter shall be settled by
arbitration conducted by one arbitrator. The decision of the arbitrator as to
the validity and amount of any claim in such Officer's Certificate shall be
binding and conclusive upon the parties to this Agreement, and notwithstanding
anything in Section 8.5 hereof, the Escrow Agent shall be entitled to act in
accordance with such decision and make or withhold payments out of the Escrow
Fund in accordance therewith.
(c) Judgment upon any award rendered by the arbitrators may be entered in
any court having jurisdiction. Any such arbitration shall be held in Santa
Clara, San Mateo or San Francisco County, California under the commercial rules
then in effect of the American Arbitration Association. For purposes of this
Section 8.6(c), in any arbitration hereunder in which any claim or the amount
thereof stated in the Officer's Certificate is at issue, Parent shall be deemed
to be the Non-Prevailing Party unless the arbitrators award Parent more than
one-half ( 1/2) of the amount in dispute, plus any amounts not in dispute;
otherwise, Company shareholders for whom
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shares of Company Common Stock otherwise issuable to them have been deposited
in the Escrow Fund shall be deemed to be the Non-Prevailing Party. The Non-
Prevailing Party to an arbitration shall pay its own expenses, the fees of each
arbitrator, the administrative fee of the American Arbitration Association, and
the expenses, including without limitation, attorneys' fees and costs,
reasonably incurred by the other party to the arbitration.
8.7 Shareholders' Agent.
(a) Thomas R. Govreau shall be constituted and appointed as agent
("Shareholders' Agent") for and on behalf of Company shareholders to give and
receive notices and communications, to authorize delivery to Parent of the
Parent Common Stock or other property from the Escrow Fund in satisfaction of
claims by Parent, to object to such deliveries, to agree to, negotiate, enter
into settlements and compromises of, and demand arbitration and comply with
orders of courts and awards of arbitrators with respect to such claims, and to
take all actions necessary or appropriate in the judgment of the Shareholders'
Agent for the accomplishment of the foregoing. Such agency may be changed by
the holders of a majority in interest of the Escrow Fund from time to time upon
not less than ten (10) days' prior written notice to Parent. No bond shall be
required of the Shareholders' Agent, and the Shareholders' Agent shall receive
no compensation for his services. Notices or communications to or from the
Shareholders' Agent shall constitute notice to or from each Company
shareholder.
(b) The Shareholders' Agent shall not be liable for any act done or omitted
hereunder as Shareholders' Agent while acting in good faith and in the exercise
of reasonable judgment, and any act done or omitted pursuant to the advice of
counsel shall be conclusive evidence of such good faith. Each Company
shareholder shall jointly and severally indemnify the Shareholders' Agent and
hold him harmless against any loss, liability or expense incurred without gross
negligence or bad faith on the part of the Shareholders' Agent and arising out
of or in connection with the acceptance or administration of his duties
hereunder.
(c) The Shareholders' Agent shall have reasonable access to information
about Company and the reasonable assistance of Company's officers and employees
for purposes of performing his duties and exercising his rights hereunder,
provided that the Shareholders' Agent shall treat confidentially and not
disclose any nonpublic information from or about Company to anyone (except on a
need to know basis to individuals who agree to treat such information
confidentially).
8.8 Actions of the Shareholders' Agent. A decision, act, consent or
instruction of the Shareholders' Agent shall constitute a decision of all
Company shareholders for whom shares of Parent Common Stock otherwise issuable
to them are deposited in the Escrow Fund and shall be final, binding and
conclusive upon each such Company shareholder, and the Escrow Agent and Parent
may rely upon any decision, act, consent or instruction of the Shareholders'
Agent as being the decision, act, consent or instruction of each and every such
Company shareholder. The Escrow Agent and Parent are hereby relieved from any
liability to any person for any acts done by them in accordance with such
decision, act, consent or instruction of the Shareholders' Agent.
8.9 Third-Party Claims. In the event Parent becomes aware of a third-party
claim which Parent believes may result in a demand against the Escrow Fund,
Parent shall promptly notify the Shareholders' Agent of such claim, and the
Shareholders' Agent and the Company shareholders for whom shares of Parent
Common Stock otherwise issuable to them are deposited in the Escrow Fund shall
be entitled, at their expense, to participate in any defense of such claim.
Parent shall have the right in its sole discretion to settle any such claim;
provided, however, that Parent may not effect the settlement of any such claim
without the consent of the Shareholders' Agent, which consent shall not be
unreasonably withheld. In the event that the Shareholders' Agent has consented
to any such settlement, the Shareholders' Agent shall have no power or
authority to object under Section 8.6 or any other provision of this Article
VIII to the amount of any claim by Parent against the Escrow Fund for indemnity
with respect to such settlement.
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ARTICLE IX
GENERAL PROVISIONS
9.1 Non-Survival at Effective Time. The representations and warranties set
forth herein shall survive until the expiration of twelve (12) months after the
Effective Time. The agreements set forth in this Agreement shall terminate at
the Effective Time, except that the agreements set forth in Article I, Section
5.4 (Confidentiality), 5.7 (Further Assurances), 5.8 (Company Shareholder
Agreements), 5.10 (Blue Sky Laws), 5.11 (Employee Benefit Plans), 5.12 (Form S-
8), 5.13 (Listing of Additional Shares), 5.16 (Expenses), 5.18 (Director and
Officer Indemnification), 7.3 (Expenses and Termination Fees), 7.4 (Amendment),
Article VIII and this Article IX shall survive the Effective Date and the
Closing.
9.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or by reputable overnight courier or sent via facsimile (with
confirmation of receipt and followed by delivery by one of the other methods
described in this Section) to the parties at the following address (or at such
other address for a party as shall be specified by like notice):
(a) if to Parent, to:
Digital Island, Inc.
45 Fremont Street
12th Floor
San Francisco, CA 94111
Attention: Ruann F. Ernst
Facsimile No.: (415) 738-4141
Telephone No.: (415) 738-4100
with a copy to:
Brobeck, Phleger & Harrison LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attention: Curtis L. Mo, Esq.
with a copy to Rod J. Howard, Esq.
Facsimile No.: (650) 496-2715
Telephone No.: (650) 424-0160
(b) if to Company, to:
Sandpiper Networks, Inc.
225 W. Hillcrest Dr.
Suite 250
Thousand Oaks, CA 91360
Attention: Leo S. Spiegel
Facsimile No.: (805) 370-2121
Telephone No.: (805) 370-2100
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with a copy to:
Riordan & McKinzie
5743 Corsa Ave.
Suite 116
Westlake Village, CA 91362
Attention: Larry Weeks, Esq.
Facsimile No.: (818) 706-2956
Telephone No.: (818) 706-1800
9.3 Interpretation. When a reference is made in this Agreement to Exhibits,
such reference shall be to an Exhibit to this Agreement unless otherwise
indicated. The words "include," "includes" and "including" when used herein
shall be deemed in each case to be followed by the words "without limitation."
The phrase "made available" in this Agreement shall mean that the information
referred to has been made available if requested by the party to whom such
information is to be made available. The phrases "the date of this Agreement",
"the date hereof", and terms of similar import, unless the context otherwise
requires, shall be deemed to refer to the date set forth in the first paragraph
of this Agreement. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
9.5 Entire Agreement; Nonassignability; Parties in Interest. This Agreement
and the documents and instruments and other agreements specifically referred to
herein or delivered pursuant hereto, including the Exhibits, the Company
Disclosure Schedule, the Parent Disclosure Schedule and the other Schedules
(a) constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, except for the Confidentiality Agreement, which shall continue in full
force and effect, and shall survive any termination of this Agreement or the
Closing, in accordance with its terms (b) are not intended to confer upon any
other person any rights or remedies hereunder, except as set forth in Sections
1.6(a), (c), (d), (f) and (g), 1.7, 1.9, 1.12, 5.11, 5.12 and 5.18; and (c)
shall not be assigned by operation of law or otherwise except as otherwise
specifically provided.
9.6 Severability. In the event that any provision of this Agreement, or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
9.7 Remedies Cumulative. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity
upon such party, and the exercise by a party of any one remedy will not
preclude the exercise of any other remedy.
9.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of California without reference to such state's
principles of conflicts of law. Each of the parties hereto irrevocably consents
to the exclusive jurisdiction of any court located within the State of
California, in connection with any matter based upon or arising out of this
Agreement or the matters contemplated herein, agrees that process may be served
upon them in any manner authorized by the laws of the State of California
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for such persons and waives and covenants not to assert or plead any objection
which they might otherwise have to such jurisdiction and such process.
9.9 Rules of Construction. The parties hereto agree that they have been
represented by legal counsel during the negotiation, preparation and execution
of this Agreement and, therefore, waive the application of any law, regulation,
holding or rule of construction providing that ambiguities in an agreement or
other document will be construed against the party drafting such agreement or
document.
9.10 Definitions. For purposes of this Agreement, the following terms shall
have the meanings set forth below:
(a) "Material Adverse Effect" means, with respect to any person or entity,
any event, change or effect that is materially adverse to the business,
operations, personnel, condition (financial or otherwise), properties, assets
(including intangible assets), liabilities, or results of operations of such
person or entity and its subsidiaries, taking such person or entity together
with its subsidiaries as a whole, provided, that none of the following, either
alone or in combination, shall constitute, in and of itself or in and of
themselves, a Material Adverse Effect: changes, events and effects that are
directly caused by (i) conditions affecting national, regional or world
economies as a whole (to the extent such person or entity is not
disproportionately affected), (ii) conditions affecting the industry or
industries, as a whole, in which such person or entity participates (to the
extent such person or entity is not disproportionately affected), (iii) the
announcement or pendency of this Agreement or the transactions contemplated by
this Agreement, (iv) failure of Parent to meet the revenue or earnings
predictions of equity analysts (as reflected in the First Call consensus
estimate), or any other published revenue or earnings predictions or
expectations, for any period ending on or after the date of this Agreement, or
(v) changes in the market price or trading volume of Parent capital stock.
(b) The term "knowledge" means, with respect to any party, the actual
knowledge after reasonable inquiry of the directors and officers of such party
and employees of such party charged with senior administrative or operational
responsibility for matters as to which knowledge is ascribed.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed and delivered by its respective officer thereunto duly authorized,
all as of the date first written above.
DIGITAL ISLAND, INC.
/s/ T.L. Thompson
By: _________________________________
Name: T.L. Thompson
Title: Chief Financial Officer &
Secretary
BEACH ACQUISITION CORP.
/s/ T.L. Thompson
By: _________________________________
Name: T.L. Thompson
Title: Chief Financial Officer &
Secretary
SANDPIPER NETWORKS, INC.
/s/ Leo S. Spiegel
By: _________________________________
Name: Leo S. Spiegel
Title: Chairman, President and
CEO
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EXHIBIT A
AGREEMENT OF MERGER OF
DIGITAL ISLAND, INC., BEACH ACQUISITION CORP.
AND SANDPIPER NETWORKS, INC.
This Agreement of Merger, dated as of the day of ("Merger
Agreement"), among Digital Island, Inc. a Delaware corporation ("Parent"),
Beach Acquisition Corp., a California corporation and a wholly owned subsidiary
of Parent ("Merger Sub"), and Sandpiper Networks, Inc., a California
corporation ("Company").
RECITALS
A. Company was incorporated in the State of California on December 23, 1996
and on the date hereof has outstanding shares of Common Stock ("Company
Common Stock") and shares of Preferred Stock ("Company Preferred Stock").
Company Common Stock and Company Preferred Stock are collectively referred to
herein as "Company Capital Stock."
B. Parent, Merger Sub and Company have entered into an Agreement and Plan of
Reorganization (the "Agreement and Plan of Reorganization") providing for the
merger ("Merger") of Merger Sub with and into Company.
C. The Boards of Directors of Parent, Company and Merger Sub and the
shareholders of Company have approved the Merger.
AGREEMENTS
The parties hereto hereby agree as follows:
1. Merger Sub shall be merged with and into Company, and Company shall be
the surviving corporation (the "Surviving Corporation").
2. The Merger shall become effective at such time (the "Effective Time") as
this Merger Agreement and the officers' certificate of Company is filed with
the Secretary of State of the State of California pursuant to Section 1103 of
the Corporations Code of the State of California.
3. At the Effective Time (i) all shares of Company Capital Stock that are
owned directly or indirectly by Company, Parent, Merger Sub or any other
subsidiary of Parent shall be cancelled, and no securities of Parent or other
consideration shall be delivered in exchange therefor, (ii) each of the issued
and outstanding shares of Company Capital Stock (other than shares, if any,
held by persons who have not voted such shares for approval of the Merger and
with respect to which such persons shall become entitled to exercise
dissenters' rights in accordance with Section 1300 et seq. of the California
Corporations Code, referred to hereinafter as "Dissenting Shares") shall be
converted automatically into and exchanged for 1.0727 shares of Parent Common
Stock. Those shares of Parent Common Stock to be issued as provided in this
Section 3 are referred to herein as the "Parent Shares."
4. Any Dissenting Shares shall not be converted into Parent Common Stock but
shall be converted into the right to receive such consideration as may be
determined to be due with respect to such Dissenting Shares pursuant to the law
of the State of California. If after the Effective Time any Dissenting Shares
shall lose their status as Dissenting Shares, then as of the occurrence of the
event which causes the loss of such status, such shares shall be converted into
Parent Common Stock in accordance with Section 3.
5. Notwithstanding any other term or provision hereof, no fractional shares
of Parent Common Stock shall be issued, but in lieu thereof each holder of
shares of Company Capital Stock who would otherwise, but
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for rounding as provided herein, be entitled to receive a fraction of a share
of Parent Common Stock shall receive from Parent an amount of cash equal to the
per share market value of Parent Common Stock (deemed to be $ ) multiplied
by the fraction of a share of Parent Common Stock to which such holder would
otherwise be entitled. The fractional share interests of each Company
shareholder shall be aggregated, so that no Company shareholder shall receive
cash in an amount greater than the value of one full share of Parent Common
Stock.
6. The conversion of Company Capital Stock into Parent Common Stock as
provided by this Merger Agreement shall occur automatically at the Effective
Time without action by the holders thereof. Each holder of Company Capital
Stock shall thereupon be entitled to receive shares of Parent Common Stock in
accordance with the Agreement and Plan of Reorganization.
7. Also, at the Effective Time, each share of Common Stock of Merger Sub
outstanding immediately prior to the Effective Time shall automatically be
converted into and exchanged for one share of Common Stock of the Surviving
Corporation. Each stock certificate of Merger Sub evidencing ownership of any
such shares shall continue to evidence ownership of such shares of capital
stock of the Surviving Corporation.
8. At the Effective Time, the separate existence of Merger Sub shall cease,
and Company shall succeed, without other transfer, to all of the rights and
properties of Merger Sub and shall be subject to all the debts and liabilities
thereof in the same manner as if Company had itself incurred them. All rights
of creditors and all liens upon the property of each corporation shall be
preserved unimpaired.
9. At the Effective Time, Company's Stock Option Plan, as amended (the
"Company Stock Option Plan"), and all options to purchase Company Common Stock
then outstanding under the Company Stock Option Plan shall be assumed by
Parent.
10. At the Effective Time, each warrant to acquire shares of Company Capital
Stock then outstanding (each a "Company Warrant") shall be converted and
exchanged for warrants to purchase such number of shares of Parent Common Stock
in accordance with the Agreement and Plan of Reorganization.
11. This Merger Agreement is intended as a plan of reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
12. (a) The Articles of Incorporation of Company in effect immediately prior
to the Effective Time shall be the Articles of Incorporation of the Surviving
Corporation unless and until thereafter amended, provided however, that
immediately after the Effective Time the Articles of Incorporation of the
Surviving Corporation shall be amended and restated so as to read in its
entirety like the Articles of Incorporation of Merger Sub with Article 1 of the
Articles of Incorporation amended to read as follows: "The name of the
corporation is Sandpiper Networks, Inc."
(b) The Bylaws of Company in effect immediately prior to the Effective Time
shall be the Bylaws of the Surviving Corporation unless and until amended or
repealed as provided by applicable law, the Articles of Incorporation of the
Surviving Corporation and such Bylaws.
(c) The directors of Merger Sub immediately prior to the Effective Time
shall be the directors of the Surviving Corporation. The officers of Company
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation.
13. (a) Notwithstanding the approval of this Merger Agreement by the
shareholders of Company, this Merger Agreement may be terminated at any time
prior to the Effective Time by mutual agreement of the Boards of Directors of
Parent and Company.
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(b) Notwithstanding the approval of this Merger Agreement by the
shareholders of Company, this Merger Agreement shall terminate in the event
that the Agreement and Plan of Reorganization shall be terminated as therein
provided.
(c) In the event of the termination of this Merger Agreement as provided
above, this Merger Agreement shall forthwith become void and there shall be no
liability on the part of Company or Parent or their respective officers,
directors or shareholders, except as otherwise provided in the Agreement and
Plan of Reorganization.
(d) This Merger Agreement may be signed in one or more counterparts, each of
which shall be deemed an original and all of which shall constitute one
agreement.
(e) This Merger Agreement may be amended by the parties hereto any time
before or after approval hereof by the shareholders of Company, but, after such
approval, no amendment shall be made which by law requires the further approval
of such shareholders without obtaining such approval. This Merger Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Merger Agreement as of
the date first written above.
DIGITAL ISLAND, INC.
By: _________________________________
[Name]
President
By: _________________________________
[Name]
Secretary
BEACH ACQUISITION CORP.
By: _________________________________
[Name]
President
By: _________________________________
[Name]
Secretary
SANDPIPER NETWORKS, INC.
By: _________________________________
[Name]
President
By: _________________________________
[Name]
Secretary
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<PAGE>
OFFICERS' CERTIFICATE OF SANDPIPER NETWORKS, INC.
, President, and , Secretary, of Sandpiper Networks,
Inc., a corporation duly organized and existing under the laws of the State of
California (the "Corporation"), do hereby certify:
1. That they are the duly elected, acting and qualified President and the
Secretary, respectively, of the Corporation.
2. There are two authorized class of shares, consisting of
shares of Common Stock, of which shares are outstanding and
entitled to vote on the Agreement of Merger in the form attached and
shares of Preferred Stock, of which shares are outstanding and
entitled to vote on such Agreement of Merger.
3. The Agreement of Merger in the form attached was duly approved by the
Board of Directors of the Corporation in accordance with the California
Corporations Code.
4. Approval of the Agreement of Merger by the holders of at least a majority
of the outstanding shares of Common Stock and Preferred Stock was required. The
percentage of the outstanding shares of each such class of the Corporation's
shares entitled to vote on the Agreement of Merger which voted to approve the
Agreement of Merger equaled or exceeded the vote required.
Each of the undersigned declares under penalty of perjury that the
statements contained in the foregoing certificate are true of their own
knowledge. Executed in , California, on .
By: _________________________________
[Name]
President
By: _________________________________
[Name]
Secretary
A-51
<PAGE>
OFFICERS' CERTIFICATE OF DIGITAL ISLAND, INC.
, President, and , Secretary, of Digital Island, Inc. a
Delaware corporation ("Parent"), hereby certify that:
1. That they are duly elected, acting and qualified President and Secretary,
respectively, of Parent.
2. There are two authorized classes of shares, consisting of (i) 100,000,000
shares of Common Stock, of which shares were issued and outstanding on
, 1999, and (ii) 10,000,000 shares of Preferred Stock, none of which are
issued and outstanding.
3. The Agreement of Merger in the form attached was approved by the Board of
Directors of Parent in accordance with the Delaware General Corporation Law.
4. No vote of the shareholders of Parent was required pursuant to Section
1201(b) of the California Corporations Code and Section 252 of the Delaware
General Corporation Law with respect to the merger under the Agreement of
Merger. The issuance of Common Stock pursuant to the merger was required to be
approved by the holders of at least a majority of the outstanding shares of
Common Stock. A majority of the outstanding shares of Common Stock approved
such issuance of Common Stock.
Each of the undersigned declares under penalty of perjury that the
statements contained in the foregoing certificate are true of their own
knowledge. Executed in , California on .
_____________________________________
[Name]
Secretary
_____________________________________
[Name]
Secretary
A-52
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EXHIBIT B
DECLARATION OF REGISTRATION RIGHTS
THIS DECLARATION OF REGISTRATION RIGHTS (the "Declaration") is made by
DIGITAL ISLAND, INC., a Delaware corporation ("Island") for the benefit of
shareholders of SANDPIPER NETWORKS, INC., a California corporation (the
"Company"), pursuant and subject to Section 1.12 of that certain Agreement and
Plan of Reorganization dated as of October 24, 1999 by and among Island, Beach
Acquisition Corp., a California corporation and a wholly owned subsidiary of
Island, and the Company (the "Reorganization Agreement"). This Declaration is
subject in its entirety to the terms and conditions set forth in the
Reorganization Agreement and the Ancillary Documents. Capitalized terms used
and not otherwise defined herein shall have the meanings set forth in the
Reorganization Agreement unless the context otherwise requires.
SECTION 1
CERTAIN DEFINITIONS
Certain Definitions. As used in this Declaration, 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.
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 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.
1.4 "Registrable Securities" means (i) the shares of Common Stock of Island
issuable or issued to each holder of Company Capital Stock or options or
warrants to acquire Company Capital Stock at the Effective Time by virtue of
the Merger (such holders collectively, the "Holders" and each individually, a
"Holder", and such shares of Common Stock, 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 Declaration 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.
1.5 "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.
1.6 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.
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<PAGE>
SECTION 2
PIGGYBACK RIGHTS
2.1 Notice of Registration. If at any time or from time to time, Island
shall determine to register any of its equity securities for its own account in
an underwritten public offering or receives a valid request from a party to the
Existing Agreement (as defined below) to register any of its equity securities
in an underwritten public offering, Island 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 Island 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 Island 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 Island. 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. Island 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. 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, Island 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 Island 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.
2.3 Right to Terminate Registration. The Island 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.
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<PAGE>
SECTION 3
OBLIGATIONS OF ISLAND
Whenever Island is required by the provisions of this Declaration to use its
reasonable best efforts to effect the registration of the Registrable
Securities, Island shall: (i) 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; (ii) 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 Island shall be required
under the provisions hereof to cause the registration statement to remain
current; (iii) 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 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; (iv) cause all Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which the same class of
securities of Island are then listed; and (v) 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 Island'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, Island 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 Island is required to qualify to do business or to file a general consent
to service of process in any such state or jurisdiction, unless Island is
already subject to service in such jurisdiction.
SECTION 4
EXPENSES OF REGISTRATION
Island shall pay all of the fees and expenses incurred in connection with
any registration statement that is initiated pursuant to this Declaration,
including, without limitation, all SEC and blue sky registration and filing
fees, printing expenses, transfer agent and registrar fees, the fees and
disbursements of Island's outside counsel, the reasonable fees and
disbursements of one counsel to the Holders and independent accountants (the
"Registration Expenses"). Provided however, that 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.
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<PAGE>
SECTION 5
INDEMNIFICATION
5.1 Island. To the extent permitted by law, Island will indemnify Holders
and each person controlling Holders within the meaning of Section 15 of the
Securities Act, and each underwriter if any, of Island's securities, with
respect to any registration, qualification or compliance which has been
effected pursuant to this Declaration, 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
Island of any rule or regulation promulgated under the Securities Act
applicable to Island in connection with any such registration, qualification or
compliance, and Island 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 Island 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 Island by such Holder or
controlling person or underwriter seeking indemnification expressly for use
therein; and provided further, that the indemnity provided in this Section 5.1
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 Island 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 Securities Act
and the Rules and Regulations thereto.
5.2 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 Island, each of its directors and officers
and each person who controls Island within the meaning of Section 15 of the
Securities Act, and each underwriter, if any, of Island's securities with
respect to any registration, qualification or compliance which has been
effected pursuant to this Declaration, 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 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 Island, such directors and officers and each person controlling
Island 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 Island by such Indemnifying Holder expressly for use therein,
provided that in no event shall any indemnity under this Section 5.2 exceed the
gross proceeds of the offering received by such Indemnifying Holder; and
provided further, that the indemnity provided in this Section 5.2 with respect
to any losses, claims, damages, liabilities or
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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 Island shall not inure to the benefit of or be available to Island
or any other person if the Holder corrected such untrue statement or alleged
untrue statement or omission or alleged omission and sent it to Island for
inclusion in the prospectus within the time required by the Securities Act and
the Rules and Regulations thereto.
5.3 Defense of Claims. Each party entitled to indemnification under this
Section 5 (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 5 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 6
RULE 144 REPORTING
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, Island 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 the date hereof;
(b) File with the SEC in a timely manner all reports and other documents
required of Island 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 Island as to its
compliance with the reporting requirements of said Rule 144 (at any time from
and after the date hereof), and of the Securities Act and the Exchange Act, a
copy of the most recent annual or quarterly report of Island, and such other
reports and documents of Island, 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.
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SECTION 7
TERMINATION OF RIGHTS
Unless otherwise specified herein, the rights and provisions of this
Declaration shall terminate as to all Holders on July 15, 2006. The rights of
any individual Holder to receive notice and to participate in a registration
pursuant to the terms of Section 2 hereof shall terminate at such time as such
Holder (i) owns less than one percent (1%) of the outstanding Stock of Island
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.
SECTION 8
MISCELLANEOUS
8.1 Assignment. Subject to compliance with the Reorganization Agreement and
the Ancillary Documents, the rights to cause Island to register Registrable
Securities granted to the Holders by Island under this Declaration 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 owned as of the date of the Effective Time by
such Holder; provided that Island 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 Declaration and agrees to be bound hereby pursuant to
a written instrument in form and substance reasonably satisfactory to Island.
Subject to the preceding sentence, this Declaration 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 Island
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 Island of
any transfer or assignment shall not affect the validity of a notice properly
given by Island to the Holders pursuant to lists maintained by Island.
8.2 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 Declaration.
8.3 Governing Law. This Declaration 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
without regard to conflicts of law principles thereof.
8.4 Counterparts. This Declaration 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.
8.5 Titles and Subtitles. The titles and subtitles used in this Declaration
are used for convenience only and are not to be considered in construing or
interpreting this Declaration.
8.6 Notices. All notices, requests, demands and other communications under
this Declaration or in connection herewith shall be given to or made upon the
Holder at the addresses set forth in Island's records and, if to Island, at the
address previously furnished by Island 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 Declaration 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.
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(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.
8.7 Attorneys' Fees. If any action at law or in equity (including
arbitration) is necessary to enforce or interpret the terms of this
Declaration, 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.
8.8 Amendments and Waivers. Any term of this Declaration may be amended or
any right hereunder waived with the written consent of Island and the Holders
of 66- 2/3% of the shareholders of record of the Company immediately prior to
the Effective Time of the Merger, provided that Island has also received any
additional consent required under that certain Amended and Restated Investors'
Rights Agreement dated February 19, 1999, as amended, by and among Island and
the individuals or entities listed on the signature pages thereof (the
"Existing Agreement"). Any amendment or waiver effected in accordance with
this Section 8.8 shall be binding upon the Holders and each transferee of the
Registrable Securities, each future holder of all such Registrable Securities
and Island.
8.9 Severability. If one or more provisions of this Declaration 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 Declaration, 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.
8.10 Delays or Omissions. No delay or omission to exercise any right, power
or remedy accruing to any party to this Declaration, 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
Declaration, or any waiver on the part of any party of any provisions or
conditions of this Declaration, must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies,
either under this Declaration, or by law or otherwise afforded to any Holder,
shall be cumulative and not alternative.
IN WITNESS WHEREOF, the undersigned has executed this Declaration as of the
date first written above.
DIGITAL ISLAND, INC.
By: ___________________________________
Name:
Title:
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EXHIBIT C
SHAREHOLDER AGREEMENT
This Shareholder Agreement (this "Agreement") is made and entered into as of
October , 1999 by and among Digital Island, Inc., a Delaware corporation
("Parent"), Sandpiper Networks, Inc., a California corporation ("Company"), and
the undersigned shareholder of Company ("Shareholder"). Capitalized terms used
but not otherwise defined herein shall have the meaning set forth in the
Reorganization Agreement (as defined below).
RECITALS
WHEREAS, pursuant to an Agreement and Plan of Reorganization dated as of
October 24, 1999 by and among Parent, Beach Acquisition Corp., a California
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and Company
(such agreement as it may be amended is hereinafter referred to as the
"Reorganization Agreement"), Merger Sub will be merged with and into Company
(the "Merger"); the outstanding shares of capital stock of Company (the
"Company Capital Stock") will be converted into common stock of Parent (the
"Parent Shares") at the applicable exchange ratio set forth in the
Reorganization Agreement; and the Company will become a wholly owned subsidiary
of Parent (the "Transaction");
WHEREAS, it is a condition of Parent's willingness to enter into the
Transaction that certain shareholders of Company have executed and delivered to
Parent a Shareholder Agreement upon the terms set forth herein; and
WHEREAS, Shareholder is the registered and beneficial owner of such number
of shares of the outstanding capital stock of Company as is indicated on the
signature page of this Agreement (the "Shares");
NOW, THEREFORE, the parties agree as follows:
1. Share Ownership and Agreement to Retain Shares.
1.1 Transfer and Encumbrance.
(a) Shareholder represents and warrants to Parent that: (i) Shareholder is
the beneficial owner of the Shares and, except as otherwise set forth on the
signature page hereto, (A) has held each such Share at all times since the date
such Share was originally issued by Company, and (B) did not acquire any shares
of Company Capital Stock in contemplation of the Merger; (ii) the Shares
constitute Shareholder's entire beneficial ownership interest in the
outstanding capital stock and voting securities of Company; (iii) no other
person or entity not a signatory to this Agreement has a beneficial interest in
or a right to acquire the Shares or any portion of the Shares (except, with
respect to Shareholders which are partnerships, partners of such Shareholders);
(iv) the Shares are and will be at all times until the Expiration (as defined
below) free and clear of any liens, claims, options, charges or other
encumbrances (except with respect to federal or state securities laws); and (v)
Shareholder's principal residence or place of business is set forth on the
signature page hereto.
(b) Other than this Agreement, at all times prior to the Expiration,
Shareholder agrees not to (i) sell, transfer, pledge, assign or otherwise
dispose of or encumber (including by gift) (collectively, "Transfer"), or
consent to any Transfer of, any Shares or New Shares (as defined below) or any
interest therein or enter into any contract, option, or other arrangement
(including any profit sharing or other derivative arrangement) with respect to
any Shares or any New Shares or any interest therein with any person other than
pursuant to the Reorganization Agreement, unless prior to any such Transfer the
transferee of such Shares or New Shares enters into and is bound by a
shareholders agreement with Parent on terms substantially identical to the
terms of this Agreement, or (ii) enter into any voting arrangement, whether by
proxy, voting agreement or otherwise, in connection with, directly or
indirectly, (1) any Acquisition Proposal (as defined below) or transaction or
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occurrence which if publicly proposed and offered to the Company and its
shareholders (or any of them) would be the subject of an Acquisition Proposal
(collectively, "Alternative Transactions") or (2) any amendment of the
Company's Articles of Incorporation or Bylaws or other proposal, action or
transaction involving the Company or any of its subsidiaries, which amendment
or other proposal, action or transaction would or could reasonably be expected
to prevent or materially impede, interfere with, hinder or delay the
consummation of the Merger or any of the other transactions contemplated by the
Reorganization Agreement or to dilute in any material respect the benefits to
Parent of the Merger and the other transactions contemplated by the
Reorganization Agreement, or change in any manner the voting rights of any
class or shares of Company Capital Stock (collectively, "Frustrating
Transactions"). As used herein, the term "Expiration" shall mean the earlier to
occur of (x) the Effective Time or (y) the valid termination of the
Reorganization Agreement in accordance with its terms.
1.2 New Shares. Shareholder agrees that any shares of capital stock of
Company that Shareholder purchases or with respect to which Shareholder
otherwise acquires beneficial ownership after the date of this Agreement and
prior to the Expiration ("New Shares") shall be subject to the terms and
conditions of this Agreement to the same extent as if they constituted Shares.
2. Agreement to Vote Shares. Prior to the Expiration, Shareholder covenants
and agrees as follows:
(a) At each meeting of the shareholders of the Company called to vote upon
the Merger, the Reorganization Agreement or any of the transactions
contemplated by the Reorganization Agreement, or at any adjournment thereof, or
in any other circumstances upon which a vote, consent or other approval
(including by written consent) with respect to the Merger, the Reorganization
Agreement or any of the transactions contemplated by the Reorganization
Agreement, is sought, such Shareholder shall, including by executing a
shareholder's written consent if requested by Parent, vote (or cause to be
voted) such Shareholder's Shares or New Shares in favor of the adoption and
approval by the Company of the Reorganization Agreement and the approval of the
terms thereof and of the Merger and each of the other transactions contemplated
by the Reorganization Agreement and in favor of any matter that could
reasonably be expected to facilitate the Merger and the other transactions
contemplated by the Reorganization Agreement, including any agreements or
arrangements that may result in the payment of any amount that would not be
deductible by reason of Section 280G of the Internal Revenue Code of 1986, as
amended.
(b) At any meeting of the shareholders of the Company or at any adjournment
thereof or in any other circumstances upon which such Shareholder's vote,
consent or other approval is sought, such Shareholder shall vote (or cause to
be voted) the Shares or New Shares of such Shareholder against, and shall not
consent to (and shall cause not to be consented to), any Alternative
Transaction or Frustrating Transaction.
(c) Notwithstanding the foregoing, nothing in this Agreement shall limit or
restrict Shareholder from acting in his capacity as a director of Company, to
the extent applicable, it being understood that this Agreement shall apply to
Shareholder solely in his capacity as a shareholder of the Company.
3. Irrevocable Proxy. Shareholder hereby agrees to timely deliver to Parent
a duly executed proxy in the form attached hereto as Annex A (the "Proxy"),
such Proxy to cover the Shares and New Shares in respect of which Shareholder
is entitled to vote at each meeting of the Shareholders of Company (including,
without limitation, each written consent in lieu of a meeting). In the event
that Shareholder is unable to provide any such Proxy in a timely manner,
Shareholder hereby grants Parent a power of attorney to execute and deliver
such Proxy for and on behalf of Shareholder, such power of attorney, which
being coupled with an interest, shall survive any death, disability,
bankruptcy, or any other such impediment of Shareholder. Upon the execution of
this Agreement by Shareholder, Shareholder hereby revokes any and all prior
proxies given by Shareholder with respect to the Shares and agrees not to grant
any subsequent proxies with respect to the Shares until after the Expiration.
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4. Additional Covenants of Shareholder. Shareholder hereby represents,
warrants and covenants to Parent as follows:
(a) Shareholder has full power and legal capacity to execute and deliver
this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Shareholder and constitutes the valid and binding
obligation of Shareholder, enforceable against Shareholder in accordance with
its terms. Except as may be limited by (i) the effect of bankruptcy,
insolvency, conservatorship, arrangement, moratorium or other laws affecting or
relating to the rights of creditors generally, or (ii) the availability of
specific performance, injunctive relief or other equitable remedies and general
principles of equity, regardless of whether considered in a proceeding in
equity or at law, the execution and delivery of this Agreement by Shareholder
does not, and the performance of Shareholder's obligations hereunder will not,
result in any breach of or constitute a default (or an event that with notice
or lapse of time or both would become a default) under, or give to others any
right to terminate, amend, accelerate or cancel any right or obligation under,
or result in the creation of any lien or encumbrance on any Shares or New
Shares pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which
Shareholder is a party or by which Shareholder or the Shares or New Shares are
or will be bound or affected.
(b) Shareholder undertakes and agrees to indemnify and hold harmless Parent,
Company, and each of their respective current and future officers and directors
(an "Indemnified Person") within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), from and against any and all claims, demands,
actions, causes of action, losses, costs, damages, liabilities and expenses
("Claims") based upon, arising out of or resulting from any breach or
nonfulfillment of any undertaking, covenant or agreement made herein by
Shareholder, or caused by or attributable to Shareholder, or Shareholder's
agents or employees, or representatives, brokers, dealers and/or underwriters
insofar as they are acting on behalf of and in accordance with the instruction
of or with the knowledge of Shareholder, in connection with or relating to any
offer, sale, pledge, transfer or other disposition or encumbrance of any of the
Parent Shares by or on behalf of Shareholder, which claim or claims result from
any breach or nonfulfillment as set forth above. The indemnification set forth
herein shall be in addition to any liability that Shareholder may otherwise
have to the Indemnified Persons. Promptly after receiving definitive notice of
any Claim in respect of which an Indemnified Person may seek indemnification
under this Agreement, such Indemnified Person shall submit notice thereof to
Shareholder. The omission by the Indemnified Person so to notify Shareholder of
any such Claim shall not relieve Shareholder from any liability Shareholder may
have hereunder except to the extent that (i) such liability was caused or
increased by such omission, or (ii) the ability of Shareholder to reduce or
defend against such liability was adversely affected by such omission. The
omission of the Indemnified Person so to notify Shareholder of any such Claim
shall not relieve Shareholder from any liability Shareholder may have otherwise
than hereunder. The Indemnified Persons and Shareholder shall cooperate with
and assist one another in the defense of any Claim and any action, suit or
proceeding arising in connection therewith.
(c) Shareholder shall take, or cause to be taken, all other actions, and to
do, or cause to be done, and to assist and cooperate with the other parties in
doing, all other things, reasonably necessary, proper or advisable to
consummate and make effective, in the most expeditious manner practicable, the
Merger and the other transactions contemplated by the Reorganization Agreement.
(d) Until the Expiration, Shareholder shall not, and shall not authorize or
permit any of its subsidiaries or affiliates (other than the Company),
officers, directors and employees and any investment banker, attorney,
accountant or other agent retained by Shareholder or them to, issue any press
release or make any other public statement with respect to the Reorganization
Agreement, this Agreement, the Merger or any of the other transactions
contemplated by the Reorganization Agreement or this Agreement without the
prior written consent of Parent, except as may be required by applicable law.
(e) Until the Expiration, Shareholder will not (and will use Shareholder's
reasonable best efforts to cause Company, its affiliates, officers, directors
and employees and any investment banker, attorney, accountant or
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other agent retained by Shareholder or them, not to): (i) initiate or solicit,
directly or indirectly, any proposal, plan, or offer to acquire all or any
substantial part of the business or assets or capital stock of Company, whether
by merger or other business combination, purchase of stock or assets, tender
offer or otherwise, or to liquidate Company or otherwise distribute to the
Shareholders of Company all or any substantial part of the business, assets or
capital stock of Company (each, an "Acquisition Proposal"); (ii) initiate,
directly or indirectly, any contact with any person in an effort to or with a
view towards soliciting or encouraging or facilitating any Acquisition
Proposal; (iii) furnish information concerning Company's business, properties
or assets to any corporation, partnership, person or other entity or group
(other than Parent, or any associate, agent or representative of Parent) under
any circumstances that could reasonably be expected to relate to an actual or
potential Acquisition Proposal; or (iv) negotiate or enter into discussions or
an agreement, directly or indirectly, with any entity or group with respect to
any potential Acquisition Proposal. In the event Shareholder shall receive or
become aware of any Acquisition Proposal subsequent to the date hereof,
Shareholder shall promptly inform Parent as to any such matter and the details
thereof to the extent possible without breaching any other agreement to which
such Shareholder is a party or violating its fiduciary duties.
(f) Shareholder hereby waives any rights of appraisal, or rights to dissent
from the Merger, that such Shareholder may have.
(g) Shareholder shall execute and deliver to Parent the Market Standoff
Letter Agreement, in the form attached hereto as Annex B.
5. Enforcement of Transfer Restrictions. Shareholder understands and agrees
that (i) Company shall be entitled to affix an appropriate legend to any
certificate representing Shares or New Shares reflecting the restrictions set
forth in this Agreement; and (ii) if Shareholder attempts to Transfer, vote or
provide any other person with the authority to vote any of the Shares other
than in compliance with this Agreement, Company shall not, and Shareholder
hereby irrevocably instructs Company not to permit any such transfer on its
books and records, issue a new certificate representing any of the Shares or
New Shares or record such vote unless and until Shareholder shall have complied
with the terms of this Agreement.
6. Additional Documents. Shareholder hereby covenants and agrees to execute
and deliver any additional documents necessary or desirable, in the reasonable
opinion of Parent, to carry out the purpose and intent of this Agreement.
7. Consent and Waiver. Shareholder hereby gives any consents or waivers that
are reasonably required for the consummation of the Transaction under the terms
of any agreement to which Shareholder is a party or pursuant to any rights
Shareholder may have.
8. Further Assurances. Shareholder will, from time to time, execute and
deliver, or cause to be executed and delivered, such additional or further
consents, documents or other instruments as Parent may request for the purpose
of effectuating the matters covered by this Agreement, including the grant of
the proxies set forth in Section 3.
9. Termination. Sections 1, 2, 3 and 4 hereof and the Proxy delivered in
connection herewith shall terminate and shall have no further force or effect
as of the Expiration.
10. Confidentiality. Shareholder agrees (i) to hold any information
regarding this Agreement and the Transaction in strict confidence, and (ii) not
to divulge any such information to any third person, until such time as the
Transaction has been publicly disclosed by Parent.
11. Miscellaneous.
11.1 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
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11.2 Binding Effect and Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but, except as otherwise
specifically provided herein, neither this Agreement nor any of the rights,
interests or obligations of the parties hereto may be assigned by any of the
parties without the prior written consent of the others. This Agreement is
intended to bind Shareholder as a Shareholder of Company only with respect to
the specific matters set forth herein.
11.3 Amendment and Modification. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
11.4 Specific Performance; Injunctive Relief. The parties hereto acknowledge
that Parent will be irreparably harmed and that there will be no adequate
remedy at law for a violation of any of the covenants or agreements of
Shareholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Parent upon any such violation, Parent
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Parent at law
or in equity and Shareholder hereby waives any and all defenses which could
exist in its favor in connection with such enforcement and waives any
requirement for the security or posting of any bond in connection with such
enforcement.
11.5 Notices. All notices, requests, demands or other communications that
are required or may be given pursuant to the terms of this Agreement shall be
in writing and shall be deemed to have been duly given if delivered by hand or
mailed by registered or certified mail, postage prepaid, or delivered to a
reputable overnight courier for overnight delivery, postage prepaid, as
follows:
(a) If to Shareholder, at the address set forth below Shareholder's
signature at the end hereof.
(b) If to Parent, to:
Digital Island, Inc.
45 Fremont Street
12th Floor
San Francisco, CA 94111
Attention: Ruann F. Ernst
Facsimile No.: (415) 738-4141
Telephone No.: (415) 738-4100
with a copy to:
Brobeck, Phleger & Harrison LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attention: Curtis L. Mo, Esq.
with a copy to Rod J. Howard, Esq.
Facsimile No.: (650) 496-2715
Telephone No.: (650) 424-0160
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(c) If to Company, to:
Sandpiper Networks, Inc.
125 Auburn Ct.
Suite 210
Westlake Village, CA 91362
Attention: Leo S. Spiegel
Facsimile No.: (805) 370-2101
Telephone No.: (805) 370-2100
with a copy to:
Riordan & McKinzie LLP
5743 Corsa Avenue
Suite 116
Westlake Village, CA 91362
Attention: Larry Weeks, Esq.
Facsimile No.: (818) 706-2956
Telephone No.: (818) 706-1800
or to such other address as any party hereto or any Indemnified Person may
designate for itself by notice given as herein provided.
11.6 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of California,
without regard to the conflicts of laws principles thereof.
11.7 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
11.8 Effect of Headings. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this Agreement.
11.9 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as
of the date first above written.
DIGITAL ISLAND, INC.
SHAREHOLDER
By: _________________________________ By: _____________________________
Name: _______________________________ (Signature)
Title: ______________________________ _________________________________
(Signature of Spouse)
SANDPIPER NETWORKS, INC.
_________________________________
(Social Security / Tax I.D. No.)
By: _________________________________
Name: _______________________________ _________________________________
(Print Name of Shareholder)
Title: ______________________________
_________________________________
(Print Street Address)
_________________________________
(Print City, State and Zip)
_________________________________
(Print Telephone Number)
_________________________________
(Social Security or Tax I.D.
Number)
Total Number of Shares of Company Capital Stock owned on the date hereof:
Common Stock: _______________________
Series A Preferred Stock: ___________
Series B Preferred Stock: ___________
State of Residence: _________________
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ANNEX A
IRREVOCABLE PROXY TO VOTE STOCK OF SANDPIPER NETWORKS, INC.
The undersigned shareholder of Sandpiper Networks, Inc., a California
corporation ("Company"), hereby irrevocably (to the full extent permitted by
the California Corporations Code) appoints the members of the Board of
Directors of Digital Island, Inc., a Delaware corporation ("Parent"), and each
of them, or any other designee of Parent, as the sole and exclusive attorneys
and proxies of the undersigned, with full power of substitution and
resubstitution, to vote and exercise all voting and related rights (to the full
extent that the undersigned is entitled to do so) with respect to all of the
shares of capital stock of Company that now are or hereafter may be
beneficially owned by the undersigned, and any and all other shares or
securities of Company issued or issuable in respect thereof on or after the
date hereof (collectively, the "Shares") in accordance with the terms of this
Irrevocable Proxy. The Shares beneficially owned by the undersigned shareholder
of Company as of the date of this Irrevocable Proxy are listed on the final
page of this Irrevocable Proxy. Upon the undersigned's execution of this
Irrevocable Proxy, any and all prior proxies given by the undersigned with
respect to any Shares are hereby revoked and the undersigned agrees not to
grant any subsequent proxies with respect to the Shares until after the
Expiration (as defined below).
This Irrevocable Proxy is irrevocable (to the extent provided in the
California Corporations Code), is coupled with an interest, including, but not
limited to, that certain Shareholder Agreement dated as of even date herewith
by and among Parent, Company, and the undersigned (the "Shareholder
Agreement"), and is granted in consideration of Parent entering into that
certain Agreement and Plan of Reorganization (the "Reorganization Agreement")
by and among Parent, Beach Acquisition Corp., a California corporation and a
wholly owned subsidiary of Parent ("Merger Sub"), and Company, which
Reorganization Agreement provides for the merger of Merger Sub with and into
Company, the conversion of outstanding shares of Company capital stock into the
right to receive Parent Common Stock (in accordance with the applicable
exchange ratio), and for Company to become a wholly owned subsidiary of Parent
(the "Merger"). As used herein, the term "Expiration" shall mean the earlier to
occur of (i) such date and time as the Merger shall become effective in
accordance with the terms and provisions of the Reorganization Agreement, and
(ii) the date of termination of the Reorganization Agreement.
The attorneys and proxies named above, and each of them are hereby
authorized and empowered by the undersigned, at any time prior to the
Expiration, to act as the undersigned's attorney and proxy to vote the Shares,
and to exercise all voting and other rights of the undersigned with respect to
the Shares (including, without limitation, the power to execute and deliver
written consents pursuant to the California Corporations Code), at every
annual, special or adjourned meeting of the shareholders of Company and in
every written consent in lieu of such meeting in favor of approval and adoption
of the Reorganization Agreement and approval of the terms thereof and of the
Merger and each of the other transactions contemplated by the Reorganization
Agreement, and in favor of any matter that could reasonably be expected to
facilitate the Merger and the other transactions contemplated by the
Reorganization Agreement, and against any Alternative Transaction or
Frustrating Transaction (as such terms are defined in the Shareholder
Agreement).
The attorneys and proxies named above may not exercise this Irrevocable
Proxy on any other matter except as provided above. The undersigned shareholder
may vote the Shares on all other matters.
All authority herein conferred shall survive the death or incapacity of the
undersigned and any obligation of the undersigned hereunder shall be binding
upon the heirs, personal representatives, successors and assigns of the
undersigned.
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This Irrevocable Proxy is coupled with an interest as aforesaid and is
irrevocable.
Dated: ____________________________ _____________________________________
(Signature of Shareholder)
_____________________________________
(Print Name of Shareholder)
Shares beneficially owned:
shares of Company Common Stock
shares of Company Series A
Preferred Stock
shares of Company Series B
Preferred Stock
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ANNEX B
MARKET STANDOFF LETTER AGREEMENT
DIGITAL ISLAND, INC.
45 Fremont Street
12th Floor
San Francisco, CA 94111
Re: Proposed Merger of Digital Island, Inc. and Sandpiper Networks, Inc.
Ladies and Gentlemen:
The undersigned understands that Sandpiper Networks, Inc., a California
corporation ("Company") and Digital Island, Inc., a Delaware corporation
("Parent") have entered into an Agreement and Plan of Reorganization, dated as
of October 24, 1999 (the "Reorganization Agreement"), pursuant to which Beach
Acquisition Corp., a California corporation and a wholly owned subsidiary of
Parent, will be merged with and into Company (the "Merger"). Capitalized terms
not otherwise defined herein shall have the same meaning given to them in the
Reorganization Agreement.
In recognition of the benefit that the Merger will confer upon the
undersigned as a securityholder, officer and/or director of Company and/or of
Parent, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees with
Parent, that, from the Effective Time until the earliest to occur of (a) the
sale by Parent of shares of its common stock ("Parent Common Stock") for its
own account in a bona fide, firm commitment underwritten public offering
pursuant to a registration statement under the Securities Act of 1933, as
amended, (b) July 15, 2000, (c) the effective date of a merger of Parent with
or into another corporation in which fifty (50%) or more of the voting power of
Parent is disposed of, or the sale of all or substantially all of the assets of
Parent; or (d) such other date, and with such limitations, as may be approved
by unanimous vote of the Board of Directors of Parent, the undersigned will not
directly or indirectly (i) issue, offer to sell, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant for the sale of, or otherwise
dispose of or transfer any shares of Parent Common Stock or any securities
convertible into or exchangeable or exercisable for Parent Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
(ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Parent Common Stock or any securities
convertible into or exchangeable for the Parent Common Stock, whether any such
swap transaction is to be settled by delivery of Parent Common Stock or other
securities, in cash or otherwise.
The foregoing paragraph shall not apply to (a) transactions by any person
relating to shares of Parent Common Stock or other securities acquired in open
market transactions after the Effective Time or (b) transfers of Parent Common
Stock or any securities convertible into or exercisable or exchangeable for
Parent Common Stock to a member of the undersigned's immediate family or to a
trust of which the undersigned or an immediate family member is the beneficiary
(either one a "Transferee") provided that upon any such transfer, the
Transferee shall sign a letter substantially similar to this letter agreement.
The undersigned agrees and consents to the entry of stop transfer
instructions with Parent's transfer agent against the transfer of shares of
Parent Common Stock held by the undersigned unless such transfer is made in
compliance with this Agreement. The undersigned understands and agrees that
Parent shall be entitled to affix an appropriate legend to any certificate
representing shares of Parent Common Stock reflecting the restrictions set
forth in this Agreement.
This Agreement is irrevocable and may only be amended in writing if agreed
to by the unanimous vote of the Board of Directors of Parent.
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The undersigned agrees that the provisions of this letter agreement shall be
binding also upon the successors, assigns, heirs and personal representatives
of the undersigned.
Very truly yours,
Date: _______________________________ _____________________________________
(Name of Entity or Individual--
Please Print)
_____________________________________
(Signature)
_____________________________________
(Name of Person signing on behalf of
Entity, if applicable--Please Print)
_____________________________________
(Title of Person signing on behalf
of Entity, if applicable--Please
Print)
On behalf of:
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EXHIBIT D
SHAREHOLDER REPRESENTATION AGREEMENT
THIS SHAREHOLDER REPRESENTATION AGREEMENT (this "Agreement") is entered into
as of the day of , between Digital Island, Inc., a
Delaware corporation ("Parent"), and the undersigned Shareholder
("Shareholder") of Sandpiper Networks, Inc., a California corporation
("Company"). Capitalized terms used and not defined herein shall have the
meanings set forth in the Reorganization Agreement referred to below.
RECITALS
A. Company and Parent have entered into an Agreement and Plan of
Reorganization, dated as of October 24, 1999 (the "Reorganization Agreement"),
pursuant to which Beach Acquisition Corp., a California corporation and a
wholly owned subsidiary of Parent, will be merged with and into Company (the
"Merger").
B. By virtue of the Merger and in connection therewith, Shareholder will
become the owner of shares of Common Stock of Parent (the "Parent Shares").
C. Pursuant to the Reorganization Agreement, Parent and an agent (the
"Shareholders' Agent") of the former shareholders of Company will enter into
the Escrow Agreement with the Escrow Agent.
D. Shareholder understands and acknowledges that Company, Parent and their
respective Securityholders, as well as legal counsel to Company and Parent, are
entitled to rely on (x) the truth and accuracy of Shareholder's representations
contained herein and (y) Shareholder's performance of the obligations set forth
herein.
NOW, THEREFORE, in consideration of the premises and the mutual agreements,
provisions and covenants set forth in the Reorganization Agreement and in this
Shareholder's Agreement, it is hereby agreed as follows:
1. Share Ownership and Agreement to Retain Shares.
1.1 Transfer and Encumbrance.
(a) Shareholder represents and warrants to Parent that: (i) Shareholder is
the beneficial owner of that number of shares of Company Capital Stock set
forth on the signature page hereto (the "Shares") and, except as otherwise set
forth on the signature page hereto, (A) has held each such Share at all times
since the date such Share was originally issued by Company, and (B) did not
acquire any Shares in contemplation of the Merger; (ii) the Shares constitute
Shareholder's entire interest in the outstanding capital stock of Company;
(iii) no other person or entity not a signatory to this Agreement has a
beneficial interest in or a right to acquire the Shares or any portion of the
Shares (except, with respect to Shareholders which are partnerships, partners
of such Shareholders); (iv) the Shares are and will be at all times up until
the Expiration free and clear of any liens, claims, options, charges or other
encumbrances (except with respect to federal and state securities laws); and
(v) Shareholder's principal residence or place of business is accurately set
forth on the signature page hereto.
(b) Shareholder agrees not to transfer (except as may be specifically
required by court order or by operation of law), sell, exchange, pledge or
otherwise dispose of or encumber the Shares, or to make any offer or agreement
relating thereto, at any time on or prior to the Expiration. As used herein,
the term "Expiration" shall mean the earlier to occur of (i) the Effective Time
or (ii) termination of the Reorganization Agreement in accordance with its
terms.
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1.2 New Shares. Shareholder agrees that any shares of capital stock of
Company that Shareholder purchases or with respect to which Shareholder
otherwise acquires beneficial ownership (including, without limitation,
pursuant to any stock split, stock dividend, recapitalization, reorganization
or the like) after the date of this Agreement and prior to the Expiration shall
be subject to the terms and conditions of this Agreement to the same extent as
if they constituted Shares.
2. Representations, Warranties and Covenants of Shareholder.
2.1 Shareholder hereby represents, warrants and covenants to Parent as
follows:
(a) Purchase Entirely for Own Account. The Parent Shares being acquired by
Shareholder pursuant to the Merger will be acquired for investment for
Shareholder's own account, not as a nominee or agent, and not with a view to
the resale or distribution of any part thereof, and Shareholder has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, Shareholder further represents that
Shareholder does not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participation to such person or to
any third person, with respect to any of such Parent Shares.
(b) Investment Experience. Shareholder, either alone or with a "purchaser
representative" as described in subsection (c) below, has substantial
experience evaluating and investing in securities of companies and acknowledges
that it has the capacity to protect its own interests in connection therewith,
can bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Parent Shares. If other than an
individual, Shareholder also represents it has not been organized for the
purpose of acquiring the Parent Shares.
(c) Accredited Investor/Suitability Questionnaire. Shareholder is and at the
Closing (i) will be an "accredited investor" within the meaning of Rule 501 of
Regulation D promulgated by the Securities and Exchange Commission (the "SEC"),
as presently in effect or (ii) has delivered an Investor Suitability
Questionnaire, in the form attached as Annex A, to Parent describing
Shareholder's ability to evaluate an investment in Parent Shares or (iii) has
appointed a "purchaser representative" as defined in Rule 501 of Regulation D
to evaluate Shareholder's investment in Parent Shares.
(d) Restricted Securities. Shareholder understands that the Parent Shares
constitute "restricted securities" under the federal securities laws inasmuch
as they are being acquired from Parent in a transaction not involving a public
offering and that under such laws and applicable regulations such securities
may be resold without registration under the Securities Act of 1933, as amended
(the "Securities Act"), only in certain limited circumstances. In this
connection, Shareholder represents that Shareholder is familiar with Rule 145
promulgated by the SEC, as presently in effect ("Rule 145"), and understands
the resale limitations imposed thereby and by the Securities Act.
(e) Further Limitations on Disposition. Shareholder agrees not to offer,
sell, exchange, transfer, pledge or otherwise dispose of or encumber any of the
Parent Shares unless at that time:
(i) such transaction is permitted pursuant to the provisions of Rule 145
under the Securities Act;
(ii) counsel representing Shareholder, reasonably satisfactory to
Parent, shall have advised Parent in a written opinion letter
reasonably satisfactory to Parent and Parent's counsel, and upon which
Parent and its counsel may rely, that no registration under the
Securities Act is required in connection with the proposed sale,
transfer or other disposition;
(iii) a registration statement under the Securities Act (a "Registration
Statement") covering the Parent Shares proposed to be sold, transferred or
otherwise disposed of, describing the manner and terms of the proposed
sale, transfer or other disposition, and containing a current prospectus,
is filed with the SEC and made effective under the Securities Act;
provided, however, that use of and reliance on the Registration Statement
will be subject to pooling of interests requirements applicable to the
Merger,
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customary "blackout" periods and, if Shareholder is an employee of the
Company or Parent at the time of a proposed offer, sale, exchange,
transfer, pledge or other disposition or encumbrance of the Parent Shares
pursuant to such registration statement, any applicable trading windows of
Parent; or
(iv) an authorized representative of the SEC shall have rendered written
advice to Shareholder (sought by Shareholder or counsel to Shareholder,
with a copy thereof and of all other related communications delivered to
Parent) to the effect that the SEC will take no action, or that the staff
of the SEC will not recommend that the SEC take action, with respect to the
proposed offer, sale, exchange, transfer, pledge or other disposition or
encumbrance if consummated.
(f) All certificates representing Parent Shares deliverable to Shareholder
pursuant to the Reorganization Agreement and in connection with the Merger and
any certificates subsequently issued with respect thereto or in substitution
therefor shall bear a legend that such shares of Parent Common Stock may only
be offered, sold, exchanged, transferred, pledged or disposed of in accordance
with this Agreement and with (i) the provisions of Rule 145 under the
Securities Act, (ii) pursuant to an effective Registration Statement or (iii)
pursuant to an exemption provided by the Securities Act. Parent, at its
discretion, may cause stop transfer orders to be placed with its transfer agent
with respect to the certificates for such Parent Shares but not as to the
certificates for any part of the Parent Shares as to which said legend is no
longer appropriate.
(g) Shareholder will observe and comply with the Securities Act and the
General Rules and Regulations thereunder, as now in effect and as from time to
time amended and including those hereafter enacted or promulgated, in
connection with any offer, sale, exchange, transfer, pledge or other
disposition or encumbrance of the Parent Shares or any part thereof.
(h) Shareholder understands that pursuant to the Reorganization Agreement,
Parent and the Shareholders' Agent shall enter into an Escrow Agreement and
that Shareholder shall be bound by the provisions of the Escrow Agreement in
the form attached as an exhibit to the Reorganization Agreement and Article
VIII of the Reorganization Agreement ("Article VIII"); and as such, Shareholder
agrees to the appointment of the person or persons identified therein as the
Shareholders' Agent and further agrees to be bound by the terms of the Escrow
Agreement and Article VIII.
3. Additional Documents and Actions. Shareholder hereby covenants and agrees
to execute and deliver any additional documents and take any actions necessary
or desirable, in the reasonable opinion of Parent, to carry out the purposes
and intents of this Agreement.
4. Consent and Waiver. Shareholder hereby gives any consents or waivers that
are reasonably required for the consummation of the transactions contemplated
by the Reorganization Agreement (the "Transaction") under the terms of any
agreement to which Shareholder is a party or pursuant to any contracted rights
Shareholder may have.
5. Confidentiality. Shareholder agrees (i) to hold any information regarding
this Agreement and the Transaction in strict confidence, and (ii) not to
divulge any such information to any third person, until such time as the
Transaction has been publicly disclosed by Parent.
6. Miscellaneous.
6.1 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
6.2 Binding Effect and Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors, but, except as otherwise specifically provided
herein, neither this Agreement nor any of the rights, interests or obligations
of the parties hereto may be assigned by either of the parties.
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6.3 Amendment and Modification. This Agreement may not be modified, amended,
altered or supplemented except by the execution and delivery of a written
agreement executed by each of the parties hereto.
6.4 Specific Performance; Injunctive Relief. The parties hereto acknowledge
that Parent will be irreparably harmed and that there will be no adequate
remedy at law for a violation of any of the covenants or agreements of
Shareholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Parent upon any such violation, Parent
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Parent at law
or in equity and Shareholder hereby waives any and all defenses which could
exist in its favor in connection with such enforcement and waives any
requirement for the security or posting of any bond in connection with such
enforcement.
6.5 Notices. All notices, requests, demands or other communications that are
required or may be given pursuant to the terms of this Agreement shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed by registered or certified mail, postage prepaid, or delivered to a
reputable overnight courier for overnight delivery, postage prepaid, as
follows:
(a) If to Shareholder, at the address set forth below Shareholder's
signature at the end hereof, with a copy to Company.
(b) If to Parent, to:
Digital Island, Inc.
45 Fremont Street
12th Floor
San Francisco, CA 94111
Attention: Ruann F. Ernst
Facsimile No.: (415) 738-4141
Telephone No.: (415) 738-4100
with a copy to:
Brobeck, Phleger & Harrison LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attention: Curtis L. Mo, Esq.
with a copy to Rod J. Howard, Esq.
Facsimile No.: (650) 496-2715
Telephone No.: (650) 424-0160
(c) if to Company, to:
Sandpiper Networks, Inc.
125 Auburn Ct.
Suite 210
Westlake Village, CA 91362
Attention: Leo S. Spiegel
Facsimile No.: (805) 370-2101
Telephone No.: (805) 370-2100
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with a copy to:
Riordan & McKinzie LLP
5743 Corsa Avenue
Suite 116
Westlake Village, CA 91362
Attention: Larry Weeks, Esq.
Facsimile No.: (818) 706-2956
Telephone No.: (818) 706-1800
or to such other address as any party hereto may designate for itself by notice
given as herein provided.
6.6 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of California,
without regard to conflict of law principles thereof.
6.7 Entire Agreement. This Agreement, together with the Reorganization
Agreement (to the extent applicable), contains the entire understanding of the
parties in respect of the subject matter hereof, and supersedes all prior
negotiations and understandings between the parties with respect to such
subject matter.
6.8 Effect of Headings. The section headings herein are for convenience only
and shall not affect the construction or interpretation of this Agreement.
6.9 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
[Rest of page intentionally left blank]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Shareholder Representation
Agreement to be executed as of the date first above written.
DIGITAL ISLAND, INC. SHAREHOLDER
By: _________________________________ By: _________________________________
Name: _______________________________ (Signature)
Title: ______________________________
_____________________________________
(Signature of Spouse)
SANDPIPER NETWORKS, INC. _____________________________________
(Print Name)
By: _________________________________ _____________________________________
Name: _______________________________ (Print Address)
Title: ______________________________
_____________________________________
(Print Address)
_____________________________________
(Print Telephone Number)
_____________________________________
(Social Security or Tax I.D. Number)
Total Number of Shares of Company Capital Stock owned on the date hereof:
Common Stock: _______________________
Series A Preferred Stock: ___________
Series B Preferred Stock: ___________
State of Residence: _________________
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ANNEX A
INVESTOR SUITABILITY QUESTIONNAIRE
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EXHIBIT E
ESCROW AGREEMENT
This ESCROW AGREEMENT is made as of , 1999, by and among
State Street Bank and Trust Company of California, N.A. (the "Escrow Agent"),
DIGITAL ISLAND, INC., a Delaware corporation ("Parent"), and THOMAS R. GOVREAU,
as agent (the "Shareholders' Agent") of the former shareholders of SANDPIPER
NETWORKS, INC., a California corporation ("Company"). Terms not otherwise
defined herein shall have the meaning set forth in the Reorganization Agreement
(as defined below).
WITNESSETH
WHEREAS, Parent, Company and Beach Acquisition Corp., a California
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), have
entered into an Agreement and Plan of Reorganization (the "Reorganization
Agreement"), dated as of October 24, 1999, providing for the merger of Merger
Sub with and into Company, with Company surviving as a wholly owned subsidiary
of Parent (the "Merger"); and
WHEREAS, pursuant to Article VIII of the Reorganization Agreement, a copy of
which is attached hereto as Annex A ("Article VIII"), an escrow fund (the
"Escrow Fund") will be established to compensate Parent for certain Damages, if
any, arising out of any misrepresentation or breach or default in connection
with any of the representations, warranties, covenants and agreements given or
made by Company in the Reorganization Agreement, the Company Disclosure
Schedule or any Ancillary Agreement; and
WHEREAS, the Shareholders' Agent has been constituted as agent for and on
behalf of the former shareholders of Company (individually, a "Shareholder" and
collectively, the "Shareholders") to undertake certain obligations specified in
Article VIII; and
WHEREAS, Article VIII provides for an Escrow Fund of Escrow Shares
representing 10% of the shares of Parent Common Stock to be delivered to the
Shareholders in connection with the Merger and pursuant to Section 1.6(a) of
the Reorganization Agreement, such escrow to be held by the Escrow Agent; and
WHEREAS, the parties hereto desire to set forth further terms and conditions
in addition to those set forth in Article VIII relating to the operation of the
Escrow Fund;
NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants
contained herein, and intending to be legally bound, hereby agree as follows:
1. Escrow and Escrow Shares. Pursuant to Article VIII, Parent shall deposit
in escrow with the Escrow Agent, as escrow agent, within five (5) business days
of the Effective Time, a stock certificate or certificates representing
shares (the "Escrow Shares"), which shall be registered in the name
of the Escrow Agent as nominee for the beneficial owners of such shares. The
Escrow Shares shall be held and distributed by the Escrow Agent in accordance
with the terms and conditions of Article VIII and this Agreement. The number of
Escrow Shares beneficially owned by each Shareholder, the percentage interest
of each Shareholder in the Escrow Fund, the address of each Shareholder and the
taxpayer identification number of each Shareholder are set forth in Annex B
attached hereto.
2. Rights and Obligations of the Parties. The Escrow Agent shall be entitled
to such rights and shall perform such duties of the escrow agent as set forth
herein and in Article VIII (collectively, the "Duties"), in accordance with the
terms and conditions of this Escrow Agreement and Article VIII. Parent and the
Shareholders' Agent shall be entitled to their respective rights and shall
perform their respective duties and obligations as set forth herein and in
Article VIII, in accordance with the terms hereof and thereof. In the event
that the terms of this Escrow Agreement conflict in any way with the provisions
of Article VIII, Article VIII shall control.
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3. Escrow Period. The Escrow Period shall terminate at 11:59 p.m. P.S.T. on
the first anniversary of the Effective Time; provided, however, that a portion
of the Escrow Shares, which in the reasonable judgment of Parent as set forth
in a certificate delivered to the Escrow Agent, subject to the objection of the
Shareholders' Agent and any subsequent arbitration of the matter in the manner
provided in Section 8.6 of Article VIII, is necessary to satisfy any
unsatisfied claims specified in any Officer's Certificate received by the
Escrow Agent prior to termination of the Escrow Period with respect to facts
and circumstances existing prior to expiration of the Escrow Period, shall
remain in the Escrow Fund until such claims have been resolved. Parent shall
deliver to the Escrow Agent a certificate specifying the Effective Time at the
time of the initial deposit of the Escrow Fund.
4. Duties of Escrow Agent. In addition to the Duties set forth in Article
VIII, the Duties of the Escrow Agent shall include the following:
(a) The Escrow Agent shall hold and safeguard the Escrow Shares during the
Escrow Period, shall treat such Escrow Fund as a trust fund in accordance with
the terms of this Escrow Agreement and Article VIII and not as the property of
Parent, and shall hold and dispose of the Escrow Shares only in accordance with
the terms hereof.
(b) The Escrow Shares shall be voted by the Escrow Agent in accordance with
the specific written instructions received by the Escrow Agent from the
beneficial owners of such shares as to how such shares are to be voted. The
Escrow Agreement need not solicit voting instructions. In the absence of such
instructions, the Escrow Agent shall be under no obligation to vote such
shares. The Escrow Agent need not forward proxy information, annual or other
reports or other information received from Parent with respect to the Escrow
Shares.
(c) Promptly following termination of the Escrow Period, the Escrow Agent
shall requisition from Parent's stock transfer agent if necessary, and shall
deliver or cause such transfer agent to deliver to the Shareholders the number
of Escrow Shares and other property in the Escrow Fund in excess of the amount
of such Escrow Shares or other property set forth in a certificate of the
Parent as being sufficient to satisfy any unsatisfied claims specified in any
Officer's Certificate received by the Escrow Agent prior to termination of the
Escrow Period with respect to facts and circumstances existing prior to
expiration of the Escrow Period, and to pay expenses as provided in Section
11(b) hereof. As soon as all such claims have been resolved, the Escrow Agent
shall deliver to the Shareholders all of the Escrow Shares and other property
remaining in the Escrow Fund and not required to satisfy such claims and
expenses.
(d) Pursuant to Section 8.4 of the Reorganization Agreement, for the purpose
of compensating Parent for its Damages pursuant to this Agreement, the Parent
Common Stock in the Escrow Fund shall be valued at the Escrow Value, which is
to be provided by Parent in writing by Parent upon the initial deposit of
Escrow Shares to the Escrow Agent. If the value to be distributed to Parent (or
to any Shareholder upon a termination of the escrow) is not evenly divisible by
the Escrow Value, the Escrow Agent shall round down the number of shares to be
distributed to the next highest number of shares and shall distribute that
number. In lieu of the fractional interest not distributed, Parent shall
furnish to the Escrow Agent, and the Escrow Agent in turn will distribute to
the Shareholders, cash equal to such fractional interest multiplied by the
Escrow Value. Parent shall be deemed to have purchased such fractional
interests with respect to which it has furnished funds to the Escrow Agent.
Accordingly, the Escrow Agent, upon receipt of such funds, shall deliver the
corresponding number of shares to Parent. In all events, Parent shall so
purchase only a whole number of shares. Any cash so received from Parent and
not so immediately distributed by the Escrow Agent shall be retained by the
Escrow Agent as part of the Escrow Fund, but need not be invested.
5. Distribution. Any cash dividends, dividends payable in securities or
other distributions of any kind (but excluding any shares of Parent capital
stock received upon a stock split or stock dividend) shall be promptly
distributed by the Escrow Agent to the beneficial holder of the Escrow Shares
to which such distribution relates. Any shares of Parent Common Stock received
by the Escrow Agent upon a stock split,
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stock dividend, recapitalization, reorganization or the like made in respect of
any securities in the Escrow Fund shall be added to the Escrow Fund and become
a part thereof. Any provision hereof and of Article VIII shall be adjusted to
appropriately reflect any stock split, stock dividend, reverse stock split,
recapitalization, reorganization, merger or the like.
6. Exculpatory Provisions.
(a) The Escrow Agent shall be obligated only for the performance of such
Duties as are specifically set forth herein and in Article VIII and may rely
and shall be protected in relying or refraining from acting on any instrument
reasonably believed to be genuine and to have been signed or presented by the
proper party or parties. The Escrow Agent shall not be charged with knowledge
of any document or agreement except for this Agreement and Article VIII. The
Escrow Agent shall not be liable for forgeries or false impersonations. The
Escrow Agent shall not be liable for any act done or omitted hereunder as
escrow agent except for its own gross negligence or willful misconduct. The
Escrow Agent shall in no case or event be liable for any representations or
warranties of Company or Parent. Any act done or omitted pursuant to the advice
or opinion of counsel shall be conclusive evidence of the good faith of the
Escrow Agent and such opinion shall be full and complete authorization and
protection in respect of any action taken or omitted by Escrow Agent in
accordance herewith.
(b) The Escrow Agent is hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person, excepting
only orders or process of courts of law or arbitration as provided in Section
8.6 of the Reorganization Agreement, and is hereby expressly authorized to
comply with and obey orders, judgments or decrees of any court or rulings of
any arbitrators. In case the Escrow Agent obeys or complies with any such
order, judgment or decree of any court or such ruling of any arbitrator, the
Escrow Agent shall not be liable to any of the parties hereto or to any other
person by reason of such compliance, notwithstanding any such order, judgment,
decree or arbitrators' ruling being subsequently reversed, modified, annulled,
set aside, vacated or found to have been entered without jurisdiction.
(c) The Escrow Agent shall not be liable in any respect on account of the
identity, authority or rights of the parties executing or delivering or
purporting to execute or deliver the Reorganization Agreement or any documents
or papers deposited or called for thereunder.
(d) The Escrow Agent shall not be liable for the outlawing of any rights
under any statute of limitations with respect to the Reorganization Agreement
or any documents deposited with the Escrow Agent.
7. Alteration of Duties. The Duties may be altered, amended, modified or
revoked only by a writing signed by all of the parties hereto.
8. Resignation and Removal of the Escrow Agent. The Escrow Agent may resign
as Escrow Agent at any time with or without cause by giving at least thirty
(30) days' prior written notice to each of Parent and the Shareholders' Agent,
such resignation to be effective thirty (30) days following the date such
notice is given. In addition, Parent and Shareholders' Agent may jointly remove
the Escrow Agent as escrow agent at any time with or without cause, by an
instrument (which may be executed in counterparts) given to the Escrow Agent,
which instrument shall designate the effective date of such removal. In the
event of any such resignation or removal, a successor escrow agent which shall
be a bank or trust company organized under the laws of the United States of
America or of the State of California having (or if such bank or trust company
is a member of a bank company, its bank holding company has) a combined capital
and surplus of not less than $50,000,000, shall be appointed by the
Shareholders' Agent with the approval of Parent, which approval shall not be
unreasonably withheld. Any such successor escrow agent shall deliver to Parent
and the Shareholders' Agent a written instrument accepting such appointment,
and thereupon it shall succeed to all the rights and duties of the Escrow Agent
hereunder and shall be entitled to receive the Escrow Fund.
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9. Further Instruments. If the Escrow Agent reasonably requires other or
further instruments in connection with performance of the Duties, the necessary
parties hereto shall join in furnishing such instruments.
10. Disputes. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities or other property held by the Escrow Agent hereunder, the Escrow
Agent is authorized and directed to act in accordance with, and in reliance
upon, the terms hereof and of Article VIII.
11. Escrow Fees and Expenses.
(a) Parent shall pay the Escrow Agent such fees as are established by the
Fee Schedule attached hereto as Annex C and all reasonable "out-of-pocket"
expenses incurred while serving as Escrow Agent (including reasonable counsel
fees).
(b) Any out-of-pocket fees and expenses incurred by the Shareholders' Agent
(including any loss, liability or expense for which the Shareholders' Agent is
to be indemnified pursuant to Section 8.7(b) of the Reorganization Agreement)
may be paid out of the Escrow Fund, but only at the end of the Escrow Period
and only to the extent any amounts remain after all other distributions from
the Escrow Fund and the final resolution of any claims thereon. Escrow Agent
shall disburse said amounts, if any, upon receipt of a written request of the
Shareholders' Agent. At least two business days prior to the expiration of the
Escrow Period, the Shareholders' Agent shall deliver to the Escrow Agent a
certificate setting forth the amount of such fees and expenses that are to be
paid out of the Escrow Fund. The Escrow Agent may rely on such certificate
without inquiry and may assume that, if the Escrow Agent has not received such
a certificate, no such fees and expenses are payable.
12. Indemnification. In consideration of the Escrow Agent's acceptance of
this appointment, Parent agrees to indemnify and hold the Escrow Agent and its
officers, directors, employees, counsel and agents harmless as to any loss,
damage, expense, or liability incurred by it to any person, firm or corporation
by reason of its having accepted such appointment or in carrying out the terms
hereof and of Article VIII, and to reimburse the Escrow Agent for all its costs
and expenses, including, among other things, counsel fees and expenses,
reasonably incurred by reason of any matter as to which an indemnity is paid;
provided, however, that no indemnity need be paid in case of the Escrow Agent's
negligence, willful misconduct or bad faith. In no event shall the Escrow Agent
be liable for special, indirect or consequential loss or damages.
13. General.
(a) Any notice given hereunder shall be in writing and shall be deemed
effective upon the earlier of personal delivery or the third day after mailing
by certified or registered mail, postage prepaid, or the first day after
delivery with a reputable overnight carrier for next day delivery, postage
prepaid, as follows:
To Parent:
Digital Island, Inc.
45 Fremont Street
12th Floor
San Francisco, CA 94111
Attention: Ruann F. Ernst
Facsimile No.: (415) 738-4141
Telephone No.: (415) 738-4100
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with a copy to:
Brobeck, Phleger & Harrison LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attention: Curtis L. Mo, Esq.
with a copy to Rod J. Howard, Esq.
Facsimile No.: (650) 496-2715
Telephone No.: (650) 424-0160
if to Company, to:
Sandpiper Networks, Inc.
125 Auburn Ct.
Suite 210
Westlake Village, CA 91362
Attention: Leo S. Spiegel
Facsimile No.: (805) 370-2101
Telephone No.: (805) 370-2100
with a copy to:
Riordan & McKinzie LLP
5743 Corsa Avenue
Suite 116
Westlake Village, CA 91362
Attention: Larry Weeks, Esq.
Facsimile No.: (818) 706-2956
Telephone No.: (818) 706-1800
To the Escrow Agent:
State Street Bank and Trust Company
of California, N.A.
633 West 5th Street, 12th Floor
Los Angeles, CA 90071
Facsimile No.: (213) 362-7357
Telephone No.: (213) 362-7334
or to such other address as any party may have furnished in writing to the
other parties in the manner provided above. Any notice addressed to the Escrow
Agent shall be effective only upon receipt. Notwithstanding the foregoing,
notices address to the Escrow Agent shall be effective only upon receipt. If
any Officer's Certificate, objection thereto or other notice or document of any
kind is required to be delivered to the Escrow Agent or any other Person, the
Escrow Agent may assume without inquiry that it has been received by such other
person if it has been received by the Escrow Agent.
(b) The Officer's Certificate as defined in Article VIII may be signed by
the President, Vice President or Chief Financial Officer of Parent.
(c) The captions in this Escrow Agreement are for convenience only and shall
not be considered a part of or affect the construction or interpretation of any
provision of this Escrow Agreement.
(d) This Escrow Agreement may be executed in any number of counterparts,
each of which when so executed shall constitute an original copy hereof, but
all of which together shall constitute one agreement.
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(e) No party may, without the prior express written consent of each other
party, assign this Escrow Agreement in whole or in part. This Escrow Agreement
shall be binding upon and inure to the benefit of the respective successors and
assigns of the parties hereto.
(f) This Escrow Agreement shall be governed by and construed in accordance
with the laws of the State of California as applied to contracts made and to be
performed entirely within the State of California, without regard to conflict
of law principles thereof. The parties to this Escrow Agreement hereby agree to
submit to personal jurisdiction in the State of California.
14. Tax Reporting Matters. Parent and the Shareholders' Representative agree
to provide the Escrow Agent with certified tax identification numbers for
Parent and each of the Shareholders by furnishing appropriate forms W-9 (or
Forms W-8, in the case of non-U.S. persons) and other forms and documents that
the Escrow Agent may reasonably request (collectively, "Tax Reporting
Documentation") to the Escrow Agent within 30 days after the date hereof. The
parties hereto understand that, if such Tax Reporting Documentation is not so
certified to the Escrow Agent, the Escrow Agent may be required by the Internal
Revenue Code, as it may be amended from time to time, to withhold a portion of
the Escrow Fund held by the Escrow Agent pursuant to this Agreement.
15. Shareholders' Agent. Unless and until the Escrow Agent shall receive
notice of the appointment of another Shareholders' Agent pursuant to Section
8.7(a) of the Reorganization Agreement, the Escrow Agent may assume without
inquiry that the last Shareholders' Agent of which it has notice remains in
that capacity.
IN WITNESS WHEREOF, each of the parties has executed this Escrow Agreement
as of the date first above written.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A.
as Escrow Agent
By: _________________________________
Name: Joni D'Amico
Title: Vice President
DIGITAL ISLAND, INC.
By: _________________________________
Name:
Title:
THOMAS R. GOVREAU
as Shareholders' Agent
By: _________________________________
Name:
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ANNEX A
ARTICLE VIII
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ANNEX B
SHAREHOLDERS
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ANNEX C
FEE SCHEDULE
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EXHIBIT F
VOTING AGREEMENT
This Voting Agreement (this "Agreement") is made and entered into as of
October , 1999 by and between Sandpiper Networks, Inc., a California
corporation ("Company"), and the undersigned stockholder ("Stockholder") of
Digital Island, Inc., a Delaware corporation ("Parent"). Capitalized terms used
but not otherwise defined herein shall have the meaning set forth in the
Reorganization Agreement (as defined below).
RECITALS
WHEREAS, pursuant to an Agreement and Plan of Reorganization dated as of
October 24, 1999 by and among Parent, Beach Acquisition Corp., a California
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and Company
(such agreement as it may be amended is hereinafter referred to as the
"Reorganization Agreement"), Merger Sub will be merged with and into Company
(the "Merger"); the outstanding shares of capital stock of Company (the
"Company Capital Stock") will be converted into common stock of Parent (the
"Parent Shares") at the applicable exchange ratio set forth in the
Reorganization Agreement; and the Company will become a wholly owned subsidiary
of Parent (the "Transaction");
WHEREAS, it is a condition of Company's willingness to enter into the
Transaction that certain stockholders of Parent vote in favor of approval of
the issuance of the Parent Shares in the Transaction, upon the terms and
conditions set forth herein; and
WHEREAS, Stockholder is either the registered or beneficial owner of, or
holds or exercises, as an individual or in a representative capacity, through
any contract, arrangement, relationship or otherwise, voting power with respect
to, such number of shares of the outstanding common stock of Parent as is
indicated on the signature page of this Agreement (the "Shares");
NOW, THEREFORE, the parties agree as follows:
1. Share Ownership and Agreement to Retain Shares.
1.1 Transfer and Encumbrance.
(a) Stockholder represents and warrants to Company that: (i) Stockholder is
either the registered or beneficial owner of, or holds or exercises, as an
individual or in a representative capacity, through any contract, arrangement,
relationship or otherwise, voting power with respect to, the Shares; (ii) the
Shares constitute all of the shares of outstanding capital stock and voting
securities of Parent as to which Stockholder is either the registered or
beneficial owner, or as to which Stockholder holds or exercises, as an
individual or in a representative capacity, through any contract, arrangement,
relationship or otherwise, voting power; (iii) no other person or entity not a
signatory to this Agreement has a beneficial interest in or a right to acquire
the Shares or any portion of the Shares (except, with respect to Shares held by
partnerships or trusts, the partners of such partnerships and the beneficiaries
of such trusts, and with respect to share held by corporations, such
corporations); (iv) the Shares are and will be at all times until the
Expiration (as defined below) free and clear of any liens, claims, options,
charges or other encumbrances (except with respect to federal or state
securities laws); and (v) Stockholder's principal residence or place of
business is set forth on the signature page hereto.
(b) Other than this Agreement, at all times prior to the Expiration,
Stockholder agrees not to (i) sell, transfer, pledge, assign or otherwise
dispose of or encumber (including by gift) (collectively, "Transfer"), or
consent to any Transfer of, any Shares or New Shares (as defined below) or any
interest therein or enter into any contract, option, or other arrangement
(including any profit sharing or other derivative arrangement) with respect to
any Shares or any New Shares or any interest therein with any person other than
pursuant to the Reorganization Agreement, unless prior to any such Transfer the
transferee of such Shares or New Shares
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enters into and is bound by a voting agreement with Company on terms
substantially identical to the terms of this Agreement, or (ii) enter into any
voting arrangement, whether by proxy, voting agreement or otherwise, in
connection with, directly or indirectly, any amendment of the Parent's
Certificate of Incorporation or Bylaws or other proposal, action or transaction
involving the Parent or any of its subsidiaries, which amendment or other
proposal, action or transaction would or could reasonably be expected to
prevent or materially impede, interfere with, hinder or delay the consummation
of the Merger or any of the other transactions contemplated by the
Reorganization Agreement or to dilute in any material respect the benefits to
Company of the Merger and the other transactions contemplated by the
Reorganization Agreement, or change in any manner the voting rights of any
class or shares of Parent Shares (collectively, "Frustrating Transactions"). As
used herein, the term "Expiration" shall mean the earlier to occur of (x) the
Effective Time or (y) the valid termination of the Reorganization Agreement in
accordance with its terms.
1.2 New Shares. Stockholder agrees that any shares of capital stock of
Parent that Stockholder purchases or with respect to which Stockholder
otherwise acquires beneficial or record ownership or voting power after the
date of this Agreement and prior to the Expiration ("New Shares") shall be
subject to the terms and conditions of this Agreement to the same extent as if
they constituted Shares.
2. Agreement to Vote Shares. Prior to the Expiration, Stockholder covenants
and agrees as follows:
(a) At each meeting of the stockholders of the Parent called to vote upon
the issuance of Parent Shares in the Transaction, or at any adjournment
thereof, or in any other circumstances upon which a vote, consent or other
approval (including by written consent) with respect to the issuance of the
Parent Shares in the Transaction, is sought, such Stockholder shall vote (or
cause to be voted) such Stockholder's Shares or New Shares in favor of the
approval of the issuance of the Parent Shares in the Transaction and in favor
of any matter that could reasonably be expected to facilitate the Merger and
the other transactions contemplated by the Reorganization Agreement, and
against any proposal, plan or offer to acquire all or any substantial part of
the business, assets or capital stock of Parent, whether by merger or other
business combinations, purchase of stock or assets, tender offer or otherwise,
or to liquidate Parent or otherwise distribute to the Stockholders of Parent
all or any substantial part of the business, assets or capital stock of the
Company (each, an "Acquisition Proposal") or transaction or occurrence which if
publicly proposed and offered to the Company and its Stockholders (or any of
them) would be the subject of an Acquisition Proposal, or Frustrating
Transaction.
(b) Notwithstanding the foregoing, nothing in this Agreement shall limit or
restrict Stockholder from acting in his capacity as a director of Parent, to
the extent applicable, it being understood that this Agreement shall apply to
Stockholder solely in his capacity as Stockholder of Parent.
3. Irrevocable Proxy. Stockholder hereby agrees to timely deliver to Company
a duly executed proxy in the form attached hereto as Annex A (the "Proxy"),
such Proxy to cover the Shares and New Shares in respect of which Stockholder
is entitled to vote at each meeting of the Stockholders of Parent (including,
without limitation, each written consent in lieu of a meeting). In the event
that Stockholder is unable to provide any such Proxy in a timely manner,
Stockholder hereby grants Company a power of attorney to execute and deliver
such Proxy for and on behalf of Stockholder, such power of attorney, which
being coupled with an interest, shall survive any death, disability,
bankruptcy, or any other such impediment of Stockholder. Upon the execution of
this Agreement by Stockholder, Stockholder hereby revokes any and all prior
proxies given by Stockholder with respect to the Shares and agrees not to grant
any subsequent proxies with respect to the Shares until after the Expiration.
4. Additional Covenants of Stockholder. Stockholder hereby represents,
warrants and covenants to Company as follows:
(a) Stockholder has full power and legal capacity to execute and deliver
this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby; this Agreement has been duly and validly
executed and delivered by Stockholder and constitutes the valid and binding
obligation of
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Stockholder, enforceable against Stockholder in accordance with its terms.
Except as may be limited by (i) the effect of bankruptcy, insolvency,
conservatorship, arrangement, moratorium or other laws affecting or relating to
the rights of creditors generally, or (ii) the availability of specific
performance, injunctive relief or other equitable remedies and general
principles of equity, regardless of whether considered in a proceeding in
equity or at law, the execution and delivery of this Agreement by Stockholder
does not, and the performance of Stockholder's obligations hereunder will not,
result in any breach of or constitute a default (or an event that with notice
or lapse of time or both would become a default) under, or give to others any
right to terminate, amend, accelerate or cancel any right or obligation under,
or result in the creation of any lien or encumbrance on any Shares or New
Shares pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which
Stockholder is a party or by which Stockholder or the Shares or New Shares are
or will be bound or affected.
(b) Stockholder undertakes and agrees to indemnify and hold harmless Parent,
Company, and each of their respective current and future officers and directors
(an "Indemnified Person") within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), from and against any and all claims, demands,
actions, causes of action, losses, costs, damages, liabilities and expenses
("Claims") based upon, arising out of or resulting from any breach or
nonfulfillment of any undertaking, covenant or agreement made herein by
Stockholder, or caused by or attributable to Stockholder, or Stockholder's
agents or employees, or representatives, brokers, dealers and/or underwriters
insofar as they are acting on behalf of and in accordance with the instruction
of or with the knowledge of Stockholder, in connection with or relating to any
offer, sale, pledge, transfer or other disposition or encumbrance of any of the
Parent Shares by or on behalf of Stockholder, which claim or claims result from
any breach or nonfulfillment as set forth above. The indemnification set forth
herein shall be in addition to any liability that Stockholder may otherwise
have to the Indemnified Persons. Promptly after receiving definitive notice of
any Claim in respect of which an Indemnified Person may seek indemnification
under this Agreement, such Indemnified Person shall submit notice thereof to
Stockholder. The omission by the Indemnified Person so to notify Stockholder of
any such Claim shall not relieve Stockholder from any liability Stockholder may
have hereunder except to the extent that (i) such liability was caused or
increased by such omission, or (ii) the ability of Stockholder to reduce or
defend against such liability was adversely affected by such omission. The
omission of the Indemnified Person so to notify Stockholder of any such Claim
shall not relieve Stockholder from any liability Stockholder may have otherwise
than hereunder. The Indemnified Persons and Stockholder shall cooperate with
and assist one another in the defense of any Claim and any action, suit or
proceeding arising in connection therewith.
(c) Stockholder shall take, or cause to be taken, all other actions, and to
do, or cause to be done, and to assist and cooperate with the other parties in
doing, all other things, reasonably necessary, proper or advisable to
consummate and make effective, in the most expeditious manner practicable, the
Merger and the other transactions contemplated by the Reorganization Agreement.
(d) Until the Expiration, Stockholder shall not, and shall not authorize or
permit any of its subsidiaries or affiliates (other than the Company),
officers, directors and employees and any investment banker, attorney,
accountant or other agent retained by Stockholder or them to, issue any press
release or make any other public statement with respect to the Reorganization
Agreement, this Agreement, the Merger or any of the other transactions
contemplated by the Reorganization Agreement or this Agreement without the
prior written consent of Parent, except as may be required by applicable law.
(e) Stockholder shall execute and deliver to Parent the Market Standoff
Letter Agreement, substantially in the form attached hereto as Annex B.
5. Enforcement of Transfer Restrictions. Stockholder understands and agrees
that (i) Parent shall be entitled to affix an appropriate legend to any
certificate representing Shares or New Shares reflecting the restrictions set
forth in this Agreement; and (ii) if Stockholder attempts to transfer, vote or
provide any other person with the authority to vote any of the Shares other
than in compliance with this Agreement, Parent shall not, and Stockholder
hereby irrevocably instructs Parent not to, permit any such transfer on its
books and
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records, issue a new certificate representing any of the Shares or New Shares
or record such vote unless and until Stockholder shall have complied with the
terms of this Agreement.
6. Additional Documents. Stockholder hereby covenants and agrees to execute
and deliver any additional documents necessary or desirable, in the reasonable
opinion of Company, to carry out the purpose and intent of this Agreement.
7. Consent and Waiver. Stockholder hereby gives any consents or waivers that
are reasonably required for the consummation of the Transaction under the terms
of any agreement to which Stockholder is a party or pursuant to any rights
Stockholder may have.
8. Termination. Sections 1, 2, and 3 hereof and the Proxy delivered in
connection herewith shall terminate and shall have no further force or effect
as of the Expiration.
9. Miscellaneous.
9.1 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
9.2 Binding Effect and Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but, except as otherwise
specifically provided herein, neither this Agreement nor any of the rights,
interests or obligations of the parties hereto may be assigned by any of the
parties without the prior written consent of the others. This Agreement is
intended to bind Stockholder as a Stockholder of Parent only with respect to
the specific matters set forth herein.
9.3 Amendment and Modification. This Agreement may not be modified, amended,
altered or supplemented except by the execution and delivery of a written
agreement executed by the parties hereto.
9.4 Specific Performance; Injunctive Relief. The parties hereto acknowledge
that Company will be irreparably harmed and that there will be no adequate
remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Company upon any such violation,
Company shall have the right to enforce such covenants and agreements by
specific performance, injunctive relief or by any other means available to
Company at law or in equity and Stockholder hereby waives any and all defenses
which could exist in its favor in connection with such enforcement and waives
any requirement for the security or posting of any bond in connection with such
enforcement.
9.5 Notices. All notices, requests, demands or other communications that are
required or may be given pursuant to the terms of this Agreement shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed by registered or certified mail, postage prepaid, or delivered to a
reputable overnight courier for overnight delivery, postage prepaid, as
follows:
(a) If to Stockholder, at the address set forth below Stockholder's
signature at the end hereof.
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(b) if to Parent, to:
Digital Island, Inc.
45 Fremont Street
12th Floor
San Francisco, CA 94111
Attention: Ruann F. Ernst
Facsimile No.: (415) 738-4141
Telephone No.: (415) 738-4100
with a copy to:
Brobeck, Phleger & Harrison LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attention: Curtis L. Mo, Esq.
with a copy to:
Rod J. Howard, Esq.
Facsimile No.: (650) 496-2715
Telephone No.: (650) 424-0160
(c) if to Company, to:
Sandpiper Networks, Inc.
125 Auburn Ct.
Suite 210
Westlake Village, CA 91362
Attention: Leo S. Spiegel
Facsimile No.: (805) 370-2101
Telephone No.: (805) 370-2100
with a copy to:
Riordan & McKinzie LLP
5743 Corsa Avenue
Suite 116
Westlake Village, CA 91362
Attention: Larry Weeks, Esq.
Facsimile No.: (818) 706-2956
Telephone No.: (818) 706-1800
or to such other address as any party hereto or any Indemnified Person may
designate for itself by notice given as herein provided.
9.6 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of California,
without regard to the conflicts of laws principle thereof.
9.7 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
9.8 Effect of Headings. The section headings herein are for convenience only
and shall not affect the construction or interpretation of this Agreement.
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9.9 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as
of the date first above written.
SANDPIPER NETWORKS, INC.
STOCKHOLDER
By: _________________________________ By: _________________________________
Name: _______________________________ (Signature)
Title: ______________________________
_____________________________________
(Signature of Spouse)
_____________________________________
(Social Security / Tax I.D. No.)
_____________________________________
(Print Name of Stockholder)
_____________________________________
(Print Street Address)
_____________________________________
(Print City, State and Zip)
_____________________________________
(Print Telephone Number)
_____________________________________
(Social Security or Tax I.D. Number)
Total Number of Shares:
Common Stock: _______________________
State of Residence: _________________
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ANNEX A
IRREVOCABLE PROXY TO VOTE STOCK OF DIGITAL ISLAND, INC.
The undersigned stockholder of Digital Island, Inc., a Delaware corporation
("Parent"), hereby irrevocably (to the full extent permitted by the Delaware
General Corporation Law) appoints the members of the Board of Directors of
Sandpiper Networks, Inc., a California corporation ("Company"), and each of
them, or any other designee of Company, as the sole and exclusive attorneys and
proxies of the undersigned, with full power of substitution and resubstitution,
to vote and exercise all voting and related rights (to the full extent that the
undersigned is entitled to do so) with respect to all of the shares of capital
stock of Parent that now are or hereafter may be beneficially owned by the
undersigned or as to which, the undersigned holds or exercises, as an
individual or in a representative capacity, through any contract, arrangement,
relationship or otherwise, voting power, and any and all other shares or
securities of Parent issued or issuable in respect thereof on or after the date
hereof (collectively, the "Shares") in accordance with the terms of this
Irrevocable Proxy. The Shares beneficially owned by the undersigned or as to
which the undersigned holds or exercises voting power as of the date of this
Irrevocable Proxy are listed on the final page of this Irrevocable Proxy. Upon
the undersigned's execution of this Irrevocable Proxy, any and all prior
proxies given by the undersigned with respect to any Shares are hereby revoked
and the undersigned agrees not to grant any subsequent proxies with respect to
the Shares until after the Expiration (as defined below).
This Irrevocable Proxy is irrevocable (to the extent provided in the
Delaware General Corporation Law), is coupled with an interest, including, but
not limited to, that certain Voting Agreement dated as of even date herewith by
and among Company, and the undersigned (the "Stockholder Agreement"), and is
granted in consideration of Company entering into that certain Agreement and
Plan of Reorganization (the "Reorganization Agreement") by and among Parent,
Beach Acquisition Corp., a California corporation and a wholly owned subsidiary
of Parent ("Merger Sub"), and Company, which Reorganization Agreement provides
for the merger of Merger Sub with and into Company, the conversion of
outstanding shares of Company capital stock into the right to receive Parent
Common Stock (in accordance with the applicable exchange ratio), and for
Company to become a wholly owned subsidiary of Parent (the "Merger"). As used
herein, the term "Expiration" shall mean the earlier to occur of (i) such date
and time as the Merger shall become effective in accordance with the terms and
provisions of the Reorganization Agreement, and (ii) the date of termination of
the Reorganization Agreement.
The attorneys and proxies named above, and each of them are hereby
authorized and empowered by the undersigned, at any time prior to the
Expiration, to act as the undersigned's attorney and proxy to vote the Shares,
and to exercise all voting and other rights of the undersigned with respect to
the Shares, at every annual, special or adjourned meeting of the stockholders
of Parent in favor of approval of the issuance of the Parent Shares in the
Transaction and in favor of any matter that could reasonably be expected to
facilitate the Merger and the other transactions contemplated by the
Reorganization Agreement, and against any proposal, plan or offer to acquire
all or any substantial part of the business, assets or capital stock of Parent,
whether by merger or other business combinations, purchase of stock or assets,
tender offer or otherwise, or to liquidate Parent or otherwise distribute to
the Stockholders of Parent all or any substantial part of the business, assets
or capital stock of the Company (each, an "Acquisition Proposal") or
transaction or occurrence which if publicly proposed and offered to the Parent
and its Stockholders (or any of them) would be the subject of an Acquisition
Proposal, or any amendment of the Parent's Certificate of Incorporation or
Bylaws or other proposal, action or transaction involving the Parent or any of
its subsidiaries, which amendment or other proposal, action or transaction
would or could reasonably be expected to prevent or materially impede,
interfere with, hinder or delay the consummation of the Merger or any of the
other transactions contemplated by the Reorganization Agreement or to dilute in
any material respect the benefits to Company of the Merger and the other
transactions contemplated by the Reorganization Agreement, or change in any
manner the voting rights of any class or shares of Parent Shares.
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The attorneys and proxies named above may not exercise this Irrevocable
Proxy on any other matter except as provided above. The undersigned stockholder
may vote the Shares on all other matters.
All authority herein conferred shall survive the death or incapacity of the
undersigned and any obligation of the undersigned hereunder shall be binding
upon the heirs, personal representatives, successors and assigns of the
undersigned.
This Irrevocable Proxy is coupled with an interest as aforesaid and is
irrevocable.
Dated: ____________________________ _____________________________________
(Signature of Stockholder)
_____________________________________
(Print Name of Stockholder)
Shares beneficially owned:
shares of Company Common Stock
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<PAGE>
ANNEX B
MARKET STANDOFF LETTER AGREEMENT
DIGITAL ISLAND, INC.
45 Fremont Street
12th Floor
San Francisco, CA 94111
Re: Proposed Merger of Digital Island, Inc. and Sandpiper Networks, Inc.
Ladies and Gentlemen:
The undersigned understands that Sandpiper Networks, Inc., a California
corporation ("Company") and Digital Island, Inc., a Delaware corporation
("Parent") have entered into an Agreement and Plan of Reorganization, dated as
of October 24, 1999 (the "Reorganization Agreement"), pursuant to which Beach
Acquisition Corp., a California corporation and a wholly owned subsidiary of
Parent, will be merged with and into Company (the "Merger"). Capitalized terms
not otherwise defined herein shall have the same meaning given to them in the
Reorganization Agreement.
In recognition of the benefit that the Merger will confer upon the
undersigned as a securityholder, officer and/or director of Company and/or of
Parent, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees with
Parent, that, from the Effective Time until the earliest to occur of (a) the
sale by Parent of shares of its common stock ("Parent Common Stock") for its
own account in a bona fide, firm commitment underwritten public offering
pursuant to a registration statement under the Securities Act of 1933, as
amended, (b) July 15, 2000, (c) the effective date of a merger of Parent with
or into another corporation in which fifty (50%) or more of the voting power of
Parent is disposed of, or the sale of all or substantially all of the assets of
Parent; or (d) such other date, and with such limitations, as may be approved
by unanimous vote of the Board of Directors of Parent, the undersigned will not
directly or indirectly (i) issue, offer to sell, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant for the sale of, or otherwise
dispose of or transfer any shares of Parent Common Stock or any securities
convertible into or exchangeable or exercisable for Parent Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
(ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Parent Common Stock or any securities
convertible into or exchangeable for the Parent Common Stock, whether any such
swap transaction is to be settled by delivery of Parent Common Stock or other
securities, in cash or otherwise.
The foregoing paragraph shall not apply to (a) transactions by any person
relating to shares of Parent Common Stock or other securities acquired in open
market transactions after the Effective Time or (b) transfers of Parent Common
Stock or any securities convertible into or exercisable or exchangeable for
Parent Common Stock to a member of the undersigned's immediate family or to a
trust of which the undersigned or an immediate family member is the beneficiary
(either one a "Transferee") provided that upon any such transfer, the
Transferee shall sign a letter substantially similar to this letter agreement.
The undersigned agrees and consents to the entry of stop transfer
instructions with Parent's transfer agent against the transfer of shares of
Parent Common Stock held by the undersigned unless such transfer is made in
compliance with this Agreement. The undersigned understands and agrees that
Parent shall be entitled to affix an appropriate legend to any certificate
representing shares of Parent Common Stock reflecting the restrictions set
forth in this Agreement.
This Agreement is irrevocable and may only be amended in writing if agreed
to by the unanimous vote of the Board of Directors of Parent.
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The undersigned agrees that the provisions of this letter agreement shall be
binding also upon the successors, assigns, heirs and personal representatives
of the undersigned.
Very truly yours,
Date: __________________________________ _____________________________________
(Name of Entity or Individual--
Please Print)
_____________________________________
(Signature)
_____________________________________
(Name of Person signing on behalf of
Entity, if applicable--Please Print)
_____________________________________
(Title of Person signing on behalf
of Entity, if applicable--Please
Print)
On behalf of:
A-96
<PAGE>
EXHIBIT G
FORM OF COMPANY LEGAL OPINION
,
Ladies and Gentlemen:
We have acted as counsel for Sandpiper Networks, Inc., a California
corporation ("Company"), in connection with the merger (the "Merger") of Beach
Acquisition Corp., a California corporation ("Merger Sub") and a wholly owned
subsidiary of Digital Island, Inc., a Delaware corporation ("Parent"), with and
into Company pursuant to the Agreement and Plan of Reorganization dated as of
October 24, 1999 (the "Reorganization Agreement"), among Parent, Merger Sub and
Company. This opinion is rendered to you pursuant to Section 6.3(e) of the
Reorganization Agreement. Capitalized terms used herein and not otherwise
defined shall have the same meaning given to such terms in the Reorganization
Agreement.
[COMPANY COUNSEL TO PROVIDE STANDARD QUALIFICATION LANGUAGE]
We are of the opinion that:
1. Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of California, and has the corporate power
and authority to own, operate and lease its properties and carry on its
business as now conducted.
2. The authorized capital stock of Company consists of 40,000,000 shares of
Common Stock, par value $.001 per share, of which [ ] shares of
Common Stock are issued and outstanding, and 13,697,640 shares of Preferred
Stock , per value $.001 per share, of which 9,885,981 shares have been
designated Series A Preferred Stock, all of which are issued and outstanding,
and 3,811,659 shares have been designated Series B Preferred Stock, all of
which are issued and outstanding, all of which have been duly authorized and
are validly issued, fully paid and nonassessable. On the date hereof,
[ ] shares of Common Stock are subject to issuance upon exercise of
outstanding options, and [ ] shares of Common Stock are subject to
issuance upon exercise of outstanding warrants.
3. The Reorganization Agreement and the Escrow Agreement have been approved
and adopted by the Board of Directors and the shareholders of Company; Company
has full corporate power and authority to execute, deliver, and perform its
obligations under the Reorganization Agreement and the Escrow Agreement;
Company has taken all requisite corporate action to approve and adopt the
Reorganization Agreement and the Escrow Agreement and to approve and to
authorize the carrying out of the transactions contemplated thereunder; and
each of the Reorganization Agreement and the Escrow Agreement has been duly
executed and delivered by Company and constitute legal, valid and binding
obligations of Company enforceable against Company in accordance with the terms
thereof, except as such enforcement may be limited by (i) bankruptcy,
insolvency, receivership or other similar laws affecting the rights of
creditors generally, or (ii) general principles of equity, regardless of
whether considered in a proceeding in law or equity.
4. The execution and delivery of the Reorganization Agreement and the Escrow
Agreement by Company, the performance by Company of its obligations thereunder
and the consummation of the transactions contemplated by the Reorganization
Agreement and the Escrow Agreement did not and will not, conflict with, or
result in any violation of, or default under (with or without notice or lapse
of time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any benefit, or result in any other
consequence, under (i) any provision of the certificate or articles of
incorporation or bylaws or other charter or organizational documents, each as
amended, of Company or any of its subsidiaries or (ii) any mortgage, indenture,
lease, contract or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Company or any of its subsidiaries or any of their
respective properties or assets, except in the case of clause (i) for any
conflicts, violations, defaults or
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other occurrences that would not (A) individually or in the aggregate have a
Material Adverse Effect on Company or any of its subsidiaries or (B) prevent or
materially impair or delay the consummation of the Merger or the other
transactions contemplated by the Reorganization Agreement.
5. Except as set forth in the Company Disclosure Schedule, there is no
consent, approval, authorization, order, registration, qualification or filing
of or with any court or any regulatory authority or other Governmental Entity
(either foreign or domestic) required by or with respect to Company in
connection with the execution and delivery by Company of the Reorganization
Agreement or the Escrow Agreement, the performance of Company's obligations
thereunder or the consummation of the transactions contemplated thereby, that
has not been obtained, except for (i) such consents, approvals, authorizations,
registration or qualifications as may be required under state securities or
Blue Sky laws in connection with the offer and sale of Parent Common Stock
pursuant to the Merger; (ii) the filing of the Agreement of Merger with the
Secretary of State of the State of California; (iii) such filings as may be
required under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as
amended; and (iv) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a Material Adverse
Effect on Parent or its stockholders. Such opinion, however, shall be subject
to the timely and proper completion of all filings and other actions
contemplated above in this paragraph 5 where such filings and actions are to be
undertaken on or after the date hereof.
6. To our knowledge, no suit, action or legal, administrative, arbitration
or other proceeding or governmental investigation is pending or threatened to
which Company or any of its assets or properties is a party which has had or
could reasonably be expected to have a material adverse effect on the execution
and delivery by Company of the Reorganization Agreement or the Escrow
Agreement, or the ability of Company to perform its obligations thereunder or
to consummate the transactions contemplated thereby.
This opinion relates solely to the laws of the State of California, and
applicable Federal laws of the United States, and we express no opinion with
respect to the effect or applicability of the laws of other jurisdictions.
The opinions expressed herein are solely for your benefit in connection with
the above transactions and may not be relied upon in any manner or for any
purpose by any other person.
Sincerely,
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<PAGE>
EXHIBIT H
FORM OF PARENT LEGAL OPINION
,
Ladies and Gentlemen:
We have acted as counsel for Digital Island, Inc., a Delaware corporation
("Parent"), in connection with the merger (the "Merger") of Beach Acquisition
Corp., a California corporation ("Merger Sub") and a wholly owned subsidiary of
Digital Island, with and into Sandpiper Networks, Inc., a California
corporation ("Company") pursuant to the Agreement and Plan of Reorganization
dated as of October 24, 1999 (the "Reorganization Agreement"), among Parent,
Merger Sub and Company. This opinion is rendered to you pursuant to Section 6.2
of the Reorganization Agreement. Capitalized terms used herein and not
otherwise defined shall have the same meaning given to such terms in the
Reorganization Agreement.
[PARENT COUNSEL TO PROVIDE STANDARD QUALIFICATION LANGUAGE]
We are of the opinion that:
1. Parent is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and has the corporate power
and authority to own, operate and lease its properties and to carry on its
business as now conducted.
2. Parent has full corporate power and authority to execute, deliver, and
perform its obligations under the Reorganization Agreement and the Escrow
Agreement; Parent has taken all requisite corporate action (including approval
of its Board of Directors) to approve and adopt the Reorganization Agreement
and the Escrow Agreement and to approve and to authorize the carrying out of
the transactions contemplated thereunder; and each of the Reorganization
Agreement and the Escrow Agreement has been duly executed and delivered by
Parent and constitute legal, valid and binding obligations of Parent
enforceable in accordance with the terms thereof; except as such enforcement
may be limited by (i) bankruptcy, insolvency, receivership or other similar
laws affecting the rights of creditors generally, or (ii) general principles of
equity, regardless of whether considered in a proceeding in law or equity.
3. The shares of Parent Common Stock to be delivered in exchange for shares
of Company Common Stock are duly authorized and will, when issued as
contemplated by the Reorganization Agreement, be validly issued, fully paid and
non-assessable; a sufficient number of shares of Parent Common Stock have been
duly authorized and validly reserved for issuance upon exercise of Company
Options being assumed by Parent pursuant to the Reorganization Agreement, and
such reserved shares, when issued in accordance with the terms of such options,
will be validly issued, fully paid and nonassessable.
4. The execution, delivery and performance of the Reorganization Agreement
and the Escrow Agreement by Parent and the carrying out of the transactions
contemplated by the Reorganization Agreement and the Escrow Agreement to be
carried out by Parent did not and will not conflict with or constitute a
violation under the charter documents of Parent.
5. To our knowledge, no suit, action or legal, administrative, arbitration
or other proceeding or governmental investigation is pending or threatened to
which Parent or any of its assets or properties is a party which has had or
could reasonably be expected to have a material adverse effect on the execution
and delivery by Parent of the Reorganization Agreement, or the ability of
Parent to perform its obligations thereunder or to consummate the transactions
contemplated thereby.
6. Except as set forth in the Parent Disclosure Schedule, there is no
consent, approval, authorization, order, registration, qualification or filing
of or with any court or any regulatory authority or other governmental
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body (either foreign or domestic) required by Parent or with respect to its
assets or properties or otherwise for the consummation of the transactions
contemplated by the Reorganization Agreement and the Agreement of Merger that
has not been obtained, except for (i) such consents, approvals, authorizations,
registration or qualifications as may be required under state securities or
Blue Sky laws in connection with the offer and sale of Parent Common Stock
pursuant to the Merger, (ii) acceptance for filing of the Agreement of Merger
together with any appropriate tax clearance certificate by the California
Secretary of State, (iii) such filings as may be required under the Hart-Scott-
Rodino Antitrust Improvement Act of 1976, as amended, and (iv) such other
consents, authorizations, filings, approvals and registrations which, if not
obtained or made, would not have a Material Adverse Effect on Company or its
shareholders. Such opinion, however, shall be subject to the timely and proper
completion of all filings and other actions contemplated above in this
paragraph 6 where such filings and actions are to be undertaken on or after the
date hereof.
This opinion relates solely to the laws of the State of California, and
applicable Federal laws of the United States, and we express no opinion with
respect to the effect or applicability of the laws of other jurisdictions.
The opinions expressed herein are solely for your benefit in connection with
the above transactions and may not be relied upon in any manner or for any
purpose by any other person.
Sincerely,
A-100
<PAGE>
ANNEX B
Fairness Opinion
of Bear, Stearns & Co. Inc.
<PAGE>
ANNEX B
[LETTERHEAD OF BEAR STEARNS]
October 23, 1999
The Board of Directors
Digital Island, Inc.
45 Fremont Street, 12th Floor
San Francisco, CA 94105
Ladies and Gentlemen:
We understand that Digital Island, Inc. ("Island") and Sandpiper Networks,
Inc. ("Sandpiper") have proposed to enter into an Agreement and Plan of
Reorganization (the "Agreement"), pursuant to which a newly-formed subsidiary
of Island will be merged with and into Sandpiper (the "Merger"), and Sandpiper
will continue as the surviving corporation in the Merger as a wholly-owned
subsidiary of Island. We further understand that, pursuant to the Agreement,
each outstanding share of common stock, par value $0.001 per share, of
Sandpiper ("Sandpiper Common Stock") shall be exchanged for 1.0727 shares (the
"Exchange Ratio") of common stock, par value $0.001 per share, of Island
("Island Common Stock"). In addition, options to purchase Sandpiper Common
Stock shall be exchanged for options to purchase Island Common Stock subject to
adjustment based on the Exchange Ratio.
You have asked us to render our opinion as to whether the Exchange Ratio is
fair, from a financial point of view, to the shareholders of Island.
In the course of performing our review and analyses for rendering this
opinion, we have:
. reviewed a draft of the Agreement in substantially final form dated
October 21, 1999;
. reviewed Island's Form S-1 Registration Statement dated June 29, 1999 and
its Quarterly Report on Form 10-Q for the period ended June 30, 1999;
. reviewed Sandpiper's audited financial statements for the years ended
December 31, 1998 and December 31, 1997 and interim unaudited statements
through August 31, 1999;
. reviewed a draft of a Form S-1 Registration Statement prepared by
Sandpiper dated October 13, 1999;
. reviewed certain operating and financial information relating to
Sandpiper's business and prospects, including projections, prepared and
provided to us by Island management (the "Sandpiper Projections");
. reviewed certain estimates of cost savings and other combination benefits
or synergies expected to result from the Merger, prepared and provided to
us by Island management (the "Combination Benefits");
. met with certain members of Sandpiper's senior management to discuss
Sandpiper's business, operations, historical and projected financial
results and future prospects;
. reviewed certain operating and financial information relating to Island's
business and prospects, including projections prepared and provided to us
by Island management (the "Island Projections" and together with the
Sandpiper Projections, the "Projections");
. met with certain members of Island's senior management to discuss
Island's business operations, historical and projected financial
statements and future prospects;
. reviewed the historical prices, valuation parameters and trading volumes
of shares of Island Common Stock;
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. reviewed publicly available financial data, stock market performance data
and valuation parameters of companies which we deemed generally
comparable to Island and Sandpiper;
. performed discounted cash flow analyses based on the Projections and the
Combination Benefits furnished to us; and
. conducted such other studies, analyses, inquiries and investigations as
we deemed appropriate.
We have relied upon and assumed, without independent verification, the
accuracy and completeness of the financial and other information, including
without limitation the Projections and Combination Benefits provided to us by
Island. With respect to the Projections and Combination Benefits that could be
achieved upon consummation of the Merger, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the senior management of Island as to the expected future
performance of Island and Sandpiper, respectively. We have not assumed any
responsibility for the independent verification of any such information or of
the Projections and Combination Benefits provided to us, and we have further
relied upon the assurances of the senior management of Island that they are
unaware of any facts that would make the information provided to us incomplete
or misleading.
In arriving at our opinion, we have not performed or obtained any
independent appraisal of the assets or liabilities of Island or Sandpiper, nor
have we been furnished with any such appraisals. We have assumed that the
Merger will qualify as a tax-free "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code. Our opinion is necessarily based
on economic, market and other conditions, and the information made available to
us, as of the date hereof.
We do not express any opinion as to the price or range of prices at which
the shares of Island Common Stock may trade subsequent to the announcement of
the Merger or as to the price or range of prices at which the shares of Island
Common Stock may trade subsequent to the consummation of the Merger.
We have acted as a financial advisor to Island in connection with the Merger
and will receive a fee for such services, a portion of which is payable on
delivery of this opinion and a portion of which is payable upon consummation of
the Merger. Bear Stearns has been previously engaged by Island to provide
certain investment banking and financial advisory services in connection with
the initial public offering of Island Common Stock and received customary
compensation. In the ordinary course of business, Bear Stearns may actively
trade the equity and debt securities of Island for our own account and for the
account of our customers and, accordingly, may at any time hold a long or short
position in such securities.
It is understood that this letter is intended for the benefit and use of the
Board of Directors of Island and does not constitute a recommendation to the
Board of Directors of Island as to how to vote in connection with the Merger or
to any holders of Island Common Stock as to how to vote on the issuance of new
shares of Island Common Stock in connection with the Merger. This opinion does
not address Island's underlying business decision to pursue the Merger. This
letter is not to be used for any other purpose, or reproduced, disseminated,
quoted to or referred to at any time, in whole or in part, without our prior
written consent; provided, however, that this letter may be included in its
entirety in any registration statement filed with the Securities and Exchange
Commission and any proxy statement, information statement or prospectus to be
distributed to the holders of Island Common Stock and Sandpiper Common Stock in
connection with the Merger.
Based on and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair, from a financial point of view, to the
holders of Island Common Stock.
Very truly yours,
BEAR, STEARNS & CO. INC.
By: _________________________________
Senior Managing Director
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<PAGE>
ANNEX C
Dissenter's Rights
<PAGE>
ANNEX C
CHAPTER 13: DISSENTERS' RIGHTS
CALIFORNIA CORPORATIONS CODE
SECTION 1300-1312
(S)1300. Reorganization or short-form merger; dissenting shares; corporate
purchase at fair market value; definitions
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as
defined in subdivision (b). The fair market value shall be determined as of the
day before the first announcement of the terms of the proposed reorganization
or short-form merger, excluding any appreciation or depreciation in consequence
of the proposed action, but adjusted for any stock split, reverse stock split,
or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that ***
subparagraph (A) rather than *** subparagraph (B) of this paragraph applies
in any case where the approval required by Section 1201 is sought by
written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
(S)1301. Notice to holders of dissenting shares in reorganizations; demand for
purchase; time; contents
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of
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the reorganization by its outstanding shares (Section 152) within 10 days after
the date of such approval, accompanied by a copy of Sections 1300, 1302, 1303,
1304 and this section, a statement of the price determined by the corporation
to represent the fair market value of the dissenting shares, and a brief
description of the procedure to be followed if the shareholder desires to
exercise the shareholder's right under such sections. The statement of price
constitutes an offer by the corporation to purchase at the price stated any
dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
(S)1302. Submission of shares certificates for endorsement; uncertificated
securities
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
(S)1303. Payment of agreed price with interest; agreement fixing fair market
value; filing; time of payment
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
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(S)1304. Action to determine whether shares are dissenting shares or fair
market value; limitation; joinder; consolidation; determination of
issues; appointment of appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
(S)1305. Report of appraisers; confirmation; determination by court; judgement;
payment; appeal; costs
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which
any dissenting shareholder who is a party, or who has intervened, is entitled
to require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of
Section 1301).
(S)1306. Prevention of immediate payment; status as creditors; interest
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
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(S)1307. Dividends on dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
(S)1308. Rights of dissenting shareholders pending valuation; withdrawal of
demand for payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
(S)1309. Termination of dissenting share and share holder status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
(S)1310. Suspension of rights to compensation or valuation proceedings;
litigation of shareholders' approval
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
(S)1311. Exempt shares
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
(S)1312. Right of dissenting shareholder to attack, set aside or rescind merger
or reorganization; restraining order or injunction; conditions.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form
C-4
<PAGE>
merger is entitled to payment in accordance with those terms and provisions or,
if the principal terms of the reorganization are approved pursuant to
subdivision (b) of Section 1202, is entitled to payment in accordance with the
terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days' prior notice to the corporation and upon a determination
by the court that clearly no other remedy will adequately protect the
complaining shareholder or the class of shareholders of which such shareholder
is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
C-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Registrant's certificate of incorporation provides that, except to the
extent prohibited by the Delaware General Corporation Law (the "DGCL"), the
Registrant's directors shall not be personally liable to the Registrant or its
stockholders for monetary damages for any breach of fiduciary duty as directors
of the Registrant. Under the DGCL, the directors have a fiduciary duty to the
Registrant which is eliminated by this provision of the certificate of
incorporation and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the DGCL
for breach of the director's duty of loyalty to the Registrant, for acts or
omissions which are found by a court of competent jurisdiction to be 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
prohibited by the DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws. The Registrant has obtained liability
insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of the director: (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's certificate of incorporation or bylaws, any agreement, a vote of
stockholders or otherwise. The Registrant's certificate of incorporation
eliminates the personal liability of directors to the fullest extent permitted
by the DGCL and provides that the Registrant shall fully indemnify any person
who was or is a party or is threatened to be made a party to, any threatened,
pending or completed action, suit or proceeding (whether civil, criminal,
administrative of investigative) by reason of the fact that such person is or
was a director or officer of the Registrant, or is or was serving at the
request of the Registrant as a director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Registrant's certificate of incorporation. The
Registrant is not aware of any threatened litigation or proceeding that may
result in a claim for such indemnification.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules.
(a) EXHIBITS
The following is a list of exhibits filed as part of the Registration
Statement:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- ----------- ---
<C> <S> <C>
2.1 Agreement and Plan of Reorganization dated as of October 24,
1999, by and among the Registrant, Beach Acquisition Corp. and
Sandpiper Networks, Inc. (attached as Annex A to the joint proxy
statement/prospectus contained in this registration statement).
3.1 Registrant's Amended and Restated Certificate of Incorporation.
3.2 Registrant's Amended and Restated Bylaws.
4.1 Reference is made to Exhibit 3.1
4.2 Reference is made to Exhibit 3.2
4.3 Specimen Stock Certificate
4.4 Amended and Restated Investors' Rights Agreement, among the
Registrant and the parties listed on the signature pages thereto
dated February 19, 1999
4.5 Amendment No. 1 to Amended and Restated Investors' Rights
Agreement, dated April 9, 1999
5.1 Opinion of Brobeck, Phleger & Harrison LLP regarding the
legality of the securities being issued.
8.1 Opinion of Riordan & McKinzie regarding certain tax matters.
10.1 1997 Stock Option and Incentive Plan
10.2 1998 Stock Option/Stock Issuance Plan
10.3 1999 Stock Incentive Plan
10.4 1999 Employee Stock Purchase Plan
10.5 Form of Indemnification Agreement for Officers and Directors
10.6 Employment Agreement between the Registrant and Ruann F. Ernst
10.7 Employment Agreement between the Registrant and Allan Leinwand
10.8 Employment Agreement between the Registrant and Timothy M.
Wilson
10.9 Employment Agreement between the Registrant and Paul Evenson
10.10 Employment Agreement between the Registrant and Leo S. Spiegel
10.11 Employment Agreement between the Registrant and Andrew Swart
10.12 Employment Agreement between the Registrant and David Farber
10.13 Lease between the Registrant and Bishop Street Associates, dated
October 21, 1996, as amended to date
10.14 Lease Agreement between the Registrant and Forty-Five Fremont
Associates, dated May 5, 1999
10.15 Note Secured by Stock Pledge Agreement by Ruann F. Ernst to
Registrant, dated April 21, 1999
21.1 Subsidiaries of Registrant
23.1 Consent of Brobeck, Phleger & Harrison, included in Exhibit 5.1.
23.2 Consent of Riordan & McKinzie, included in Exhibit 8.1.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Ernst & Young.
23.5 Consent of Bear, Stearns, and Co., Inc.
24.1 Power of Attorney, included on the signature page of this
Registration Statement.
99.1 Form of Digital Island Proxy Card.
99.2 Form of Sandpiper Proxy Card.
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts S-2
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.
II-2
<PAGE>
(c) Opinion of Bear, Stearns & Co, Inc., attached as Annex B to this joint
proxy statement/prospectus which is part of this registration statement.
Item 22. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the Securities
Act, each such post effective amendment 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;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering;
(4) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement 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;
(5) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form;
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to this
Registration Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment 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;
(7) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the
II-3
<PAGE>
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of this Registration Statement through the date of responding to the
request; and
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this Registration Statement when it
became effective.
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 20 above, 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 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 whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in The City of San
Francisco, State of California, on this 8th day of December 1999.
Digital Island, Inc.
/s/ Ruann F. Ernst
By:__________________________________
Ruann F. Ernst,
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of Digital Island, Inc. (the
"Company"), hereby severally constitute and appoint Ruann F. Ernst, Chief
Executive Officer, and T.L. Thompson, Chief Financial Officer, and each of them
individually, with full powers of substitution and resubstitution, our true and
lawful attorneys, with full powers to them and each of them to sign for us, in
our names and in the capacities indicated below, the Registration Statement on
Form S-4 filed with the Securities and Exchange Commission, and any and all
amendments to said Registration Statement (including post-effective
amendments), and any registration statement filed pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, in connection with the registration
under the Securities Act of 1933, as amended, of equity securities of the
Company, and to file or cause to be filed the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys, and each of them, full power and
authority to do and perform each and purposes as each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as each of them might or could do in person, and hereby
ratifying and confirming all that said attorneys, and each of them, or their
substitute or substitutes, shall do or cause to be done by virtue of this Power
of Attorney.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement to be signed by the following persons in the capacities
indicated on December 8, 1999:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Ruann F. Ernst Chief Executive Officer and December 8, 1999
____________________________________ Director (Principal
Ruann F. Ernst Executive Officer)
/s/ T.L. Thompson Chief Financial Officer December 8, 1999
____________________________________ (Principal Financial and
T. L. Thompson Accounting Officer)
/s/ Charlie Bass Director December 8, 1999
____________________________________
Charlie Bass
/s/ Christos Cotsakos Director December 8, 1999
____________________________________
Christos Cotsakos
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Marcelo A. Gumucio Director December 8, 1999
____________________________________
Marcelo A. Gumucio
/s/ Cliff Higgerson Director December 8, 1999
____________________________________
Cliff Higgerson
/s/ David Spreng Director December 8, 1999
____________________________________
David Spreng
/s/ Shahan Soghikian Director December 8, 1999
____________________________________
Shahan Soghikian
</TABLE>
II-6
<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, 1999 and 1998, and for each of the three years in the period
ended September 30, 1999, and have issued our report thereon dated October 29,
1999. Our audits also included the financial statement schedule listed in Item
21(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
October 29, 1999
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Digital Island, Inc.
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Cost and End of
Description of Period Expenses Deductions Period
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
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 $ 6,218,000 $ -- $ 8,361,000
---------- ----------- -------- -----------
Total....................... $2,143,000 $ 6,329,104 $ 56,104 $ 8,416,000
========== =========== ======== ===========
Year ended September 30, 1999:
Allowance for doubtful
accounts.................... $ 55,000 $ 471,602 $146,192 $ 380,410
Deferred tax valuation
allowance................... $8,361,000 $17,705,000 $ -- $26,066,000
---------- ----------- -------- -----------
Total....................... $8,416,000 $18,176,602 $146,192 $26,446,410
========== =========== ======== ===========
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- ----------- ---
<C> <S> <C>
2.1 Agreement and Plan of Reorganization dated as of October 24,
1999, by and among the Registrant, Beach Acquisition Corp. and
Sandpiper Networks, Inc. (attached as Annex A to the joint proxy
statement/prospectus contained in this registration statement).
3.1 Registrant's Amended and Restated Certificate of Incorporation.
3.2 Registrant's Amended and Restated Bylaws.
4.1 Reference is made to Exhibit 3.1
4.2 Reference is made to Exhibit 3.2
4.3 Specimen Stock Certificate
4.4 Amended and Restated Investors' Rights Agreement, among the
Registrant and the parties listed on the signature pages thereto
dated February 19, 1999
4.5 Amendment No. 1 to Amended and Restated Investors' Rights
Agreement, dated April 9, 1999
5.1 Opinion of Brobeck, Phleger & Harrison LLP regarding the
legality of the securities being issued.
8.1 Opinion of Riordan & McKinzie regarding certain tax matters.
10.1 1997 Stock Option and Incentive Plan
10.2 1998 Stock Option/Stock Issuance Plan
10.3 1999 Stock Incentive Plan
10.4 1999 Employee Stock Purchase Plan
10.5 Form of Indemnification Agreement for Officers and Directors
10.6 Employment Agreement between the Registrant and Ruann F. Ernst
10.7 Employment Agreement between the Registrant and Allan Leinwand
10.8 Employment Agreement between the Registrant and Timothy M.
Wilson
10.9 Employment Agreement between the Registrant and Paul Evenson
10.10 Employment Agreement between the Registrant and Leo S. Spiegel
10.11 Employment Agreement between the Registrant and Andrew Swart
10.12 Employment Agreement between the Registrant and David Farber
10.13 Lease between the Registrant and Bishop Street Associates, dated
October 21, 1996, as amended to date
10.14 Lease Agreement between the Registrant and Forty-Five Fremont
Associates, dated May 5, 1999
10.15 Note Secured by Stock Pledge Agreement by Ruann F. Ernst to
Registrant, dated April 21, 1999
21.1 Subsidiaries of Registrant
23.1 Consent of Brobeck, Phleger & Harrison, included in Exhibit 5.1.
23.2 Consent of Riordan & McKinzie, included in Exhibit 8.1.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Ernst & Young.
23.5 Consent of Bear, Stearns, and Co., Inc.
24.1 Power of Attorney, included on the signature page of this
Registration Statement.
99.1 Form of Digital Island Proxy Card.
99.2 Form of Sandpiper Proxy Card.
</TABLE>
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DIGITAL ISLAND, INC.
The undersigned, Ruann F. Ernst and T.L. Thompson, hereby certify
that:
ONE: They are the duly elected, qualified and acting President and
---
Secretary, respectively, of Digital Island, Inc., a Delaware corporation.
TWO: The Certificate of Incorporation of said corporation was
---
originally filed in the Office of the Secretary of State of the State of
Delaware on March 31, 1999 and the Amended and Restated Certificate of
Incorporation of said corporation was originally filed in such office on May 27,
1999.
THREE: The Amended and Restated Certificate of Incorporation of said
-----
corporation is amended and restated to read in its entirety as follows:
ARTICLE I
The name of this corporation is Digital Island, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, Delaware
19801. The name of the Corporation's registered agent at such address is the
Corporation Service Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware (the "GCL").
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares that the Corporation is authorized to issue is One Hundred Ten
Million (110,000,000). One Hundred Million (100,000,000) shares shall be Common
Stock, par value $0.001 per share, and Ten Million (10,000,000) shares shall be
Preferred Stock, par value $0.001 per share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors of the
Corporation is hereby
<PAGE>
authorized to fix or alter the rights, preferences, privileges and restrictions
granted to or imposed upon each series of Preferred Stock, and the number of
shares constituting any such series and the designation thereof, or of any of
them. The rights, privileges, preferences and restrictions of any such
additional series may be subordinated to, pari passu with (including, without
----------
limitation, inclusion in provisions with respect to liquidation and acquisition
preferences, redemption and/or approval of matters by vote), or senior to any of
those of any present or future class or series of Preferred Stock or Common
Stock. The Board of Directors is also authorized to increase or decrease the
number of shares of any series prior or subsequent to the issue of that series,
but not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation. In addition, the
Bylaws may be amended by the affirmative vote of holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of voting stock of
the Corporation entitled to vote at an election of directors.
ARTICLE VI
The number of directors of the Corporation shall be determined by
resolution of the Board of Directors.
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide. Advance notice of stockholder nominations
for the election of directors and of any other business to be brought before any
meeting of the stockholders shall be given in the manner provided in the Bylaws
of this Corporation.
At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, or until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the GCL.
The directors of the Corporation shall be divided into three (3)
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. For the purposes hereof, the initial Class I, Class II
and Class III directors shall be those directors so designated by a resolution
of the Board of Directors. At the first annual meeting of stockholders
following the closing of the initial public offering of the Corporation's Common
Stock, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three (3) years. At the second
annual meeting of stockholders following the closing of the initial public
offering of the Corporation's Common Stock, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three (3) years. At the third annual meeting of stockholders following the
initial public offering of the Corporation's Common
<PAGE>
Stock, the term of office of the Class III directors shall expire and Class III
directors shall be elected for a full term of three (3) years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three (3) years to succeed the directors of the class whose terms expire
at such annual meeting. If the number of directors is hereafter changed, each
director then serving as such shall nevertheless continue as a director of the
Class of which he is a member until the expiration of his current term and any
newly created directorships or decrease in directorships shall be so apportioned
among the classes as to make all classes as nearly equal in number as is
practicable.
Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
even if less than a quorum, at any meeting of the Board of Directors. A person
so elected by the Board of Directors to fill a vacancy shall hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been duly elected and
qualified. A director may be removed from office by the affirmative vote of the
holders of 66 2/3% of the outstanding shares of voting stock of the Corporation
entitled to vote at an election of directors, provided that such removal is for
cause.
ARTICLE VII
Stockholders of the Corporation shall take action by meetings held
pursuant to this Amended and Restated Certificate of Incorporation and the
Bylaws and shall have no right to take any action by written consent without a
meeting. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. Special meetings of the stockholders, for
any purpose or purposes, may only be called by the Board of Directors of the
Corporation. The books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the Corporation.
ARTICLE VIII
To the fullest extent permitted by applicable law, this Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and agents (and any other persons to which
Delaware law permits this Corporation to provide indemnification) through Bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the GCL, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to action for breach of duty to the Corporation, its stockholders, and
others.
No director of the Corporation shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the GCL or any amendment thereto or shall be liable
by reason that, in addition to any and all other requirements for such
liability, such director (1) shall have breached the director's duty or loyalty
to the Corporation or its stockholders, (2) shall have acted in manner involving
intentional misconduct or a knowing violation of law or, in failing to act,
shall have acted in a manner involving
<PAGE>
intentional misconduct or a knowing violation of law, or (3) shall have derived
an improper personal benefit. If the GCL is hereafter amended to authorize the
further elimination or limitation of the liability of a director, the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the GCL, as so amended.
Each person who was or is made a party or is threatened to be made a
party to or is in any way involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or a direct
or indirect subsidiary of the Corporation, or is or was serving at the request
of the Corporation as a director or officer of another entity or enterprise, or
was a director or officer of a foreign or domestic corporation which was
predecessor corporation of the Corporation or of another entity or enterprise at
the request of such predecessor corporation, shall be indemnified and held
harmless by the Corporation, and the Corporation shall advance all expenses
incurred by any such person in defense of any such proceeding prior to its final
determination, to the fullest extent authorized by the GCL. In any proceeding
against the Corporation to enforce these rights, such person shall be presumed
to be entitled to indemnification and the Corporation shall have the burden of
proving that such person has not met the standards of conduct for permissible
indemnification set forth in the GCL. The rights to indemnification and
advancement of expenses conferred by this Article VIII shall be presumed to have
been relied upon by the directors and officers of the Corporation in serving or
continuing to serve the Corporation and shall be enforceable as contract rights.
Said rights shall not be exclusive of any other rights to which those seeking
indemnification may otherwise be entitled. The Corporation may, upon written
demand presented by a director or officer of the Corporation or of a direct or
indirect subsidiary of the Corporation, or by a person serving at the request of
the Corporation as a director or officer of another entity or enterprise, enter
into contracts to provide such persons with specified rights to indemnification,
which contracts may confer rights and protections to the maximum extent
permitted by the GCL, as amended and in effect from time to time.
If a claim under this Article VIII is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the Corporation ) that the claimant
has not met the standards of conduct which make it permissible under the GCL for
the Corporation to indemnify the claimant for the amount claimed, but the
claimant shall be presumed to be entitled to indemnification and the Corporation
shall have the burden of proving that the claimant has not met the standards of
conduct for permissible indemnification set forth in the GCL.
If the GCL is hereafter amended to permit the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment, the indemnification rights conferred by this
Article VIII shall be broadened to the fullest extent permitted by the GCL, as
so amended.
<PAGE>
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in
Articles V, VI, VII, VIII and IX of this Amended and Restated Certificate of
Incorporation may not be repealed or amended in any respect without the
affirmative vote of holders at least 66-2/3% of the outstanding voting stock of
the Corporation entitled to vote at election of directors.
FOUR: The foregoing amendment and restatement has been duly adopted
----
by the Corporation's Board of Directors in accordance with the applicable
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
FIFTH: The foregoing amendment and restatement was approved by the
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holders of the requisite number of shares of the Corporation in accordance with
Section 228 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
July 2, 1999.
/s/ Ruann F. Ernst
------------------------------------------
Ruann F. Ernst
President
/s/ T.L. Thompson
------------------------------------------
T.L. Thompson
Secretary
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BYLAWS
OF
DIGITAL ISLAND, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
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County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places
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both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
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directors shall be held at such place as may be fixed from time to time by the
Board of Directors, or at such other place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held at such date
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and time as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. At each annual meeting, the stockholder
shall elect directors to succeed those whose terms expire in that year and shall
transact such other business as may properly be brought before the meeting.
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Section 3. Written notice of the annual meeting stating the place,
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date and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not less than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
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corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
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purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may only be called by the Board.
Section 6. Written notice of a special meeting stating the place,
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date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of stockholders
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shall be limited to the purposes stated in the notice.
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Section 8. The holders of a majority of the stock issued and
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outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted that might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
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holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of
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incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three (3) years from its date, unless the proxy provides for a longer
period.
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Section 11. Nominations for election to the Board of Directors must
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be made by the Board of Directors or by a committee appointed by the Board of
Directors for such purpose or by any stockholder of any outstanding class of
capital stock of the corporation entitled to vote for the election of directors.
Nominations by stockholders must be preceded by notification in writing received
by the secretary of the corporation not less than one-hundred twenty (120) days
prior to any meeting of stockholders called for the election of directors. Such
notification shall contain the written consent of each proposed nominee to serve
as a director if so elected and the following information as to each proposed
nominee and as to each person, acting alone or in conjunction with one or more
other persons as a partnership, limited partnership, syndicate or other group,
who participates or is expected to participate in making such nomination or in
organizing, directing or financing such nomination or solicitation of proxies to
vote for the nominee:
(a) the name, age, residence, address, and business address of
each proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of
business and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially,
either directly or indirectly, by each proposed nominee and each such person;
and
(d) a description of any arrangement or understanding of each
proposed nominee and of each such person with each other or any other person
regarding future employment or any future transaction to which the corporation
will or may be a party.
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The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
Section 12. At any meeting of the stockholders, only such business
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shall be conducted as shall have been brought before the meeting (a) pursuant to
the corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in this Bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this Bylaw.
For business to be properly brought before any meeting by a
stockholder pursuant to clause (c) above of this Section 12, the stockholder
must have given timely notice thereof in writing to the secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than one hundred twenty (120) days prior to the date of the meeting. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (a) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, and the name
and address of the beneficial owner, if any, on whose behalf the proposal is
made, (c) the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder of record and by the beneficial
owner, if any, on whose behalf of the proposal is made and (d) any material
interest of such stockholder of record and the beneficial owner, if any, on
whose behalf the proposal is made in such business.
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Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at a meeting except in accordance with the procedures set
forth in this Section 12. The presiding officer of the meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the procedures
prescribed by this Section 12, and if such person should so determine, such
person shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted. Notwithstanding the
foregoing provisions of this Section 12, a stockholder shall also comply with
all applicable requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder with respect to the matters set forth
in this Section 12.
Section 13. Effective upon the closing of the corporation's initial
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public offering of securities pursuant to a registration statement filed under
the Securities Act of 1933, as amended, the stockholders of the Corporation may
not take action by written consent without a meeting but must take any such
actions at a duly called annual or special meeting in accordance with these
Bylaws and the Certificate of Incorporation.
ARTICLE III
DIRECTORS
Section 1. The number of directors of this corporation that shall
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constitute the whole board shall be determined by resolution of the Board of
Directors; provided, however, that no decrease in the number of directors shall
have the effect of shortening the term of an incumbent director. The Board of
Directors shall be classified, with respect to the time for which they severally
hold office, into three classes, as nearly equal in number as possible, as
determined by the Board of Directors, one class ("Class I") to hold office
initially for a term
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<PAGE>
expiring at the annual meeting to be held in 2000, another class ("Class II") to
hold office initially for a term expiring at the annual meeting of stockholders
held in 2001 and another class ("Class III") to hold office initially for a term
expiring at the annual meeting of stockholders to be held in 2002, with the
members of each class to hold office until their successors are elected and
qualified. At each annual meeting of stockholders, the successors of the class
of directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election.
Section 2. Vacancies and newly created directorships resulting from
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any increase in the authorized number of directors may be filled by a majority
of the directors then in office, though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
election of the class for which such directors were chose and until their
successors are duly elected and qualified or until earlier resignation or
removal. If there are no directors in office, then an election of directors may
be held in the manner provided by statute.
Section 3. The business of the corporation shall be managed by or
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under the direction of its Board of Directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by these bylaws directed or required
to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
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meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of Directors
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shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to
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<PAGE>
constitute the meeting, provided a quorum shall be present. In the event of the
failure of the stockholders to fix the time or place of such first meeting of
the newly elected Board of Directors, or in the event such meeting is not held
at the time and place so fixed by the stockholders, the meeting may be held at
such time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the Board of Directors, or as shall be
specified in a written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held
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without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
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president on two (2) days' notice to each director by mail or forty-eight (48)
hours notice to each director either personally, or by telephone, telegram or
facsimile; special meetings shall be called by the president or secretary in
like manner and on like notice on the written request of a majority of the Board
unless the Board consists of only one director, in which case special meetings
shall be called by the president or secretary in like manner and on like notice
on the written request of the sole director. A written waiver of notice, signed
by the person entitled thereto, whether before or after the time of the meeting
stated therein, shall be deemed equivalent to notice.
Section 8. At all meetings of the board a majority of the directors
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shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
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<PAGE>
Section 9. Unless otherwise restricted by the certificate of
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incorporation of these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
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majority of the whole board, designate one (1) or more committees, each
committee to consist of one (1) or more of the directors of the corporation.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in
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<PAGE>
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority in reference to amending the
certificate of incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a revocation of a dissolution,
or amending the bylaws of the corporation; and, unless the resolution or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings
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and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving
the corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
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<PAGE>
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
-----------
incorporation or bylaws, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
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certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice (except as provided in Section 7 of Article III of these Bylaws), but
such notice may be given in writing, by mail, addressed to such director or
stockholder, at his address as it appears on the records of the corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
directors may also be given by telephone, telegram or facsimile.
Section 2. Whenever any notice is required to be given under the
----------
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
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Board of Directors and shall be a president, a chief financial officer and a
secretary. The Board of Directors may elect from among its members a Chairman
of the Board. The Board of Directors
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may also choose one or more vice-presidents, assistant secretaries and assistant
treasurers. Any number of offices may be held by the same person, unless the
certificate of incorporation or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
----------
annual meeting of stockholders shall choose a president, a chief financial
officer, and a secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers and
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agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers of the corporation shall be
----------
fixed by the Board of Directors or any committee established by the Board of
Directors for such purpose. The salaries of agents of the corporation shall,
unless fixed by the Board of Directors, be fixed by the president or any vice-
president of the corporation.
Section 5. The officers of the corporation shall hold office until
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their successors are chosen and qualify. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
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meetings of the Board of Directors and of the stockholders at which he shall be
present. He/she shall have and may exercise such powers as are, from time to
time, assigned to him by the Board and as may be provided by law.
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<PAGE>
Section 7. In the absence of the Chairman of the Board, the
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president, shall preside at all meetings of the Board of Directors and of the
stockholders at which he shall be present. He shall have and may exercise such
powers as are, from time to time, assigned to him by the Board and as may be
provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer of the
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corporation; and in the absence of the Chairman of the Board he/she shall
preside at all meetings of the stockholders and the Board of Directors; he/she
shall have general and active management of the business of the corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect.
Section 9. The president or any vice president shall execute bonds,
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mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
Section 10. In the absence of the president or in the event of his
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inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
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<PAGE>
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board of
-----------
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He/she shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he/she shall be. He/she shall have custody
of the corporate seal of the corporation and he/she, or an assistant secretary,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by his signature or by the signature of such
assistant secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
his signature.
Section 12. The assistant secretary, or if there be more than one,
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the assistant secretaries in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the secretary or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
THE CHIEF FINANCIAL OFFICER
Section 13. The chief financial officer shall be the chief financial
-----------
officer and treasurer of the corporation, shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the
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corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the corporation in such depositories as may be designated
by the Board of Directors.
Section 14. He/she shall disburse the funds of the corporation as may
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be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 15. Along with the president or any vice president, he/she
-----------
shall be authorized to execute bonds, mortgages and other contracts requiring a
seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the corporation.
Section 16. If required by the Board of Directors, he/she shall give
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the corporation a bond (which shall be renewed every six years) in such sum and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of his/her office and for the
restoration to the corporation, in case of his/her death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his/her control
belonging to the corporation.
Section 17. The assistant treasurer, or if there shall be more than
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one, the assistant treasurers in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the chief financial officer or in the event of his
inability or refusal to act, perform the duties and exercise the powers
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of the chief financial officer and shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled
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to have a certificate, signed by, or in the name of the corporation by, the
Chairman of the Board of Directors, or the president or a vice-president and the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of the corporation, certifying the number of shares owned by him/her in the
corporation.
Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate that the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating,
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<PAGE>
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
Any of or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he/she were such
officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 2. The Board of Directors may direct a new certificate or
----------
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his/her
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 3. Upon surrender to the corporation or the transfer agent of
----------
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a
17
<PAGE>
new certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
FIXING RECORD DATE
Section 4. In order that the corporation may determine the
----------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 5. The corporation shall be entitled to recognize the
----------
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
18
<PAGE>
Section 1. Dividends upon the capital stock of the corporation,
----------
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
----------
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the
----------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
----------
resolution of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
----------
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
19
<PAGE>
Section 6. The corporation shall, to the fullest extent authorized
----------
under the laws of the State of Delaware, as those laws may be amended and
supplemented from time to time, indemnify any director made, or threatened to be
made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
corporation or a predecessor corporation or, at the corporation's request, a
director or officer of another corporation, provided, however, that the
corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the corporation. The indemnification provided for in this Section
6 shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled under any bylaw, agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in their official
capacities and as to action in another capacity while holding such office, (ii)
continue as to a person who has ceased to be a director, and (iii) inure to the
benefit of the heirs, executors and administrators of such a person. The
corporation's obligation to provide indemnification under this Section 6 shall
be offset to the extent of any other source of indemnification or any otherwise
applicable insurance coverage under a policy maintained by the corporation or
any other person.
Expenses incurred by a director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of the corporation (or was serving at the corporation's request
as a director or officer of another corporation) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation as authorized by relevant sections of the
General Corporation Law of Delaware. Notwithstanding
20
<PAGE>
the foregoing, the corporation shall not be required to advance such expenses to
an agent who is a party to an action, suit or proceeding brought by the
corporation and approved by a majority of the Board of Directors of the
corporation which alleges willful misappropriation of corporate assets by such
agent, disclosure of confidential information in violation of such agent's
fiduciary or contractual obligations to the corporation or any other willful and
deliberate breach in bad faith of such agent's duty to the corporation or its
stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of
the corporation to indemnify any person, other than a director, made a party to
any action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been "fiduciaries" of any employee benefit plan of the corporation
which may exist from time to time, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this Section 6, be interpreted as follows:
an "other enterprise" shall be deemed to include such an employee benefit plan,
including without limitation, any plan of the corporation which is governed by
the Act of Congress entitled "Employee Retirement Income Security Act of 1974,"
as amended from
21
<PAGE>
time to time; the corporation shall be deemed to have requested a person to
serve an employee benefit plan where the performance by such person of his
duties to the corporation also imposes duties on, or otherwise involves services
by, such person to the plan or participants or beneficiaries of the plan; excise
taxes assessed on a person with respect to an employee benefit plan pursuant to
such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new
----------
bylaws may be adopted by the affirmative vote of holders of at least 66-2/3%
vote of the outstanding voting stock of the corporation. These bylaws may also
be altered, amended or repealed or new bylaws may be adopted by the Board of
Directors, when such power is conferred upon the Board of Directors by the
certificate of incorporation. The foregoing may occur at any regular meeting of
the stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal bylaws is conferred
upon the Board of Directors by the certificate of incorporation it shall not
divest or limit the power of the stockholders to adopt, amend or repeal bylaws.
22
<PAGE>
CERTIFICATE OF ADOPTION BY THE
SECRETARY OF
DIGITAL ISLAND, INC.
The undersigned, T.L. Thompson, hereby certifies that he is the duly
elected and acting Secretary of Digital Island, Inc., a Delaware corporation
(the "Corporation"), and that the Amended and Restated Bylaws attached hereto
constitute the Bylaws of said Corporation as duly adopted by the Board of
Directors and the Stockholders of the Corporation and as in effect on the date
hereof.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this 2nd day of July, 1999.
/s/ T.L. Thompson
_____________________________________
T.L. Thompson
Secretary
23
<PAGE>
EXHIBIT 4.3
===============================================================================
NUMBER [LOGO] COMMON STOCK
DI SHARES
SEE REVERSE FOR CERTAIN
DEFINITIONS
CUSIP 25385N 10 1
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON, MA OR NEW YORK, NY
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK,
$0.001 PAR VALUE OF $0.001 PER SHARE, OF
DIGITAL ISLAND, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
[CORPORATE SEAL
OF DIGITAL ISLAND, INC.]
/s/ /s/
CHIEF FINANCIAL OFFICER PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
TRANSFER AGENT AND REGISTRAR
BY /s/
AUTHORIZED SIGNATURE
================================================================================
<PAGE>
================================================================================
DIGITAL ISLAND, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the Certificate
of Incorporation of the Corporation and by any certificate of determination,
the number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-.........Custodian.........
TEN ENT - as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to
JT TEN - as joint tenants with Minors Act..................
right of survivorship (State)
and not as tenants in UNIF TRF MIN ACT- .....Custodian (until age..)
common (Cust)
COM PROP- as community property ......under Uniform Transfer
(Minor)
to Minors Act...............
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
OF ASSIGNEE
_____________________________
_____________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated ____________________________
X __________________________________
X __________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_________________________________
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 4.4
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
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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 4.5
AMENDMENT NO. 1
to
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
This Amendment No. 1, dated as of April 9, 1999, amends that certain
Amended and Restated Investors' Rights Agreement, dated as of February 19, 1999
(the "Agreement"), by and among Digital Island, Inc., a California corporation
---------
(the "Company"), and the individuals or entities listed on the signature pages
-------
thereto (each a "Holder" and collectively, the "Holders"). Capitalized terms
------ -------
used herein without definition shall have the respective meanings ascribed to
them in the Agreement.
WHEREAS, the Company intends to undertake an Initial Public Offering;
and
WHEREAS, the Company and the Holders wish to amend the Agreement to
facilitate the Initial Public Offering; and
WHEREAS, the Agreement, pursuant to Section 14.8 thereof, may be
amended with the written consent of the Company and the Holders of at least 66
2/3% of the outstanding Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred and Registrable Securities.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Section 9 of the Agreement is hereby deleted in its entirety and
the following is substituted therefor:
Section 9
Standoff Agreement
------------------
In connection with the Company's Initial Public Offering, each Holder
agrees not to offer to sell or sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any securities of the
Company held by Holder at any time during such period (other than those included
in the Initial Public Offering, if any), directly or indirectly, without the
prior written consent of the Company or the underwriters of such Initial Public
Offering for a period of one-hundred eighty (180) days following the effective
date of the Initial Public Offering. In connection with the Company's Initial
Public Offering, each Holder further agrees to enter into the managing
underwriter's standard lockup letter. In order to enforce the foregoing, the
Company may impose stop-transfer instructions with respect to the Registrable
Securities of each Holder
<PAGE>
(and the share or securities of every other person subject to the foregoing
restrictions) until the end of such period."
2. Each of the other provisions of the Agreement shall remain in full
force and effect.
This Amendment No. 1 may be executed in counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
instrument.
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Amendment No. 1 as of the date first above written.
By:
----------------------------------
Print Name:
--------------------------
Title:
-------------------------------
<PAGE>
EXHIBIT 5.1
December 9, 1999
Digital Island, Inc.
45 Fremont Street
Suite 1200
San Francisco, CA 94105
Re: Digital Island, Inc. Registration Statement on Form S-4 for
Issuance of Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to Digital Island, Inc., a Delaware corporation
(the "Company"), in connection with the proposed public offering of the
Company's Common Stock (the "Shares"), as described in the Company's
Registration Statement on Form S-4 (the "Registration Statement") filed on the
date hereof with the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Act").
This opinion is being furnished in accordance with the requirements of
Item 21(a) of Form S-4 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents, the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Shares and such other instruments, documents or other information as we deemed
necessary or appropriate in rendering our opinion. Based on such review, we are
of the opinion that the Shares have been duly authorized and if, as and when
issued in accordance with the Registration Statement and the related joint
proxy statement/prospectus (as amended and supplemented through the date of
issuance) will be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K.
This opinion letter is rendered as of the date first above written and
we disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company or the
Shares.
Very truly yours,
/s/ BROBECK, PHLEGER & HARRISON LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 8.1
December 9, 1999
Sandpiper Networks, Inc.
225 West Hillcrest Drive
Suite 250
Thousand Oaks, CA 91360
Attention: Mr. Leo S. Spiegel
Re: Agreement and Plan of Reorganization Dated as of October 24, 1999
By and Among Digital Island, Inc., Beach Acquisition Corp., and
Sandpiper Networks, Inc.
------------------------------------------------------------------
Dear Sir:
We have acted as counsel for Sandpiper Networks, Inc., a California
corporation ("Sandpiper"), in connection with the merger (the "Merger") of Beach
Acquisition Corp., a California corporation ("Merger Sub") and wholly-owned
subsidiary of Digital Island, Inc., a Delaware corporation ("Island"), with and
into Sandpiper pursuant to an agreement and plan of reorganization, dated as of
October 24, 1999 by and among Sandpiper, Merger Sub and Island (the "Merger
Agreement").
In that connection, you have requested our opinion regarding certain U.S.
Federal income tax consequences of the Merger. In providing our opinion, we
have examined the Merger Agreement, the registration statement on Form S-4 (the
"Registration Statement"), which includes the Joint Proxy Statement and
Prospectus of Sandpiper and Island (the "Proxy Statement/Prospectus"), filed
with the Securities and Exchange Commission (the "SEC") on December 9, 1999,
and such other documents and corporate records as we have deemed necessary or
appropriate for purposes of our opinion. In our examination, we have assumed
the genuineness of all signatures, the legal capacity of all natural persons,
the authority of all persons signing documents, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies and
the authenticity of the originals of such copies. In addition, we have assumed
that (i) the Merger will be consummated in accordance with the provisions of the
Merger Agreement and the Registration Statement, (ii) the statements concerning
the Merger set forth in the Merger Agreement and the Registration Statement are
true, complete and correct, (iii) the representations
<PAGE>
Sandpiper Networks, Inc.
December 9, 1999
Page 2
made by Sandpiper and Island, in their respective letters delivered to us for
purposes of this opinion (the "Representation Letters") are true, complete and
correct and will remain true, complete and correct at all times up to and
including the Effective Time (as defined in the Merger Agreement), and (iv) any
representations made in the Representation Letters "to the best knowledge of" or
similarly qualified are correct without such qualification. We have made no
independent investigation with regard to such statements or representations. We
assume that no actions will be taken that are inconsistent with such statements
and representations. If any of the above described assumptions are untrue for
any reason or if the Merger is consummated in a manner that is different from
the manner in which it is described in the Merger Agreement or the Proxy
Statement/Prospectus, our opinions as expressed below may be adversely affected
and may not be relied upon.
Based upon the foregoing, for U.S. Federal income tax purposes, we are of
opinion that (i) the Merger will constitute a reorganization within the meaning
of Section 368 (a) of the Internal Revenue Code of 1986, as amended (the
"Code"), (ii) Sandpiper, Merger Sub and Island will each be a party to such
reorganization within the meaning of Section 368 (b) of the Code; (iii) except
as provided below, holders of Sandpiper stock (a) will not recognize gain or
loss for federal income tax purposes as a result of the exchange of their shares
of Sandpiper stock for Island common stock in the Merger, except with respect to
cash received instead of a fractional share of Island common stock, as discussed
below, and (b) will have a tax basis in the Island stock received in the Merger
equal to the tax basis of the Sandpiper stock surrendered in the Merger less any
tax basis of the Sandpiper stock surrendered that is allocable to a fractional
share of Island common stock for which cash is received; (iv) a Sandpiper
shareholder's holding period with respect to the Island common stock received in
the Merger will include the holding period of the Sandpiper stock surrendered in
the Merger therefor, assuming the shareholder holds the shares of Sandpiper
stock as a capital asset on the date of the exchange; and (v) to the extent that
a holder of shares of Sandpiper stock receives cash instead of a fractional
share of Island common stock, the holder will recognize gain or loss for federal
income tax purposes, measured by the difference between the amount of cash
received and the portion of the tax basis of the holder's shares of Sandpiper
stock allocable to such fractional share of Island common stock. Assuming the
shareholder holds the shares of Sandpiper stock as a capital asset on the date
of the exchange, the gain or loss will be a capital gain or loss and will be a
long-term capital gain or loss if the share of Sandpiper stock exchanged for the
fractional share of Island common stock was held for more than one year at the
Effective Time.
Our opinion does not address all aspects of United States federal income
taxation that may be relevant to a Sandpiper shareholder in light of the
shareholder's particular circumstances or to those Sandpiper shareholders
subject to special rules, such as shareholders who are not citizens or residents
of the United States or organized under the laws of the United States,
<PAGE>
Sandpiper Networks, Inc.
December 9, 1999
Page 3
financial institutions, tax-exempt organizations, insurance companies, brokers
or dealers in securities, traders in securities electing mark to market,
shareholders who acquired their Sandpiper stock pursuant to the exercise of
options or similar derivative securities or otherwise as compensation or
shareholders who hold their Sandpiper stock pursuant to a tax-qualified
retirement plan or as part of a straddle, hedge or conversion transaction.
Our opinion is limited to the federal income tax matters addressed, and no
opinion is rendered with respect to any other issue, including any other tax
aspects of the Merger. In particular, we express no opinion with respect to the
tax consequences of any Island common stock received other than in exchange for
Sandpiper stock or with respect to any state, local or foreign tax consequences
of the Merger. In addition, our conclusions are based on federal income tax law
currently in effect, which is subject to change on a prospective or retroactive
basis. If any assumption or representation described above or contained in the
Merger Agreement or the Representations Letters is not true, correct and
complete, or in the event of a change in law adversely affecting the conclusions
reached in this letter, our opinion will be void and of no force or effect. You
should be aware that although this letter represents our opinion concerning the
matter specifically discussed, it is not binding on the courts or on any
administrative agency, including the Internal Revenue Service, and a court or
agency may hold or act to the contrary. We undertake no obligation to update
this letter or our opinion at any time. Our opinion is provided to you as a
legal opinion only, and not as a guaranty or warranty, and is limited to the
specific transactions, documents and matter described above. No opinion may be
implied or inferred beyond that which is expressly stated in this letter.
This opinion is furnished solely for the benefit of Sandpiper in connection
with the Merger Agreement and may not be filed with or furnished to any
individual, entity, association, agency or other person and may not be quoted or
referred to, orally or in writing, in whole or in part, without our prior
written consent.
We hereby consent to the use of our name in the Registration Statement and
in the Joint Proxy Statement/Prospectus filed as a part thereof and to the
filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ Riordan & McKinzie
Riordan & McKinzie
<PAGE>
EXHIBIT 10.1
DIGITAL ISLAND, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
1. GENERAL
1.1 Purpose
This Stock Option and Incentive Plan (the "Plan") is intended to provide
incentives and encourage stock ownership on the part of officers and selected
key employees of Digital Island, Inc. (the "Company"). The purpose of the Plan
is to provide certain employees with a proprietary interest in the Company and
to encourage them to remain in the employ of and to increase their efforts on
behalf of the Company. The term "Company," as used in this Plan, includes
Digital Island, Inc. and any of its "subsidiary corporations" which meet the
definition of subsidiary corporation contained in Section 425(f) of the Code.
The Plan permits the grant of stock options, restricted stock, stock
appreciation rights, dividend equivalents and performance awards (sometimes
referred to in this Plan, collectively, as "Awards"). The Plan also permits the
grant of incentive stock options ("Incentive Stock Options") within the meaning
of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"),
and the grant of other options that do not constitute Incentive Stock Options
("Nonqualified Stock Options"), Incentive stock options and nonqualified stock
options granted under this Plan are sometimes referred-to in this Plan,
collectively, as "Options." The recipients of Options or Awards are referred to,
individually, as "Optionee" and, collectively, as "Optionees."
1.2 Administration
The Plan will be administered by the Board of Directors of the Company (the
"Board").
The Board will have full and complete authority to promulgate such rules
and regulations as it deems desirable for administering and interpreting the
Plan. All determinations, decisions and computations made by the Board under
this Plan and all interpretations by the Board of any provisions of this Plan or
of any Option or Award will be in the Board's sole and absolute discretion and
will be final and conclusive. No member of the Board will be liable for any an
or determination made in good faith with respect to the Plan or any Option or
Award.
The Board may delegate all or any portion of its authority, rights, duties
or obligations to such other person(s) as the Board will determine from time to
time, except that only the Board can make grants to persons who are subject to
Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
1.3 Eligibility
Subject to the terms and conditions of this Plan, the Board will determine
which employees and/or other individuals will be granted Options and/or Awards
and the terms and conditions of the Options and/or Awards.
1
<PAGE>
1.4 Shares of Stock Subject to the Plan
The shares that may be issued under the Plan will be authorized and
unissued or reacquired shares of the Company's common stock (the "Common
Stock"). The aggregate number of shares which may be issued under the Plan will
not exceed shares of Common Stock, as adjusted in accordance with Session
4. If an option or Award is exercised or otherwise paid, the number of shares of
Common Stock to which the exercise or payment relates will be charged against
the maximum amount of Common Stock that may be delivered pursuant to the Plan
and, if applicable, pursuant to the Option or Award.
If an Option or Award expires or is canceled for any reason without having
been fully exercised or vested, the number of shares subject to that Option or
Award which were not purchased or did not vest may again be made subject to
either an Option or an Award (to the same person or to a different person).
1.5 Amendment of the Plan
The Board may, insofar as permitted by law, from time to time, suspend or
discontinue the Plan or reuse or amend the Plan in any respect whatsoever,
except that no amendment will alter or impair any rights or obligations under
any Options or Awards without the consent of the affected Optionee(s).
1.6 Term of Plan
The Plan will become effective on January 1, 1997. Subject to suspension or
discontinuation of the Plan, Options and Awards may be granted under the Plan at
any time after the Plan becomes effective and until January 1, 2007, on which
date the Plan will terminate. Notwithstanding the foregoing, each Option and
Award granted under the Plan will remain in effect until such Option or Award
has been satisfied by the issuance of shares or terminated in accordance with
its terms and the terms of the Plan.
1.7 Other Provisions
The Option Agreements and other agreements authored under this Plan may
contain provisions not expressly set forth in this Plan, including without
limitation, restrictions upon the exercise of the Option or restrictions
required by any applicable securities laws, as the Board deems advisable.
1.8 Restrictions
The Board may impose as a condition of the exercise of any Award or Option,
that the shares subject to any Award or Option are listed, registered or
qualified under the rules of any securities exchange or under any state or
federal law or regulation and, in that event, the affected Options or Awards may
not be exercised (in whole or in part) unless and until the Board's condition
has been met.
1.9 Nonassignability
No Option or Award will be assignable or transferable by the Optionee,
except by will or by the laws of descent and distribution. During the lifetime
of the Optionee, the Option or Award will be exercisable only by that optionee,
and no other person will acquire any rights in the Option or Award.
2
<PAGE>
1.10 Withholding Taxes
Whenever shares are to be issued, or cash is to be paid, under the Plan,
the Company will have the right to require the Optionee to remit to the Company
an amount adequate to satisfy federal, stale and local withholding tax
requirements prior to the delivery of any certificate for the shares or the
payment of the cash. The Company may deduct withholding taxes from any shares or
cash paid under the Plan.
1.11 Definition of "Fair Market Value"
For the purposes of the Plan, the term "Fair Market Value" will mean, with
respect to a share of Common Stock as of any particular date, (i) the closing
sales price of a share of Common Stock on the principal national securities
exchange (as designated by the Board) for the last preceding date on which there
was a sale of the Common Stock on such exchange; or (ii) if the Common Stock is
not then listed on a national securities exchange, then the average of the
closing bid and asked prices for the shares of Common Stock on the over-the-
counter market on which the shares are traded (or, if more than one, then the
one designated by the Board) for the last preceding date (within the preceding
30-day period) on which there was a sale of the Common Stock in that market; or
(iii) if there has been no reported sale of the Common Stock on an over-the-
cover market within that period, then the average of the closing bid and asked
prices for e shares of Common Stock on the National Association of Securities
Dealers' Automated Quotations System ("NASDAQ"), or any comparable system (as
designated by the Board) on which the shares are listed, on the last preceding
date for which there are closing bid and asked prices; or (iv) if the Common
Stock is not then listed on NASDAQ or any comparable system, then the closing
sales price or, if no reported sale has taken place within the preceding 30-day
period, the average of the closing bid and asked prices, as furnished by any
member of the National Association of Securities Dealers selected from time to
time by the Board for that purpose, for the last preceding date for which there
was a closing sales price or closing bid and asked prices; or (v) if no such
sales or bid and asked prices are available, then the fair market value of a
share of the Common Stock on that date as determined in good faith by the Board.
2. INCENTIVE STOCK OPTIONS
2.1 Award of Incentive Stock Options
Incentive Stock Options may be granted to any employee under all the terms
and conditions contained in this Plan; provided that, during any calendar year,
the aggregate Fair Market Value (determined as of the date of grant) of the
stock with respect to any Incentive Stock Options which are exercisable for the
first time by any one Optionee will not exceed $100,000.
2.2 Term of Options
The term of any Incentive Stock Option shall not exceed ten years from the
date of grant; provided that, the term of any Incentive Stock Option will not
exceed five years from the date of grant if it is issued to a person who, at the
time of the grant and in accordance with Section
3
<PAGE>
425(d) of the Code, owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company.
2.3 Cancellation of and Substitution for Options
With the agreement of Optionee, the Board may cancel any Option at any time
and grant to the same Optionee in substitution a new Option containing terms and
conditions determined by the Board, subject to the express limitations provided
in this Plan.
2.4 Terms and Conditions of Options
All Options will be evidenced by written agreements (individually, "Option
Agreement" collectively, "Option Agreements") containing terms and conditions
determined by the Board from time to time; provided that, each Option Agreement
will comply with the following terms and conditions:
(a) Number of Shares and Type of Option
Each Option Agreement will state the number of shares to which the
Option pertains and whether the Option is intended to be an Incentive Stock
Option or a Nonqualified Stock Option.
(b) Option Price
Each Option Agreement will state the Option price per share (or the
method by which the price will be computed). In the case of an Incentive Stock
Option, the option price will be not less than 100% of the Fair Market Value of
a share of the Common Stock on the date the Incentive Stock Option is printed.
Notwithstanding the foregoing, if the Incentive Stock Option is granted to a
person who, on the date of the grant and in accordance with Section 425(d) of
the Code, owns stock possession more than 10% of the total combined voting power
of all classes of stock of the Company, then the price will be not less than
110% of the Fair Market Value of a share of the Common Stock on the date the
Incentive Stock Option is granted.
(c) Medium and Time of Payment
The Option price will be due and payable upon the exercise of the
Option and payment will be made in cash, in shares of the Common Stock or in a
combination of cash and shares. The Board may permit some or all of a cash
payment to be made pursuant to a promissory note from the Optionee, subject to
those terms and conditions determined by the Board. Upon receipt of payment, the
Company will deliver to the Optionee (or person entitled to exercise the option)
a certificate or certificates for the appropriate number shares of Common Stock.
(d) Exercise of Options
Each Option will state the time(s) when it becomes exercisable. The
Board may waive any vesting provisions contained in an Option Agreement. To the
extent that an Option has become vested, and subject to the foregoing
restrictions, it may be exercised in whole or in such lesser amount as may be
authorized by the Option Agreement. If exercised in part, the unexercised
portion of an Option will continue to be held by the Optionee under the terms
and conditions of the Option Agreement and this Plan.
4
<PAGE>
(e) Termination and Transfer of Options
An Option Agreement may provide for the termination of all or any
portion of an Option under certain circumstances, including, without limitation,
termination of the Optionee's employment or service as a result of resignation,
retirement, disability or death, or for cause, and may distinguish among various
causes of termination as the Board deems appropriate.
3. OTHER AWARDS
3.1 General
The Board may grant the Awards described in this Section. All Awards (other
than Options) will be evidenced by a written agreement(s) containing the terms
and conditions determined by the Board from time to time.
3.2 Restricted Stock.
The Board may award restricted stock to officers and key employees of the
Company. The number of shares of Common Stock to be delivered, the date of
delivery, the price, if any, to be paid for the shares, the dividend, voting and
other shareholder rights and the restrictions imposed on the shares will be
determined by the Board and set forth in a restricted stock agreement.
3.3 Stock Appreciation Rights.
(a) Award of Stock Appreciation Rights
Stock appreciation rights may be related or unrelated to Options or
other Awards, and may extend to all or a portion of the shares covered by a
related Option or Award. Stock appreciation rights may be awarded at any time,
unless related to an Incentive Stock Option, in which case they may be awarded
only at the time of the grant of the related Incentive Stock Option. The terms
and conditions of the exercise of stock appreciation rights will be determined
by the Board and set forth in a stock appreciation rights agreement.
(b) Payment
(i) Upon the exercise of a stock appreciation right and, if such
stock appreciation right is related to an Option, surrender of an
exercisable portion of the related Option, the employee will be entitled to
receive payment of an amount determined by multiplying: (A) the difference
obtained by subtracting (x) the purchase price of a share of Common Stock
specified in the related Option or, if such stock appreciation right is
unrelated to an Option, the initial share value specified in the award of a
share of Common Stock, from (y) the Fair Market Value (or other method of
valuation as determined by the Board) a share of Common Stock on the date
of exercise of such stock appreciation right, by (B) the number of shares
as to which such stock appreciation right has been exercised.
(ii) The Company may pay the amount determined under the preceding
paragraph in cash, in shares of Common Stock (valued at Fair Market Value
on the
5
<PAGE>
business day next preceding the date of exercise of the stock appreciation
right), or a combination of cash and shares.
3.4 Performance Awards
The Board may grant one or more performance awards to any officer or key
employee of the Company. The value of such awards will be determined based on
the Fair Market Value of the Common Stock or any other performance criteria
determined appropriate by the Board. In making its determinations, the Board
will consider (among such other factors as it deems relevant in light of the
specific type of award) the contributions, responsibilities and other
compensation of the Optionee. The payment of performance awards may be made in
shares of Common Stock, or in cash, or a combination of cash and shares.
3.5 Dividend Equivalents
Under the terms and conditions determined by the Board, an Optionee may be
granted dividend equivalents based on the dividends declared and paid on the
Common Stock covered by the Option or Award during the period between the date
the Option or Award is granted and the date the Option or Award is exercised,
vests or expires, as determined by the Board. Dividend equivalents may be
granted concurrently with or subsequent to the grant of an Option or Award;
provided that, any dividend equivalent relating to an Incentive Stock Option may
be granted only concurrently with the grant of the Incentive Stock Option.
3.6 Deferral of Awards
Payment of any portion or all of an Award may be deferred by the Board in
accordance with guidelines established by the Board. Without limiting the
generality of the foregoing, the Board may provide for (i) the crediting of
interest on cash payments that are deferred (and setting the rates(s) of
interest) and (ii) the crediting of dividends or dividend equivalents on
deferred payments denominated in the form of shares.
3.7 Termination of Awards
An award agreement may provide for the termination of all or any portion of
an Award under certain circumstances, including, without limitation, termination
of the Optionee's employment or service as a result of resignation, retirement,
disability or death, or for cause, and may distinguish among various causes of
termination as the Board deems appropriate.
4. RECAPITALIZATION AND REORGANIZATION
4.1 Stock Dividends, etc.
The number of shares of Common Stock covered by figs Plan, and the number
of shares and price per share of each outstanding Option and Award, will be
proportionately adjusted for any increase or decrease in the number of issued
and outstanding shares of Common Stock resulting from a subdivision or
consolidation of shares, or the payment of a stock dividend, or any other
increase or decrease in the number of issued and outstanding shares of Common
Stock effected without receipt of consideration by the Company.
6
<PAGE>
4.2 Mergers, etc.
If the Company is the surviving corporation in any merger or consolidation,
each outstanding Option and Award will apply to the same number and type of
securities in the new entity that would have been received if the Option or
Award had been fully exercised and the Optionee had become the holder of the
shares of Common Stock that are subject to the Option or Award. In the event of
dissolution or liquidation of the Company or a merger or consolidation in which
the Company is not the surviving corporation, each outstanding Option and Award
will be terminated, unless the agreement of merger or consolidation otherwise
provides (a "Terminating Transaction"); provided, however, each Optionee will
have the right immediately prior to the Terminating Transaction to exercise each
Option or Award in whole or in part, subject to the limitations required by the
Code.
4.3 General
Any adjustments required under this Section will be made by the Board
pursuant to Section 1.2 (Administration). The grant of an Option or Award will
not affect in any way the Company's right or power to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or to
transfer all or any part of its business or assets.
5. MISCELLANEOUS PROVISIONS
5.1 Rights as a Shareholder
No Optionee (or transferee) will have any rights as a shareholder of the
Company with respect to any shares covered by an Option or Award until the
exercise of the Option or Award and the receipt by the Company of all payments
due under this Plan. No adjustment will be made with respect to any Option or
Award for dividends (ordinary or extraordinary, whether in cash, securities or
other property) or distributions or other rights prior to the exercise of the
Option or Award and the receipt by the Company of all payments due under this
Plan, except as expressly provided in this Plan.
5.2 Modification, Extension and Renewal of Options and Awards
Subject to the terms and conditions of this Plan, the Board may modify,
extend, renew or cancel outstanding any Options and/or Awards; provided that,
any change which impairs or diminishes any rights or obligations under any
Option or Award will require the affected Optionee(s) consent.
5.3 Application of Funds
The proceeds received by the Company from the sale of Common Stock pursuant
to the exercise of Options will be used for general corporate purposes.
5.4 No Obligation to Exercise Option or Award
The granting of an Option or Award will not impose any obligation upon the
Optionee (or any transferee) to exercise the Option or Award.
7
<PAGE>
5.5 Not an Employment Agreement
Nothing in this Plan or in any Option or Award granted under this Plan will
affect the right of the Company to terminate at any time or for any reason the
employment of any Optionee.
5.6 Securities Law Requirements
(a) Investment Representation
The Board may require any person, as a condition of either the grant
or the exercise of an Option or Award pursuant to this Plan, to represent and
establish to the satisfaction of the Board that all shares of Common Stock
required upon the exercise of such Option or Award will be acquired for
investment and not for distribution.
(b) Registration Requirements
No shares of Common Stock will be issued upon the exercise of any
Option or Award if counsel for the Company determines that there has not been
met any applicable registration requirements under the Exchange Act or the
Securities Act of 1933, as mended, any applicable listing requirement of any
stock exchange on which the Common Stock is listed, any state securities law or
any other applicable provision of state or federal law.
(c) Information to Optionees
The Company will provide to each Optionee, during the period for which
he or she has one or more options or awards outstanding, copies of all annual
reports and other information which are provided to all shareholders of the
Company. The Company will not be required to provide such information if the
issuance of options under the Plan is limited to key employees whose duties in
connection with the Company assure their access to equivalent information.
5.7 Shareholder Approval
This Plan is subject to the approval of the shareholders of the Company on
or before January 1, 1998, and any Option Agreement entered into under this Plan
before that approval will contain a provision to the effect that the exercise of
that Option is subject to shareholder approval.
8
<PAGE>
EXHIBIT 10.2
DIGITAL ISLAND, INC.
1998 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
(As Amended and Restated through March 18, 1999)
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1998 Stock Option/Stock Issuance Plan is intended to promote the
interests of Digital Island, Inc., a California corporation, by providing
eligible persons in the Corporation's employ or service with the opportunity to
acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Corporation as an incentive for them to continue in such employ
or service.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate equity programs:
(i) the Option Grant Program under which eligible persons
may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock, and
(ii) the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan Administrator, be issued shares
of Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any Parent
or Subsidiary).
B. The provisions of Articles One and Four shall apply to both
equity programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the functions of the Committee
and reassume all powers and authority previously delegated to the Committee.
<PAGE>
B. The Plan Administrator shall have full power and authority
(subject to the provisions of the Plan) to establish such rules and regulations
as it may deem appropriate for proper administration of the Plan and to make
such determinations under, and issue such interpretations of, the Plan and any
outstanding options or stock issuances thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator shall be final and binding on all
parties who have an interest in the Plan or any option or stock issuance
thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Plan are as follows:
(i) Employees,
(ii) non-employee members of the Board or the non-employee
members of the board of directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. The Plan Administrator shall have full authority to determine,
(i) with respect to the grants made under the Option Grant Program, which
eligible persons are to receive the option grants, the time or times when those
grants are to be made, the number of shares to be covered by each such grant,
the status of the granted option as either an Incentive Option or a Non-
Statutory Option, the time or times when each option is to become exercisable,
the vesting schedule (if any) applicable to the option shares and the maximum
term for which the option is to remain outstanding, and (ii) with respect to
stock issuances made under the Stock Issuance Program, which eligible persons
are to receive such stock issuances, the time or times when those issuances are
to be made, the number of shares to be issued to each Participant, the vesting
schedule (if any) applicable to the issued shares and the consideration to be
paid by the Participant for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 5,433,284
shares.
2.
<PAGE>
B. Such authorized share reserve is comprised of (i) the number of
shares which remained available for issuance under the Predecessor Plan as of
the Plan Effective Date, including the shares subject to the outstanding options
to be incorporated into this Plan pursuant to the provisions of Section II of
Article Four, plus (ii) an additional increase of 794,159 shares authorized as
of the Plan Effective Date and subsequently approved by the shareholders, plus
(iii) an additional increase of 750,000 shares authorized by the Board on July
17, 1998, subject to shareholder approval, plus (iv) an additional increase of
600,000 shares authorized by the Board on October 18, 1998, subject to
shareholder approval, and plus (v) an additional increase of 1,000,000 shares
authorized by the Board on March 18, 1999, subject to shareholder approval.
C. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the option exercise or direct issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan.
D. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan and (ii) the number and/or class of securities and the exercise
price per share in effect under each outstanding option in order to prevent the
dilution or enlargement of benefits thereunder. The adjustments determined by
the Plan Administrator shall be final, binding and conclusive. In no event shall
any such adjustments be made in connection with the conversion of one or more
outstanding shares of the Corporation's preferred stock into shares of Common
Stock.
3.
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
--------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:
(i) The exercise price per share shall not be less than
eighty-five percent (85%) of the Fair Market Value per share of Common
Stock on the option grant date.
(ii) If the person to whom the option is granted is a 10%
Shareholder, then the exercise price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12 of the 1934 Act at the time the option is exercised, then the
exercise price may also be paid as follows:
(i) in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions (A) to a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such
4.
<PAGE>
exercise and (B) to the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete the
sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option grant. However, no option shall have a term in excess of ten (10)
years measured from the option grant date.
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Should the Optionee cease to remain in Service for any
reason other than death, Disability or Misconduct, then the Optionee shall
have a period of three (3) months following the date of such cessation of
Service during which to exercise each outstanding option held by such
Optionee.
(ii) Should Optionee's Service terminate by reason of
Disability, then the Optionee shall have a period of twelve (12) months
following the date of such cessation of Service during which to exercise
each outstanding option held by such Optionee.
(iii) If the Optionee dies while holding an outstanding
option, then the personal representative of his or her estate or the person
or persons to whom the option is transferred pursuant to the Optionee's
will or the laws of inheritance shall have a twelve (12)-month period
following the date of the Optionee's death to exercise such option.
(iv) Under no circumstances, however, shall any such option
be exercisable after the specified expiration of the option term.
(v) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding with respect to any and all option shares for which the
option is not otherwise at the time exercisable or in which the Optionee is
not otherwise at that time vested.
5.
<PAGE>
(vi) Should Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to remain outstanding.
2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(vii) extend the period of time for which the option is to
remain exercisable following Optionee's cessation of Service or death from
the limited period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
(viii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the Optionee
would have vested under the option had the Optionee continued in Service.
D. Shareholder Rights. The holder of an option shall have no
------------------
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become the
recordholder of the purchased shares.
E. Unvested Shares. The Plan Administrator shall have the discretion
---------------
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right. The Plan Administrator may not impose a vesting schedule upon
the option grant or any shares of Common Stock subject to that option which is
more restrictive than twenty percent (20%) per year vesting, with the initial
vesting to occur not later than one (1) year after the option grant date.
However, such limitation shall not be applicable to any option grants made to
individuals who are officers of the Corporation, non-employee Board members or
independent consultants.
F. First Refusal Rights. Until such time as the Common Stock is
--------------------
first registered under Section 12 of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Plan. Such right of first refusal shall be exercisable in accordance
with the terms established by the Plan Administrator and set forth in the
document evidencing such right.
6.
<PAGE>
G. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.
H. Withholding. The Corporation's obligation to deliver shares of
-----------
Common Stock upon the exercise of any options granted under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of the Plan shall be applicable to Incentive Options. Options which
are specifically designated as Non-Statutory Options shall not be subject to the
terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Exercise Price. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Shareholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Shareholder, then the option term shall not exceed five (5)
years measured from the option grant date.
III. CORPORATE TRANSACTION
A. The shares subject to each option outstanding under the Plan at
the time of a Corporate Transaction shall automatically vest in full so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all of the shares of Common Stock at
the time subject to that option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, the shares subject to an
outstanding option shall not vest on such an accelerated basis if and to the
extent: (i) such option is assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and the Corporation's repurchase rights
with respect to the unvested option shares are concurrently
7.
<PAGE>
assigned to such successor corporation (or parent thereof) or (ii) such option
is to be replaced with a cash incentive program of the successor corporation
which preserves the spread existing on the unvested option shares at the time of
the Corporate Transaction and provides for subsequent payout in accordance with
the same vesting schedule applicable to those unvested option shares or (iii)
the acceleration of such option is subject to other limitations imposed by the
Plan Administrator at the time of the option grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction, had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
--------
securities shall remain the same.
E. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration (in whole or in part) of
one or more outstanding options (and the immediate termination of the
Corporation's repurchase rights with respect to the shares subject to those
options) upon the occurrence of a Corporate Transaction, whether or not those
options are to be assumed in the Corporate Transaction.
F. The Plan Administrator shall also have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to structure such option so that the shares subject
to that option will automatically vest on an accelerated basis should the
Optionee's Service terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which the option is assumed and the
repurchase rights applicable to those shares do not otherwise terminate. Any
option so accelerated shall remain exercisable for the fully-vested option
shares until the earlier of (i) the expiration of the option term or (ii) the
-------
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination. In addition, the Plan Administrator may provide that
one or more
8.
<PAGE>
of the Corporation's outstanding repurchase rights with respect to shares held
by the Optionee at the time of such Involuntary Termination shall immediately
terminate on an accelerated basis, and the shares subject to those terminated
rights shall accordingly vest at that time.
G. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction shall remain exercisable as an Incentive Option
only to the extent the applicable One Hundred Thousand Dollar limitation is not
exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.
H. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
9.
<PAGE>
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Plan and to grant in
substitution therefor new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
10.
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the issue date. However, the purchase
price per share of Common Stock issued to a 10% Shareholder shall not be less
than one hundred and ten percent (110%) of such Fair Market Value.
2. Subject to the provisions of Section I of Article Four,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. However, the Plan Administrator may not impose a vesting schedule
upon any stock issuance effected under the Stock Issuance Program which is more
restrictive than twenty percent (20%) per year vesting, with initial vesting to
occur not later than one (1) year after the issuance date. Such limitation shall
not apply to any Common Stock issuances made to the officers of the Corporation,
non-employee Board members or independent consultants.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
11.
<PAGE>
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full shareholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further shareholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to such surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the non-
completion of the vesting schedule applicable to such shares. Such waiver shall
result in the immediate vesting of the Participant's interest in the shares of
Common Stock as to which the waiver applies. Such waiver may be effected at any
time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.
C. First Refusal Rights. Until such time as the Common Stock
--------------------
is first registered under Section 12 of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
II. CORPORATE TRANSACTION
A. Upon the occurrence of a Corporate Transaction, all outstanding
repurchase rights under the Stock Issuance Program shall terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, except to the extent: (i) those repurchase
rights are assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated vesting is
precluded by other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.
12.
<PAGE>
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights with respect to those shares remain
outstanding, to provide that those rights shall automatically terminate on an
accelerated basis, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those repurchase rights are assigned
to the successor corporation (or parent thereof).
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion,
be held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
13.
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant
to pay the option exercise price or the purchase price for shares issued to such
person under the Plan by delivering a full-recourse, interest-bearing promissory
note payable in one or more installments and secured by the purchased shares.
However, any promissory note delivered by a consultant must be secured by
collateral in addition to the purchased shares of Common Stock. In no event
shall the maximum credit available to the Optionee or Participant exceed the sum
of (i) the aggregate option exercise price or purchase price payable for the
purchased shares plus (ii) any Federal, state and local income and employment
tax liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan became effective on the Plan Effective Date and
was subsequently approved by the shareholders on June 12, 1998. On July 17,
1998, October 18, 1998 and March 18, 1999, the Board authorized an increase to
the number of shares of Common Stock reserved for issuance under the Plan by an
additional 750,000 shares, 600,000 shares and 1,000,000 shares, respectively,
with each such increase subject to shareholder approval on or before July 16,
1999. If such shareholder approval is not obtained, then all options granted on
the basis of such share increases will terminate and cease to be outstanding
without ever becoming exercisable for the option shares, and no further option
grants, and no issuances of Common Stock, shall be made on the basis of such
increase. Subject to such limitation, the Plan Administrator may grant options
and issue shares under the Plan at any time after the Plan Effective Date and
before the date fixed herein for termination of the Plan.
B. The Plan shall serve as the successor to the Predecessor
Plan, and no further option grants or direct stock issuances shall be made under
the Predecessor Plan after the Plan Effective Date. All options outstanding
under the Predecessor Plan on the Plan Effective Date shall be incorporated into
this Plan at that time and shall be treated as outstanding options under this
Plan. However, each outstanding option so incorporated shall continue to be
governed solely by the terms of the documents evidencing such option, and no
provision of this Plan shall be deemed to affect or otherwise modify the rights
or obligations of the holders of such incorporated options with respect to their
acquisition of shares of Common Stock.
14.
<PAGE>
C. The Plan shall terminate upon the earliest of (i) the
--------
expiration of the ten (10)-year period measured from the Plan Effective Date,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as vested shares or (iii) the termination of all outstanding
options in connection with a Corporate Transaction. All options and unvested
stock issuances outstanding at that time under the Plan shall continue to have
full force and effect in accordance with the provisions of the documents
evidencing such options or issuances.
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect the rights and obligations with
respect to options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require shareholder approval
pursuant to applicable laws and regulations.
B. Options may be granted under the Option Grant Program and
shares may be issued under the Stock Issuance Program which are in each instance
in excess of the number of shares of Common Stock then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained shareholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such shareholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock
upon the exercise of any options or upon the issuance or vesting of any shares
issued under the Plan shall be subject to the satisfaction of all applicable
Federal, state and local income and employment tax withholding requirements.
15.
<PAGE>
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any option or (ii) under the Stock Issuance Program shall be subject
to the Corporation's procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the options granted
under it and the shares of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
VIII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income
statement at least annually to each individual holding an outstanding option
under the Plan, unless such individual is a key Employee whose duties in
connection with the Corporation (or any Parent or Subsidiary) assure such
individual access to equivalent information.
16.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Code shall mean the Internal Revenue Code of 1986, as
----
amended.
C. Committee shall mean a committee of two (2) or more Board
---------
members appointed by the Board to exercise one or more administrative functions
under the Plan.
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following
---------------------
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting power
of the Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
F. Corporation shall mean Digital Island, Inc., a California
-----------
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of Digital Island, Inc. which shall by appropriate action
adopt the Plan.
G. Disability shall mean the inability of the Optionee or the
----------
Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment and shall be determined by
the Plan Administrator on the basis of such medical evidence as the Plan
Administrator deems warranted under the circumstances.
H. Employee shall mean an individual who is in the employ of
--------
the Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
I. Exercise Date shall mean the date on which the Corporation
-------------
shall have received written notice of the option exercise.
J. Fair Market Value per share of Common Stock on any relevant
-----------------
date shall be determined in accordance with the following provisions:
A-1.
<PAGE>
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market. If there is no closing selling
price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding
date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither listed on
any Stock Exchange nor traded on the Nasdaq National Market, then the
Fair Market Value shall be determined by the Plan Administrator after
taking into account such factors as the Plan Administrator shall deem
appropriate.
K. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
L. Involuntary Termination shall mean the termination of the
-----------------------
Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge
by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation which
materially reduces his or her duties and responsibilities or the level
of management to which he or she reports, (B) a reduction in his or her
level of compensation (including base salary, fringe benefits and
target bonuses under any corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation of
such individual's place of employment by more than fifty (50) miles,
provided and only if such change, reduction or relocation is effected
without the individual's consent.
A-2.
<PAGE>
M. Misconduct shall mean the commission of any act of fraud,
----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
N. 1934 Act shall mean the Securities Exchange Act of 1934, as
--------
amended.
O. Non-Statutory Option shall mean an option not intended to
--------------------
satisfy the requirements of Code Section 422.
P. Option Grant Program shall mean the option grant program in
--------------------
effect under the Plan.
Q. Optionee shall mean any person to whom an option is granted
--------
under the Plan.
R. Parent shall mean any corporation (other than the
------
Corporation) in an unbroken chain of corporations ending with the Corporation,
provided each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
S. Participant shall mean any person who is issued shares of
-----------
Common Stock under the Stock Issuance Program.
T. Plan shall mean the Corporation's 1998 Stock Option/Stock
----
Issuance Plan, as set forth in this document.
U. Plan Administrator shall mean either the Board or the
------------------
Committee acting in its capacity as administrator of the Plan.
V. Plan Effective Date shall mean May 14, 1998, the date the Plan
-------------------
was adopted by the Board.
W. Predecessor Plan shall mean the Corporation's Stock Option and
----------------
Incentive Plan. adopted by the Board.
X. Service shall mean the provision of services to the
-------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant.
A-3.
<PAGE>
Y. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
Z. Stock Issuance Agreement shall mean the agreement entered
------------------------
into by the Corporation and the Participant at the time of issuance of shares of
Common Stock under the Stock Issuance Program.
AA. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under the Plan.
BB. Subsidiary shall mean any corporation (other than the
----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
CC. 10% Shareholder shall mean the owner of stock (as determined
---------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
A-4.
<PAGE>
DIGITAL ISLAND
1998 STOCK OPTION /STOCK ISSUANCE PLAN
PLAN AMENDMENT
--------------
The Digital Island 1998 Stock Option/Stock Issuance Plan (the "Plan") is
hereby amended, effective May 19, 1999, as follows:
1. Section IIIA of the Plan is hereby amended to read as
follows:
A. The Plan shall be administered by the Board. However,
any or all administrative functions otherwise exercisable by the Board
may, with respect to officers and Board members, be delegated to the
Primary Committee and, with respect to all other persons eligible to
participate in the Plan, to the Secondary Committee. Members of the
Primary Committee or any Secondary Committee shall serve for such period
of time as the Board may determine and shall be subject to removal by
the Board at any time. The Board may also at any time terminate the
functions of the Primary Committee or any Secondary Committee and
reassume all powers and authority previously delegated to such
committee.
2. For purposes of this Plan Amendment, the following
definitions shall be in effect:
Primary Committee shall mean a committee of two or more Board
-----------------
members appointed by the Board to exercise one or more administrative
functions under the Plan with respect to officers and non-employee Board
members.
Secondary Committee shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Plan with respect to
eligible persons other than officers and non-employee Board members.
3. Except to the extent specifically modified by this Plan
Amendment, all of the terms and conditions of the Plan shall continue in
full force and effect.
IN WITNESS WHEREOF, Digital Island has caused this Plan
Amendment to be executed on its behalf by its duly-authorized officer on this
19th day of May, 1999.
- ----
DIGITAL ISLAND
By: /s/ Ruann T. Ernst
----------------------------
Title: CEO and President
-------------------------
6.
<PAGE>
EXHIBIT 10.3
DIGITAL ISLAND, INC.
1999 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests of
Digital Island, Inc., a Delaware corporation, by providing eligible persons in
the Corporation's service with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in such service.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,
- the Salary Investment Option Grant Program under which eligible
employees may elect to have a portion of their base salary invested each year
in special option grants,
- the Stock Issuance Program under which eligible persons may, at
the discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of such shares or as a bonus for
services rendered the Corporation (or any Parent or Subsidiary),
- the Automatic Option Grant Program under which eligible non-
employee Board members shall automatically receive option grants at designated
intervals over their period of continued Board service, and
- the Director Fee Option Grant Program under which non-employee
Board members may elect to have all or any portion of their annual retainer fee
otherwise payable in cash applied to a special stock option grant.
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee shall be made by a disinterested majority of the Board.
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of those programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
D. The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under those
programs.
2
<PAGE>
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive such grants, the time or times
when those grants are to be made, the number of shares to be covered by each
such grant, the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive such issuances, the time or times when the issuances are
to be made, the number of shares to be issued to each Participant, the vesting
schedule (if any) applicable to the issued shares and the consideration for such
shares.
D. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
E. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
first become non-employee Board members on or after the Underwriting Date,
whether through appointment by the Board or election by the Corporation's
stockholders, and (ii) those individuals who continue to serve as non-employee
Board members at one or more Annual Stockholders Meetings held after the
Underwriting Date. A non-employee Board member who has previously been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an option grant under the Automatic Option Grant Program at the time he
or she first becomes a non-employee Board member, but shall be eligible to
receive periodic option grants under the Automatic Option Grant Program while he
or she continues to serve as a non-employee Board member.
F. All non-employee Board members shall be eligible to participate in
the Director Fee Option Grant Program.
3
<PAGE>
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall not exceed 7,544,000
shares. Such reserve shall consist of (i) the number of shares estimated to
remain available for issuance, as of the Plan Effective Date, under the
Predecessor Plan as last approved by the Corporation's stockholders, including
the shares subject to outstanding options under that Predecessor Plan, (ii) plus
an additional increase of approximately 2,500,000 shares to be approved by the
Corporation's stockholders prior to the Underwriting Date.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2000, by
an amount equal to four percent (4%) of the total number of shares of Common
Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
2,000,000 shares.
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 750,000 shares of Common Stock in the aggregate per calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation at the original issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section IV of Article Two, Section III of Article Three,
Section 11 of Article Five or Section III of Article Six of the Plan shall not
be available for subsequent issuance under the Plan.
4
<PAGE>
E. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made by the Plan Administrator to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the number and/or class of securities
for which any one person may be granted stock options, separately exercisable
stock appreciation rights and direct stock issuances under the Plan per calendar
year, (iii) the number and/or class of securities for which grants are
subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan, (v) the number and/or class of securities and price per
share in effect under each outstanding option incorporated into this Plan from
the Predecessor Plan and (vi) the maximum number and/or class of securities by
which the share reserve is to increase automatically each calendar year pursuant
to the provisions of Section V.B of this Article One. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
5
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall, subject to the provisions of Section I of Article Seven
and the documents evidencing the option, be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
6
<PAGE>
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option held by the Optionee at the time of death and
exercisable in whole or in part at that time may be subsequently exercised
by the personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or the laws of inheritance or by the Optionee's designated beneficiary or
beneficiaries of that option.
(iii) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of' Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested had the
Optionee continued in Service.
7
<PAGE>
D. Stockholder Rights. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory Option
may, in connection with the Optionee's estate plan, be assigned in whole or in
part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate. Notwithstanding the foregoing, the Optionee may also designate
one or more persons as the beneficiary or beneficiaries of his or her
outstanding options under this Article Two, and those options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred option, including (without limitation) the limited time
period during which the option may be exercised following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section 11, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Nonstatutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000).
8
<PAGE>
To the extent the Employee holds two (2) or more such options which
become exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
C. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become fully exercisable for
the total number of shares of Common Stock at the time subject to such option
and may be exercised for any or all of those shares as fully vested shares of
Common Stock. However, an outstanding option shall not become exercisable on
such an accelerated basis if and to the extent: (i) such option is, in
connection with the Corporate Transaction, to be assumed by the successor
corporation (or parent thereof) or (ii) such option is to be replaced with a
cash incentive program of the successor corporation which preserves the spread
existing at the time of the Corporate Transaction on any shares for which the
option is not otherwise at that time exercisable and provides for subsequent
payout in accordance with the same exercise/vesting schedule applicable to those
option shares or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
B. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted
9
<PAGE>
stock options, separately exercisable stock appreciation rights and direct stock
issuances under the Plan per calendar year and (iv) the maximum number and/or
class of securities by which the share reserve is to increase automatically each
calendar year.
E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effect date of
such Corporate Transaction, become fully exercisable for the total number of
shares of Common Stock at the time subject to those options and may be exercised
for any or all of those shares as fully vested shares of Common Stock, whether
or not those options are to be assumed in the Corporate Transaction. In
addition, the Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the
Discretionary Option Grant Program so that those rights shall not be assignable
in connection with such Corporate Transaction and shall accordingly terminate
upon the consummation of such Corporate Transaction, and the shares subject to
those terminated rights shall thereupon vest in full.
F. The Plan Administrator shall have full power and authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall become fully exercisable for the total
number of shares of Common Stock at the time subject to those options in the
event the Optionee's Service is subsequently terminated by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of any Corporate Transaction in which those
options are assumed and do not otherwise accelerate. Any options so accelerated
shall remain exercisable for fully vested shares until the earlier of (i) the
expiration of the option term or (ii) the expiration of the one (1) year period
measured from the effective date of the Involuntary Termination. In addition,
the Plan Administrator may structure one or more of the Corporation's repurchase
rights so that those rights shall immediately terminate with respect to any
shares held by the Optionee at the time of his or her Involuntary Termination,
and the shares subject to those terminated repurchase rights shall accordingly
vest in full at that time.
G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effect date of a
Change in Control, become fully exercisable for the total number of shares of
Common Stock at the time subject to those options and may be exercised for any
or all of those shares as fully vested shares of Common Stock. In addition, the
Plan Administrator shall have the discretionary authority to structure one or
more of the Corporation's repurchase rights under the Discretionary Option Grant
Program so that those rights shall terminate automatically upon the consummation
of such Change in Control, and the shares subject to those terminated rights
shall thereupon vest in full. Alternatively, the Plan Administrator may
condition the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program and the termination of one or more of the
Corporation's outstanding repurchase rights under such program upon the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control. Each option so
accelerated shall remain exercisable for fully vested shares until the earlier
-------
of (i) the expiration of the option term or (ii) the expiration of the one (1)
year period measured from the effective date of Optionee's cessation of Service.
10
<PAGE>
H. The portion of any Incentive Option accelerated in connection with
a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution from
the Corporation in an amount equal to the excess of (a) the Fair Market
Value (on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.
(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator, either at the time of the actual option
surrender or at any earlier time. If the surrender is so approved, then the
distribution to which the Optionee shall be entitled may be made in shares
of Common Stock valued at Fair Market Value on the option surrender date,
in cash, or partly in shares and partly in cash, as the Plan Administrator
shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is not approved by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
later of (a) five (5) business days after the
-----
11
<PAGE>
receipt of the rejection notice or (b) the last day on which the option is
otherwise exercisable in accordance with the terms of the documents
evidencing such option, but in no event may such rights be exercised more
than ten (10) years after the option grant date.
C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited
stock appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation. In return for the surrendered option, the
Optionee shall receive a cash distribution from the Corporation in an
amount equal to the excess of (A) the Take-Over Price of the shares of
Common Stock at the time subject to such option (whether or not the
Optionee is otherwise vested in those shares) over (B) the aggregate
exercise price payable for those shares. Such cash distribution shall be
paid within five (5) days following the option surrender date.
(iii) At the time such limited stock appreciation right is
granted, the Plan Administrator shall pre-approve any subsequent exercise
of that right in accordance with the terms of this Paragraph C.
Accordingly, no further approval of the Plan Administrator or the Board
shall be required at the time of the actual option surrender and cash
distribution.
12
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for such calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely
authorization shall automatically be granted an option under the Salary
Investment Grant Program on the first trading day in January of the calendar
year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
that each such document shall comply with the terms specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the reduction in the Optionee's base
salary for the calendar year to be in effect pursuant to this program,
and
13
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.
D. Effect of Termination of Service. Should the Optionee cease
--------------------------------
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
ten-n or (ii) the expiration of the two (2)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or the laws of inheritance or by the designated beneficiary
or beneficiaries of such option. Such right of exercise shall lapse, and the
option shall terminate, upon the earlier of (i) the expiration of the ten (10)-
--------
year option term or (ii) the two (2)-year period measured from the date of the
Optionee's cessation of Service. However, the option shall, immediately upon
the Optionee's cessation of Service for any reason, terminate and cease to
remain outstanding with respect to any and all shares of Common Stock for which
the option is not otherwise at that time exercisable.
III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all the shares of Common Stock at the
time subject to such option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully-
vested shares until the earlier of (i) the expiration of the ten (10)-year
option term or (ii) the expiration of the two (2)-year period measured from the
date of the Optionee's cessation of Service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become fully exercisable for all the shares of Common Stock at the time subject
to such option and may be exercised for any or all of those shares as fully-
vested shares of Common Stock.
14
<PAGE>
The option shall remain so exercisable until the earliest to occur of
(i) the expiration of the ten (10)-year option term, (ii) the expiration of the
two (2)-year period measured from the date of the Optionee's cessation of
Service, (iii) the termination of the option in connection with a Corporate
Transaction or (iv) the surrender of the option in connection with a Hostile
Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. The Primary Committee shall, at the time the option
with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
E. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
15
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards which entitle the recipients to receive
those shares upon the attainment of designated performance goals.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
16
<PAGE>
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
6. Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock shall
actually be issued in satisfaction of those awards, if the performance goals
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock under one
or more outstanding share right awards as to which the designated performance
goals have not been attained.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.
17
<PAGE>
B. The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).
C. The Plan Administrator shall also have the discretionary authority
to structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
18
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. Grant Dates. Option grants shall be made on the dates specified
-----------
below:
1. Each individual who is first elected or appointed as a
nonemployee Board member at any time on or after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 15,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
2. On the date of each Annual Stockholders Meeting held after the
Underwriting Date, each individual who is to continue to serve as an Eligible
Director, whether or not that individual is standing for re-election to the
Board at that particular Annual Meeting, shall automatically be granted a Non-
Statutory Option to purchase 5,000 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 5,000-share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received one or
more stock option grants from the Corporation prior to the Underwriting Date
shall be eligible to receive one or more such annual option grants over their
period of continued Board service.
B. Exercise Price.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
-------------------------------
exercisable for any or all of the option shares. However, any unvested shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each initial
15,000-share grant shall vest, and the Corporation's repurchase right shall
19
<PAGE>
lapse, in a series of six (6) successive equal semi-annual installments upon the
Optionee's completion of each six (6)-month period of service as a Board member
over the thirty-six (36)month period measured from the option grant date. The
shares subject to each annual 5,000-share option grant shall be fully vested as
of the grant date.
E. Limited Transferability of Options. Each option under this
----------------------------------
Article Five may, in connection with the Optionee's estate plan, be assigned in
whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. The Optionee may also designate one or more persons as the
beneficiary or beneficiaries of his or her outstanding options under this
Article Three, and those options shall, in accordance with such designation,
automatically be transferred to such beneficiary or beneficiaries upon the
Optionee's death while holding those options. Such beneficiary or beneficiaries
shall take the transferred options subject to all the terms and conditions of
the applicable agreement evidencing each such transferred option, including
(without limitation) the limited time period during which the option may be
exercised following the Optionee's death.
F. Termination of Board Service. The following provisions shall
----------------------------
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or persons
to whom the option is transferred pursuant to the Optionee's will or the
laws of inheritance or by the designated beneficiary or beneficiaries of
such option) shall have a twelve (12)-month period following the date of
such cessation of Board service in which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the option
may not be exercised in the aggregate for more than the number of vested
shares of Common Stock for which the option is exercisable at the time of
the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve (12)-month
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised.
20
<PAGE>
However, the option shall, immediately upon the Optionee's cessation of
Board service for any reason other than death or Permanent Disability,
terminate and cease to be outstanding to the extent the option is not
otherwise at that time exercisable for vested shares.
G. Special Modification. If the financial accounting treatment for
--------------------
non-employee director stock options proposed in the March 31, 1999 Exposure
Draft of the Financial Accounting Standards Board under APB Opinion No. 25 is
adopted, then following changes shall be made to the foregoing provisions of the
Automatic Option Grant Program:
. The 15,000-share option grant shall not be made to a newly-
elected or appointed non-employee Board member until the first Annual
Stockholders Meeting held more than twelve (12) months after the date
of his or her initial election or appointment to the Board. At that
annual meeting, the non-employee Board member shall also receive an
option grant for an additional 5,000 shares under the annual grant
portion of the Automatic Option Grant Program.
. One-third of the shares subject to the 15,000-share option
grant shall be immediately vested at the time of the option grant, and
the remaining shares shall vest in a series of four (4) successive
equal semi-annual installments upon the Optionee's completion of each
six (6)-month period of Board service over the twenty-four (24)-month
period measured from the grant date.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as fully-
vested shares of Common Stock. Immediately following the consummation of the
Corporate Transaction, each automatic option grant shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.
C. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction or Change in
Control.
21
<PAGE>
D. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required at the time of the
actual option surrender and cash distribution.
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
F. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
22
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years for which the Director Fee Option Grant
Program is to be in effect. For each such calendar year the program is in
effect, each non-employee Board member may elect to apply all or any portion of
the annual retainer fee otherwise payable in cash for his or her service on the
Board for that year to the acquisition of a special option grant under this
Director Fee Option Grant Program. Such election must be filed with the
Corporation's Chief Financial Officer prior to first day of the calendar year
for which the annual retainer fee which is the subject of that election is
otherwise payable. Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
the annual retainer fee which is the subject of that election would otherwise be
payable in cash.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
23
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) equal monthly installments upon the Optionee's
completion of each month of Board service over the twelve (12)-month period
measured from the grant date. Each option shall have a maximum term of ten (10)
years measured from the option grant date.
D. Limited Transferability of Options. Each option under this
----------------------------------
Article Six may, in connection with the Optionee's estate plan, be assigned in
whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. The Optionee may also designate one or more persons as the
beneficiary or beneficiaries of his or her outstanding options under this
Article Three, and those options shall, in accordance with such designation,
automatically be transferred to such beneficiary or beneficiaries upon the
Optionee's death while holding those options. Such beneficiary or beneficiaries
shall take the transferred options subject to all the terms and conditions of
the applicable agreement evidencing each such transferred option, including
(without limitation) the limited time period during which the option may be
exercised following the Optionee's death.
E. Termination of Board Service. Should the Optionee cease Board
----------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the two (2)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
F. Death or Permanent Disability. Should the Optionee's service as
-----------------------------
a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the two (2)-year period measured
from the date of such cessation of Board service. In the event of the Optionee's
death while holding such option, the option may be exercised by the personal
representative of the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or the laws of inheritance
or by the designated beneficiary or beneficiaries of such option.
24
<PAGE>
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the two
(2)-year period measured from the date of the Optionee's cessation of Board
service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for the total number of shares of Common
Stock at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. Each such outstanding
option shall terminate immediately following the Corporate Transaction, except
to the extent assumed by the successor corporation (or parent thereof) in such
Corporate Transaction. Any option so assumed and shall remain exercisable for
the fully-vested shares until the earlier of (i) the expiration of the ten (10)-
-------
year option term or (ii) the expiration of the two (2)-year period measured from
the date of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall immediately become fully exercisable for the total number of shares of
Common Stock at the time subject to such option and may be exercised for any or
all of those shares as fully-vested shares of Common Stock. The option shall
remain so exercisable until the earliest to occur of (i) the expiration of the
ten (10)-year option term, (ii) the expiration of the two (2)-year period
measured from the date of the Optionee's cessation of Board service, (iii) the
termination of the option in connection with a Corporate Transaction or (iv) the
surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required at the time of the actual option surrender and
cash distribution.
25
<PAGE>
D. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
26
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Withholding Taxes to which
such holders may become subject in connection with the exercise of their options
or the vesting of their shares. Such right may be provided to any such holder in
either or both of the following formats:
Stock Withholding: The election to have the Corporation withhold,
-----------------
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Withholding
Taxes (not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at the
--------------
time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
27
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately on the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant Program shall not be implemented until such time as the Primary
Committee may deem appropriate. Options may be granted under the Discretionary
Option Grant at any time on or after the Plan Effective Date, and the initial
option grants under the Automatic Option Grant Program shall also be made on the
Plan Effective Date to any non-employee Board members eligible for such a grant
at that time. However, no options granted under the Plan may be exercised, and
no shares shall be issued under the Plan, until the Plan is approved by the
Corporation's stockholders. If such stockholder approval is not obtained within
twelve (12) months after the Plan Effective Date, then all options previously
granted under this Plan shall terminate and cease to be outstanding, and no
further options shall be granted and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan, and
no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Plan Effective Date. All options outstanding under
the Predecessor Plan on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.
C. One or more provisions of the Plan, including (without limitation)
the option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control, may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest to occur of (i) April
15, 2009, (ii) the date on which all shares available for issuance under the
Plan shall have been issued as fully-vested shares or (iii) the termination of
all outstanding options in connection with a Corporate Transaction. Should the
Plan terminate on April 15, 2009, then all option grants and unvested stock
issuances outstanding at that time shall continue to have force and effect in
accordance with the provisions of the documents evidencing such grants or
issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
28
<PAGE>
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
29
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option
------------------------------
grant program in effect under Article Five of the Plan.
B. Board shall mean the Corporation's Board of Directors.
------
C. Change in Control shall mean a change in ownership or control of
------------------
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
-----
E. Common Stock shall mean the Corporation's common stock.
- -------------
F. Corporate Transaction shall mean either of the following
----------------------
stockholder approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
30
<PAGE>
G. Corporation shall mean Digital Island, Inc., a Delaware
------------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Digital Island, Inc. which shall by appropriate action
adopt the Plan.
H. Director Fee Option Grant Program shall mean the special stock
---------------------------------
option grant in effect for non-employee Board members under Article Six of the
Plan.
I. Discretionary Option Grant Program shall mean the discretionary
----------------------------------
option grant program in effect under Article Two of the Plan.
J. Eligible Director mean a non-employee Board member eligible to
-----------------
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Articles One and Five.
K. Employee shall mean an individual who is in the employ of the
---------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. Exercise Date shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date
------------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to the
price per share at which the Common Stock is to be sold in the initial
public offering pursuant to the Underwriting Agreement.
31
<PAGE>
N. Hostile Take-Over shall mean the acquisition, directly or
------------------
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
O. Incentive Option shall mean an option which satisfies the
-----------------
requirements of Code Section 422.
P. Involuntary Termination shall mean the termination of the Service
------------------------
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her duties and responsibilities or the level of management to which
he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonus under any
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without the
individual's consent.
Q. Misconduct shall mean the commission of any act of fraud,
-----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
R. 1934 Act shall mean the Securities Exchange Act of 1934, as
---------
amended.
S. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
T. Optionee shall mean any person to whom an option is granted
---------
under the Discretionary Option Grant, Salary Investment Option Grant, Automatic
Option Grant or Director Fee Option Grant Program.
32
<PAGE>
U. Parent shall mean any corporation (other than the Corporation)
-------
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Participant shall mean any person who is issued shares of Common
------------
Stock under the Stock Issuance Program.
W. Permanent Disability or Permanently Disabled shall mean the
---------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. Plan shall mean the Corporation's 1999 Stock Incentive Plan, as
-----
set forth in this document.
Y. Plan Administrator shall mean the particular entity, whether the
-------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. Plan Effective Date shall mean the date the Plan shall become
--------------------
effective and shall be coincident with the Underwriting Date.
AA. Predecessor Plan shall mean the Corporation's 1998 Stock
-----------------
Option/Stock Issuance Plan in effect immediately prior to the Plan Effective
Date hereunder.
BB. Primary Committee shall mean the committee of two (2) or more
-----------------
nonemployee Board members appointed by the Board to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and
to administer the Salary Investment Option Grant Program solely with respect to
the selection of the eligible individuals who may participate in such program.
CC. Salary Investment Option Grant Program shall mean the salary
--------------------------------------
investment option grant program in effect under Article Three of the Plan.
DD. Secondary Committee shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
33
<PAGE>
EE. Section 16 Insider shall mean an officer or director of the
-------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
FF. Service shall mean the performance of services for the
--------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
GG. Stock Exchange shall mean either the American Stock Exchange or
---------------
the New York Stock Exchange.
HH. Stock Issuance Program shall mean the agreement entered into by
----------------------
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
II. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under Article Four of the Plan.
JJ. Subsidiary shall mean any corporation (other than the
-----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
KK. Take-Over Price shall mean the greater of (i) the Fair Market
----------------
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
LL. 10% Stockholder shall mean the owner of stock (as determined
----------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
MM. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
NN. Underwriting Date shall mean the date on which the Underwriting
------------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
OO. Withholding Taxes shall mean the Federal, state and local income
-----------------
and employment withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of those options or the vesting of those shares.
34
<PAGE>
EXHIBIT 10.4
DIGITAL ISLAND, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests
of Digital Island, Inc., a Delaware corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll-deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares of Common Stock
purchased on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall be limited to three
hundred thousand (300,000) shares.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2000, by
an amount equal to one percent (1%) of the total number of shares of Common
Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
five hundred thousand (500,000) shares.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date, (iii) the maximum number and class of
securities purchasable by all Participants in the aggregate on any one Purchase
Date, (iv) the maximum
<PAGE>
number and/or class of securities by which the share reserve is to increase
automatically each calendar year pursuant to the provisions of Section III.B of
this Article One and (v) the number and class of securities and the price per
share in effect under each outstanding purchase right in order to prevent the
dilution or enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in July
2001. The next offering period shall commence on the first business day in
August 2001, and subsequent offering periods shall commence as designated by the
Plan Administrator.
C. Each offering period shall be comprised of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in February to the last business day in July each year and from the
first business day in August each year to the last business day in January in
the following year. However, the first Purchase Interval in effect under the
initial offering period shall commence at the Effective Time and terminate on
the last business day in January 2000.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new
offering period shall have a duration of twenty (24) months, unless a shorter
duration is established by the Plan Administrator within five (5) business days
following the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
any offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
2.
<PAGE>
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Base Salary paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the
offering period, reduce his or her rate of payroll deduction to
become effective as soon as possible after filing the appropriate
form with the Plan Administrator. The Participant may not,
however, effect more than one (1) such reduction per Purchase
Interval.
(ii) The Participant may, prior to the commencement of
any new Purchase Interval within the offering period, increase
the rate of his or her payroll deduction by filing the
appropriate form with the Plan Administrator. The new rate (which
may not exceed the fifteen percent (15%) maximum) shall become
effective on the start date of the first Purchase Interval
following the filing of such form.
B. Payroll deductions shall begin on the first pay day
administratively feasible following the Participant's Entry Date into the
offering period and shall (unless sooner terminated by the Participant) continue
through the pay day ending with or immediately prior to the last day of that
offering period. The amounts so collected shall be credited to the Participant's
book account under the Plan, but no interest shall be paid on the balance from
time to time outstanding in such account. The amounts collected from the
Participant shall not be required to be held in any segregated account or trust
fund and may be commingled with the general assets of the Corporation and used
for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
3.
<PAGE>
VII. PURCHASE RIGHTS
A. Grant of Purchase Right. A Participant shall be granted a
-----------------------
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.
C. Purchase Price. The purchase price per share at which Common
--------------
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
-----
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. Number of Purchasable Shares. The number of shares of Common
----------------------------
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed 1,200 shares, subject to periodic adjustments in the event of certain
changes in the Corporation's capitalization. In addition, the maximum aggregate
number of shares of Common Stock purchasable by all Participants on any one
Purchase Date shall not exceed 200,000 shares, subject to periodic adjustments
in the event of certain changes in the Corporation's capitalization. However,
the Plan Administrator shall have the discretionary authority, exercisable prior
to the start of any offering period under the Plan, to increase or decrease the
limitations to be in effect for the number of shares purchasable per Participant
and in the aggregate by all Participants on each Purchase Date during that
offering period.
4.
<PAGE>
E. Excess Payroll Deductions. Any payroll deductions not applied to
-------------------------
the purchase of shares of Common Stock on any Purchase Date because they are
not sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable per Participant or in the
aggregate on the Purchase Date shall be promptly refunded.
F. Termination of Purchase Right. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next
scheduled Purchase Date in the offering period, terminate his or
her outstanding purchase right by filing the appropriate form
with the Plan Administrator (or its designate), and no further
payroll deductions shall be collected from the Participant with
respect to the terminated purchase right. Any payroll deductions
collected during the Purchase Interval in which such termination
occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next Purchase
Date. If no such election is made at the time such purchase right
is terminated, then the payroll deductions collected with respect
to the terminated right shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the
offering period for which the terminated purchase right was
granted. In order to resume participation in any subsequent
offering period, such individual must re-enroll in the Plan (by
making a timely filing of the prescribed enrollment forms) on or
before his or her scheduled Entry Date into that offering period.
(iii) Should the Participant cease to remain an
Eligible Employee for any reason (including death, disability or
change in status) while his or her purchase right remains
outstanding, then that purchase right shall immediately
terminate, and all of the Participant's payroll deductions for
the Purchase Interval in which the purchase right so terminates
shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid
leave of absence, then the Participant shall have the right,
exercisable up until the last business day of the Purchase
Interval in which such leave commences, to (a) withdraw all the
payroll deductions collected to date on his or her behalf for
that Purchase Interval or (b) have such funds held for the
purchase of shares on his or her behalf on the next scheduled
Purchase Date. In no event, however, shall any further payroll
deductions be collected on the Participant's behalf during such
leave. Upon the Participant's return to active service (x) within
ninety (90) days following the commencement of such leave or (y)
prior to the expiration of any longer period for which such
Participant's right to reemployment with the Corporation is
guaranteed by statute or contract, his or her payroll deductions
under the Plan shall automatically resume at the rate in
5.
<PAGE>
effect at the time the leave began, unless the Participant
withdraws from the Plan prior to his or her return. An individual
who returns to active employment following a leave of absence
which exceeds in duration the applicable (x) or (y) time period
will be treated as a new Employee for purposes of subsequent
participation in the Plan and must accordingly re-enroll in the
Plan (by making a timely filing of the prescribed enrollment
forms) on or before his or her scheduled Entry Date into the
offering period.
G. Change in Control. Each outstanding purchase right shall
-----------------
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
-----
Stock on the Participant's Entry Date into the offering period in which such
Change in Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change in Control. However, the
applicable limitation on the number of shares of Common Stock purchasable per
Participant shall continue to apply to any such purchase, but not the limitation
applicable to the maximum number of shares of Common Stock purchasable in the
aggregate.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. Proration of Purchase Rights. Should the total number of shares
----------------------------
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. Assignability. The purchase right shall be exercisable only by
-------------
the Participant and shall not be assignable or transferable by the Participant.
J. Stockholder Rights. A Participant shall have no stockholder
------------------
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans
6.
<PAGE>
(within the meaning of Code Section 423) of the Corporation or any Corporate
Affiliate, would otherwise permit such Participant to purchase more than Twenty-
Five Thousand Dollars ($25,000.00) worth of stock of the Corporation or any
Corporate Affiliate (determined on the basis of the Fair Market Value per share
on the date or dates such rights are granted) for each calendar year such rights
are at any time outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in a series of installments on each successive
Purchase Date during the offering period on which such right remains
outstanding.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one or more other purchase rights at a rate equal to Twenty-Five Thousand
Dollars ($25,000.00) worth of Common Stock (determined on the basis of the
Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on April 21, 1999 and shall
become effective at the Effective Time, provided no purchase rights granted
--------
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
7.
<PAGE>
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in July 2009, (ii) the date on
--------
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Change in Control. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the recognition of compensation
expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments
or revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify the eligibility requirements for participation in
the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
B. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.
8.
<PAGE>
Schedule A
----------
Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time
------------------------
Digital Island, Inc.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Base Salary shall mean the regular base salary paid to a
-----------
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan. Base
Salary shall be calculated before deduction of (A) any income or employment tax
withholdings or (B) any and all contributions made by the Participant to any
Code Section 401(k) salary deferral plan or Code Section 125 cafeteria benefit
program now or hereafter established by the Corporation or any Corporate
Affiliate. Base Salary shall not include (i) any overtime payments, bonuses,
commissions, profit-sharing distributions and other incentive-type payments
received during the period of participation in the Plan and (ii) any
contributions made on the Participant's behalf by the Corporation or any
Corporate Affiliate to any employee benefit or welfare plan now or hereafter
established (other than Code Section 401(k) or Code Section 125 contributions).
B. Board shall mean the Corporation's Board of Directors.
-----
C. Change in Control shall mean a change in ownership of the
-----------------
Corporation pursuant to any of the following transactions:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined
voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons
holding those securities immediately prior to such transaction,
or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly by an
person or related group of persons (other than the Corporation or
a person that directly or indirectly controls, is controlled by
or is under common control with the Corporation) of beneficial
ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities
pursuant to a tender or exchange offer made directly to the
Corporation's stockholders.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
A-1.
<PAGE>
E. Corporate Affiliate shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
G. Corporation shall mean Digital Island, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Digital Island, Inc. which shall by appropriate action
adopt the Plan.
H. Effective Time shall mean the time at which the Underwriting
--------------
Agreement is executed and the Common Stock priced for the initial public
offering. Any Corporate Affiliate which becomes a Participating Corporation
after such Effective Time shall designate a subsequent Effective Time with
respect to its employee-Participants.
I. Eligible Employee shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. Entry Date shall mean the date an Eligible Employee first
----------
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as such price is reported by the National Association
of Securities Dealers on the Nasdaq National Market. If there is
no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question
on the Stock Exchange determined by the Plan Administrator to be
the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which
such quotation exists.
(iii) For purposes of the initial offering period which
begins at the Effective Time, the Fair Market Value shall be
deemed to be equal to the price per share at which the Common
Stock is sold in the initial public offering pursuant to the
Underwriting Agreement.
A-2.
<PAGE>
L. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
M. Participant shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
N. Participating Corporation shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
O. Plan shall mean the Corporation's 1999 Employee Stock Purchase
----
Plan, as set forth in this document.
P. Plan Administrator shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
Q. Purchase Date shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be January 31, 2000.
R. Purchase Interval shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. Semi-Annual Entry Date shall mean the first business day in
----------------------
February and August each year on which an Eligible Employee may first enter an
offering period.
T. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
U. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
<PAGE>
EXHIBIT 10.5
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 10.6
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/ M.A. Gumucio
------------------------------------
Title: Chairman
------------------------------------
/s/ Ruann F. Ernst
------------------------------------
RUANN ERNST, EXECUTIVE
13.
<PAGE>
EXHIBIT 10.7
[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/ AL
-------------------------
Company: RH
-----------
1
<PAGE>
EXHIBIT 10.8
[LETTERHEAD OF DIGITAL ISLAND]
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of March
16, 1998 by Digital Island, Inc., a California corporation and Timothy M. Wilson
("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 of Marketing. In this position you will report to the
President/CEO. 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 $12,500.00 (which would equal $150,000 annually), payable (less
required withholdings) no less frequently than twice monthly. In addition to
your base salary, you will be eligible for a bonus of $12,500 per quarter, based
upon the achievement of mutually agreed upon objectives. (Bonuses paid for the
first quarter of employment will be pro-rated as of your start date.) You are
guaranteed your bonus for the first two complete quarters 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.
The company agrees to reimburse you for the following relocation expenses:
moving your household goods to California; temporary housing of up to $2,000 per
month for 6 months; and one round trip coach airline ticket every two weeks to
be used by you or your wife over the 6 month period.
2.b. Incentive Stock Options (ISO): The Company will offer the employee a
-----------------------------
qualified option to purchase 140,000 shares (assumes 140,000 shares outstanding
after the closes
<PAGE>
of the current financing) of Digital Island at an ISO price to be determined by
the Board of Directors. 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. (This option will
be contingent upon Board of Director review and approval.)
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 Executive
Staff, all in accordance with the Company's benefits program in effect from time
to time.
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
2
<PAGE>
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;
(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
3
<PAGE>
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 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 right, 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 right 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
rights, 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 rights or to procure a waiver of such rights
from the holders of such rights.
12. License. In the event Employee has any rights 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,
4
<PAGE>
royalty-free license during the term of the rights to reproduce, distribute,
modify, publicly perform and publicly display, with the right to sublicense and
assign such rights in and to the Work Product or the Developments including,
without limitation, the right 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.
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.
5
<PAGE>
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.
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 rights, 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.
Timothy M. Wilson:
Date: 3/30/98 /s/ Timothy M. Wilson
------------------- ------------------------------
Employee's Signature
Timothy M. Wilson
------------------------------
Typed or Printed Name
DIGITAL ISLAND, INC.:
/s/ Ron Higgins
------------------------------
Date:___________________ Signature
Ron Higgins
------------------------------
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"]
Patent Pending filed under Lucent Technologies for method of requesting
alternate transport paths during the conversations and implementing same without
loss in connection.
<PAGE>
EXHIBIT 10.9
[LOGO OF DIGITAL ISLAND]
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of October
26, 1998 by Digital Island, Inc., a California corporation and Paul Evenson
("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 of Operations. In this position you will be reporting
to the President and CEO. 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 semi-
-------------------------
monthly salary of $6,250.00 (which would equal $150,000 annually), payable (less
required withholdings) no less frequently than twice monthly. In addition to
your base salary, for each fiscal year of the Company during your period of
employment beginning with the fiscal year starting October 1, 1998, you will be
entitled to incentive compensation in an amount not less than forty thousand
dollars ($40,000) which is to become payable upon (i) the Company's achievement
of the financial objectives and performance milestones established by the Board
for each such year, and (ii) your continuation in employment through the close
of that year. Should you continue in the Company's employ through September 30,
1999, then you are hereby guaranteed an incentive bonus of at least twenty
thousand dollars ($20,000) for the fiscal year ending on that date, subject to
the Company's collection of applicable withholding taxes. 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 150,000 shares of Digital Island at an ISO price to
be determined by
<PAGE>
the Board of Director. 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. (This option will be
contingent upon Board of Director review and approval.)
2.c. Other Benefits. During the Term of Employment, Employee shall be
--------------
entitled to such medical and disability coverage and such vacation, sick leave,
holiday and any other 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.
3. Company's Trade Secret: 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 agree 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:
2
<PAGE>
(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;
(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
3
<PAGE>
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 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 right, 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 right 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
rights, 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 rights or to procure a waiver of such rights
from the holders of such rights.
12. License. In the event Employee has any rights 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
rights to reproduce, distribute, modify, publicly perform and publicly display,
with the right to sublicense and assign such rights in and to the
4
<PAGE>
Work Product or the Developments including, without limitation, the right 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.
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
5
<PAGE>
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.
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 rights, 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.
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
6
<PAGE>
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.
Paul Evenson:
/s/ Paul R. Evenson
------------------------------
Date:___________________ Employee's Signature
Paul R. Evenson
------------------------------
Typed or Printed Name
DIGITAL ISLAND, INC.:
/s/ Ruann F. Ernst
------------------------------
Date:___________________ Signature
Ruann F. Ernst
------------------------------
Typed or Printed Name
President & 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 10.10
DIGITAL ISLAND
EMPLOYMENT AGREEMENT
October 24, 1999
Leo S. Spiegel
225 West Hillcrest Drive #250
Thousand Oaks, CA 91362
Dear Leo:
We are pleased to offer you the position of President reporting to
Ruann Ernst. This letter, if accepted, sets forth the terms of your employment
with Digital Island, Inc. and Sandpiper Networks, Inc. (hereafter "Sandpiper")
(collectively "Digital Island") after the closing. This offer is contingent on
the occurrence of the closing of Digital Island, Inc.'s acquisition (the
"Acquisition") of Sandpiper and, if you accept this offer, it would take effect
as of that Closing Date. The terms of your employment would be as follows:
Compensation and Benefits
- -------------------------
You would receive an annual base salary of $240,000, less all
applicable deductions, and would be eligible to participate in the Digital
Island Bonus Plan, with an annual bonus target of $48,000. The bonus is
currently structured to be paid in quarterly installments each fiscal year based
upon (i) the Company's achievement of financial objectives and performance
milestones established by the Board for that year, (ii) the achievement of your
individual objectives as agreed by you and the Chief Executive Officer, and
(iii) your continuation of employment through the close of each quarter. In
addition, you would participate in all of Digital Island's employee benefit
programs for which you are eligible.
Term of Employment
- ------------------
You agree to remain employed through November 24, 2000. Nevertheless,
Digital Island may terminate your employment at any time for any reason, with or
without cause, by giving you written notice of such termination.
If Digital Island terminates your employment "Without Cause" or if you
terminate your employment for "Good Reason" prior to November 24, 2000, then
Digital Island will continue your base salary as a severance payment until the
earlier of (1) one (1) year after the termination of your employment or (2) the
date you begin employment with another employer. You will notify Digital Island
in writing within ten days of your acceptance of any new employment. The
severance set forth herein will be in lieu of any entitlement you may have to
<PAGE>
notice of termination, pay in lieu of notice of termination, or any other
severance payment from any other source. All benefits and future stock and
option vesting would terminate as of the date of termination of your employment,
except as provided for under a separate "Acknowledgement Letter" dated as of the
date hereof and attached hereto. You would, of course, be paid your salary
through your date of termination and for the value of all unused paid time off
earned through that date and allowed to continue your medical coverage at your
own expense to the extent provided for by COBRA, but you would not be entitled
to any additional payments or benefits except as set forth herein or as provided
for under a separate "Acknowledgement Letter" dated as of the date hereof and
attached hereto. You would be allowed to exercise your vested options during the
time period set forth in and in accordance with your option agreement.
If you were to resign for any reason other than for "Good Reason" or
your employment were to be terminated for "Cause" before November 24, 2000, then
you would be paid all salary and benefits, as well as for the value of your
unused paid time off, through the date of termination of your employment, but
nothing else. A termination for "Cause" shall mean a termination for any of the
following reasons: (i) willful and repeated failure or refusal to comply in any
material respect with reasonable directives from the CEO which are consistent
with your job responsibilities and stature, provided that such failure or
refusal continues for 45 days after written notice is given to you describing
such failure or refusal in reasonable detail and stating the Company's intention
to terminate your employment if such continues, (ii) conviction of a felony
which has a material adverse impact on Digital Island or (iii) the intentional
and known unauthorized use or disclosure of the confidential proprietary
information of Digital Island or any Digital Island subsidiary, including
Sandpiper after the Acquisition, which has a material adverse impact on Digital
Island. Digital Island will provide written notice of the reason for termination
in the case of any termination for "Cause." A termination for any other reason
shall be a termination "Without Cause."
A termination for "Good Reason" shall mean a termination by you of
your employment for any of the following reasons: (i) diminution of
responsibilities consistent with your position of President as agreed upon at
the time of Acquisition, after providing notice to the CEO and allowing for
reasonable opportunity to cure the diminution of responsibilities; (ii) change
in title or reporting relationship; or (iii) involuntary relocation from your
principal place of employment in San Diego, California.
You will not be required to relocate your principal place of
employment in San Diego, California before November 24, 2000 unless mutually
agreed upon by you and Digital Island.
If your employment with Digital Island terminates for any reason
before November 24, 2000, you agree to contemporaneously resign from the Board
of Directors.
If your employment with Digital Island were to continue after November
24, 2000, then your employment would continue to be on an "at-will" basis. This
means that either you or Digital Island could terminate your employment at any
time for any reason with or without cause and without the obligation to pay you,
or your right to, any severance payment except as may be provided at such time
under Digital Island's employee benefit plans for which you are eligible.
2
<PAGE>
Your Position
- -------------
You will have the title of President, reporting to Ruann Ernst. You
will have whatever reasonable duties are assigned to you consistent with your
title and position.
Non-Competition
- ---------------
You understand and agree that this agreement is entered into in
connection with the acquisition by Digital Island, Inc. of all of the
outstanding stock of Sandpiper. You further understand and agree that you were a
substantial shareholder or optionholder of Sandpiper; a key and significant
member of either the management and/or the technical workforce of Sandpiper; and
that Digital Island, Inc. paid you substantial consideration in order to
purchase your stock and/or option interest in Sandpiper. In addition, the
parties agree that, prior to acquisition by Digital Island, Inc. of the stock of
Sandpiper, Sandpiper was engaged in its business in each of the fifty states of
the United States and throughout the world. Digital Island represents and you
understand that, following the acquisition by Digital Island of the stock of
Sandpiper, Digital Island will continue conducting such business in all parts of
the United States and throughout the world.
You agree that during your employment with Digital Island you will not
engage in any other employment, business, or business related activity unless
you receive Digital Island's prior written approval from the Chief Executive
Officer to hold such outside employment or engage in such business or activity.
Such written approval will not be unreasonably withheld if such outside
employment, business or activity would not in any way be competitive with the
business or proposed business of Digital Island or otherwise conflict with or
adversely affect in any way your performance of your employment obligations to
Digital Island. The requirement for written approval will not apply to your
current position of Director at Videoscape, Inc., so long as that activity is
not in any way competitive with the business or proposed business of Digital
Island, or does not conflict with or adversely affect in any way your
performance of your employment obligations to Digital Island.
Commencing on the Closing Date and continuing until the latter of (1)
November 24, 2000, or (2) one (1) year after the date of termination of your
employment with Digital Island, you will not, as an employee, agent, consultant,
advisor, independent contractor, general partner, officer, director,
stockholder, investor, lender or guarantor of any corporation, partnership or
other entity, or in any other capacity directly or indirectly:
1. render any services to any Content Distribution companies that
operate networks which serve content in one or two ways to multiple devices
distributed throughout deployed networks of distributed servers (including
without limitation Adero, Akamai, Real Broadcast Networks, Exodus, AT&T)
(hereafter collectively referred to as "the Businesses") in the United States or
throughout the world; or
2. permit your name to be used in connection with a business which
is competitive or substantially similar to the Businesses.
Notwithstanding the foregoing, you may own, directly or indirectly,
solely as an investment, up to one percent (1%) of any class of "publicly traded
securities" of any business
3
<PAGE>
that is competitive or substantially similar to the Businesses person or any
person who owns a business that is competitive or substantially similar to the
Businesses. The term "publicly traded securities" shall mean securities that are
traded on a national securities exchange or listed on the National Association
of Securities Dealers Automated Quotation System.
If any restriction set forth in this non-competition section is found
by a court to be unreasonable, then you agree, and hereby submit, to the
reduction and limitation of such prohibition to such area or period as shall be
deemed reasonable. You acknowledge that the services that you will provide to
Digital Island under this agreement are unique and that irreparable harm will be
suffered by Digital Island in the event of the breach by you of any of your
obligations under this agreement, and that Digital Island will be entitled, in
addition to its other rights, to enforce by an injunction or decree of specific
performance the obligations set forth in this agreement. Any claims asserted by
you against Digital Island shall not constitute a defense in any injunction
action brought by Digital Island to obtain specific enforcement of said
paragraphs.
Arbitration
- -----------
We each agree that any and all disputes between us which arise out of
your employment, the termination of your employment, or under the terms of this
agreement shall be resolved through final and binding arbitration. This shall
include, without limitation, disputes relating to this agreement, any disputes
regarding your employment by Digital Island 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 any 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 your employment with
Digital Island or its termination. The only claims not covered by this section
are the following: (i) claims for benefits under the unemployment insurance or
workers' compensation laws and (ii) claims concerning the validity, infringement
or enforceability of any trade secret, patent right, copyright, trademark or any
other intellectual property held or sought by Digital Island, or which Digital
Island could otherwise seek; in each of these instances such disputes or claims
shall not be subject to arbitration, but rather, will be resolved pursuant to
applicable law. Binding arbitration will be conducted in San Francisco County,
California in accordance with the rules and regulations of the American
Arbitration Association. If, however, you do not reside within 100 miles of San
Francisco County at the time the dispute arose, then the arbitration may take
place in the largest metropolitan area within fifty miles of your place of
residence when the dispute arose. The prevailing party in the arbitration shall
be entitled to the recovery of all reasonable attorney's fees and costs incurred
with respect to the arbitration. You understand and agree that arbitration shall
be instead of any civil litigation, that each side waives its right to a jury
trial, and 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.
Miscellaneous Provisions
- ------------------------
This agreement, the accompanying Confidential Information and
Inventions Agreement, the accompanying "Acknowledgement Letter", the
accompanying Amendment to the Sandpiper Purchase Agreement, any stock option and
stock purchase agreement that you
4
<PAGE>
have with Sandpiper, and any loan obligations you have to Sandpiper will be the
entire agreement between Digital Island and you relating to your employment and
the additional matters provided for herein. You agree that there were no
promises or commitments made to you regarding your employment with Digital
Island except as set forth in this letter. This agreement supersedes and
replaces (i) any prior verbal or written agreements between you and Digital
Island and (ii) any prior verbal or written agreements between you and
Sandpiper, except as provided for herein, relating to the subject matter hereof,
including, but not limited to, any and all prior employment agreements. This
agreement may be amended or altered only in a writing signed by you and Digital
Island's Chief Executive Officer. This agreement shall be construed and
interpreted in accordance with the laws of the State of California. Each
provision of this agreement is severable from the others, and if any provision
hereof shall be to any extent unenforceable, it and the other provisions shall
continue to be enforceable to the full extent allowable, as if such offending
provision had not been a part of this agreement. This offer is also contingent
on your executing the Digital Island Confidential Information and Inventions
Agreement, a copy of which is attached hereto.
We are delighted that you will be joining Digital Island. We believe
that you bring the skills and expertise to help us continue to build our
reputation in the industry. We look forward to working with you in developing
the full potential of our company.
If you have any questions about this offer, please contact me. If you
find this offer acceptable, please sign and date this letter below and return it
to me.
Sincerely,
DIGITAL ISLAND, INC.
/s/ Chris Albinson
CHRIS ALBINSON
V.P. CORPORATE DEVELOPMENT
I agree to the terms and conditions in this offer.
Date: 10-24-99 Leo S. Spiegel
------------------- ------------------------------
Leo S. Spiegel
5
<PAGE>
EXHIBIT 10.11
DIGITAL ISLAND
EMPLOYMENT AGREEMENT
October 24, 1999
Andrew Swart
225 West Hillcrest Drive #250
Thousand Oaks, CA 91362
Dear Andrew:
We are pleased to offer you the position of Vice President, Software
Engineering reporting to Ruann Ernst. This letter, if accepted, sets forth the
terms of your employment with Digital Island, Inc. and Sandpiper Networks, Inc.
(hereafter "Sandpiper") (collectively "Digital Island") after the closing. This
offer is contingent on the occurrence of the closing of Digital Island, Inc.'s
acquisition (the "Acquisition") of Sandpiper and, if you accept this offer, it
would take effect as of that Closing Date. The terms of your employment would be
as follows:
Compensation and Benefits
- -------------------------
You would receive an annual base salary of $170,000, less all
applicable deductions, and would be eligible to participate in the Digital
Island Bonus Plan, with an annual bonus target of $50,000. The bonus is
currently structured to be paid in quarterly installments each fiscal year based
upon (i) the Company's achievement of financial objectives and performance
milestones established by the Board for that year, (ii) the achievement of your
individual objectives as agreed by you and the Chief Executive Officer, and
(iii) your continuation of employment through the close of each quarter. In
addition, you would participate in all of Digital Island's employee benefit
programs for which you are eligible.
Term of Employment
- ------------------
You agree to remain employed for a period of one (1) year after the
Closing Date. Nevertheless, Digital Island may terminate your employment at any
time for any reason, with or without cause, by giving you written notice of such
termination.
If Digital Island terminates your employment "Without Cause" prior to
one (1) year after the Closing Date, then Digital Island will continue your base
salary as a severance payment until the earlier of (1) one (1) year after the
termination of your employment or (2) the date you begin employment with another
employer. You will notify Digital Island in writing within ten days of your
acceptance of any new employment. In the event you become unable to perform your
job duties by reason of death or disability within the one (1) year time period
following the Closing Date, Digital Island will pay you or your estate a lump
sum payment equal to the base pay you would have received through the end of the
one year period. The severance set forth herein will be in lieu of any
entitlement you may have to notice of termination, pay in lieu of notice of
termination, or any other severance payment from any other source. All benefits
<PAGE>
and future stock and option vesting would terminate as of the date of
termination of your employment. You would, of course, be paid your salary
through your date of termination and for the value of all unused paid time off
earned through that date and allowed to continue your medical coverage at your
own expense to the extent provided for by COBRA, but you would not be entitled
to any additional payments or benefits except as set forth herein. You would be
allowed to exercise your vested options during the time period set forth in and
in accordance with your option agreement.
If you were to resign for any reason or your employment were to be
terminated for "Cause" within one (1) year after the Closing Date, then you
would be paid all salary and benefits, as well as for the value of your unused
paid time off, through the date of termination of your employment, but nothing
else. A termination for "Cause" shall mean a termination for any of the
following reasons: (i) your failure to perform the duties of your position after
receipt of a written warning; (ii) engaging in serious misconduct; (iii) being
convicted of a felony; (iv) committing an act of fraud against, or the
misappropriation of property belonging to, Digital Island; or (v) material
breach of this agreement or any confidentiality or proprietary information
agreement between you and Digital Island. Digital Island will provide written
notice of the reason for termination in the case of any termination for "Cause."
A termination for any other reason shall be a termination "Without Cause."
During the one (1) year time period following the Closing Date, you
will not be required to relocate your principal place of employment unless
mutually agreed upon by you and Digital Island.
If your employment with Digital Island were to continue after one (1)
year beyond the Closing Date, then your employment would continue to be on an
"at-will" basis. This means that either you or Digital Island could terminate
your employment at any time for any reason with or without cause and without the
obligation to pay you, or your right to, any severance payment except as may be
provided at such time under Digital Island's employee benefit plans for which
you are eligible.
Stock Option Grant
- ------------------
At the first meeting of Digital Island's Compensation Committee
following the Closing Date, you will be granted a stock option for 150,000
shares of Digital Island's common stock. The option will have an exercise price
per share equal to the fair market value per share of Digital Island's common
stock on the grant date. The option will be an incentive stock option under the
federal tax laws, to the maximum extent allowable, and the balance will be a
non-statutory option. The option will have a maximum term of ten (10) years,
subject to earlier termination upon your cessation of employment. The option
will become exercisable for twenty-four percent (24%) of the option shares upon
your completion of one year of employment with Digital Island and will become
exercisable for the balance of the option shares in a series of thirty-eight
(38) successive monthly installments, each equal to two percent (2%) of the
total number of option shares, upon your completion of each of the next thirty
eight (38) months of employment with Digital Island following the first
anniversary of your start date. The remaining terms of your option will be
governed by the provisions of the Company's 1999 Stock Incentive Plan. No
additional vesting will occur after your termination of employment.
2
<PAGE>
In the event of a Change in Control that takes place after the Closing
Date of Digital Island, Inc.'s acquisition of Sandpiper, your option described
in the preceding paragraph will accelerate and become immediately exercisable
for all of the option shares as fully-vested shares, unless the acquiring entity
------
assumes the option. If your option is assumed and does not accelerate in the
event of a Change in Control, then immediately upon an "Involuntary Termination"
of your employment with Digital Island (or successor entity), which occurs
within eighteen (18) months after the effective date of such Change in Control
but more than twelve (12) months after the date you commence employment with
Digital Island, your option will immediately vest and become exercisable for
all the shares at the time subject to that option and may be exercised for any
or all of those shares as fully-vested shares at any time prior to the
expiration or sooner termination of your option. In the event such Change in
Control and Involuntary Termination both occur within the first twelve (12)
months of your employment with Digital Island, then your option will immediately
vest and become exercisable at the time of such Involuntary Termination for that
number of shares for which your option would have otherwise become exercisable
had you continued in employment with Digital Island through the first
anniversary of your commencement date (i.e., twenty-four percent (24%) of the
total option shares).
"Change in Control" as referred to herein shall mean any of the
following transactions effecting a change in ownership or control of Digital
Island:
(i) a merger, consolidation or reorganization approved by the
Digital Island's shareholders in which securities representing more than
fifty percent (50%) of the total combined voting power of Digital Island's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) any shareholder-approved transfer or other disposition of
all or substantially all of Digital Island's assets in complete liquidation
or dissolution of Digital Island, or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than Digital Island or a person that
directly or indirectly controls, is controlled by, or is under common
control with, Digital Island), of beneficial ownership (within the meaning
of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of
securities possessing more than fifty percent (50%) of the total combined
voting power of Digital Island's outstanding securities pursuant to a
tender or exchange offer made directly to Digital Island's shareholders.
"Involuntary Termination" shall mean (i) the involuntary
termination of your employment with Digital Island other than a termination for
"Cause," as defined above, or (ii) your voluntary resignation within ninety (90)
days following (A) a material reduction in the scope of your duties and
responsibilities or the level of management to which you report. (B) a
reduction in the level of your compensation (including base salary, fringe
benefits and target bonuses under any corporate-performance based incentive
program) by more than fifteen percent (15%) or (C) a relocation of your
principal place of employment by more than fifty (50) miles.
3
<PAGE>
Involuntary Termination shall not include the termination of your employment by
reason of death or disability.
Your Position
- -------------
You will initially have the title of Vice President, Software
Engineering, reporting to Ruann Ernst. You will have whatever reasonable duties
are assigned to you consistent with your title and position.
Non-Competition
- ---------------
You understand and agree that this agreement is entered into in
connection with the acquisition by Digital Island, Inc. of all of the
outstanding stock of Sandpiper. You further understand and agree that you were a
substantial shareholder or optionholder of Sandpiper; a key and significant
member of either the management and/or the technical workforce of Sandpiper; and
that Digital Island, Inc. paid you substantial consideration in order to
purchase your stock and/or option interest in Sandpiper. In addition, the
parties agree that, prior to acquisition by Digital Island, Inc. of the stock of
Sandpiper, Sandpiper was engaged in its business in each of the fifty states of
the United States and throughout the world. Digital Island represents and you
understand that, following the acquisition by Digital Island of the stock of
Sandpiper, Digital Island will continue conducting such business in all parts of
the United States and throughout the world.
You agree that during your employment with Digital Island you will not
engage in any other employment, business, or business related activity unless
you receive Digital Island's prior written approval from the Chief Executive
Officer to hold such outside employment or engage in such business or
activity. Such written approval will not be unreasonably withheld if such
outside employment, business or activity would not in any way be competitive
with the business or proposed business of Digital Island or otherwise conflict
with or adversely affect in any way your performance of your employment
obligations to Digital Island. The requirement for written approval will not
apply to your current position at Sandpiper Consulting, LLC, so long as that
activity is not in any way competitive with the business or proposed business
of Digital Island, or does not conflict with or adversely affect in any way your
performance of your employment obligations to Digital Island.
Commencing on the Closing Date and continuing until the latter of (1)
one (1) year after the Closing Date, or (2) one (1) year after the date of
termination of your employment with Digital Island, you will not, as an
employee, agent, consultant, advisor, independent contractor, general partner,
officer, director, stockholder, investor, lender or guarantor of any
corporation, partnership or other entity, or in any other capacity directly or
indirectly:
1. render any services to any Content Distribution companies that
operate networks which serve content in one or two ways to multiple devices
distributed throughout deployed networks of distributed servers (including
without limitation Adero, Akamai, Real Broadcast Networks, Exodus, AT&T)
(hereafter collectively referred to as "the Businesses") in the United States or
throughout the world; or
4
<PAGE>
2. permit your name to be used in connection with a business which
is competitive or substantially similar to the Businesses.
Notwithstanding the foregoing, you may own, directly or indirectly,
solely as an investment, up to one percent (1%) of any class of "publicly traded
securities" of any business that is competitive or substantially similar to the
Businesses or any person who owns a business that is competitive or
substantially similar to the Businesses. The term "publicly traded securities"
shall mean securities that are traded on a national securities exchange or
listed on the National Association of Securities Dealers Automated Quotation
System.
If any restriction set forth in this non-competition section is found
by a court to be unreasonable, then you agree, and hereby submit, to the
reduction and limitation of such prohibition to such area or period as shall be
deemed reasonable. You acknowledge that the services that you will provide to
Digital Island under this agreement are unique and that irreparable harm will be
suffered by Digital Island in the event of the breach by you of any of your
obligations under this agreement, and that Digital Island will be entitled, in
addition to its other rights, to enforce by an injunction or decree of specific
performance the obligations set forth in this agreement. Any claims asserted by
you against Digital Island shall not constitute a defense in any injunction
action brought by Digital Island to obtain specific enforcement of said
paragraphs.
Arbitration
- -----------
We each agree that any and all disputes between us which arise out of
your employment, the termination of your employment, or under the terms of this
agreement shall be resolved through final and binding arbitration. This shall
include, without limitation, disputes relating to this agreement, any disputes
regarding your employment by Digital Island 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 any 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 your employment with
Digital Island or its termination. The only claims not covered by this section
are the following: (i) claims for benefits under the unemployment insurance or
workers' compensation laws and (ii) claims concerning the validity, infringement
or enforceability of any trade secret, patent right, copyright, trademark or any
other intellectual property held or sought by Digital Island, or which Digital
island could otherwise seek; in each of these instances such disputes or claims
shall not be subject to arbitration, but rather, will be resolved pursuant to
applicable law. Binding arbitration will be conducted in San Francisco,
California in accordance with the rules and regulations of the American
Arbitration Association. If, however, you do not reside within 100 miles of San
Francisco County at the time the dispute arose, then the arbitration may take
place in the largest metropolitan area within fifty miles of your place of
residence when the dispute arose. The prevailing party in the arbitration shall
be entitled to the recovery of all reasonable attorney's fees and costs
incurred with respect to the arbitration. You understand and agree that
arbitration shall be instead of any civil litigation, that each side waives its
right to a jury trial, and 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.
5
<PAGE>
Miscellaneous Provisions
- ------------------------
This agreement, the accompanying Confidential Information and
Inventions Agreement, any stock option and stock purchase agreements that you
have with Sandpiper, and any loan obligations you have to Sandpiper, will be the
entire agreement between Digital Island and you relating to your employment and
the additional matters provided for herein. You agree that there were no
promises or commitments made to you regarding your employment with Digital
Island except as set forth in this letter. This agreement supersedes and
replaces (i) any prior verbal or written agreements between you and Digital
Island and (ii) any prior verbal or written agreements between you and
Sandpiper, except as provided for herein, relating to the subject matter hereof,
including, but not limited to, any and all prior employment agreements. This
agreement may be amended or altered only in a writing signed by you and Digital
Island's Chief Executive Officer. This agreement shall be construed and
interpreted in accordance with the laws of the State of California. Each
provision of this agreement is severable from the others, and if any provision
hereof shall be to any extent unenforceable, it and the other provisions shall
continue to be enforceable to the full extent allowable, as if such offending
provision had not been a part of this agreement. This offer is also contingent
on your executing the Digital Island Confidential Information and Inventions
Agreement, a copy of which is attached hereto.
We are delighted that you will be joining Digital Island. We believe
that you bring the skills and expertise to help us continue to build our
reputation in the industry. We look forward to working with you in developing
the full potential of our company.
If you have any questions about this offer, please contact me. If you
find this offer acceptable, please sign and date this letter below and return it
to me.
Sincerely,
DIGITAL ISLAND, INC.
/s/ Chris Albinson
------------------------------
CHRIS ALBINSON
V.P. CORP. DEV.
I agree to the terms and conditions in this offer.
Date: 24 October 1999 /s/ Andrew D. Swart
------------------------ ------------------------------
Andrew Swart
6
<PAGE>
EXHIBIT 10.12
DIGITAL ISLAND
EMPLOYMENT AGREEMENT
October 24, 1999
David Farber
225 West Hillcrest Drive #250
Thousand Oaks, CA 91362
Dear David:
We are pleased to offer you the position of Chief Scientist reporting
to Andrew Swart. This letter, if accepted, sets forth the terms of your
employment with Digital Island, Inc. and Sandpiper Networks, Inc. (hereafter
"Sandpiper") (collectively "Digital Island") after the closing. This offer is
contingent on the occurrence of the closing of Digital Island, Inc.'s
acquisition (the "Acquisition") of Sandpiper and, if you accept this offer, it
would take effect as of that Closing Date. The terms of your employment would be
as follows:
Compensation and Benefits
- -------------------------
You would receive an annual base salary of $170,000, less all
applicable deductions, and would be eligible to participate in the Digital
Island Bonus Plan, with an annual bonus target of $50,000. The bonus is
currently structured to be paid in quarterly installments each fiscal year based
upon (i) the Company's achievement of financial objectives and performance
milestones established by the Board for that year, (ii) the achievement of your
individual objectives as agreed by you and your manager, and (iii) your
continuation of employment through the close of each quarter. In addition, you
would participate in all of Digital Island's employee benefit programs for which
you are eligible.
Term of Employment
- ------------------
You agree to remain employed for a period of one (1) year after the
Closing Date. Nevertheless, Digital Island may terminate your employment at any
time for any reason, with or without cause, by giving you written notice of such
termination.
If Digital Island terminates your employment "Without Cause" prior to
one (1) year after the Closing Date, then Digital Island will continue your base
salary as a severance payment until the earlier of (1) one (1) year after the
termination of your employment or (2) the date you begin employment with another
employer. You will notify Digital Island in writing within ten days of your
acceptance of any new employment. In the event you become unable to perform your
job duties by reason of death or disability within the one (1) year time period
following the Closing Date, Digital Island will pay you or your estate a lump
sum payment equal to the base pay you would have received through the end of the
one year period. The severance set forth herein will be in lieu of any
entitlement you may have to notice of termination, pay in lieu of notice of
termination, or any other severance payment from any other source. All benefits
<PAGE>
and future stock and option vesting would terminate as of the date of
termination of your employment. You would, of course, be paid your salary
through your date of termination and for the value of all unused paid time off
earned through that date and allowed to continue your medical coverage at your
own expense to the extent provided for by COBRA, but you would not be entitled
to any additional payments or benefits except as set forth herein. You would be
allowed to exercise your vested options during the time period set forth in and
in accordance with your option agreement.
If you were to resign for any reason or your employment were to be
terminated for "Cause" within one (1) year after the Closing Date, then you
would be paid all salary and benefits, as well as for the value of your unused
paid time off, through the date of termination of your employment, but nothing
else. A termination for "Cause" shall mean a termination for any of the
following reasons: (i) your failure to perform the duties of your position after
receipt of a written warning; (ii) engaging in serious misconduct; (iii) being
convicted of a felony; (iv) committing an act of fraud against, or the
misappropriation of property belonging to, Digital Island; or (v) material
breach of this agreement or any confidentiality or proprietary information
agreement between you and Digital Island. Digital Island will provide written
notice of the reason for termination in the case of any termination for "Cause."
A termination for any other reason shall be a termination "Without Cause."
During the one (1) year time period following the Closing Date, you
will not be required to relocate your principal place of employment unless
mutually agreed upon by you and Digital Island.
If your employment with Digital Island were to continue after one (1)
year beyond the Closing Date, then your employment would continue to be on an
"at-will" basis. This means that either you or Digital Island could terminate
your employment at any time for any reason with or without cause and without the
obligation to pay you, or your right to, any severance payment except as may be
provided at such time under Digital Island's employee benefit plans for which
you are eligible.
Stock Option Grant
- ------------------
At the first meeting of Digital Island's Compensation Committee
following the Closing Date, you will be granted a stock option for 150,000
shares of Digital Island's common stock. The option will have an exercise price
per share equal to the fair market value per share of Digital Island's common
stock on the grant date. The option will be an incentive stock option under the
federal tax laws, to the maximum extent allowable, and the balance will be a
non-statutory option. The option will have a maximum term of ten (10) years,
subject to earlier termination upon your cessation of employment. The option
will become exercisable for twenty-four percent (24%) of the option shares upon
your completion of one year of employment with Digital Island and will become
exercisable for the balance of the option shares in a series of thirty-eight
(38) successive monthly installments, each equal to two percent (2%) of the
total number of option shares, upon your completion of each of the next thirty
eight (38) months of employment with Digital Island following the first
anniversary of your start date. The remaining terms of your option will be
governed by the provisions of the Company's 1999 Stock Incentive Plan. No
additional vesting will occur after your termination of employment.
2
<PAGE>
In the event of a Change in Control that takes place after the Closing
Date of Digital Island, Inc.'s acquisition of Sandpiper, your option described
in the preceding paragraph will accelerate and become immediately exercisable
for all of the option shares as fully-vested shares, unless the acquiring entity
------
assumes the option. If your option is assumed and does not accelerate in the
event of a Change in Control, then immediately upon an "Involuntary Termination"
of your employment with Digital Island (or successor entity), which occurs
within eighteen (18) months after the effective date of such Change in Control
but more than twelve (12) months after the date you commence employment with
Digital Island, your option will immediately vest and become exercisable for all
the shares at the time subject to that option and may be exercised for any or
all of those shares as fully-vested shares at any time prior to the expiration
or sooner termination of your option. In the event such Change in Control and
Involuntary Termination both occur within the first twelve (12) months of your
employment with Digital Island, then your option will immediately vest and
become exercisable at the time of such Involuntary Termination for that number
of shares for which your option would have otherwise become exercisable had you
continued in employment with Digital Island through the first anniversary of
your commencement date (i.e., twenty-four percent (24%) of the total option
shares).
"Change in Control" as referred to herein shall mean any of the
following transactions effecting a change in ownership or control of Digital
Island:
(i) a merger, consolidation or reorganization approved by the
Digital Island's shareholders in which securities representing more than
fifty percent (50%) of the total combined voting power of Digital Island's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) any shareholder-approved transfer or other disposition of
all or substantially all of Digital Island's assets in complete liquidation
or dissolution of Digital Island, or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than Digital Island or a person that
directly or indirectly controls, is controlled by, or is under common
control with, Digital Island), of beneficial ownership (within the meaning
of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of
securities possessing more than fifty percent (50%) of the total combined
voting power of Digital Island's outstanding securities pursuant to a
tender or exchange offer made directly to Digital Island's shareholders.
"Involuntary Termination" shall mean (i) the involuntary
termination of your employment with Digital Island other than a termination for
"Cause," as defined above, or (ii) your voluntary resignation within ninety (90)
days following (A) a material reduction in the scope of your duties and
responsibilities or the level of management to which you report, (B) a reduction
in the level of your compensation (including base salary, fringe benefits and
target bonuses under any corporate-performance based incentive program) by more
than fifteen percent (15%) or (C) a relocation of your principal place of
employment by more than fifty (50) miles.
3
<PAGE>
Involuntary Termination shall not include the termination of your employment by
reason of death or disability.
Your Position
- -------------
You will initially have the title of Chief Scientist reporting to
Andrew Swart. You will have whatever reasonable duties are assigned to you
consistent with your title and position.
Non-Competition
- ---------------
You understand and agree that this agreement is entered into in
connection with the acquisition by Digital Island, Inc. of all of the
outstanding stock of Sandpiper. You further understand and agree that you were a
substantial shareholder or optionholder of Sandpiper; a key and significant
member of either the management and/or the technical workforce of Sandpiper; and
that Digital Island, Inc. paid you substantial consideration in order to
purchase your stock and/or option interest in Sandpiper. In addition, the
parties agree that, prior to acquisition by Digital Island, Inc. of the stock of
Sandpiper, Sandpiper was engaged in its business in each of the fifty states of
the United States and throughout the world. Digital Island represents and you
understand that, following the acquisition by Digital Island of the stock of
Sandpiper, Digital Island will continue conducting such business in all parts of
the United States and throughout the world.
You agree that during your employment with Digital Island you will not
engage in any other employment, business, or business related activity unless
you receive Digital Island's prior written approval from the Chief Executive
Officer to hold such outside employment or engage in such business or activity.
Such written approval will not be unreasonably withheld if such outside
employment, business or activity would not in any way be competitive with the
business or proposed business of Digital Island or otherwise conflict with or
adversely affect in any way your performance of your employment obligations to
Digital Island. The requirement for written approval will not apply to your
current position at Sandpiper Consulting, LLC, so long as that activity is not
in any way competitive with the business or proposed business of Digital Island,
or does not conflict with or adversely affect in any way your performance of
your employment obligations to Digital Island.
Commencing on the Closing Date and continuing until the latter of (1)
one (1) year after the Closing Date, or (2) one (1) year after the date of
termination of your employment with Digital Island, you will not, as an
employee, agent, consultant, advisor, independent contractor, general partner,
officer, director, stockholder, investor, lender or guarantor of any
corporation, partnership or other entity, or in any other capacity directly or
indirectly;
1. render any services to any Content Distribution companies that
operate networks which serve content in one or two ways to multiple devices
distributed throughout deployed networks of distributed servers (including
without limitation Adero, Akamai, Real Broadcast Networks, Exodus, AT&T)
(hereafter collectively referred to as "the Businesses") in the United States or
throughout the world; or
4
<PAGE>
2. permit your name to be used in connection with a business which
is competitive or substantially similar to the Businesses.
Notwithstanding the foregoing, you may own, directly or indirectly,
solely as an investment, up to one percent (1%) of any class of "publicly traded
securities" of any business that is competitive or substantially similar to the
Businesses or any person who owns a business that is competitive or
substantially similar to the Businesses. The term "publicly traded securities"
shall mean securities that are traded on a national securities exchange or
listed on the National Association of Securities Dealers Automated Quotation
System.
If any restriction set forth in this non-competition section is found
by a court to be unreasonable, then you agree, and hereby submit, to the
reduction and limitation of such prohibition to such area or period as shall be
deemed reasonable. You acknowledge that the services that you will provide to
Digital Island under this agreement are unique and that irreparable harm will be
suffered by Digital Island in the event of the breach by you of any of your
obligations under this agreement, and that Digital Island will be entitled, in
addition to its other rights, to enforce by an injunction or decree of specific
performance the obligations set forth in this agreement. Any claims asserted by
you against Digital Island shall not constitute a defense in any injunction
action brought by Digital Island to obtain specific enforcement of said
paragraphs.
Arbitration
- -----------
We each agree that any and all disputes between us which arise out of
your employment, the termination of your employment, or under the terms of this
agreement shall be resolved through final and binding arbitration. This shall
include, without limitation, disputes relating to this agreement, any disputes
regarding your employment by Digital Island 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 any 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 your employment with
Digital Island or its termination. The only claims not covered by this section
are the following: (i) claims for benefits under the unemployment insurance or
workers' compensation laws and (ii) claims concerning the validity, infringement
or enforceability of any trade secret, patent right, copyright, trademark or any
other intellectual property held or sought by Digital Island, or which Digital
Island could otherwise seek; in each of these instances such disputes or claims
shall not be subject to arbitration, but rather, will be resolved pursuant to
applicable law. Binding arbitration will be conducted in San Francisco,
California in accordance with the roles and regulations of the American
Arbitration Association. If, however, you do not reside within 100 miles of San
Francisco County at the time the dispute arose, then the arbitration may take
place in the largest metropolitan area within fifty miles of your place of
residence when the dispute arose. The prevailing party in the arbitration shall
be entitled to the recovery of all reasonable attorney's fees and costs incurred
with respect to the arbitration. You understand and agree that arbitration shall
be instead of any civil litigation, that each side waives its right to a jury
trial, and 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.
5
<PAGE>
Miscellaneous Provisions
- ------------------------
This agreement, the accompanying Confidential Information and
Inventions Agreement, any stock option and stock purchase agreements that you
have with Sandpiper, and any loan obligations you have to Sandpiper, will be the
entire agreement between Digital Island and you relating to your employment and
the additional matters provided for herein. You agree that there were no
promises or commitments made to you regarding your employment with Digital
Island except as set forth in this letter. This agreement supersedes and
replaces (i) any prior verbal or written agreements between you and Digital
Island and (ii) any prior verbal or written agreements between you and
Sandpiper, except as provided for herein, relating to the subject matter hereof,
including, but not limited to, any and all prior employment agreements. This
agreement may be amended or altered only in a writing signed by you and Digital
Island's Chief Executive Officer. This agreement shall be construed and
interpreted in accordance with the laws of the State of California. Each
provision of this agreement is severable from the others, and if any provision
hereof shall be to any extent unenforceable, it and the other provisions shall
continue to be enforceable to the full extent allowable, as if such offending
provision had not been a part of this agreement. This offer is also contingent
on your executing the Digital Island Confidential Information and Inventions
Agreement, a copy of which is attached hereto.
We are delighted that you will be joining Digital Island. We believe
that you bring the skills and expertise to help us continue to build our
reputation in the industry. We look forward to working with you in developing
the full potential of our company.
If you have any questions about this offer, please contact me. If you
find this offer acceptable, please sign and date this letter below and return it
to me.
Sincerely,
DIGITAL ISLAND, INC.
/s/ Chris Albinson
CHRIS ALBINSON
V.P. Corporate Development
I agree to the terms and conditions in this offer.
Date: October 24, 1999 /s/ David Farber
------------------------ ------------------------------
David Farber
6
<PAGE>
Exhibit 10.13
LEASE
Between
BISHOP STREET ASSOCIATES
and
DIGITAL ISLAND, INC.
TABLE OF CONTENTS
PAGE
SECTION DESCRIPTION NUMBER
------- ----------- ------
1. Premises and Basic Lease Information............. 1
2. Term............................................. 3
3. Base Rent; Adjustments; General Rent Provisions.. 3
4. Additional Rent.................................. 3
5. Security Deposit................................. 5
6. Restrictions on Use; Compliance with Laws........ 6
7. Improvements and Alterations..................... 6
8. Repairs and Maintenance.......................... 7
9. Lien............................................. 7
10. Assignment and Subletting........................ 8
11. Waiver; Indemnity................................ 9
12. Insurance........................................ 10
13. Service and Utilities............................ 11
14. Estoppel Certificate............................. 12
15. Holding Over 20.................................. 12
16. Subordination; Requirements of Lenders........... 13
17. Observance of Rules and Regulations.............. 13
18. Access by Landlord............................... 13
19. Default by Tenant................................ 14
20. Remedies of Landlord............................. 14
21. Default by Landlord; Limitation of Liability..... 17
22. Damage and Destruction........................... 17
23. Eminent Domain................................... 18
i
<PAGE>
TABLE OF CONTENTS
PAGE
SECTION DESCRIPTION NUMBER
- ------- ----------- ------
24. Sale by Landlord........... 18
25. Surrender of Premises...... 18
26. Quiet Enjoyment............ 18
27. Notices.................... 19
28. Personal Property Taxes.... 19
29. Interest and Late Charges.. 19
30. Successors and Assigns..... 20
31. Attorney's Fees............ 20
32. Light and Air.............. 20
33. Signs and Directory........ 20
34. Parking.................... 20
35. Brokers.................... 21
36. Relocation Right........... 21
37. Authority.................. 21
38. Miscellaneous.............. 21
39. Rules and Regulations...... 23
40. Door Sign Rules............ 26
ADDENDUM TO LEASE
Exhibit "A"....... Outline of Premises
Exhibit "B"....... Work Agreement
Exhibit "C"....... Form of Notice of Lease Term Dates
Exhibit "D"....... Form of Estoppel Agreement
<PAGE>
LEASE
THIS LEASE ("Lease") is made as of ,1996, by and between Bishop Street
-----
Associates, a Hawaii Limited Partnership ("Landlord") and DIGITAL ISLAND, INC.,
a California corporation (the "Tenant") upon the following terms and conditions:
1. Premises and Basic Lease Information
1.1 Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord, upon the terms and conditions set forth in this Lease, those
certain premises (the "Premises") described in Section 1.1.1 of the Basic
Lease Information (as defined below) and outlined in Exhibit "A" attached
hereto and hereby made a part hereof. For purposes of this Lease, the
rentable area. of the Premises has been determined by Landlord's space
planner or architect by reference to the "Standard Method for Measuring
Floor Area in Office Buildings," adopted by the Building Owners and
Managers Association International and approved by the American National
Standards Institute, Inc., August 1990 reprint. The Premises are situated
in that certain office building (the "Building") located at 1132 Bishop
Street, Honolulu, Hawaii. The land upon which the Building is located (the
"Land"), together with the Building and related facilities and
appurtenances, including, but not limited to, the area adjacent to the
Building known as "Union Mall", shall hereinafter be collectively referred
to as the "Project." The terms and conditions of this Lease shall include,
without limitation, the following basic Lease information (the "Basic
Lease Information"):
1.1.1 Premises (Section 1.1): Suite 1001 on floor ten (10) of the
Building, consisting of approximately 2,588 rentable square feet and
approximately 2,270 usable square feet.
1.1.2 Term (Section 2): Five (5) years, to commence on November 1,
1996, and to expire on October 31, 2001.
1.1.3 Base Rent (Section 3.1): In the following amounts:
Period Rate Total Amount
------ ---- ------------
11/01/96 through $0.00 $0.00 per month
04/30/97
05/01/97 through $1.00 per rentable square foot $2,588.00 per month
10/31/01 per month
1.1.4 Additional Rent (Section 4.1): Equal to Tenant's Percentage Share
(Section 1.1.6) of Operating Costs (Section 4.8).
1.1.5 Rentable Square Footage of the Building: 450,000 square feet.
1.1.6 Tenant's Percentage Share (Section 4.1): 0.575%, which was
computed by dividing the rentable area of the Premises described in
Section 1.1.1 by the rentable area of the Building.
1.1.7 Security Deposit (Section 5): One (1) month's gross rent
($5,256.84), subject to adjustment as provided herein. Gross rent
shall be equal to the sum of (i) Base Rent, plus (ii) Additional Rent
equal to Tenant's Percentage Share of Operating Costs, plus (iii)
State of Hawaii general excise tax on such Base Rent and Additional
Rent at the rate of 0.04166. Notwithstanding Section 5, such deposit
shall be increased from time to time to correspond to any increase in
Base Rent, Additional Rent and/or general excise tax.
1.1.8 Permitted Use (Section 6.1): General office use and as an office
to market digital communication.
<PAGE>
1.1.9 Minimum Limits for Commercial General Liability Insurance:
$1,000,000.00 per occurrence and $1,000,000.00 aggregate for bodily
injury, death and property damage, including liquor liability if
liquor is sold; $1,000,000.00 fire legal liability to value coverage
(section 12.1.1).
1.1.10 For notices to Tenant:
DIGITAL ISLAND, INC.
1132 Bishop Street, Suite 1001
Honolulu, Hawaii 96813
Attention: Ron Higgins
Telephone No.:(808)____________
1.1.11 (Intentionally Omitted.)
1.1.12 Parking Rights (Section 34): Two (2) automobiles in unassigned
parking stalls, at an initial rate of $150.00 per month per automobile
with adjustment pursuant to Section 34, together with State of Hawaii
general excise taxes thereon as provided herein.
1.1.13 Interest and Late Charges (Section 29): Interest rate on unpaid
amount(s) equal to the rate which is the lesser of (a) one percent
(1%) per month, or (b) the maximum rate permitted by law; late charge
office percent (5%) of unpaid amount.
1.1.14 Tenant's Broker (Section 3:5): Monroe & Friedlander, Inc.
1.1.15 Tenant's Broker (Section 35): Monroe & Friedlander, Inc.
1.1.16 Landlord's Construction Representative (Exhibit "B"): The Harris
Company
1.1.17 Tenant's Construction Representative (Exhibit "B"): Ron Higgins
1.1.18 Guarantor (if any): None
1.1.19 Additional provisions: See Addendum to Lease.
Each reference in this Lease to any of the Basic Lease Information shall
be construed to incorporate, in addition to the Basic Lease Information set
forth above, the terms and conditions set forth in the particular Lease section
in which such reference is made.
1.2 The term "common areas" as used in this Lease shall mean all areas and
facilities around the Premises and within the exterior boundaries of the
Project which are provided and designated from time to time by Landlord
for the general use and convenience of Tenant and other tenants of the
Building and their respective employees and invitees. Common areas
include, without limitation, the lobby area, walk-ways, parking
facilities, arcades, landscaped areas, sidewalks, service quarters,
hallways, corridors, restrooms (if not part of the Premises), stairways,
elevators (except elevators which may be reserved for the exclusive use of
one or more tenants), walls, fire stairs, telephone and electrical
closets, aisles, truck docks, plazas, service areas, lobbies and all other
common service areas of the Land and Building or any other area of the
Project intended for such use. Floors wholly occupied by Tenant shall not
have any facilities which would be used in common with other tenants,
except for fire stairs, shafts and similar installations. Tenant, its
employees and invitees, shall have the nonexclusive right to use the
common areas along with others entitled to use the same, subject to
Landlord's rights and duties as hereinafter set forth. Without Tenant's
consent and without liability to Tenant, Landlord shall have the right to
do the following:
1.2.1 Establish and enforce reasonable rules and regulations concerning
the maintenance, management, use and operation of the common areas;
-2-
<PAGE>
1.2.2 Temporarily close any of the common areas for maintenance,
alternation or improvement purposes;
1.2.3 Select, appoint and/or contract with any person for the purpose
of operating and maintaining the common areas; and
1.2.4 Change the size, use, shape or nature of any of the common areas.
Landlord shall use reasonable efforts to minimize any interference
with Tenant's use and access of the Premises resulting from Landlord's
exercise of such rights.
2. Term
The term of this Lease shall commence upon the later of the following dates
(the "Commencement Date"): (i) the scheduled Commencement Date specified in
Section 1.1.2 of the Basic Lease Information, or (b) the date that Landlord
tenders possession to Tenant, provided that any work to be performed by Landlord
pursuant to the Work Agreement attached to this Lease as Exhibit "B" is
substantially completed, as determined by Landlord's space planner or architect,
or would have been so substantially completed but for any delay caused by any
occurrence within the control of Tenant or its agents, employees or contractors.
Such term shall continue until the expiration date specified in said Section
1.1.2, unless sooner terminated pursuant to any provision hereof.
This Lease shall not be void or voidable, nor shall Landlord be subject to
any liability as a result of any delay in the Commencement Date for any reason,
except that if the delay has resulted from actions of Landlord (not caused by
delays of Tenant) rent shall not commence until the Premises are available for
occupancy by Tenant with all work to be performed by Landlord substantially
completed. The parties hereto shall execute a written statement, substantially
in the form attached hereto as Exhibit "C" and hereby made a part hereof,
setting forth the Commencement Date and the date of expiration of this Lease,
promptly after same have been ascertained, but the enforceability of this Lease
shall not be affected should either party fail or refuse to execute such
statement. If permission is given to Tenant, in Landlord's sole discretion, to
enter or occupy the Premises prior to the Commencement Date, such early entrance
or occupancy shall be subject to all the terms of such permission and all the
provisions of this Lease which could be reasonably and logically construed as
applying thereto, and Tenant shall not in any way interfere with or delay any of
Landlord's work to be performed in the Premises from being substantially
completed or otherwise cause additional cost or expense to Landlord.
3. Base Rent; Adjustments; General Rent Provisions.
3.1 Tenant shall pay to Landlord as base rent ("Base Rent") for the
Premises, without prior notice or demand, throughout the term of this
Lease, the amount so specified in Section 1.1.3 of the Basic Lease
Information (subject to any increase provided herein), in advance, on or
before the first day of each and every calendar month during the term
hereof, except that Base Rent for the first full month for which Base Rent
shall be payable hereunder shall be paid upon the execution hereof.
3.2 (Intentionally Deleted.)
3.3. Base Rent and any other rent (except for parking rental) due under
this Lease for any period during the term hereof which is for less than
one (1) month shall be a pro rata portion of the monthly amount due, based
upon a thirty (30) day month. Rent and all other amounts due to Landlord
shall be paid to Landlord, without deduction, offset or abatement, at
Landlord's address as specified in Section 27 below or to such other firm
or at such other place as Landlord may from time to time designate in
writing. Landlord shall have the right to accept all rent and other
payments, whether full or partial, and to negotiate checks in payment
thereof without any waiver of rights, irrespective of any conditions to
the contrary sought to be imposed by Tenant. Rent hereunder shall be
deemed paid to Landlord when received by Landlord, or its designee, at
Landlord's address or at such other address as Landlord shall have
designated.
4. Additional Rent
4.1 Commencing with the calendar year in which the term hereof commences
and during each succeeding calendar year (or portion thereof) of the lease
term, Tenant shall pay as additional rent ("Additional Rent") in addition
to and at the time provided
-3-
<PAGE>
for payment of Base Rent an amount equal to Tenant's Percentage Share of
the estimated Operating Costs of the Project for the then current calendar
year as specified in Section 1.1.6 of the Basic Lease Information.
4.2 Prior to the end of each calendar year, Landlord shall furnish to
Tenant a written statement or statements showing in reasonable detail
Landlord's estimate of Operating Costs for the immediately succeeding
calendar year and the amount of any Additional Rent payable by Tenant,
appropriately prorated on a monthly basis. Thereafter, Tenant shall pay
monthly as Additional Rent hereunder the amount set forth in such
estimated Additional Rent statement from Landlord. Neither Landlord's
failure to deliver, nor the late delivery of, such statement or statements
shall constitute a default by Landlord hereunder or a waiver of Landlord's
right to any estimated or actual Additional Rent.
4.3 Within one hundred twenty (120) days following the close of each
calendar year, Landlord shall furnish to Tenant a written statement of
reconciliation (the ("Reconciliation") showing in reasonable detail
Landlord's actual Operating Costs for the relevant calendar year, together
with a statement of any adjustments necessary to reconcile any sums paid
by Tenant hereunder as estimated Additional Rent during such calendar year
with those sums actually payable and due hereunder for such calendar year
as set forth in the Reconciliation. If the Reconciliation shows that
additional sums are due from Tenant hereunder, Tenant shall pay such sums
to Landlord within ten (10) days after receipt of the Reconciliation. If
the Reconciliation shows that an overpayment has been made by Tenant with
respect to Additional Rent, such overpayment shall be refunded to Tenant
within thirty (30) days after Tenant's receipt of the Reconciliation. In
the event this Lease has expired or been terminated prior to the end of a
calendar year, the party's obligation to reconcile shall survive such
expiration or termination. Landlord's failure to deliver the
Reconciliation to Tenant as provided herein shall not constitute a default
by Landlord hereunder nor operate as a waiver of Landlord's right to
collect all Additional Rent and other sums due hereunder. Where only a
portion of a calendar year falls within the term hereof, Landlord shall
calculate estimated (or actual, as the ease may be) Additional Rent based
upon a reasonable proration of estimated (or actual) Operating Costs for
such calendar year.
4.4 Landlord may divide the statements referred to above into separate
statement(s) for Tax Costs (as defined in Section 4.6 below) and Building
Operating Costs (as defined in Section 4.7 below). Additionally, Landlord
may estimate and measure Tax Costs or Building Operating Costs or both, on
a fiscal year instead of a calendar year basis, and in such event any and
all references in this Section 4 to calendar year shall be deemed to refer
to such fiscal year.
4.5 Notwithstanding anything to the contrary contained herein, under no
circumstances shall the provisions of this Section 4 cause Base Rent to be
reduced. Any reference to Landlord's "actual" Operating Costs in this
Section 4 shall be deemed to include an allowance for any adjustment to
reflect the level of occupancy of the Building to the extent provided for
below.
4.6 "Tax Costs" shall mean the sum of the following: any and all real
property taxes, assessments (including, but not limited to, general and
special assessments) charges, surcharges, license and other fees, levies,
cost of improvement bonds, penalties, and any and all other taxes (other
than income, franchise and estate or gift taxes of Landlord) on or
relating to all or a portion of the Project (as it may exist from time to
time) including, but not limited to walkways, parking facilities, common
areas, landscaped areas, fountains and art works or any legal or equitable
interest of Landlord therein which may be imposed, levied, assessed or
charged for any reason by any authority having the direct or indirect
power to tax including, but not limited to, the United States or the
state, county or city in which the Building is located, or any other local
governmental authority, agency, district or political subdivision thereof,
together With personal property taxes, assessments, fees and charges
(other than those paid by Tenant pursuant to Section 28 below), fees of
tax consultants and attorneys retained to seek a reduction, to contest or
to act in some other manner in connection with any of the foregoing Tax
Costs, together with any tax, assessment or other amount (including,
without limitation, commercial rental taxes) imposed, levied or charged as
a substitute for or a supplement to the foregoing. If, for any calendar
year subsequent to the year in which the Commencement Date occurs, the
assessed valuation or Tax Costs of the Building shall not be based upon a
completed building at least ninety-five percent (95%) occupied, then for
the purpose of computing Additional Rent due hereunder Tax Costs actually
incurred during such calendar year shall be increased to reflect the
amounts which would have been payable if the Building had been completed
and was ninety-five percent (95%) occupied. Tax Costs for each tax year
shall be appropriately prorated to determine the Tax Costs for the subject
calendar year.
4.7 "Building Operating Costs" shall mean the sum of the following: any and
all costs, expenses and disbursements paid or incurred by landlord in
connection with the management, operation, security, maintenance, and
repair of the Project (as it may
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exist from time to time) including, but not limited to, salaries, wages,
benefits and related costs for employees, management fees, either as
charged to Landlord by outside management companies or an amount not
exceeding the amount typically charged by outside management companies if
Landlord manages the Building itself, together with the rental value of
space occupied as the Project management office and any building operating
costs (including, but not limited to, real property taxes, utilities, and
insurance) attributed to such space occupied as the project management
office; charges for utilities and services (including any taxes thereon);
the cost of insurance; the cost of building cleaning supplies and
materials; ground rent; and a reasonable allowance for depreciation (or
amortization) with respect to machinery and equipment and other capital
expenditures and improvements; provided, however, that the only
depreciation (or amortization and expenditures) includable in Building
Operating Costs shall be a reasonable allowance for depreciation (or
amortization) on (a) items intended to result in cost savings, (b) common
area interior floor and wall coverings and resurfacing and common area
window treatments, and (c) Required Alterations (as defined below). If,
during any calendar year subsequent to the year in which the Commencement
Date occurred, the Building is less than ninety-five percent (95%)
occupied, then for the purpose of computing Additional Rent due hereunder
Building Operating Costs actually incurred during such calendar year shall
be increased to reflect the amounts which would have been payable if the
Building had been ninety five percent (95%) occupied.
Without limiting the generality of the foregoing, and notwithstanding any
contrary provision herein, if at any time Landlord is required by any rule,
regulation or law, to make any changes, alterations or improvements to the
common area or the Building, the Premises, or any other portion of the Project
(including, but not limited to, electrical, mechanical, water sprinkler, or
other systems or components) ("Required Alterations") (but excluding Required
Alterations attributable exclusively to Tenant's specific use and occupancy of
the Premises, which alterations shall be Tenant's sole responsibility), all
costs relating to such Required Alterations (including, but not limited to, all
planning, legal, architectural, engineering, construction, financing and other
costs) shall be fully included in Building Operating Costs in the year in which
such charges accrue, or in such year as Landlord pays such charges, as Landlord
shall elect. If under generally accepted accounting principles a portion of
costs relating to Required Alterations should be allocated to capital
improvements, to be depreciated or amortized over two (2) or more years,
Landlord shall be entitled each year to include in Building Operating Costs a
reasonable allowance for depreciation (or amortization) with respect thereto.
The capital costs described herein shall include all costs relating to the
financing of any Required Alterations or other capital investment items. If
Landlord internally finances any such capital costs, interest shall be added to
such costs at an annual rate reasonably determined by Landlord.
4.8 "Operating Costs" shall mean the aggregate of Tax Costs and Building
Operating Costs.
4.9 In addition to any other items payable by Tenant to Landlord under this
Lease, Tenant shall pay not less than ten (10) days after written notice
from Landlord, as Additional Rent, any conveyance tax imposed by the
State of Hawaii in connection with this Lease and shall at Landlord's
request execute such affidavits and other documentation as may be
necessary or proper in connection therewith.
4.10 Tenant will also pay to Landlord, as Additional Rent, at the time
and together with each payment of Base Rent, Additional Rent or other
charge required hereunder by Tenant to Landlord which is subject to the
State of Hawaii general excise tax on gross income, any sales or value
added taxes under any successor, similar or new federal, state or county
law which may be hereafter enacted, on account of the receipt, actual or
constructive, by Landlord of the rental payments, reimbursement of gross
income taxes, any other taxable gross income attributable to the Premises
or this Lease, an amount which, when added to Base Rent, Additional Rent
or other charge (whether actually or constructively received by
Landlord), shall yield to Landlord, after deduction of all such taxes
payable by Landlord with respect thereto, an amount equal to that which
Landlord would have realized therefrom had no such taxes been imposed.
For purpose of illustration only, the amount of such tax is presently
four percent (4%), resulting in a figure to be divided into Base Rent,
Additional Rent and other amounts payable by Tenant hereunder of .96 in
order to ascertain the total amount due.
5. Security Deposit.
Concurrently with Tenant's execution hereof, Tenant shall pay to Landlord a
security deposit to secure the performance and observance of all obligations and
covenants of Tenant hereunder. The initial amount of such deposit is specified
in Section 1.1.7 of the Basic Lease Information. Such deposit shall be increased
proportionately (a) upon determination of the rentable area of the Premises, to
correspond to any resultant increase in the initial Base Rent, and (b) from time
to time thereafter to correspond to any increase in Base Rent. Landlord may
apply such deposit to remedy any failure by Tenant to perform or observe any of
its obligations and covenants hereunder. Should Landlord use any portion of such
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deposit pursuant to the foregoing, Tenant shall forthwith replenish such deposit
in full. Landlord shall, upon the expiration or sooner termination hereof,
promptly return any unused portion of such deposit to Tenant (or the last
permitted assignee of Tenant's interest hereunder. Landlord shall not be
required to keep such deposit separate from its general funds, and Tenant shall
not be entitled to any interest on such deposit.
6. Restrictions on Use; Compliance with Laws.
6.1. Tenant shall use and occupy the Premises only for the specific uses
specified in Section 1.1.8 of the Basic Lease Information and for no
other uses whatsoever. Tenant shall not do or permit anything to be
done in or about the Premises which will in any way obstruct or
interfere with the rights of other tenants or occupants of the Building
or injure or annoy them, nor use or allow the Premises to be used for
any improper immoral, unlawful or objectionable purpose, nor shall
Tenant cause or maintain or permit any nuisance in or about the
Premises, nor shall Tenant cause or permit any hazardous or toxic
waste, substance or material to be brought to the Promises or used,
transported, generated, handled, stored or disposed of in or about the
Premises. Tenant shall not conduct business or other activity in or
about the Premises of such a nature as to place an unreasonable or
excessive burden upon the public and common areas of the Building.
Tenant shall not place a load upon any floor exceeding the floor load
which such floor was designed to carry, nor shall Tenant install any
equipment, apparatus or device in the Premises which shall cause
vibrations or excessive noise. Tenant shall not commit or suffer the
commission of any waste in or about the Premises.
6.2 Tenant shall not use the Premises or permit anything to be done in
or about the Premises which shall in any way conflict with any law,
statute, ordinance or governmental rule or regulation now in force or
which may hereafter be enacted or promulgated. Tenant shall not do or
permit anything to be done in or about the Premises or bring or keep
anything therein which will in any way increase the rate of any
insurance upon the Building or any of its contents, or cause
cancellation of said insurance or otherwise affect said insurance in
any manner, and Tenant shall at its sole cost and expense promptly
comply with all laws, statutes, ordinances and governmental rules,
regulations and requirements now in force or which may hereafter be in
force and with the requirements of any board of fire underwriters or
other similar body now or hereafter constituted relating to or
affecting the condition, use or occupancy of the Premises.
7. Improvements and Alterations.
7.1 Initial improvements to the Premises shall be governed by the
provisions of Exhibit "B" attached thereto and hereby made a part
hereof (the "Work Agreement") and the other provisions of this Lease
not in conflict therewith.
Without the prior written consent of Landlord, Tenant shall not make or
permit to be made any alterations, additions, or improvements in, on or to the
Premises or the Project or any part thereof, except for interior, non-structural
alterations to the Premises not exceeding One Thousand Dollars ($1,000) in
cumulative costs throughout the term hereof.
7.2 Landlord may impose as a condition to such consent such requirements
as Landlord may deem necessary in its sole discretion, including
(without limitation) requirements relating to the manner in which the
work is done, the contractor by whom it is performed, and the limes
during which it is accomplished, as well as the requirement that upon
written request of Landlord, Tenant will remove at its expense any and
all permanent improvements or additions to the Premises installed by
Tenant. Any damage done to the Premises in connection with such removal
shall be repaired at Tenant's sole cost and expense. Landlord may, in
connection with any such removal which reasonably might involve
damaging the Premises, require that such removal be performed by a
bonded contractor or other person for which a bond satisfactory to
Landlord has been furnished covering the cost of repairing the
anticipated damage.
Notwithstanding any contrary provision herein, Tenant shall not, in any
event, make any alterations, additions or improvements which might or could
affect the structure of the Building or to the mechanical or electrical systems
of the Building or which are visible from the exterior of the Premises or which
interfere with or disrupt other tenants in the Building or with any work then
being carried out therein by Landlord or its contractors. Any alterations,
additions or improvements desired by Tenant shall be made at Tenant's sole cost
and expense in compliance with Section 9 below and in accordance with plans and
specifications, and pursuant to governmental permits, approved in advance by
Landlord. Any contractor selected by Tenant to make same must be bondable and
licensed and be approved in advance by Landlord and must provide insurance
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coverage acceptable to Landlord. Such work shall be performed by union labor
unless Landlord determines that the use of nonunion labor is not likely to cause
labor unrest or disputes.
At Landlord's option, any alterations, additions or improvements desired
by Tenant shall be made by Landlord or its contractors for Tenant's account, and
Tenant shall pay the cost thereof to Landlord prior to Landlord's contracting
for such work; provided, however, that Landlord's price shall not exceed the
lowest bona fide bid, from a contractor reasonably satisfactory to Landlord,
therefore obtained by Tenant and communicated to Landlord. Upon completion of
any alterations, additions or improvements, Tenant shall furnish Landlord a set
of "as built" plans and specifications therefor, and, within ten (I 0) days
after such completion, Tenant shall cause an appropriate notice of completion to
be recorded in the office of the Clerk of Circuit Court of the First Circuit,
State of Hawaii, pursuant to Section 507-43, Hawaii Revised Statutes, as
amended.
Tenant shall cause all such alterations, additions or improvements to be
completed in a good, workmanlike, diligent, prompt and expeditious manner in
compliance with all applicable laws. Landlord's approval of Tenant's plans and
specifications shall not constitute a representation or warranty of Landlord as
to the adequacy thereof or compliance thereof with applicable laws. Tenant shall
pay to Landlord a fee equal to ten percent (10%) of the total cost of the
subject work for reviewing Tenant's plans and specifications and Landlord's
coordination, scheduling and review of subject work, regardless of whether
Landlord or Tenant contracts for such work.
8. Repairs and Maintenance.
8.1 By taking possession of the Premises, Tenant shall be deemed to have
conclusively agreed to accept the Premises "AS-IS" and as being in the
condition in which Landlord is required to deliver the same and
otherwise in good order, condition and repair (except for latent
defects). Subject to the provisions of Section 22 below, Tenant shall,
at all times during the term hereof and at Tenant's sole cost and
expense, keep the Premises and every part thereof in good condition and
repair. It is understood and agreed that Landlord has no obligation to
alter, remodel, improve, repair, decorate or paint the Premises or any
part thereof, except as specified in Section 22 below or in the Work
Agreement, and that no representations relating to the condition of the
Premises, the Building or the Project have been made by Landlord (or
any employee or agent thereof) to Tenant, except as may be specifically
set forth in this Lease.
8.2 Subject to the provisions of Section 8.1 above and Section 22 below,
Landlord shall maintain the common area, the foundation and structural
portions of the Building, and the mechanical and electrical systems
providing the services and utilities to be furnished by Landlord
pursuant to Section 13.1 below, in good order and condition, provided
however, if such maintenance and repairs are caused in whole or in part
by the act, neglect, fault, or omission of any duty by Tenant, its
agents, servants, employees, or invitees, Tenant shall pay to Landlord
the reasonable cost of such maintenance and repairs. Landlord shall not
be liable for any failure to make any such repairs or to perform any
maintenance unless such failure shall persist for an unreasonable time
after written notice of the need of such repairs or maintenance is
given to Landlord by Tenant. Except as provided in Section 22 hereof,
there shall be no abatement of rent and no liability of Landlord by
reason of any injury to or interference with Tenant's business arising
from the making of any repairs, alterations or improvements in or to
any portion of the Building or the Premises, or in or to fixtures,
appurtenances and equipment therein. Tenant waives the right to make
repairs at Landlord's expense under any law, statute or ordinance now
or hereafter in effect.
9. Lien.
Tenant shall keep the Project free from any liens arising out of any work
performed, materials furnished or obligations incurred by Tenant. In the event
that Tenant shall not within ten (10) days following the imposition of any such
lien, cause the same to be released of record by payment or posting of a proper
bond, Landlord shall have, in addition to all other remedies provided herein and
at law or in equity, the right to cause same to be released by such means as it
shall deem proper including, but not limited to, payment (from the security
deposit referred to in Section 5 above or otherwise) of the claim giving rise to
such lien. All such sums paid by Landlord and all expenses incurred by it in
connection therewith shall be considered additional rent and shall be payable to
it by Tenant on demand with interest at the Interest Rate (as defined in Section
29 below).
Landlord may require, at Landlord's sole option, that Tenant cause to be
provided to Landlord, at Tenant's sole cost and expense, a performance and labor
and materials payment bond acceptable to Landlord with respect to any
improvements, additions or alterations to the Premises. Landlord shall have the
right at all times to post and keep posted on the Premises any notices permitted
or required by law, or which
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Landlord shall deem proper, for the protection of Landlord, the Project and
any other party having an interest therein from mechanics' and materialmen's
liens.
10. Assignment and Subletting.
10.1 Tenant shall not assign, sublease or otherwise transfer,
("Transfer") to any party ("Transferee") voluntarily, by operation of
law or otherwise, any interest herein or in the Premises, or permit any
Transfer to occur, or permit the use of the Premises except for
Tenant's own business operations by any person other than Tenant and
the agents and servants of Tenant, without in each case Landlord's
prior written consent, which consent shall not be unreasonably
withheld. Any such Transfer without Landlord's prior written consent
shall be void.
In determining whether to grant such consent, Landlord may consider
various factors including, but not limited to, the following: (a) business
criteria relating to the proposed Transferee's background, experience,
reputation, general operating ability and ability to perform Lease obligations,
and potential for succeeding in its business, (b) financial criteria relating to
the proposed Transferee's financial responsibility, credit rating and
capitalization, (e) the identity and personal characteristics of the proposed
Transferee and its invitees and guests, and (d) the nature of the proposed use
and business of the proposed Transferee and its effect on the tenant mix of the
Building, the public repute of the Building and the impact on the common areas
or utility systems of the Building. Without limiting the generality of the
foregoing, Landlord hereby reserves the right to condition any such consent upon
Landlord's determination that (i) the proposed Transferee is at least as
financially responsible as Tenant and at least as financially and morally
responsible as Tenant then is or was upon the execution hereof, whichever is
greater, (ii) the proposed Transferee shall use the Premises for a use
compatible with other tenancies in the Building, and (iii) the proposed
Transferee's use of the Premises will not adversely materially impact on the
common areas or utility systems of the Building.
Notwithstanding any provision of this Lease to the contrary, Tenant shall
not enter into any proposed Transfer of any interest herein or in the Premises
which would result in (a) detraction from the first-class character or image of
the Building or diminution in the value thereof, (b) the Premises being occupied
by more than two (2) tenants, or (e) a breach by Landlord of any then-existing
exclusive right in favor of any other tenant of the Building, any loan
obligation or agreement, any covenants, conditions and restrictions of record,
or any insurance policy. Tenant shall give Landlord thirty (30) days prior
written notice of its intention to Transfer its lease. Tenant shall submit the
following information with such notice and with a written request for Landlord's
consent to any Transfer: (i) all Transfer and related documents, (ii) financial
statements of the proposed Transferee, (iii) business, credit and personal
references and history of the proposed Transferee, and (iv) such other
information as Landlord may reasonably request relating to the proposed Transfer
and the parties involved therein. Any transaction which does not comply with
provisions of this Section shall be voidable at the option of Landlord.
If Landlord disapproves the proposed Transfer, Tenant shall not complete
such proposed Transfer. On the other hand, if Landlord approves such proposed
Transfer, Tenant shall be required to pay Landlord's reasonable legal fees and
other costs incurred in connection with Landlord's review of the proposed
Transfer and the execution of documents reflecting such Transfer, plus an
administrative fee of $500.00. In addition, in the event Landlord consents to
the proposed Transfer: (i) any subtenant of part or all of Tenant's interest in
the Premises shall agree that in the event Landlord gives such subtenant notice
that Tenant is in default under this Lease, such subtenant shall thereafter make
all sublease or other payments direct to Landlord, which payments will be
received by Landlord without any liability whether to honor the sublease or
otherwise (except to credit such payments against sums due under the Lease); and
any subtenant shall at Landlord's option agree to attorn to Landlord or its
successors and assigns should the Lease be terminated for any reason,
voluntarily, or otherwise, except that in no event shall Landlord or its
successors or assigns be obligated to accept such attornment, (ii) any such
Transfer and consent shall be effected on forms, the form and substance of which
will be supplied or approved by Landlord; and (iii) Landlord may require that
Tenant not then be in default hereunder in any respect.
10.2 The parties acknowledge that Landlord's economic stake in the
Building housing the Premises is significantly greater than Tenant's
economic stake in this Lease or in the Premises, and that Tenant has
not leased the Premises to make a profit on transferring the same, but
solely to occupy the same. Accordingly, the parties have expressly
bargained for the following allocation of any consideration to be
derived by Tenant from any Transfer of this Lease. Tenant shall be
required to pay Landlord fifty percent (50%) of any rent, key money,
transfer consideration, or other premiums of any kind or nature on the
Transfer in excess of the rental and other charges dues under this
Lease, whether such premium be in the form of an increased rental, a
lump sum payment in consideration of the Transfer, or consideration of
any other form. If such Transfer pertains to a portion of the Premises
only, any premium shall be computed on the assumption that Tenant's
rental and other sums due hereunder are allocable on a pro rata, per
square foot basis.
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The provisions of this Section shall apply regardless of whether such
Transfer is made in compliance with the provisions of this Lease. Any payments
made to Landlord pursuant to this Section shall not cure any default under this
Lease arising from such Transfer. Tenant shall not artificially structure any
Transfer to reduce the amount payable to Landlord under this Section, nor shall
Tenant take any other steps for the purpose of circumventing its obligation to
pay amounts to Landlord under this Section; in the event that Tenant does same,
the amount payable to Landlord under this Section shall be the amount that would
have been payable to Landlord had same not occurred.
10.3 No Transfer, even with the consent of Landlord, shall result in
Tenant's being released from any of its obligations hereunder.
Landlord's consent to any one Transfer shall apply only to the specific
transaction thereby authorized and such consent shall not be construed
as a waiver of the duty of Tenant or any Transferee to obtain
Landlord's consent to any other or subsequent Transfer or as modifying
or limiting Landlord's rights hereunder in any way. Landlord's
acceptance of rent directly from any assignee, subtenant or other
Transferee shall not be construed as Landlord's approval or consent
thereto nor Landlord's agreement to accept the attornment of any
subtenant in the event of any termination of this Lease. In no event
shall Landlord's enforcement of any provision of this Lease against a
Transferee be deemed a waiver of Landlord's right to enforce any term
of this Lease against Tenant or other person.
10.4 If Tenant is a corporation, an unincorporated association or a
partnership, any cumulative Transfer, of any stock or interest in such
corporation, association or partnership greater than twenty-five
percent (25%) then of, or any cumulative Transfer (other than in the
ordinary course of business) of any assets of such corporation,
association or partnership greater than twenty-five percent (25%)
thereof, shall be deemed an assignment within the meaning and
provisions of this Section and shall be subject to the provisions
hereof; provided, however, that the foregoing shall not apply to
corporations, fifty percent (50%) or more of the stock of which is
traded through a national or regional exchange or over-the-counter.
10.5 Notwithstanding any of the foregoing provisions, covenants and
conditions to the contrary, in the event that this Lease is assigned to
any person or entity pursuant to the provisions of the Bankruptcy Code,
11 U.S.C. 101 et seq (the "Bankruptcy Code"), any and all monies or
-- ---
other consideration payable or otherwise to be delivered in connection
with such assignment shall be paid or delivered to Landlord, shall be
and remain the exclusive property of Landlord and shall not constitute
property of Tenant or of the estate of Tenant within the meaning of the
Bankruptcy Code. Any and all monies or other consideration constituting
Landlord's property under the preceding sentence not paid or delivered
to Landlord shall be held in trust for the benefit of Landlord and
shall promptly be paid to or turned over to Landlord. If Tenant
proposes to assign this Lease pursuant to the provisions of the
Bankruptcy Code to any person or entity who shall have made a bona fide
offer to accept an assignment of this Lease on terms acceptable to
Tenant, then notice of such proposed assignment setting forth (i) the
name and address of such person (ii) all of the terms and conditions of
such offer, (iii) the adequate assurance provided by Tenant to assure
such person's future performance under this Lease, including without
limitation, the assurance referred to in Section 365 of the Bankruptcy
Code, or any such successor or substitute legislation or rule thereto,
shall be given to Landlord by Tenant no later than twenty (20) days
after receipt by Tenant, but in any event no later than ten (10) days
prior to the date that Tenant shall make application to a court of
competent jurisdiction for authority and approval to enter into such
assignment and assumption. Landlord shall thereupon have the prior
right and option, to be exercised by notice to Tenant given at any time
prior to the effective date of such proposed assignment, to accept an
assignment of this Lease upon the same terms and conditions and for the
same consideration, if any, as the bonafide offer made by such person,
less any brokerage commissions which may be payable out of the
consideration to be paid by such person for the assignment of this
Lease. Any person or entity to which this Lease is assigned pursuant to
the provisions of the Bankruptcy Code shall be deemed without further
act or deed to have assumed all of the obligations arising under this
Lease on and after the date of such assignment. Any such assignee shall
upon demand execute and deliver to Landlord an instrument confirming
such assumption.
11. Waiver; Indemnity
11.1 Notwithstanding any contrary provision herein, and except to the
extent arising from the gross negligence or willful misconduct of
Landlord, Landlord shall not be liable and Tenant hereby waives all
claims against Landlord for any injury or damage to any person or
property or any other loss (including, but not limited to loss of
income), which may be sustained by the persons, goods, wares,
merchandise or property of Tenant, its agent, contractors, employees,
invitees or customers or any other person in or about the Premises, the
Building, or the Project by or from any cause whatsoever, and, without
limiting the generality of the foregoing, whether caused by or
resulting from water leakage of any character from the roof, walk,
windows, basement, or any other portion
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of the Premises, the Building, or the Project, or by fire, steam,
electricity, gas or oil, or by any interruption of utilities or
services, or by any tenant, occupant, or other person, or by any other
cause whatsoever, in, on or about the Premises, the Building or the
Project. Notwithstanding any contrary provision in the Lease, Landlord
shall in no event be liable for consequential damages hereunder.
11.2 Except to the extent that claims arise from the gross negligence or
willful misconduct of Landlord, Tenant shall indemnify Landlord and
hold Landlord harmless from and against any and all claims, demands,
losses, damages, liabilities, costs and expenses (including, but not
limited to, reasonable attorneys' fees) arising from Tenant's use or
enjoyment of the Project, from the conduct of Tenant's business, from
any act or omission, work or thing done, permitted or suffered by
Tenant (or any officer, employee, agent, contractor, representative,
licensee, guest, invitee or visitor thereof) in or about the Project,
or from any default under this Lease by Tenant. If any action or
proceeding is brought against Landlord by reason of any such matter,
Tenant shall, upon notice from Landlord, defend same at Tenant's
expense by counsel satisfactory to Landlord. Tenant, as a material part
of the consideration to Landlord, hereby assumes all risk of damage to
property of Tenant, or injury to persons in or about the Premises,
except to the extent arising from gross negligence or willful
misconduct of Landlord, and Tenant hereby waives all claims in respect
thereof against Landlord. The provision of this Section shall survive
the expiration or termination of this Lease with respect to any claims
or liability arising from events occurring prior to such expiration or
termination.
12. Insurance
12.1 Throughout the term hereof, Tenant shall carry and maintain, at its
own expense, the following types, amounts and forms of insurance.
12.1.1 Tenant shall carry and maintain a policy of commercial general
liability if insurance in the name of Tenant (with Landlord and, if
requested by Landlord, any mortgagee, trust deed holder, ground
lessor or secured party with an interest in this Lease, the
Building, or the Project named as an additional insured). Such
policy shall specifically include, without limitation, personal
injury, broad form property damage, and contractual liability
coverage, the last of which shall cover the insuring provisions of
this Lease and the performance of Tenant of the indemnity agreements
in Section 11 above. Such policy shall provide coverage on an
occurrence basis. The minimum limits of liability shall not be less
than the amounts specified in Section 1.1.9. The amount of such
insurance required here under shall be subject to adjustment from
time to time as reasonably requested by Landlord.
12.1.2 Tenant shall carry and maintain a policy or policies of
property insurance in the name of Tenant (with Landlord and, if
requested by Landlord, any mortgagee, trust deed holder, ground
lessor or secured party with an interest in this Lease, the Building
or the Project named as additional insured) covering Leasehold
improvements, including without limitation any improvements made to
the Premises by Landlord for the benefit of Tenant, and any property
of Tenant at the Premises and providing protection against all
perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, special extended peril (all
risk) and sprinkler leakage, in an amount equal to at least one
hundred percent (100%) of the replacement cost thereof from time to
time (including without limitation, cost of debris removal). Any
proceeds from such insurance shall be used for the repair or
replacement of the property damaged or destroyed, unless this Lease
is terminated pursuant to the provisions hereof. If the Premises are
not repaired or restored following damage or destruction, Landlord
shall receive any proceeds from such insurance allocable to Tenant's
leasehold improvements.
12.1.3 Tenant shall carry and maintain a policy or policies of
worker's compensation and employer's liability insurance in
compliance with all applicable laws.
12.1.4 Tenant shall carry and maintain such other policies of
insurance (including without limitation, business interruption or
rental income insurance) in connection with the Premises as Landlord
may from time to time require.
12.1.5 All of the policies required to be obtained by Tenant pursuant
to the provisions of this Section 12.1 shall be issued by companies
and shall be in the form and content acceptable to Landlord. Without
limiting the generality of the foregoing, any deductible amounts
under said policies shall be subject to Landlord's approval. Each
policy shall designate Landlord as an
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additional insured and shall provide full coverage in the amounts
set forth herein. Although named as an additional insured, Landlord
shall be entitled to recover under said policies for any loss
occasioned to it, its servants, agents and employees, by reason of
the negligence of Tenant.
Tenant shall, prior to delivery of the Premises by Landlord to Tenant,
provide Landlord with copies of and certificates for all insurance policies. All
insurance policies shall provide that they may not be modified or canceled until
after thirty (30) days written notice to Landlord (by any means described in
Section 27 below) and to any other additional insureds thereunder. Tenant shall,
at least thirty (30) days prior to the expiration of any of such policies,
furnish Landlord with a renewal or binder therefor.
Tenant may carry insurance under a so-called "blanket" policy, provided
that such policy provides that the amount of insurance required hereunder shall
not be prejudiced by other losses covered thereby. All insurance policies
carried by Tenant shall be primary with respect to, and non-contributory with,
any other insurance available to Landlord.
If Tenant fails to carry any insurance policy required hereunder or to
furnish copies thereof and certificates therefor pursuant hereto, Landlord may,
without waiving Tenant's default, upon notice, obtain such insurance, and Tenant
shall reimburse Landlord for the costs thereof with the next monthly rental
payments due hereunder.
12.2 During the term of this Lease, landlord shall keep and maintain
property insurance for the Project in such reasonable amounts, and with
such reasonable coverages, as would be carried by a prudent owner of a
similar building in the city where the Building is located, or as any
lienholder may require. Tenant acknowledges that it shall not be a
named insured in such policies and that it has no right to receive any
proceeds from any such insurance policies carried by Landlord.
Notwithstanding any contrary provision herein, Landlord shall not be
required to carry insurance covering the property described in Section
12.1.2 above or covering flood or earthquake.
12.3 Each party hereto hereby waives any and all rights to recover
against the other party, or against the officers, employees or
principals thereof, for loss or damage arising from any peril insured
against under any property or worker's compensation insurance policy
required to be carried by such waiving party pursuant to the provisions
of this Lease. To the extent reasonably available, each such policy
shall be endorsed to reflect the foregoing.
12.4 Tenant shall pay any increases in insurance premiums relating to
property in the Project other than the Premises to the extent that any
such increase is specified by the insurance carrier as being caused by
Tenant's acts or omission or use or occupancy of the Premises.
13. Service and Utilities
13.1 Subject to the provisions contained elsewhere herein and to the
rules and regulations of the Building, Landlord shall cause to be
furnished to the Premises electricity, together with heating,
ventilating and air conditioning ("HVAC"), required in Landlord's
reasonable judgment for the comfortable use and occupation of the
Premises (but not in excess of such utilities and services which are
customarily furnished in comparable office buildings in the immediate
market area), during the business hours of the Building, which shall
initially be 7:00 A.M. to 6:00 P.M., Monday through Friday, except for
holidays determined by Landlord from time to lime, and janitorial
services during the times and in the manner that such services are
customarily furnished in comparable office buildings in the immediate
market area. Landlord shall, at Tenant's request, provide after-hours
HVAC to the Premises, provided that Tenant shall pay to Landlord a
charge therefor as reasonably determined by landlord from time to time.
Tenant shall notify Landlord in advance prior to noon on any business
day of Tenant's after-hour HVAC requirements. Tenant shall keep and
cause to be kept closed all window coverings when necessary because of
the sun's position, and Tenant shall at all times cooperate fully with
Landlord and abide by all the regulations and requirements which
Landlord may prescribe for the proper functioning and protection of the
heating, ventilating and air conditioning system. If any heat-
generating machines, excess lighting or equipment used in the Premises
affects the temperature otherwise maintained by the air conditioning
system for the Premises and the Building, or requires additional
cooling for its operation, Landlord may install supplementary air
conditioning for the Premises, and the cost thereof (including, but not
limited to, the cost of installation, operation and maintenance
thereof) shall be paid by Tenant to Landlord upon demand by Landlord.
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13.2 Tenant shall not, without the prior written consent of Landlord,
use in the Premises any apparatus, device, machine or equipment using
excess righting, electricity or water, nor shall Tenant connect any
apparatus or device to sources of electrical current or water except
through existing electrical outlets or water pipes in the Premises. If
Tenant shall require excess electricity or any other resource in excess
of that customarily supplied for use of similar premises, in comparable
office buildings in the area of the Project, Tenant shall first request
the consent of Landlord. In the event that Landlord gives its consent,
Tenant may cause a separate metering device to be installed in the
Promises. The cost of any such separate metering device including, but
not limited to, the cost of installation, maintenance and repair
thereof shall be paid by Tenant. Tenant shall promptly pay the cost of
all excess resources consumed within the Premises, together with any
additional administrative expense incurred by Landlord in connection
therewith. For purposes of the foregoing, excess electricity shall be
deemed to consist of any amount in excess of 2.5 kilowatt hours at 277
volts per rentable square foot on an annualized basis for fluorescent
lighting and 2.5 kilowatt hours at 120 volts per rentable square foot
on an annualized basis for convenience power.
13.3 Landlord shall not be in default hereunder or be liable for any
damages directly or indirectly resulting from any interruption of
utilities or services caused by (i) the installation or repair of any
equipment in connection with the furnishing of utilities or services,
(ii) acts of God or the elements, labor disturbances of any character,
any other accidents or any other conditions beyond the reasonable
control of Landlord, or by the making of repairs or improvements to the
Premises or the Project, or (iii) the limitation, curtailment,
rationing or restriction imposed by any governmental agency or service
or utility supplier on use of water or electricity, gas or any other
form of energy or any other service or utility whatsoever serving the
Premises or the Project. Furthermore, Landlord shall be entitled,
without any obligation or compensation to Tenant, to cooperate
voluntarily in a reasonable manner with the efforts of national, state
or local governmental agencies or service or utility suppliers in
reducing energy or other resource consumption. If Landlord shall so
cooperate, Tenant shall also reasonably cooperate therewith.
13.4 Any sums payable under this Section 13 shall be considered
Additional Rent and may be added to any installment of rent thereafter
becoming due, and Landlord shall have the same remedies for a default
in payment of such sums as for a default in the payment of rent.
14. Estoppel Certificate
14.1 Within ten (10)days after any written request which Landlord may
make from time to time, Tenant shall execute and deliver to Landlord a
certificate (the "Certificate") substantially in the form attached
hereto as Exhibit "D" and hereby made a part hereof, together with such
financial information relating to Tenant or any guarantor as Landlord
or any prospective purchaser or lender may reasonably request. Landlord
shall have the right to amend or otherwise supplement the Certificate
to include such other information and provisions as may be reasonably
requested by any existing or prospective lender or by any prospective
purchaser. Any failure by Tenant to so execute and deliver the
Certificate shall, at Landlord's election, constitute a certification
by Tenant that the statements which may be included in the Certificate
(as same may have been so amended or supplemented) are true and
correct, except as Landlord shall otherwise indicate. Landlord and
Tenant intend that the Certificate may be relied upon by any existing
or prospective lender or by any prospective purchaser. Tenant hereby
acknowledges that any failure by it to execute and deliver the
Certificate would likely result in Landlord's incurring substantial
consequential damages.
15. Holding Over
15.1 If Tenant, with Landlord's written consent, remains in possession
of all or any portion of the Premises after the expiration or sooner
termination of the term hereof, such holding over shall constitute and
be construed as a tenancy from month-to-month only, upon such terms and
conditions hereof as may reasonably and logically be construed as
applying thereto; provided, however, that during such holding over,
Base Rent and any parking charges shall be two hundred percent (200%)
of the Base Rent and parking charges in effect immediately prior to
such expiration or termination, and any and all options or other
preferential rights of Tenant shall be deemed to have lapsed and to be
of no further force or effect. Landlord may terminate such tenancy from
month to month by giving to Tenant written notice of termination at
least twenty-five (25) days prior to the end of the rental month.
Acceptance by Landlord of any rent after such expiration or termination
shall not be deemed to constitute Landlord's consent to such holding
over.
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16. Subordination; Requirements of Lenders
16.1 Without the necessity of any additional document being executed by
Tenant for the purpose of effecting a subordination, this Lease shall
be subject and subordinate at all times to (a) all ground leases or
underlying leases which may now exist or hereafter be executed
affecting all or any portion of the Project and (b) the lien of any
mortgage or deed of trust which may now exist or hereafter be executed
affecting all or any portion of the Project.
Notwithstanding the foregoing, Landlord shall have the right to
subordinate or cause to be subordinated any such ground leases or underlying
leases or any such liens to this Lease. If any ground lease or underlying lease
terminates for any reason or any mortgage or deed of trust is foreclosed or a
deed in lieu of foreclosure is made for any reason, then at the election of such
ground lessor or mortgagee or beneficiary, Tenant shall, notwithstanding any
subordination, attorn to and become the Tenant of the successor-in-interest at
the option of such successor-in-interest. It shall be a condition to any future
subordination of the Lease that the ground lessor or mortgagee or beneficiary
requesting such subordination shall agree that so long as Tenant is not in
default under this Lease, Tenant's possession of the Premises shall not be
disturbed as a result of such termination, foreclosure or deed in lieu of
foreclosure. Tenant shall execute and deliver, upon demand by Landlord and in
the form requested by Landlord, any additional documents evidencing the priority
or subordination of this Lease and the attornment of Tenant with respect to any
such ground leases or underlying leases or the lien of any such mortgage or deed
of trust. Tenant hereby irrevocably appoints Landlord as attorney-in-fact of
Tenant to execute, deliver and record any such documents in the name and on
behalf of Tenant if Tenant fails to do same pursuant to the foregoing.
16.2 If, in connection with the obtainment of financing for the Project
or any portion thereof, the lender requests reasonable modifications of
this Lease as a condition to the furnishing of such financing, Tenant
shall not unreasonably withhold or delay its consent thereto, provided
that such modifications do not increase the obligations of Tenant
hereunder or materially adversely affect Tenant's rights hereunder.
17. Observance of Rules and Regulations
Tenant shall observe and comply with the rules and regulations set forth in
Section 39 below and any and all reasonable modifications thereof and additions
thereto from time to time established by Landlord. Landlord shall not be
responsible for the non-observance of, or noncompliance with, any of said rules
and regulations by any other tenant or occupant of the Building. In the event of
any conflict between said rules and regulations and other provisions hereof, the
latter shall control.
18. Access by Landlord
Landlord reserves, and Landlord (and its agents, contractors and employees)
shall at reasonable times have, the right to enter the Premises to inspect same,
to supply janitorial services and any other service to be provided by Landlord
to Tenant hereunder, to show the Premises to any prospective purchaser,
beneficiary, mortgagee, or, during the last six (6) months of the term hereof to
prospective tenants, and to make any alteration, improvement or repair to the
Premises or any portion of the Building, or Project, without abatement of rent,
and Landlord may for that purpose erect, use and maintain scaffolding, pipes,
conduits and other necessary structures in and through the Premises where
reasonably required by the character of the work to be performed, provided that
entrance to the Premises shall not be blocked thereby, and provided further that
Landlord shall use reasonable efforts to minimize any interference with Tenant's
use of and access to the Premises resulting from the foregoing. Tenant hereby
waives any claim for damages or abatement of rent for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the Premises, and any other loss occasioned thereby,
except to the extent arising from the gross negligence or willful misconduct of
Landlord. For each of the aforesaid purposes, Landlord shall at all times have
and retain a key with which to unlock all of the doors in, upon and about the
Premises, excluding Tenant's vaults and safes, and Landlord shall have the right
to use any and all means which Landlord may deem necessary or proper to open
said doors in an emergency, in order to obtain entry to any portion of the
Premises, and any entry to the Premises or portions thereof obtained by Landlord
by any such means or otherwise shall not under any circumstances be construed or
deemed to be a forcible or unlawful entry into, or a detainer of, the Premises,
or an eviction, actual or constructive, of Tenant from the Premises or any
portion thereof.
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Landlord shall also have the right at any time, without same constituting
an actual or constructive eviction and without incurring any liability to Tenant
therefor, to change the arrangement and/or location of entrances or passageways,
doors and doorways, and corridors, elevators, stairs, toilets or other public
parts of the Building, provided that Landlord shall use reasonable efforts to
minimize any interference with Tenant's use of and access to the Premises
resulting from the foregoing.
19. Default by Tenant
The occurrence of any of the following shall constitute a breach of and
default under this Lease by Tenant:
19.1 Failure by Tenant to pay any amount (including, without limitation,
monthly installments of Base Rent and Additional Rent) when and as same
become payable in accordance with the provisions of this Lease, or to
duly, promptly and completely perform any obligation of Tenant under
Section 14 or 16 above, and continuation of such failure for a period
of three (3) days after written notice from Landlord to Tenant
specifying the nature of such failure.
19.2 Failure by Tenant in the due, prompt and complete performance or
observance of any other express or implied covenant, agreement or
obligation of Tenant contained in this Lease, and the continuation of
such failure for a period often (10) days after written notice from
Landlord to Tenant specifying the nature of such failure; provided,
however, that if any such failure not involving a hazardous condition
is curable, but cannot reasonably be cured within such period, Tenant
shall not be deemed to be in default hereunder if Tenant promptly
commences such cure within such period and thereafter diligently
pursues such cure to completion within a reasonable time, but in no
event more than thirty (30) days after such notice.
19.3 Tenant's vacating or abandoning of the Premises.
19.4 Any financial statement or any representation given to Landlord by
Tenant, or any assignee, sublessee, other transferee or successor of
Tenant or any guarantor of this Lease, proves to be materially false or
misleading.
19.5 The insolvency of Tenant, the making by Tenant of any assignment
for the benefit of creditors; the filing by or against Tenant of a
petition to have Tenant adjudged bankrupt or of a petition for
reorganization or arrangement under any law relating to bankruptcy,
insolvency or creditor's rights in general (unless in the case of a
petition filed against Tenant, the same is dismissed within sixty (60)
days); the appointment of a trustee or receiver to take possession of
all or a substantial part of Tenant's assets or of Tenant's interest
under this Lease, where such seizure is not discharged within thirty
(30) days. The occurrence of any of the acts or events referred to in
this subsection with respect to any guarantor of this Lease shall also
constitute a default hereunder.
19.6 The attachment, execution or other judicial seizure of a
substantial portion of Tenant's assets or of Tenant's interest in this
Lease, where such seizure is not discharged within thirty (30) days.
20. Remedies of Landlord
20.1 In the event of Tenant's breach of or default under this Lease as
provided in Section 19 above, Landlord, at Landlord's option, and
without limiting Landlord in the exercise of any other right or remedy
Landlord may have on account of such default, and without any further
demand or notice, may terminate this Lease and/or, to the extent
permitted by law, remove all persons and property from the Premises,
which property shall be stored by Landlord at a warehouse or elsewhere
at the risk, expense and for the account of Tenant.
20.2 If Landlord elects to terminate this Lease as provided in Section
20.1 above, Landlord shall be entitled to recover from Tenant the
aggregate of:
20.2.1 The worth at the time of the award of the unpaid rent and charges
equivalent to rent earned as of the date of the termination hereof;
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20.2.2 The worth at the time of award of the amount by which the future
rent and charges equivalent to future rent and other amounts due
hereunder which would have been earned after the date of termination
hereof until the time of the award exceeds the amount of such rental
loss that Tenant proves could have been reasonably avoided;
20.2.3 The worth at the time of the award of the amount by which the
future rent and charges equivalent to future rent for the balance of
the term hereof after the time of the award exceeds the amount of
such rental loss that Tenant proves could have been reasonably
avoided;
20.2.4 Any other amount necessary to compensate Landlord for the
detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which, in the ordinary course of
things, would be likely to result therefrom; and,
20.2.5 Any other amount which Landlord may hereafter be permitted to
recover from Tenant to compensate Landlord for the detriment caused
by Tenant's default.
For the purposes of this Section, the "time of the award" shall mean
the date upon which the judgement in any action brought by Landlord against
Tenant by reason of such default is entered or such earlier date as the court
may determine; the "worth at the time of award" of the amounts referred to in
Sections 20.2.1 and 20.2.2 shall be computed by allowing interest at the
Interest Rate, but not less than the legal rate; and the "worth at the time of
award" of the amount referred to in Section 20.2.3 shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of the award plus one percent (1%) per annum.
20.3 Nothing in this Section 20 shall be deemed to affect Landlord's
right to indemnification, under the indemnification clause or clauses
contained in this Lease for claims or liability arising from events
occurring prior to the termination of this Lease.
20.4 Notwithstanding anything to the contrary set forth herein,
Landlord's reentry to perform acts of maintenance or preservation of,
or in connection with efforts to relet, the Premises, or any portion
thereof, or the appointment of a receiver upon Landlord's initiative to
protect Landlord's interest under this Lease shall not terminate
Tenant's right to possession of the Premises or any portion thereof
and, until Landlord does elect to terminate this Lease, this Lease
shall continue in full force and Landlord may pursue all its remedies
hereunder including, without limitation, the right to recover from
Tenant as they become due hereunder all rent and other charges required
to be paid by Tenant under the terms of this Lease.
20.5 In the event of any default by Tenant as set forth above, then in
addition to any other remedies available to Landlord at law or in
equity or under this Lease, Landlord shall have the right to bring an
action or actions from time to time against Tenant, in any court of
competent jurisdiction, for all rental and other sums due or becoming
due under this Lease, including all damages and costs proximately
caused thereby, notwithstanding Tenant's abandonment or vacation of the
Premises or other acts of Tenant. Such remedy may be exercised by
Landlord without prejudice to its right to thereafter terminate this
Lease in accordance with the other provisions contained in this Section
20.
20.6 The term "rent" and "rental" as used in this Section 20 and in any
and all other provisions of this Lease, shall mean Base Rent,
Additional Rent and any and all other amounts payable by Tenant
pursuant to the provisions of this Lease.
20.7 In the event of Tenant's abandonment of the Premises or if Landlord
shall elect to reenter or shall take possession of the Premises
pursuant to any legal proceeding or pursuant to any notice provided by
law, and until Landlord elects to terminate this Lease, Landlord may,
from time to time, without terminating this Lease, recover all rental
as it becomes due under Section 20.5 above and/or relet the Premises or
any part thereof for the account of and on behalf of Tenant, on any
terms, for any term (whether or not longer than the term of this Lease)
and at any rental as Landlord in its reasonable discretion may deem
advisable, and Landlord may make any alterations and repairs to the
Premises in connection therewith. Tenant hereby irrevocably constitutes
and appoints Landlord as its special attorney-in-fact, irrevocable and
coupled with an interest, for purposes of reletting the Premises
pursuant to the immediately preceding sentence. In the event that
Landlord shall elect to so relet the Premises on behalf of Tenant, then
rentals received by Landlord from such reletting shall be applied:
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20.7.1 First, to reimburse Landlord for the costs and expenses of such
reletting (including, without limitation, costs and expenses or
retaking or repossessing the Premises, removing persons and property
therefrom, securing new tenants, and, if Landlord shall maintain and
operate the Premises, the costs thereof) and necessary or reasonable
alterations.
20.7.2 Second, to the payment of any indebtedness of Tenant to Landlord
other than Base Rent, adjustments to Base Rent, Additional Rent and
other sums due and unpaid hereunder.
20.7.3 Third, to the payment of rent, Base Rent, Additional Rent and
other sums due and unpaid hereunder, and the residue, if any, shall
be held by Landlord and applied in payment of other or future
obligations of Tenant to Landlord as the same may become due and
payable.
Should the rentals received from such reletting, when applied in the
manner and order indicated above at any time be less than the total amount owing
from Tenant pursuant to this Lease, then Tenant shall pay such deficiency to
Landlord and if Tenant does not pay such deficiency within five (5) days of its
receipt of written notice, Landlord may bring an action against Tenant for
recovery of such deficiency or pursue its other remedies hereunder.
20.8 All rights, powers and remedies of Landlord hereunder and under any
other agreement now or hereafter in force between Landlord and Tenant
shall be cumulative and not alternative and shall be in addition to all
rights, powers and remedies given to Landlord at law or in equity. The
exercise of any one or more of such rights or remedies shall not impair
Landlord's right to exercise any other right or remedy.
20.9 As security for Tenant's performance and satisfaction of each and
every one of its duties and obligations under this Lease, Tenant does
hereby assign and grant to Landlord a security interest under the
Hawaii Commercial Code in and to Tenant's right, power and authority,
during the continuance of this Lease, to receive the Tenants' share of
rents, issues, profits or other payments received under any sublease or
other transfer of part or all of Tenant's interest in the Premises,
reserving unto Tenant the right prior to any default hereunder to
collect and retain the Tenant's share of said rents, issues and profits
as they become due and payable, except that nothing contained herein
shall be construed to alter the provisions of Section 10 above. Upon
any such default, Landlord shall have the right at any time thereafter,
without notice (except as may be provided for herein), either in
person, by agent or receiver to be appointed by a court, to enter and
take possession of the Premises and collect such Tenant's share of such
rents, issues, profits or other payments, including without limitation
those past due and unpaid, and apply same, less court costs and
expenses of collection, including without limitation reasonable
attorneys' fees upon any indebtedness secured hereby and in such order
as Landlord may determine.
20.10 If, after Tenant's abandonment of the Premises, Tenant leaves behind
any items of personal property, then Landlord shall store such property
at a warehouse or any other location at the risk, expense and for the
account of Tenant, and such property shall be released only upon
Tenant's payment of any and all moving and storage charges, as well as
any expense or damages incurred as a result of the removal, moving and
storage of such property, together with all sums due and owing under
this Lease. If Tenant does not reclaim such property within the period
permitted by law, Landlord may sell such property in accordance with
law and apply the proceeds of such sale to any sums due and owing
hereunder, or retain said property, granting Tenant credit against sums
due and owing hereunder for the reasonable value of such property.
20.11 To the extent permitted by law, Tenant hereby waives all provisions
of, and protection under, any decisions, statutes, rules, regulations
and other laws of the State of Hawaii to the extent same are
inconsistent and in conflict with specific terms and provisions hereof.
If, at any time during the term hereof, Tenant fails, refuses or
neglects to do any of the things provided to be done by Tenant, Landlord may,
after notice (except in the event of emergency), do the same, but at the expense
and for the account of Tenant. The amount of any money so expended or
obligations so incurred by Landlord, together with interest thereon at the
Interest Rate, shall be repaid to Landlord within five (5) days after demand by
Landlord.
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21. Default by Landlord; Limitation of Liability
21.1 Landlord shall not be deemed to be in default hereunder unless
obligations required by Landlord hereunder are not performed by
Landlord, or by any beneficiary under any deed of trust, mortgagee,
ground lessor or other lienholder with rights in all or any portion of
the Project, within thirty (30) days after written notice thereof by
Tenant to Landlord and to such other parties whose names and addresses
are furnished to Tenant in writing, which notice specifies that there
has been a failure to perform such obligation provided, however, that
if the nature of such obligations is such that more than thirty (30)
days are reasonably required for their cure, Landlord shall not be
deemed to be in default hereunder if Landlord or any such other
party(s) commences such cure within such thirty (30) day period and
thereafter diligently pursues such cure to completion.
21.2 If Landlord is in default hereunder and, as a consequence thereof,
Tenant recovers a judgment against Landlord, such judgment may be
satisfied only out of the right, title and interest of Landlord in the
Project and out of the rent or other revenue receivable by Landlord
from the Project, or out of the proceeds receivable by Landlord from
the sale or other disposition of all or any portion of Landlord's
right, title and interest in the Project. Neither Landlord nor any of
the partners of Landlord shall be personally liable for any deficiency
or otherwise.
22. Damage and Destruction
22.1 If the Premises or the Project is damaged by an insured casualty,
occurring more than six (6) months prior to the expiration of the term
hereof, Landlord shall forthwith repair same, or cause same to be
repaired, to the extent that insurance proceeds are made available to
Landlord therefor and provided that such repairs can, in Landlord's
reasonable opinion, be made within ninety (90) from the date of such
damage (without payment of overtime or other premiums) under the laws
and regulations of the federal, state and local governmental
authorities having jurisdiction thereof.
If the Premises or the Project is damaged by an uninsured casualty which
shall cost more than $100,000 to repair, or if with respect to an insured
casualty the repairs shall require more than ninety (90) days to complete
without payment of overtime or other premium, or if the Premises or the Project
is damaged by casualty within the last six (6) months of the term and cost in
excess of $ I00,000 to repair, Landlord shall have the option within forty-five
(45) days from the date of such damage either to (i) notify Tenant of Landlord's
election to repair such damage, in which event Landlord shall thereafter repair
same, or (ii) notify Tenant of Landlord's election to immediately terminate this
Lease, in which event the Lease shall be so terminated. Landlord shall refund to
Tenant any rent previously paid for any period of time subsequent to such
termination. Notwithstanding any contrary provision herein, and regardless of
whether caused by casualty, (a) Landlord shall not be required to repair any
damage to the property of Tenant or to repair or replace any paneling,
decorations, railings, floor coverings, alterations, additions, fixtures or
improvements installed on the Premises by or at the expense of Tenant, and (b)
any damage caused by the negligence or willful misconduct of Tenant or any of
its agents, contractors, employees or invitees shall be promptly repaired by
Tenant, at its sole cost and expense, to the reasonable satisfaction of
Landlord; provided, however, that Landlord shall bear such cost and expense to
the extent it receives proceeds covering such damage from insurance obtained by
Landlord as part of Building Operating Costs.
22.2 If Landlord repairs damage to the Premises pursuant to the
provisions of Section 22. l above, Base Rent and Additional Rent
payable hereunder until such repairs are completed shall be abated in
the proportion that the rentable area of the portion, if any, of the
Premises rendered unusable by Tenant (and therefore not used) bears to
the rentable area of the Premises; provided, however, that there shall
be such rent abatement only if (i) the damage so repaired is not caused
by the negligence or willful misconduct of Tenant or any of its agents,
contractors, employees, guests or invitees, and (ii) a material portion
of the Premises is so rendered unusable for more than five (5)
consecutive business days. Except for abatement of rent, if any, Tenant
shall have no claim against Landlord for any damage suffered by reason
o(Pounds) (1) any damage to the Premises, (2) such repairs or (3) any
inconvenience, interruption, annoyance, loss of business, or continued
expense of operation caused by such damage or repair.
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23. Eminent Domain
23.1 If the entire Premises or so much thereof as to render the balance
thereof not reasonably usable for the conduct of Tenant's business,
shall be taken or appropriated under the power of eminent domain or
conveyed in lieu thereof, either party hereto may, by serving written
notice upon the other party hereto within thirty (30) days thereafter,
immediately terminate this Lease. If any such substantial part of the
Project excluding the Premises shall be taken or appropriated under the
power of eminent domain or conveyed in lieu thereof, Landlord may so
terminate this Lease. In either of such events, Landlord shall receive
(and Tenant shall assign to Landlord upon demand by Landlord) any
income, rent, award or any interest therein which may be paid in
connection therewith, and Tenant shall have no claim for any part of
any sum so paid, whether or not attributable to the value of the
unexpired term of this Lease; provided, however, that nothing herein
shall prevent Tenant from pursuing a separate award in connection with
the taking of Tenant's removable tangible personal property placed in
the Premises solely at Tenant's expense and for Tenant's relocation
costs.
If a part of the Premises shall be so taken, appropriated or conveyed and
neither party hereto shall elect to so terminate this Lease, (i) Base Rent and
Additional Rent payable hereunder shall be abated in the proportion that the
rentable area of the Premises so taken, appropriated or conveyed beats to the
rentable area of the entire Premises, and (ii) if the Premises shall have been
damaged as a consequence of such partial taking, appropriation or conveyance,
Landlord shall, to the extent of any severance damages received by Landlord,
restore the Premises continuing under this Lease, provided, however, that
Landlord shall not be required to repair or restore any damage to the property
of Tenant or to make any repairs to or restoration of any alterations,
additions, fixtures or improvements installed on the Premises by or at the
expense of Tenant, and Tenant shall pay any amount in excess of such severance
damages required to complete such repairs or restoration.
Notwithstanding anything to the contrary contained in this Section, if the
temporary use or occupancy of any part of the Premises shall be taken or
appropriated under the power of eminent domain or conveyed in lieu thereof
during the term of this Lease, this Lease shall be and remain unaffected by such
taking, appropriation or conveyance and Tenant shall continue to pay in full all
rent payable hereunder by Tenant during the term of this Lease. In the event of
any such temporary taking, appropriation or conveyance, Tenant shall be entitled
to receive that portion of any award which represents compensation for loss of
the use or occupancy of the Premises during the term of this Lease, and Landlord
shall be entitled to receive the balance of such award.
24. Sale by Landlord
If Landlord sells or transfers all or any portion of the Project including
the Premises, Landlord shall, upon consummation of the sale or transfer, be
released from any liability relating to obligations or covenants thereafter to
be performed or observed under this Lease, and in such event Tenant agrees to
look solely to Landlord's successor-in-interest with respect to such liability.
Landlord may transfer or credit any security deposit or prepaid rent to
Landlord's successor-in-interest, and upon such transfer Landlord shall be
discharged from any further liability therefor.
25. Surrender of Premises
Tenant shall upon the expiration or sooner termination of the term hereof,
surrender to Landlord the Premises, and all repairs, changes, alterations,
additions and improvements thereto, in good order, condition and repair,
ordinary wear and tear excepted, clean and free of debris provided, however,
that Landlord may require that Tenant remove any changes, alterations, additions
and improvements to the Premises installed by Tenant upon such expiration or
termination, in which event Tenant shall so remove same and restore the Premises
to its former state at its sole cost and expense. Tenant shall, upon the
expiration or sooner termination of the term hereof, and at Tenant's sole cost
and expense, remove all movable furniture, equipment and other personal property
belonging to Tenant placed in the Premises solely at Tenant's expense, Tenant
shall immediately, at its sole cost and expense, repair any damage caused by the
removal of any property.
26. Quiet Enjoyment
So long as Tenant is not in default hereunder, Tenant shall have the right
to the quiet peaceful enjoyment and possession of the Premises and the common
areas during the term of this Lease, subject to the terms and conditions of this
Lease.
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27. Notices
Whenever any notice, demand or other communication is to be given under the
provisions of this Lease by either party hereto to the other party hereto, it
shall be in writing and shall be (a) personally served, (b) mailed by United
States registered or certified mail, return receipt requested, postage prepaid,
(c) sent by a nationally recognized courier service (e.g. Federal Express) for
next day delivery, to be confirmed in writing by such courier, (d) or "faxed"
with appropriate provisions for confirmation of receipt, addressed as set forth
in Sections 1.1.10 and 1.1.11 of the Basic Lease Information with respect to
Tenant and as follows with respect to Landlord:
Bishop Street Associates
1132 Bishop Street
Suite 1405
Honolulu, Hawaii 96813
Facsimile No. (808) 599-5211
with a copy to:
Monroe & Friedlander Management, Inc.
220 South King Street, Suite 1800
Honolulu, HI 96813
Facsimile No. (808) 545-5689
Attention: Bobbie Lau
In the event that a different address is furnished by either party hereto
to the other party hereto in writing, notices, demands and other communications
shall thereafter be sent or delivered to the new address. Service by mail shall
be deemed complete on the day of actual delivery as shown by the addressee's
registered or certified mail receipt or at the expiration of the third (3rd)
business day after the date of mailing, whichever first occurs. Service by
personal service or courier shall be deemed complete on receipt. Service by
"fax" shall be deemed complete on confirmation of receipt.
28. Personal Property Taxes
Tenant shall pay before delinquency all taxes, assessments, license fees
and other charges (collectively "taxes") that are levied and assessed against
Tenant's trade fixtures and other personal property installed or located in or
on the Premises, and that become payable during the term. On demand by Landlord,
Tenant shall furnish Landlord with satisfactory evidence of such payments. If
any taxes on Tenant's personal property are levied against Landlord or
Landlord's property, or if the assessed value of the Building and other
improvements in which the Premises are located is increased by the inclusion of
a value placed on Tenant's personal property or leasehold improvements, as
determined by Landlord, and if Landlord pays the taxes on any of these items or
the taxes based on the increased assessment of these items, Tenant, on demand,
shall immediately reimburse Landlord for the sum of the taxes levied against
Landlord, or the proportion of the taxes resulting from the increases in
Landlord's assessment. Landlord shall have the right to pay these taxes
regardless of the validity of the levy.
29. Interest and Late Charges
Any amount not paid by Tenant to Landlord when due hereunder shall bear
interest at a rate (the "Interest Rate") equal to the rate specified in Section
1.1.13 of the Basic Lease Information, from the due date until paid, unless
otherwise specifically provided herein, but the payment of such interest shall
not excuse or cure any such failure by Tenant under this Lease. In addition to
such interest, if any amount is not paid within ten (10) days after same is due,
a late charge equal to the amount specified in Section 1.1.13 of the Basic Lease
Information of such amount shall be assessed, which late charge Tenant hereby
agrees is a reasonable estimate of the damages Landlord shall suffer as a result
of Tenant's late payment, which damages include Landlord's additional
administrative and other costs associated with such late payment. The parties
agree that it would be impracticable and extremely difficult to fix Landlord's
actual damages in such event. Such interest and late charges are separate and
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cumulative and are in addition to and shall not diminish or represent a
substitute for any or all of Landlord's rights or remedies under any other
provision of this Lease. If a late charge is payable hereunder, whether or not
collected, for any three (3) installments of Base Rent during any twelve (12)
month period, then all further Base Rent shall automatically become due and
payable quarterly in advance, rather than monthly, notwithstanding any provision
of this Lease to the contrary.
30. Successors and Assigns
Subject to Sections 10 and 24 above, the provisions hereof shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, executors, administrators, successors and assigns.
31. Attorney's Fees
In any litigation arising herefrom between the parties hereto, the
prevailing party shall be entitled to recover reasonable attorney's fees and
costs incurred therein.
32. Light and Air
Tenant covenants and agrees that no diminution of light, air or view by any
structure which may hereafter be erected (whether or not by Landlord) shall
entitle Tenant to any reduction of rent under this Lease, result in any
liability of Landlord to Tenant, or in any other way affect this Lease or
Tenant's obligations hereunder.
33. Signs and Directory
33.1 Tenant shall not, without the prior written consent of Landlord,
place, construct or maintain any sign, advertisement, awning, banner or
other decoration on or visible from, or otherwise use, the exterior or
interior of the Premises (including, but not limited to, the outer
surfaces of the exterior walls and doors of the Premises), any
terraces, the roof of the Building, and the public and common areas of
the Project. All door signs on the corridor doors of the Premises which
lead to the common areas of the Project must conform to standards of
the Project as to size, style, placement, color and number of included
names, and other matters set forth in Section 40 below.
33.2 Landlord shall place, construct and maintain a directory(ies) to be
located in the lobby of the Building and in such other locations, if
any, as Landlord, in its sole discretion, may determine, which
directory(ies) shall be for the display of the business names of
tenants in the Building and their respective suite numbers, provided,
however, that Tenant shall notify Landlord of the business names it
desires to include on such directory and shall, upon demand by
Landlord, pay the cost of directory sign strips bearing such Tenant's
business name. Landlord shall have the sole right to determine and
change from time to time the type of such directory(ies) and such sign
and all common Project signage, including door signs and the contents
thereof, including, but not limited to, size of letters, style, color
and placement.
34. Parking
Subject to applicable rules and regulations, Tenant shall have parking
rights hereunder With respect to such number of its employees' automobiles in
the parking facility of the Building, and at such rental rate(s) and upon such
other terms, as may be specified in Section 1.1.12 of the Basic Lease
Information. All of such parking rights shall be exercised by Tenant throughout
the entire term hereof. Tenant may not sell, assign or transfer its parking
rights hereunder, except pursuant to a permitted sublease or assignment of this
Lease. Except as may otherwise be specifically provided in said Section 1.1.12
or elsewhere in this Lease, Tenant shall not be entitled to any designated,
reserved, assigned or valet parking hereunder. In addition to such rights,
Tenant and its invitees shall have the right to use in common with other tenants
of the Building and their invitees and the general public any portions of the
parking facilities of the Building designated for public use, subject to the
rates, rules and
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regulations, and any other charges, fees and taxes to be collected by Landlord,
for such parking facility use. Landlord reserves the right to establish and
alter, from time to time, all parking rates, rules and regulations, including
the parking rates set forth in Section 1.1.12.
35. Brokers
35.1 Landlord has entered into an agreement with the real estate broker
specified as Landlord's broker in Section 1.1.14 of the Basic Lease
Information ("Landlord's Broker") pursuant to which Landlord has
granted to Landlord's Broker the exclusive right to lease space in the
Building. Landlord shall pay any commissions or fees that are payable
to Landlord's Broker with respect to this Lease in accordance with the
provisions of a separate commission contract. Landlord shall have no
further or separate obligation for payment of commissions or fees to
any other real estate broker, finder or intermediary. Tenant represents
that it has not had any dealings with any real estate broker, finder or
intermediary with respect to this Lease, other than Landlord's Broker
and Tenant's broker ("Tenant's Broker"), if any, specified in Section
1.1.15 of the Basic Lease Information. Any commissions or fees payable
to Tenant's Broker with respect to this Lease shall be paid exclusively
by Landlord's Broker and/or Tenant, and Landlord shall have no
obligation of any kind with respect to such commissions or fees.
Subject to the foregoing, each party hereto shall indemnify and hold
harmless the other hereto from and against all losses, all damages,
liabilities, costs and expenses (including, but not limited to,
reasonable attorneys' fees and related costs) resulting from any claims
that may be assessed against such other party by any real estate
broker, finder or intermediary arising from any act of the indemnifying
party in connection with this Lease.
36. Relocation Right
Landlord may, upon not less than sixty (60) days' prior written notice to
Tenant, substitute for the Premises reasonably similar space elsewhere in the
Building, and this Lease shall be deemed modified so as to eliminate the
Premises hereby leased and to substitute therefor such other premises. In such
event, in all other respects this Lease shall remain in full force and effect
according to its terms. In connection therewith, the costs of preparing such
other premises for Tenant's use shall be borne by Landlord, and any other
Tenant's reasonable costs of moving with respect thereto shall be paid by
Landlord.
37. Authority
If Tenant is a corporation, trust or partnership, each individual executing
this Lease on behalf of Tenant represents and warrants that he or she is duly
authorized to so execute and deliver this Lease. If Tenant is a corporation,
trust or partnership, it shall, within ten (10) days after execution of this
Lease, deliver to Landlord satisfactory evidence of such authority. If Tenant is
a corporation or partnership, it shall, upon demand by Landlord, also deliver to
Landlord satisfactory evidence of (a) good standing in Tenant's state of
incorporation or formation and (b) qualification to do business in Hawaii.
38. Miscellaneous
38.1 If Landlord waives the performance of any term, covenant or
condition contained in this Lease, such waiver shall not be deemed to
be a waiver of any other breach of the same or of any other term,
covenant or condition contained herein. Furthermore, the acceptance of
rent by Landlord shall not constitute a waiver of any preceding breach
by Tenant of any term, covenant or condition of this Lease, other than
the failure of Tenant to pay the particular rent so accepted,
regardless of Landlord's knowledge of such breach at the time of
Landlord's acceptance of such rent. Failure by Landlord to enforce any
of the terms, covenants or conditions of this Lease for any length of
time shall not be deemed to waive or to affect the right of Landlord to
insist thereafter upon strict performance by Tenant. Waiver by Landlord
of any term, covenant or condition contained in this Lease may only be
made by a written document signed by Landlord.
38.2 Any voluntary or other surrender of this Lease by Tenant, mutual
termination hereof or termination hereof by Landlord shall not work a
merger, and shall, at the option of Landlord, terminate all or any
existing subleases or sub-tenancies, or may, at the option of Landlord,
operate as an assignment to Landlord of any or all such subleases or
sub-tenancies.
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38.3 This Lease shall not be recorded, no memorandum hereof shall be
recorded without Landlord's prior written consent.
38.4 Rent and all other sums payable under this Lease must be paid in
lawful money of the United States of America.
38.5 This Lease may be executed in counterparts with the same effect as
if both parties hereto had executed the same document. Both
counterparts shall be construed together and shall constitute a single
lease.
38.6 Nothing contained in this Lease shall be construed to create the
relationship of principal and agent, partnership, joint venture or any
other relationship between the parties hereto, other than the
relationship of landlord and tenant.
38.7 Any provisions of this Lease which shall prove to be invalid, void
or illegal shall in no way affect, impair or invalidate any other
provision hereof, and such other provisions shall remain in full force
and effect, provided, however, that if in Landlord's reasonable
judgment the invalidation or voiding of any such provision or
provisions would materially frustrate the reasonable expectations of
the parties hereto in entering into this Lease, then Landlord may
terminate this Lease and release Tenant from prospective liability
hereunder upon sixty (60) days' advance written notice.
38.8 The term "Premises" shall be deemed to include (unless, based on
the context, such meaning would clearly be unintended) the space
demised and improvements on or at any time hereafter built in such
space.
38.9 The Term "Tenant" or any pronoun used in place hereof shall
indicate and include the masculine or feminine, the singular or plural
number, individual, firms or corporations, and any successor in
interest of Tenant.
38.10 The section headings herein are for convenience of reference only
and shall in no way define, increase, limit or describe the scope or
intent of any provision of this Lease.
38.11 In any case where this Lease is entered into by co--tenants, the
obligations of such co-tenants hereunder shall be joint and several.
38.12 Time is of the essence of this Lease and all of its provisions.
38.13 This Lease shall in all respects be governed by the laws of the
state in which the Premises is located. The parties acknowledge that
the laws of the state in which the Premises is located may change by
virtue of legislative enactment or judicial decision. The parties
further acknowledge that they have entered into this Lease based on the
law at the time of the execution of the Lease, and each hereby
expressly waives any further rights, benefits, or advantages derived
from or as a result of any future changes in law. In any action or
proceeding arising herefrom, Tenant hereby consents to (a) the
jurisdiction of any competent court within the state in which the
Premises is located, (b) service of process by any means authorized by
the law of the state in which the Premises is located, and (c) trial
without a jury.
38.14 This Lease contains the entire agreement of the parties hereto with
respect to the subject matter hereof and supersedes any previous
negotiations. There have been no representations made by Landlord or
any representative thereof or understandings made between the parties
other than those set forth in this Lease. Without limiting the
generality of the foregoing, Tenant specifically acknowledges and
agrees that neither Landlord nor any broker, agent or representative
thereof has made any warranty or representation with respect to the
tenant mix of the Building, the identity of prospective or other
tenants of the Building, profitability or suitability of the Premises
for Tenant use, the state of repair of the Project and the Premises, or
the amount and extent of provided services, except as may be otherwise
specifically set forth herein.
38.15 This Lease may not be modified, except by a written document
executed by the parties hereto.
38.16 If any guarantee of this Lease is required by Landlord, such
guarantee shall be in the form and content attached hereto.
38.17 The words "person" and "persons" as used herein shall include
individuals, firms, partnerships, associations and corporations.
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38.18 The language in all parts of this Lease shall be in all cases
construed simply according to its fair meaning, and not strictly for or
against Landlord or Tenant. Any reference to any Section herein shall
be deemed to include all subsections thereof unless otherwise specified
or reasonably required from the context. Any reference to "days" or
"months" herein shall refer to calendar days or months, respectively,
unless specifically provided to the contrary. Unless clearly
inconsistent with the context, any reference herein to the "term
hereof" or "the term of this Lease" shall refer to the term of this
Lease as the same may be extended pursuant to any extension option(s)
contained herein. The terms "herein", hereunder" and "hereof" as used
in this Lease shall mean "in this Lease" and "of this Lease"
respectively, except as otherwise specifically set forth in this Lease.
38.19 Any and all exhibits and addendums referred to in this Lease are
incorporated herein as a part hereof.
38.20 Tenant hereby acknowledges and agrees that the exterior walls of the
Building and the area between the demising walls of the Premises and
the finished ceilings and floors of the Building thereabove or
therebelow have not been demised hereby and that the use thereof,
together with the right to install, maintain, use, repair and replace
pipes, ducts, conduits and wires leading through, under, above or
alongside the Premises, is hereby excepted and reserved unto Landlord.
38.21 The submission of this Lease by Landlord or its agent or
representative for examination or execution by Tenant does not
constitute an option to offer to lease the Premises upon the terms and
conditions contained herein or a reservation of the Premises in favor
of Tenant, it being intended hereby that this Lease shall become
effective only upon the execution hereof by Landlord and delivery of a
fully executed counterpart hereof to Tenant.
38.22 Tenant hereby warrants and represents that neither its execution of
nor performance under this Lease shall cause Tenant to be in violation
of any agreement, instrument, contract, law, rule or regulation by
which Tenant is bound, and Tenant agrees to indemnify Landlord against
any loss, cost, damage or liability including, without limitation,
reasonable attorney's fees and related costs arising out of Tenant's
breach of this warranty and representation.
38.23 Tenant acknowledges that Landlord may choose not to designate a
thirteenth (13th) floor in the Building.
38.24 Rent shall not be abated, nor may this Lease be terminated by
Tenant, except as may otherwise be expressly provided herein.
39. Rules and Regulations
39.1 No sidewalks, entrance, passages, courts, elevators, vestibules,
stairways, corridors or halls shall be obstructed or encumbered by
Tenant or used for any purpose other than ingress and egress to and
from the Premises of the Building and if the Premises is situated on
the ground floor of the building, Tenant shall further, at Tenant's own
expense, keep the sidewalks and curb directly in front of the Premises
clean and free from rubbish.
39.2 No awning or other projection shall be attached to the outside
walls or windows of the Building without the prior written consent of
Landlord. No curtains, blinds, shades, drapes or screens shall be
attached to or hung in, or used in connection with any window or door
of the Premises, without the prior written consent of Landlord. Such
awnings, projections, curtains, blinds, shades, drapes, screens and
other fixtures must be of a quality, type, design, color, material and
general appearance approved by Landlord, and shall be attached in the
manner approved by Landlord. All electrical fixtures hung in offices or
spaces along the perimeter of the Premises must be fluorescent, of a
quality, type, design, bulb color, size and general appearance approved
by Landlord.
39.3 No sign, advertisement, notice or other lettering shall be
exhibited, inscribed, painted or affixed by Tenant on any part of the
outside or inside of the Premises or of the Building, without the prior
written consent of Landlord. In the event of the violation of the
foregoing by Tenant, Landlord may remove same without any liability,
and may charge the expense incurred by such removal to Tenant. Interior
signs on doors and directory tablet shall be inscribed, painted or
affixed for Tenant by Landlord at the expense of Tenant, and shall be
of a quality, quantity, type, design, color, size, style, composition,
material, location and general appearance acceptable to Landlord.
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39.4 The sashes, sash doors, skylights, windows, and doors that reflect
or admit light or air into the halls, passageways or other public
places in the Building shall not be covered or obstructed by Tenant,
nor shall any bottles, parcels, or other articles be placed on the
window sills, or in the public portions of the Building.
39.5 No show cases or other articles shall be put in front of or affixed
to any part of the exterior of the Building, nor placed in public
portions thereof without the prior written consent of Landlord.
39.6 The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed,
and no sweepings, rubbish, rags or other substances shall be thrown
therein. All damages resulting from any misuse of the fixtures shall be
borne by Tenant to the extent that Tenant or Tenant's agents, servants,
employees, contractors, visitors or licensees shall have caused the
same.
39.7 Tenant shall not mark, paint, drill into or in any way deface any
part of the Premises or the Building. No boring, cutting or stringing
of wires shall be permitted, except with the prior written consent of
Landlord, and as Landlord may direct.
39.8 No animal or bird of any kind or bicycles shall be brought into or
kept in or about the Premises or the Building.
39.9 Prior to leaving the Premises for the day, Tenant shall draw or
lower window coverings and extinguish all lights.
39.10 Tenant shall not make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of the Building
or neighboring buildings or premises or those having business with them.
Tenant shall not throw anything out of the doors, windows or skylights or
down the passageways.
39.11 Neither Tenant or any of Tenant's agents, servants, employees,
contractors, visitors or licensees shall at any time bring or keep upon
the Premises any inflammable, combustible or explosive fluid, chemical or
substance.
39.12 No additional locks, bolts, or mail slots of any kind shall be
placed upon any of the doors or windows by Tenant, nor shall any change
be made in existing locks or the mechanism thereof. Tenant must, upon the
termination of the tenancy, restore to Landlord all keys of stores,
offices and toilet rooms, either furnished to, or otherwise procured by
Tenant, and in the event of the loss of any keys so furnished, Tenant
shall pay to Landlord the cost thereof.
39.13 All removals, or the carrying in or out of any safes, freight,
furniture, fixtures, bulky matter or heavy equipment of any description
must take place only during the hours which Landlord or its agent may
determine from time to time. Landlord reserves the right to prescribe the
weight and position of all safes, which must be placed upon two-inch
thick plank strips to distribute the weight. The moving of safes,
freight, furniture, fixtures, bulky matter or heavy equipment of any kind
must be made upon previous notice to the Superintendent of the Building
and in a manner and at times prescribed by him, and the person employed
by Tenant for such work are subject to Landlord's prior approval.
Landlord reserves the right to inspect all safes, freight or other bulky
articles to be brought into the Building and to exclude from the Building
all safes, freight or other bulky articles which violate any of these
Rules and Regulations or the lease of which these Rules and Regulations
are a part.
39.14 Tenant shall not occupy or permit any portion of the Premises to be
occupied as an office that is not generally consistent with the character
and nature of all other tenancies in the Building, or is (a) for an
employment agency, a public stenographer or typist, a labor union office,
a physician's or dentist's office, a dance or music studio, a school, a
beauty parlor or barber shop, the business or photographic or multilith
or multigraph reproductions or offset printing (not precluding using any
part of the Premises for photographic, multilith or multigraph
reproductions solely in connection with Tenant's own business and/or
activities), a restaurant or bar, an establishment for the sale of
confectionery or soda or beverages or sandwiches or ice cream or baked
goods, an establishment for the preparation or dispensing or consumption
of food or beverages (of any kind) in any manner whatsoever, or as a news
or cigar stand, or as a radio or television or recording studio, theater
or exhibition-hall, for manufacturing, for the storage of merchandise or
for the sale of merchandise, goods or property of any kind at auction, or
for lodging, sleeping or for any immoral purpose, or for any business
which would tend to generate a large amount of elevator or foot traffic
in or about the Building or the land upon which it is located, or any of
the arms used in the operation of the Building, or (b) a use which
conflicts with any so-called "exclusive" then in favor of, or is for any
use the same as that stated in any percentage lease to, another tenant of
the Building, or
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any of Landlord's then buildings which are in the same complex as the
Building, or (c) a use which would be prohibited by any other portion of
this Lease (including but not limited to any Rules and Regulations then
in effect) or in violation of law. Tenant shall not engage or pay any
employees of the Premises, except those actually working for Tenant on
the Premises nor shall Tenant advertise for laborers giving an address at
the Premises.
39.15 Tenant shall not purchase spring water, towels, janitorial or
maintenance or other like service from any company or person not approved
by Landlord. Landlord shall approve a sufficient number of sources of
such services to provide Tenant with a reasonable selection, but only in
such instances and to such extent as Landlord in its reasonable judgment
shall deem appropriate after due consideration to matters concerning
security and proper operation of the Building.
39.16 Landlord shall have the right to prohibit any advertising or
business conducted by Tenant referring to the Building which, in
Landlord's opinion tends to impair the reputation of the Building or its
desirability as a first class building for offices, and upon. notice from
Landlord, Tenant shall refrain from or discontinue such advertising.
39.17 Landlord reserves the right to exclude from the Building between the
hours of 6:00 P.M. and 7:00 A.M. on all days, and at all hours on
Saturdays, Sundays and legal holidays, all persons who do not present a
pass to the Building issued by Landlord. Landlord may furnish passes to
Tenant so that Tenant may validate and issue same. Tenant shall safeguard
said passes and shall be responsible for all acts of persons in or about
the Building who possess a pass issued to Tenant.
39.18 Tenant's contractors shall, while in the Building or elsewhere in
the complex of which the Building forms a part, be subject to and under
the control and direction of the Superintendent of the Building (but not
as agent or servant of said Superintendent or of Landlord).
39.19 If the Premises or the Project is or becomes infested with vermin as
a result of the use or any misuse or neglect of the Premises by Tenant,
its agents, servants, employees, contractors, visitors or licensees,
Tenant shall forthwith at Tenant's expense cause the same to be
exterminated from time to time to the satisfaction of Landlord and shall
employ such licensed exterminators as shall be approved in writing in
advance by Landlord.
39.20 The requirements of Tenant will be attended to only upon application
at the office of the Building. Building personnel shall not perform any
work or do anything outside of their regular duties, unless under special
instructions from the office of Landlord.
39.21 Canvassing, soliciting and peddling in the Building are prohibited
and Tenant shall co-operate to prevent the same.
39.22 No water cooler, air conditioning unit or system or other apparatus
shall be installed or used by Tenant without the written consent of
Landlord.
39.23 There shall not be used in any space, or in the public halls, plaza
areas or lobbies of the Building, or elevators in the complex of which
the Building forms a part, either by Tenant or by jobbers or others, in
the delivery or receipt of merchandise, any hand trucks or dollies except
those equipped with rubber tires and side guards.
39.24 Tenant, Tenant's agents, servants, employees, contractors, licensees
or visitors shall not park any vehicle in any driveway, service
entrances, or areas posted as "No Parking."
39.25 Tenant shall install and maintain, at Tenant's sole cost and
expense, an adequate visibly marked (at all times properly operational)
fire extinguisher next to any duplicating or photocopying machine or
similar heat producing equipment, which may or may not contain
combustible material, in the Premises.
39.26 Tenant shall keep its window coverings closed during any period of
the day when the sun is shining directly on the windows of the Premises.
39.27 Tenant shall not use the name of the Building for any purpose other
than as the address of the business to be conducted by Tenant in the
Premises, nor shall Tenant use any picture of the Building in its
advertising, stationery or in any other manner without
-25-
<PAGE>
the prior written permission of Landlord. Landlord expressly reserves the
right at anytime to change said name without in any manner being liable
to Tenant therefor.
40. Door Sign Rules
40.1 There shall be one frame for the suite number and one frame for the
plaques containing the name.
40.2 The top of the frame which holds the suite number plaque will be
located 35 inches from the ceiling.
40.3 The top of the frame which holds the name plaques will be located
40 inches from the ceiling, and the bottom of the frame which holds the
last name plaque will be located no lower than 55 inches from the
ceiling.
40.4 No more than six name plaques shall be permitted on a door, and
each plaque may contain only one line.
40.5 No more than 28 letters and spaces will be allowed on a plaques
(including punctuation).
40.6 Only firm names and names of individuals will be permitted.
Designations such as "Sales Office", "Private", etc. will not be
allowed.
40.7 The name of a firm or individual may be placed only once on any
door.
40.8 The lettering on all door plaques must be centered within the
plaque.
40.9 All door plaques will be in building standard size, color, style
and material as determined by Landlord.
40.10 There may be no signs on any door visible from the corridors of the
Building other than suite main entry doors.
40.11 Any suite which has double entry doors will be treated as having
only one entry door, and signs will be located only on one of such
doors.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date
first hereinabove set forth.
LANDLORD: TENANT:
BISHOP STREET ASSOCIATES DIGITAL ISLAND, INC.,
a California Corporation
By: 1132, INC.
Its Sole General Partner By: /s/ Brian Higgins
--------------------------
Its: CEO
By: /s/ Intelligible By:
----------------------------- --------------------------
Its President Its
THIS LEASE HAS BEEN PREPARED FOR TENANT'S REVIEW AND FOR TENANT'S SUBMISSION
TO ITS LEGAL AND/OR TAX CONSULTANT. NO REPRESENTATION OR RECOMMENDATION IS MADE
BY LANDLORD OR BROKER, OR THE AGENTS OR EMPLOYEES OF EITHER, AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION
RELATING HERETO.
-26-
<PAGE>
ADDENDUM TO LEASE
This Addendum is attached to and made a part of that certain Lease (the
"Lease") dated ,1996, between Bishop Street Associates, a Hawaii Limited
partnership ("Landlord"), and DIGITAL ISLAND, INC., a California corporation
("Tenant"), relating to premises described as Suite 1001 of the Building located
at 1132 Bishop Street, Honolulu, Hawaii. The provisions set forth below shall
supersede any inconsistent provisions set forth in the Lease. To the extent
possible, the provisions set forth below have been numbered to coincide with the
numbered sections of the Lease to which they relate. Except as otherwise
provided below, capitalized terms used below shall their respective meaning set
forth in the Lease.
13. Utilities.
Tenants operations require 24-hour, 7 days a week usage of air conditioning
for the room designated as "New computer room" on said Exhibit "1". Landlord, at
Landlord's expense, shall install and maintain the equipment to provide such air
conditioning for said Room A; provided that Tenant shall pay for the cost of
operating such air conditioning equipment, including without limitation, the
cost of electricity to operate such air conditioning equipment.
41. Existing Improvements.
Notwithstanding any term contained herein to the contrary, Landlord shall
deliver the Premises to Tenant together with all tincture then located in the
Premises. Tenant shall be entitled to use such furniture without the payment of
additional rent, provided that Tenant shall surrender such furniture to Landlord
upon the expiration or sooner termination of the term of this Lease, in good
order, condition and repair, ordinary wear and tear excepted.
42. Right of Second Refusal.
Subject to the rights of Hawaii Pacific Engineers Inc. to rent the Area
(hereafter defined), during the term of this Lease, Landlord shall not rent the
area shown in Exhibit "A" attached hereto (the "Area"), containing a rentable
area of approximately 706 square feet to any person or entity until Landlord
shall have (i) offered (in writing) to rent the Area to Tenant upon the same
terms, rent and conditions that Landlord would rent the Area to any other person
or entity, and (ii) allowed Tenant seven (7) days after receipt of said offer to
accept such offer in writing. If Tenant does not accept Landlord's offer by
delivering a written acceptance to Landlord within said seven (7) days period,
then Landlord may rent the Area to any other person or entity upon those terms,
rent and conditions which were offered to Tenant. Should the terms, rent or
conditions of such lease be changed, the Area shall again be offered to Tenant
upon the revised terms, rent or conditions and Tenant shall be allowed seven (7)
days after receipt of such revised offer within which to accept such revised
offer in writing. Notwithstanding any term contained herein to the contrary,
Tenant's rights under this Section 42 shall terminate upon the expiration of the
term of this Lease.
43. Letter Credit.
Upon the execution of this Lease by Landlord and Tenant, Tenant shall
deliver to Landlord a Letter of Credit (i) issued by a bank authorized to do
business in the State of Hawaii, (ii) for the sum of $25,000.00, and (iii) in
such form as shall be reasonably approved by Landlord (the "Letter of Credit").
The Letter of Credit shall provide that Landlord may draw upon the Letter of
Credit upon the occurrence of any of the events described in Section 19 of this
Lease. The Letter of Credit shall commence on November 1, 1996 and shall expire
on October 31, 1997.
Landlord's Tenant's
Initial: Initial:
-27-
<PAGE>
Exhibit A
10TH FLOOR
TOTAL RENTABLE AREA: 19,008 sf
<PAGE>
WORK AGREEMENT
--------------
This Work Agreement supplements the Lease dated _____, 1996, executed
concurrently herewith by BISHOP STREET ASSOCIATES, a Hawaii limited partnership,
as "Landlord," and DIGITAL ISLAND, INC., a California corporation, as the
"Tenant," for Suite 1001 (the "Premises") on the tenth (10th) floor of the
Building located at 1132 Bishop Street, Honolulu, Hawaii (the "Building").
1. Construction of Building. Landlord has constructed or will construct the
Building consisting of:
A. The Building shell;
B. The core area including basic mechanical, electrical, plumbing, life
safety, air conditioning and ventilation system therein;
C. Core area toilet rooms including necessary plumbing fixtures, ceramic
tile floors, accessories, ceilings and lighting;
D. Interior dry wall covering all exposed core walls, perimeter columns
and exterior building wall areas except at windows;
E. Air conditioning duct mains;
F. Finished elevator lobbies;
G. Finished hallways on multi-tenant floors; and
H. Parking facilities.
2. Agreement to Complete. Landlord agrees to complete the Premises for Tenant
in accordance with the provisions of this Work Agreement. Tenant agrees to duly
and timely perform all of the acts, and pay all of the consideration, required
of Tenant hereunder, all to the effect that the Premises can be timely completed
as provided in this Work Agreement.
3. Tenant's Space Plan. Landlord agrees to be solely responsible to pay for
the cost of the Final Space Plan, as defined herein, prepared by Landlord's
architect or space planner. The Final Space Plan dated 10/14, 1996 (the
-----
"Final Space Plan") and the Estimate of Probable Cost dated 10/15, 1996, have
-----
been approved by Landlord and Tenant, and copies thereof are attached as Exhibit
"1" and made a part hereof.
4. Landlord's Installation. In completing the Premises, Landlord, at
Landlord's expense, agrees to provide and install the improvements in accordance
with the Final Space Plan, including without limitation the following:
A. Install all building standard wall partitions with sound batting.
EXHIBIT "B"
-----------
Page 1 of 4
<PAGE>
B. Install all building standard doors and hardware.
C. Install building standard light switches, one (1) per each 175 square
feet of usable area.
D. Install building standard duplex receptacle wall outlets, three (3)
per each 150 square feet of usable area.
E. Install building standard telephone wall outlets, one (1) per each 100
square feet of usable area.*
F. Install building standard computer outlets one (1) per each 100 square
feet of usable area.
G. Install building standard air conditioning. Zoning designed by
building engineer.
H. Install building standard 2'x 4' parolouver light fixtures.
I. Install building standard acoustical ceiling tile in all rooms.
J. Install building standard carpeting including building standard 4"
rubber carpet base.
K. Paint all walls with semi-gloss washable paint. Choice limited to 3
colors per suite.
L. In lieu of paint Landlord will prime walls for wall covering. The wall
covering and its installation will be Tenant's expense.
M. One inch metal mini-blinds for all exterior windows.
* Landlord will provide box and stub conduit above the ceiling. Tenant
must provide and install plenum rated cabling for the telephone and
computers.
5. Tenant's Installations. Tenant shall pay for the cost of all installations
which are not shown or described in the attached Final Space Plan and Estimate
of Probable Cost.
6. Landlord's Quote. Landlord shall not be required to approve any change to
the Final Space Plan which would have a material impact or place an undue load
on the structural, mechanical or electrical systems in the Building beyond that
which would be expected for space of the type and kind rented to Tenant, or
which would result in the Premises being not in keeping with the overall
character of the Building, or which will not meet the approval of all applicable
governmental authorities. When and if Landlord approved any change to the Final
Space Plan, Landlord shall concurrently notify Tenant in writing of the price to
Tenant for the quantities (and\or qualities) of items included in such change
which are in excess of Landlord's Standard Installations as described in
paragraph 4 above. Landlord shall not be required to commence work unless Tenant
has approved in writing the cost of the over-standard work to be paid for by
Tenant. Tenant shall pay the agreed amount of Tenant's costs in excess of
Landlord's Standard Installations not later than five (5) days after receipt of
billing therefor.
EXHIBIT "B"
-----------
Page 2 of 4
<PAGE>
7. Schedule of Work All work shall be scheduled by Landlord in coordination
with Tenant and Tenant shall reimburse Landlord for any extra expense incurred
by Landlord by reason of delays caused by Tenant.
8. Time for Completion. Landlord shall not be required to complete Landlord's
Standard Installations in the Premises for Tenant sooner than sixty (60) days
after the later of (i) the delivery to Landlord of Tenant's written approval of
the cost of the over-standard work to be paid by Tenant as described in
paragraph 6 above, or (ii) receipt of approval of the Final Space Plan by all
applicable governmental authorities. If Tenant's written approval of the cost
and said over-standard work is not received by Landlord at least sixty (60) days
prior to the scheduled commencement date specified in Section 1.1.2 of the Basic
Lease Information (the "Commencement Date"), then notwithstanding the fact that
the Premises have not been completed by the Commencement Date, rent shall,
nevertheless, commence to accrue on the Commencement Date.
9. Changes. If Tenant shall timely request any change to the Final Space
Plan, Landlord shall have the right to approve the change in accordance with the
standards set forth in paragraph 6 above. If Landlord approves such change,
Landlord shall promptly give Tenant a written estimate of the maximum cost of
engineering and design services to revise the Final Space Plan in accordance
with such request, the time delay expected because of such request and the extra
cost to Tenant for such change. If Tenant approves such estimate in writing,
Landlord shall have working drawings prepared and proceed to make such change
and Tenant shall promptly reimburse Landlord for the cost thereof. Tenant shall
approve or disapprove such estimate within three (3) business days. In the
absence of such written authorization Landlord shall not be obligated to make
such change and shall continue work on the Premises in accordance with the then
current Final Space Plan. Tenant shall be chargeable with any delay in the
completion of the Premises resulting from any such change, and rent shall
commence to accrue on the Commencement Date whether or not the Premises have
then been completed.
10. Delays. If the completion of Landlord's Standard Installations in the
Premises is delayed by Tenant's failure to comply with any of the foregoing
provisions, or by Tenant's requirement of materials or installations different
from Landlord's Standard Installations, or by changes in the work ordered by
Tenant or by extra work ordered by Tenant, then notwithstanding the delay in
completion of the Premises, the rent shall commence to accrue on the
Commencement Date. Further, if beyond the schedule for completion thereof
because of the unavailability of materials or work specially requested by
Tenant, then rent shall commence on the Commencement Date, notwithstanding that
such work is not completed. Provided, however, Landlord shall notify Tenant of
anticipated delays in delivery of non-standard materials.
11. Data Processing. All data processing and other special electrical
equipment shall be installed only under the supervision of Landlord's electrical
contractor.
12. Substitutions. If plans and specifications for construction of the
Premises shall require Landlord's Standard Installation(s) in mounts which are
in excess of standards to be provided by Landlord as described in Paragraph 4
above, then Tenant shall pay for such additional quantities at Landlord's actual
cost therefore. Landlord may substitute an item of equal quality for any
standard item(s) listed, provided that it is specifically understood and agreed
that if such substitution shall result in a total cost exceeding Landlord's
budget for improvements of the Premises, Tenant shall pay to Landlord the amount
of such additional cost.
13. Energy Conservation. Due to energy conservation requirements, Tenant will
be restricted in the installation and use of lighting in any part of the
Building except as approved by Landlord.
14. Common Areas. It is specifically acknowledged that portions of the
Building and the common areas may not be completed on or prior to the
Commencement Date, without liability of Landlord to Tenant, and without any
abatement or reduction in rent,
EXHIBIT "B"
-----------
Page 3 of 4
<PAGE>
provided that Landlord shall have obtained a temporary certificate of occupancy
for the Premises as well as for the Building, and Landlord's architect/designer
shall have certified that the Premises are substantially complete and Tenant
shall have reasonable access to the Premises.
15. Access. During the thirty (30) day period immediately prior to the
Commencement Date, Tenant shall be afforded reasonable access to the Premises
for the purpose of coordinating the installation of its tenant improvements.
16. Landlord's Representative. During the construction of the Premises all
matters and questions for Landlord shall be referred to The Harris Company who
-------------------
shall act as Landlord's representative.
17. Tenant's Representatives. During the construction of the Premises all
matters and questions for Tenant shall be referred to G. Stephen Elisha who
shall act as Tenant's representative.
DATED:
BISHOP STREET ASSOCIATES
By 1132, Inc.
Its Sole General Partner
By: /s/ Unintelligible
------------------------------
Its President
"Landlord"
DIGITAL ISLAND, INC.,
a California corporation
By: /s/ Ron Higgins
------------------------------
Its CEO
By:
------------------------------
Its
"Tenant"
Landlord's Tenant's
Initial: Initial:
EXHIBIT "B"
-----------
Page 4 of 4
<PAGE>
Notice of Lease Term Dates
------ -- ----- ---- -----
1132 Bishop Street
Honolulu, Hawaii 96813
(808) 599-5009
Telecopier: (808) 599-5211
Gentlemen:
Congratulations on moving into your new suite. We are looking forward to many
years of pleasant and friendly relations.
In order to eliminate any future misunderstanding, we wish to go on record
that the commencement date of the Lease between Bishop Street Associates and you
is_____________ and the termination date is _____________________.
I would appreciate your confirming the foregoing by signing the enclosed copy
of this letter and returning it to the office of the Building at 1132 Bishop
Street, Honolulu, Hawaii 96813.
Sincerely,
BISHOP STREET ASSOCIATES
By 1132, Inc.
Its Sole General Partner
By: /s/ Unintelliglble
----------------------------------
Its Presdident
APPROVED:
- ----------------------------------,
a _____________________________
BY
---------------------------------
Its
Landlord's Tenant's
Initial: Initial:
EXHIBIT "C"
-----------
<PAGE>
ESTOPPEL CERTIFICATE
TO: ___________________________ and its successors and assigns.
FROM: ___________________________________________________________.
RE: Lease for Suite ___, of the Building located at 1132 Bishop Street,
Honolulu, Hawaii.
The undersigned is the current tenant under that certain Lease
dated , 1996, between Bishop Street Associates, as Landlord; and , as
Tenant, relating to Suite (the "Premises"), in the building located at
1132 Bishop Street, Honolulu, Hawaii (the "Building").
The undersigned has been requested to furnish this Estoppel Certificate in
accordance with Section 14 of the Lease below described.
The undersigned, understanding that the Landlord under the Lease below
described and institutional lenders will materially rely thereon, hereby
represents and warrants the following:
1. Attached hereto is a true copy of the Lease dated ___________ together with
all of the amendments thereto dated _________________ (the "Lease").
2. The Lease amendments set forth in paragraph I above are the only amendments
to the Lease, and the Lease, as amended by said amendments, is otherwise
modified and in full force and effect, and constitutes the only agreement
between the Landlord and the undersigned relating to the Premises.
3. The undersigned is the current Tenant under the Lease.
4. The Premises consists of _______________ square feet of rentable area.
5. The Lease commencement date was ___________, and the Lease termination date
is ________________, with ____________, ______________ year options to renew
or extend at rent.
6. The base rent currently being paid by the undersigned under the Lease is
$__________ per month. All free rent or other concessions to which the
undersigned is entitled under the Lease have been utilized except
_____________________.
7. The percentage rent is (a) _____________ % over a floor of $_____________
in gross sales; (b) none (strike one).
8. Rent is adjusted every _______ year(s) under the Lease for increases in the
consumer price index. There is (is not) a "cap" on such increases. Such cap
is ____________%. The undersigned's share of any consumer price index
adjustments under the Lease has been paid through __________________.
EXHIBIT "D"
-----------
Page 1 of 2
<PAGE>
9. As of the date hereof, the Lease is valid and subsisting and in full force
and effect, and the undersigned has accepted and is presently occupying the
Premises.
10. To the best knowledge of the undersigned, there are no uncured breaches or
defaults on the part of the Landlord under the Lease, and the undersigned has
no knowledge of any event, which with the giving of notice or the passage of
time, or both, would constitute a default thereunder. The undersigned has no
unfulfilled claims or offsets or defenses of any kind under the Lease as of
the date hereof.
11. Rent has been paid through _________________________, 19__. No rent has
been paid in advance.
12. (Intentionally deleted).
13. A security deposit of $_________ has been paid to Landlord under the
Lease.
14. The undersigned is entitled to ______________ parking spaces under the
Lease for the term of the Lease for $ per month. The undersigned is (is not)
entitled to free (validated) parking for its invitees.
15. All improvements required to be placed and completed on the Premises by
the Landlord under the Lease have been so placed and completed and conform to
the Lease requirements except _______________________.
16. The undersigned has no purchase options affecting the Premises or the
Building.
Very truly yours,
______________________________
Landlord's Tenant's
Initial: Initial:
EXHIBIT "D"
-----------
Page 2 of 2
<PAGE>
Exhibit "1"
FLOOR PLAN - 12TH
<PAGE>
ESTIMATE OF PROBABLE COST
Tenant: Digital Island Architect: Architekton Ltd.
Location: First Hawaiian Tower- 10th Floor Date: Oct. 17, 1996
Owner: Bishop Street Associates By: AL
<TABLE>
<CAPTION>
NO ITEM QTY UNIT PRICE TOTAL
====================================================================================================================================
BUILDING STANDARD WORK:
====================================================================================================================================
<C> <S> <C> <C> <C> <C>
1 SUPERVISION/GEN REQUIREMENTS 1 LS 809.35 809
- ----------------------------------------------------------------------------------------------------------------------==============
2 0 LF 0.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
3 DEMOLITION 1 LS 500.00 500
- ----------------------------------------------------------------------------------------------------------------------==============
4 INTERIOR PARTITION (no insulation) 6 LF 50.00 300
- ----------------------------------------------------------------------------------------------------------------------==============
5 GYPSUM BD. FURRING 0 SF 3.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
6 CORRIDOR DOORS (SC) 0 EA 1,600.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
7 INTERIOR DOORS (HC) 1 EA 1,000.00 1,00
- ----------------------------------------------------------------------------------------------------------------------==============
8 POCKET/SLIDING DOOR (HC) 0 EA 800.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
9 CARPET (anti-static type) 30 SY 300.00 900
- ----------------------------------------------------------------------------------------------------------------------==============
10 VINYL COMPOSITION TILE (@ Library & Storag 0 SF 4.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
11 MINI-BLINDS @ PERIMETER WINDOWS 0 EA 200.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
12 RESILIENT BASE 0 LF 2.00 0
- ----------------------------------------------------------------------------------------------------------------------==============
13 PAINT 840 SF 1.25 1,050
- ----------------------------------------------------------------------------------------------------------------------==============
14 SUSPENDED CEILING (patch/repair) 494 SF 0.75 371
- ----------------------------------------------------------------------------------------------------------------------==============
15 ELECTRICAL (addt'l power, 24 hr. a/c) 494 SF 5.50 2,717
- ----------------------------------------------------------------------------------------------------------------------==============
16 MECHANICAL (Bldg. Std. A/C) 494 SF 5.00 2,470
- ----------------------------------------------------------------------------------------------------------------------==============
17 SUBTOTAL 10,117
- ----------------------------------------------------------------------------------------------------------------------==============
18 CONTRACTORS PROFIT 10% 1,012
- ----------------------------------------------------------------------------------------------------------------------==============
19 TOTAL BUILDING STANDARD WORK $11,129
====================================================================================================================================
BUILDING NON-STANDARD WORK:
====================================================================================================================================
20 24 HR. A/C (Portable Unit(s)) 1 LS 10,000.00 10,000
- ----------------------------------------------------------------------------------------------------------------------==============
21 RAISED ACCESS FLOORING (w/steps & railing) 264 SF 33.00 8,712
- ----------------------------------------------------------------------------------------------------------------------==============
22 INTERIOR GLASS 45 SF 25.00 1,125
- ----------------------------------------------------------------------------------------------------------------------==============
23 EMERGENCY/BACK-UP POWER HOOK-UP 1 LS 1,100.00 1,100
- ----------------------------------------------------------------------------------------------------------------------==============
24 0
- ----------------------------------------------------------------------------------------------------------------------==============
25 0
- ----------------------------------------------------------------------------------------------------------------------==============
26 0
- ----------------------------------------------------------------------------------------------------------------------==============
27 0
- ----------------------------------------------------------------------------------------------------------------------==============
28 0
- ----------------------------------------------------------------------------------------------------------------------==============
29 0
- ----------------------------------------------------------------------------------------------------------------------==============
30 0
- ----------------------------------------------------------------------------------------------------------------------==============
31 SUBTOTAL 20,937
- ----------------------------------------------------------------------------------------------------------------------==============
29 CONTRACTORS PROFIT 10% 2,094
- ----------------------------------------------------------------------------------------------------------------------==============
30 TOTAL BUILDING NON-STANDARD WORK $23,031
====================================================================================================================================
31 TOTAL OF PROBABLE CONSTRUCTION COST $34,159
====================================================================================================================================
32 0
- ----------------------------------------------------------------------------------------------------------------------==============
32 0
- ----------------------------------------------------------------------------------------------------------------------==============
33 PERMIT/BOWS FEES 560
- ----------------------------------------------------------------------------------------------------------------------==============
34 GRAND TOTAL $34,719
====================================================================================================================================
</TABLE>
NOTE: The actual cost will vary based on the final scope of work and
construction bid(s) received.
<PAGE>
LAND COURT REGULAR SYSTEM
- --------------------------------------------------------------------------------
AFTER RECORDATION, RETURN BY MAIL [ ] PICK-UP [ ]
- --------------------------------------------------------------------------------
AMENDMENT OF LEASE
------------------
THIS AMENDMENT is made as of the 15th day of November 1996, by
------ -------------
and between BISHOP STREET ASSOCIATES, a Hawaii limited partnership, whose post
office address is 1132 Bishop Street, Suite 1405, Honolulu, Hawaii 96813 (the
"Landlord"), and DIGITAL ISLAND, INC., a California corporation, whose post
office address is 1132 Bishop Street, Suite 1001, Honolulu, Hawaii 96813 (the
"Tenant").
RECITALS:
- ---------
A. Landlord and Tenant entered into that certain Lease dated ______,
1996 (the "Lease"), for the rental of Suite 1001 of the office building located
at 1132 Bishop Street, Honolulu, Hawaii 96813 (the "Building"), containing
approximately 2,588 rentable square feet (the "Premises").
<PAGE>
B. Landlord and Tenant desire to amend the provisions of the Lease
concerning the Letter of Credit given by Tenant to secure Tenant's performance
of its obligations under the Lease.
AGREEMENT:
- ---------
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant
hereby agree as follows:
1. The following paragraph is added to the Lease as Paragraph 44:
"44. Letter of Credit.
Upon the execution of this Lease by Landlord and Tenant, Tenant
shall deliver to Landlord a Letter of Credit (i) issued by a bank
authorized to do business in the State of Hawaii, (ii) for the sum of
$63,082.10, and (iii) in such form as shall be reasonably required by
Landlord (the "Letter of Credit"). The Letter of Credit shall provide
that Landlord may draw upon the Letter of Credit upon the occurrence
of any of the events described in Section 19 of this Lease, to satisfy
any amounts owed by Tenant under the terms of this Lease. The Letter
of Credit shall commence on November 1, 1996 and shall expire on
November 1, 2001. In the event that the bank issuing the Letter of
Credit (the "Bank") notifies Landlord that the Bank will not renew the
---
Letter of Credit on its annual expiration date and thus the Letter of
Credit will expire prior to November 1,2001, such occurrence shall be
deemed a default under this Lease. Upon Landlord's receipt of such
notice, Landlord shall be entitled to pursue any and all remedies
provided to Landlord under Section 20 of this Lease. In addition to
--------
such remedies, Landlord may draw down the remaining balance of the
Letter of Credit as liquidated damages for Tenant's default under this
Lease. Landlord and Tenant hereby acknowledge that they understand and
have agreed that in such event, the injury or damages to Landlord will
be difficult and/or expensive to determine in view of: Landlord's
financial commitments with respect to the Building, the difficulty in
obtaining a new tenant for the Premises and the nature of the rental
market for commercial space in Honolulu, Hawaii. AS A REASONABLE
ESTIMATE OF LANDLORD'S FAIR COMPENSATION FOR ANY INJURY OR DAMAGES
RESULTING FROM SUCH DEFAULT, THE PARTIES AGREE THAT THE SUMS TO BE
DRAWN UNDER THE LETTER OF CREDIT SHALL BELONG TO LANDLORD AS
LIQUIDATED DAMAGES. Landlord may, in addition to the aforesaid
damages, pursue any other remedy, including specific performance,
permitted by law or equity. All costs, including reasonable attorneys'
fees, incurred by reason of Tenant's default shall be borne by Tenant,
regardless of whether or not a lawsuit is filed."
-2-
<PAGE>
2. No Defenses. Tenant hereby agrees and acknowledges that Tenant
-----------
has no claims, offsets, deductions or defenses against its payment of sums due
under the Lease, or against the performance of its obligations under the Lease.
Tenant further agrees that Landlord is not currently in default of any of its
obligations under the Lease.
3. Gender. Landlord and Tenant agree that in interpreting this
------
instrument, the use of any gender shall be construed to include all genders, and
the use of any number shall be construed as singular or plural, as the
circumstances may require. The terms "Landlord" and "Tenant", together with any
pronouns used in lieu thereof, refer to the singular or plural, as the case may
be.
4. Successors and Assigns. The covenants made by Landlord and/or
----------------------
Tenant, and all rights and benefits conferred hereunder upon Landlord and/or
Tenant, shall be binding upon and inure to the benefit of Landlord and/or Tenant
and their respective legal representatives, successors in trust, successors and
assigns.
5. Governing Law. This instrument shall be governed by, and
-------------
construed in accordance with, the laws of the State of Hawaii.
6. Attorneys' Fees and Costs. If any party hereto commences an
-------------------------
action or arbitration proceeding to interpret or enforce this Amendment, or any
provision hereof, the prevailing party shall be entitled to an award of costs
and attorneys' fees in addition to all other amounts awarded by the court or
arbitrator. Tenant also agrees to pay all costs and reasonable attorneys' fees
which may be incurred or paid by Landlord in enforcing without litigation any of
the covenants contained hereunder.
7. In all other respects the Lease shall remain unamended and in
full force and effect.
-3-
<PAGE>
IN WITNESS WHEREOF, the Landlord and Tenant have executed this
instrument as of the day and year first above written.
LANDLORD: BISHOP STREET ASSOCIATES,
- -------- a Hawaii limited partnership
By 1132, Inc.,
a Hawaii corporation
Its Sole General Partner
By /s/ S. Steven Sofos
--------------------------------
S. Steven Sofos
Its President
TENANT: DIGITAL ISLAND, INC.,
- ------ a California corporation
By /s/ Ron Higgins
--------------------------------
Its CEO
By
--------------------------------
Its
-4-
<PAGE>
SECOND AMENDMENT OF LEASE
-------------------------
THIS SECOND AMENDMENT OF LEASE ("Amendment") is made as of April 14
-------------- --------
, 1997, by and between BSOT HOLDINGS, LLC, a Delaware limited liability company,
whose post office address is 1132 Bishop Street, Suite 1405, Honolulu, Hawaii
96813 (the "Landlord"), and DIGITAL ISLAND, INC., a California corporation,
----------
whose post office address is 1132 Bishop Street, Suite 1001, Honolulu, Hawaii
96813 (the "Tenant" ).
--------
Recitals:
- ---------
(a) Bishop Street Associates, a Hawaii limited partnership, and Tenant
entered into that certain Lease dated October 21, 1996, for the rental of Suite
1001 of the office building located at 1132 Bishop Street, Honolulu, Hawaii
96813 (the "Building"), containing approximately 2,588 rentable square feet (the
----------
"Existing Premises"), as amended by an Amendment of Lease dated November 15,
- -------------------
1996 (the "Lease").
(b) Landlord has acquired the Building and is now the landlord under
the Lease.
(c) Landlord and Tenant desire to amend the Lease to increase the area
of the Existing Premises.
Agreements:
- ----------
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant
hereby agree as follows:
1. The Premises as shown on Exhibit A attached to the Lease shall
include not only the area outlined by a heavy dark line and identified as "Suite
1001" but also the area out-lined by a heavy dark line and identified as "Vacant
706rsf".
2. Section 1.1.1 Of the Lease is amended in its entirety to read as
follows:
1.1.1 Premises (Section 1.1): Suite 1001 on floor ten (10) of the
Building, consisting of approximately 3,294 rentable square feet
and approximately 2,889 usable square feet.
<PAGE>
3. Section 1.1.3 of the Lease is amended in its entirety to read as
follows:
1.1.3 Base Rent (Section 3.1): In the following amounts:
Period Rate Total Amount
------ ---- ------------
11/01/96 $0.00 0.00 per month
through
04/14/97
04/15/97 $1.00 per $706.00 per month
through rentable
04/30/97 square foot
per month
05/01/97 $1.00 per $3,294.00 per
through rentable month
11/05/01 square foot
per month
4. Section 1.1.6 of the Lease is amended in its entirety to read as
follows:
1.1.6 Tenant's Percentage Share (Section 4.1): 0.732%, which was
computed by dividing the rentable area of the Premises described
in Section 1.1.1 by the rentable area of the Building.
5. The security deposit under Section 1.1.7 of the Lease shall
remain unchanged at $5,256.84, notwithstanding the increase in the area of the
Premises and in the amount of the Base Rent as provided in this Amendment. The
security deposit may be subject to change in the future as otherwise provided in
the Lease.
6. Landlord shall create an opening between the areas identified on
Exhibit A attached to the Lease as "Suite 1001" and "Vacant 706rsf". The opening
does not include the installation of a door. Landlord's obligation to create the
opening is subject to and upon the terms of the Work Agreement attached to the
Lease as Exhibit B.
7. Lease in Full Force and Effect. Landlord and Tenant hereby
------------------------------
confirm and agree that all of the terms of the Lease remain in full force and
effect, as amended hereby.
2
<PAGE>
8. Miscellaneous
-------------
8.1 Definitions. Capitalized terms not other-wise defined in this
-----------
Amendment have the meanings given to them in the Lease.
8.2 No Defenses. Tenant hereby agrees and acknowledges that Tenant has
-----------
no claims, offsets, deductions or defenses against its payment of sums due under
the Lease, or against the performance of its obligations under the Lease. Tenant
further agrees that Landlord is not currently in default of any of its
obligations under the Lease.
8.3 Gender. Landlord and Tenant agree that in interpreting this
------
Amendment, the use of any gender shall be construed to include all genders, and
the use of any number shall be construed as singular or plural, as the
circumstances may require. The terms "Landlord" and "Tenant", together with any
pronouns used in lieu thereof, refer to the singular or plural, as the case may
be.
8.4 Successors and Assigns. The covenants made by Landlord and/or
----------------------
Tenant, and all rights and benefits conferred hereunder upon Landlord and/or
Tenant, shall be binding upon and inure to the benefit of Landlord and/or Tenant
and their respective legal representatives, successors in trust, successors and
assigns.
8.5 Governing Law. This Amendment shall be governed by, and construed
-------------
in accordance with, the laws of the State of Hawaii.
8.6 Attorneys' Fees and Costs. If any party hereto commences an action
-------------------------
or arbitration proceeding to interpret or enforce this Amendment, or any
provision hereof, the prevailing party shall be entitled to an award of costs
and attorneys' fees in addition to all other amounts awarded by the court or
arbitrator. Tenant also agrees to pay all costs and reasonable attorneys' fees
which may be incurred or paid by Landlord in enforcing without litigation any of
the covenants contained hereunder.
IN WITNESS WHEREOF, the Landlord and Tenant have ex-
3
<PAGE>
ecuted this Amendment as of the day and year first above written.
BSOT HOLDINGS, LLC, DIGITAL ISLAND, INC.,
a Delaware limited liability a California corporation
company
By BSOT, Inc., By /s/ Ron Higgins
a California corporation ---------------------------------
Its Manager Its
By /s/ Nicholas Lock By CEO
-------------------------- ---------------------------------
Nicholas Lock Its
Its Vice President
Landlord Tenant
4
<PAGE>
FLOOR PLAN
THE FIRST HAWAIIAN TOWER
<PAGE>
Exhibit 10.14
OFFICE LEASE
FORTY-FIVE FREMONT ASSOCIATES,
A CALIFORNIA GENERAL PARTNERSHIP,
Landlord
and
DIGITAL ISLAND, INC.,
Tenant
DATED AS OF: May 5, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Paragraph Page
- --------- ----
<C> <S> <C>
1. Premises........................................................... 1
2. Certain Basic Lease Terms.......................................... 1
3. Term; Delivery of Possession of Premises........................... 2
4. Condition of Premises.............................................. 2
5. Monthly Rent....................................................... 5
6. Lease Security..................................................... 6
7. Additional Rent: Increases in Operating Expenses and Tax Expenses.. 7
8. Use of Premises; Compliance with Law............................... 10
9. Alterations and Restoration........................................ 11
10. Repair............................................................. 12
11. Abandonment........................................................ 13
12. Liens.............................................................. 13
13. Assignment and Subletting.......................................... 13
14. Indemnification of Landlord........................................ 17
15. Insurance.......................................................... 17
16. Mutual Waiver of Subrogation Rights................................ 19
17. Utilities.......................................................... 19
18. Personal Property and Other Taxes.................................. 20
19. Rules and Regulations.............................................. 20
20. Surrender; Holding Over............................................ 21
21. Subordination and Attornment....................................... 21
22. Financing Condition................................................ 22
23. Entry by Landlord.................................................. 22
24. Insolvency or Bankruptcy........................................... 22
25. Default and Remedies............................................... 23
26. Damage or Destruction.............................................. 25
27. Eminent Domain..................................................... 26
28. Landlord's Liability; Sale of Building............................. 26
29. Estoppel Certificates.............................................. 27
30. Right of Landlord to Perform....................................... 27
31. Late Charge........................................................ 27
32. Attorneys' Fees; Waiver of Jury Trial.............................. 27
33. Waiver............................................................. 28
34. Notices............................................................ 28
35. Deleted............................................................ 28
36. Defined Terms and Marginal Headings................................ 28
37. Time and Applicable Law............................................ 28
38. Successors......................................................... 28
39. Entire Agreement; Modifications.................................... 29
40. Light and Air...................................................... 29
41. Name of Building................................................... 29
42. Severability....................................................... 29
43. Authority.......................................................... 29
44. No Offer........................................................... 29
45. Real Estate Brokers................................................ 29
46. Consents and Approvals............................................. 29
47. Reserved Rights.................................................... 30
48. Financial Statements............................................... 30
49. Deleted............................................................ 30
50. Nondisclosure of Lease Terms....................................... 30
51. Hazardous Substance Disclosure..................................... 30
52. Stairway Access.................................................... 31
53. Right of First Offer............................................... 31
54. Signage............................................................ 32
55. Parking............................................................ 32
</TABLE>
<PAGE>
EXHIBITS:
- --------
A - Outline of Premises
B - Rules and Regulations
C - Appraisal Procedure
<PAGE>
LEASE
-----
THIS LEASE is made as of the 5th day of May, 1999, between FORTY-FIVE
FREMONT ASSOCIATES, a California general partnership ("Landlord"), and DIGITAL
ISLAND, INC., a California corporation ("Tenant").
1. Premises. Landlord hereby leases to Tenant, and Tenant hereby
--------
leases from Landlord, on the terms and conditions set forth herein, the space
outlined on the attached Exhibit A (the "Premises"). The Premises are located on
the floor(s) specified in Paragraph 2 below of the building (the "Building")
located at 45 Fremont Street, San Francisco, California. The Building, the
parcel(s) of land (the "Land") on which the Building is located and the other
improvements on the Land are referred to herein as the "Real Property".
Tenant's lease of the Premises shall include the right to use, in
common with others and subject to the other provisions of this Lease, the public
lobbies, entrances, stairs, elevators and other public portions of the Building.
All of the windows and outside walls of the Premises and any space in the
Premises used for shafts, stacks, pipes, conduits, ducts, electrical equipment
or other utilities or Building facilities are reserved solely to Landlord and
Landlord shall have rights of access through the Premises for the purpose of
operating, maintaining and repairing the same.
2. Certain Basic Lease Terms. As used herein, the following terms
-------------------------
shall have the meaning specified below:
a. Floor(s) on which the Premises are located: Eleventh (11th) and
twelfth (12th) floors.
b. Lease term: Approximately five (5) years and two (2) months,
commencing on the date Landlord delivers the Premises to Tenant
(the "Commencement Date") and ending on the last day of the
sixtieth (60th) full calendar month after the Rent Commencement
Date (as defined in Paragraph 2.c. below)(the "Expiration Date").
c. Monthly Rent: One Hundred Ten Thousand Three Hundred Seventy-Two
Dollars ($110,372.00).
The "Rent Commencement Date" shall be the date which is the
earlier of (i) sixty (60) days after the Commencement Date
(provided that if the Tenant Improvements (as defined in
Paragraph 4.a.i. below) have not been Substantially Completed (as
defined below) by the end of such 60-day period due to a delay
caused by Force Majeure (as defined below) or a Landlord Delay
(as defined below), then the 60-day period shall be extended by
the length of such delay; provided, however, that any such
extension of the 60-day period on account of Force Majeure shall
be limited to five (5) days), or (ii) the date Tenant commences
occupancy of any portion of the Premises for the conduct of
Tenant's business therein.
For purposes of the foregoing, the following terms shall have the
following meanings:
Substantial Completion of the Tenant Improvements shall have
occurred when, in Landlord's and Tenant's reasonable judgment,
the Tenant Improvements have been completed in accordance with
the Final Plans (as defined in Paragraph 4.a.i. below),
subject only to correction or completion of "Punch List"
items, which items shall be limited to minor items of
incomplete or defective work or materials or mechanical
maladjustments that are of such a nature that they do not
materially interfere with or impair Tenant's use of the
Premises for Tenant's business. The definition of Substantial
Completion shall also apply to the term "Substantially
Completed."
"Force Majeure" shall mean any delay in the Substantial
Completion of the Tenant Improvements that is caused by (i)
strikes, lockout, labor disputes, shortages of customary
materials and supplies (for which reasonable replacements are
not readily available) or labor, fire or other casualty, acts
of God or any similar cause that is beyond the reasonable
control of the party from whom performance is required, or
(ii) the failure of the
1
<PAGE>
applicable governmental authority, following receipt of all of
the required plans and other information, to issue the
required building permits or approvals within the customary
time periods for such issuance that existed as of the date of
this Lease.
"Landlord Delay" shall mean any delay in the Substantial
Completion of the Tenant Improvements that is due to (i)
Landlord's failure to provide any required consent or
disapproval within the time periods set forth in Paragraph 4
below, (ii) Landlord's failure to timely disburse Landlord's
Contribution in accordance with Paragraph 4.d.i. below, or
(iii) any other delay that is directly and solely caused by
the acts or failures to act (subject to any applicable time
periods for such actions provided for in Paragraph 4 below) of
Landlord or its agents or contractors.
d. Letter of Credit Amount: Five Hundred Thousand Dollars
($500,000.00).
e. Tenant's Share: 6.54%
f. Base Year: The calendar year 1999.
Base Tax Year: The fiscal tax year ending June 30, 2000.
g. Business of Tenant: Global internet service provider.
h. Real estate broker(s): Shorenstein Management Inc., and CB
Richard Ellis, Inc.
3. Term Delivery of Possession of Premises.
---------------------------------------
a. The term of this Lease shall commence on the Commencement Date
(as defined in Paragraph 2.b.) and, unless sooner terminated pursuant to the
terms hereof or at law, shall expire on the Expiration Date (defined in
Paragraph 2.b.).
b. Landlord shall deliver possession of the Premises to Tenant as
soon as reasonably possible following the date hereof. Except as expressly
provided below, in the event of any delay in the delivery of the Premises to
Tenant, this Lease shall not be void or voidable, nor shall Landlord be liable
to Tenant for any loss or damage resulting therefrom. Notwithstanding the
foregoing, if Landlord has not delivered the Premises to Tenant for commencement
of construction of the Tenant Improvements on or before June 1, 1999 (the
"Outside Delivery Date") then Tenant may terminate this Lease by providing
Landlord with written notice of such termination prior to the date that the
Premises are delivered to Tenant for commencement of construction of the Tenant
Improvements, but in no event later than five (5) business days following the
Outside Delivery Date (as such date may have been extended pursuant to the
following). The foregoing Outside Delivery Date shall be extended by the length
of any delay in the delivery of the Premises to Tenant that is caused by
strikes, lock-outs, labor disputes, fire or other casualty, acts of God, or any
other cause beyond the reasonable control of Landlord; provided, however, that
the Outside Delivery Date may not be extended solely as a result of Landlord's
inability to recover possession of the Premises from the prior tenant of the
Premises and/or remove such tenant's possessions from the Premises. Tenant's
foregoing right to terminate this Lease shall be Tenant's sole remedy for
Landlord's failure to deliver the Premises to Tenant by the Outside Delivery
Date (as such date may have been extended pursuant to the terms hereof).
4. Condition of Premises. Improvements shall be constructed in the
---------------------
Premises in accordance with this Paragraph 4.
a. Plans; Selection of General Contractor.
--------------------------------------
i. Plans. On or before May 3, 1999, Tenant shall furnish to
-----
Landlord for Landlord's review and reasonable approval working plans and
specifications for the improvements Tenant desires to be constructed in the
Premises, prepared by an architect reasonably acceptable to Landlord ("Tenant's
Architect"). The working plans and specifications shall show improvements that
conform to Landlord's base building requirements, the "Tenant Construction
Standards" and "Conditions for Construction" applicable to the Building
(collectively, the Building Construction Standards"), applicable building codes
and other Legal Requirements (as defined in Paragraph 7.a.(16) below) and shall
be in sufficient detail as to enable the general contractor for the work to
obtain all necessary governmental permits for commencement of the improvements
and to secure complete bids from qualified contractors to perform the work.
Landlord's approval of the working plans and specifications shall merely
indicate Landlord's consent to the proposed work shown thereon. In no event
shall such consent by Landlord be deemed to constitute a representation by
Landlord that the work called for in the working plans and specifications
complies with applicable building codes or other Legal Requirements nor shall
such consent release Tenant from Tenant's obligation to supply working plans and
specifications which do so conform
2
<PAGE>
to applicable building codes and Legal Requirements. Landlord shall respond to
each portion of the plans, either in writing or by marking up the submitted
plans, as soon as reasonably possible (but in any event within five (5) business
days of its receipt thereof) and, if Landlord disapproves of any portion of the
plans, Landlord shall advise Tenant of Landlord's reasons therefor. Tenant shall
respond to any reasonable objections of Landlord to the plans and resubmit
appropriately revised plans to Landlord. Landlord shall respond to any
resubmission of the plans as soon as reasonably possible (but in any event,
within five (5) business days of Landlord's receipt thereof), provided that the
resubmitted plans shall clearly indicate /which portions of the plans are
revised and which portions of the plan remain unchanged from the previously
submitted plans. (The working plans and specifications, as approved in writing
by Landlord, are hereinafter called the "Final Plans" and the improvements to be
performed in accordance with the Final Plans are hereinafter called the "Tenant
Improvements".) Notwithstanding anything to the contrary herein, Landlord and
Tenant shall cooperate with each other to resolve any space plan issues raised
by applicable local building codes.
ii. Selection of General Contractor. On or before the date that
-------------------------------
is five (5) business days following the approval by Landlord and Tenant of the
Final Plans, Tenant shall advise Landlord of whether Tenant selects Landlord's
designated contractor ("Landlord's Contractor") to be the general contractor for
the construction of the Tenant Improvements or whether Tenant desires to hire an
outside general contractor ("Tenant's Contractor") to construct the Tenant
Improvements.
b. Construction by Tenant's Contractor. If Tenant selects Tenant's
-----------------------------------
Contractor to construct the Tenant Improvements pursuant to Paragraph 4.a.ii.
above, the following provisions shall apply:
i. Tenant's Contractor shall be subject to Landlord's prior
written approval, which approval shall not be unreasonably withheld.
ii. Tenant's Contractor shall (1) have substantial recent
experience in the construction of tenant improvements in high-rise office
buildings in downtown San Francisco, (2) be licensed by the State of
California (as evidenced by Tenant's submission to Landlord of Tenant's
Contractor's state license number), and (3) have the capacity to be bonded
by a recognized surety company to assure full performance of the
construction contract for the work shown on the Final Plans (as evidenced
by Tenant's submission to Landlord of a commitment or other writing issued
by a recognized surety company confirming that Tenant's Contractor is
bondable for construction projects having a contract price not less than
the contract price under the construction contract for the Tenant
Improvements).
Tenant shall be responsible for Tenant's Contractor,
subcontractors, suppliers and materialmen (A) utilizing only union labor on
the construction, (B) obtaining Landlord's prior written approval (which
Landlord shall not unreasonably withhold) of all subcontractors to be
utilized in the performance of such construction work, (C) obtaining all
necessary governmental permits and approvals in connection with the Tenant
Improvements (and Landlord shall have no responsibility whatsoever in
connection with obtaining the same) and (D) furnishing to Landlord, prior
to the commencement of any construction in the Premises, certificates of
insurance evidencing insurance with coverage and in form and amount
required by Landlord for the subject contractors' or materialmens'
operations in the Premises, which policies shall name Landlord as an
additional insured. Landlord shall have no responsibility for furnishing
any security services in or about the Building or Premises to safeguard the
construction project or materials in connection therewith, other than that
customarily provided in the Building for its use as an office building.
iii. Following selection of Tenant's Contractor, Tenant shall
promptly enter into a contract with Tenant's Contractor for construction of
the Tenant Improvements. Tenant shall then cause Tenant's Contractor to
promptly commence and diligently pursue to completion the Tenant
Improvements in accordance with the Final Plans. If Tenant requests any
change, addition or alteration in or to the Final Plans ("Changes"), Tenant
shall cause Tenant's Architect to prepare additional plans implementing
such Change and such additional plans shall be submitted to Landlord for
Landlord's prior written approval, which approval shall not be unreasonably
withheld. Tenant's Contractor shall comply with the Building's reasonable
construction procedures and with all applicable laws and governmental
requirements regarding the performance of the work.
c. Construction By Landlord's Contractor. If Tenant selects
-------------------------------------
Landlord's Contractor to construct the Tenant Improvements pursuant to Paragraph
4.a.ii. above, the following provisions shall apply:
i. Construction. As soon as Landlord and Tenant have approved
------------
the Final Plans, Landlord shall cause Landlord's Contractor to commence and
diligently pursue construction of the Tenant Improvements to completion.
Landlord will provide ordinary power wiring to locations shown on the Final
Plans and shall provide and cause Landlord's Contractor to install conduits
as required for Tenant's telephone and computer systems as shown on the
Final Plans, but unless
3
<PAGE>
required by Tenant and specifically indicated on the Final Plans,
Landlord's Contractor shall not install, pull or hook up such wires, supply
jacks or plugs or provide wiring necessary for special conditioned power to
the Premises. The Tenant Improvements shall be constructed by Landlord's
Contractor in conformance with the Final Plans (subject to approved
Changes) and Landlord's Contractor shall comply with applicable
governmental requirements regarding the performance of the work; provided,
however, that the foregoing shall in no event require Landlord's Contractor
to identify and correct any violations of codes or laws reflected in the
Final Plans, it being agreed that, as expressly stated in Paragraph 4.a.i.
hereof, Tenant is responsible for submitting to Landlord Final Plans that
comply with all applicable laws.
Landlord's Contractor's fee for the construction of the
Tenant Improvements shall be as agreed upon by Tenant and Landlord.
ii. Changes. If Tenant requests any Changes to the Final Plans,
-------
Tenant shall cause Tenant's Architect to prepare additional plans
implementing such Change and such plans shall be submitted to Landlord for
Landlord's prior written approval, which approval shall not be unreasonably
withheld. As soon as reasonably possible after the completion of such
additional plans and Landlord's approval thereof, Landlord shall notify
Tenant of the estimated cost of the Change and the estimated affect the
Change will have on the construction schedule for the Tenant Improvements.
Within five (5) business days after receipt of such cost and timing
estimate, Tenant shall notify Landlord in writing whether Tenant approves
the Change. If Tenant approves the Change, Landlord shall proceed with the
Change and the cost of the Change shall be added to the cost of the Tenant
Improvements. If Tenant fails to approve the Change within such five (5)
business day period, construction of the Tenant Improvements shall proceed
as provided in accordance with the Final Plans as they existed prior to the
requested Change.
iii. Punch List Items. Upon notice from Landlord that the Tenant
----------------
Improvements have been completed in accordance With the Final Plans,
subject only to correction or completion of "Punch List" items (which Punch
List Items shall be limited to minor items of incomplete or defective work
or materials or mechanical maladjustments that are of such a nature that
they do not materially interfere with or impair Tenant's use of the
Premises for Tenant's business) Landlord and Tenant shall tour the Premises
and prepare a joint list of Punch List Items. Landlord shall cause
Landlord's Contractor to complete the Punch List items as soon as
reasonably possible.
d. Cost of Tenant Improvements. The cost of the construction and
---------------------------
installation of the Tenant Improvements shall be borne as follows:
i. Landlord's Contribution. Landlord shall contribute toward the
-----------------------
cost of the design, construction and installation of the Tenant
Improvements (including, without limitation, the fee for Landlord's
Contractor or Tenant's Contractor, whichever is applicable, and the
Construction Management Fee (as defined below) if applicable) an amount not
to exceed Five Hundred Thirty-Six Thousand Nine Hundred Forty Dollars
($536,940.00)("Landlord's Contribution"); provided, however that not more
than Seventy-One Thousand Five Hundred Ninety-Two Dollars ($71,592.00) of
Landlord's Contribution may be applied to Tenant's reasonable space
planning, architectural and engineering costs for the design of the Tenant
Improvements. No portion of Landlord's Contribution may be applied to the
cost of equipment, trade fixtures, moving expenses, furniture, signage or
free rent.
Tenant shall pay for all costs of the construction of the Tenant
Improvements in excess of Landlord's Contribution (the "Excess Cost").
Based on the estimated cost of the construction of the Tenant Improvements
(inclusive of the applicable fees referenced above)(which estimated cost
shall be mutually and reasonably agreed upon by Landlord and Tenant, and is
referred to hereinafter as the "Estimated Costs"), the prorata share of the
Estimated Costs payable by Landlord and Tenant shall be determined and an
appropriate percentage share established for each (a "Share of Costs").
Tenant and Landlord shall fund the cost of such work (including the
applicable portion of the applicable fees) as the same is performed, in
accordance with their respective Share of Costs for such work, with
Tenant's payments being made to Landlord's Contractor within thirty (30)
days of written demand if Landlord's Contractor constructs the Tenant
Improvements. At such time as Landlord's Contribution has been entirely
disbursed, Tenant shall pay the remaining Excess Cost, if any, which
payments shall be made in installments as construction progresses in the
same manner as Tenant's payments of Tenant's Share of Costs were paid.
If Tenant's Contractor constructs the Tenant Improvements, the
following provisions shall govern the disbursement of Landlord's
Contribution. Landlord shall disburse Landlord's Contribution (with each
payment being calculated in accordance with Landlord's Share of Costs as
provided above) directly to Tenant's Contractor, or subcontractors, or to
Tenant as Landlord and Tenant may agree, in monthly installments. Each
disbursement shall be conditioned upon Landlord's receipt of invoices to be
furnished by Tenant covering work actually performed, construction in place
and materials delivered to the site (as may be applicable). No payment will
4
<PAGE>
be made for materials or supplies not on site. To the extent permitted by
law, Landlord may withhold the amount of any and all retention percentages
provided for in original contracts or subcontracts until the earlier of (i)
the expiration of the applicable lien period or (ii) Landlord's receipt of
a waiver of lien rights from Tenant's Contractor, subcontractors or
suppliers whose invoices are applicable to the respective disbursement for,
and/or on account of, the work or materials covered by such invoice. Tenant
shall pay Tenant's Share of Costs directly to the contractor or suppliers
involved and shall furnish to Landlord copies of receipted invoices
therefor and such waivers of lien rights as Landlord may reasonably
require.
Notwithstanding the foregoing, Landlord shall retain from the amount
of Landlord's Contribution, as compensation to Landlord for review of the
Final Plans and for construction inspection, administration and management
with regard to the Tenant Improvements, a sum (the "Construction Management
Fee") equal to Twenty-Four Thousand Dollars ($24,000.00). At the time
Landlord makes any disbursement of Landlord's Contribution, Landlord shall
retain from Landlord's Contribution, as a partial payment of the
Construction Management Fee, a proportionate amount of the Construction
Management Fee based upon Landlord's reasonable estimation of the amount
required to be withheld from each disbursement in order to ensure that the
entire Construction Management Fee is retained over the course of
construction on a prorata basis. At such time as Landlord's Contribution
has been entirely disbursed, Tenant shall, within thirty (30) days of
written demand, pay to Landlord the remainder, if any, of the Construction
Management Fee not yet paid to Landlord.
ii. Landlord's Work. In additional to Landlord's Contribution,
---------------
Landlord shall pay for the entire cost of Landlord's Work described in
Paragraph 4.e. below.
e. Landlord's Work. Regardless of whether Tenant's Contractor or
---------------
Landlord's Contractor constructs the Tenant Improvements, Landlord shall cause
the following work ('Landlord's Work") to be performed at Landlord's cost:
i. Perform the work, if any, required to bring the restrooms on
the 11th and 12th floors of the Building into compliance
with Title 24 accessibility requirements.
ii. Perform the work, if any, required to bring the common areas
of the Building that are reasonably anticipated to be in
Tenant's path of travel, to comply with Title 24
accessibility requirements in effect as of the Commencement
Date.
Landlord's Work shall be performed concurrently with the construction of the
Tenant Improvements.
5. Monthly Rent.
------------
a. On or before the first day of each calendar month during the term
hereof, Tenant shall pay to Landlord, as monthly rent for the Premises, the
Monthly Rent specified in Paragraph 2 above. If the term of this Lease commences
on a day other than the first day of a calendar month, or terminates on a day
other than the last day of a calendar month, then the Monthly Rent payable for
such partial month shall be appropriately prorated on the basis of a thirty
(30)-day month. Monthly Rent and the Additional Rent specified in Paragraph 7
shall be paid by Tenant to Landlord, in advance, without deduction, offset,
prior notice or demand, in immediately available funds of lawful money of the
United States of America, or by good cheek as described below, at the office of
Shorenstein Company, L.P., at 555 California Street, 14th floor, San Francisco,
California 94104, or to such other person or at such other place as Landlord may
from time to time designate in writing not less than five (5) business days in
advance. Payments made by cheek must be drawn either on a California financial
institution or on a financial institution that is a member of the federal
reserve system. Notwithstanding the foregoing, Tenant shall pay to Landlord with
execution of this Lease an amount equal to one (1) month's Monthly Rent
hereunder, which amount shall be applied to the Monthly Rent first due and
payable hereunder.
b. All amounts payable by Tenant to Landlord under this Lease, or
otherwise payable in connection with Tenant's occupancy of the Premises, in
addition to the Monthly Rent hereunder and Additional Rent under Paragraph 7,
shall constitute rent owed by Tenant to Landlord hereunder.
c. Any rent not paid by Tenant to Landlord when due shall bear
interest from the date due to the date of payment by Tenant at an annual rate of
interest (the "Interest Rate") equal to the lesser of (i) the maximum annual
interest rate allowed by law on such due date for business loans (not primarily
for personal, family or household purposes) not exempt from the usury law, or
(ii) a rate equal to the sum of six (6) percentage points over the six-month
United States Treasury bill rate (the "Treasury Rate") in effect from time to
time during such delinquency (or if there is no such publicly announced rate,
the rate quoted by the San Francisco Main Office of Bank of America, NT&SA, or
any successor bank thereto, in pricing ninety (90)-day commercial loans to
substantial commercial borrowers). Failure by Tenant to pay rent when due,
including any interest accrued under this subparagraph, shall constitute an
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Event of Default (as defined in Paragraph 25 below) giving rise to all the
remedies afforded Landlord under this Lease and at law for nonpayment of rent.
d. No security or guaranty which may now or hereafter be furnished
to Landlord for the payment of rent due hereunder or for the performance by
Tenant of the other terms of this Lease shall in any way be a bar or defense to
any of Landlord's remedies under this Lease or at law.
6. Lease Security. As security for the performance by Tenant of
--------------
Tenant's obligations hereunder, Tenant shall cause to be delivered to Landlord
concurrently with the execution of this Lease by Tenant, an original irrevocable
standby letter of credit (the "Letter of Credit") in the amount of Five Hundred
Thousand Dollars ($500,000.00), which Landlord may draw upon to cure any default
under this Lease or to compensate Landlord for any damage Landlord incurs as a
result of Tenant's failure to perform any of its obligations hereunder. Any such
draw on the Letter of Credit shall not constitute a waiver of any other rights
of Landlord with respect to such default. The Letter of Credit shall be issued
by a major commercial bank reasonably acceptable to Landlord with a San
Francisco service and claim point for the Letter of Credit, have an expiration
date not earlier than the Expiration Date (or, in the alternative, have a term
of not less than one (1) year and be automatically renewable for an additional
one (1) year period unless notice of non-renewal is given by the issuer to
Landlord not later than sixty (60) days prior to the expiration thereof). The
Letter of Credit shall provide for payment to Landlord upon the issuer's receipt
of a sight draft from Landlord together with Landlord's certificate certifying
that the requested sum is due and payable from Tenant and Tenant has failed to
pay, and with no other conditions, and otherwise be in form and content
satisfactory to Landlord. If the Letter of Credit has an expiration date earlier
than the Expiration Date, then throughout the term hereof (including any renewal
or extension of the term) Tenant shall provide evidence of renewal of the Letter
of Credit to Landlord at least sixty (60) days prior to the date the Letter of
Credit expires. If Landlord draws on the Letter of Credit pursuant to the terms
hereof, Tenant shall immediately replenish the Letter of Credit or provide
Landlord with an additional letter of credit conforming to the requirements of
this paragraph so that the amount available to Landlord from the Letter of
Credit(s) provided hereunder is $500,000.00
Tenant's failure to deliver any replacement, additional or extension of
the Letter of Credit, or evidence of renewal of the Letter of Credit, within the
time specified under this Lease shall entitle Landlord to draw upon the full
amount of the Letter of Credit then in effect and (a) Landlord shall hold the
drawn amount as security for Tenant's obligations under this Lease and no
interest shall accrue to Tenant with regard to such sums so held by Landlord,
(b) Landlord may (but shall not be required to) use the sums so held or any
portion thereof to cure any Event of Default or to compensate Landlord for any
damage Landlord incurs as a result of Tenant's failure to perform any of its
covenants or obligations hereunder, it being understood that any use of such
sums shall not constitute a bar or defense to any of Landlord's remedies under
this Lease or at law (and if Landlord so uses all or part of the security
deposit, then upon written notice from Landlord to Tenant specifying the amount
of the security deposit so utilized by Landlord and the particular purpose for
which such amount was applied, Tenant shall immediately deposit with Landlord an
amount sufficient to return the security deposit to an amount equal to one
hundred percent (100%) of the security deposit held by Landlord prior to such
application of the security deposit; and Tenant's failure to make such payment
to Landlord within five (5) business days of receipt of Landlord's notice shall
constitute an Event of Default, (e) if Tenant is not in default at the
expiration or termination of this Lease, Landlord shall return to Tenant the
balance of such sums so held by Landlord; provided, however, that in no event
shall any such return be construed as an admission by Landlord that Tenant has
performed all of its covenants and obligations under the Lease, and (d) no
holder of a Superior Interest (as defined in Paragraph 21 below), nor any
purchaser at any judicial or private foreclosure sale of the Real Property or
any portion thereof, shall be responsible to Tenant for the sums so held by
Landlord unless and only to the extent such holder or purchaser shall have
actually received the same.
Tenant may from time to time during the Lease term (but not more than
once during any twelve (12) month period) request that Landlord review Tenant's
then current financial statement to determine if Landlord will continue to
require the Letter of Credit as security for Tenant's obligations under this
Lease. Tenant acknowledges that Landlord shall in no event be required to
eliminate the requirement that Tenant provide the Letter of Credit, it being
agreed that Landlord's sole obligation under this grammatical paragraph is to
review the financial statement submitted by Tenant.
If, at any time during the term hereof while the Letter of Credit is in
effect, Tenant becomes a publicly held corporation, then Tenant may replace the
Letter of Credit with a cash security deposit equal to One Hundred Ten Thousand
Three Hundred Seventy-Two Dollars ($110,372.00). Upon Landlord's receipt from
Tenant of (i) reasonable documentation evidencing that Tenant has become a
publicly held company and (ii) the $110,372.00 security deposit, Landlord shall
return to Tenant the Letter of Credit held by Landlord. If Tenant does
substitute a cash security deposit for the Letter of Credit, the provisions of
(a) through (d) of the second grammatical paragraph of this Paragraph 6 shall
apply thereto. Once the Letter of Credit is replaced with the security deposit,
the security deposit shall remain in effect throughout the remainder of the
Lease term, and Landlord shall be under no further obligation to review Tenant's
financial statements.
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7. Additional Rent: Increases in Operating Expenses and Tax Expenses.
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a. Operating Expenses. Tenant shall pay to Landlord, at the times
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hereinafter set forth, Tenant's Share, as specified in Paragraph 2.e. above, of
any increase in the Operating Expenses (as defined below) incurred by Landlord
in each calendar year subsequent to the Base Year specified in Paragraph 2.f.
above, over the Operating Expenses incurred by Landlord during the Base Year.
The amounts payable under this Paragraph 7.a. and Paragraph 7.b. below are
termed "Additional Rent" herein.
The term "Operating Expenses" shall mean the total costs and expenses incurred
by Landlord in connection with the management, operation, maintenance, repair
and ownership of the Real Property, including, without limitation, the following
costs: (1) salaries, wages, bonuses and other compensation (including
hospitalization, medical, surgical, retirement plan, pension plan, union dues,
life insurance, including group life insurance, welfare and other fringe
benefits, and vacation, holidays and other paid absence benefits) relating to
employees of Landlord or its agents engaged in the operation, repair, or
maintenance of the Real Property; (2) payroll, social security, workers'
compensation, unemployment and similar taxes with respect to such employees of
Landlord or its agents, and the cost of providing disability or other benefits
imposed by law or otherwise, with respect to such employees; (3) the cost of
uniforms (including the cleaning, replacement and pressing thereof) provided to
such employees; (4) premiums and other charges incurred by Landlord with respect
to fire, other casualty, rent and liability insurance, any other insurance as is
deemed necessary or advisable in the reasonable judgment of Landlord, or any
insurance required by the holder of any Superior Interest (as defined in
Paragraph 21 below), and, after the Base Year, costs of repairing an insured
casualty to the extent of the deductible amount under the applicable insurance
policy, or, in the event of earthquake damage sustained during any period that
Landlord does not actually carry earthquake insurance, the costs of repairing
the earthquake damage up to the amount of the deductible that Landlord would
have paid had Landlord actually carried earthquake insurance at the time of the
earthquake (provided that Landlord may include in Operating Expenses the amount
of Landlord's deductible (or deemed deductible, with regard to repairs of
earthquake damage sustained during any period that Landlord does not actually
carry earthquake insurance) only to the extent such deductible (or deemed
deductible) does not materially exceed the customary range of deductibles for
comparable first-class office buildings in the San Francisco financial district;
and provided, further, if the Real Property sustains earthquake damage, and
Tenant's Share of the deductible paid by Landlord under Landlord's earthquake
policy (or deemed deductible, in the event Landlord does not carry earthquake
insurance) is more than $110,372.00, then Tenant may, at Tenant's option, either
(i) pay the entire amount of Tenant's Share of the deductible in the manner
required by application of this Paragraph 7 or (ii) pay only $110,372.00 at the
time Tenant's payment is due pursuant to the provisions of this Paragraph 7,
with the remaining portion of Tenant's Share of the deductible to be paid by
Tenant by amortizing such amount over the remaining term of the Lease, which
amortization shall be on a straight line basis, with monthly payments, at an
interest rate equal to the rate (as of the commencement of the amortization
period) quoted by the San Francisco Main Office of Bank of America, NT&SA, or
any successor bank thereto, in pricing commercial loans of a duration equal to
the subject amortization period to substantial commercial borrowers); (5) water
charges and sewer rents or fees; (6) license, permit and inspection fees; (7)
sales, use and excise taxes on goods and services purchased by Landlord in
connection with the operation, maintenance or repair of the Real Property and
Building systems and equipment; (8) telephone, telegraph, postage, stationery
supplies and other expenses incurred in connection with the operation,
maintenance, or repair of the Real Property; (9) management fees and expenses;
(10) costs of repairs to and maintenance of the Real Property, including
building systems and appurtenances thereto and normal repair and replacement of
worn-out equipment, facilities and installations, but excluding the replacement
of major building systems (except to the extent provided in (16) and (17)
below); (11) fees and expenses for janitorial, window cleaning, guard,
extermination, water treatment, rubbish removal, plumbing and other services and
inspection or service contracts for elevator, electrical, mechanical and other
building equipment and systems or as may otherwise be necessary or proper for
the operation, repair or maintenance of the Real Property; (12) costs of
supplies, tools, materials, and equipment used in connection with the operation,
maintenance or repair of the Real Property; (13) accounting, legal and other
professional fees and expenses; (14) fees and expenses for painting the exterior
or the public or common areas of the Building and the cost of maintaining the
sidewalks, landscaping and other common areas of the Real Property; (15) costs
and expenses for electricity, chilled water, air conditioning, water for
heating, gas, fuel, steam, heat, lights, power and other energy related
utilities required in connection with the operation, maintenance and repair of
the Real Property; (16) the cost of any capital improvements made by Landlord to
the Real Property or capital assets acquired by Landlord after the Base Year in
order to comply with any local, state or federal law, ordinance, role,
regulation, code or order of any governmental entity or insurance requirement
(collectively, "Legal Requirement") with which the Real Property was not
required to comply during the Base Year, or to comply with any amendment or
other change to the enactment or interpretation of any Legal Requirement from
its enactment or interpretation during the Base Year; (17) the cost of any
capital improvements made by Landlord to the Building or capital assets acquired
by Landlord after the Base Year for the protection of the health and safety of
the occupants of the Real Property or that are designed to reduce other
Operating Expenses; (18) the cost of furniture, draperies, carpeting,
landscaping and other customary and ordinary items of personal property
(excluding paintings, sculptures and other works of art) provided by Landlord
for use in common areas of the Building or in the Building office (to the extent
that such Building office is dedicated to the operation and
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management of the Real Property); (19) any expenses and costs resulting from
substitution of work, labor, material or services in lieu of any of the above
itemizations, or for any additional work, labor, services or material resulting
from compliance with any Legal Requirement applicable to the Real Property or
any parts thereof; and (20) Building office rent or rental value; provided that
the rent or rental value shall be for premises not to exceed One Thousand Five
Hundred (1,500) rentable square feet of space and the rent or rental value shall
not to exceed the fair market rent for the subject space. With respect to the
costs of items included in Operating Expenses under (16) and (17), such costs
shall be amortized over a reasonable period (which period shall be determined by
Landlord in accordance with generally accepted property management practices),
together with interest on the unamortized balance at a rate per annum equal to
three (3) percentage points over the Treasury Rate charged at the time such item
is constructed or acquired, or, if Landlord borrows funds to finance the
construction or acquisition of the subject item, at the actual interest rate
paid by Landlord on such funds borrowed for the purpose of constructing or
acquiring such item, but in either case not more than the maximum rate permitted
by law at the time such item is constructed or acquired.
Operating Expenses shall not include the following: (i) depreciation
on the Building or equipment or systems therein; (ii) principal or interest
payments on loans secured by mortgages or trust deed on the Real Property; (iii)
rental under any ground or underlying lease; (iv) interest (except as expressly
provided in this Paragraph 7.a.); (v) Tax Expenses (as defined in Paragraph 7.b.
below); (vi) attorneys' fees and expenses incurred in connection with lease
negotiations with prospective Building tenants or disputes with Building
tenants; (vii) the cost (including any amortization thereof) of any improvements
or alterations which would be properly classified as capital expenditures
according to generally accepted property management practices (except to the
extent expressly included in Operating Expenses pursuant to Paragraphs 7.a.(16)
and (17); (viii) the cost of decorating, improving for tenant occupancy,
painting or redecorating portions of the Building to be demised to tenants; (ix)
salaries of executives and officers above the function of Director of Property
Management, or the cost of labor and employees with respect to personnel not
located at the Building on a full-time basis unless such costs are appropriately
allocated between the Building and the other responsibilities of such personnel;
(x) advertising; (xi) real estate broker's or other leasing commissions, rental
concessions, build-outs for tenants and lease buy-outs; (xii) penalties or other
costs incurred due to a violation by Landlord, as determined by written
admission, stipulation, final judgment or arbitration award, of any of the terms
and conditions of this Lease or any other lease relating to the Building except
to the extent such costs reflect costs that would have been incurred by Landlord
absent such violation; (xiii) subject to the Operating Expense inclusions set
forth in item (4) above, repairs and other work occasioned by fire, windstorm or
other casualty; (xiv) costs, penalties or fines arising from Landlord's
violation of any applicable governmental role or authority except to the extent
such costs reflect costs that would have been incurred by Landlord absent such
violation; (xv) overhead and profit increments paid to subsidiaries or
affiliates of Landlord for management or other services on or to the Building or
for supplies or other materials to the extent that the cost of the services,
supplies or materials materially exceed the amounts normally payable for similar
goods and services under similar circumstances (taking into account the market
factors in effect on the date any relevant contracts were negotiated) in first
class buildings in the San Francisco Financial District; (xvi) the cost of
services or facilities made available at no special cost to any tenant in the
Building but not to Tenant; (xvii) costs associated with the operation of the
business of the partnership or corporation which constitutes Landlord, as the
same are distinguished from the costs of the operation of the Real Property by
Landlord; (xviii) political or charitable contributions; (xix) costs solely
attributable to the garage in the Building (provided, however, that the cost of
providing utilities to the garage shall be included in Operating Expenses); (xx)
the cost of any service for which Tenant pays directly to third parties or for
which Landlord is reimbursed by tenants (other than by application of provisions
such as this Paragraph 7); (xxi) the cost of damage and repairs necessitated by
the deliberate misconduct of Landlord; (xxii) any costs incurred in installing,
operating, maintaining or owning any specialty not normally installed, operated
and maintained in buildings comparable to the Building and not necessary for
Landlord's operation, repair, maintenance and providing of required services for
the Building, including, but not limited to any observatory, broadcasting
facility (other than the Building's music system and life support systems),
luncheon club, athletic or recreational club; (xxiii) the costs of purchasing or
leasing any sculpture, paintings or other works of art; or (xxiv) costs incurred
in large scale or material (as opposed to minor or incidental) cleaning-up or
removing hazardous materials from the Real Property pursuant to government
mandate.
b. Tax Expenses. Tenant shall pay to Landlord as Additional Rent
------------
under this Lease, at the times hereinafter set forth, Tenant's Share, as
specified in Paragraph 2.e. above, of any increase in Tax Expenses (as defined
below) incurred by Landlord in each calendar year over Tax Expenses incurred by
Landlord during the Base Tax Year. Notwithstanding the foregoing, if any
reassessment, reduction or recalculation of any item included in Tax Expenses
during the term results in a reduction of Tax Expenses, then for purposes of
calculating Tenant's Share of increases in Tax Expenses from and after the
calendar year in which such adjustment occurs, Tax Expenses for the Base Tax
Year shall be adjusted to reflect such reduction.
The term "Tax Expenses" shall mean all taxes, assessments (whether
general or special), excises, transit charges, housing fund assessments or other
housing charges, improvement districts, levies
8
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or fees, ordinary or extraordinary, unforeseen as well as foreseen, of any kind,
which are assessed, levied, charged, confirmed or imposed on the Real Property,
on Landlord with respect to the Real Property, on the act of entering into
leases of space in the Real Property, on the use or occupancy of the Real
Property or any part thereof, with respect to services or utilities consumed in
the use, occupancy or operation of the Real Property, on any improvements,
fixtures and equipment and other personal property of Landlord located in the
Real Property and used in connection with the operation of the Real Property, or
on or measured by the rent payable under this Lease or in connection with the
business of renting space in the Real Property, including, without limitation,
any gross income tax or excise tax levied with respect to the receipt of such
rent, by the United States of America, the State of California, the City and
County of San Francisco, any political subdivision, public corporation, district
or other political or public entity or public authority, and shall also include
any other tax, fee or other excise, however described, which may be levied or
assessed in lieu of, as a substitute (in whole or in part) for, or as an
addition to, any other Tax Expense. Tax Expenses shall include reasonable
attorneys' fees, costs and disbursements incurred in connection with proceedings
to contest, determine or reduce Tax Expenses. If it shall not be lawful for
Tenant to reimburse Landlord for any increase in Tax Expenses as defined herein,
the Monthly Rent payable to Landlord prior to the imposition of such increases
in Tax Expenses shall be increased to net Landlord the same net Monthly Rent
after imposition of such increases in Tax Expenses as would have been received
by Landlord prior to the imposition of such increases in Tax Expenses.
Tax Expenses shall not include income, franchise, transfer, inheritance
or capital stock taxes, unless, due to a change in the method of taxation, any
of such taxes is levied or assessed against Landlord in lieu of, as a substitute
(in whole or in part) for, or as an addition to, any other charge which would
otherwise constitute a Tax Expense.
c. Adjustment for Occupancy Factor. Notwithstanding any other
-------------------------------
provision herein to the contrary, in the event the Building is not fully
occupied during the Base Year or any calendar year during the term after the
Base Year, an adjustment shall be made by Landlord in computing Operating
Expenses for such year so that the Operating Expenses shall be computed for such
year as though the Building had been fully occupied during such year. In
addition, if any particular work or service includable in Operating Expenses is
not furnished to a tenant who has undertaken to perform such work or service
itself, Operating Expenses shall be deemed to be increased by an amount equal to
the additional Operating Expenses which would have been incurred if Landlord had
furnished such work or service to such tenant. The parties agree that statements
in this Lease to the effect that Landlord is to perform certain of its
obligations hereunder at its own or sole cost and expense shall not be
interpreted as excluding any cost from Operating Expenses or Tax Expenses if
such cost is an Operating Expense or Tax Expense pursuant to the terms of this
Lease.
d. Intention Regarding Expense Pass-Through. It is the intention of
----------------------------------------
Landlord and Tenant that the Monthly Rent paid to Landlord throughout the term
of this Lease shall be absolutely net of all increases, respectively, in Tax
Expenses and Operating Expenses over, respectively, Tax Expenses for the Base
Tax Year and Operating Expenses for the Base Year, and the foregoing provisions
of this Paragraph 7 are intended to so provide.
e. Notice and Payment. On or before the first day of each calendar
------------------
year during the term hereof subsequent to the Base Year, or as soon as
practicable thereafter, Landlord shall give to Tenant notice of Landlord's
estimate of the Additional Rent, if any, payable by Tenant pursuant to
Paragraphs 7.a. and 7.b. for such calendar year subsequent to the Base Year. On
or before the first day of each month during each such subsequent calendar year,
Tenant shall pay to Landlord one-twelfth (1/12th) of the estimated Additional
Rent; provided, however, that if Landlord's notice is not given prior to the
first day of any calendar year Tenant shall continue to pay Additional Rent on
the basis of the prior year's estimate until the month after Landlord's notice
is given. If at any time it appears to Landlord that the Additional Rent payable
under Paragraphs 7.a. and/or 7.b. will vary from Landlord's estimate by more
than five percent (5%), Landlord may, by written notice to Tenant, revise its
estimate for such year, and subsequent payments by Tenant for such year shall be
based upon the revised estimate. On the first monthly payment date after any new
estimate is delivered to Tenant, Tenant shall also pay any accrued cost
increases, based on such new estimate.
f. Annual Accounting. Landlord shall maintain adequate records of the
-----------------
Operating Expenses and Tax Expenses in accordance with generally accepted
property management practices. Within ninety (90) days after the close of each
calendar year subsequent to the Base Year, or as soon after such ninety (90) day
period as practicable, Landlord shall deliver to Tenant a statement of the
Additional Rent payable under Paragraphs 7.a. and 7.b. for such year. The
statement shall be based on the results of an audit of the operations of the
Building prepared for the applicable year by a nationally recognized certified
public accounting firm selected by Landlord. Upon Tenant's request, Landlord
shall promptly deliver to Tenant a copy of the auditor's statement on which
Landlord's annual statement is based and such other information regarding the
annual statement as may be reasonably required by Tenant to ascertain Landlord's
compliance with this Paragraph 7. Landlord's annual statement shall be final and
binding upon Landlord and Tenant unless either party, within ninety (90) days
after Tenant's receipt thereof, shall contest any item therein by giving written
notice to the other, specifying each item contested and the
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reason therefor. Notwithstanding the foregoing, the Tax Expenses included in any
such annual statement may be modified by any subsequent adjustment or
retroactive application of Tax Expenses affecting the calculation of such Tax
Expenses. Provided that the issue is raised by either party within the
aforementioned ninety (90) day period, Landlord and Tenant shall endeavor in
good faith to promptly resolve any disagreement between the parties regarding
the subject annual statement. If the annual /'statement shows that Tenant's
payments of Additional Rent for such calendar year pursuant to Paragraph 7.e.
above exceeded Tenant's obligations for the calendar year, Landlord shall, at
Tenant's option, either (1) credit the excess to the next succeeding
installments of estimated Additional Rent or (2) pay the excess to Tenant within
thirty (30) days after delivery of such statement. If the annual statement shows
that Tenant's payments of Additional Rent for such calendar year pursuant to
Paragraph 7.e. above were less than Tenant's obligation for the calendar year,
Tenant shall pay the deficiency to Landlord within thirty (30) days after
delivery of such statement.
g. Proration for Partial Lease Year. If this Lease terminates on a
--------------------------------
clay other than the last clay of a calendar year, the Additional Rent payable by
Tenant pursuant to this Paragraph 7 applicable to the calendar year in which
this Lease terminates shall be prorated on the basis that the number of days
from the commencement of such calendar year to and including such termination
date bears to three hundred sixty-five (365).
8. Use of Premises; Compliance with Law.
------------------------------------
a. Use of Premises. The Premises shall be used solely for general
---------------
office purposes which are consistent with the operation of the Building as a
first-class office building, which do not materially increase (beyond that which
would be typical for use of the Premises by a general office user typical of
first-class financial district office buildings) (a) the operating costs for the
Building, (b) the burden on the Building services, or (c) the foot traffic,
elevator usage or security concerns in the Building, and which do not create an
increased probability of the comfort and/or safety of the Landlord or other
tenants of the Building being compromised or reduced, or which may conflict with
any exclusive uses granted to other tenants of the Real Property, or with the
terms of any easement, covenant, condition or restriction or other agreement
affecting the Real Property, and for no other use or purpose without the prior
written consent of Landlord, which may be withheld in Landlord's sole discretion
(for example, but not exclusively, Landlord's consent shall be required for and
may be denied with respect to, use of the Premises for a school or training
facility, an entertainment, sports or recreation facility, retail sales to the
public, or a consulate or similar office).
Tenant shall not do or suffer or permit anything to be done in or about
the Premises or the Real Property, nor bring or keep anything therein, which
would in any way subject Landlord, Landlord's agents or the holder of any
Superior Interest (as defined in Paragraph 21) to any liability, increase the
premium rate of or affect any fire, casualty, liability, rent or other insurance
relating to the Real Property or any of the contents of the Building, or cause a
cancellation of, or give rise to any defense by the insurer to any claim under,
or conflict with, any policies for such insurance. If any act or omission of
Tenant results in any such increase in premium rates, Tenant shall pay to
Landlord upon demand the amount of such increase. Tenant shall not do or suffer
or permit anything to be done in or about the Premises or the Real Property
which will in any way obstruct or interfere with the rights of other tenants or
occupants of the Building or injure or annoy them, or use or suffer or permit
the Premises to be used for any immoral, unlawful or objectionable purpose, nor
shall Tenant cause, maintain, suffer or permit any nuisance in, on or about the
Premises or the Real Property. Without limiting the foregoing, no loudspeakers
or other similar device which can be heard outside the Premises shall, without
the prior written approval of Landlord, be used in or about the Premises. Tenant
shall not commit or suffer to be committed any waste in, to or about the
Premises.
Tenant agrees not to employ any person, entity or contractor for any work
in the Premises (including moving Tenant's equipment and furnishings in, out or
around the Premises) whose presence may give rise to a labor or other
disturbance in the Building and, if necessary to prevent such a disturbance in a
particular situation, Landlord may require Tenant to employ union labor for the
work.
b. Compliance with Law. Tenant shall not do or permit anything to be
-------------------
done in or about the Premises which will in any way conflict with any Legal
Requirement (as defined in Paragraph 7.a.(16) above) now in force or which may
hereafter be enacted. Tenant, at its sole cost and expense, shall promptly
comply with all such present and future Legal Requirements relating to the
condition, use or occupancy of the Premises, and shall perform all work to the
Premises or other portions of the Real Property required to effect such
compliance (or, at Landlord's election, Landlord may perform such work at
Tenant's cost). Notwithstanding the foregoing, however, Tenant shall not be
required to perform any structural changes to the Premises or other portions of
the Real Property unless such changes are related to or affected or triggered by
(i) Tenant's Alterations (as defined in Paragraph 9 below), (ii) Tenant's
particular use of the Premises (as opposed to Tenant's use of the Premises for
general office purposes in a normal and customary manner), (iii) Tenant's
particular employees or employment practices, or (iv) the construction of
initial improvements to the Premises (except that Tenant shall have no
responsibility for performing Landlord's Work, as defined in Paragraph 4.e.
above). The judgment of any court of competent
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jurisdiction or the admission of Tenant in an action against Tenant, whether or
not Landlord is a party thereto, that Tenant has violated any Legal Requirement
shall be conclusive of that fact as between Landlord and Tenant. Tenant shall
immediately furnish Landlord with any notices received from any insurance
company or governmental agency or inspection bureau regarding any unsafe or
unlawful conditions within the Premises or the violation of any Legal
Requirement.
c. Hazardous Materials. Tenant shall not cause or permit the
-------------------
storage, use, generation, release, handling or disposal (collectively,
"Handling") of any Hazardous Materials (as defined below), in, on, or about the
Premises or the Real Property by Tenant or any agents, employees, contractors,
licensees, subtenants, customers, guests or invitees of Tenant (collectively
with Tenant, "Tenant Parties"), except that Tenant shall be permitted to use
normal quantities of office supplies or products (such as copier fluids or
cleaning supplies) customarily used in the conduct of general business office
activities ("Common Office Chemicals"), provided that the Handling of such
Common Office Chemicals shall comply at all times with all Legal Requirements,
including Hazardous Materials Laws (as defined below). Notwithstanding anything
to the contrary contained herein, however, in no event shall Tenant permit any
usage of Common Office Chemicals in a manner that may cause the Premises or the
Real Property to be contaminated by any Hazardous Materials or in violation of
any Hazardous Materials Laws. Tenant shall immediately advise Landlord in
writing of (a) any and all enforcement, cleanup, remedial, removal, or other
governmental or regulatory actions instituted, completed, or threatened pursuant
to any Hazardous Materials Laws relating to any Hazardous Materials affecting
the Premises; and (b) all claims made or threatened by any third party against
Tenant, Landlord, the Premises or the Real Property relating to damage,
contribution, cost recovery, compensation, loss, or injury resulting from any
Hazardous Materials on or about the Premises. Without Landlord's prior written
consent (which consent may be withheld in Landlord's sole discretion), Tenant
shall not take any remedial action or enter into any agreements or settlements
in response to the presence of any Hazardous Materials in, on, or about the
Premises. Tenant shall be solely responsible for and shall indemnify, defend and
hold Landlord and all other Indemnitees (as defined in Paragraph 14.b. below),
harmless from and against all Claims (as defined in Paragraph 14.b. below),
arising out of or in connection with, or otherwise relating to (i) any Handling
of Hazardous Materials by any Tenant Party or Tenant's breach of its obligations
hereunder, or (ii) any removal, cleanup, or restoration work and materials
necessary to return the Real Property or any other property of whatever nature
located on the Real Property to their condition existing prior to the Handling
of Hazardous Materials in, on or about the Premises. Tenant's obligations under
this paragraph shall survive the expiration or other termination of this Lease.
For purposes of this Lease, "Hazardous Materials" means any explosive,
radioactive materials, hazardous wastes, or hazardous substances, including
without limitation asbestos containing materials, PCB's, CFC's, or substances
defined as "hazardous substances" in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601-9657;
the Hazardous Materials Transportation Act of 1975, 49 U.S.C. Section 1801-1812;
the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901-6987;
or any other Legal Requirement regulating, relating to, or imposing liability or
standards of conduct concerning any such materials or substances now or at any
time hereafter in effect (collectively, "Hazardous Materials Laws").
d. Applicability of Paragraph. The provisions of this Paragraph 8
--------------------------
are for the benefit of Landlord, the holder of any Superior Interest (as defined
in Paragraph 21 below), and the other Indemnitees only and are not nor shall
they be construed to be for the benefit of any tenant or occupant of the
Building.
9. Alterations and Restoration.
---------------------------
a. Tenant shall not make or permit to be made any alterations,
modifications, additions, decorations or improvements to the Premises, or any
other work whatsoever that would directly or indirectly involve the penetration
or removal (whether permanent or temporary) of, or require access through, in,
under, or above any floor, wall or ceiling, or surface or coveting thereof in
the Premises (collectively, "Alterations"), except as expressly provided in this
Paragraph 9. Tenant shall have the right, without Landlord's consent, to make
any Alteration to the Premises, provided that (a) the Alteration is decorative
in nature (such as paint, carpet or other wall or floor finishes, partitions or
other such work), (b) Tenant provides Landlord with five (5) business days'
advance notice of the commencement of any such Alteration, (e) such Alteration
does not affect the Building's electrical, mechanical or HVAC systems or any
part of the Building other than the Premises, (d) the work will not decrease the
value of the Premises, does not require a building permit or other governmental
permit, uses only first-class materials and is performed in a workmanlike manner
and in accordance with all applicable Legal Requirements, (e) the work does not
involve opening the ceiling of the Premises and (f) the work does not involve
the Building's asbestos procedures. At the time Tenant notifies Landlord of any
such work, Tenant shall give Landlord a copy of Tenant's plans for the work. If
the Alterations are of such a nature that formal plans will not be prepared for
the work, Tenant shall provide Landlord with a reasonably specific description
of the work. If Tenant desires any Alteration that is not covered by the second
sentence of this grammatical paragraph, Tenant must obtain Landlord's prior
written approval of such Alteration, which approval Landlord agrees, shall not
be unreasonably withheld.
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All Alterations shall be made at Tenant's sole cost and expense
(including the expense of complying with all present and future Legal
Requirements, including those regarding asbestos, if applicable, and any other
work required to be performed in other areas within or outside the Premises by
reason of the Alterations). Alterations shall be made, at Tenant's election, by
Landlord or by a contractor reasonably approved by Landlord. If Tenant hires
Landlord to perform the Alteration, Landlord's contractor shall be entitled to
receive a fee as negotiated by Tenant and Landlord. If Landlord does not perform
the work pursuant to the above, Tenant shall pay Landlord on demand prior to or
during the course of such construction an amount (the "Alteration Operations
Fee") equal to five percent (5%) of the total cost of the Alteration (and for
purposes of calculating the Alteration Operations Fee, such cost shall not
include architectural, engineering or permit fees) as compensation to Landlord
for electrical energy consumed in connection with the work, freight elevator
operation, additional cleaning expenses, additional security services, and for
other miscellaneous costs incurred by Landlord as result of the work.
All such work shall be performed diligently and in a first-class
workmanlike manner and in accordance with plans and specifications approved by
Landlord, and shall comply with all Legal Requirements and Landlord's
construction procedures and requirements for the Building (including Landlord's
requirements relating to insurance and contractor qualifications). In no event
shall Tenant employ any person, entity or contractor to perform work in the
Premises whose presence may give rise to a labor or other disturbance in the
Building. Default by Tenant in the payment of any sums agreed to be paid by
Tenant for or in connection with an Alteration (regardless of whether such
agreement is pursuant to this Paragraph 9 or separate instrument) shall entitle
Landlord to all the same remedies as for non-payment of rent hereunder. Any
Alterations, including, without limitation, moveable partitions that are affixed
to the Premises (but excluding moveable, free standing partitions) and all
carpeting, shall at once become part of the Building and the property of
Landlord. Tenant shall give Landlord not less than five (5) days prior written
notice of the date the construction of the Alteration is to commence. Landlord
may post and record an appropriate notice of nonresponsibility with respect to
any Alteration and Tenant shall maintain any such notices posted by Landlord in
or on the Premises.
b. Landlord shall advise Tenant at the time of Landlord's approval
of any Alteration requested by Tenant whether Landlord will require that the
Alteration be removed by Tenant from the Premises at the expiration or sooner
termination of this Lease and the Premises restored by Tenant to their condition
prior to the making of the Alteration, ordinary wear and tear excepted. The
removal of the Alterations so required to be removed from the Premises and the
restoration of the Premises shall be performed by a general contractor selected
by Tenant and approved by Landlord, and Tenant shall pay the general
contractor's fees and costs in connection with such work. Any separate work
letter or other agreement which is hereafter entered into between Landlord and
Tenant pertaining to Alterations shall be deemed to automatically incorporate
the terms of this Lease without the necessity for further reference thereto.
10. Repair.
------
a. Except as specifically provided in this Lease, Tenant agrees that
the Premises are in good condition and repair. Tenant, at Tenant's sole cost and
expense, shall keep the Premises and every part thereof (including the interior
walls and ceilings of the Premises, those portions of the Building systems
located within and exclusively serving the Premises (which, as to the Building's
HVAC system, shall be limited to branch line flex duct, mixing boxes, diffusers
and thermostats), and improvements and Alterations) in good condition and
repair; provided that Tenant shall not be responsible for repairs to the extent
such repairs are (i) necessitated because of fire, earthquake, act of God or the
elements, (ii) necessitated by the negligence or willful misconduct of Landlord
or Landlord's agents, employees or contractors, or (iii) Landlord's obligation
pursuant to Paragraph 10.b. below. It is specifically understood and agreed
that, except as specifically set forth in this Lease, Landlord has no obligation
and has made no promises to alter, remodel, improve, repair, decorate or paint
the Premises or any part thereof, and that no representations respecting the
condition of the Premises or the Building have been made by Landlord to Tenant.
Notwithstanding the foregoing, if any portion of the Building systems located
within and exclusively serving the Premises require maintenance or repair,
Landlord shall perform the required work and Tenant shall reimburse Landlord for
the reasonable costs thereof within thirty (30) days of receipt of Landlord's
written invoice therefor. Tenant hereby waives the provisions of California
Civil Code Sections 1932(1), 1941 and 1942 and of any similar Legal Requirement
now or hereafter in effect.
b. Repairs to the Premises due to item (i) described in Paragraph
10.a. above shall be governed by Paragraph 26 below. Landlord shall repair the
Premises if they are damaged due to item (ii) described in Paragraph 10.a.
above. Further, Landlord shall repair and maintain in good condition and repair
the structural portions of the Building and all Building systems, including
plumbing, air conditioning, heating, electrical, life safety and other systems
installed or furnished by Landlord (other than the portions of those systems
that are Tenant's responsibility to maintain and repair pursuant to Paragraph
10.a. above) and the exterior windows of the Premises, but excluding (i) non-
Building standard lighting and electrical wiring and (ii) extraordinary
quantities of electrical, plumbing, HVAC or other Building facilities or
distribution thereof; provided, however, that to the extent repairs which
Landlord is required to make pursuant to this sentence are necessitated by the
negligence or deliberate misconduct of
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Tenant or Tenant's agents, employees or contractors, then Tenant shall reimburse
Landlord for the cost of such repair to the extent Landlord is not reimbursed
therefor by insurance. Landlord shall in no event be obligated to repair any
wear and tear to the Premises.
11. Abandonment. Tenant shall not vacate or abandon the Premises or any
-----------
part thereof at any time during the term hereof. Tenant understands that if
Tenant leaves the Premises or any part thereof vacant, the risk of fire, other
casualty and vandalism to the Premises and the Building will be increased.
Accordingly, such action by Tenant shall constitute an Event of Default
hereunder regardless Of whether Tenant continues to pay Monthly Rent and
Additional Rent under this Lease. Upon the expiration or earlier termination of
this Lease, or if Tenant abandons, vacates or surrenders all or any part of the
Premises or is dispossessed of the Premises by process of law, or otherwise, any
movable furniture, equipment, trade fixtures, or other personal property
belonging to Tenant and left on the Premises shall at the option of Landlord be
deemed to be abandoned and, whether or not the property is deemed abandoned,
Landlord shall have the right to remove such property from the Premises and
charge Tenant for the removal and any restoration of the Premises as provided in
Paragraph 9. Landlord may charge Tenant for the storage of Tenant's property
left on the Premises at such rates as Landlord may from time to time reasonably
determine, or, Landlord may, at its option, store Tenant's property in a public
warehouse at Tenant's expense. Notwithstanding the foregoing, neither the
provisions of this Paragraph 11 nor any other provision of this Lease shall
impose upon Landlord any obligation to care for or preserve any of Tenant's
property left upon the Premises, and Tenant hereby waives and releases Landlord
from any claim or liability in connection with the removal of such property from
the Premises and the storage thereof and specifically waives the provisions of
California Civil Code Section 1542 with respect to such release. Landlord's
action or inaction with regard to the provisions of this Paragraph 11 shall not
be construed as a waiver of Landlord's right to require Tenant to remove its
property, restore any damage to the Premises and the Building caused by such
removal, and make any restoration required pursuant to Paragraph 9 above.
12. Liens. Tenant shall not permit any mechanic's, materialman's or
-----
other liens arising out of work performed at the Premises by or on behalf of
Tenant to be filed against the fee of the Real Property nor against Tenant's
interest in the Premises. Landlord shall have the right to post and keep posted
on the Premises any notices which it deems necessary for protection from such
liens. If any such liens are filed, Landlord may, upon ten (10) days' written
notice to Tenant, without waiving its rights based on such breach by Tenant and
without releasing Tenant from any obligations hereunder, pay and satisfy the
same and in such event the sums so paid by Landlord shall be due and payable by
Tenant immediately without notice or demand, with interest from the date paid by
Landlord through the date Tenant pays Landlord, at the Interest Rate. Tenant
agrees to indemnify, defend and hold Landlord and the other Indemnitees (as
defined in Paragraph 14.b. below) harmless from and against any Claims (as
defined in Paragraph 14.b. below) for mechanics', materialmen's or other liens
in connection with any Alterations, repairs or any work performed, materials
furnished or obligations incurred by or for Tenant.
13. Assignment and Subletting.
-------------------------
a. Landlord's Consent. Landlord's and Tenant's agreement with regard
------------------
to Tenant's right to transfer all or part of its interest in the Premises is as
expressly set forth in this Paragraph 13. Tenant agrees that, except upon
Landlord's prior written consent, which consent shall not (subject to Landlord's
rights under Paragraph 13.d. below) be unreasonably withheld, neither this Lease
nor all or any part of the leasehold interest created hereby shall, directly or
indirectly, voluntarily or involuntarily, by operation of law or otherwise, be
assigned, mortgaged, pledged, encumbered or otherwise transferred by Tenant or
Tenant's legal representatives or successors in interest (collectively an
"assignment") and neither the Premises nor any part thereof shall be sublet or
be used or occupied for any purpose by anyone other than Tenant (collectively, a
"sublease"). Any assignment or subletting without Landlord's prior written
consent shall, at Landlord's option, be void and shall constitute an Event of
Default entitling Landlord to terminate this Lease and to exercise all other
remedies available to Landlord under this Lease and at law.
The parties hereto agree and acknowledge that, among other circumstances
for which Landlord may reasonably withhold its consent to an assignment or
sublease, it shall be reasonable for Landlord to withhold its consent where: (i)
the assignment or subletting would increase the operating costs for the Building
or the burden on the Building services, or generate additional foot traffic,
elevator usage or security concerns in the Building, or create an increased
probability of the comfort and/or safety of Landlord and other tenants in the
Building being compromised or reduced, (ii) the space will be used for a school
or training facility, an entertainment, sports or recreation facility, retail
sales to the public (unless Tenant's permitted use is retail sales), a personnel
or employment agency, an office or facility of any governmental or quasi-
governmental agency or authority, a place of public assembly (including without
limitation a meeting center, theater or public forum), any use by or affiliation
with a foreign government (including without limitation an embassy or consulate
or similar office), or a facility for the provision of social, welfare or
clinical health services or sleeping accommodations (whether temporary, daytime
or overnight); (iii) the proposed assignee or subtenant is a prospective tenant
of the Building with whom Landlord is then negotiating to lease space in the
Building and Landlord has adequate available space to meet such prospective
tenant's space requirements, or is a current tenant of the Building and Landlord
has
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<PAGE>
adequate available space to meet such current tenant's expansion requirements;
(iv) Landlord disapproves of the proposed assignee or subtenant's reputation or
creditworthiness; (v) Landlord determines that the character of the business
that would be conducted by the proposed assignee or subtenant at the Premises,
Or the manner of conducting such business, would be inconsistent with the
character of the Building as a first-class office building; (vi) the proposed
assignee or subtenant is an entity or related to an entity with whom Landlord or
any affiliate of Landlord has had adverse dealings; (vii) the assignment or
subletting may conflict with any exclusive uses granted to other tenants of the
Real Property, or with the terms of i any easement, covenant, condition or
restriction, or other agreement affecting the Real Property; (viii) the
assignment or subletting would involve a change in use from that expressly
permitted under this Lease; or (ix) Landlord determines that the proposed
assignee may be unable to perform all of Tenant's obligations under this Lease
or the proposed subtenant may be unable to perform all of its obligations under
the proposed sublease. Landlord's foregoing rights and options shall continue
throughout the entire term of this Lease.
For purposes of this Paragraph 13, the following events shall be deemed
an assignment or sublease, as appropriate: (i) the issuance of equity interests
(whether stock, partnership interests or otherwise) in Tenant or any subtenant
or assignee, or any entity controlling any of them, to any person or group of
related persons, in a single transaction or a series of related or unrelated
transactions, such that, following such issuance, such person or group shall
have Control (as defined below) of Tenant or any subtenant or assignee; (ii) a
transfer of Control of Tenant or any subtenant or assignee, or any entity
controlling any of them, in a single transaction or a series of related or
unrelated transactions (including, without limitation, by consolidation, merger,
acquisition or reorganization), except that the transfer of outstanding capital
stock or other listed equity interests by persons or parties other than
"insiders" within the meaning of the Securities Exchange Act of 1934, as
amended, through the "over-the-counter" market or any recognized national or
international securities exchange, shall not be included in determining whether
Control has been transferred; (iii) a reduction of Tenant's assets to the point
that this Lease is substantially Tenant's only asset; (iv) a change or
conversion in the form of entity of Tenant, any subtenant or assignee, or any
entity controlling any of them, which has the effect of limiting the liability
of any of the partners, members or other owners of such entity; or (v) the
agreement by a third party to assume, take over, or reimburse Tenant for, any or
all of Tenant's obligations under this Lease, in order to induce Tenant to lease
space with such third party. "Control" shall mean direct or indirect ownership
of 50% or more of all of the voting stock of a corporation or 50% or more of the
legal or equitable interest in any other business entity, or the power to direct
the operations of any entity (by equity ownership, contract or otherwise).
Notwithstanding anything to the contrary in this grammatical paragraph or
elsewhere in this Paragraph 13, (i) if Digital Island, Inc., a California
corporation ("Digital Island") makes a public offering of shares of Tenant in
conformance with applicable securities laws, the issuance of stock in Tenant
pursuant to such laws shall not constitute an assignment or subletting of the
Lease and Landlord's consent shall not be required therefor and (ii) if Digital
Island, Inc., a California corporation issues any equity interests in itself as
a result of investments or strategic partnerships with or by any public or
private entities or individuals, then the issuance of such equity interests
shall not be deemed an assignment for the purposes of this Lease, or require the
consent of Landlord thereto, notwithstanding the fact that the issuance of such
equity interests may result in a change in Control, so long as the issuance of
such equity interests does not result in a decrease in the net worth of Digital
Island and, following such issuance of the equity interests, Digital Island
continues substantially the same business operations as were in effect of the
date as of this Lease. The provisions of the immediately preceding sentence are
personal to Digital Island, and shall not apply to any assignee or subtenant
thereof.
If this Lease is assigned, whether or not in violation of the terms of
this Lease, Landlord may collect rent from the assignee. If the Premises or any
part thereof is sublet, Landlord may, upon an Event of Default by Tenant
hereunder, collect rent from the subtenant. In either event, Landlord may apply
the amount collected from the assignee or subtenant to Tenant's monetary
obligations hereunder.
The consent by Landlord to an assignment or subletting hereunder shall
not relieve Tenant or any assignee or subtenant from obtaining Landlord's
express prior written consent to any other or further assignment or subletting
(which consent shall not be unreasonably withheld, subject to Landlord's rights
under this Paragraph 13). Neither an assignment or subletting nor the collection
of rent by Landlord from any person other than Tenant, nor the application of
any such rent as provided in this Paragraph 13.a. shall be deemed a waiver of
any of the provisions of this Paragraph 13.a. or release Tenant from its
obligation to comply with the provisions of this Lease and Tenant shall remain
fully and primarily liable for all of Tenant's obligations under this Lease. If
Landlord approves of an assignment or subletting hereunder and this Lease
contains any renewal options, expansion options, rights of first refusal, rights
of first negotiation or any other rights or options pertaining to additional
space in the Building, such rights and/or options shall not run to the subtenant
or assignee unless such subtenant or assignee is an Affiliate (as defined in
Paragraph 13.g. below), it being agreed by the parties hereto that any such
rights and options are personal to the Tenant originally named herein and may
not be transferred other than to an Affiliate.
b. Processing Expenses. Tenant shall pay to Landlord, as Landlord's
-------------------
cost of processing each proposed assignment or subletting, an amount equal to
the sum of (i) Landlord's reasonable attorneys'
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and other professional fees, plus (ii) the sum of $750.00 for the cost of
Landlord's administrative, accounting and clerical time (collectively,
"Processing Costs"), and the amount of all out-of-pocket costs and expenses (if
any) incurred by Landlord directly arising from the assignee or sublessee taking
Occupancy of the subject space (including, without limitation, costs of freight
elevator operation for moving of furnishings and trade fixtures, security
service, janitorial and cleaning service, and rubbish removal service).
Notwithstanding anything to the contrary herein, Landlord shall not be required
to process any request for Landlord's consent to an assignment or subletting
until Tenant has paid to Landlord the amount of Landlord's estimate of the
Processing Costs and all other direct and indirect costs and expenses of
Landlord and its agents arising from the assignee or subtenant taking occupancy.
c. Consideration to Landlord. In the event of any assignment or
-------------------------
sublease, whether or not requiting Landlord's consent, Landlord shall be
entitled to receive, as additional rent hereunder, seventy-five percent (75%) of
any consideration (including, without limitation, payment for leasehold
improvements and any "Leasehold Profit" as defined below) paid by the assignee
or subtenant for the assignment or sublease and, in the case of a sublease,
seventy-five percent (75%) of the excess of the amount of rent paid for the
sublet space by the subtenant over the amount of Monthly Rent under Paragraph 5
above and Additional Rent under Paragraph 7 above attributable to the sublet
space for the corresponding month; except that Tenant may first recapture (i)
any brokerage commissions paid by Tenant in connection with the subletting or
assignment (not to exceed commissions typically paid in the market at the time
of such subletting or assignment), (ii) reasonable legal fees paid by Tenant in
connection with such assignment or subletting (provided that Tenant shall submit
to Landlord evidence reasonably acceptable to Landlord of such legal fees
actually paid by Tenant, which evidence shall include copies of the applicable
attorney bills) and (iii) any improvement allowance or construction costs
incurred by Tenant in connection with the assignment or sublease (collectively
the "Assignment or Subletting Costs"), provided that, as a condition to Tenant
recapturing the Assignment or Subletting Costs, Tenant shall provide to
Landlord, within ninety (90) days of Landlord's execution of Landlord's consent
to the assignment or subletting, a detailed accounting of the Assignment or
Subletting Costs and supporting documents, such as receipts and construction
invoices. To effect the foregoing, Tenant shall deduct from the monthly amounts
received by Tenant from the subtenant or assignee as rent or consideration (i)
the Monthly Rent and Additional Rent payable by Tenant to Landlord for the
subject space and (ii) the Assignment or Subletting Costs, and seventy-five
percent (75%) of the then remaining sum shall be paid promptly to Landlord. Upon
Landlord's request, Tenant shall assign to Landlord all amounts to be paid to
Tenant by any such subtenant or assignee and that belong to Landlord, and shall
direct such subtenant or assignee to pay the same directly to Landlord. If there
is more than one sublease under this Lease, the amounts (if any) to be paid by
Tenant to Landlord pursuant to the preceding sentence shall be separately
calculated for each sublease and amounts due Landlord with regard to any one
sublease may not be offset against rental and other consideration pertaining to
or due under any other sublease.
"Leasehold Profit" shall be the value allocated to the leasehold between
the parties to the assignment or sublease, provided that, if (a) such allocation
is less than the "Calculated Leasehold Profit" (which Calculated Leasehold
Profit shall be the excess of the present value of the fair market rent of the
Premises for the remaining term of this Lease after such assignment or sublease,
over the present value of the Monthly Rent payable hereunder for such remaining
term (as reasonably estimated by Landlord and Tenant)), (b) Tenant will receive
from the assignee or subtenant pursuant to the written agreement between Tenant
and the assignee or subtenant, an amount in excess of Tenant's monetary
obligations under the Lease for the subject space and (c) Tenant does not
provide reasonable evidence to Landlord that the excess consideration received
by Tenant from the assignee or subtenant is attributable to payment for some
value received by the assignee or subtenant from Tenant other than the value of
the leasehold, then the Leasehold Profit shall be deemed to be the Calculated
Leasehold Profit; provided, however, that Landlord shall collect Landlord's
share of Leasehold Profit only to the extent such amounts are actually paid by
the assignee or subtenant to Tenant in connection with such assignment or
sublease.
d. Procedures. If Tenant desires to assign this Lease or any
----------
interest therein or sublet all or part of the Premises, Tenant Shall give
Landlord written notice thereof and the terms proposed (the "Sublease Notice"),
which Sublease Notice, in the case of a proposed sublease, shall designate the
space proposed to be sublet. Landlord shall have the prior right and option (to
be exercised by written notice to Tenant given within thirty (30) days after
receipt of the Sublease Notice) (i) in the event of an assignment of the Lease,
to terminate this Lease in its entirety, and in the event of a sublease that
will result in more than twenty-five percent (25%) of the Premises being under
sublease or a sublease that will terminate during the final eighteen (18) months
of the Lease term, to terminate the Lease as it pertains to the portion of the
Premises so proposed by Tenant to be sublet, or (ii) to approve Tenant's
proposal to sublet conditional upon Landlord's subsequent written approval of
the specific sublease obtained by Tenant and the specific subtenant named
therein. If Landlord exercises its option described in (ii) above, then Tenant
shall have six (6) months thereafter to submit to Landlord, for Landlord's
written approval, Tenant's proposed sublease agreement (in which the proposed
subtenant shall be named, and which agreement shall otherwise meet the
requirements of Paragraph 13.e. below), together with a current financial
statement of such proposed subtenant and any other information reasonably
requested by Landlord. If (x) Tenant fails to submit the specific sublease and
other required information within such time, or (y) the rent under the specific
sublease submitted by Tenant is Five Dollars ($5.00) or more per
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square foot per annum lower than the rental rate set forth in the Sublease
Notice previously approved by Landlord pursuant to (ii) above, or (z) the size
of the space to be sublet under the specific sublease submitted by Tenant
differs by more than twenty-five percent (25%) from the size set forth in the
Sublease Notice approved by Landlord pursuant to (ii) above, then Tenant shall
be required to submit a new Sublease Notice for Landlord's evaluation pursuant
to the procedures set forth in this paragraph. If Landlord fails to exercise any
such option to sublet or to terminate, this shall not be construed as or
constitute a waiver of any of the provisions of Paragraphs 13.a., b., c. or d.
herein. If Landlord exercises any option to terminate, any costs of demising the
portion of the Premises affected by such termination shall be borne by Landlord.
In addition, Landlord shall have no liability for any real estate brokerage
commission(s) or with respect to any of the costs and expenses that Tenant may
have incurred in connection with its proposed subletting, and Tenant agrees to
indemnify, defend and hold Landlord and all other Indemnitees harmless from and
against any and all Claims (as defined in Paragraph 14.b. below), including,
without limitation, claims for commissions arising from such proposed
subletting. Landlord's foregoing rights and options shall continue throughout
the entire term of this Lease. For purposes of this Paragraph 13.d., a proposed
assignment of this Lease in whole or in part shall be deemed a proposed
subletting of such space.
If Landlord exercises its rights under (i) of the immediately preceding
grammatical paragraph, then, notwithstanding anything to the contrary in
Paragraph 13.b. above, the Processing Costs provided for therein shall be
inapplicable with regard to the proposed assignment or sublease which triggered
Landlord's exercise of its rights under (i) above.
e. Documentation. No permitted assignment or subletting by Tenant
-------------
shall be effective until there has been delivered to Landlord a fully executed
counterpart of the assignment or sublease which expressly provides that (i) the
assignee or subtenant may not further assign or sublet the assigned or sublet
space without Landlord's prior written consent (which, in the case of a further
assignment proposed by an assignee, shall not be unreasonably withheld, subject
to Landlord's rights under the provisions of this Paragraph 13), (ii) the
assignee or subtenant will comply with all of the provisions of this Lease, and
Landlord may enforce the Lease provisions directly against such assignee or
subtenant, (iii) in the case of an assignment, the assignee assumes all of
Tenant's obligations under this Lease arising on or after the date of the
assignment, and (iv) in the case of a sublease, the subtenant agrees to be and
remain jointly and severally liable with Tenant for the payment of rent
pertaining to the sublet space in the amount set forth in the sublease, and for
the performance of all of the terms and provisions of this Lease. In addition to
the foregoing, no sublease by Tenant shall be effective until there has been
delivered to Landlord a fully executed counterpart of Landlord's consent to
sublease form or, in the case of a sublease to an Affiliate pursuant to
Paragraph 13.g. below, a waiver and acknowledgement form. The failure or refusal
of a subtenant or assignee to execute any such instrument shall not release or
discharge the subtenant or assignee from its liability as set forth above.
Notwithstanding the foregoing, however, no subtenant or assignee shall be
permitted to occupy the Premises unless and until such subtenant or assignee
provides Landlord with certificates evidencing that such subtenant or assignee
is carrying all insurance coverage required of such subtenant or assignee under
this Lease.
f. No Merger. Without limiting any of the provisions of this
---------
Paragraph 13, if Tenant has entered into any subleases of any portion of the
Premises, the voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation by Landlord and Tenant, shall not work a merger, and shall, at the
option of Landlord, terminate all or any existing subleases or subtenancies or,
at the option of Landlord, operate as an assignment to Landlord of any or all
such subleases or subtenancies. If Landlord does elect that such surrender or
cancellation operate as an assignment of such subleases or subtenancies,
Landlord shall in no way be liable for any previous act or omission by Tenant
under the subleases or for the return of any deposit(s) under the subleases that
have not been actually delivered to Landlord, nor shall Landlord be bound by any
sublease modification(s) executed without Landlord's consent or for any advance
rental payment by the subtenant in excess of one month's rent.
g. Affiliates. Notwithstanding anything to the contrary in
----------
Paragraphs 13.a. and 13.d., but subject to Paragraphs 13.e. and 13.f., Tenant
may assign this Lease or sublet the Premises or any portion thereof, without
Landlord's consent, to any partnership, corporation or other entity which
controls, is controlled by, or is under common control with Tenant or Tenant's
parent (control being defined for such purposes as ownership of at least 50% of
the equity interests in, or the power to direct the management of, the relevant
entity) or to any partnership, corporation or other entity resulting from a
merger or consolidation with Tenant or Tenant's parent, or to the corporation
resulting from a corporate reorganization of Tenant (provided that, following
such reorganization, the corporation continues substantially the same business
operations of Tenant as were in effect as of the date of this Lease) or to any
person or entity which acquires substantially all the assets of Tenant as a
going concern (collectively, an "Affiliate"), provided that (i) Landlord
receives prior written notice of an assignment or subletting, (ii) the
Affiliate's net worth is sufficient, in Landlord's sole but good faith judgment,
to satisfy Landlord's then existing financial criteria for new tenants of the
Building, (iii) the Affiliate (or its officers and employees) has proven
experience in the operation of a first-class business of a type consistent with
the use of the Building as a first-class office Building, (iv) the Affiliate
remains an Affiliate for the duration of the subletting or the balance of the
term in the event of an assignment, (v) the Affiliate assumes (in the event
16
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of an assignment) in writing all of Tenant's obligations under this Lease and
(vi) Landlord receives a fully executed copy of an assignment or sublease
agreement between Tenant and the Affiliate.
h. Shared Space Arrangement. Notwithstanding anything to the
------------------------
contrary in this Paragraph 13, Tenant may from time to time permit third parties
with whom Tenant will share office services to use a portion of the Premises and
such use shall not be deemed to be a sublease so long as (i) no more than 1,500
rentable square feet of the Premises is so used at any one time, and (ii) the
space Occupied by such parties is not separately demised from the balance of the
Premises (i.e. separated from the balance of the space by a wall or other
constructed device and having separate entrances to the common areas) and (iii)
the use of the space is not a use which increases (a) the operating costs for
the Building, (b)the burden on the Building services, or (c) the foot traffic,
elevator usage or security concerns in the Building, or creates an increased
probability of the comfort and/or safety of the Landlord and other tenants in
the Building being unreasonably compromised or reduced, and (iv) Tenant does not
realize a profit with respect to the space so used. The rights set forth in this
paragraph are personal to Digital Island, Inc., a California corporation, and
shall not inure to the benefit of any successor, assignee or subtenant of
Tenant. Tenant shall be fully responsible for the conduct of such parties within
the Premises and the Real Property, and Tenant's indemnification obligations set
forth in Paragraph 14 of this Lease shall apply with respect to the conduct of
such parties. Tenant shall supply Landlord with the terms of any such space
sharing arrangement. If such arrangement indicates that the sums payable
thereunder for the value of the use of the space exceed the Monthly Rent and
Additional Rent payable under Paragraphs 5 and 7 hereof for such space, that
particular space sharing arrangement will be deemed to be a sublease for the
purpose of applying the provisions of Paragraph 13.e. above. Notwithstanding the
foregoing, Tenant shall not permit any party to occupy space in the Premises (or
conduct business in the Premises) pursuant to the above until Tenant delivers to
Landlord a fully executed counterpart of Landlord's waiver and acknowledgement
form for space sharing arrangements.
14. Indemnification of Landlord.
---------------------------
a. Landlord and the holders of any Superior Interests (as defined in
Paragraph 21 below) shall not be liable to Tenant and Tenant hereby waives all
claims against such parties for any loss, injury or other damage to person or
property in or about the Premises or the Real Property from any cause
whatsoever, including without limitation, water leakage of any character from
the roof, walls, basement, fire sprinklers, appliances, air conditioning,
plumbing or other portion of the Premises or the Real Property, or gas, fire,
explosion, falling plaster, steam, electricity, or any malfunction within the
Premises or the Real Property, or acts of other tenants of the Building;
provided, however, that the foregoing waiver shall be inapplicable to any loss,
injury or damage resulting directly from Landlord's gross negligence or willful
misconduct. Tenant acknowledges that from time to time throughout the term of
this Lease, construction work may be performed in and about the Building and the
Real Property by Landlord, contractors of Landlord, or other tenants or their
contractors, and that such construction work may result in noise and disruption
to Tenant's business. In addition to and without limiting the foregoing waiver
or any other provision of this Lease, Tenant agrees that Landlord shall not be
liable for, and Tenant expressly waives and releases Landlord and the other
Indemnitees (as defined in Paragraph 14.b. below) from any Claims (as defined in
Paragraph 14.b. below), including without limitation, any and all consequential
damages or interruption or loss of business, income or profits, or claims of
constructive eviction, arising or alleged to be arising as a result of any such
construction activity.
b. Tenant shall hold Landlord and the holders of any Superior
Interest, and the constituent shareholders, partners or other owners thereof,
and all of their agents, contractors, servants, officers, directors, employees
and licensees (collectively with Landlord, the "Indemnitees") harmless from and
indemnify the Indemnitees against any and all claims, liabilities, damages,
costs and expenses, including reasonable attorneys' fees and costs incurred in
defending against the same (collectively, "Claims"), to the extent arising from
(a) the acts or omissions of Tenant or any other Tenant Parties (as defined in
Paragraph 8.e. above) in, on or about the Real Property, or (b) any construction
or other work undertaken by or on behalf of Tenant in, on or about the Premises,
whether prior to or during the term of this Lease, or (e) any breach or Event of
Default under this Lease by Tenant, or (d) any accident, injury or damage,
howsoever and by whomsoever caused, to any person or property, occurring in, on
or about the Premises; except to the extent such Claims are caused directly by
the gross negligence or willful misconduct of Landlord or its authorized
representatives. In case any action or proceeding be brought against any of the
Indemnitees by reason of any such Claim, Tenant, upon notice from Landlord,
covenants to resist and defend at Tenant's sole expense such action or
proceeding by counsel reasonably satisfactory to Landlord. The provisions of
this Paragraph 14.b. shall survive the expiration or earlier termination of this
Lease with respect to any injury, illness, death or damage occurring prior to
such expiration or termination.
15. Insurance.
---------
a. Tenant's Insurance. Tenant shall, at Tenant's expense, maintain
------------------
during the term of this Lease (and, if Tenant occupies or conducts activities in
or about the Premises prior to or after the term hereof, then also during such
pre-term or post-term period): (i) commercial general liability insurance
17
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including contractual liability coverage, with minimum coverages of $1,000,000
per occurrence combined single limit for bodily injury and property damage,
$1,000,000 for products-completed operations coverage, $100,000 fire legal
liability, $1,000,000 for personal and advertising injury (which coverage shall
not be subject to the contractual liability exclusion), with a $2,000,000
general aggregate limit, for injuries to, or illness or death of, persons and
damage to property occurring in or about the Premises or otherwise resulting
from Tenant's operations in the Building, (ii) property insurance protecting
Tenant against loss or damage by fire and such other risks as arc insurable
under then-available standard forms Of "all risk" insurance policies (excluding
earthquake and flood but including water damage), coveting Tenant's personal
property and trade fixtures in or about the Premises or the Real Property, and
any improvements and/or Alterations in the Premises, for the full replacement
value thereof without deduction for depreciation; (iii) workers' compensation
insurance in statutory limits; (iv) at least three months' coverage for loss of
business income and continuing expenses, providing protection against any peril
included within the classification "all risk," excluding earthquake and flood
but including water damage; and (v) if Tenant operates owned, leased or non-
owned vehicles on the Real Property, comprehensive automobile liability
insurance with a minimum coverage of $1,000,000 per occurrence, combined single
limit. The above described policies shall protect Tenant, as named insured, and
Landlord and all the other Indemnitees and any other parties designated by
Landlord, as additional insureds; shall insure Landlord's and such other
parties' contingent liability with regard to acts or omissions of Tenant; shall
specifically include all liability assumed by Tenant under this Lease (provided,
however, that such contractual liability coverage shall not limit or be deemed
to satisfy Tenant's indemnity obligations under this Lease); and, if subject to
deductibles, shall provide for deductible amounts not in excess of those
reasonably approved in advance in writing by Landlord. Landlord reserves the
right to increase the foregoing amount of liability coverage from time to time
as Landlord determines is required to adequately protect Landlord and the other
parties designated by Landlord from the matters insured thereby (provided,
however, that Landlord makes no representation that the limits of liability
required hereunder from time to time shall be adequate to protect Tenant);
provided, however, such increased amounts shall not materially exceed the
greater of (a) those amounts normally required for comparable buildings in the
San Francisco Financial District or (b) those amounts required to provide
Landlord with the same relative protection as the amounts set forth above as of
the date of this Lease. Further, Landlord reserves the right to require that
Tenant cause any of its contractors, vendors, movers or other parties conducting
activities in or about or occupying the Premises to obtain and maintain
insurance as reasonably determined by Landlord and as to which Landlord and such
other parties designated by Landlord shall be additional insureds.
b. Policy Form. Each insurance policy required pursuant to Paragraph
-----------
15.a. above shall be issued by an insurance company licensed in the State of
California and with a general policyholders' rating of "A+" or better and a
financial size ranking of "Class VIII" or higher in the most recent edition of
Best's Insurance Guide. Each insurance policy, other than Tenant's workers'
compensation insurance, shall (i) provide that it may not be materially changed,
cancelled or allowed to lapse unless thirty (30) days' prior written notice to
Landlord and any other insureds designated by Landlord is first given, (ii)
provide that no act or omission of Tenant shall affect or limit the obligations
of the insurer with respect to any other insured, (iii) include all waiver of
subrogation rights endorsements necessary to effect the provisions of Paragraph
16 below, and (iv) provide that the policy and the coverage provided shall be
primary, that Landlord, although an additional insured, shall nevertheless be
entitled to recovery under such policy for any damage to Landlord or the other
Indemnitees by reason of acts or omissions of Tenant, and that any coverage
carried by Landlord shall be noncontributory with respect to policies carried by
Tenant. Each such insurance policy or a certificate thereof shall be delivered
to Landlord by Tenant on or before the effective date of such policy and
thereafter Tenant shall deliver to Landlord renewal policies or certificates at
least thirty (30) days prior to the expiration dates of expiring policies. If
Tenant fails to procure such insurance or to deliver such policies or
certificates, Landlord may, at its option, procure the same for Tenant's
account, and the cost thereof shall be paid to Landlord by Tenant upon demand.
Landlord may at any time, and from time to time, inspect and/or copy any and all
insurance policies required by this Lease.
Nothing in this Paragraph 15 shall be construed as creating or
implying the existence of (i) any ownership by Tenant of any fixtures,
additions, Alterations, or improvements in or to the Premises or (ii) any right
on Tenant's part to make any addition, Alteration or improvement in or to the
Premises.
d. Landlord's Insurance. During the term hereof, Landlord shall keep
--------------------
the Building and all Tenant Improvements to the Premises made pursuant to
Paragraph 4 hereof (but excluding any Alterations made pursuant to Paragraph 9
hereof, and any personal property, fixtures, office equipment, furniture,
artwork and other decoration not affixed to and a part of the Building) insured
through reputable insurance underwriters against perils covered by a standard
"all risk" insurance policy or policies as such policies are in use as of the
date of this Lease (excluding perils such as earthquake, flood and other
standard "all risk" policy form exclusions, although Landlord may carry
earthquake insurance at Landlord's option), if such a policy is reasonably
available, with a deductible provision, if any, that does not materially exceed
that which prudent, efficient operators of first-class high-rise office
buildings in the downtown San Francisco financial district would carry from
time-to-time in the exercise of reasonable business judgment, in an amount or
amounts equal to not less than eighty percent (80%) of the full
18
<PAGE>
replacement value of the Building (excluding the land and the footings,
foundations and installations below the basement level) and the Tenant
Improvements made pursuant to Paragraph 4 hereof, without deduction for
depreciation, including the costs of demolition and debris removal, or such
other fire and property damage insurance as Landlord shall reasonably determine
to give substantially equal or greater protection.
16. Mutual Waiver of Subrogation Rights. Each party hereto hereby
-----------------------------------
releases the other respective party and, in the Case of Tenant as the releasing
party, the other Indemnitees, and the respective partners, shareholders, agents,
employees, officers, directors and authorized representatives of such released
party, from any claims such releasing party may have for damage to the Building,
the Premises or any of such releasing party's fixtures, personal property,
improvements and alterations in or about the Premises, the Building or the Real
Property that is caused by or results from risks insured against under any fire
and extended coverage insurance policies actually carried by such releasing
party or deemed to be carried by such releasing party; provided, however, that
such waiver shall be limited to the extent of the net insurance proceeds payable
by the relevant insurance company with respect to such loss or damage (or in the
case of deemed coverage, the net proceeds that would have been payable). For
purposes of this Paragraph 16, Tenant shall be deemed to be carrying any of the
insurance policies required pursuant to Paragraph 15 but not actually carried by
Tenant, and Landlord shall be deemed to carry standard fire and extended
coverage policies on the Real Property with a deductible not to exceed the
customary range of deductibles in effect for comparable first-class office
buildings in the San Francisco Financial District. Each party hereto shall cause
each such fire and extended coverage insurance policy obtained by it to provide
that the insurance company waives all rights of recovery by way of subrogation
against the other respective party and the other released parties in connection
with any matter covered by such policy.
17. Utilities.
---------
a. Basic Services. Landlord shall furnish the following utilities
--------------
and services ("Basic Services") for the Premises: (i) during the hours of 8 A.M.
to 6 P.M. ("Business Hours") Monday through Friday (except public holidays)
("Business Days"), electricity for Building standard lighting and power suitable
for the use of the Premises for ordinary general office purposes, (ii) during
Business Hours on Business Days, heat and air conditioning required in
Landlord's reasonable judgment for the comfortable use and occupancy of the
Premises for ordinary general office purposes, (iii) unheated water for the
restroom(s) and drinking fountains in the public areas servicing the Premises,
(iv) elevator service to the floor(s) of the Premises by nonattended automatic
elevators for general office pedestrian usage, and (v) on Business Days,
janitorial services limited to emptying and removal of general office refuse,
light vacuuming as needed and window washing as determined by Landlord.
Notwithstanding the foregoing, however, Tenant may use water, heat, air
conditioning, electric current, elevator and janitorial service in excess of
that provided in Basic Services ("Excess Services," which shall include without
limitation any power usage other than through existing standard 110-volt AC
outlets; electricity and/or water consumed by Tenant in connection with any
dedicated or supplemental heating, ventilating and/or air conditioning, computer
power, telecommunications and/or other special units or systems of Tenant;
chilled, heated or condenser water; or water used for any purpose other than
ordinary drinking and lavatory purposes), provided that the Excess Services
desired by Tenant are reasonably available to Landlord and to the Premises (it
being understood that in no event shall Landlord be obligated to make available
to the Premises more than the pro rata share of the capacity of any Excess
Service available to the Building or the applicable floor of the Building, as
the case may be), and provided further that Tenant complies with the procedures
established by Landlord from time to time for requesting and paying for such
Excess Services and with all other provisions of this Paragraph 17. Landlord
reserves the right to install in the Premises or the Real Property electric
current and/or water meters (including, without limitation, any additional
wiring, conduit or panel required therefor) to measure the electric current or
water consumed by Tenant or to cause the usage to be measured by other
reasonable methods (e.g. by temporary "check" meters or by survey).
b. Payment for Utilities and Services. The cost of Basic Services
----------------------------------
shall be included in Operating Expenses. In addition, Tenant shall pay to
Landlord upon demand (i) the cost, at Landlord's prevailing rate (based on
Landlord's actual cost thereof) of any Excess Services used by Tenant, (ii) the
cost of installing, operating, maintaining, repairing or reasonable costs of
monitoring, any meter or other device or system used to measure Tenant's
consumption of utilities and (iii) the cost of installing, operating,
maintaining, repairing or reasonable costs of monitoring, any Temperature
Balance Equipment (as defined in Paragraph 17.c. below) for the Premises and/or
any equipment required in connection with any Excess Services requested by
Tenant. Landlord's failure to bill Tenant for any of the foregoing shall not
waive Landlord's right to bill Tenant for the same at a later time.
c. Temperature Balance. If the temperature otherwise maintained in
-------------------
any portion of the Premises by the heating, air conditioning or ventilation
system is affected as a result of (i) the type or quantity of any lights,
machines or equipment (including without limitation typical office equipment)
used by Tenant in the Premises, (ii) the occupancy of such portion of the
Premises by more than one person per two hundred (200) square feet of rentable
area therein, (iii) an electrical load for lighting or power in excess of the
limits specified in Paragraph 17.d. below, or (iv) any rearrangement of
partitioning or other improvements, then at Tenant's sole cost, Landlord may
install any equipment, or modify any
19
<PAGE>
existing equipment (including the standard air conditioning equipment) Landlord
deems necessary to restore the temperature balance (such new equipment or
modifications to existing equipment termed herein "Temperature Balance
Equipment"). Tenant agrees to keep closed, when necessary, draperies which,
because of the sun's position, must be closed to provide for the efficient
operation of the air conditioning system, and Tenant agrees to cooperate with
Landlord and to abide by the regulations and requirements which Landlord may
prescribe for the proper functioning and protection of the heating, ventilating
and air conditioning system. Landlord makes no representation to Tenant
regarding the adequacy or fitness of the heating, air conditioning or
ventilation equipment in the Building to maintain temperatures that may be
required for, or because of, any computer or communications rooms, machine
rooms, conference rooms or other areas of high concentration of personnel or
electrical usage, or any other uses other than or in excess of the fractional
horsepower normally required for office equipment, and Landlord shall have no
liability for loss or damage suffered by Tenant or others in connection
therewith.
d. Utility Connections. Tenant shall not connect or use any
-------------------
apparatus or device in the Premises (i) using current in excess of 110 volts, or
(ii) which would cause Tenant's electrical demand load to exceed 1.0 watts per
rentable square foot for overhead lighting or 2.0 watts per rentable square foot
for convenience outlets, or (iii) which would exceed the capacity of the
existing panel or transformer serving the Premises. Tenant shall not connect
with electric current (except through existing outlets in the Premises or such
additional outlets as may be installed in the Premises as part of initial
improvements or Alterations approved by Landlord), or water pipes, any apparatus
or device for the purpose of using electrical current or water.
Landlord will not permit additional coring of the floor of the Premises
in order to install new electric outlets in the Premises unless Landlord is
satisfied, on the basis of such information to be supplied by Tenant at Tenant's
expense, that coring of the floor in order to install such additional outlets
will not weaken the structure of the floor.
e. Interruption of Services. Landlord's obligation to provide
------------------------
utilities and services for the Premises are subject to the Rules and Regulations
of the Building, applicable Legal Requirements (including the rules or actions
of the public utility company furnishing the utility or service), and shutdowns
for maintenance and repairs, for security purposes, or due to strikes, lockouts,
labor disputes, fire or other casualty, acts of God, or other causes beyond the
control of Landlord. In the event of an interruption in, or failure or inability
to provide any service or utility for the Premises for any reason, such
interruption, failure or inability shall not constitute an eviction of Tenant,
constructive or otherwise, or impose upon Landlord any liability whatsoever,
including, but not limited to, liability for consequential damages or loss of
business by Tenant. Tenant hereby waives the provisions of California Civil Code
Section 1932(1) or any other applicable existing or future Legal Requirement
permitting the termination of this Lease clue to such interruption, failure or
inability.
f. Governmental Controls. In the event any governmental authority
---------------------
having jurisdiction over the Real Property or the Building promulgates or
revises any Legal Requirement or building, fire or other code or imposes
mandatory or voluntary controls or guidelines on Landlord or the Real Property
or the Building relating to the use or conservation of energy or utilities or
the reduction of automobile or other emissions (collectively "Controls") or in
the event Landlord is required or elects to make alterations to the Real
Property or the Building in order to comply with such mandatory or voluntary
Controls, Landlord may, in its sole discretion, comply with such Controls or
make such alterations to the Real Property or the Building related thereto;
provided that in making any such alterations, Landlord shall use commercially
reasonable efforts to minimize any disruption to Tenant's business in the
Premises. Such compliance and the making of such alterations shall not
constitute an eviction of Tenant, constructive or otherwise, or impose upon
Landlord any liability whatsoever, including, but not limited to, liability for
consequential damages or loss of business by Tenant.
18. Personal Property and Other Taxes. Tenant shall pay before
---------------------------------
delinquency, any and all taxes, fees, charges or other governmental impositions
levied or assessed against Landlord or Tenant (a) upon Tenant's equipment,
furniture, fixtures, improvements and other personal property (including
carpeting installed by Tenant) located in the Premises, (b) by virtue of any
Alterations made by Tenant to the Premises, and (e) upon this transaction or any
document to which Tenant is a party creating or transferring an interest or an
estate in the Premises. If any such fee, charge or other governmental imposition
is paid by Landlord, Tenant shall reimburse Landlord for Landlord's payment upon
demand.
19. Rules and Regulations. Tenant shall comply with the rules and
---------------------
regulations set forth on Exhibit B attached hereto, as such rules and
---------
regulations may be reasonably modified or amended by Landlord from time to time,
provided that such modifications or amendments do not conflict with the express
provisions of this Lease (the "Rules and Regulations"). Landlord shall not be
responsible to Tenant for the nonperformance or noncompliance by any other
tenant or occupant of the Building of or with any of the Rules and Regulations,
but Landlord shall use reasonable efforts to enforce the Rules and Regulations.
20
<PAGE>
20. Surrender; Holding Over.
------------------------
a. Surrender. Upon the expiration or other termination of this
---------
Lease, Tenant shall surrender the Premises to Landlord vacant and broom-clean,
with all improvements and Alterations (except as provided below) in their
original condition, except for reasonable wear and tear, damage from casualty or
condemnation or from acts of Landlord or its agents, employees or contractors
and any changes resulting from approved Alterations; provided, however, that
prior to the expiration or termination of this Lease Tenant shall remove from
the Premises any Alterations that Tenant is required by Landlord to remove under
the provisions of this Lease, and all of Tenant's personal property and trade
fixtures, and, at Landlord's sole election, any portion of the Tenant
Improvements constructed pursuant to Paragraph 4 above that Landlord advises
Tenant, at the time Landlord approves of the Final Plans therefor, Landlord will
require be removed upon the expiration or sooner termination of this Lease. If
such removal is not completed at the expiration or other termination of this
Lease, Landlord may remove the same at Tenant's expense. Any damage to the
Premises or the Building caused by such removal shall be repaired promptly by
Tenant (including the patching or repairing of ceilings and walls) or, if Tenant
fails to do so, Landlord may do so at Tenant's expense. The removal of
Alterations from the Premises shall be governed by Paragraph 9 above. Tenant's
obligations under this paragraph shall survive the expiration or other
termination of this Lease. Upon expiration or termination of this Lease or of
Tenant's possession, Tenant shall surrender all keys to the Premises or any
other part of the Building and shall make known to Landlord the combination of
locks on all safes, cabinets and vaults that may be located in the Premises.
b. Holding Over. If Tenant remains in possession of the Premises
------------
after the expiration or earlier termination of this Lease with the express
written consent of Landlord (which consent may be withheld in Landlord's sole
discretion), Tenant's occupancy shall be a month-to-month tenancy at a rent
equal to the greater of (i) for the first thirty (30) days of any such holdover
period, one hundred twenty-five percent (125%), and for each day of the holdover
period thereafter, one hundred fifty percent (150%), of the Monthly Rent and
Additional Rent payable under this Lease during the last full month prior to the
date of the expiration of this Lease or (ii) the then fair market rental (as
reasonably determined by Landlord) for the Premises; provided, however, if
Landlord and Tenant agree in writing that a different monthly rent shall apply
during such month-to-month tenancy, then the monthly rent specified in such
written agreement shall instead apply. Except as provided in the preceding
sentence, the month-to-month tenancy shall be on the terms and conditions of
this Lease, except that any renewal options, expansion options, rights of first
refusal, rights of first negotiation or any other rights or options pertaining
to additional space in the Building contained in this Lease shall be deemed to
have terminated and shall be inapplicable thereto. Landlord's acceptance of rent
after such holding over with Landlord's written consent shall not result in any
other tenancy or in a renewal of the original term of this Lease. If Tenant
remains in possession of the Premises after the expiration or earlier
termination of this Lease without Landlord's consent as required above, Tenant's
continued possession shall be on the basis of a tenancy at sufferance and Tenant
shall pay as Monthly Rent during the holdover period an amount equal to the
greater of (i) one hundred twenty-five percent (125%) of the fair market rental
(as reasonably determined by Landlord) for the Premises or (ii) two hundred
percent (200%) of the Monthly Rent and Additional Rent payable under this Lease
for the last full month prior to the date of such expiration or termination.
c. Indemnification. Tenant shall indemnify, defend and hold Landlord
---------------
harmless from and against all Claims incurred by or asserted against Landlord
and arising directly or indirectly from Tenant's failure to timely surrender the
Premises, including but not limited to (i) any rent payable by or any loss,
cost, or damages, including lost profits, claimed by any prospective tenant of
the Premises or any portion thereof, and (ii) Landlord's damages as a result of
such prospective tenant rescinding or refusing to enter into the prospective
lease of the Premises or any portion thereof by reason of such failure to timely
surrender the Premises.
21. Subordination and Attornment.
----------------------------
a. This Lease is expressly made subject and subordinate to any
mortgage, deed of trust, ground lease, underlying lease or like encumbrance
affecting any part of the Real Property or any interest of Landlord therein
which is now existing or hereafter executed or recorded, any present or future
modification, amendment or supplement to any of the foregoing, and to any
advances made thereunder (any of the foregoing being a "Superior Interest")
without the necessity of any further documentation evidencing such
subordination. Notwithstanding the foregoing, Tenant shall, within ten (10) days
after Landlord's request, execute and deliver to Landlord a document evidencing
the subordination of this Lease to a particular Superior Interest, and Tenant's
failure to timely deliver the required document shall constitute an Event of
Default under Paragraph 25.a.3. below. If the interest of Landlord in the Real
Property or the Building is transferred to any person ("Purchaser") pursuant to
or in lieu of proceedings for enforcement of any Superior Interest, Tenant shall
immediately and automatically attorn to the Purchaser, and this Lease shall
continue in full force and effect as a direct lease between the Purchaser and
Tenant on the terms and conditions set forth herein.
b. Notwithstanding the above, upon Tenant's written request,
Landlord will request that the then existing (if any) holders of a Superior
Interest execute a written "non-disturbance agreement"
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on Tenant's behalf providing that, if Tenant is not in default under this Lease
beyond any applicable grace period, that such party will recognize this Lease
and Tenant's rights hereunder and will not disturb Tenant's possession
hereunder, and if this Lease is by operation of law terminated in a foreclosure,
that a new lease will be entered into on the same terms as this Lease for the
remaining term hereof. The failure of any future holder of a Superior Interest
to execute and deliver such a non-disturbance agreement upon Landlord's request
shall not constitute a default hereunder by Landlord, it being understood that
Landlord's sole obligation is to request in good faith the execution and
delivery of such agreement. Further, if in order to obtain such non-disturbance
agreement, Landlord is required to expend any sum, Landlord shall so notify
Tenant and Tenant may elect to pay such sum. In no event shall Landlord be
required to expend any sums in connection therewith.
22. Financing Condition. If any lender or ground lessor that intends to
-------------------
acquire an interest in, or holds a mortgage, ground lease or deed of trust
encumbering any portion of the Real Property should require, either the
execution by Tenant of an agreement requiring Tenant to send such lender written
notice of any default by Landlord under this Lease, giving such lender the right
to cure such default until such lender has completed foreclosure, and preventing
Tenant from terminating this Lease unless such default remains uncured after
foreclosure has been completed, and/or any modification of the agreements,
covenants, conditions or provisions of this Lease, then Tenant agrees that it
shall, within ten (10) days after Landlord's request, execute and deliver such
agreement and modify this Lease as required by such lender or ground lessor;
provided, however, that no such modification shall affect the length of the term
or increase the rent payable by Tenant under Paragraphs 5 and 7 or otherwise
materially lessen the rights, or increase the obligations of, Tenant hereunder.
Tenant acknowledges and agrees that its failure to timely execute any such
agreement or modification required by such lender or ground lessor may cause
Landlord serious financial damage by causing the failure of a financing
transaction and giving Landlord all of its rights and remedies under Paragraph
25 below, including its right to damages caused by the loss of such financing.
23. Entry by Landlord. Landlord may, at any and all reasonable times,
-----------------
and upon reasonable advance notice (provided that no advance notice need be
given if an emergency necessitates an immediate entry or prior to entry to
provide routine janitorial services), enter the Premises to (a) inspect the same
and to determine whether Tenant is in compliance with its obligations hereunder,
(b) supply janitorial and any other service Landlord is required to provide
hereunder, (c) show the Premises to prospective lenders or purchasers or, during
the final twelve (12) months of the Lease term, to prospective tenants, (d) post
notices of nonresponsibility, and (e) alter, improve or repair the Premises or
any other portion of the Real Property. In connection with any such alteration,
improvement or repair, Landlord may erect in the Premises or elsewhere in the
Real Property scaffolding and other structures reasonably required for the work
to be performed. In no event shall such entry or work entitle Tenant to an
abatement of rent, constitute an eviction of Tenant, constructive or otherwise,
or impose upon Landlord any liability whatsoever, including but not limited to
liability for consequential damages or loss of business or profits by Tenant;
provided, however, that Landlord shall use good faith efforts to cause all such
work to be done in such a manner as to cause as little interference to Tenant as
reasonably possible without incurring additional expense. Landlord shall at all
times retain a key with which to unlock all of the doors in the Premises, except
Tenant's vaults and safes. If an emergency necessitates immediate access to the
Premises, Landlord may use whatever force is necessary to enter the Premises and
any such entry to the Premises shall not constitute a forcible or unlawful entry
into the Premises, a detainer of the Premises, or an eviction of Tenant from the
Premises, or any portion thereof.
In any entrance into the Premises pursuant to the provisions of this
Paragraph 23, Landlord shall endeavor in good faith to comply with Tenant's
reasonable security procedures previously detailed by Tenant to Landlord, except
to the extent Landlord or its agents determine that an emergency makes
compliance with such procedures impracticable.
24. Insolvency or Bankruptcy. The occurrence of any of the following
------------------------
shall constitute an Event of Default under Paragraph 25 below:
1. Tenant ceases doing business as a going concern, makes an
assignment for the benefit of creditors, is adjudicated an insolvent, files a
petition (or files an answer admitting the material allegations of such
petition) seeking for Tenant any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar arrangement under any state or
federal bankruptcy or other law, or Tenant consents to or acquiesces in the
appointment, pursuant to any state or federal bankruptcy or other law, of a
trustee, receiver or liquidator for the Premises, for Tenant or for all or any
substantial part of Tenant's assets; or
2. Tenant fails within sixty (60) days after the commencement of
any proceedings against Tenant seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any state or
federal bankruptcy or other Legal Requirement, to have such proceedings
dismissed, or Tenant fails, within sixty (60) days after an appointment pursuant
to any state or federal bankruptcy or other Legal Requirement without Tenant's
consent or acquiescence, of any trustee,
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receiver or liquidator for the Premises, for Tenant or for all or any
substantial part of Tenant's assets, to have such appointment vacated; or
3. Tenant is unable, or admits in writing its inability, to pay
its debts as they mature; or
4. Tenant gives notice to any governmental body of its
insolvency or pending insolvency, or of its suspension or pending suspension of
operations.
In no event shall this Lease be assigned or assignable by reason of any
voluntary or involuntary bankruptcy, insolvency or reorganization proceedings,
nor shall any rights or privileges hereunder be an asset of Tenant, the trustee,
debtor-in-possession, or the debtor's estate in any bankruptcy, insolvency or
reorganization proceedings.
25. Default and Remedies.
a. Events of Default. The occurrence of any of the following shall
-----------------
constitute an "Event of Default" by Tenant:
1. Tenant fails to pay Monthly Rent, Additional Rent or any
other rent due hereunder within five (5) business days following written notice
that such sum is past due; provided, however, if Landlord is entitled to give
written notice to Tenant that sums due under this Lease are past due and
Landlord actually gives such notice to Tenant two (2) times during any twelve
(12) month period, then thereafter the above five (5) business day notice and
grace period for payment shall no longer apply until a period of twelve (12)
months passes during which all payments due from Tenant to Landlord under this
Lease are timely paid by Tenant, at which time the five (5) business day notice
and grace period provided for above shall again apply; or
2. Tenant fails to occupy and use the Premises for thirty (30)
consecutive days, which failure shall be deemed an abandonment of the Premises
by Tenant; or
3. Tenant fails to deliver any estoppel certificate pursuant to
Paragraph 29 below, subordination agreement pursuant to Paragraph 21 above, or
document required pursuant to Paragraph 22 above, within the applicable period
set forth therein; or
4. Tenant violates the bankruptcy and insolvency provisions of
Paragraph 24 above; or
5. Tenant makes or has made or delivers or has delivered any
warranty, representation or statement to Landlord in connection with this Lease,
or any other agreement made by Tenant for the benefit of Landlord, which is or
was false or misleading in any material respect when made or furnished; or
6. Tenant assigns this Lease or subleases any portion of the
Premises in violation of Paragraph 13 above; or
7. A default by Tenant occurs under any other lease between
Tenant and Landlord or any affiliate of Landlord, and Tenant fails to cure such
default within the applicable period set forth therein; or
8. Tenant fails to comply with any other provision of this Lease
in the manner required after notice from Landlord of such failure, or, with
respect to matters which do not pose a health, safety or security risk and do
not annoy other tenants, Tenant fails to comply within thirty (30) calendar days
after written notice of such failure (or if the noncompliance cannot by its
nature be cured within the 30-day period, if Tenant fails to commence to cure
such noncompliance within the 30-day period and thereafter diligently prosecute
such cure to completion) .
b. Remedies. Upon the occurrence of an Event of Default Landlord
--------
shall have the following remedies, which shall not be exclusive but shall be
cumulative and shall be in addition to any other remedies now or hereafter
allowed by law:
1. Landlord may terminate Tenant's right to possession of the
Premises at any time by written notice to Tenant. Tenant expressly acknowledges
that in the absence of such written notice from Landlord, no other act of
Landlord, including, but not limited to, its re-entry into the Premises, its
efforts to relet the Premises, its reletting of the Premises for Tenant's
account, its storage of Tenant's personal property and trade fixtures, its
acceptance of keys to the Premises from Tenant, its appointment of a receiver,
or its exercise of any other rights and remedies under this Paragraph 25 or
otherwise at law, shall constitute an acceptance of Tenant's surrender of the
Premises or constitute a termination of this Lease or of Tenant's right to
possession of the Premises.
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Upon such termination in writing of Tenant's right to possession of
the Premises, this Lease shall terminate and Landlord shall be entitled to
recover damages from Tenant as provided in California Civil Code Section 1951.2
or any other applicable existing or future Legal Requirement providing for
recovery of damages for such breach, including but not limited to the following:
(i) The reasonable cost of recovering the Premises; plus
(ii) The reasonable cost of removing Tenant's Alterations,
trade fixtures and improvements; plus
(iii) All unpaid rent due or earned hereunder prior to the
date of termination, less the proceeds of any reletting or any rental received
from subtenants prior to the date of termination applied as provided in
Paragraph 25.b.2. below, together with interest at the Interest Rate, on such
sums from the date such rent is due and payable until the date of the award of
damages; plus
(iv) The amount by which the rent which would be payable by
Tenant hereunder, including Additional Rent under Paragraph 7 above, as
reasonably estimated by Landlord, from the date of termination until the date of
the award of damages, exceeds the amount of such rental loss as Tenant proves
could have been reasonably avoided, together with interest at the Interest Rate
on such sums from the date such rent is due and payable until the date of the
award of damages; plus
(v) The amount by which the rent which would be payable by
Tenant hereunder, including Additional Rent under Paragraph 7 above, as
reasonably estimated by Landlord, for the remainder of the then term, after the
date of the award of damages exceeds the amount such rental loss as Tenant
proves could have been reasonably avoided, discounted at the discount rate
published by the Federal Reserve Bank of San Francisco for member banks at the
time of the award plus one percent (1%); plus
(vi) Such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable law, including
without limitation any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom.
2. Landlord has the remedy described in California Civil Code
Section 1951.4 (a landlord may continue the lease in effect after the tenant's
breach and abandonment and recover rent as it becomes due, if the tenant has the
right to sublet and assign subject only to reasonable limitations), and may
continue this Lease in full force and effect and may enforce all of its rights
and remedies under this Lease, including, but not limited to, the right to
recover rent as it becomes due. After the occurrence of an Event of Default,
Landlord may enter the Premises without terminating this Lease and sublet all or
any part of the Premises for Tenant's account to any person, for such term
(which may be a period beyond the remaining term of this Lease), at such rents
and on such other terms and conditions as Landlord deems advisable. In the event
of any such subletting, rents received by Landlord from such subletting shall be
applied (i) first, to the payment of the costs of maintaining, preserving,
altering and preparing the Premises for subletting, the other costs of
subletting, including but not limited to brokers' commissions, attorneys' fees
and expenses of removal of Tenant's personal property, trade fixtures and
Alterations; (ii) second, to the payment of rent then due and payable hereunder;
(iii) third, to the payment of future rent as the same may become due and
payable hereunder; (iv) fourth, the balance, if any, shall be paid to Tenant
upon (but not before) expiration of the term of this Lease. If the rents
received by Landlord from such subletting, after application as provided above,
are insufficient in any month to pay the rent due and payable hereunder for such
month, Tenant shall pay such deficiency to Landlord monthly upon demand.
Notwithstanding any such subletting for Tenant's account without termination,
Landlord may at any time thereafter, by written notice to Tenant, elect to
terminate this Lease by virtue of a previous Event of Default.
During the continuance of an Event of Default, for so long as Landlord
does not terminate Tenant's right to possession of the Premises and subject to
Paragraph 13, entitled Assignment and Subletting, and the options granted to
Landlord thereunder, Landlord shall not unreasonably withhold its consent to an
assignment or sublease of Tenant's interest in the Premises or in this Lease.
3. During the continuance of an Event of Default, Landlord may
enter the Premises without terminating this Lease and remove all Tenant's
personal property, Alterations and trade fixtures from the Premises and store
them at Tenant's risk and expense. If Landlord removes such property from the
Premises and stores it at Tenant's risk and expense, and if Tenant fails to pay
the cost of such removal and storage after written demand therefor and/or to pay
any rent then due, then after the property has been stored for a period of
thirty (30) days or more Landlord may sell such property at public or private
sale, in the manner and at such times and places as Landlord deems commercially
reasonable following reasonable notice to Tenant of the time and place of such
sale. The proceeds of any such sale shall be applied first to the payment of the
expenses for removal and storage of the property, the preparation for and the
conducting of such sale, and for attorneys' fees and other legal expenses
incurred
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by Landlord in connection therewith, and the balance shall be applied as
provided in Paragraph 25.b.2. above.
Tenant hereby waives all claims for damages that may be caused by
Landlord's reentering and taking possession of the Premises or removing and
storing Tenant's personal property pursuant to this Paragraph 25, and Tenant
shall indemnify, defend and hold Landlord harmless from and against any and all
Claims resulting from any such act. No reentry by Landlord shall constitute or
be construed as a forcible entry by Landlord.
4. Landlord may require Tenant to remove any and all
Alterations from the Premises or, if Tenant fails to do so within ten (10) days
after Landlord's request, Landlord may do so at Tenant's expense.
5. Landlord may cure the Event of Default at Tenant's
expense, it being understood that such performance shall not waive or cure the
subject Event of Default. If Landlord pays any sum or incurs any expense in
curing the Event of Default, Tenant shall reimburse Landlord upon demand for the
amount of such payment or expense with interest at the Interest Rate from the
date the sum is paid or the expense is incurred until Landlord is reimbursed by
Tenant. Any amount due Landlord under this subsection shall constitute
additional rent hereunder.
c. Waiver of Redemption. Tenant hereby waives, for itself and all
--------------------
persons claiming by and under Tenant, all rights and privileges which it might
have under any present or future Legal Requirement to redeem the Premises or to
continue this Lease after being dispossessed or ejected from the Premises.
26. Damage or Destruction. If all or a part of the Premises are
---------------------
damaged by fire or other casualty, or if the Building is so damaged that access
to or use and occupancy of the Premises is materially impaired, Landlord shall
promptly give Tenant notice of Landlord's reasonable estimate of the time
required to make such repairs (the "Damage Estimate"). If the Damage Estimate is
one hundred twenty (120) days or less, then Landlord shall repair the damage and
this Lease shall remain in full force and effect. If the Damage Estimate is more
than one hundred twenty (120) days, Landlord, at its option exercised by written
notice to Tenant within sixty (60) days of the date of the damage, shall either
(a) repair the damage, in which event this Lease shall continue in full force
and effect, or (b) terminate this Lease as of the date specified by Landlord in
the notice, which date shall be not less than thirty (30) days nor more than
sixty (60) days after the date such notice is given, and this Lease shall
terminate on the date specified in the notice. If the Damage Estimate is more
than one hundred eighty (180) days, and Landlord does not give notice
terminating this Lease, then Tenant may give notice to Landlord, within thirty
(30) calendar days after Tenant receives the Damage Estimate, terminating this
Lease as of the date of such fire or casualty.
Notwithstanding anything to the contrary contained in this Paragraph 26,
if the initial Damage Estimate is more than ninety (90) days, and the date on
which Landlord reasonably anticipates the repairs of such damage will be
completed is during the last twelve (12) months of the Lease term, Landlord and
Tenant shall each have the option to terminate this Lease as of the date of such
damage by giving written notice to the other, in the case of Landlord together
with the Damage Estimate, or, in the case of Tenant, within thirty (30) days of
Tenant's receipt of the Damage Estimate.
If the fire or other casualty damages the Premises or the common areas of
the Real Property necessary for Tenant's use and occupancy of the Premises,
Tenant ceases to use any portion of the Premises as a result of such damage, and
the damage does not result from the negligence or willful misconduct of Tenant
or any other Tenant Parties, then during the period the Premises or portion
thereof are rendered unusable by such damage and repair, Tenant's Monthly Rent
and Additional Rent under Paragraphs 5 and 7 above shall be proportionately
reduced based upon the extent to which the damage and repair prevents Tenant
from conducting, and Tenant does not conduct, its business at the Premises.
Landlord shall not be obligated to repair or replace any of Tenant's movable
furniture, equipment, trade fixtures, and other personal property, nor any
Alterations installed in the Premises by Tenant, and no damage to any of the
foregoing shall entitle Tenant to any abatement, and Tenant shall, at Tenant's
sole cost and expense, repair and replace such items. All such repair and
replacement of Alterations shall be constructed in accordance with Paragraph 9
above regarding Alterations.
A total destruction of the Building shall automatically terminate this
Lease. In no event shall Tenant be entitled to any compensation or damages from
Landlord for loss of use of the whole or any part of the Premises or for any
inconvenience occasioned by any such destruction, rebuilding or restoration of
the Premises, the Building or access thereto, except for the rent abatement
expressly provided above. Tenant hereby waives California Civil Code Sections
1932(2) and 1933(4), providing for termination of hiring upon destruction of the
thing hired and Sections 1941 and 1942, providing for repairs to and of
premises.
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27. Eminent Domain.
--------------
a. If all or any part of the Premises are taken by any public or
quasi-public authority under the power of eminent domain, or any agreement in
lieu thereof (a "taking"), this Lease shall terminate as to the portion of the
Premises taken effective as of the date of taking. If only a portion of the
Premises is taken, Landlord or Tenant may terminate this Lease as to the
remainder of the Premises upon written notice to the other party within ninety
(90) days after the taking; provided, however, that Tenant's right to terminate
this Lease is conditioned upon the remaining portion of the Premises being of
Such size or configuration that such remaining portion of the Premises is
unusable or uneconomical for Tenant's business. Landlord shall be entitled to
all compensation, damages, income, rent awards and interest thereon whatsoever
which may be paid or made in connection with any taking and Tenant shall have no
claim against Landlord or any governmental authority for the value of any
unexpired term of this Lease or of any of the improvements or Alterations in the
Premises; provided, however, that the foregoing shall not prohibit Tenant from
prosecuting a separate claim against the taking authority for an amount
separately designated for Tenant's relocation expenses or the interruption of or
damage to Tenant's business or as compensation for Tenant's personal property,
trade fixtures, Alterations or other improvements paid for by Tenant so long as
any award to Tenant will not reduce the award to Landlord.
In the event of a partial taking of the Premises which does not result
in a termination of this Lease, the Monthly Rent and Additional Rent under
Paragraphs 5 and 7 hereunder shall be equitably reduced. If all or any part of
the Real Property other than the Premises is taken, Landlord may terminate this
Lease upon written notice to Tenant given within ninety (90) days after the date
of taking.
b. Notwithstanding the foregoing, if all or any portion of the
Premises is taken for a period of time ending prior to the end of the term of
this Lease, this Lease shall remain in full force and effect and Tenant shall
continue to pay all rent and to perform all of its obligations under this Lease;
provided, however, that Tenant shall be entitled to all compensation, damages,
income, rent awards and interest thereon that is paid or made in connection with
such temporary taking of the Premises (or portion thereof), except that any such
compensation in excess of the rent or other amounts payable to Landlord
hereunder shall be promptly paid over to Landlord as received. Landlord and
Tenant each hereby waive the provisions of California Code of Civil Procedure
Section 1265.130 and any other applicable existing or future Legal Requirement
providing for, or allowing either party to petition the courts of the state in
which the Real Property is located for, a termination of this Lease upon a
partial taking of the Premises and/or the Building.
28. Landlord's Liability; Sale of Building. The term "Landlord," as
--------------------------------------
used in this Lease, shall mean only the owner or owners of the Real Property at
the time in question. Notwithstanding any other provision of this Lease, the
liability of Landlord for its obligations under this Lease is limited solely to
Landlord's interest in the Real Property as the same may from time to time be
encumbered, and no personal liability shall at any time be asserted or
enforceable against any other assets of Landlord or against the constituent
shareholders, partners or other owners of Landlord, or the directors, officers,
employees and agents of Landlord or such constituent shareholder, partner or
other owner, on account of any of Landlord's obligations or actions under this
Lease. For purposes of the foregoing, Landlord's interest in the Real Property
shall include (subject to the rights of any holder of a Superior Interest) (a)
any condemnation awards receivable (but not received) by Landlord in respect of
a taking of a portion of the Real Property and (b) any proceeds of casualty
insurance receivable (but not received) by Landlord in respect of damage to or
destruction of any portion of the Real Property, but only to the extent that
such insurance proceeds are not used or to be used for the repair or replacement
of any portion of the Real Property damaged or destroyed. In addition, in the
event of any conveyance of title to the Real Property, then the grantor or
transferor shall be relieved of all liability with respect to Landlord's
obligations to be performed under this Lease after the date of such conveyance.
In no event shall Landlord be deemed to be in default under this Lease unless
Landlord fails to perform its obligations under this Lease, Tenant delivers to
Landlord written notice specifying the nature of Landlord's alleged default, and
Landlord fails to cure such default within thirty (30) days following receipt of
such notice (or, if the default cannot reasonably be cured within such period,
to commence action within such thirty (30)-day period and proceed diligently
thereafter to cure such default). Upon any conveyance of title to the Real
Property, the grantee or transferee shall be deemed to have assumed Landlord's
obligations to be performed under this Lease from and after the date of such
conveyance, subject to the limitations on liability set forth above in this
Paragraph 28. If Tenant provides Landlord with any security for Tenant's
performance of its obligations hereunder, and Landlord transfers such security
to the grantee or transferee of Landlord's interest in the Real Property,
Landlord shall be released from any further responsibility or liability for such
security. Notwithstanding any other provision of this Lease, but not in
limitation of the provisions of Paragraph 14.a. above, Landlord shall not be
liable for any consequential damages, or interruption or loss of business,
income or profits, or claims of constructive eviction, nor shall Landlord be
liable for loss of or damage to artwork, currency, jewelry, bullion, unique or
valuable documents, securities or other valuables, or for other property not in
the nature of ordinary fixtures, furnishings and equipment used in general
administrative and executive office activities and functions. Wherever in this
Lease Tenant (a) releases Landlord from any claim or liability, (b) waives or
limits any right of Tenant to assert any claim against Landlord or to seek
recourse against any property of Landlord or (c) agrees to indemnify
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Landlord against any matters, the relevant release, waiver, limitation or
indemnity shall run in favor of and apply to Landlord, the constituent
shareholders, partners or other owners of Landlord, and the directors, officers,
employees and agents of Landlord and each such constituent shareholder, partner
or other owner.
Notwithstanding anything to the contrary contained above in this
Paragraph 28 or elsewhere in this Lease, in the event that Landlord's interest
in the Real Property, as the same may from time to time be encumbered, shall be
in excess often Million Dollars ($10,000,000.00), then such excess shall not be
subject to any claims by Tenant or liability to Tenant arising out of or in
connection with this Lease.
29. Estoppel Certificates. At any time and from time to time, upon
---------------------
not less than ten (10) business days' prior notice from Landlord, Tenant shall
execute, acknowledge and deliver to Landlord a statement certifying the
commencement date of this Lease, stating that this Lease is unmodified and in
full force and effect (or if there have been modifications, that this Lease is
in full force and effect as modified and the date and nature of each such
modification), that Landlord is not in default under this Lease (or, if Landlord
is in default, specifying the nature of such default), that Tenant is not in
default under this Lease (or if Tenant is in default, specifying the nature of
such default), the current amounts of and the dates to which the Monthly Rent
and Additional Rent has been paid, and setting forth such other matters as may
be reasonably requested by Landlord. Any such statement may be conclusively
relied upon by a prospective purchaser of the Real Property or by a lender
obtaining a lien on the Real Property as security. If Tenant fails to execute
and deliver to Landlord the required certificate within the required ten (10)
business day period, then Landlord may send Tenant a second written notice
requesting that Tenant execute and deliver such certificate to Landlord pursuant
to the terms hereof. If Tenant fails to execute and return such certificate to
Landlord within ten (10) business days following such second written notice,
then such failure shall be conclusive upon Tenant that (i) this Lease is in full
force and effect, without modification except as may be represented by Landlord,
(ii) there are no uncured defaults in Landlord's performance of its obligations
hereunder, (iii) not more than one month's installment of Monthly Rent has been
paid in advance, and (iv) any other statements of fact included by Landlord in
such statement are correct. Tenant acknowledges and agrees that its failure to
execute such certificate within the ten (10) business day period following
Landlord's second written notice to Tenant, as provided above, may cause
Landlord serious financial damage by causing the failure of a sale or financing
transaction and shall give Landlord all of its rights and remedies under
Paragraph 25 above, including its right to damages caused by the loss of such
sale or financing.
30. Right of Landlord to Perform. If Tenant fails to make any payment
----------------------------
required hereunder (other than Monthly Rent and Additional Rent) or fails to
perform any other of its obligations hereunder within any applicable notice and
cure period provided for herein, Landlord may, but shall not be obliged to, and
without waiving any default of Tenant or releasing Tenant from any obligations
to Landlord hereunder, make any such payment or perform any other such
obligation on Tenant's behalf. All sums so paid by Landlord and all necessary
incidental costs in connection with the performance by Landlord of an obligation
of Tenant (together with interest thereon from the date of such payment by
Landlord until paid at the Interest Rate) shall be payable by Tenant to Landlord
within thirty (30) days of written demand, and Tenant's failure to make such
payment within such thirty (30) day period shall entitle Landlord to the same
rights and remedies provided Landlord in the event of non-payment of rent.
31. Late Charge. Tenant acknowledges that late payment of any
-----------
installment of Monthly Rent or Additional Rent or any other amount required
under this Lease will cause Landlord to incur costs not contemplated by this
Lease and that the exact amount of such costs would be extremely difficult and
impracticable to fix. Such costs include, without limitation, processing and
accounting charges, late charges that may be imposed on Landlord by the terms of
any encumbrance or note secured by the Real Property and the loss of the use of
the delinquent funds. Therefore, if any installment of Monthly Rent or
Additional Rent or any other amount due from Tenant is not received when due,
Tenant shall pay to Landlord on demand, on account of the delinquent payment, an
additional sum equal to the greater of (i) five percent (5%) of the overdue
amount, or (ii) $100.00, which additional sum represents a fair and reasonable
estimate of the costs that Landlord will incur by reason of late payment by
Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant's
default with respect to the overdue amount, nor prevent Landlord from exercising
its right to collect interest as provided above, rent, or any other damages, or
from exercising any of the other rights and remedies available to Landlord.
32. Attorneys' Fees; waiver of Jury Trial. In the event of any action
-------------------------------------
or proceeding between Landlord and Tenant (including an action or proceeding
between Landlord and the trustee or debtor in possession while Tenant is a
debtor in a proceeding under any bankruptcy law) to enforce any provision of
this Lease, the losing party shall pay to the prevailing party all costs and
expenses, including, without limitation, reasonable attorneys' fees and
expenses, incurred in such action and in any appeal in connection therewith by
such prevailing party. The "prevailing party" will be determined by the court
before whom the action was brought based upon an assessment of which party's
major arguments or positions taken in the suit or proceeding could fairly be
said to have prevailed over the other party's major arguments or positions on
major disputed issues in the court's decision. Notwithstanding the foregoing,
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however, Landlord shall be deemed the prevailing party in any unlawful detainer
or other action or proceeding instituted by Landlord based upon any default or
alleged default of Tenant hereunder if (i) judgment is entered in favor of
Landlord, or (ii) prior to trial or judgment Tenant pays all or any portion of
the rent claimed by Landlord, vacates the Premises, or otherwise cures the
default claimed by Landlord.
If Landlord becomes involved in any litigation or dispute, threatened or
actual, by or against anyone not a party to this Lease, but arising by reason of
or related to any act or omission of Tenant or any Tenant Party, Tenant agrees
to pay Landlord's reasonable attorneys' fees and other costs incurred in
connection with the litigation or dispute, regardless of whether a lawsuit is
actually filed.
IF ANY ACTION OR PROCEEDING BETWEEN LANDLORD AND TENANT TO ENFORCE THE
PROVISIONS OF THIS LEASE (INCLUDING AN ACTION OR PROCEEDING BETWEEN LANDLORD AND
THE TRUSTEE OR DEBTOR IN POSSESSION WHILE TENANT IS A DEBTOR IN A PROCEEDING
UNDER ANY BANKRUPTCY LAW) PROCEEDS TO TRIAL, LANDLORD AND TENANT HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY IN SUCH TRIAL. Landlord and Tenant agree that
this paragraph constitutes a written consent to waiver of trial by jury within
the meaning of California Code of Civil Procedure Section 631 (a)(2), and Tenant
does hereby authorize and empower Landlord to file this paragraph and/or this
Lease, as required, with the clerk or judge of any court of competent
jurisdiction as a written consent to waiver of jury trial.
33. Waiver. No provisions of this Lease shall be deemed waived by
------
Landlord or Tenant unless such waiver is in a writing signed by the party giving
such waiver. The waiver by either party of any breach of any provision of this
Lease by the other party shall not be deemed a waiver of any subsequent breach
of the same or any other provision of this Lease. No delay or omission in the
exercise of any right or remedy of Landlord upon any default by Tenant, or of
Tenant upon any default of Landlord, shall impair such right or remedy or be
construed as a waiver. Landlord's acceptance of any payments of rent due under
this Lease shall not be deemed a waiver of any default by Tenant under this
Lease (including Tenant's recurrent failure to timely pay rent) other than
Tenant's nonpayment of the accepted sums, and no endorsement or statement on any
check or accompanying any check or payment shall be deemed an accord and
satisfaction. Tenant's payment of rent due and Tenant's continuance in
possession shall not constitute a waiver by Tenant of any default of Landlord.
Landlord's consent to or approval of any act by Tenant requiring Landlord's
consent or approval shall not be deemed to waive or render unnecessary
Landlord's consent to or approval of any subsequent act by Tenant.
34. Notices. All notices and demands which may or are required to be
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given by either party to the other hereunder shall be in writing. All notices
and demands by Landlord to Tenant shall be delivered personally or sent by
United States certified or registered mail, return receipt requested, postage
prepaid, or by any reputable overnight or same-day courier, addressed to Tenant
at the Premises, or to such other place as Tenant may from time to time
designate by notice to Landlord hereunder. All notices and demands by Tenant to
Landlord shall be sent by United States mail, postage prepaid, or by any
reputable overnight or same-day courier, addressed to Landlord in care of
Shorenstein Company, L.P., 555 California Street, 49th floor, San Francisco,
California 94104, or to such other place as Landlord may from time to time
designate by notice to Tenant hereunder. In the event Tenant requests multiple
notices hereunder, Tenant will be bound by such notice from the earlier of the
effective times of the multiple notices.
35. Deleted.
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36. Defined Terms and Marginal Headings. When required by the context of
-----------------------------------
this Lease, the singular includes the plural. If more than one person or entity
signs this Lease as Tenant, the obligations hereunder imposed upon Tenant shall
be joint and several, and the act of, written notice to or from, refund to, or
signature of, any Tenant signatory to this Lease (including without limitation
modifications of this Lease made by fewer than all such Tenant signatories)
shall bind every other Tenant signatory as though every other Tenant signatory
had so acted, or received or given the written notice or refund, or signed. The
headings and titles to the paragraphs of this Lease are for convenience only and
are not to be used to interpret or construe this Lease. Wherever the term
including or includes is used in this Lease it shall be construed as if followed
by the phrase "without limitation." The language in all parts of this Lease
shall in all eases be construed as a whole and in accordance with its fair
meaning and not construed for or against any party simply because one party was
the drafter thereof."
37. Time and Applicable Law. Time is of the essence of this Lease and of
-----------------------
each and all of its provisions, except as to the conditions relating to the
delivery of possession of the Premises to Tenant. This Lease shall be governed
by and construed in accordance with the laws of the State of California, and the
venue of any action or proceeding under this Lease shall be the City and County
of San Francisco, California.
38. Successors. Subject to the provisions of Paragraphs 13 and 28 above,
----------
the covenants and conditions hereof shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors, executors, administrators and assigns.
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39. Entire Agreement; Modifications. This Lease (including any
-------------------------------
exhibit, rider or attachment hereto) constitutes the entire agreement between
Landlord and Tenant with respect to Tenant's lease of the Premises. No provision
of this Lease may be amended or otherwise modified except by an agreement in
writing signed by the parties hereto. Neither Landlord nor Landlord's agents
have made any representations or warranties with respect to the Premises, the
Building, the Real Property or this Lease except as expressly set forth herein,
including without limitation any representations or warranties as to the
suitability or fitness of the Premises for the conduct of Tenant's business or
for any other purpose, nor has Landlord or its agents agreed to undertake any
alterations or construct any improvements to the Premises except those, if any,
expressly provided in this Lease, and no rights, easements or licenses shall be
acquired by Tenant by implication or otherwise unless expressly set forth
herein. Neither this Lease nor any memorandum hereof shall be recorded by
Tenant.
40. Light and Air. Tenant agrees that no diminution of light, air or
-------------
view by any structure which may hereafter be erected (whether or not by
Landlord) shall entitle Tenant to any reduction of rent hereunder, result in any
liability of Landlord to Tenant, or in any other way affect this Lease.
41. Name of Building. Tenant shall not use the name of the Building for
----------------
any purpose other than as the address of the business conducted by Tenant in the
Premises without the written consent of Landlord, which consent may be denied in
Landlord's sole discretion. Landlord reserves the right to change the name of
the Building at any time in its sole discretion by written notice to Tenant and
Landlord shall not be liable to Tenant for any loss, cost or expense on account
of any such change of name.
42. Severability. If any provision of this Lease or the application
------------
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Lease and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
43. Authority. If Tenant or Landlord is a corporation, partnership,
---------
trust, association or other entity, Tenant and Landlord and each person
executing this Lease on their respective behalf, hereby covenant and warrant
that (a) Tenant or Landlord, as the case may be, is duly incorporated or
otherwise established or formed and validly existing under the laws of its state
of incorporation, establishment or formation, (b) Tenant or Landlord, as the
case may be, has and is duly qualified to do business in California, (c) Tenant
or Landlord, as the case may be, has full corporate, partnership, trust,
association or other appropriate power and authority to enter into this Lease
and to perform all Tenant's obligations hereunder, and (d) each person (and all
of the persons if more than one signs) signing this Lease on behalf of Tenant or
Landlord is duly and validly authorized to do so.
44. No Offer. Submission of this instrument for examination and
--------
signature by Tenant does not constitute an offer to lease or a reservation of or
option for lease, and is not effective as a lease or otherwise until execution
and delivery by both Landlord and Tenant.
45. Real Estate Brokers. Landlord and Tenant each represents and
-------------------
warrants to the other that such party has negotiated this Lease directly with
the Real Estate Broker(s) identified in Paragraph 2 and has not authorized or
employed, or acted by implication to authorize or to employ, any other real
estate broker or salesman to act for such party in connection with this Lease.
Each party shall hold the other harmless from and indemnify and defend the other
against any and all Claims by any real estate broker or salesman other than the
Real Estate Broker(s) identified in Paragraph 2 for a commission, finder's fee
or other compensation as a result of the inaccuracy of such party's
representation above.
46. Consents and Approvals. Wherever the consent, approval, judgment or
----------------------
determination of Landlord is required or permitted under this Lease, such
consent, approval, judgment or determination shall not be unreasonably withheld,
unless the provision providing for such consent, approval, judgment or
determination specifies that Landlord's consent or approval may be granted or
denied in Landlord's sole discretion or otherwise states specific criteria for
the granting or withholding of consent or approval. Whenever Tenant requests
Landlord to take any action or give any consent or approval, Tenant shall
reimburse Landlord for all of Landlord's reasonable costs incurred in reviewing
the proposed action or consent (whether or not Landlord consents to any such
proposed action), including without limitation reasonable attorneys' or
consultants' fees and expenses, within thirty (30) days after Landlord's
delivery to Tenant of a statement of such costs. If it is determined that
Landlord failed to give its consent or approval where it was required to do so
under this Lease, Tenant's sole remedy will be an order of specific performance
or mandatory injunction of the Landlord's agreement to give its consent or
approval. The review and/or approval by Landlord of any item shall not impose
upon Landlord any liability for accuracy or sufficiency of any such item or the
quality or suitability of such item for its intended use. Any such review or
approval is for the sole purpose of protecting Landlord's interest in the Real
Property, and neither Tenant nor any Tenant Party nor any person or entity
claiming by, through or under Tenant, nor any other third party shall have any
rights hereunder by virtue of such review and/or approval by Landlord.
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47. Reserved Rights. Landlord retains and shall have the rights set
---------------
forth below, exercisable without notice and without liability to Tenant for
damage or injury to property, person or business and without effecting an
eviction, constructive or actual, or disturbance of Tenant's use or possession
of the Premises or giving rise to any claim for rent abatement:
(a) To grant to anyone the exclusive right to conduct any business or render
any service in or to the Building and its tenants, provided that such
exclusive right shall not operate to require Tenant to use or patronize
such business or service or to exclude Tenant from its use of the
Premises expressly permitted herein.
(b) To perform, or cause or permit to be performed, at any time and from time
to time, including during Business Hours, construction in the common
areas and facilities or other leased areas in the Real Property.
(c) To reduce, increase, enclose or otherwise change at any time and from
time to time the size, number, location, lay-out and nature of the common
areas and facilities and other tenancies and premises in the Real
Property and to create additional rentable areas through use or enclosure
of common areas.
48. Financial Statements. Upon submission of this Lease to Landlord
--------------------
and at any time thereafter within thirty (30) days after Landlord's request
therefor, Tenant shall furnish to Landlord copies of true and accurate financial
statements reflecting Tenant's then current financial situation (including
without limitation balance sheets, statements of profit and loss, and changes in
financial condition) and Tenant's most recent audited or certified annual
financial statements pertaining to Tenant's business, and in addition shall
cause to be furnished to Landlord similar financial statements for any
guarantor(s) of this Lease. Landlord shall use good faith efforts to keep such
information received from Tenant confidential, except that Landlord may disclose
such financial information received from Tenant to any lender or prospective
lender for, or purchaser or prospective purchaser of, the Real Property and
except that the foregoing confidentiality requirement shall be inapplicable in
the event the subject financial information is made publicly available by the
Security and Exchange Commission or any other governmental body.
49. Deleted.
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50. Nondisclosure of Lease Terms. Tenant agrees that the terms of
----------------------------
this Lease are confidential and constitute proprietary information of Landlord,
and that disclosure of the terms hereof could adversely affect the ability of
Landlord to negotiate with other tenants. Tenant hereby agrees that Tenant and
its partners, officers, directors, employees, agents, real estate brokers and
sales persons and attorneys shall not disclose the terms of this Lease to any
other person without Landlord's prior written consent (which consent may be
denied in Landlord's sole discretion), except to (i) any accountants of Tenant
in connection with the preparation of Tenant's financial statements or tax
returns, (ii) to an assignee of this Lease or sublessee of the Premises, (iii)
to an entity or person to whom disclosure is required by applicable law or in
connection with any action brought to enforce this Lease, (iv) Tenant's
consultants, agents, architects or attorneys representing Tenant in connection
with this Lease or (v) any governmental or judicial entity involved in any
investigation into the compliance of the Premises or the Real Property with
applicable Legal Requirements.
51. Hazardous Substance Disclosure. California law requires landlords
------------------------------
to disclose to tenants the existence of certain hazardous substances.
Accordingly, the existence of gasoline and other automotive fluids, maintenance
fluids, copying fluids and other office supplies and equipment, certain
construction and finish materials, tobacco smoke, cosmetics and other personal
items, and asbestos-containing materials ("ACM") must be disclosed. Gasoline and
other automotive fluids are found in the garage area of the Building. Cleaning,
lubricating and hydraulic fluids used in the operation and maintenance of the
Building are found in the utility areas of the Building not generally accessible
to Building occupants or the public. Many Building occupants use copy machines
and printers with associated fluids and toners, and pens, markers, inks, and
office equipment that may contain hazardous substances. Certain adhesives,
paints and other construction materials and finishes used in portions of the
Building may contain hazardous substances. Although smoking is prohibited in the
public areas of the Building, these areas may, from time to time, be exposed to
tobacco smoke. Building occupants and other persons entering the Building from
time-to-time may use or carry prescription and non-prescription drugs, perfumes,
cosmetics and other toiletries, and foods and beverages, some of which may
contain hazardous substances. Further, certain portions of the Building contain
ACM in the form of fireproofing on structural elements, heat insulation sealed
within fire doors, and small areas of resilient floor tile, but these areas are
generally inaccessible to Building occupants and visitors, such as machinery and
utility rooms, the inside of sealed walls and above suspended ceilings. Landlord
has made no special investigation of the Premises with respect to any hazardous
substances. Tenant agrees not to expose or disturb any ACM unless Landlord has
given Tenant prior written consent thereto (which consent may be denied in
Landlord's sole discretion) and Tenant complies with all applicable Legal
Requirements and Landlord's written procedures for handling ACM. Tenant's
failure to comply with the immediately preceding sentence
30
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shall constitute an Event of Default under Paragraph 25 of this Lease. Tenant
may obtain a copy of Landlord's written procedures for handling ACM from the
Building office.
52. Stairway Access. Throughout the Lease term, Landlord shall permit
---------------
Tenant to use the Building's fire stairs for access by Tenant's employees
between the 11th floor of the Premises and the 12th floor of the Premises.
Tenant acknowledges that the doors leading from the fire stairs to individual
floors are kept locked, subject to applicable Legal Requirements and Building
procedures. Accordingly, a security system mutually acceptable to Landlord and
Tenant (such as code access, card key access or other system) shall be installed
by Tenant, at Tenant's sole cost, on the doors leading from the fire stairs to
the 11th floor of the Premises and the 12th floor of the Premises so that
Tenant's employees are able to open the doors from the fire stairs using such
system. Such installation shall be performed either as a part of the Tenant
Improvements or as an Alteration pursuant to Paragraph 9 below. Tenant's access
rights provided in this Paragraph 52 shall be subject to applicable Legal
Requirements and reasonable Building procedures currently or hereinafter in
effect. Throughout the Lease term, Tenant shall, at Tenant's sole cost, maintain
the security system in first class working condition. Notwithstanding anything
to the contrary above, if Landlord, at any time during the Lease term and for
any reason, adopts a uniform policy that tenants of the Building may not use the
fire stairs for access to their premises, then Landlord may revoke Tenant's
rights under this Paragraph 52 to use the fire stairs for such access. Upon the
expiration or earlier termination of this Lease (or such earlier date that
Landlord, in accordance with the provisions above, revokes Tenant's right to use
the fire stairs for access between the 11th and 12th floors) Landlord may, at
its option, require that the security system be removed and the affected
portions of the Building returned to their condition immediately prior to the
installation of the security system (ordinary wear and tear excepted). If
Landlord does so require that the security system be removed, then Landlord
shall perform such removal and Tenant shall reimburse Landlord for the
reasonable costs thereof, within thirty (30) days of Landlord's written demand
therefor.
53. Right of First Offer.
--------------------
a. First Offer Right; Available Space. If, during the first three
----------------------------------
(3) years of the Lease term, the entire thirteenth (13th) floor of the Building
(the "First Offer Space") becomes "available for lease," then Tenant shall have
a right of first offer to lease the First Offer Space, subject to the provisions
of this Paragraph 53. The First Offer Space shall not be deemed "available for
lease" if the tenant under an expiring lease of such space desires to renew or
extend its lease, whether pursuant to a renewal option or a new arrangement with
Landlord, or if any tenant of the Building exercises an option or right of first
offer to lease such space, which option or right of first offer existed as of
the date of this Lease. Upon Landlord obtaining knowledge that the First Offer
Space will be available for lease, Landlord shall send Tenant a written notice
(the "Availability Notice") specifying the availability date (or estimated
availability date).
b. Exercise of First Offer Right. If Tenant elects to lease the
-----------------------------
First Offer Space (and Tenant must lease the entire First Offer Space, and may
not elect to lease only a portion thereof), Tenant shall so notify Landlord in
writing within five (5) business days after Tenant's receipt of the Availability
Notice. If Tenant does not exercise its right to lease the First Offer Space
within such five (5) business day period, then Landlord shall be released of its
obligation to lease the First Offer Space to Tenant and the provisions of this
Paragraph 53 shall no longer have any force or effect either as to the First
Offer Space.
c. Terms and Conditions.
--------------------
(i) Upon Tenant's election to lease the First Offer Space,
Landlord and Tenant shall promptly enter into an amendment of this Lease, adding
the First Offer Space to the Premises on all the terms and conditions set forth
in this Lease as to the Premises originally demised hereunder, except that (1)
the term of the lease to Tenant of the First Offer Space shall commence upon the
availability date specified in the Availability Notice (but in event sooner than
thirty (30) days after the date of Landlord's Availability Notice to Tenant) or,
if later, the date Landlord actually delivers the space to Tenant, vacant and
free of other tenancies, and shall continue coextensively with the remaining
term hereof and any extension thereof, (2) the Monthly Rent payable by Tenant
under Paragraph 5 of this Lease for the First Offer Space shall be the fair
market rent for the First Offer Space, as provided below, (3) Tenant's Share for
purposes of Paragraph 7 hereof with respect to the First Offer Space shall be
determined by dividing the rentable square footage of such First Offer Space by
the rentable square footage of the Building, (4) for purposes of Paragraph 7
hereof, the Base Year for the First Offer Space shall be the calendar year in
which the First Offer Space is added to this Lease and the Base Tax Year shall
be the fiscal tax year in which the First Offer Space is added to this Lease,
and (5) Tenant shall take the First Offer Space in its then "as-is" condition.
For purposes of this Paragraph 53.c., the term "fair market rent"
shall mean the rental rate that would be applicable for a lease term commencing
on the commencement date of the lease as to the First Offer Space and that would
be payable in any arms length negotiations for the First Offer Space for a lease
term of the length of the term that Tenant will lease the First Offer Space
(provided, however,
31
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if the term of this Lease as to the First Offer Space will be less than five (5)
years, then for the purposes of establishing the fair market rent for the First
Offer Space, the term of this Lease shall be deemed to be five (5) years), which
rental rate may be established by reference to rental terms actually negotiated
for comparable space under primary lease (and not sublease), taking into
consideration the fact that the First Offer Space is being leased in its as-is
condition, and taking into consideration the location of the Building and such
amenities as existing improvements, view, floor on which the First Offer Space
is situated and the like, situated in first-class, reputable, established office
and retail complexes in comparable locations in the San Francisco Financial
District, in comparable physical and economic condition, taking into
consideration the then-prevailing ordinary rental market practices with respect
to tenant concessions (if any) (e.g. not offering extraordinary rental,
promotional deals and other concessions to tenants which deviate from what is
the then-prevailing ordinary practice in an effort to alleviate cash flow
problems, difficulties in meeting loan obligations or other financial distress,
or in response to a greater than average vacancy rate).
The fair market rent for the First Offer Space shall be mutually
agreed upon by Landlord and Tenant in writing within the thirty (30)-day period
commencing with Landlord's notice to Tenant stating the commencement date for
the First Offer Space, but no sooner than three (3) months prior to the date the
First Offer Space is to be added to this Lease. If Landlord and Tenant are
unable to agree upon the fair market rent within such thirty (30)-day period,
the fair market rent shall be established by appraisal in accordance with the
procedures set forth in Exhibit C attached hereto.
---------
(ii) If Tenant exercises the right of first offer granted
herein, Landlord does not guarantee that the First Offer Space will be available
on the stated availability date for the lease thereof, if the then existing
occupants of the First Offer Space shall hold-over, or for any other reason
beyond Landlord's reasonable control. In such event, rent with respect to the
First Offer Space shall be abated until Landlord legally delivers the same to
Tenant, as Tenant's sole recourse.
d. Minimum Monthly Rent. Notwithstanding anything in the foregoing
--------------------
or Exhibit C to the contrary, at no time during the term of this Lease may the
Monthly Rent for the First Offer Space be less than the amount produced by
multiplying the rentable square footage of such First Offer Space by the
aggregate of the monthly rental rate per rentable square foot payable by Tenant
for the original Premises leased under this Lease under Paragraphs 5 and 7
hereof, as such monthly rental rate may adjust from time to time during the term
hereof.
e. Limitation on Tenant's Right of First Offer. Notwithstanding the
-------------------------------------------
foregoing, if (i) on the date of exercise of the right of first offer, or the
date immediately preceding the date the Lease term for the First Offer Space is
to commence, Tenant is in default of any of its obligations under this Lease, or
(ii) on the date immediately preceding the date the Lease term for the First
Offer Space is to commence Tenant named herein (a) is not in occupancy of eighty
percent (80%) of the Premises then leased hereunder or (b) does not intend to
occupy eighty percent (80%) of the Premises then leased hereunder, together with
the entire First Offer Space, then Tenant shall have no right to lease the First
Offer Space and the exercise of the right of first offer shall be null and void.
54. Signage. Tenant may, at Tenant's expense, install a sign
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identifying Tenant's business at the entrance to the Premises, provided that the
design, size, color and location of the sign shall be in accordance with the
Building's standard signage program and subject to Landlord's prior reasonable
approval. Tenant shall be entitled, at no cost to Tenant, to have the name of
Tenant's company listed on the Building directory situated in the lobby of the
Building.
55. Parking.
--------
a. Commencing upon the date that Tenant first conducts its business
from the Premises, Landlord shall provide Tenant with five (5) reserved parking
spaces in such areas of the parking facility for the Building as Landlord may
designate from time to time, and Tenant shall pay for such parking at the rate
or charge in effect from time to time for parking in the Building. Tenant
acknowledges that monthly parking rates apply only to parking during Business
Hours on Business Days and that parking outside or beyond such hours shall be
subject to additional hourly rates in effect from time to time, and Tenant
further acknowledges that the monthly and hourly rates or charges in effect may
vary from time to time based on, among other things, the time of day, type of
parking (e.g., valet, self-park, or tandem), occurrence of "special events", and
general rate increases.
b. Tenant shall provide Landlord with advance written notice of the
names of each individual to whom Tenant from time to time distributes Tenant's
parking rights hereunder, and shall cause each such individual to execute
Landlord's standard waiver form for garage users. If the parking charge is not
paid when due, and such failure continues for ten (10) days after written notice
to Tenant of such failure, then in addition to any other remedies afforded
Landlord under this Lease by reason of nonpayment of rent, Landlord may
terminate Tenant's rights under this Paragraph 55. Further, if at any time
Tenant releases to Landlord any parking space provided for in this Paragraph 55,
then Tenant's right under this Paragraph 55 to use such released parking space
shall automatically terminate.
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<PAGE>
c. The parking spaces to be made available to Tenant hereunder may
contain a reasonable mix of spaces for compact ears. Landlord shall take
reasonable actions to ensure the availability of the parking spaces leased by
Tenant, but Landlord does not guarantee the availability of those spaces at all
times against the actions of other tenants of the Building and users of the
parking facility, and Landlord further reserves the right to restrict the hours
during which the parking facility is available to Tenant for use of the parking
spaces provided to Tenant hereunder to Business Hours on Business Days. Without
limiting the foregoing, in no event shall this Lease be void or voidable, nor
shall Landlord be liable to Tenant for any loss or damage, nor shall there be
any abatement of rent hereunder (other than the parking charge paid hereunder
for any parking space no longer made available), by reason of any reduction in
Tenant's parking rights hereunder by reason of strikes, lock-outs, labor
disputes, shortages of material or labor, fire, flood or other casualty, acts of
God or any other cause beyond the control of Landlord. Access to the parking
spaces to be made available to Tenant shall, at Landlord's option, be by card,
pass, bumper sticker, decal or other appropriate identification issued by
Landlord, and Tenant's right to use the parking facility is conditioned on
Tenant's abiding by and shall otherwise be subject to such rules and regulations
as may be promulgated by Landlord from time to time for the parking facility.
d. The parking rights set forth in this Paragraph 55 are non-
transferrable, are personal to the Tenant originally named herein, and shall not
inure to the benefit of any successor, assignee or subtenant of Tenant other
than an Affiliate (as defined in Paragraph 13.g. above). In the event of any
assignment or sublease of parking space rights that is approved by Landlord
(provided, however, that such approval may be granted or withheld by Landlord in
its sole and absolute discretion), Landlord shall be entitled to receive one
hundred percent (100%) of any profit received by Tenant in connection with such
assignment or sublease.
THIS LEASE IS EXECUTED by Landlord and Tenant as of the date set forth at
----------------------
the top of page 1 hereof.
FORTY-FIVE FREMONT ASSOCIATES, DIGITAL ISLAND, INC., a California
a California general partnership corporation
By Shorenstein Company, L.P., a By /s/ TL THOMPSON
California limited partnership, --------------------------------
General Partner Name TL Thompson
------------------------------
By Shorenstein Management, Inc., a Title CFO
California corporation, -----------------------------
General Partner Tenant
By /s/ Douglas W. Shorenstein
__________________________
Douglas W. Shorenstein
President
Landlord
33
<PAGE>
[PREMISES FLOOR PLAN]
45 FREMONT
FLOOR 11
EXHIBIT A
Page 1 of 2
<PAGE>
[PREMISES FLOOR PLAN]
45 FREMONT
FLOOR 12
EXHIBIT A
Page 2 of 2
<PAGE>
EXHIBIT B
---------
RULES AND REGULATIONS
FORTY-FIVE FREMONT STREET BUILDING
1. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside or
inside of the Building or any part of the Premises visible from the exterior of
the Premises without the prior written consent of Landlord, which consent may be
withheld in Landlord's sole discretion. Landlord shall have the right to remove,
at Tenant's expense and without notice to Tenant, any such sign, placard,
picture, advertisement, name or notice that has not been approved by Landlord.
All approved signs or lettering on doors and walls shall be
printed, painted, affixed or inscribed at the expense of Tenant by a person
approved of by Landlord.
If Landlord notifies Tenant in writing that Landlord objects to
any curtains, blinds, shades or screens attached to or hung in or used in
connection with any window or door of the Premises, such use of such curtains,
blinds, shades or screens shall be removed immediately by Tenant. No awning
shall be permitted on any part of the Premises.
2. No ice, drinking water, towel, barbering or bootblacking,
shoeshining or repair services, or other similar services shall be provided to
the Premises, except from persons authorized by Landlord and at the hours and
under regulations fixed by Landlord.
3. The bulletin board or directory of the Building will be provided
exclusively for the display of the name and location of tenants only and
Landlord reserves the right to exclude any other names therefrom.
4. The sidewalks, halls, passages, exits, entrances, elevators and
stairways shall not be obstructed by any of the Tenant Parties or used by Tenant
for any purpose other than for ingress to and egress from its Premises. The
halls, passages, exits, entrances, elevators, stairways, balconies and roof are
not for the use of the general public and Landlord shall in all cases retain the
right to control and prevent access thereto by all persons whose presence in the
judgment of Landlord shall be prejudicial to the safety, character, reputation
and interests of the Building and its tenants. No tenant and no employees or
invitees of any tenant shall go upon the roof of the Building.
5. Tenant shall not alter any lock or install any new or additional
locks or any bolts on any interior or exterior door of the Premises without the
prior written consent of Landlord.
6. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein and the expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees or
invitees, shall have caused it.
7. Tenant shall not overload the floor of the Premises or mark, drive
nails, screw or drill into the partitions, woodwork or plaster or in any way
deface the Premises or any part thereof.
8. No furniture, freight or equipment of any kind shall be brought
into the Building without the consent of Landlord and all moving of the same
into or out of the Building shall be done at such time and in such manner as
Landlord shall designate. Landlord shall have the right to prescribe the weight,
size and position of all safes and other heavy equipment brought into the
Building and also the times and manner of moving the same in and out of the
Building. Safes or other heavy objects shall, if considered necessary by
Landlord, stand on a platform of such thickness as is necessary to properly
distribute the weight. Landlord will not be responsible for loss of or damage to
any such safe or property from any cause, and all damage done to the Building by
moving or maintaining any such safe or other property shall be repaired at the
expense of Tenant. The elevator designated for freight by Landlord shall be
available for use by all tenants in the Building during the hours and pursuant
to such procedures as Landlord may determine from time to time. The persons
employed to move Tenant's equipment, material, furniture or other property in or
out of the Building must be acceptable to Landlord. The moving company must be a
locally recognized professional mover, whose primary business is the performing
of relocation services, and must be bonded and fully insured. In no event shall
Tenant employ any person or company whose presence may give rise to a labor or
other disturbance in the Real Property. A certificate or other verification of
such insurance must be received and approved by Landlord prior to the start of
any moving operations. Insurance must be sufficient in Landlord's sole opinion,
to cover all personal liability, theft or damage to the Project, including, but
not limited to, floor coverings, doors, walls, elevators, stairs, foliage and
landscaping. Special care must be taken to prevent damage to foliage and
landscaping during adverse weather. All moving operations shall be conducted at
such times and in such a manner as Landlord shall direct, and all moving shall
take place during non-business hours unless Landlord agrees in writing
otherwise.
1
<PAGE>
9. Tenant shall not employ any person or persons other than the
janitor of Landlord for the purpose of cleaning the Premises, unless otherwise
agreed to by Landlord. Except with the written consent of Landlord, no person or
persons other than those approved by Landlord shall be permitted to enter the
Building for the purpose of cleaning the Building or the Premises. Tenant shall
not cause any unnecessary labor by reason of Tenant's carelessness or
indifference in the preservation of good order and cleanliness.
10. Tenant shall not use, keep or permit to be used or kept any foul
or noxious gas or substance in the Premises, or permit or suffer the Premises to
be occupied or used in a manner offensive or objectionable to Landlord or other
occupants of the Building by reason of noise, odors and/or vibrations, or
interfere in any way with other tenants or those having business therein, nor
shall any animals or birds be brought in or kept in or about the Premises or the
Building. In no event shall Tenant keep, use, or permit to be used in the
Premises or the Building any guns, firearm, explosive devices or ammunition.
11. No cooking shall be done or permitted by Tenant in the Premises,
nor shall the Premises be used for the storage of merchandise, for washing
clothes, for lodging, or for any improper, objectionable or immoral purposes.
12. Tenant shall not use or keep in the Premises or the Building any
kerosene, gasoline, or inflammable or combustible fluid or material, or use any
method of heating or air conditioning other than that supplied by Landlord.
13. Landlord will direct electricians as to where and how telephone
and telegraph wires are to be introduced into the Premises and the Building. No
boring or cutting for wires will be allowed without the prior consent of
Landlord. The location of telephones, call boxes and other office equipment
affixed to the Premises shall be subject to the prior approval of Landlord.
14. Upon the expiration or earlier termination of the Lease, Tenant
shall deliver to Landlord the keys of offices, rooms and toilet rooms which have
been furnished by Landlord to Tenant and any copies of such keys which Tenant
has made. In the event Tenant has lost any keys furnished by Landlord, Tenant
shall pay Landlord for such keys.
15. Tenant shall not lay linoleum, tile, carpet or other similar
floor covering so that the same shall be affixed to the floor of the Premises,
except to the extent and in the manner approved in advance by Landlord. The
expense of repairing any damage resulting from a violation of this rule or
removal of any floor covering shall be borne by the tenant by whom, or by whose
contractors, employees or invitees, the damage shall have been caused.
16. No furniture, packages, supplies, equipment or merchandise will
be received in the Building or carried up or down in the elevators, except
between such hours and in such elevators as shall be designated by Landlord,
which elevator usage shall be subject to the Building's customary charge
therefor as established from time to time by Landlord.
17. On Saturdays, Sundays and legal holidays, and on other days
between the hours of 6:00 P.M. and 8:00 A.M., access to the Building, or to the
halls, corridors, elevators or stairways in the Building, or to the Premises may
be refused unless the person seeking access is known to the person or employee
of the Building in charge and has a pass or is properly identified. Landlord
shall in no ease be liable for damages for any error with regard to the
admission to or exclusion from the Building of any person. In ease of invasion,
mob, riot, public excitement, or other commotion, Landlord reserves the right to
prevent access to the Building during the continuance of the same by closing the
doors or otherwise, for the safety of the tenants and protection of property in
the Building.
18. Tenant shall be responsible for insuring that the doors of the
Premises are closed and securely locked before leaving the Building and must
observe strict care and caution that all water faucets or water apparatus are
entirely shut off before Tenant or Tenant's employees leave the Building, and
that all electricity, gas or air shall likewise be carefully shut off, so as to
prevent waste or damage, and for any default or carelessness Tenant shall make
good all injuries sustained by other tenants or occupants of the Building or
Landlord. Landlord shall not be responsible to Tenant for loss of property on
the Premises, however occurring, or for any damage to the property of Tenant
caused by the employees or independent contractors of Landlord or by any other
person.
19. Landlord reserves the right to exclude or expel from the Building
any person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in violation
of any of the rules and regulations of the Building.
20. The requirements of any tenant will be attended to only upon
application at the office of the Building. Employees of Landlord shall not
perform any work or do anything outside of their regular duties unless under
special instructions from Landlord, and no employee will admit any person
(tenant or otherwise) to any office without specific instructions from Landlord.
2
<PAGE>
21. No vending machine or machines of any description shall be
installed, maintained or operated upon the Premises without the prior written
consent of Landlord.
22. Subject to Tenant's right of access to the Premises in accordance
with Building security procedures, Landlord reserves the right to close and keep
locked all entrance and exit doors of the Building on Saturdays, Sundays and
legal holidays and on other days between the hours of 6:00 P.M. and 8:00 A.M.,
and during such further hours as Landlord may deem advisable for the adequate
protection of the Building and the property of its tenants.
3
<PAGE>
EXHIBIT C
---------
Appraisal Procedure
-------------------
Within fifteen (15) days after the expiration of the thirty (30)-day
period set forth in Paragraph 53 of the Lease for the mutual agreement of
Landlord and Tenant as to the fair market monthly rental, each party hereto, at
its cost, shall engage a real estate appraiser to act on its behalf in
determining the fair market monthly rental. The appraisers each shall have at
least ten (10) years' experience with leases in first-class office/retail
buildings in the San Francisco Financial District and shall submit to Landlord
and Tenant in advance for Landlord's and Tenant's reasonable approval the
appraisal methods to be used. If a party does not appoint an appraiser within
such fifteen (15)-day period but an appraiser is appointed by the other
respective party, the single appraiser appointed shall be the sole appraiser and
shall set the fair market monthly rental. If the two appraisers are appointed by
the parties as stated in this paragraph, such appraisers shall meet promptly and
attempt to set the fair market monthly rental. If such appraisers are unable to
agree within thirty (30) days after appointment of the second appraiser, the
appraisers shall elect a third appraiser meeting the qualifications stated in
this paragraph within ten (10) days after the last date the two appraisers are
given to set the fair market monthly rental. Each of the parties hereto shall
bear one-half (1/2) the cost of appointing the third appraiser and of the third
appraiser's fee. The third appraiser shall be a person who has not previously
acted in any capacity for either party.
The third appraiser shall conduct his own investigation of the fair
market monthly rent, and shall be instructed not to advise either party of his
determination of the fair market monthly rent except as follows: When the third
appraiser has made his determination, he shall so advise Landlord and Tenant and
shall establish a date, at least five (5) days after the giving of notice by the
third appraiser to Landlord and Tenant, on which he shall disclose his
determination of the fair market monthly rent. Such meeting shall take place in
the third appraiser's office unless otherwise agreed by the parties. After
having initialed a paper on which his determination of fair market monthly rent
is set forth, the third appraiser shall place his determination of the fair
market monthly rent in a sealed envelope. Landlord's appraiser and Tenant's
appraiser shall each set forth their determination of fair market monthly rent
on a paper, initial the same and place them in sealed envelopes. Each of the
three envelopes shall be marked with the name of the party whose determination
is inside the envelope.
In the presence of the third appraiser, the determination of the fair
market monthly rent by Landlord's appraiser and Tenant's appraiser shall be
opened and examined. If the higher of the two determinations is 105% or less of
the amount set forth in the lower determination, the average of the two
determinations shall be the fair market monthly rent, the envelope containing
the determination of the fair market monthly rent by the third appraiser shall
be destroyed and the third appraiser shall be instructed not to disclose his
determination. If either party's envelope is blank, or does not set forth a
determination of fair market monthly rent, the determination of the other party
shall prevail and be treated as the fair market monthly rent. If the higher of
the two determinations is more than 105% of the amount of the lower
determination, the envelope containing the third appraiser's determination shall
be opened. If the value determined by the third appraiser is the average of the
values proposed by Landlord's appraiser and Tenant's appraiser, the third
appraiser's determination of fair market monthly rent shall be the fair market
monthly rent. If such is not the case, fair market monthly rent shall be the
rent proposed by either Landlord's appraiser or Tenant's appraiser which is
closest to the determination of fair market monthly rent by the third appraiser.
4
<PAGE>
EXHIBIT 10.15
DIGITAL ISLAND, INC.
--------------------
NOTE SECURED BY STOCK PLEDGE AGREEMENT
--------------------------------------
$199,998.00 April 21, 1999
San Francisco, California
FOR VALUE RECEIVED, Ruann Ernst ("Maker") promises to pay to the order
of Digital Island, Inc. (the "Corporation"), at its corporate offices at 353
Sacramento Street, Suite 1520, San Francisco, California, 94111, the principal
sum of One Hundred Ninety Nine Thousand Nine Hundred Ninety Eight Dollars
($199,998.00), together with all accrued interest thereon, upon the terms and
conditions specified below.
1. Principal. The principal balance of this Note shall become due
---------
and payable in one lump sum on April 20, 2003.
2. Interest. Interest shall accrue on the unpaid balance outstanding
--------
from time to time under this Note at the rate of 7.75% per annum, compounded
semi-annually. Accrued interest shall be payable in a series of sixteen (16)
successive equal quarterly installments over the four (4)-year period measured
from the April 21, 1999 execution date of this Note. The first such installment
shall become due and payable on July 20, 1999, and the last such installment
shall become due and payable on April 20, 2003.
3. Payment. Payment shall be made in lawful tender of the United
-------
States and shall be applied first to the payment of all accrued and unpaid
interest and then to the payment of principal. Prepayment of the principal
balance of this Note, together with all accrued and unpaid interest, may be made
in whole or in part at any time without penalty.
4. Events of Acceleration. The entire unpaid principal balance of
----------------------
this Note, together with all accrued and unpaid interest, shall become
immediately due and payable prior to the specified due date of this Note upon
the occurrence of one or more of the following events:
A. the failure of the Maker to pay any installment of accrued
interest under this Note when due and the continuation of such default for
more than thirty (30) days; or
B. the expiration of the thirty (30)-day period following the
date the Maker ceases for any reason to remain in the service of the
Corporation; or
C. the insolvency of the Maker, the commission of any act of
bankruptcy by the Maker, the execution by the Maker of a general assignment
for the benefit of creditors, the filing by or against the Maker of any
petition in bankruptcy or any petition for relief under the provisions of
the Federal
<PAGE>
bankruptcy act or any other state or Federal law for the relief of debtors
and the continuation of such petition without dismissal for a period of
thirty (30) days or more, the appointment of a receiver or trustee to take
possession of any property or assets of the Maker or the attachment of or
execution against any property or assets of the Maker; or
D. the occurrence of any event of default under the Stock Pledge
Agreement securing this Note or any obligation secured thereby.
5. Special Acceleration Event. In the event the Maker sells or
--------------------------
otherwise transfers for value one or more shares of the Corporation's common
stock purchased with the proceeds of this Note, then any unpaid portion of the
principal balance of this Note attributable to the purchase price of those
shares shall become immediately due and payable, together with all accrued and
unpaid interest on that principal portion.
6. Services. For purposes of applying the provisions of this Note,
--------
the Maker shall be considered to remain in the service of the Corporation for so
long as the Maker renders services as (i) an employee of the Corporation or any
successor entity or one or more of the Corporation's fifty percent (50%)-or-more
owned subsidiaries, (ii) a member of the Corporation's Board of Directors or the
board of directors of any successor entity or (iii) an independent consultant to
the Corporation or any successor entity.
7. Security. The proceeds of the loan evidenced by this Note shall
--------
be applied solely to the payment of the purchase price of shares of the
Corporation's common stock, and payment of this Note shall be secured by a
pledge of those shares with the Corporation pursuant to the Stock Pledge
Agreement to be executed this date by the Maker. The Maker, however, shall
remain personally liable for payment of this Note and assets of the Maker, in
addition to the collateral under the Stock Pledge Agreement, may be applied to
the satisfaction of the Maker's obligations hereunder.
8. Collection. If action is instituted to collect this Note, the
----------
Maker promises to pay all costs and expenses (including reasonable attorney
fees) incurred in connection with such action.
9. Waiver. A waiver of any term of this Note, the Stock Pledge
------
Agreement or of any of the obligations secured thereby must be made in writing
and signed by a duly-authorized officer of the Corporation and any such waiver
shall be limited to its express terms.
No delay by the Corporation in acting with respect to the terms of
this Note or the Stock Pledge Agreement shall constitute a waiver of any breach,
default, or failure of a condition under this Note, the Stock Pledge Agreement
or the obligations secured thereby.
The Maker waives presentment, demand, notice of dishonor, notice of
default or delinquency, notice of acceleration, notice of protest and
nonpayment, notice of costs, expenses or losses and interest thereon, notice of
interest on interest and diligence in taking any action to collect any sums
owing under this Note or in proceeding against any of the rights or interests in
or to properties securing payment of this Note.
2
<PAGE>
10. Conflicting Agreements. In the event of any inconsistencies
----------------------
between the terms of this Note and the terms of any other document related to
the loan evidenced by the Note, the terms of this Note shall prevail.
11. Governing Law. This Note shall be construed in accordance with
-------------
the laws of the State of California without resort to that State's conflict-of-
laws rules.
/S/ RUANN ERNST
------------------------------------
RUANN ERNST, MAKER
3
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Digital Island, Ltd.
2. Digital Island, B.V.
3. Digital Island (Europe) SA.
4. Digital Island (Hong Kong), Ltd.
5. Digital Island (Japan) KK.
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Digital Island, Inc. of our report dated October 29, 1999, relating to the
consolidated financial statements and financial statement schedules of Digital
Island, Inc., which appear in such Registration Statement. We also consent to
the reference to our firm under the caption "Experts" and "Digital Island
Selected Historical Consolidated Financial Data" in such Registration
Statement. However, it should be noted that PricewaterhouseCoopers LLP has not
prepared or certified such "Digital Island Selected Historical Consolidated
Financial Data."
/s/ PricewaterhouseCoopers LLP
San Francisco, California
December 8, 1999
<PAGE>
EXHIBIT 23.4
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report on the consolidated financial statements of Sandpiper
Networks, Inc. dated February 3, 1999, in the Form S-4 Registration Statement
of Digital Island, Inc.
/s/ Ernst & Young LLP
Los Angeles, CA
December 8, 1999
<PAGE>
EXHIBIT 23.5
[BEAR, STEARNS & CO. INC. LETTERHEAD]
November 30, 1999
The Board of Directors
Digital Island, Inc.
45 Fremont Street, 12th Floor
San Francisco, CA 94105
Re: Registration Statement on Form S-4 for Digital Island
Ladies and Gentlemen:
Reference is made to our opinion letter dated October 23, 1999 with respect to
the fairness from a financial point of view to Digital Island, Inc. (the
"Company") of the exchange ratio of 1.0727 shares of Common Stock, par value
$0.001 per share, of the Company to be paid for each share of Common Stock, par
value $0.001 per share, of Sandpiper Networks, Inc. ("Sandpiper") pursuant to
the Agreement and Plan of Reorganization, dated as of October 24, 1999, between
the Company, Beach Acquisition Corp., a wholly-owned subsidiary of the Company,
and Sandpiper.
The foregoing opinion letter was provided for the information and assistance of
the Board of Directors of the Company in connection with its consideration of
the transaction contemplated therein and is not to be used, circulated, quoted
or otherwise referred to for any other purpose, nor is it to be filed with,
included in or referred to in whole or in part in any registration statement,
proxy statement or any other document, except in accordance with our prior
written consent. We understand that the Company has determined to include our
opinion in the above-referenced Registration Statement.
In that regard, we hereby consent to the reference to the opinion of our Firm
under the captions "Summary of the Joint Proxy Statement/Prospectus--Opinions
of Digital Island's Financial Advisors", "The Merger--Background of the
Merger", "The Merger--Joint Reasons for the Merger; Recommendations of Boards
of Directors" and "The Merger--Opinions of Digital Island's Financial Advisor"
and to the inclusion of the foregoing opinion in its entirety in the Joint
Proxy Statement/Prospectus included in the above-mentioned Registration
Statement. In giving such consent, we do not thereby admit that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933 or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
Bear, Stearns & Co. Inc.
/s/ Paul A. Berman
By: _________________________________
Managing Director
<PAGE>
Exhibit 99.1
(Form of Proxy)
DIGITAL ISLAND, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
, 1999
This Proxy is solicited on behalf of the Board of Directors of the Digital
Island, Inc.
The undersigned stockholder of Digital Island, Inc. hereby appoints
and , and each of them, with full power of
substitution, proxies to vote the shares of stock which the undersigned could
vote if personally present at the Special Meeting of Stockholders of Digital
Island, Inc. to be held at 8:30 a.m., local time, on , 1999, at
, San Francisco, California:
1. To approve the issuance of shares of common stock, par value $0.001 per
share, of Digital Island pursuant to the merger agreement among Digital
Island, Sandpiper Networks, Inc, and Beach Acquisition Corp.
[_] FOR[_] AGAINST[_] ABSTAIN
2. To grant the Board of Directors the discretionary authority to adjourn the
special meeting to solicit additional votes for approval of the share
issuance.
[_] FOR[_] AGAINST[_] ABSTAIN
The Board of Directors recommends a vote FOR Proposal Nos. 1 and 2. This
Proxy, when properly executed, will be voted as specified above. This Proxy
will be voted FOR Proposal Nos. 1 and 2 if no specification is made, and
will be voted at the discretion of the proxy holders on such other matters
as may properly come before the Special Meeting.
Please date and sign exactly as your name appears on the envelope in which
this material was mailed. If shares are held jointly, each stockholder
should sign. Executors, administrators, trustees, etc. should use full
title and, if more than one, all should sign. If the stockholder is a
corporation, please sign full corporate name by an authorized officer. If
the stockholder is a partnership, please sign full partnership name by an
authorized person.
_____________________________________
Name(s) of Stockholder
_____________________________________
Signature(s) of Stockholder
_____________________________________
(Additional signature if jointly
held)
Dated: ______________________________
<PAGE>
Exhibit 99.2
(Form of Proxy)
SANDPIPER NETWORKS, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
, 1999
This Proxy is solicited on behalf of the Board of Directors of the Sandpiper
Networks, Inc.
The undersigned shareholder of Sandpiper Networks, Inc. hereby appoints
and , and each of them, with full power of
substitution, proxies to vote the shares of stock which the undersigned could
vote if personally present at the Special Meeting of Shareholders of Sandpiper
Networks, Inc. to be held at 9:00 a.m., local time, on , 1999, at
225 West Hillcrest Drive, Suite 250, Thousand Oaks, California:
1. To approve and adopt the merger agreement among Digital Island, Inc.,
Sandpiper Networks, Inc., and Beach Acquisition Corporation, and to approve
the merger.
[_] FOR[_] AGAINST[_] ABSTAIN
The Board of Directors recommends a vote FOR Proposal No. 1. This Proxy,
when properly executed, will be voted as specified above. This Proxy will
be voted FOR Proposal No. 1 if no specification is made, and will be voted
at the discretion of the proxy holders on such other matters as may
properly come before the Special Meeting.
Please date and sign exactly as your name appears on the envelope in which
this material was mailed. If shares are held jointly, each shareholder
should sign. Executors, administrators, trustees, etc. should use full
title and, if more than one, all should sign. If the shareholder is a
corporation, please sign full corporate name by an authorized officer. If
the shareholder is a partnership, please sign full partnership name by an
authorized person.
_____________________________________
Name(s) of Shareholder
_____________________________________
Signature(s) of Shareholder
_____________________________________
(Additional signature if jointly
held)
Dated: ______________________________
