<PAGE>
As filed with the Securities and Exchange Commission on September 28, 1999.
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CACHEFLOW INC.
(Exact name of Registrant as specified in its charter)
---------------
Delaware 7373 91-1715963
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
650 Almanor Avenue
Sunnyvale, California 94086
(408) 220-2200
(Address, including zip code, and telephone number,
including area code, of the Registrant's principal executive offices)
---------------
BRIAN M. NESMITH
President and Chief Executive Officer
CacheFlow Inc.
650 Almanor Avenue
Sunnyvale, California 94086
(408) 220-2200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Robert V. Gunderson, Jr. William H. Hinman, Jr.
Daniel E. O'Connor Shearman & Sterling
Gunderson Dettmer Stough 1550 El Camino Real
Villeneuve Franklin & Hachigian, LLP Menlo Park, California 94025
155 Constitution Drive (650) 330-2200
Menlo Park, California 94025
(650) 321-2400
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, 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. [_]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
------------------------------------------------------------------------------
------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Amount of
Scurities to be Registerede Offering Price(1) Registration Fee
------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.0001 par value per share... $50,000,000 $13,900
------------------------------------------------------------------------------
------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
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, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued , 1999
Shares
[LOGO]
COMMON STOCK
-----------
CacheFlow Inc. is offering shares of its common stock. This is our initial
public offering and no public market currently exists for our shares. We
anticipate that the initial public offering price will be between $ and $
per share.
-----------
We have filed an application for our common stock to be quoted on the Nasdaq
National Market under the symbol "CFLO."
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions CacheFlow
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.................... $ $ $
Total........................ $ $ $
</TABLE>
CacheFlow Inc. has granted the underwriters the right to purchase up to an
additional shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 1999.
-----------
MORGAN STANLEY DEAN WITTER ___________________________CREDIT SUISSE FIRST BOSTON
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
, 1999
<PAGE>
INSIDE FRONT COVER
The heading for the page reads "A New Layer of the Internet Infrastructure."
In the center of the page is a graphic. The graphic is a triangle layered into
five horizontal sections. In the top section is the word "User." In the next
four sections from top to bottom are the words "Content," "Cache,"
"Router," and "Switch."
At the top left of the page runs the following text:
"The Internet cache appliance"
The text continues at the middle right of the page:
"manages content flow."
At the bottom of the page is our logo.
<PAGE>
At the top of the page is our logo.
Immediately underneath our logo is the word "Solutions."
In the center of the page is a picture of one of our Internet caching
appliances.
Immediately underneath this picture and across the bottom of the page runs the
following text:
"The CacheFlow family of Internet caching appliances combines CacheOS embedded
software with purpose-built appliance hardware."
At the top left of the page is a graphic, with the words "Enterprise Caching"
immediately underneath. The graphic is a picture of a cityscape at night.
Immediately below the words "Enterprise Caching" is the following text:
"Accomodate growth in mission critical Internet and intranet traffic without
sacrificing control; enhance employee productivity with response time
improvements; replace overloaded proxy servers to scale performance and reduce
operating costs; deliver performance equality to branch office employees."
At the bottom left of the page is a graphic, with the words "E-Commerce
Acceleration" immediately underneath. The graphic is a picture of a portion of a
computer keyboard.
Immediately below the words "E-Commerce Acceleration" is the following text:
"Increase transaction capacity while reducing operating costs; improve
consumer quality of service with faster response times; offload servers to
deliver accelerated performance and surge protection; offload overburdened
firewalls without sacrificing security."
At the top right of the page is a graphic, with the words "Broadband
Fulfillment" immediately underneath. The graphic is a picture of a person's
hand plugging a fiber-optic cable into a switch.
Immediately below the words "Broadband Fulfillment" is the following text:
"Enable the performance gains expected from broadband; reduce the effects of
Internet distance, congestion and latency; speed the delivery of popular
content; scale network capacity to meet growing demand."
At the bottom right of the page is a graphic, with the words "International
Access" immediately underneath. The graphic is a picture of the Arc de
Triomphe, which is a monument in France.
Immediately below the words "International Access" is the following text:
"Improve bandwidth application; reduce the impact of Internet distance,
congestion and latency; increase network capacity while reducing operating
costs; attract and retain customers with response time improvements."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 6
Special Note Regarding Forward-
Looking Statements................. 19
Use of Proceeds..................... 20
Dividend Policy..................... 20
Capitalization...................... 21
Dilution............................ 22
Selected Consolidated Financial
Data............................... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 24
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business........................... 33
Management......................... 45
Certain Transactions............... 55
Principal Stockholders............. 56
Description of Capital Stock....... 58
Shares Eligible for Future Sale.... 61
Underwriters....................... 63
Legal Matters...................... 66
Experts............................ 66
Additional Information............. 66
Change in Independent Accountants.. 66
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
----------------
We were incorporated in Delaware on March 13, 1996. Our principal executive
offices are located at 650 Almanor Avenue, Sunnyvale, California 94086, and
our telephone number is (408) 220-2200.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
In this prospectus, "CacheFlow," "we," "us" and "our" refer to CacheFlow
Inc. Unless otherwise indicated, all information contained in this prospectus:
. assumes that the underwriters' over-allotment option is not exercised;
and
. reflects the two-for-one split of our common stock and preferred stock
effected in June 1999.
Until , 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement
is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes appearing
elsewhere in this prospectus.
CACHEFLOW
CacheFlow is a leading provider of Internet caching appliances that
accelerate and manage the flow of information over the Internet. We focus
exclusively on designing, developing, marketing and supporting products that
are specifically designed, or purpose-built, for high-performance Internet
caching. In its most basic form, a cache stores data physically closer to end
users, eliminating the need to retrieve data from its source each time it is
requested. All of our caching appliances are based on CacheOS, our proprietary
high-performance operating system. Our Internet caching appliances enable our
Internet service provider and enterprise customers to reduce web response
times, easily manage and administer their networks and reduce overall network
costs. In addition, our Internet caching appliances are designed to provide
better network security and more up-to-date content than traditional caching
solutions.
The number of Internet users, Internet access devices and web pages
worldwide is expected to grow rapidly. This growth, coupled with the increasing
complexity of web content, is expected to significantly increase the volume of
data transmitted across the Internet and corporate intranets. The physical
infrastructure of the Internet must therefore accommodate sharply increased
volumes of data traffic, including a high degree of redundant data, as well as
highly unpredictable and event-driven usage patterns. Advances in
communications technology have improved the Internet's ability to transfer
packets of data, but these technologies do not reduce the volume of data that
must be moved from origin server to user, shorten the physical distance between
source and user, or enable the analysis or control of web content. Web servers
are becoming overloaded by a growing number of content requests, and slow web
response time remains a continuing problem that can have a significant
financial impact on corporate enterprises and Internet service providers. While
traditional caching solutions reduce the physical distance between content and
user and remove much of the redundant traffic from the network, these solutions
do not comprehensively address the disparate requirements of Internet service
providers, enterprises and users. Due to increasing network traffic volumes,
rising network complexity and heightened user expectations for Internet
performance, we believe that the market for Internet caching appliances will
grow rapidly. According to the GartnerGroup, this market is projected to grow
from $92 million in 1999 to over $1 billion in 2003.
As of August 31, 1999, we had approximately 100 customers, including
Internet service providers such as Road Runner and germany.net, as well as
corporate enterprises such as Delta Airlines and Xerox. Our business strategy
is to be the leading provider of Internet caching solutions by continuing to
deliver high-performance, innovative Internet caching appliances. To implement
our strategy, we intend to leverage our Internet caching focus to target
specific markets that are particularly well-suited for our appliances. Using
our technological expertise, we intend to continue to develop both the software
and hardware elements of our appliances. We intend to extend our distribution
channels by expanding our direct sales force and establishing relationships
with additional resellers, systems integrators and original equipment
manufacturers. We also intend to increase our investments in a broad range of
marketing and educational programs to build and establish the CacheFlow brand.
----------------
We were incorporated in Delaware in March 1996. Our principal executive
offices are located at 650 Almanor Avenue, Sunnyvale, California 94086, and our
telephone number is (408) 220-2200.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered...... shares
Common stock to be
outstanding after this
offering................. shares
Use of proceeds........... For working capital and general corporate purposes.
Proposed Nasdaq National
Market symbol............ CFLO
</TABLE>
The information above is based on shares outstanding as of July 31, 1999,
and assumes the conversion of all outstanding shares of preferred stock into
14,341,912 shares of common stock upon the completion of this offering. This
information also includes 672,850 shares issuable upon exercise of warrants
that expire upon the closing of this offering. This information does not
include 3,401,251 shares subject to outstanding options as of July 31, 1999,
and 141,842 shares issuable upon exercise of outstanding warrants as of July
31, 1999, which warrants do not expire upon the closing of this offering.
Between August 1, 1999 and September 24, 1999, we granted options to purchase
an additional 2,874,000 shares of common stock.
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
April 30, July 31,
----------------- --------------------
1998 1999 1998 1999
------- -------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Net sales........................... $ -- $ 7,036 $ 809 $ 3,612
Gross profit........................ -- 3,739 211 2,232
Operating expenses.................. 5,740 16,744 2,584 8,243
Operating loss...................... (5,740) (13,005) (2,373) (6,011)
Net loss............................ (5,507) (13,202) (2,302) (6,047)
Basic and diluted net loss per
common share....................... $ (1.88) $ (3.06) $ (.65) $ (.97)
Weighted average shares used in
computing basic and diluted net
loss per common share.............. 2,936 4,316 3,517 6,214
Pro forma basic and diluted net loss
per common share................... $ (.89) $ (.30)
Shares used in computing pro forma
basic and diluted net loss per
common share....................... 14,849 19,946
</TABLE>
The pro forma basic and diluted share calculations above and the pro forma
column below give effect to the conversion of all outstanding shares of
preferred stock into 14,341,912 shares of common stock upon the completion of
this offering, as if the conversion occurred at the date of original issuance.
The pro forma basic and diluted share calculations above and the pro forma
column below also reflect the cash exercise of warrants to purchase 672,850
shares at a weighted average exercise price of $1.48 per share prior to
completion of the offering. The pro forma as adjusted column below gives effect
to this offering and the application of the proceeds at an assumed initial
public offering price of $ per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
As of July 31, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................... $17,825 $18,821 $
Working capital............................. 16,880 17,876
Total assets................................ 24,019 25,015
Long-term obligations, net of current
portion ................................... 3,211 3,211
Total liabilities........................... 7,986 7,986
Total stockholders' equity.................. 16,033 17,029
</TABLE>
5
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following risk factors and the other information
in this prospectus before investing in our common stock. Our business,
financial condition and results of operations could be seriously harmed by any
of the following risks. The trading price of our common stock could decline
due to any of these risks, and you may lose all or part of your investment.
Risks Related to Our Business
Our business is difficult to evaluate because we have a limited operating
history.
We were founded in March 1996 and did not sell any products or services
until May 1998. The market for our products is unproven. Our limited operating
history makes an evaluation of our future prospects very difficult. We expect
to encounter risks and difficulties frequently encountered by early stage
companies in new and rapidly evolving markets. Many of these risks are
described in more detail in this "Risk Factors" section. Our business will be
seriously harmed if we do not successfully execute our business strategy or if
we do not successfully address the risks we face.
We have a history of losses and we expect to incur future losses.
We incurred net losses of $1.4 million from our inception in March 1996
through April 30, 1997, $5.5 million for the fiscal year ended April 30, 1998,
$13.2 million for the fiscal year ended April 30, 1999, and $6.0 million for
the quarter ended July 31, 1999. As of July 31, 1999, we had an accumulated
deficit of approximately $26.2 million. We have not had a profitable quarter
since our inception and we expect to continue to incur net losses in the
future. We may never achieve profitability. To date, we have funded our
operations from the sale of equity securities and through bank loans and
equipment leases.
We expect to continue to incur significant operating expenses and, as a
result, we will need to generate significant revenues if we are to achieve
profitability. In particular, we anticipate that our operating expenses will
increase substantially in the future as we:
. fund increased levels of research and development;
. enhance our existing products and create and market additional products;
. increase our direct sales and marketing activities, particularly by
expanding our direct sales force;
. expand our indirect sales channels;
. make additional investments to develop our brand; and
. implement additional internal systems, develop additional infrastructure
and hire additional employees.
We expect to incur substantial non-cash costs relating to the amortization
of deferred compensation, which will contribute to our net losses. As of July
31, 1999, we had an aggregate of $19.5 million of deferred compensation to be
amortized. Between August 1, 1999 and September 24, 1999, we recorded
additional deferred compensation charges of $17.6 million with respect to
stock option grants made during this period.
We expect our operating results to fluctuate, which makes the management of
our business more difficult.
Our net sales and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:
. fluctuations in demand for Internet caching appliances;
. the timing and size of the shipment of individual orders;
6
<PAGE>
. announcements of new products and product enhancements by us or by our
competitors;
. the level of competition;
. unexpected delays in introducing new or enhanced products, including
manufacturing delays;
. our ability to obtain sufficient supplies of limited source components
for our products at acceptable prices, or at all;
. the mix of our products sold and the mix of distribution channels
through which we sell our products;
. our ability to control expenses; and
. capital budget cycles of existing and potential customers and changes in
these cycles.
We cannot reliably forecast our future quarterly sales for several reasons,
including:
. sales in any quarter are dependent on orders booked and shipped in that
quarter, and we often operate with very little order backlog;
. we have a limited operating history, and the market in which we compete
is relatively new and rapidly evolving;
. we expect that, for the foreseeable future, most of our sales will come
from a small number of customers, so delays or cancellations of orders
by a few customers can significantly impact net sales within a quarter;
and
. our sales cycle varies substantially from customer to customer.
A high percentage of our expenses, including those related to research and
development, sales and marketing, general and administrative functions and
amortization of deferred compensation, are essentially fixed in the short
term. As a result, if our net sales are less than forecasted, our quarterly
operating results are likely to be seriously harmed.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results may not be meaningful. It is likely that
in some future quarter or quarters, our operating results will be below the
expectations of public market analysts or investors. When this occurs, the
price of our common stock will likely decrease significantly.
We expect increased competition, and if we do not compete effectively our
business could be seriously harmed.
The market for Internet caching solutions is intensely competitive,
evolving and subject to rapid technological change. The intensity of
competition is expected to increase in the future. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market
share, any one of which could seriously harm our business. We may not be able
to compete successfully against current or future competitors and we cannot be
certain that competitive pressures we face will not seriously harm our
business. Our competitors vary in size and in the scope and breadth of the
products and services they offer. We primarily encounter competition from a
variety of companies, including Cisco Systems, Inktomi, Network Appliance,
Novell and various others using public domain software. In addition, because
there are relatively low barriers to entry in the Internet caching market, we
expect additional competition from other established and emerging companies as
the market for Internet caching continues to develop and expand.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base
of customers than we do. In addition, many of our competitors have well-
established relationships with our current
7
<PAGE>
and potential customers and have extensive knowledge of our industry. As a
result, our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, marketing, promotion and sale of their products
than we can. Current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the market acceptance of their products. In addition, our competitors
may be able to replicate our products, make more attractive offers to existing
and potential employees and strategic partners, more quickly develop new
products or enhance existing products and services, or bundle Internet caching
appliances in a manner that we cannot provide. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. We also expect that competition will
increase as a result of industry consolidation.
Our variable sales cycle makes it difficult to predict the timing of a sale
or whether a sale will be made.
The timing of our sales is difficult to predict because of the variability
of the sales cycle for our products. Because customers have differing views on
the strategic importance of implementing Internet caching appliances, the time
required to educate customers and sell our products can vary widely. As a
result, the evaluation, testing, implementation and acceptance procedures
undertaken by customers can vary, resulting in a variable sales cycle, which
typically ranges from two to six months. Sales cycles for our products that
are sold to enterprises have traditionally been longer than sales cycles for
our products that are sold to ISPs. We expect that sales to enterprises will
increase as a percentage of our total sales over time, and, accordingly, we
expect that the average sales cycle for our products will increase. While our
customers are evaluating our products and before they place an order with us,
we may incur substantial sales and marketing expenses and expend significant
management efforts. In addition, product purchases are frequently subject to
unplanned processing and other delays, particularly with respect to larger
customers for whom our products represent a very small percentage of their
overall purchase activity. Large customers typically require approvals at a
number of management levels within their organizations, and, therefore,
frequently have longer sales cycles.
We are entirely dependent on the success of our Internet caching appliance
product family and the introduction of future products.
To date, our Internet caching appliance product family and related services
have accounted for all of our net sales. The CacheFlow 100 Series, 500 Series,
3000 Series and 5000 Series products are the only products that we currently
sell. Our CacheFlow 1000 Series and 2000 Series products, which have
historically accounted for a substantial portion of our net sales, have been
discontinued and replaced by our recently introduced CacheFlow 3000 Series
products. We introduced our 3000 Series product in September 1999 and our 5000
Series product in June 1999. We cannot be certain that our CacheFlow 3000
Series or 5000 Series products will achieve any significant degree of market
acceptance.
We intend to extend the offerings under our product family in the future,
both by introducing new products and by introducing enhancements to our
existing products. Our inability to timely, cost-effectively and successfully
introduce new products and product enhancements, or the failure of these new
products or enhancements to achieve market acceptance, could seriously harm
our business. Life cycles of our products are difficult to predict, because
the market for our products is new and evolving and characterized by rapid
technological change, changing customer needs and evolving industry standards.
The introduction of products employing new technologies and emerging industry
standards could render our products obsolete and unmarketable.
To be successful, we need to develop and introduce new products and
services and enhancements to existing products and services on a timely basis.
These products and services must keep pace with competitive offerings,
technological developments and emerging industry standards, address the ever-
changing and increasingly sophisticated needs of our customers, and achieve
market acceptance.
In developing new products and services and enhancements to existing
products, we may:
. fail to develop and market products that respond to competitive
offerings, technological changes or emerging industry standards in a
timely or cost-effective manner;
8
<PAGE>
. encounter products, capabilities or technologies developed by others
that render our products and services obsolete or noncompetitive or that
shorten the life cycles of our existing products and services;
. experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and
services and enhancements to existing products; or
. fail to develop new products and services and enhancements to existing
products that adequately meet the requirements of the marketplace or
achieve market acceptance.
We are dependent on several third-party manufacturers.
We rely on several third-party manufacturers to build portions of our
products. We have no written agreement with any of these manufacturers and
they fulfill our supply requirements on the basis of individual purchase
orders from us. Accordingly, these manufacturers are not obligated to continue
to fulfill our supply requirements, and the prices we are charged for these
components could be increased on short notice. If we are unable to manage our
relationships with these manufacturers effectively or if these manufacturers
fail to meet our future requirements for timely delivery, our business would
be seriously harmed. Any interruption in the operations of any one of these
manufacturers would adversely affect our ability to meet our scheduled product
deliveries to our customers, which could cause the loss of existing or
potential customers and would seriously harm our business. In addition, the
products that these manufacturers build for us may not be sufficient in
quality or in quantity to meet our needs. Our delivery requirements could
exceed the capacity of these manufacturers, which would likely result in
manufacturing delays, which could result in lost sales and the loss of
existing and potential customers. We cannot be certain that these
manufacturers or any other manufacturer will be able to meet the technological
or delivery requirements of our current products or any future products that
we may develop and introduce. The inability of these manufacturers or any
other of our contract manufacturers in the future to provide us with adequate
supplies of high-quality products, or the loss of any of our contract
manufacturers in the future, would cause a delay in our ability to fulfill
customer orders while we attempt to obtain a replacement manufacturer. Delays
associated with our attempting to replace or our inability to replace one of
our manufacturers would seriously harm our business.
We may experience substantial assembly capacity constraints, which could
negatively affect our net sales.
We currently conduct all final assembly and testing of our products at our
headquarters in Sunnyvale, California. We plan to transition final assembly to
third parties in the future. We may experience production interruptions or
quality control problems in connection with any transition of final assembly,
either of which would seriously harm our business. Either we or any third-
party assembler may experience substantial assembly capacity constraints. In
the event of any capacity constraints we may be unable to accept certain
orders from, and deliver products in a timely manner to, our customers. In
addition, if we are unable to identify a third-party final assembler, we would
be required to make additional capital investments in new or existing assembly
facilities. To the extent any such capital investments are required, our gross
margins, and as a result, our business could be seriously harmed.
Some of the key components in our products come from limited sources of
supply.
We currently purchase several key parts and components used in the
manufacture of our Internet caching appliances from limited sources of supply.
For example, we purchase custom power supplies and certain Intel hardware for
use in all of our Internet caching appliances. The introduction by Intel or
others of new versions of their hardware, particularly if not anticipated by
us, could require us to expend significant resources to incorporate this new
hardware into our products. In addition, if Intel or others were to
discontinue production of a necessary part or component, we would be required
to expend significant resources in locating and integrating replacement parts
or components from another vendor. Qualifying additional suppliers for limited
source components can be time-consuming and expensive. Any of these events
would be disruptive to us and could seriously harm our business. Further,
financial or other difficulties faced by these suppliers or unanticipated
9
<PAGE>
demand for these parts or components could limit the availability of these
parts or components. Any interruption or delay in the supply of any of these
parts or components, or the inability to obtain these parts or components from
alternate sources at acceptable prices and within a reasonable amount of time,
would seriously harm our ability to meet our scheduled product deliveries to
our customers.
We use rolling forecasts based on anticipated product orders, product order
history and backlog to determine our materials requirements. Lead times for
the parts and components that we order vary significantly and depend on
factors such as the specific supplier, contract terms and demand for a
component at a given time. If actual orders do not match our forecasts, we may
have excess or inadequate inventory of certain materials and components, which
could seriously harm our business.
We are dependent upon key personnel and we must attract, assimilate and
retain other highly qualified personnel in the future.
Our future success depends on the continued service of our senior
management, research and development and sales personnel. We have recently
experienced significant transition in our management team. Brian NeSmith, our
President and Chief Executive Officer, joined us in March 1999. Stuart Aaron,
our Vice President of Marketing and Product Management, joined us in April
1999. Terry Printy, our Vice President of Customer Support, joined us in June
1999. Alan Robin, our Senior Vice President of Sales, and Michael Johnson, our
Vice President and Chief Financial Officer, joined us in July 1999. We expect
that it will take time for our new management team to integrate into our
company and it is too early to predict whether these changes will be
successful. None of our employees is bound by an employment agreement and we
do not carry key-person life insurance. The loss of the services of one or
more of our key personnel could seriously harm our business.
Our future success also depends on our continuing ability to attract, hire,
train and retain a substantial number of highly skilled managerial, technical,
sales, marketing and customer support personnel. We are particularly dependent
on hiring additional personnel to increase our direct sales and research and
development organizations. In addition, new hires frequently require extensive
training before they achieve desired levels of productivity. Competition for
such personnel is intense, especially in the San Francisco Bay Area, and we
may fail to retain our key employees, or attract, assimilate or retain other
highly qualified personnel in the future. If so, our business would be
seriously harmed.
Our business could be seriously harmed by the Nokia IP litigation.
On September 16, 1999, Nokia IP filed a lawsuit in Santa Clara County
Superior Court naming CacheFlow Inc., Brian NeSmith, our President and Chief
Executive Officer and a director, and Alan Robin, our Senior Vice President of
Sales, as defendants. Messrs. NeSmith and Robin were officers and employees of
Ipsilon Networks, Inc., which was acquired by Nokia in December 1997.
Following the acquisition, Messrs. NeSmith and Robin became employees of
Nokia. Nokia's allegations against us include misappropriation of trade
secrets, unfair competition and inducing breach of contract. Nokia's
allegations against Messrs. NeSmith and Robin include breach of contract,
misappropriation of trade secrets and unfair competition and, with respect to
Mr. Robin only, breach of fiduciary duty. Nokia's claims are based upon
Nokia's allegation that Mr. NeSmith has violated a non-competition and non-
solicitation provision contained in his employment agreement with Nokia and
that Mr. Robin has violated a non-solicitation obligation to Nokia. Nokia is
seeking compensatory and punitive damages, a decree that the defendants'
alleged acts were and are unfair acts of competition, orders restraining and
enjoining the defendants from disclosing or using Nokia's trade secrets or
confidential and proprietary information and acting in a manner that violates
Messrs. NeSmith's and Robin's contractual and fiduciary duties to Nokia,
attorneys' fees and other specified damages. This litigation was only recently
filed and we are presently evaluating these claims. We and the other
defendants believe that there are meritorious defenses to the asserted claims
and intend to defend the litigation vigorously. However, the outcome of
litigation is inherently unpredictable and the results of the litigation may
not be favorable to us or the other defendants. In such case, our business
could be seriously harmed. Regardless of the ultimate outcome, the litigation
could result in substantial expense to us and significant diversion of effort
by our managerial and other personnel.
10
<PAGE>
In order to manage our growth and expansion, we will need to improve and
implement new systems, procedures and controls.
We have expanded our operations rapidly since the inception of our company
and we currently intend to continue this expansion. The number of our
employees increased from 40 at April 30, 1998 to 126 at August 31, 1999, and
we plan to further increase our headcount. This expansion of our operations
has placed and is expected to continue to place a significant strain upon our
management systems and financial and operational resources. We currently have
research and development facilities in Sunnyvale, California; Redmond,
Washington and Waterloo, Ontario, Canada. The coordination and management of
these product development organizations that are located at different sites
requires significant management attention and coordination, particularly from
our managerial and engineering organizations. If we are unable to coordinate
and manage these separate development organizations, our business will be
seriously harmed.
Our ability to compete effectively and to manage future expansion of our
operations will require us to continue to improve our financial and management
controls, reporting systems and procedures on a timely basis, and expand,
train and manage our employee work force. We believe that our existing
managerial and other systems will not be adequate to support our anticipated
growth, and we are currently planning to implement a new enterprise resource
planning software system that will replace substantially all of our business
and manufacturing systems. We may encounter difficulties in transitioning to
the new enterprise resource planning software system. Even after we implement
this system, our personnel, systems, procedures and controls may be inadequate
to support our future operations. If we are unable to effectively manage
future growth and expansion, our business will be seriously harmed.
We depend on a limited number of customers.
To date, a significant portion of our net sales has resulted from a small
number of customers placing relatively large orders. For the fiscal year ended
April 30, 1999, three customers accounted for approximately 33% of our net
sales. For the quarter ended July 31, 1999, two customers accounted for
approximately 22% of our net sales. We anticipate that our operating results
for any given period will continue to depend to a significant extent on large
orders from a small number of customers. As a result, our quarterly operating
results may fluctuate significantly if we are unable to complete one or more
substantial sales in a quarter.
Some of our smaller customers may present credit and other risks.
Some of our products are designed for use by smaller customers. Sales to
smaller customers entail certain risks, including increased credit risks and
the need for additional sales and support personnel to support an increased
volume of customers.
If we fail to expand our direct and indirect sales channels, our growth
will be limited.
We need to substantially expand our direct sales operations, both
domestically and internationally, in order to increase market awareness and
sales of our products and services. Our products and services require a
sophisticated sales effort targeted at senior management of our customers. We
have recently expanded our direct sales force and plan to hire additional
sales personnel. New hires will require extensive training and typically take
several months to achieve productivity. Competition for qualified sales
personnel is intense, and we might not be able to hire the kind and number of
sales personnel we are targeting. If we fail to increase our direct sales
capabilities as we have planned, our business will be seriously harmed.
We depend on our indirect sales channels, which include resellers, systems
integrators and original equipment manufacturers, for a significant percentage
of our net sales. For the fiscal year ended April 30, 1999, approximately 41%
of our net sales resulted from sales through indirect sales channels. For the
quarter ended July 31, 1999, approximately 39% of our net sales resulted from
sales through indirect channels. We need to expand our indirect channels, and
if we fail to do so our business could be seriously harmed. Our agreements
with such indirect channel partners are generally not exclusive and in many
cases may be terminated by either
11
<PAGE>
party without cause. Many of these indirect channel partners do not have
minimum purchase or resale requirements and carry products that are
competitive with our products. These resellers may not give a high priority to
the marketing of our products or may not continue to carry our products. They
may give a higher priority to other products, including the products of
competitors. We may not retain any of our current indirect channel partners or
successfully recruit new indirect channel partners. Events or occurrences of
this nature could seriously harm our business. In addition, any sales through
indirect channel partners will have lower gross margins than direct sales.
If we are unable to expand our customer service and support organization,
we may not be able to retain our existing customers or attract new customers.
We currently have a small customer service and support organization and
will need to increase our capabilities to support new customers and the
expanding needs of our existing customers. If we are unable to expand our
customer service and support organization, we may not be able to retain our
existing customers or attract new customers.
Our dependence on international markets involves many risks.
For the fiscal year ended April 30, 1999, we derived approximately 44% of
our net sales from customers outside of the United States and Canada. For the
quarter ended July 31, 1999, sales to customers outside of the United States
and Canada accounted for approximately 48% of our net sales. We expect
international customers to continue to account for a significant percentage of
net sales in the future. To successfully expand international sales, we must
expand international operations including establishing manufacturing assembly
capabilities overseas, hire international personnel and recruit additional
international resellers. To the extent we are unable to do so in a timely
manner, our growth, if any, in international sales will be limited and our
business could be seriously harmed. In addition, if we fail to expand and
improve our worldwide operating systems, our ability to accurately forecast
sales demand, manage our supply chain and record and report financial and
management information will be adversely affected, seriously harming our
business.
The acceptance and use of the Internet in international markets are in
earlier stages of development than in the United States. If the Internet fails
to gain sufficient acceptance in international markets, our business could be
seriously harmed. In addition, we may fail to maintain or increase
international market demand for our products.
Our international sales are currently denominated in United States dollars.
An increase in the value of the United States dollar relative to foreign
currencies could make our products more expensive and, therefore, potentially
less competitive in those markets. In addition, we rely significantly on our
indirect channel partners in international sales efforts. Since these partners
are not our employees and typically do not offer our products exclusively, we
can not be certain that they will continue to market our products.
Additional risks inherent in our international business activities
generally include:
. government regulation regarding privacy issues for Internet users;
. expenses associated with customizing products for foreign countries;
. expenses associated with obtaining foreign regulatory approvals;
. protectionist laws and business practices that favor local competition;
. dependence on local vendors;
. multiple, conflicting and changing governmental laws and regulations;
. longer sales and accounts receivable cycles;
. increased difficulties in collecting accounts receivable;
. difficulties in managing operations across disparate geographic areas;
12
<PAGE>
. difficulties associated with enforcing agreements through foreign legal
systems;
. reduced or limited protection of our intellectual property rights in
some countries;
. potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
. foreign currency exchange rate fluctuations; and
. political and economic instability.
Undetected software or hardware errors could seriously harm us.
Our products may contain undetected software or hardware errors. All of our
products operate on our internally developed CacheOS operating system. As a
result, any error in CacheOS will affect all of our products. We have
experienced minor errors in the past in connection with new products. We
expect that errors will be found from time to time in new or enhanced products
after commencement of commercial shipments. These errors may cause us to incur
significant warranty and repair costs, divert the attention of our engineering
personnel from our product development efforts and cause significant customer
relations problems. The occurrence of these problems could result in the delay
or loss of market acceptance of our products and would likely seriously harm
our business.
We could be subject to potential product liability.
Our customers integrate our Internet caching appliances into their network
architectures. Any errors, defects or other performance problems with our
Internet caching appliance products could negatively impact our customers'
internal networks, resulting in financial or other damages to our customers.
Our customers may then seek damages from us for their losses. Although our
license agreements typically contain provisions designed to limit our exposure
to claims, unfavorable judicial decisions could negate such limitation of
liability provisions. We have not experienced any product liability claims to
date. However, a product liability claim brought against us, even if not
successful, would likely be time-consuming and costly. A product liability
claim could seriously harm our business reputation.
Our business could be affected by Year 2000 issues.
The "Year 2000 issue" refers generally to the problems that some software
and hardware may have in determining the correct century for the year. For
example, software with date-sensitive functions that is not Year 2000
compliant may not be able to distinguish whether "00" means 1900 or 2000,
which may result in failures or the creation of erroneous results.
We believe that our current products are Year 2000 compliant when
configured and used in accordance with the related documentation, and provided
that the other network components in the host network and any other software
used with our products are Year 2000 compliant. However, we have not tested
for Year 2000 compliance the compatability of our products with the other
network components in the host network and any other software used by our
customers with our products. We continue to respond to customer questions
about prior versions of our products on a case-by-case basis.
We have defined Year 2000 compliant as the ability to:
. correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
. function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
. respond to two-digit date input in a way that resolves the ambiguity as
to century in a disclosed, defined and predetermined manner;
. store and provide output of date information in ways that are
unambiguous as to century if the date elements in interfaces and data
storage specify the century; and
13
<PAGE>
. recognize Year 2000 as a leap year.
We have tested software obtained from third parties, including licensed
software, shareware, and freeware that is incorporated into our products, and
we are seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite testing by us and current and potential customers, and
assurances from developers of products incorporated into our products, our
products may contain undetected errors or defects associated with Year 2000
date functions. Known or unknown errors or defects in our products could
result in delay or loss of net sales, diversion of development resources,
damage to our reputation, or increased service and warranty costs, any of
which could seriously harm our business. Some commentators have predicted
significant litigation regarding Year 2000 compliance issues, and we are aware
of such lawsuits against software vendors. Because of the unprecedented nature
of such litigation, it is uncertain whether or to what extent we may be
affected by it.
We have initiated an assessment of our material internal information
technology systems, including both our own software products and third-party
software and hardware technologies, but we have not initiated an assessment of
our non-information technology systems. We are seeking assurances from our
third-party software vendors that their systems are Year 2000 compliant. In
addition, we intend to seek assurances from the vendors of any future software
purchased by us, including our planned purchase of a new enterprise resource
planning system. We are not currently aware of any material operational issues
or costs associated with preparing our internal information technology and
non-information technology systems for the Year 2000. However, we may
experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal information
technology and non-information technology systems.
We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce
or eliminate the budgets that current or potential customers could have for
purchases of our products and services. As a result, our business, financial
condition and results of operations could be seriously harmed.
We have not separately accounted for Year 2000 costs in the past. To date,
these costs have not been material. We will incur additional costs related to
the Year 2000 efforts for administrative personnel to manage the project,
outside contractor assistance, technical support for our products, product
engineering and customer satisfaction. In addition, we may experience
significant problems and costs with Year 2000 compliance that could seriously
harm our business.
We have not yet fully developed a contingency plan to address situations
that may result if we are unable to achieve Year 2000 readiness of our
critical operations. The cost of developing and implementing such a plan may
itself be significant. Finally, we are also subject to external forces that
might generally affect industry and commerce, such as utility or
transportation company Year 2000 compliance failure interruptions.
If the protection of our proprietary technology is inadequate, our
competitors may gain access to our technology, and our business could be
seriously harmed.
We depend significantly on our ability to develop and maintain the
proprietary aspects of our technology. To protect our proprietary technology,
we rely primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets, copyright and trademark laws and patents. Despite
our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that
we regard as proprietary. Policing unauthorized use of our products is
difficult. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our
products or design around patents that may be issued to us or our other
intellectual property.
14
<PAGE>
We currently have four United States patent applications on file and
pending before the United States Patent and Trademark Office. We also
currently have four PCT International Applications on file to reserve rights
in foreign jurisdictions under appropriate international treaties. We cannot
assure you that any U.S. or international patent will be issued from these
applications. Even if patents are issued, we cannot assure you that we will be
able to detect any infringement or, if infringement is detected, that such
patent will be enforceable or that any damages awarded to us will be
sufficient to adequately compensate us.
In addition, we cannot assure you that any products, services or
technologies that we are developing, or will develop in the future, will
result in intellectual property that is protectable under law, whether in the
United States or a foreign jurisdiction, that such intellectual property will
produce competitive advantage for us or that the intellectual property of
competitors will not restrict our freedom to operate, or put us at a
competitive disadvantage.
We rely on technology that we license from third parties, including
software that is integrated with internally developed software and used in
CacheOS to perform key functions. For example, we license subscription
filtering technology from Secure Computing. If we are unable to continue to
license any of this software on commercially reasonable terms, we will face
delays in releases of our software or will be required to drop this
functionality from our software until equivalent technology can be identified,
licensed or developed, and integrated into our current product. Any such
delays could seriously harm our business.
There has been a substantial amount of litigation in the technology
industry regarding intellectual property rights. It is possible that in the
future third parties may claim that we or our current or potential future
products infringe their intellectual property. We expect that companies in the
Internet and networking industries will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Any claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require us to enter
into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all, which
could seriously harm our business.
We may need additional capital, which may not be available.
At July 31, 1999, we had approximately $17.8 million in cash and cash
equivalents. We believe that this amount, combined with proceeds from this
offering, will enable us to meet our capital requirements for at least the
next twelve months. However, if cash is used for acquisitions or other
unanticipated uses, we may need additional capital. The development and
marketing of new products and the expansion of indirect channels and
associated support personnel will require a significant commitment of
resources. In addition, if the market for Internet caching appliances develops
at a slower pace than anticipated or if we fail to establish significant
market share and achieve a meaningful level of revenue, we could be required
to raise substantial additional capital. We cannot be certain that additional
capital will be available to us on favorable terms, or at all. If we are
unable to raise additional capital when we require it, our business would be
seriously harmed.
Risks Related to the Internet Caching Appliance Industry
Sales of our products are dependent on demand for Internet caching
appliances.
Sales of our products depend on increased demand for Internet caching
appliances. The market for Internet caching appliances is a new and rapidly
evolving market. If the market for Internet caching appliances fails to grow
as we anticipate, or grows more slowly than we anticipate, our business will
be seriously harmed. Because this market is new, we cannot predict its
potential size or future growth rate. Our success in generating net sales in
this emerging market will depend on, among other things, our ability to:
. educate potential end users and indirect channel partners about the
benefits of Internet caching appliances;
. continue to develop our direct sales channel; and
. establish and maintain relationships with leading indirect channel
partners.
15
<PAGE>
The market for our products is characterized by rapid technological change.
The market for our products is new and is characterized by rapid
technological change, frequent enhancements to existing products and new
product introductions, changes in customer requirements and evolving industry
standards. We may not be able to respond quickly or effectively to these
developments. To be successful, we need to develop and introduce new products
and enhancements to existing products on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of our customers.
The introduction of new products by competitors, market acceptance of
products based on new or alternative technologies, or the emergence of new
industry standards, could render our existing products obsolete, which would
seriously harm our business. The emergence of new industry standards might
require us to redesign our products. If our products are not in compliance
with industry standards that become widespread, our customers and potential
customers may not purchase our products.
The legal environment in which we operate is uncertain and claims against
us could cause our business to suffer.
Our Internet caching appliances operate in part by storing material
available on the Internet and making this material available to end users from
our appliance. This creates the potential for claims to be made against us
(either directly or through contractual indemnification provisions with
customers) for defamation, negligence, copyright or trademark infringement,
personal injury, invasion of privacy or other legal theories based on the
nature, content or copying of these materials. It is also possible that if any
information provided through any of our products contains errors, third
parties could make claims against us for losses incurred in reliance on this
information. Our insurance may not cover potential claims of this type or be
adequate to protect us from all liability that may be imposed.
Internet-related laws could adversely affect our business.
Laws and regulations which apply to communications and commerce over the
Internet are becoming more prevalent. For example, 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. In
addition, tax authorities at the international, federal, state and local
levels are currently reviewing the appropriate tax treatment of companies
engaged in Internet commerce. We cannot predict the result of current attempts
to impose taxes on commerce over the Internet, but any taxes imposed on our
customers may adversely impact their businesses and may result in order
cancellations or postponements of product purchases by our customers, which
would seriously harm our business. The law of the Internet, however, remains
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how exisitng laws such as those
governing intellectual property, privacy and libel apply to the Internet. The
adoption or modification of laws or regulations relating to the Internet, or
interpretations of existing law, could seriously harm our business.
Sales of our products are dependent on the increased use and widespread
adoption of the Internet.
Sales of our products depend on the increased use and widespread adoption
of the Internet. Our business would be seriously harmed if the use of the
Internet does not increase as anticipated or if our ISP customers' Internet-
related services are not well received by the marketplace. Certain critical
issues concerning use of the Internet are unresolved and will likely affect
use of the Internet. These issues include security, reliability, bandwidth,
congestion, cost, ease of access and quality of service. Even if these issues
are resolved, if the market for Internet-related products and services fails
to develop, or develops at a slower pace than anticipated, our business would
be seriously harmed.
16
<PAGE>
Our business may be adversely affected by government regulation of the
communications industry.
The jurisdiction of the Federal Communications Commission, or FCC, extends
to the communications industry, to our customers and to the products that our
customers sell. Future regulations set forth by the FCC or other regulatory
bodies may adversely affect Internet-related industries. Regulation of our
customers may seriously harm our business. For example, FCC regulatory
policies that affect the availability of data and Internet services may impede
our customers' penetration into certain markets. In addition, international
regulatory bodies are beginning to adopt standards for the communications
industry. The delays that these governmental processes entail may cause order
cancellations or postponements of product purchases by our customers, which
would seriously harm our business.
Risks Related to the Securities Markets
Our stock price may be volatile.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. We will negotiate and determine the initial
public offering price with the representatives of the underwriters based on
several factors. This price may vary from the market price of the common stock
after this offering. The market price of the common stock may fluctuate
significantly in response to the following factors:
. variations in our quarterly operating results;
. changes in financial estimates or investment recommendations by
securities analysts;
. changes in market valuations of Internet-related and networking
companies;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. loss of a major customer;
. additions or departures of key personnel;
. the limited number of shares of our common stock that is expected to be
publicly traded;
. sales of common stock or other securities in the future; and
. fluctuations in stock market prices and volumes.
Our business may be adversely affected by class action litigation due to
stock price volatility.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of the
company's securities. We may in the future be the target of similar
litigation. If we become engaged in securities class action litigation, our
management's attention and resources may be diverted and we may incur
substantial costs, resulting in serious harm to our business.
Control by existing stockholders may limit your ability to influence the
outcome of director elections and certain transactions.
Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will beneficially own shares,
or approximately %, of the outstanding shares of common stock, or % if the
underwriters' over-allotment option is exercised in full. These stockholders,
if acting together, would be able to significantly influence all matters
requiring approval by our stockholders, including the election of directors
and the approval of mergers or other business combination transactions.
17
<PAGE>
Substantial sales of our common stock could adversely affect our stock
price.
Sales of a substantial number of shares of our common stock after this
offering could adversely affect the market price of our common stock by
potentially introducing a large number of sellers of our common stock into a
market in which our common stock price is already volatile, thus driving our
common stock price down. In addition, the sale of these shares could impair
our ability to raise capital through the sale of additional equity securities.
Based on shares outstanding as of July 31, 1999, upon completion of this
offering, we will have shares of common stock outstanding, or
shares if the underwriters' over-allotment option is exercised in full. Our
directors, executive officers and current stockholders have executed lock-up
agreements that limit their ability to sell shares of our common stock. These
stockholders have agreed not to sell or otherwise dispose of any shares of our
common stock for a period of at least 180 days after the date of this
prospectus without the prior written approval of Morgan Stanley & Co.
Incorporated. When these lock-up agreements expire, these shares and the
shares of common stock underlying any options held by these individuals will
become eligible for sale, in some cases pursuant only to the volume, manner of
sale and notice requirements of Rule 144. In addition, after this offering,
the holders of approximately shares of common stock, or their transferees,
will be entitled to various rights with respect to the registration of such
shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by
affiliates) immediately upon the effectiveness of such registration. See
"Shares Eligible for Future Sale."
Investors will experience immediate dilution.
The initial public offering price of our common stock is expected to be
substantially higher than the book value per share of our outstanding common
stock immediately after the offering. Accordingly, if you purchase our common
stock in this offering, you will incur immediate dilution of approximately
$ in the book value per share of our common stock from the price you pay
for our common stock, assuming an initial public offering price of $ per
share.
Anti-takeover provisions in our charter documents and Delaware law could
prevent or delay a change in control of our company.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult
for a third party to acquire us, even if doing so would be beneficial to our
stockholders. See "Description of Capital Stock--Antitakeover Effects of
Provisions of the Certificate of Incorporation and Delaware Law."
18
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus. These factors may cause our actual results to
differ materially from any forward-looking statement.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "intends," "would," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue"
or the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform such statements to
actual results.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to CacheFlow from the sale of the shares of common
stock offered hereby are estimated to be $ million, at an assumed initial
public offering price of $ and after deducting estimated underwriting
discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, the net proceeds of
this offering are estimated to be $ million. The primary purposes of this
offering are to obtain additional equity capital, create a public market for
our common stock, and facilitate future access to public markets. We expect to
use the net proceeds for general corporate purposes, including working
capital. A portion of the net proceeds may also be used to repay debt
obligations of CacheFlow, which totaled $4.6 million as of July 31, 1999. A
portion of the net proceeds may also be used for the acquisition of
businesses, products and technologies that are complementary to ours. We have
no current plans, agreements or commitments and are not currently engaged in
any negotiations with respect to any such transaction. Pending such uses, we
will invest the net proceeds of this offering in investment grade, interest-
bearing securities.
DIVIDEND POLICY
We have not paid any cash dividends since our inception and do not intend
to pay any cash dividends in the foreseeable future. The terms of our line of
credit prohibit the payment of dividends on our capital stock.
20
<PAGE>
CAPITALIZATION
The following table sets forth as of July 31, 1999:
. our actual capitalization;
. our capitalization on a pro forma basis, after giving effect to the
conversion of all outstanding shares of preferred stock into 14,341,912
shares of common stock upon the completion of this offering and the cash
exercise of warrants to purchase 672,850 shares of preferred stock at a
weighted average exercise price of $1.48 per share prior to completion
of the offering and the conversion of these shares of preferred stock
into common stock upon completion of the offering; and
. our capitalization on a pro forma as adjusted basis, to additionally
reflect this offering and the application of the proceeds at an assumed
initial public offering price of $ per share, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
July 31, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Long-term obligations, net of current portion... $ 3,211 $ 3,211
Stockholders' equity............................
Preferred stock, $.0001 par value; 30,000,000
shares authorized actual; 10,000,000 shares
authorized pro forma and pro forma as
adjusted; 14,341,912 shares issued and
outstanding actual; no shares issued and
outstanding pro forma or pro forma as
adjusted...................................... 1 --
Common stock, $.0001 par value; 60,000,000
shares authorized actual; 200,000,000 shares
authorized pro forma and pro forma as
adjusted; 12,656,269 shares issued and
outstanding actual; 27,671,031 shares issued
and outstanding pro forma; issued and
outstanding pro forma as adjusted............. 1 2
Additional paid-in capital..................... 62,794 63,790
Note receivable from stockholder............... (1,017) (1,017)
Deferred stock compensation.................... (19,547) (19,547)
Accumulated deficit............................ (26,199) (26,199)
------- -------
Total stockholders' equity.................... 16,033 17,029
------- -------
Total capitalization........................ $19,244 $20,240
======= =======
</TABLE>
The information above excludes 3,401,251 shares of common stock issuable
upon exercise of outstanding options under our 1996 Stock Option Plan as of
July 31, 1999 with a weighted average exercise price of $1.21 per share,
141,842 shares of common stock issuable upon exercise of outstanding warrants
as of July 31, 1999 (assuming the conversion of all outstanding shares of
preferred stock into common stock) with a weighted average exercise price of
$3.42 per share, and 33,217 shares of common stock reserved for issuance under
our 1996 Stock Option Plan as of July 31, 1999. On August 27, 1999, we amended
our 1996 Stock Option Plan to increase the number of shares authorized for
issuance thereunder by 3,000,000 shares. Between August 1 and September 24,
1999, we granted options to purchase 2,874,000 shares of common stock. On
September 24, 1999, we adopted our 1999 Stock Incentive Plan as a successor
plan to replace our 1996 Stock Option Plan, whereby 5,000,000 shares were
reserved for issuance thereunder. No options will be granted under the 1996
Stock Option Plan after this offering. In addition, on September 24, 1999, we
adopted our Employee Stock Purchase Plan and reserved 2,500,000 shares of
common stock for issuance under such plan and our 1999 Non-Employee Director
Option Plan and reserved 500,000 shares of common stock for issuance under
such plan. See "Management--1999 Stock Incentive Plan," "Employee Stock
Purchase Plan" and "--1999 Director Option Plan."
21
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of July 31,
1999 was $16.7 million, or $.60 per share. Pro forma net tangible book value
per share represents the amount of our stockholders' equity, less intangible
assets, divided by the pro forma number of shares of common stock outstanding
after giving effect to the conversion of all outstanding shares of preferred
stock into 14,341,912 shares of common stock upon the completion of this
offering and the cash exercise of warrants to purchase 672,850 shares of
preferred stock prior to completion of the offering and the conversion of
these shares of preferred stock into common stock.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after completion of this offering. After giving
effect to our sale of shares of common stock in this offering at an
assumed initial offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses and the
application of the net proceeds therefrom, our pro forma as adjusted net
tangible book value as of July 31, 1999, would have been $ , or $ per
share. This represents an immediate increase in net tangible book value of
$ per share to existing stockholders and an immediate dilution in net
tangible book value of $ per share to investors purchasing shares of common
stock in this offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Pro forma net tangible book value per share as of July 31, 1999..... $.60
Increase per share attributable to new investors....................
----
Pro forma as adjusted net tangible book value per share after this
offering...........................................................
----
Net tangible book value dilution per share to new investors......... $
====
</TABLE>
The following table sets forth as of July 31, 1999, after giving effect to
the conversion of all outstanding shares of preferred stock into 14,341,912
shares of common stock upon the completion of this offering and the cash
exercise of warrants to purchase 672,850 shares of preferred stock prior to
completion of the offering and the conversion of these shares of preferred
stock into common stock, the difference between the existing stockholders and
the investors purchasing shares in this offering at the assumed initial
offering price of $ per share with respect to the number of shares purchased
from us, the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 27,671,031 % $37,581,000 % $1.36
New investors..........
---------- ----- ----------- -----
Totals............... 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
As of July 31, 1999, there were options outstanding to purchase a total of
3,401,251 shares of common stock at a weighted average exercise price of $1.21
per share under our 1996 Stock Option Plan. In addition, as of July 31, 1999,
there were outstanding warrants to purchase a total of 141,842 shares of
common stock (assuming the conversion of all of our preferred stock into
common stock) at a weighted average exercise price of $3.42 per share. Between
August 1, 1999 and September 24, 1999, we granted options to purchase
2,874,000 shares of common stock at a weighted average exercise price of $4.69
per share. To the extent outstanding options or warrants are exercised, there
will be further dilution to new investors.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are included elsewhere
in this prospectus. The consolidated statement of operations data for the
period from inception (March 13, 1996) to April 30, 1997 and for each of the
two years in the period ended April 30, 1999, and the consolidated balance
sheet data at April 30, 1998 and 1999, are derived from, and are qualified by
reference to, the audited consolidated financial statements included in this
prospectus. The consolidated balance sheet data at April 30, 1997 are derived
from audited consolidated financial statements not included in this
prospectus. The selected consolidated financial data at July 31, 1999 and for
the three months ended July 31, 1998 and July 31, 1999 have been derived from
our unaudited consolidated financial statements included in this prospectus.
The unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements contained in this
prospectus and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of such
information. Consolidated results of operations for the three months ended
July 31, 1999 are not necessarily indicative of the results that may be
expected for the full fiscal year.
<TABLE>
<CAPTION>
Period from Three Months
March 13, 1996 Year Ended Ended
(Inception) to April 30, July 31,
April 30, ----------------- ----------------
1997 1998 1999 1998 1999
-------------- ------- -------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales.................. $ -- $ -- $ 7,036 $ 809 $ 3,612
Cost of goods sold......... -- -- 3,297 598 1,380
------- ------- -------- ------- -------
Gross profit............... -- -- 3,739 211 2,232
Operating expenses:
Research and development.. 1,055 2,396 4,034 755 1,613
Sales and marketing....... 130 1,655 6,865 1,335 3,481
General and
administrative........... 310 1,630 2,069 275 667
Stock compensation........ 4 59 3,776 219 2,482
------- ------- -------- ------- -------
Total operating
expenses.............. 1,499 5,740 16,744 2,584 8,243
------- ------- -------- ------- -------
Operating loss............. (1,499) (5,740) (13,005) (2,373) (6,011)
Other income (expense),
net....................... 56 233 (197) 71 (36)
------- ------- -------- ------- -------
Net loss................... $(1,443) $(5,507) $(13,202) $(2,302) $(6,047)
======= ======= ======== ======= =======
Basic and diluted net loss
per share................. $ (1.54) $ (1.88) $ (3.06) $ (.65) $ (.97)
Shares used in computing
basic and diluted net loss
per share................. 939 2,936 4,316 3,517 6,214
Pro forma basic and diluted
net loss per share........ $ (.89) $ (.30)
Shares used in computing
pro forma basic and
diluted net loss per
share..................... 14,849 19,946
</TABLE>
<TABLE>
<CAPTION>
As of April 30, As of
----------------------- July 31,
1997 1998 1999 1999
------ ------ ------- --------
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short term
investments................................ $3,605 $7,349 $ 2,291 $17,825
Working capital............................. 3,589 6,955 787 16,880
Total assets................................ 3,769 8,461 6,716 24,019
Long-term obligations, net of current
portion.................................... -- 7 3,211 3,211
Total liabilities........................... -- 861 7,060 7,986
Accumulated deficit......................... (1,443) (6,950) (20,152) (26,199)
Total stockholders' equity (deficit)........ 3,702 7,600 (344) 16,033
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with the consolidated
financial statements and notes to consolidated financial statements appearing
elsewhere in this prospectus. This discussion and analysis contains forward-
looking statements that involve risks, uncertainties and assumptions. Our
actual results may differ materially from those anticipated in these forward-
looking statements as a result of many factors, including, but not limited to,
those set forth under "Risk Factors" and elsewhere in this prospectus.
Overview
We design, develop, market and support high-performance Internet caching
appliances. From our inception in March 1996 through April 30, 1998, we were
considered to be in the development stage. Our activities were related
primarily to conducting research and development, developing our initial
product, recruiting personnel, building sales channels, establishing the
market for our initial product, raising capital and purchasing operating
assets.
We began commercial shipment of our first products in May 1998. Since that
time, we have introduced other Internet caching appliances, which have a
variety of hardware configurations designed for the different price,
performance, bandwidth and reliability requirements of our customers. The list
prices of our caching appliances increase as they become more highly
configured. Substantially all of our net sales through July 31, 1999 were
attributable to sales of our Internet caching appliance products. We
anticipate that these products will continue to account for a substantial
portion of our future net sales for the foreseeable future.
We market our products through our direct sales force, which is
complemented by indirect sales channels consisting of resellers, systems
integrators and original equipment manufacturers. Customers that purchase our
products through our direct sales force generally do so by delivering a
purchase order. Direct and indirect sales accounted for approximately 59% and
41% of our net sales for the fiscal year ended April 30, 1999, and
approximately 61% and 39% of our net sales for the quarter ended July 31,
1999. Sales through indirect channels have lower gross margin than direct
sales. As a result, we expect that our total gross margin on product sales
will decline if the portion of sales that are made through indirect channels
increases.
Net sales from international operations were $3.1 million, or approximately
44% of net sales, for the fiscal year ended April 30, 1999, and $1.7 million,
or approximately 48% of net sales, for the quarter ended July 31, 1999. The
majority of international sales were made in Europe and Asia by a combination
of our direct sales force and indirect channels. We treat sales to customers
in Canada as part of North American sales, and not as international sales. Our
international sales are denominated in United States dollars.
For the year ended April 30, 1999, Sumitronics, Global One Communications
and Nissho Electronics each accounted for more than ten percent of our net
sales, for an aggregate of approximately 33% of our net sales. For the quarter
ended July 31, 1999, Road Runner and Global One Communications each accounted
for more than ten percent of our net sales, for an aggregate of approximately
22% of our net sales.
We generally record product revenue upon shipment, net of allowances for
estimated sales returns and uncollectable customer accounts. Maintenance
contract revenue is initially deferred when a maintenance contract is
purchased by the customer and recorded evenly over the life of the contract.
To date, maintenance contract revenue has not been a significant portion of
our net sales.
We recorded deferred stock compensation of approximately $4,000, $157,000
and $13.7 million for the period from inception (March 13, 1996) to April 30,
1997 and for the years ended April 30, 1998 and 1999 and $12.0 million for the
quarter ended July 31, 1999. These amounts represent the difference between
the exercise price and the deemed fair value of certain stock option and
warrant grants to employees, consultants, directors and third parties. Related
stock compensation expense is recorded over the related option or warrant
vesting
24
<PAGE>
period, generally two to four years, or immediately if there is no vesting
period. We recorded stock compensation expense of approximately $4,000,
$59,000 and $3.8 million for the period from inception to April 30, 1997 and
for the years ended April 30, 1998 and 1999 and $2.5 million for the quarter
ended July 31, 1999 using a graded vesting method. Based on grants from August
1 through September 24, 1999, we expect to record additional stock
compensation charges of approximately $17.6 million. As a result of the
cumulative effect of stock compensation charges, we expect stock compensation
expense, which is primarily attributable to amortization of deferred
compensation charges, to impact our reported results through April 30, 2004.
In addition, we intend to record a charge of approximately $604,000 for the
quarter ended October 31, 1999 related to certain warrants.
We have incurred net losses in each quarter since inception. As of July 31,
1999, we had an accumulated deficit of $26.2 million. Our net loss was $5.5
million for the fiscal year ended April 30, 1998, $13.2 million for the fiscal
year ended April 30, 1999, and $6.0 million for the quarter ended July 31,
1999. These losses resulted from significant costs incurred in the development
and sale of our products and services. We expect to experience significant
growth in our operating expenses, particularly research and development and
sales and marketing expenses. As a result, we expect to incur additional
losses and continued negative cash flow from operations for the foreseeable
future.
Our limited operating history makes the prediction of future operating
results difficult. We believe that period-to-period comparisons of our
operating results should not be relied upon as predictive of future
performance. Our prospects must be considered in light of the risks, expenses
and difficulties encountered by companies at an early state of development,
particularly companies in new and rapidly evolving markets. We may not be
successful in addressing these risks and difficulties.
Selected Quarterly Results of Operations
Because we have a limited operating history, we believe that year-to-year
comparisons prior to 1999 are less meaningful than an analysis of recent
quarterly operating results. Accordingly, we are first providing a discussion
and analysis of our results of operations for the five quarters ended July 31,
1999.
25
<PAGE>
The following tables set forth, in dollars and as a percentage of revenues,
consolidated statements of operations data for each of the five quarters ended
July 31, 1999. This information has been derived from our unaudited
consolidated financial statements. The unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements contained in this prospectus and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary
for a fair presentation of such information. You should read this information
in conjunction with our consolidated financial statements and notes thereto
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------
Jul. Oct. Jan. Apr. Jul.
31, 31, 31, 30, 31,
1998 1998 1999 1999 1999
------- ------- ------- ------- -------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net sales........................ $ 809 $ 1,082 $ 2,201 $ 2,944 $ 3,612
Cost of goods sold............... 598 652 890 1,157 1,380
------- ------- ------- ------- -------
Gross profit..................... 211 430 1,311 1,787 2,232
Operating expenses:
Research and development........ 755 958 978 1,343 1,613
Sales and marketing............. 1,335 1,719 1,654 2,157 3,481
General and administrative...... 275 685 510 599 667
Stock compensation.............. 219 587 871 2,099 2,482
------- ------- ------- ------- -------
Total operating expenses..... 2,584 3,949 4,013 6,198 8,243
------- ------- ------- ------- -------
Operating loss................... (2,373) (3,519) (2,702) (4,411) (6,011)
Other income (expense), net...... 71 33 (115) (186) (36)
------- ------- ------- ------- -------
Net loss......................... $(2,302) $(3,486) $(2,817) $(4,597) $(6,047)
======= ======= ======= ======= =======
As a Percentage of Net Sales:
Net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............... 73.9 60.3 40.4 39.3 38.2
------- ------- ------- ------- -------
Gross margin..................... 26.1 39.7 59.6 60.7 61.8
Operating expenses:
Research and development........ 93.3 88.5 44.4 45.6 44.7
Sales and marketing............. 165.0 158.9 75.1 73.3 96.4
General and administrative...... 34.0 63.3 23.1 20.3 18.5
Stock compensation.............. 27.1 54.3 39.6 71.3 68.6
------- ------- ------- ------- -------
Total operating expenses..... 319.4 365.0 182.2 210.5 228.2
------- ------- ------- ------- -------
Operating loss................... (293.3) (325.2) (122.8) (149.8) (166.4)
Other income (expense), net...... 8.8 3.0 (5.2) (6.3) (1.0)
------- ------- ------- ------- -------
Net loss......................... (284.5)% (322.2)% (128.0)% (156.1)% (167.4)%
======= ======= ======= ======= =======
</TABLE>
Net Sales
Net sales increased in each of the five quarters ended July 31, 1999, from
$809,000 for the quarter ended July 31, 1998 to $3.6 million for the quarter
ended July 31, 1999. The increase was primarily attributable to the
introduction of new products and their growing acceptance in the marketplace,
growth in our customer base, and the addition of individuals to our sales
force. We offer products in both fixed and expandable configurations. The
growth in net sales was attributable to a combination of higher unit sales
volumes and higher average selling prices associated with increased sales of
expandable configuration systems. We expect that prior growth rates of our net
sales will not be sustained in the future.
26
<PAGE>
Gross Profit
Gross profit increased in each of the five quarters ended July 31, 1999,
from $211,000 for the quarter ended July 31, 1998 to $2.2 million for the
quarter ended July 31, 1999. Gross margin increased from approximately 26.1%
to 61.8% over the five quarters ended July 31, 1999. The increase in gross
profit was principally attributable to the introduction of new products and
their growing acceptance in the marketplace and higher sales volumes. The
increase in gross margin was primarily due to the resulting economies of scale
from higher unit production and cost savings achieved by outsourcing component
manufacturing.
Our gross margin has been and will continue to be affected by a variety of
factors, including competition, fluctuations in demand for our products, the
timing and size of customer orders and product implementations, the mix of
direct and indirect sales, the mix and average selling prices of products, new
product introductions and enhancements, component costs, manufacturing costs
and product configuration.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of salaries and benefits, and prototype and test equipment costs.
Our research and development expenses increased in each of the five quarters
ended July 31, 1999, from $755,000 for the quarter ended July 31, 1998 to $1.6
million for the quarter ended July 31, 1999. The increases in research and
development expenses were primarily attributable to increased staffing and
associated support for engineers required to expand and enhance our product
line, and, to a lesser extent, expenses related to prototype and test
equipment units. We believe that significant investments in research and
development will be required to remain competitive and expect that research
and development expenses will continue to increase in absolute dollars.
Through July 31, 1999, all research and development costs have been expensed
as incurred.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and benefits, commissions, advertising and promotional expenses, and
customer service and support costs. Our sales and marketing expenses generally
increased over the five quarters ended July 31, 1999, from $1.3 million for
the quarter ended July 31, 1998 to $3.5 million for the quarter ended July 31,
1999. The increases in sales and marketing expenses were primarily related to
the expansion of our sales and marketing organization, the increase in our
direct sales force, increased commission expenses related to higher sales
volumes, and the expansion of sales and support facilities worldwide. We
expect to continue to increase our sales and marketing expenses significantly
in absolute dollars in an effort to expand domestic and international markets,
introduce new products, and establish and expand new distribution channels.
General and Administrative. Our general and administrative expenses
increased from $275,000 for the quarter ended July 31, 1998 to $667,000 for
the quarter ended July 31, 1999. The increases in general and administrative
expenses were primarily attributable to increased staffing and associated
expenses necessary to manage and support our growth. We expect general and
administrative expenses to increase in absolute dollars as we continue to
increase staffing to manage expanding operations and facilities and incur the
additional expenses associated with operating as a public company.
27
<PAGE>
Results of Operations
For the period from our inception in March 1996 through April 30, 1998, we
did not record any net sales. The following table sets forth, as a percentage
of net sales, consolidated statements of operations data for the periods
indicated:
<TABLE>
<CAPTION>
Three Months
Ended July
31,
Year Ended ---------------
April 30, 1999 1998 1999
-------------- ------ ------
<S> <C> <C> <C>
Consolidated Statements of Operations Data:
Net sales...................................... 100.0% 100.0% 100.0%
Cost of goods sold............................. 46.9 73.9 38.2
------ ------ ------
Gross margin................................... 53.1 26.1 61.8
Operating expenses:
Research and development...................... 57.3 93.3 44.7
Sales and marketing........................... 97.6 165.0 96.4
General and administrative.................... 29.4 34.0 18.5
Stock compensation............................ 53.6 27.1 68.6
Total operating expenses................... 237.9 319.4 228.2
------ ------ ------
Operating loss................................. (184.8) (293.3) (166.4)
Other income (expense), net.................... (2.8) 8.8 (1.0)
------ ------ ------
Net loss....................................... (187.6)% (284.5)% (167.4)%
====== ====== ======
</TABLE>
Comparison of Quarters Ended July 31, 1999 and 1998
Net Sales. Net sales increased from $809,000 for the quarter ended July 31,
1998 to $3.6 million for the quarter ended July 31, 1999. The increase was
primarily attributable to the introduction of new products and their growing
acceptance in the marketplace, growth in our customer base, and the addition
of individuals to our sales force. Growth in net sales was also attributable
to a combination of higher unit sales volumes and higher average selling
prices associated with increased sales of our expandable configuration
systems. During the quarter ended July 31, 1998, three customers accounted for
approximately 51% of our net sales, and during the quarter ended July 31,
1999, two customers accounted for approximately 22% of our net sales.
Gross Profit. Gross profit increased from $211,000 for the quarter ended
July 31, 1998 to $2.2 million for the quarter ended July 31, 1999. Gross
margin increased from approximately 26.1% for the quarter ended July 31, 1998
to approximately 61.8% for the quarter ended July 31, 1999. The increase in
gross profit was primarily attributable to the introduction of new products
and their growing acceptance in the marketplace and higher sales volumes. The
increase in gross margin was principally due to the resulting economies of
scale from higher unit production and cost savings achieved by outsourcing
component manufacturing.
Research and Development. Research and development expenses increased from
$755,000 for the quarter ended July 31, 1998 to $1.6 million for the quarter
ended July 31, 1999. The increase in research and development expenses was
primarily attributable to increased staffing and associated support for
engineers required to expand and enhance our product line, and, to a lesser
extent, expenses related to prototype and test equipment units.
Sales and Marketing. Sales and marketing expenses increased from $1.3
million for the quarter ended July 31, 1998 to $3.5 million for the quarter
ended July 31, 1999. The increase in sales and marketing expenses was
primarily related to the expansion of our sales and marketing organization,
the increase in our direct sales force, increased commission expenses related
to higher sales volumes, and the expansion of sales and support facilities
worldwide.
28
<PAGE>
General and Administrative. General and administrative expenses increased
from $275,000 for the quarter ended July 31, 1998 to $667,000 for the quarter
ended July 31, 1999. The increase in general and administrative expenses was
primarily attributable to increased staffing and associated expenses necessary
to manage and support our growth.
Other Income (Expense), Net. Other income (expense), net consists of
interest income, interest expense and other non-operating expenses. Other
income (expense), net decreased from $71,000 for the quarter ended July 31,
1998, to $(36,000) for the quarter ended July 31, 1999. The decrease was
primarily attributable to increased interest costs as a result of incurring
additional borrowings.
Comparison of Period from Inception (March 13, 1996) to April 30, 1997 and
Fiscal Years Ended April 30, 1998 and 1999
Net Sales. We did not generate any sales for the period from inception to
April 30, 1998. Net sales for the fiscal year ended April 30, 1999 were $7.0
million. The increase was primarily attributable to the introduction of new
products and their growing acceptance in the marketplace, higher unit sales
volumes, growth in our customer base, and the addition of individuals to our
sales force. During the fiscal year ended April 30, 1999, three customers
accounted for approximately 33% of our net sales.
Gross Profit. We did not generate any sales for the period from inception
to April 30, 1998. The increase in gross profit and gross margin in the year
ended April 30, 1999 was attributable to generating sales in fiscal 1999.
Research and Development. Research and development expenses increased from
$1.1 million for the period from inception to April 30, 1997 to $2.4 million
for the fiscal year ended April 30, 1998 to $4.0 million for the fiscal year
ended April 30, 1999. The increases in research and development expenses were
primarily attributable to increased staffing and associated support for
engineers required to expand and enhance our product line, and, to a lesser
extent, expenses related to prototype and test equipment units.
Sales and Marketing. Sales and marketing expenses increased from $130,000
for the period from inception to April 30, 1997 to $1.7 million for the fiscal
year ended April 30, 1998 to $6.9 million for the fiscal year ended April 30,
1999. The increases in sales and marketing expenses were primarily related to
the expansion of our sales and marketing organization, the increase in our
direct sales force, increased commission expenses related to higher sales
volumes, and the expansion of sales and support facilities worldwide.
General and Administrative. General and administrative expenses increased
from $310,000 for the period from inception to April 30, 1997 to $1.6 million
for the fiscal year ended April 30, 1998 to $2.1 million for the fiscal year
ended April 30, 1999. The increases in general and administrative expenses
were primarily attributable to increased staffing and associated expenses
necessary to manage and support our growth.
Other Income (Expense), Net. Other income (expense), net increased from
$56,000 for the period from inception to April 30, 1997 to $233,000 for the
fiscal year ended April 30, 1998, and decreased to $(197,000) for the fiscal
year ended April 30, 1999. The increase from the period from inception to
April 30, 1997 to the fiscal year ended April 30, 1998 was primarily
attributable to increased investment income from cash received from equity
financings. The decrease from the fiscal year ended April 30, 1998 to the
fiscal year ended April 30, 1999 was primarily attributable to increased
interest costs as a result of incurring additional borrowings.
Income Taxes
Income taxes consist of federal, state and local taxes, when applicable. We
expect significant consolidated net losses for the foreseeable future, which
should generate net operating loss carryforwards. However, our ability to use
net operating losses may be subject to annual limitations. Under the
provisions of the Internal Revenue Code, certain substantial changes in our
ownership may limit the amount of net operating loss
29
<PAGE>
carryforwards that could be utilized annually in the future to offset taxable
income. In addition, income taxes may be payable during this time due to
operating income and the imposition of federal or state minimum taxes. We
recognized no provision for taxes, because we operated at a loss throughout
the years ended April 30, 1997, 1998 and 1999, and for the quarter ended July
31, 1999.
Liquidity and Capital Resources
Since inception, we have financed our operations and the purchase of
property and equipment through private sales of preferred stock, with net
proceeds of $33.4 million, as well as through bank loans and equipment leases.
At July 31, 1999, we had $17.8 million in cash and cash equivalents and
$16.9 million in working capital.
Net cash used in operating activities was $1.4 million for the period from
inception to April 30, 1997, $5.1 million for the fiscal year ended April 30,
1998, $9.7 million for the fiscal year ended April 30, 1999, and $3.9 million
for the quarter ended July 31, 1999. We used cash primarily to fund our net
losses from operations.
Net cash used in investing activities was $3.5 million for the period from
inception to April 30, 1997, $971,000 for the fiscal year ended April 30, 1999
and $472,000 for the quarter ended July 31, 1999. Net cash provided by
investing activities was $2.8 million for fiscal year ended April 30, 1998.
Net cash used in investing activities was primarily attributable to purchases
of property, plant and equipment and short-term investments. Net cash provided
by investing activities was primarily attributable to the proceeds from the
sale of short-term investments. We expect that, in the future, any cash in
excess of current requirements will be invested in investment grade, interest-
bearing securities.
Net cash provided by financing activities was $5.1 million for the period
from inception to April 30, 1997, $9.4 million for the fiscal year ended April
30, 1998, $5.6 million for the fiscal year ended April 30, 1999 and $19.9
million for the quarter ended July 31, 1999.
Capital expenditures were $123,000 for the period from inception to April
30, 1997, $623,000 for the fiscal year ended April 30, 1998, $971,000 for the
fiscal year ended April 30, 1999, and $472,000 for the quarter ended July 31,
1999. Our capital expenditures consisted of purchases of plant, equipment and
software. We expect that our capital expenditures will continue to increase in
the future.
We currently have two credit facilities. In November 1998, we amended our
then existing credit facility to increase the amount available thereunder from
$400,000 to $3.0 million. This credit facility, which expires in November 1999
and bears interest at the prime interest rate plus .75%, had $1.2 million
available for borrowing as of July 31, 1999. In November 1998, we entered into
an additional credit facility consisting of a $3.5 million three year term
loan and a $350,000 equipment line of credit. The term loan and equipment line
of credit are secured by all of our assets and bear interest at 13.0% and
11.4% and mature in November 2002 and May 2000. As of July 31, 1999, all
amounts under the term loan had been borrowed, and all amounts under the
equipment line of credit were available for borrowing. Both of our credit
facilities require us to maintain compliance with certain financial covenants.
We believe that working capital together with the net proceeds from the
sale of the common stock in this offering will be sufficient to meet our
working capital and capital expenditure requirements for at least the next
twelve months. Thereafter, we may find it necessary to obtain additional
equity or debt financing. In the event additional financing is required, we
may not be able to raise it on acceptable terms or at all.
Year 2000 Readiness
The "Year 2000 issue" refers generally to the problems that some software
and hardware may have in determining the correct century for the year. For
example, software with date-sensitive functions that is not Year 2000
compliant may not be able to distinguish whether "00" means 1900 or 2000,
which may result in failures or the creation of erroneous results.
30
<PAGE>
We believe that our current products are Year 2000 compliant when
configured and used in accordance with the related documentation, and provided
that the other network components in the host network and any other software
used with our products are Year 2000 compliant. However, we have not tested
for Year 2000 compliance the compatability of our products with the other
network components in the host network and any other software used by our
customers with our products. We continue to respond to customer questions
about prior versions of our products on a case-by-case basis.
We have defined Year 2000 compliant as the ability to:
. correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
. function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
. respond to two-digit date input in a way that resolves the ambiguity as
to century in a disclosed, defined and predetermined manner;
. store and provide output of date information in ways that are
unambiguous as to century if the date elements in interfaces and data
storage specify the century; and
. recognize Year 2000 as a leap year.
We have tested software obtained from third parties, including licensed
software, shareware, and freeware that is incorporated into our products, and
we are seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite testing by us and current and potential customers, and
assurances from developers of products incorporated into our products, our
products may contain undetected errors or defects associated with Year 2000
date functions. Known or unknown errors or defects in our products could
result in delay or loss of net sales, diversion of development resources,
damage to our reputation, or increased service and warranty costs, any of
which could seriously harm our business. Some commentators have predicted
significant litigation regarding Year 2000 compliance issues, and we are aware
of such lawsuits against software vendors. Because of the unprecedented nature
of such litigation, it is uncertain whether or to what extent we may be
affected by it.
We have initiated an assessment of our material internal information
technology systems, including both our own software products and third-party
software and hardware technologies, but we have not initiated an assessment of
our non-information technology systems. We are seeking assurances from our
third-party software vendors that their systems are Year 2000 compliant. In
addition, we intend to seek assurances from the vendors of any future software
purchased by us, including our planned purchase of a new enterprise resource
planning system. We are not currently aware of any material operational issues
or costs associated with preparing our internal information technology and
non-information technology systems for the Year 2000. However, we may
experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal information
technology and non-information technology systems.
We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce
or eliminate the budgets that current or potential customers could have for
purchases of our products and services. As a result, our business, financial
condition and results of operations could be seriously harmed.
We have not separately accounted for Year 2000 costs in the past. To date,
these costs have not been material. We will incur additional costs related to
the Year 2000 efforts for administrative personnel to manage the project,
outside contractor assistance, technical support for our products, product
engineering and customer
31
<PAGE>
satisfaction. In addition, we may experience significant problems and costs
with Year 2000 compliance that could seriously harm our business.
We have not yet fully developed a contingency plan to address situations
that may result if we are unable to achieve Year 2000 readiness of our
critical operations. The cost of developing and implementing such a plan may
itself be significant. Finally, we are also subject to external forces that
might generally affect industry and commerce, such as utility or
transportation company Year 2000 compliance failure interruptions.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," or FAS 133. The new standard establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. FAS 133
will be effective for the Company's fiscal year ending April 30, 2002. We do
not expect FAS 133 to have a material effect on our consolidated financial
condition or results of operations.
Qualitative and Quantitative Disclosures about Market Risk
We develop products in the United States and sell them in North America,
Asia and Europe. As a result, our financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Since all of our sales are currently made in
United States dollars, a strengthening of the dollar could make our products
less competitive in foreign markets. Our interest income is sensitive to
changes in the general level of United States interest rates, particularly
since the majority of our investments are cash and cash equivalents. Due to
the nature of our cash and cash equivalents, we have concluded that they do
not expose us to material risk.
32
<PAGE>
BUSINESS
The prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in
such forward-looking statements.
Overview
We are a leading provider of Internet caching appliances that are
specifically designed, or purpose-built, to accelerate and manage the flow of
information over the Internet. Our products enable our customers to improve
the performance of their networks and reduce network costs, while enhancing
network security. As of August 31, 1999, we had approximately 100 customers
and 575 installations. End users of our products include large and small
Internet service providers, or ISPs, and corporate enterprises.
Industry Background
The Internet has emerged as one of the fastest growing communications media
in history, and is dramatically changing the way businesses and individuals
communicate and conduct commerce. International Data Corporation, or IDC,
estimates that there were approximately 97 million users of the Internet at
the end of 1998, and projects that the number of Internet users will grow to
over 319 million by 2002. IDC also projects that the number of Internet access
devices worldwide will grow from an estimated 120 million in 1998 to over 515
million by the end of 2002. Similarly, the amount of content available on the
Internet is increasing rapidly. IDC estimates that the number of web pages
worldwide will grow from approximately 829 million in 1998 to over 7.7 billion
by 2002.
The volume of data transmitted across the Internet and corporate intranets
is also growing as a result of increasingly complex content. Web sites and e-
mail messages, for example, increasingly incorporate graphics as well as audio
and video elements which require much larger files than simple text. Each time
an Internet user requests web page content, the request, access and
transmission of this content must follow a network path from user to origin
server and back. This process is repeated serially for each object that a web
page contains. Popular web pages typically contain ten to twenty objects,
requiring multiple transmissions per web page. This serial request of content
significantly lengthens web response time. In addition, with users anywhere
accessing information anywhere, traffic patterns are unpredictable.
The physical infrastructure of the Internet today must therefore
accommodate sharply increased volumes of data traffic, which includes a high
degree of redundant data, as well as highly unpredictable and event-driven
usage patterns. Advances in communications technology such as high-speed
routers, switches and broadband access technologies have improved the Internet
infrastructure and its ability to transfer packets of data. However, these
technologies do not reduce the volume of data that must be moved from origin
server to user, nor the physical distance between source and user. Further,
these improvements do not allow for the analysis or control of the actual
content. As a result, servers are still overloaded by the growing number of
requests, and web response time remains a continuing problem despite the
advent of broadband technologies and other improvements in data transmission
capacity, or bandwidth.
Slow web response time and web server outages can have a significant
financial impact on corporate enterprises and Internet service providers, or
ISPs. As enterprises increasingly depend on the Internet to conduct business,
web server availability and performance become increasingly important for
generating revenue and communicating with customers and vendors. The
availability and performance of web servers and the quality of a customer's
web site experience directly impact revenue for a business engaged in
electronic commerce, or e-commerce. Delayed web server response times decrease
productivity and can threaten the revenue-generating or communications
capabilities of the Internet. Users who have difficulty accessing a web site
may stop using it or find an alternative site. In the case of ISPs, slow web
response times may frustrate their customers, encouraging them to cancel their
service.
In response to these problems, caching technologies based on proprietary
software solutions or open platforms were introduced. By storing frequently
requested Internet content physically closer to users, caching reduces the
distance over which web content must travel, and removes much of the redundant
traffic from the network. By saving bandwidth, these caching solutions are
able to modestly reinforce the extensive improvements in routing, switching
and transmission capacity. However, they do not adequately address the
33
<PAGE>
disparate requirements of ISPs, enterprises and users. Specifically, these
solutions have failed to address market demand for:
. reduced web response time, including download times for non-cached
content;
. simple administration and management;
. reduced network costs;
. secure networks; and
. fresh web content.
For example, traditional software-based caching solutions based on general-
purpose operating systems, where source code is widely available and well
understood, can be costly, difficult to implement and manage and vulnerable to
security breaches. Caching solutions based on publicly available software, or
freeware, generally provide inferior performance, security and features
because they lack consistent, dedicated programming efforts. More recently,
some vendors have chosen to modify hardware-based solutions, such as filers or
routers, from their original purpose to become caching solutions. Because
these hardware-based solutions were initially designed for other purposes,
they can be slower than other alternatives, more cumbersome to operate and
less efficient. Finally, these traditional hardware and software caching
solutions have had limited success in ensuring the freshness of content served
from the cache.
In recent years, the increasing complexity within networks required the
introduction of dedicated routing and switching appliances in order to achieve
desired network performance and reliability levels. Similarly, increasing
traffic volumes, network complexity and user expectations for the performance
of the Internet require the introduction of a specifically-designed, dedicated
Internet caching appliance to reduce web response time, provide extensive
administration and management capabilities, reduce network costs, ensure data
security and deliver fresh content. As a result, the Internet caching
appliance market is expected to grow rapidly. According to the GartnerGroup,
this market is expected to grow from approximately $92 million in 1999 to over
$1 billion in 2003, representing a compounded annual growth rate of
approximately 85%.
The CacheFlow Solution
CacheFlow designs, develops, markets and supports high-performance Internet
caching appliances that manage the flow of information over the Internet. We
are exclusively focused on developing appliances that are specifically
designed, or purpose-built, for Internet caching. At the foundation of each
CacheFlow product is CacheOS, our high-performance operating system designed
specifically to manage and accelerate the delivery of Internet content. As
purpose-built appliances, our products enhance network performance by reducing
the data burden on the network backbone, firewall and server. Our products
improve response time for Internet users and provide network administrators
and managers a high degree of control over the access, flow and delivery of
Internet content. The principal benefits of our Internet caching appliances
include:
High Performance. Our purpose-built appliances were designed from inception
for high-performance Internet caching. Our appliances provide high data
throughput and reduce latency, or the time between initiating a request for
data and the completion of the actual data transfer. Even uncached content is
accelerated, since our appliances simultaneously retrieve numerous objects
from the origin server, in many cases doubling the speed of content delivery.
Designed to be intelligent pieces of network equipment, our appliances become
network-aware, content-aware elements of the network that improve network
efficiency and speed web response times.
Ease of Installation and Management. Our products are designed for easy
installation and maintenance, reducing the cost and time required for
implementation and use. In many cases, our Internet caching appliances can be
installed in under thirty minutes. All of our products provide customers with
a range of management features, functions, user interfaces and modes of
operation. In addition, our appliances support relevant networking standards,
enabling our appliances to interact with existing networking equipment such as
routers, servers, switches and load balancers.
34
<PAGE>
Attractive Return on Investment. Our products are designed to reduce
bandwidth costs. By allowing content to be served from a cache located closer
to the user, instead of the origin server on the Internet, enterprises and
ISPs employing our Internet caching appliances require less bandwidth and can
reduce data transmission costs. Our customers better utilize the bandwidth of
their existing network since redundant traffic is offloaded from the network
and served from the cache. Enterprises engaged in e-commerce can reduce the
need to purchase additional servers since our Internet caching appliances
offload a significant amount of traffic that could otherwise overload their
existing servers, requiring incremental server capacity. Our products also
help to improve the productivity of Internet users by reducing web response
time. Faster downloading of web content increases productivity and end-user
satisfaction.
Security. Our appliances run on a proprietary and purpose-built operating
system. CacheOS is designed to be less vulnerable to unauthorized entry than
caches based on more commonly understood, general-purpose operating systems,
such as Windows NT, UNIX or NetWare. In addition, CacheOS employs
authentication and filtering capabilities that prohibit unauthorized users
from accessing or penetrating through the cache.
Broad Product Suite. Enterprises and ISPs have varying bandwidth,
reliability and data throughput needs, depending on the size and nature of
their operations. We offer a wide range of products to meet different price,
performance and reliability requirements, and provide an upgrade path to our
customers as they expand their networks. Our products can be deployed in a
variety of environments, ranging from small or remote network locations to
large ISPs or enterprise headquarters.
Delivery of Fresh Web Content. Moving content closer to the user increases
network efficiency, but creates the risk that the content delivered is not
fresh. Internet caching appliances store content, but do not originate or own
that content, so in order to provide fresh content, caches must track the
content at its origin. Unlike traditional caches that are passive, our
Internet caching appliances are active, refreshing content through efficient
and sophisticated algorithms that monitor user activity and the frequency with
which source content is changed without requiring additional bandwidth or
adversely affecting response time. These algorithms are managed through a
control mechanism that allows the network administrator to easily set the
level of freshness delivered by the cache. The algorithms are self-adapting
based on the administrative settings.
Ability to Manage the Flow of Content. Our Internet caching appliances are
installed at points in the Internet infrastructure where they interact with
the content being requested, the user requesting that content and the network
infrastructure itself. Our appliances are able to leverage their placement at
this network juncture to provide a range of additional value-added services,
including content filtering, user tracking and control of cached content.
The CacheFlow Strategy
Our objective is to be the leading provider of Internet caching solutions
by delivering high-performance, innovative Internet caching appliances. Key
elements of our strategy include the following:
Leverage Internet Caching Focus to Target Market Segments. Since our
inception, we have focused exclusively on developing Internet caching
appliances. We believe this exclusive focus helps us to rapidly identify and
target attractive market opportunities. We are directing our product
development, marketing and sales activities at specific market segments that
we believe represent attractive opportunities based on a demonstrated need for
caching, the opportunity to sell to numerous customers and the level of
existing competition. We intend to leverage our customer relationships in
these market segments to further penetrate these segments as well as other
related markets.
Enhance Capabilities of our Appliances. We intend to leverage our
technological expertise to meet the needs of the evolving Internet caching
market. We plan to continue to develop both the software and hardware elements
of our solution to gain and maintain a competitive advantage and expand the
market for our products. Our additional efforts to enhance the capabilities of
our appliances include adding more functionality to control
35
<PAGE>
the flow of content, customizing hardware and software to enhance performance
and developing enhancements to improve ease of deployment.
Broaden Distribution Channels. We intend to extend our distribution
channels to meet the anticipated growth in demand for Internet caching
appliances. We plan to continue to expand both our direct and indirect sales
channels in order to continue to extend our marketing reach and increase our
volume distribution. In particular, we plan to enter into relationships with
additional resellers, systems integrators and original equipment manufacturers
to increase penetration of the enterprise and ISP markets.
Build the CacheFlow Brand. We intend to establish CacheFlow as the premier
brand in the Internet caching appliance market. We believe that brand
awareness is important to increase market acceptance of Internet caching
appliances generally and to identify us as a leading provider of Internet
caching appliance solutions. We intend to continue to educate customers,
resellers, systems integrators and original equipment manufacturers about the
value of implementing caching appliances. We believe a thorough process of
explanation and education of our products will help to promote brand
recognition and to further an overall acceptance and understanding of caching
appliances. To this end, we intend to increase our investments in a broad
range of marketing and educational programs.
Products
Our products are designed to meet the different price, performance,
bandwidth and reliability requirements of our customers and potential
customers. Embedded in each of our caching appliances is our CacheOS operating
system. Because CacheOS acts as a common platform across our product line, all
of our products support a consistent set of software features and functions, a
common easy-to-manage user interface and common operational characteristics.
Internet Caching Appliances
We began commercial shipment of our first Internet caching appliances in
May 1998. Our current product family is separated into four product series:
. 100 Series--The CacheFlow 110 Internet caching appliance, the sole
model within the 100 Series, is designed for use by small ISPs and
corporate branch or remote offices. The CacheFlow 110 is designed to
support Internet traffic loads of up to 1.5 Mbps, the equivalent of
a T-1 line.
. 500 Series--The CacheFlow 500 Series includes our 515, 525 and 545
Internet caching appliances, which are specifically designed to
support ISPs and enterprises with Internet connections up to 15
Mbps. The CacheFlow 500 Series is typically deployed in front of web
servers and firewalls and is used for accelerating the delivery of
content to ISP and enterprise users.
. 3000 Series--The CacheFlow 3000 Series is comprised of high-
performance Internet caching appliances designed specifically to
support ISPs and enterprises with Internet connections from 10 to
45Mbps, the equivalent of a T-3 line. Our 3000 Series provides our
customers with the ability to add capacity to the appliance as their
needs grow.
. 5000 Series--The CacheFlow 5000 Series is comprised of high-
performance Internet caching appliances designed specifically for
carrier-class scalability and reliability. The CacheFlow 5000 is
highly scalable, designed to support traffic loads ranging from 45
Mbps, or T-3, to more than 155 Mbps, the equivalent of OC-3. Our
5000 Series can contain up to three separate AC or DC power supplies
to allow uninterrupted operation and provides our customers with the
ability to add capacity to the appliances as their needs grow.
36
<PAGE>
The following table describes the configurations of our Internet caching
appliances:
<TABLE>
<CAPTION>
Maximum Maximum Fixed/
Series Disk Space Memory Expandable
------ ---------- ------- ----------
<S> <C> <C> <C>
CacheFlow 100.................................. 4 Gb 128 Mb Fixed
CacheFlow 500.................................. 36 Gb 768 Mb Fixed
CacheFlow 3000................................. 63 Gb 1 Gb Expandable
CacheFlow 5000................................. 243 Gb 4 Gb Expandable
</TABLE>
CacheOS
CacheOS is the operating system that runs all of our Internet caching
appliances. Unlike general operating systems, such as Windows NT, UNIX and
NetWare, CacheOS was developed specifically to enable Internet caching and,
therefore, does not contain the millions of lines of code necessary to support
the many features required of a general operating system. As a result, our
Internet caching appliances run more efficiently. Because we developed CacheOS
internally, our Internet caching appliances are more secure than caching
devices that run on operating systems whose source code is more commonly
understood. In addition, our operating system enables redundancies, such as
storing multiple copies of images on each disk within the appliance and
keeping a copy of CacheOS on each disk, so that if one disk fails, the next
can automatically reboot the appliance. These redundancies allow our caching
appliances to be highly reliable.
CacheOS is designed with a variety of features that improve network
performance and administration.
. Object Pipelining reduces web response time by enabling the simultaneous
retrieval of multiple objects on a page.
. Adaptive Probabilistic Refresh improves content freshness without
sacrificing response time by tracking and checking content freshness,
independently of user requests, based on the probability that the
content will be requested and the probability that the content has
changed.
. Value-based Deletion reduces web response time and improves network
efficiency by deleting excess content stored in the cache, based on the
probability that the content will be requested and the time required to
retrieve that content.
. Security is enhanced because CacheOS is a specialized, internally-
developed operating system, which is designed to be less vulnerable to
unauthorized entry than caches based on more commonly understood,
general purpose operating systems. In addition, CacheOS enhances cache
management security for network administrators.
. Transparent and Proxy Mode Support provides administrators with
increased deployment flexibility by allowing CacheOS to simultaneously
service direct requests from client browsers and redirected requests
from routers or Layer 4 switches.
. Filtering prevents viewing of restricted content and provides increased
security by allowing administrators to control the content that users
can access.
. Authentication prevents unauthorized access to the cache and increases
security by requiring users to identify themselves and verifying access
privileges before granting users access to the cache.
. Easy Installation and Maintenance. CacheOS installs quickly and easily
into customers' networks and is easy-to-maintain, is reliable and has a
low cost of ownership.
Customers and Applications
We began commercial shipment of our first Internet caching appliances in
May 1998 and, as of August 31, 1999, we had approximately 100 customers and
575 installations. Our customers include both large and small ISPs, as well as
enterprises. We sell our products both domestically and internationally. Net
sales from international operations were $3.1 million, or approximately 44% of
net sales, for the fiscal year ended April 30, 1999, and $1.7 million, or
approximately 48% of net sales, for the quarter ended July 31, 1999.
37
<PAGE>
The following end-user customers and resellers have purchased or leased
over $50,000 of our products:
<TABLE>
<CAPTION>
Internet Service Providers Enterprises Resellers
- -------------------------- ----------------- ---------------
<S> <C> <C>
Clear Communications Delta Airlines BTN Internetworking
Datacom Caribe Force 3 Colt Telecom
germany.net Goldman Sachs Dynavar Networking
Global One Communications Hewlett-Packard Lidcam Technology
Helsinki Telephone Hughes Network Systems Lucent Technologies
Infonie Lucent Technologies Nissho Electronics
MTS Advanced Xerox Phitech
Road Runner Solunet
Servint Corp. Internet Services Stark Technology
Swisscom Sumitronics
</TABLE>
For the year ended April 30, 1999, Sumitronics, Global One Communications
and Nissho Electronics each accounted for over ten percent of our net sales,
for an aggregate of approximately 33% of our net sales. For the quarter ended
July 31, 1999, Road Runner and Global One Communications each accounted for
over ten percent of our net sales, for an aggregate of approximately 22% of
our net sales.
Customers have purchased and used our products for a variety of different
applications. ISPs typically use our products to help meet the performance
potential of broadband technology, to achieve bandwidth savings and to gain
efficiencies in web and applications hosting. Enterprises typically use our
products for handling e-commerce related traffic and as a replacement for
proxy servers. The following are our principal target markets:
E-commerce
Many organizations have come to rely on their web sites as a means of
attracting new customers and generating additional revenue. Increased business
use of the Internet, coupled with the widespread adoption of e-commerce by
consumers, has resulted in large amounts of traffic flowing to e-commerce
sites. Many organizations' current network infrastructures are incapable of
handling this increase in traffic, resulting in overburdened firewalls and e-
commerce servers, resulting in fewer transactions per day for the e-commerce
site. Furthermore, slower response times and poor quality of service can lead
consumers to become dissatisfied with the e-commerce experience and either
stop making web purchases or go to a competitor's web site where performance
is better, which can result in a loss of potential revenues.
Customer Case Study: Delta Airlines. Delta Airlines, a leading worldwide
airline company, was looking for a solution to scale the performance of its
online travel service. Delta wanted to increase capacity for special
promotions, offer surge protection against peak traffic loads, and accommodate
an overall increase in usage of its e-commerce site without sacrificing
performance, manageability or control. Delta contemplated deploying additional
web servers and firewalls, but instead chose our Internet caching appliances.
Because of the level of security afforded by our proprietary operating system,
Delta was able to deploy our products outside its corporate firewall and in
front of its web site. By servicing user requests for content outside the
firewall, our products were able to reduce traffic on the servers, firewall
and intranet, helping to reduce operating costs. As a result, Delta was able
to increase the capacity of its site and improve the response time and content
freshness, without the need for additional firewalls or web servers. According
to Delta, approximately 92% of user requests for content from Delta's web site
are now being served from our products.
Bandwidth Savings
As the Internet has evolved as a network for shared data, content has
become accessible to end users throughout the world. In many cases, this
content does not originate from web sites located near the user requesting the
information, resulting in slower response times to end users and significant
bandwidth costs to
38
<PAGE>
ISPs. Because most Internet content originates in the United States, these
issues are particularly acute for international users.
Customer Case Study: germany.net. germany.net, a large ISP in Germany,
needed a way to meet growing customer demand for faster access to the
Internet. germany.net found that much of the content its customers were
accessing was hosted on web servers located outside of Germany, resulting in
increasingly slow response times and high bandwidth costs. At the same time,
germany.net wanted to minimize its operating costs. germany.net had been
running cache software on Unix servers, which required daily maintenance. To
improve quality of service for existing customers and provide the
infrastructure to scale with new customer additions, while preserving valuable
bandwidth, germany.net deployed our Internet caching appliances. They reported
an immediate improvement in performance, including web sites where content was
being requested for the first time. Because our products request all objects
on a particular web site simultaneously, the host web server does not need to
be re-contacted each time a separate object is requested, enabling germany.net
to deliver noticeably reduced response times for its customers.
Proxy Server Replacement
The amount of data traffic over many enterprise networks has increased
significantly. For many enterprises, exchanging and accessing information over
their intranets and from the Internet is a strategically important tool in
increasing productivity. With this dependence on remote sources of
information, enterprises face a number of risks, including end user access of
inappropriate content, unauthorized outside entities gaining access to their
networks, unpredictable network traffic volumes, and new traffic types that,
if not controlled, could have adverse effects on network bandwidth and
performance. Proxy servers offering user authentication and filtering
capabilities were originally put into networks to allow the network
administrator to implement corporate policies to control the flow of
information in and out of the network. However, the growth in data traffic in
large enterprises has outpaced the growth in proxy server capacity, forcing
many network administrators to choose between accommodating growth and
maintaining control.
Customer Case Study: Xerox. Xerox, a global leader in the document
processing business, was experiencing significant growth in the amount of data
traffic over its network, and wanted to enhance its ability to deliver
critical web-based data to its employees in a timely manner. Increasing
intranet and Internet usage by Xerox employees worldwide was resulting in
congestion in its network and slower response times for its employees. This
problem was compounded by the fact that Xerox was transporting several
terabytes of information every day. Recognizing that the moving and sharing of
data was critical in enhancing employee productivity, both at corporate
headquarters and among remote offices, Xerox needed a reliable solution that
would scale with its employees' growing usage and would enable it to better
manage traffic over its network. Xerox chose our Internet caching appliances
to accomplish these objectives. By placing our caching appliances between
their intranet and the Internet, Xerox was able to offload many of the
requests that otherwise would have been routed to its proxy servers. According
to Xerox, it has experienced immediate and significant productivity gains as
well as significant improvements in bandwidth efficiency and response time.
Broadband
Broadband ISPs offer high-speed Internet access, enabling the delivery of a
wide range of new content and the ability to make the Internet a truly
interactive medium. However, faster access speeds do not necessarily result in
significantly faster response time due to the distance, congestion and latency
of the Internet itself. Customer expectation of high-speed Internet access
remains largely unfulfilled, posing a challenge for broadband ISPs competing
to attract and retain customers.
Customer Case Study: Road Runner. Road Runner, a leading provider of high-
speed Internet service delivered over cable infrastructure, was looking for
product solutions to enhance network performance. Because the broadband market
is viewed as new and highly competitive, it was critical for Road Runner to
continue to deliver high-quality service in order to attract new customers and
retain existing customers. In addition, Road
39
<PAGE>
Runner wanted to ensure a high level of performance for the web content that
Road Runner itself hosts. Road Runner also required a network infrastructure
product that was reliable and would enable them to scale with their growing
customer base. At the same time, Road Runner sought a product solution that
was easy to configure and deploy, and that was secure. As a result, Road
Runner chose our Internet caching appliances. According to Road Runner, the
speed of our appliances has helped Road Runner attract world-class content
providers and because Road Runner has been able to redirect much of its
traffic through our appliances, response time for its customers has improved
significantly.
Technology
CacheFlow's Internet caching appliances are high-performance, self-tuning
systems that are easy to install and manage and are produced in a variety of
storage configurations. At the core of our technology is our proprietary
special-purpose operating system, CacheOS, which we created specifically to be
the foundation for a family of high-performance Internet caching appliances.
CacheOS is designed to enable our wide range of products, from small shared
caches to very large caches, to manage and accelerate the delivery of Internet
content. Our appliances' high performance, ease of installation and
management, security, and ability to deliver fresh content are made possible
by certain proprietary technologies.
Efficient, Purpose-Built Operating System. CacheOS is designed to be faster
and more reliable than a general-purpose operating system. At the core of
CacheOS is a high-performance multitasking kernel that provides sub-
microsecond inter-process message passing. CacheOS operates at higher speeds
because it does not have the overhead of providing the general-purpose
services of a standard operating system, such as virtual memory, multiple
address spaces and memory protection. CacheOS uses a high-performance TCP/IP
stack based on the Berkeley Net/3 stack with modifications that support high
connection rates, fast recovery of lost packets and minimal data copying.
CacheOS is designed to be less vulnerable to security attacks than caches
based on more commonly understood, general-purpose operating systems such as
Windows NT, UNIX or NetWare. CacheOS can be remotely managed and monitored
using a Java-enabled browser or through a command-line interface. In addition,
geographically distributed caches can be centrally administered using custom-
designed scripts. CacheOS can be configured to automatically send e-mail
alerts and important operational statistics. New releases of CacheOS software
can be installed remotely over the network, with only a minimal interruption
of service. Additionally, CacheOS is designed to provide high availability. In
the event of a system failure, CacheOS detects the failure and is generally
able to restart in less than 20 seconds. If the appliance experiences a power
outage, it automatically restarts and becomes operational within a few
minutes.
Web Object Storage System. CacheOS uses a high-performance specialized
object storage system designed specifically for storing and retrieving web
objects on disk. The method of storing objects on disk is critical for
achieving high performance with a large number of users. It determines how
quickly a cached object can be accessed when a client requests it, how rapidly
new objects can be acquired from the origin web server and the rate at which
client requests can be serviced. The web object storage system is an object
cache. A relatively small number of objects, such as system code,
configuration objects and log files, are stored on each disk within the cache.
These objects are stored on multiple disks to achieve fault tolerance. All
other stored objects are stored in such a way that they can be removed to
create space for new, incoming objects. The object cache is not a file system,
and uses no directories. Objects are located on disk using an efficient hash
table in RAM that ensures that any object can be accessed in a single disk
read. This design results in higher object throughput on each disk and better
response time.
Object Pipelining. CacheOS uses a technology known as object pipelining to
speed the delivery of web content, even when it is not stored in the cache.
This technology improves web page response time and reduces page load times.
Without object pipelining, web browsers request embedded objects serially, a
few at a time. Pipelining reduces web page download times by retrieving all
web page objects from the origin web server simultaneously and in parallel.
40
<PAGE>
Adaptive Probabilistic Refresh. CacheOS utilizes asynchronous refresh
checks, which means that refresh checks are performed without increasing
response time for client requests. Thus, the delivery of web content is not
delayed by a "freshness" check of the content at the origin server prior to
delivery. CacheOS uses adaptive object refresh algorithms, which increase the
likelihood that objects being served from the cache are fresh. These
algorithms adapt to determine how often objects change and how popular each
object is. Because the cache actively maintains the freshness of its objects,
end users receive up-to-date web content with fast response times.
Sales and Marketing
We utilize a combination of our direct sales force, resellers, systems
integrators and original equipment manufacturers as appropriate for each of
our target markets. We support our distribution channels with systems
engineers and customer support personnel that provide technical service and
support to our customers. We have entered into agreements with resellers and
network equipment providers such as Lucent Technologies, Nissho Electronics
and Sumitronics. We intend to pursue relationships with additional resellers
and original equipment manufacturers to implement our distribution strategy
and to expand our customer base. We have been expanding our sales force
rapidly, and, as of August 31, 1999, we employed 69 persons in sales,
marketing and customer support.
Our marketing efforts focus on increasing the market awareness of our
products and technology and promoting the CacheFlow brand. Our strategy is to
create this awareness by distinguishing our products based on their high level
of performance. We have a number of marketing programs to support the sale and
distribution of our products and to inform existing and potential customers
within our target market segments about the capabilities and benefits of our
products. Our marketing efforts include participation in industry tradeshows,
preparation of competitive analyses, sales training, maintenance of our web
site, advertising and public relations.
Research and Development
Following our inception in March 1996, we developed the first version of
CacheOS, which was specifically designed as the operating platform for our
Internet caching appliances. Our research and development efforts are focused
on developing technological improvements to and new versions of our Internet
caching appliances. Our research and development team consists of engineers
with extensive backgrounds in operating systems, algorithms, computer science
and network engineering. We believe that the experience and capabilities of
our research and development professionals represents a competitive advantage
for CacheFlow. As of August 31, 1999, we employed 36 persons in research and
development.
We have worked closely with several of our customers in developing and
enhancing our products. Our current research and development efforts are
primarily focused on three strategic initiatives:
. developing Internet caching appliances to address price/performance
points for which we do not currently offer products;
. improving the performance of our Internet caching appliances, including
data throughput and response time; and
. adding new features and strengthening the existing features of our
Internet caching appliances to give them enhanced capabilities.
We expect that most of the enhancements to our existing and future products
will be developed internally. However, we currently license certain
technologies and will continue to evaluate externally developed solutions for
integration into our products.
Manufacturing
We currently outsource the manufacturing of all of the subassemblies and
components of our Internet caching appliances, including certain printed
circuit boards, custom power supplies, chassis, cables and
41
<PAGE>
subassemblies, to third parties, and we perform final assembly and testing in
house. This approach allows us to reduce investment in manufacturing capital
and to leverage the expertise of our vendors. Our internal manufacturing
operations consist primarily of prototype development, materials planning and
procurement, final assembly, testing and quality control. We plan to
subcontract final assembly to third parties in the future. Our standard parts
and components are generally available from more than one vendor. We typically
obtain these components through purchase orders and do not have contractual
relationships or guaranteed supply arrangements with these suppliers. If one
of these vendors ceased to provide us with necessary parts and components, we
would likely encounter delays in product production as we make the transition
to another vendor. As of August 31, 1999, we employed 7 persons in
manufacturing.
Competition
The market for Internet caching solutions is intensely competitive,
evolving and subject to rapid technological change. Our competitors vary in
size and in the scope and breadth of the products and services they offer. Our
competitors' solutions are generally based on a hardware appliance, public
domain software or proprietary software. We primarily encounter competition
from Cisco Systems, Inktomi, Network Appliance, Novell and various others
using public domain software. In addition, because there are relatively low
barriers to entry in the Internet market, we expect additional competition
from other established and emerging companies as the market for Internet
caching continues to develop and expand.
We believe that the principal competitive factors affecting our market are
product quality and performance, product features, ability to implement
solutions and customer service. We also believe that solutions specifically
designed for Internet caching have a competitive advantage over solutions that
are derived from products designed for other uses. Although we believe that
our products currently compete favorably with respect to these factors we may
not be able to maintain our competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources.
Intellectual Property and Other Proprietary Rights
We depend significantly on our ability to develop and maintain the
proprietary aspects of our technology. To protect our proprietary technology,
we rely primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets, copyright and trademark laws and patents. Despite
our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that
we regard as proprietary. Policing unauthorized use of our products is
difficult. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our
products or design around patents that may be issued to us or our other
intellectual property.
We currently have four United States patent applications on file and
pending before the United States Patent and Trademark Office. We also
currently have four PCT International Applications on file to reserve rights
in foreign jurisdictions under appropriate international treaties.
We cannot assure you that any U.S. or international patent will be issued
from these applications. Even if patents are issued, we cannot assure you that
we will be able to detect any infringement or, if infringement is detected,
that such patent will be enforceable or that any damages awarded to us will be
sufficient to adequately compensate us.
There can be no assurance or guarantee that any products, services or
technologies that we are presently developing, or will develop in the future,
will result in intellectual property that is protectable under law, whether in
the United States or a foreign jurisdiction, that such intellectual property
will produce competitive advantage for us or that the intellectual property of
competitors will not restrict our freedom to operate, or put us at a
competitive disadvantage.
42
<PAGE>
We rely on technology that we license from third parties, including
software that is integrated with internally developed software and used in
CacheOS to perform key functions. For example, we license subscription
filtering technology from Secure Computing. If we are unable to continue to
license any of this software on commercially reasonable terms, we will face
delays in releases of our software or will be required to drop this
functionality from our software until equivalent technology can be identified,
licensed or developed, and integrated into our current product. Any such
delays could seriously harm our business.
There has been a substantial amount of litigation in the technology
industry regarding intellectual property rights. It is possible that in the
future third parties may claim that we or our current or potential future
products infringe their intellectual property. We expect that companies in the
Internet and networking industries will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Any claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require us to enter
into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all, which
could seriously harm our business.
CacheFlow is a registered trademark in the United States. We also have
filed applications to register the following trademarks in the United States:
"CacheOS," "Content Aware Network Aware," "Content Aware," "Network Aware,"
"Accelerating the Intranet," "Accelerating the Web" and "Internet
Accelerator." The above mentioned trademark applications are subject to review
by the United States Patent and Trademark Office, may be opposed by private
parties and may not issue.
Litigation
On September 16, 1999, Nokia IP filed a lawsuit in Santa Clara County
Superior Court naming CacheFlow Inc., Brian NeSmith, our President and Chief
Executive Officer and a director, and Alan Robin, our Senior Vice President of
Sales, as defendants. Messrs. NeSmith and Robin were officers and employees of
Ipsilon Networks, Inc., which was acquired by Nokia in December 1997.
Following the acquisition, Messrs. NeSmith and Robin became employees of
Nokia. Nokia's allegations against us include misappropriation of trade
secrets, unfair competition and inducing breach of contract. Nokia's
allegations against Messrs. NeSmith and Robin include breach of contract,
misappropriation of trade secrets and unfair competition and, with respect to
Mr. Robin only, breach of fiduciary duty. Nokia's claims are based upon
Nokia's allegation that Mr. NeSmith has violated a non-competition and non-
solicitation provision contained in his employment agreement with Nokia and
that Mr. Robin has violated a non-solicitation obligation to Nokia. Nokia is
seeking compensatory and punitive damages, a decree that the defendants'
alleged acts were and are unfair acts of competition, orders restraining and
enjoining the defendants from disclosing or using Nokia's trade secrets or
confidential and proprietary information and acting in a manner that violates
Messrs. NeSmith's and Robin's contractual and fiduciary duties to Nokia,
attorneys' fees and other specified damages. This litigation was only recently
filed and we are presently evaluating these claims. We and the other
defendants believe that there are meritorious defenses to the asserted claims
and intend to defend the litigation vigorously. However, the outcome of
litigation is inherently unpredictable and the results of the litigation may
not be favorable to us or the other defendants. In such case, our business
could be seriously harmed. Regardless of the ultimate outcome, the litigation
could result in substantial expense to us and significant diversion of effort
by our managerial and other personnel.
Employees
As of August 31, 1999, we had a total of 126 employees, including 36 in
research and development, 69 in sales, marketing and customer support, 7 in
manufacturing and 14 in general and administrative. Of these employees, 111
were located in North America with 15 located internationally. None of our
employees is represented by collective bargaining agreements, nor have we
experienced any work stoppages. We consider our relations with our employees
to be good.
43
<PAGE>
Our future operating results depend significantly upon the continued
service of our key technical, sales and senior management personnel, none of
whom is bound by an employment agreement. Competition for these personnel is
intense, and we may not be able to retain them in the future. Our future
success also depends upon our continuing ability to attract and retain highly
qualified individuals. We may experience difficulties managing our expected
growth and performance if we are unable to attract and retain such qualified
personnel.
Facilities
We lease approximately 39,000 square feet for our headquarters facility in
Sunnyvale, California, under a lease that expires on August 31, 2005. We also
lease space for research and development in Redmond, Washington and Waterloo,
Ontario, Canada. In addition, we lease space for sales and support in nine
metropolitan areas in North America as well as Dusseldorf, London, Stockholm,
Sydney, Taipei and Tokyo.
44
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages as of August 31, 1999,
are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Brian M. NeSmith........ 37 President and Chief Executive Officer, Director
Michael A. Malcolm...... 54 Chairman of the Board, Director
Stuart G. Aaron......... 29 Vice President, Marketing and Product Management
Douglas A. Crow......... 38 Vice President, Product Development
Michael J. Johnson...... 46 Vice President, Chief Financial Officer and Secretary
Ray G. Myers............ 64 Vice President, Manufacturing
Terry L. Printy......... 44 Vice President, Customer Support
Alan L. Robin........... 43 Senior Vice President, Sales
Ian Telford............. 58 President of CacheFlow Canada
Rangaswamy Vasudevan.... 49 Chief Technology Officer
William S. Warner....... 40 Vice President, Business Development
David W. Hanna(2)....... 60 Director
Stuart G.
Phillips(1)(2)......... 41 Director
Andrew S. Rachleff(1)... 40 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Brian NeSmith has served as President and Chief Executive Officer and a
director of CacheFlow since March 1999. From December 1997 to March 1999, Mr.
NeSmith served as Vice President of Nokia IP, Inc., a security router company,
which acquired Ipsilon Networks, Inc., an IP switching company, where Mr.
NeSmith served as Chief Executive Officer from May 1995 to December 1997. From
October 1987 to April 1995, Mr. NeSmith held several positions at Newbridge
Networks Corporation, a networking equipment manufacturer, including vice
president and general manager of the VIVID group. Mr. NeSmith holds a B.S. in
electrical engineering from the Massachusetts Institute of Technology.
Michael Malcolm has served as Chairman of the board of directors of
CacheFlow since March 1996. From June 1997 to December 1998, Mr. Malcolm also
served as President and Chief Executive Officer of CacheFlow. From April 1992
to October 1994, Mr. Malcolm served as President and Chief Executive Officer
of Network Appliance Inc., a network filer company. Mr. Malcolm holds a B.S.
in mechanical engineering from the University of Denver and M.A. and Ph.D.
degrees in computer science from Stanford University.
Stuart Aaron has served as Vice President of Marketing and Product
Management of CacheFlow since April 1999. From July 1993 to April 1999, Mr.
Aaron held several marketing and product management positions at Newbridge
Networks Corporation, a networking equipment manufacturer. Prior to that time,
Mr. Aaron worked as an industry analyst with the Network Strategies Practice
of Ernst & Young LLP where he specialized in Internetworking and Network
Management. Mr. Aaron holds a B.S. in electrical engineering from Cornell
University.
Douglas Crow has served as Vice President of Product Development of
CacheFlow since May 1996. From June 1992 to May 1996, Mr. Crow served as
Development Manager of Wall Data Inc., a host connectivity software company.
Mr. Crow holds a B.S. in computer science from the University of Washington.
Michael Johnson has served as Vice President and Chief Financial Officer of
CacheFlow since July 1999. From May 1998 to July 1999, Mr. Johnson served as
Vice President of Finance and Chief Financial Officer of AdiCom Wireless,
Inc., a developer of CDMA based wireless access systems. From May 1994 to
April 1998, Mr. Johnson served as Controller and Chief Accounting Officer of
Ascend Communications Inc., a provider of wide area networking systems. Mr.
Johnson holds a B.S. in business administration from California State
University Hayward and is also a Certified Public Accountant.
45
<PAGE>
Ray Myers has served as Vice President of Manufacturing of CacheFlow since
October 1997. From May 1993 to April 1996, Mr. Myers served as Vice President
of Manufacturing of Network Appliance Inc., a network filer company. Mr. Myers
holds a B.S. in physics from Colorado College and a B.S. in business finance
from San Jose State University.
Terry Printy has served as Vice President of Customer Support of CacheFlow
since June 1999. From January 1999 to May 1999, Mr. Printy served as Vice
President of Worldwide Services of Nokia IP, Inc., a security router company.
From October 1990 to April 1998, Mr. Printy served as Vice President and
General Manager of Worldwide Service at Network General Corporation, a
protocol analysis company.
Alan Robin has served as Senior Vice President of Sales at CacheFlow since
July 1999. From January 1997 to July 1999, Mr. Robin served as Vice President
of Sales of Ipsilon Networks, Inc., an IP switching company, and then of Nokia
IP, Inc., a security router company, which acquired Ipsilon Networks, Inc. in
December 1997. From January 1991 to January 1997, Mr. Robin held a number of
sales and sales management positions at Wellfleet/Bay Networks, a networking
company. Mr. Robin holds an A.B. in chemistry from Kenyon College and a M.B.A
in finance from Fairleigh Dickenson University.
Ian Telford has served as President of CacheFlow Canada since May 1, 1999.
From March 1995 to April 1999, Mr. Telford served as Chief Executive Officer
of Scaleable Software Solutions, Inc., a company he co-founded that
specializes in operating system and file development. From December 1983 to
January 1991, Mr. Telford held a variety of positions at Waterloo Microsystems
Inc., a software company specializing in the production of PC Network
Operating Systems, and then at Hayes Microcomputer Products (Canada) Limited,
which acquired the assets of Waterloo Microsystems in January of 1991. Mr.
Telford holds a B.S. in industrial chemistry from The City University, London,
England.
Rangaswamy Vasudevan has served as Chief Technology Officer of CacheFlow
since August 1997. From April 1989 to July 1997, Mr. Vasudevan served as a
Senior Engineer and a Sun Distinguished Engineer at Sun Microsystems, Inc., a
manufacturer of network computing equipment. Mr. Vasudevan holds a Bachelor of
Technology in electrical engineering from the Indian Institute of Technology
and a Ph.D. in computer science from the University of Waterloo.
William Warner has served as Vice President of Business Development of
CacheFlow since August 1999. He also served as Vice President of Sales at
CacheFlow from September 1997 to August 1999. From March 1987 to April 1997,
Mr. Warner served as Director of the Telecommunications Industry Group of
Silicon Graphics, Inc., a manufacturer of computer equipment. Mr. Warner holds
a B.S. in political science and business from the University of Kansas.
David Hanna has served as a director of CacheFlow since October 1996. From
December 1998 to March 1999, Mr. Hanna also served as our President and Chief
Executive Officer. Since March 1998, Mr. Hanna has served as President and
Chief Executive Officer of Sage Software, Inc., a financial software company.
Mr. Hanna served as President and Chief Executive Officer of State of The Art,
Inc., a financial software developer, from November 1993 until March 1998. Mr.
Hanna currently serves as President of The Hanna Group, which provides
operational and strategic consulting to both small, high-tech companies and to
larger organizations requiring growth restoration and restructuring. In
addition, Mr. Hanna serves as Chairman of Hanna Capital Management Inc., which
provides financial management services to high-net-worth individuals. He is
Chief Executive Officer of Hanna Ventures, which invests in networking,
communications, and internet/intranet companies. Mr. Hanna also serves on the
boards of directors of several privately held companies. Mr. Hanna holds a
B.S. in business administration from the University of Arizona.
Stuart Phillips has served as a director of CacheFlow since January 1997.
Since June 1997, Mr. Phillips has been a General Partner at U.S. Venture
Partners, a venture capital firm. From October 1993 to June 1997, Mr. Phillips
served as Vice President of Central Engineering at Cisco Systems Inc., an
internetworking company. Mr. Phillips also serves on the boards of directors
of several privately held companies. He holds a B.S. in electronics from the
University of Wales at Cardiff, U.K.
46
<PAGE>
Andrew Rachleff has served as a director of CacheFlow since October 1997.
In May 1995, Mr. Rachleff co-founded Benchmark Capital, a venture capital
firm, and has served as a general partner since that time. Prior to co-
founding Benchmark Capital, Mr. Rachleff spent ten years as a general partner
with Merrill, Pickard, Anderson & Eyre, a venture capital firm. Mr. Rachleff
also serves on the boards of directors of NorthPoint Communications Group,
Inc., a competitive local exchange carrier, and several privately held
companies. Mr Rachleff holds a B.S. in economics from the University of
Pennsylvania and an M.B.A. from Stanford University.
Board of Directors
CacheFlow currently has authorized five directors. Each director holds
office until the next annual meeting of stockholders or until his or her
successor is duly elected and qualified. The officers serve at the discretion
of the board. There are no family relationships among the directors and
officers of CacheFlow.
Board Committees
The audit committee consists of Stuart Phillips and Andrew Rachleff. The
audit committee makes recommendations to the board of directors regarding the
selection of independent accountants, reviews the results and scope of audit
and other services provided by our independent accountants and reviews and
evaluates the our audit and control functions.
The compensation committee consists of David Hanna and Stuart Phillips. The
compensation committee makes recommendations regarding our stock plans and
makes decisions concerning salaries and incentive compensation for our
employees and consultants.
Compensation Committee Interlocks and Insider Participation
No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee.
Director Compensation
Directors currently do not receive any cash compensation from CacheFlow for
their services as members of the board of directors, although members are
reimbursed for expenses in connection with attendance at board of directors
and committee meetings. Directors are eligible to participate in CacheFlow's
stock plans, and beginning in 1999, employee directors will also be able to
participate in CacheFlow's 1999 Stock Incentive Plan and non-employee
directors will receive periodic option grants under CacheFlow's 1999 Director
Option Plan. See "Management--1999 Stock Incentive Plan" and "--1999 Director
Option Plan."
Options were granted during the fiscal year to Messrs. Hanna and Malcolm
and those options are disclosed in the table below entitled Option Grants in
Last Fiscal Year.
47
<PAGE>
Executive Compensation
The following table sets forth information with respect to compensation for
the fiscal year ended April 30, 1999 paid by us for services by each of the
individuals who served as our Chief Executive Officer during the fiscal year,
Mr. Hanna, who served as our Chief Executive Officer from December 11, 1998 to
March 2, 1999, and each of the four other executive officers whose total
salary and bonuses for the fiscal year exceeded $100,000, collectively
referred to as the Named Executive Officers:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual
Compensation Securities
---------------- Underlying
Name and Principal Position Salary Bonus Options
- --------------------------- -------- ------- ------------
<S> <C> <C> <C>
Brian M. NeSmith, President and Chief Executive
Officer........................................ $ 8,978 $ -- 2,000,000
Michael A. Malcolm, Chairman.................... 197,854 -- 1,000,000
Douglas A. Crow, Vice President, Product
Development.................................... 133,626 -- --
David Hanna, Director (1)....................... 21,708 -- 250,000
Kelly Herrell, Former Vice President,
Marketing...................................... 148,765 -- --
Rangaswamy Vasudevan, Chief Technical Officer... 149,907 -- --
William S. Warner, Vice President, Business
Development.................................... 149,889 40,000 --
</TABLE>
- --------
(1) Consulting fees were paid to Hanna Group for services rendered by Mr.
Hanna.
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options during the
fiscal year ended April 30, 1999 to each of the Named Executive Officers. We
have not granted stock appreciation rights. Each of the options listed in the
table is immediately exercisable. The shares purchasable thereunder are
subject to repurchase by CacheFlow at the original exercise price paid per
share upon the optionee's cessation of service prior to vesting in such
shares. For Mr. Malcolm, the repurchase right on half of his option shares
lapses and he vests as to these option shares in a series of 36 equal monthly
installments from October 14, 1998. The repurchase right on the second half of
his options lapses and he vests as to these option shares in a series of six
equal monthly installments from October 14, 1998. For Mr. NeSmith, the
repurchase right on his option lapses and he vests as to 25% of the option
shares upon completion of one year of service from the date of grant and the
balance in a series of equal monthly installments over the next 36 months of
service thereafter. In addition, he vests in an additional 25% of the option
shares upon a merger and certain other corporate transactions.
We have calculated the percentage of total options granted to employees
based on an aggregate of 5,371,400 options granted to our employees during the
12 months ended April 30, 1999. The exercise price for each option was equal
to the fair market value of our common stock as determined by our board of
directors on the date of grant. The exercise price may be paid in cash, in
shares of our common stock valued at fair market value on the exercise date or
through a cashless exercise procedure involving a same-day sale of the
purchased shares. We may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased shares,
together with any federal and state income tax liability incurred by the
optionee in connection with such exercise.
We have calculated the potential realizable value based on the term of the
option at the time of grant (ten years) and we assumed stock price
appreciation of 5% and 10% is assumed pursuant to rules promulgated by the
Securities and Exchange Commission; this does not represent our prediction of
our stock price performance. The potential realizable values at 5% and 10%
appreciation are calculated by assuming that the exercise price on the date of
grant appreciates at the indicated rate for the entire term of the option and
that the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price.
48
<PAGE>
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of
Securities Options Exercise Stock Price Appreciation
Underlying Granted Price for Option Term
Options to Employees in Per Expiration -------------------------
Name Granted Fiscal Year Share Date 5% 10%
- ---- ---------- --------------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Brian M. NeSmith........ 2,000,000 37.0% $.50 3/1/09 $ 628,895 $ 1,593,742
Michael A. Malcolm...... 1,000,000 18.4 .50 10/13/08 314,448 796,872
Douglas A. Crow......... -- -- -- -- -- --
David Hanna............. 250,000 4.6 .50 3/1/09 78,612 199,218
Kelly Herrell........... -- -- -- -- -- --
Rangaswamy Vasudevan.... -- -- -- -- -- --
William S. Warner....... -- -- -- -- -- --
</TABLE>
In addition to the options listed above, on July 26, 1999, Mr. Johnson, our
Vice President and Chief Financial Officer, received an option to purchase
250,000 shares and an option to purchase 65,000 shares at an exercise price of
$2.00 per share. On July 26, 1999, Mr. Robin, our Senior Vice President of
Sales, received an option to purchase 250,000 shares and an option to purchase
222,000 shares at an exercise price of $2.00 per share. On June 21, 1999, Mr.
Printy, our Vice President of Customer Support, received an option to purchase
75,000 shares at an exercise price of $2.00 per share. On August 27, 1999, we
granted options to Mr. Crow for 240,000 shares, Mr. Telford for 123,000
shares, and Mr. Printy for 37,500 shares at an exercise price of $4.00 per
share. On September 27, 1999, we granted an option to Mr. NeSmith for 200,000
shares at an exercise price of $5.50 per share. All of these options are
immediately exercisable and the shares purchasable thereunder are subject to
repurchase by us at the original exercise price paid per share upon the
optionee's cessation of service prior to vesting in such shares. The
repurchase right lapses as to 25% of the option shares upon completion of one
year of service from the date of grant and the balance in a series of equal
monthly installments over the next 36 months of service thereafter, except
that the option granted to Mr. Crow and certain of the options granted to Mr.
Telford begin to vest in 2000 or 2001.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth for each of the Named Executive Officers the
number of options exercised during the fiscal year ended April 30, 1999 and
the number and value of securities underlying unexercised options that are
held by the Named Executive Officers as of April 30, 1999. With respect to
options exercised, value realized refers to the fair market value of the
purchased shares on the option exercise date, less the exercise price paid for
such shares. Since our options are immediately exercisable at grant, any
shares purchased under those options will be subject to repurchase by us, at
the original exercise price paid per share, upon the optionee's cessation of
service with CacheFlow, prior to vesting in such shares. Accordingly, we have
chosen to report the number of the underlying shares that are vested and the
number unvested as of April 30, 1999. The heading "Vested" refers to shares no
longer subject to repurchase; the heading "Unvested" refers to shares subject
to repurchase as of April 30, 1999. Our board of directors determined that the
fair market value of our common stock on April 30, 1999 was $1.00 per share.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Securities Underlying in-the-Money
Unexercised Options Options at
Shares at April 30, 1999 April 30, 1999
Acquired on Value ------------------------ ----------------
Name Exercise Realized Vested Unvested Vested Unvested
- ---- ----------- -------- ------------ ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Brian M. NeSmith........ 2,000,000 $ -- -- -- $ -- $ --
Michael A. Malcolm...... -- -- -- -- -- --
Douglas A. Crow......... -- -- 20,000 -- 15,000 --
David Hanna............. 250,000 -- -- -- -- --
Kelly Herrell........... 490,000 85,750 -- -- -- --
Rangaswamy Vasudevan.... 470,000 82,250 -- -- -- --
William S. Warner....... 490,000 85,750 -- -- -- --
</TABLE>
49
<PAGE>
Change of Control Arrangements
The compensation committee of the board of directors, as plan administrator
of the 1999 Stock Incentive Plan, has the authority to provide for accelerated
vesting of the shares of common stock subject to outstanding options held by
the Named Executive Officers and any other person in connection with certain
changes in control of CacheFlow. In connection with our adoption of the 1999
Stock Incentive Plan, we have provided that upon a change in control of
CacheFlow, each outstanding option and all shares of restricted stock will
generally become fully vested unless the surviving corporation assumes the
option or award or replaces it with a comparable award. In addition, an option
or award will become fully exercisable and fully vested if the holder's
employment or service is involuntarily terminated within 18 months following
the change in control.
Except for Mr. NeSmith, Mr. Johnson, and Mr. Robin, none of the Named
Executive Officers has an employment agreement with CacheFlow, and their
employment may be terminated at any time. CacheFlow has entered into an
agreement with Mr. NeSmith, dated February 24, 1999 which provides that his
salary shall be $175,000 per year. The agreement provides for the grant of an
option to Mr. NeSmith to purchase shares of our common stock at the fair
market value on the grant date. The agreement also provides that we will
extend a loan to Mr. NeSmith of up to $800,000. The agreement also provides
for acceleration of vesting of option shares as if Mr. NeSmith remained
employed for one additional year in the event of certain changes in control of
CacheFlow.
We have entered into an agreement with Mr. Johnson, our Vice President and
Chief Financial Officer, dated June 4, 1999 which provides that his salary
shall be $170,000 per year. The agreement provides for the grant of an option
to Mr. Johnson to purchase shares of common stock at the fair market value on
the grant date. The agreement also provides for acceleration of vesting of
option shares as if Mr. Johnson remained employed for one additional year in
the event that he is not offered the same or similar position following
certain changes in control of CacheFlow.
CacheFlow has entered into an agreement with Mr. Robin, our Senior Vice
President of Sales, dated July 12, 1999 which provides for a salary of
$150,000 per year and a target commission of up to $125,000 per year. Under
the agreement, he is also eligible for cash bonuses of $200,000 each payable
60 days after his start date and on August 1, 2000. The agreement provides for
the grant of an option to Mr. Robin to purchase shares of our common stock at
the fair market value on the grant date. The agreement also provides for
payment of severance pay in the amount of six months base salary plus bonus in
the event that Mr. Robin's employment is terminated without cause. The
agreement also provides for acceleration of vesting of option shares as if Mr.
Robin remained employed for one additional year in the event that his
employment is terminated without cause; after three years of employment,
vesting acceleration declines by one month for each month of service and does
not apply after four years of employment. The agreement also provides for
acceleration of vesting of option shares as if Mr. Robin remained employed for
one additional year in the event that he is not offered the same or similar
position following certain changes in control of CacheFlow.
1999 Stock Incentive Plan
Share Reserve. Our board of directors adopted our 1999 Stock Incentive Plan
on September 24, 1999 to be effective on the effective date of this offering.
We also intend to ask our stockholders to approve this plan. We have reserved
5,000,000 shares of our common stock for issuance under the 1999 Stock
Incentive Plan. This includes any shares not yet issued under our 1996 Stock
Option Plan on the date of this offering which will be available only under
the 1999 Stock Incentive Plan after this offering. On January 1 of each year,
starting with the year 2000, the number of shares in the reserve will
automatically increase by 5% of the total number of shares of common stock
that are outstanding at that time or, if less, by 2,000,000 shares. In
general, if options or shares awarded under the 1999 Stock Incentive Plan or
the 1996 Stock Option Plan are forfeited, then those options or shares will
again become available for awards under the 1999 Stock Incentive Plan. We have
not yet granted any options under the 1999 Stock Incentive Plan.
Outstanding options under the 1996 Stock Option Plan will be incorporated
into the 1999 Stock Incentive Plan at the time of this offering and no further
option grants will be made under the 1996 Stock Option Plan.
50
<PAGE>
The incorporated options will continue to be governed by their existing terms,
unless the Board elects to extend one or more features of the 1999 Stock
Incentive Plan to those options or to other outstanding shares. The Board has
elected to extend the change in control acceleration feature of the 1999 Stock
Incentive Plan to all outstanding options and unvested shares. Previously,
options granted under the 1996 Stock Option Plan provided that vesting of the
shares would accelerate upon an acquisition only if not assumed by the
acquiring entity.
Administration. The compensation committee of our board of directors
administers the 1999 Stock Incentive Plan. The committee has the complete
discretion to make all decisions relating to the interpretation and operation
of our 1999 Stock Incentive Plan. The committee has the discretion to
determine who will receive an award, what type of award it will be, how many
shares will be covered by the award, what the vesting requirements will be (if
any), and what the other features and conditions of each award will be. The
compensation committee may also reprice outstanding options and modify
outstanding awards in other ways.
Eligibility. The following groups of individuals are eligible to
participate in the 1999 Stock Incentive Plan:
. employees;
. members of our board of directors who are not employees; and
. consultants.
Types of Award. The 1999 Stock Incentive Plan provides for the following
types of award:
. incentive stock options to purchase shares of our common stock;
. nonstatutory stock options to purchase shares of our common stock;
. restricted shares of our common stock;
. stock appreciation rights and stock units.
Options and Stock Appreciation Rights. An optionee who exercises an
incentive stock option may qualify for favorable tax treatment under Section
422 of the Internal Revenue Code of 1986. On the other hand, nonstatutory
stock options do not qualify for such favorable tax treatment. The exercise
price for incentive stock options granted under the 1999 Stock Incentive Plan
may not be less than 100% of the fair market value of our common stock on the
option grant date. In the case of nonstatutory stock options, the minimum
exercise price is 85% of the fair market value of our common stock on the
option grant date. Optionees may pay the exercise price by using:
. cash;
. shares of common stock that the optionee already owns;
. a full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
. an immediate sale of the option shares through a broker designated by
us; or
. a loan from a broker designated by us, secured by the option shares.
A participant who exercises a stock appreciation right shall receive the
increase in value of our common stock over the base price. The base price for
stock appreciation rights granted under the 1999 Stock Incentive Plan shall be
determined by the compensation committee. The settlement value of the stock
appreciation right may be paid in cash or shares of common stock.
Options and stock appreciation rights vest at the time or times determined
by the compensation committee. In most cases, our options and stock
appreciation rights will vest over a four-year period following the date of
grant. Options and stock appreciation rights generally expire 10 years after
they are granted. The Compensation Committee may provide for a longer term
except that options and stock appreciation rights generally expire earlier if
the participant's service terminates earlier. The 1999 Stock Incentive Plan
provides that no participant
51
<PAGE>
may receive options or stock appreciation rights covering more than 1,500,000
shares in the same year, except that a newly hired employee may receive
options or stock appreciation rights covering up to 2,000,000 shares in the
first year of employment.
Restricted Shares. Restricted shares may be awarded under the 1999 Stock
Incentive Plan in return for:
. cash;
. a full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
. services already provided to us; and
. in the case of treasury shares only, services to be provided to us in
the future.
Restricted shares vest at the time or times determined by the compensation
committee. Stock units may be awarded under the 1999 Stock Incentive Plan. No
cash consideration shall be required of the award recipients. Stock units may
be granted in consideration of a reduction in the recipient's other
compensation or in consideration of services rendered. Each award of stock
units may or may not be subject to vesting and vesting, if any, shall occur
upon satisfaction of the conditions specified by the compensation committee.
Settlement of vested stock units may be made in the form of cash, shares of
common stock or a combination of both.
Change in Control. If a change in control of CacheFlow occurs, an option or
restricted stock award under the 1999 Stock Incentive Plan will generally
become fully vested. However, if the surviving corporation assumes the option
or award or replaces it with a comparable award, then vesting will not
accelerate. An option or award will become fully exercisable and fully vested
if the holder's employment or service is involuntarily terminated within 18
months following the change in control. A change in control includes:
. a merger of CacheFlow after which our own stockholders own 50% or less
of the surviving corporation (or its parent company);
. a sale of all or substantially all of our assets;
. a proxy contest that results in the replacement of more than one-half of
our directors over a 24-month period; or
. an acquisition of 50% or more of our outstanding stock by any person or
group, other than a person related to CacheFlow (such as a holding
company owned by our stockholders).
Amendments or Termination. Our board may amend or terminate the 1999 Stock
Incentive Plan at any time. If our board amends the plan, it does not need to
ask for stockholder approval of the amendment unless applicable law requires
it. The 1999 Stock Incentive Plan will continue in effect indefinitely, unless
the board decides to terminate the plan earlier.
Employee Stock Purchase Plan
Share Reserve and Administration. Our board of directors adopted our
Employee Stock Purchase Plan on September 24, 1999, to be effective on the
effective date of this offering. We also intend to ask our stockholders to
approve this plan. Our Employee Stock Purchase Plan is intended to qualify
under Section 423 of the Internal Revenue Code. We have reserved 2,500,000
shares of our common stock for issuance under the plan. In addition, on
January 31 of each year, starting with the year 2000, the number of shares in
the reserve will automatically increase by 500,000 shares or such lesser
number as our board of directors determines. The plan will be administered by
the compensation committee of our board of directors.
Eligibility. All of our employees are eligible to participate if they are
employed by us for more than 20 hours per week and for more than five months
per year. Eligible employees may begin participating in the Employee Stock
Purchase Plan at the start of any offering period. Each offering period lasts
24 months. Overlapping offering periods start on August 1 and February 1 of
each year. However, the first offering period will start on the effective date
of this offering and end on January 31, 2002.
52
<PAGE>
Amount of Contributions. Our Employee Stock Purchase Plan permits each
eligible employee to purchase common stock through payroll deductions. Each
employee's payroll deductions may not exceed 15% of the employee's cash
compensation. Purchases of our common stock will occur on July 31 and January
31 of each year. Each participant may purchase up to 2,000 shares on any
purchase date. But the value of the shares purchased in any calendar year
(measured as of the beginning of the applicable offering period) may not
exceed $25,000.
Purchase Price. The price of each share of common stock purchased under our
Employee Stock Purchase Plan will be 85% of the lower of:
. the fair market value per share of common stock on the date immediately
before the first day of the applicable offering period, or
. the fair market value per share of common stock on the purchase date.
In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:
. the price per share to the public in this offering, or
. the fair market value per share of common stock on the purchase date.
Other Provisions. Employees may end their participation in the Employee
Stock Purchase Plan at any time. Participation ends automatically upon
termination of employment with CacheFlow. If a change in control of CacheFlow
occurs, our Employee Stock Purchase Plan will end and shares will be purchased
with the payroll deductions accumulated to date by participating employees,
unless the plan is assumed by the surviving corporation or its parent. Our
board of directors may amend or terminate the Employee Stock Purchase Plan at
any time. Our Chief Executive Officer may also amend the plan in certain
respects. If our board increases the number of shares of common stock reserved
for issuance under the plan (except for the automatic increases described
above), it must seek the approval of our stockholders.
1999 Director Option Plan
Share Reserve. Our board of directors adopted our 1999 Director Option Plan
on September 24, 1999. The 1999 Director Option Plan became effective on the
date of its adoption. We also intend to ask our stockholders to approve this
plan. We have reserved 500,000 shares of our common stock for issuance under
the plan. In addition, on January 31 of each year, starting with the year
2000, the number of shares in the reserve will automatically increase by
100,000 shares or such lesser number as our board of directors determines. In
general, if options granted under the 1999 Director Option Plan are forfeited,
then those options will again become available for grants under the plan. The
Director Option Plan will be administered by the compensation committee of our
board of directors, although all grants under the plan are automatic and non-
discretionary.
Initial Grants. Only the non-employee members of our board of directors
will be eligible for option grants under the 1999 Director Option Plan. Each
non-employee director who first joins our board after the effective date of
the 1999 Director Option Plan will receive an initial option for 25,000
shares. For new directors, that grant will occur when the director takes
office. The initial options vest in four equal annual installments over the
four-year period following the date of grant.
Annual Grants. At the time of each of our annual stockholders' meetings,
beginning in 2000, each non-employee director who will continue to be a
director after that meeting will automatically be granted an annual option for
5,000 shares of our common stock. However, a new non-employee director who is
receiving the initial option will not receive the annual option in the same
calendar year. The annual options are fully vested on the first anniversary of
the date of grant.
Other Option Terms. The exercise price of each non-employee director's
option will be equal to the fair market value of our common stock on the
option grant date. A director may pay the exercise price by using
53
<PAGE>
cash, shares of common stock that the director already owns, or an immediate
sale of the option shares through a broker designated by us. The non-employee
directors' options have a 10-year term, except that they expire one year after
a director leaves the board (if earlier). If a change in control of CacheFlow
occurs, a non-employee director's option granted under the 1999 Director
Option Plan will become fully vested.
Amendments or Termination. Our board may amend or terminate the 1999
Director Option Plan at any time. If our board amends the plan, it does not
need to ask for stockholder approval of the amendment unless applicable law
requires it. The 1999 Director Option Plan will continue in effect
indefinitely, unless the board decides to terminate the plan.
54
<PAGE>
CERTAIN TRANSACTIONS
Since our inception on March 13, 1996, we have sold preferred stock to the
following persons who are our principal stockholders, executive officers or
directors.
<TABLE>
<CAPTION>
Shares of Shares of Shares of
Series A Series B Series C
Investor Preferred Stock Preferred Stock Preferred Stock
- -------- --------------- --------------- ---------------
<S> <C> <C> <C>
Entities affiliated with
Benchmark Capital ........... 3,222,858 796,462 738,068
Entities affiliated with U.S.
Venture Partners............. -- 2,654,868 455,622
Entities affiliated with
Technology Crossover
Ventures..................... -- -- 1,890,816
Michael A. Malcolm............ 777,144 221,240 801,116
Persons and entities
affiliated with David W.
Hanna........................ 800,002 367,258 209,432
Ray G. Myers.................. 75,374 -- 43,716
Joseph J. Pruskowski.......... 58,572 -- --
</TABLE>
Shares held by all affiliated persons and entities have been aggregated.
Share numbers and purchase price information are reflected on an as if
converted into shares of common stock basis. See "Principal Stockholders" for
more detail on shares held by these purchasers. The per share purchase price
for the Series A Preferred Stock was $.875. The per share purchase price for
the Series B Preferred Stock was $2.26. The per share purchase price for the
Series C Preferred Stock was $4.575. Andrew S. Rachleff, one of our directors,
is an affiliate of each of the entities affiliated with Benchmark Capital.
Stuart G. Phillips, one of our directors, is an affiliate of each of the
entities affiliated with U.S. Venture Partners.
We loaned $999,900 to Brian M. NeSmith, our President and Chief Executive
Officer, on April 13, 1999, pursuant to a full-recourse promissory note that
is due April 12, 2004 and bears interest at the rate of 4.99% per annum. We
also loaned $800,000 to Mr. NeSmith on August 31, 1999, pursuant to a non-
recourse, interest free promissory note that is due August 30, 2004. The
promissory notes are secured by 2,000,000 shares of our common stock owned by
Mr. NeSmith.
In addition, we have granted options to some of our directors and executive
officers. See "Management--Option Grants in the Last Fiscal Year" and
"Principal Stockholders."
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors on the board of directors, and
will continue to be on terms no less favorable to us than could be obtained
from unaffiliated third parties.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of July 31, 1999, and as adjusted to reflect the sale
of shares offered hereby held by:
. each person who we know to own beneficially more than five percent of
our common stock;
. each of the Named Executive Officers;
. each of our directors; and
. all directors and executive officers as a group.
The number of shares of common stock outstanding after this offering
includes shares of common stock being offered for sale in this offering.
The percentage of beneficial ownership for the following table is based on
27,671,031 shares of common stock outstanding as of July 31, 1999, after
giving effect to the conversion of all outstanding shares of preferred stock
into common stock upon the completion of this offering and the cash exercise
of warrants to purchase 672,850 shares of preferred stock prior to completion
of the offering and the conversion of these shares of preferred stock into
common stock, and assuming no exercise of the underwriters' over-allotment
option. The number of shares beneficially owned and the percent beneficially
owned set forth in the table below assumes that existing stockholders,
officers and directors do not purchase any shares in the offering. See
"Underwriters."
In accordance with the rules of the Securities and Exchange Commission,
beneficial ownership includes voting or investment power with respect to
securities and includes the shares issuable pursuant to stock options and
warrants that are exercisable within 60 days of July 31, 1999. Shares issuable
pursuant to stock options and warrants are deemed outstanding for computing
the percentage of the person holding such options and warrants but are not
outstanding for computing the percentage of any other person.
To our knowledge, except as indicated in the footnotes to this table and
pursuant to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of common
stock.
<TABLE>
<CAPTION>
Shares
Beneficially Percent
Owned Beneficially Owned
------------ ----------------------
Before After
Name and Address of Beneficial Owner Number Offering Offering
------------------------------------ ------------ --------- ---------
<S> <C> <C> <C>
Michael A. Malcolm....................... 5,163,785 18.7%
650 Almanor Avenue
Sunnyvale, California 94086
Entities affiliated with Benchmark
Capital(1).............................. 4,757,388 17.2
2480 Sand Hill Road, Suite 200
Menlo Park, California 94025
Entities affiliated with U.S. Venture
Partners(2)............................. 3,110,490 11.2
2180 Sand Hill Road, Suite 300
Menlo Park, California 94025
Joseph J. Pruskowski(3).................. 2,520,243 9.1
18109 236th Avenue NE
Woodinville, Washington 98072
Brian M. NeSmith(4)...................... 2,000,000 7.2
650 Almanor Avenue
Sunnyvale, California 94086
Entities affiliated with Technology
Crossover Ventures(5)................... 1,890,816 6.8
56 Main Street, Suite 210
Millburn, New Jersey 07041
Douglas A. Crow(6)....................... 620,000 2.2
William S. Warner........................ 490,000 1.8
Rangaswamy Vasudevan..................... 470,000 1.7
Andrew S. Rachleff(1).................... 4,757,388 17.2
Stuart G. Phillips(7).................... 3,280,490 11.9
David W. Hanna(8)........................ 1,626,692 5.9
All directors and executive officers as a
group (14 persons)(9)................... 19,556,065 70.7
</TABLE>
56
<PAGE>
- --------
* Less than 1%.
(1) Consists of 4,176,178 shares held by Benchmark Capital Partners, L.P. and
581,210 shares held by Benchmark Founders' Fund, L.P. Mr. Rachleff, one of
our directors, is a managing member of Benchmark Capital Management Co.,
L.L.C., which is the general partner of each of Benchmark Capital
Partners, L.P. and Benchmark Founders' Fund, L.P. Mr. Rachleff disclaims
beneficial ownership of the shares held by Benchmark Capital Partners,
L.P. and Benchmark Founders' Fund, L.P. except to the extent of his
pecuniary interest therein arising from his interest therein.
(2) Consists of 2,799,438 shares held by U.S. Venture Partners V, L.P.,
155,526 shares held by USVP V International, L.P., 87,094 shares held by
2180 Associates Fund V, L.P. and 68,432 shares held by USVP V Entrepreneur
Partners, L.P. Mr. Phillips, one of our directors, is a general partner of
Presidio Management Group V, L.L.C., which is the general partner of each
of U.S. Venture Partners V, L.P., USVP V International, L.P., 2180
Associates Fund V, L.P. and USVP V Entrepreneur Partners, L.P. Mr.
Phillips disclaims beneficial ownership of the shares held by U.S. Venture
Partners V, L.P., USVP V International, L.P., 2180 Associates Fund V, L.P.
and USVP V Entrepreneur Partners, L.P., except to the extent of his
pecuniary interest therein arising from his general partnership interest
therein.
(3) Includes 33,100 shares held by Mr. Pruskowski's spouse.
(4) Excludes options immediately exercisable for 200,000 shares granted after
July 31, 1999.
(5) Consists of 13,730 shares held by TCV III (GP), 65,216 shares held by TCV
III, L.P., 1,733,374 shares held by TCV III (Q), L.P. and 78,496 shares
held by TCV III Strategic Partners, L.P.
(6) Includes options immediately exercisable for 20,000 shares.
(7) Includes 170,000 shares owned individually by Mr. Phillips, 2,799,438
shares held by U.S. Venture Partners V, L.P., 155,526 shares held by USVP
V International, L.P., 87,094 shares held by 2180 Associates Fund V, L.P.
and 68,432 shares held by USVP V Entrepreneur Partners, L.P. Mr. Phillips,
one of our directors, is a general partner of Presidio Management Group V,
L.L.C., which is the general partner of each of U.S. Venture Partners V,
L.P., USVP V International, L.P., 2180 Associates Fund V, L.P. and USVP V
Entrepreneur Partners, L.P. Mr. Phillips disclaims beneficial ownership of
the shares held by U.S. Venture Partners V, L.P., USVP V International,
L.P., 2180 Associates Fund V, L.P. and USVP V Entrepreneur Partners, L.P.,
except to the extent of his pecuniary interest therein arising from his
general partnership interest therein.
(8) Consists of 928,384 shares owned individually by Mr. Hanna, 342,858 shares
held by K-H Investors (1996-B), L.P., 101,770 shares held by K-H Investors
(1998-A), L.P., 122,000 shares held by Hanna Ventures-CacheFlow III, L.P.,
87,432 shares held by the David William Hanna Trust dated October 30,
1989, and 44,248 shares held by Mr. Hanna's spouse. Mr. Hanna, one of our
directors, is an affiliate of K-H Investors (1996-B), L.P., K-H Investors
(1998-A), L.P. and Hanna Ventures-CacheFlow III, L.P. Mr. Hanna disclaims
beneficial ownership of the shares held by these entities, except to the
extent of his pecuniary interest therein.
(9) Includes options immediately exercisable for 630,800 shares.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock will consist of 200,000,000 shares of common
stock, par value $.0001 per share, and 10,000,000 shares of preferred stock,
par value $.0001 per share, after giving effect to the amendment and
restatement of our amended and restated certificate of incorporation to delete
references to Series A, Series B and Series C Preferred Stock, which will
occur immediately following the closing of this offering.
Common Stock
As of July 31, 1999, there were 27,671,031 shares of common stock
outstanding that were held of record by approximately 85 stockholders, after
giving effect to the conversion of all outstanding shares of preferred stock
into 14,341,912 shares of common stock upon the completion of this offering
and the cash exercise of warrants to purchase 672,850 shares of preferred
stock prior to completion of the offering and the conversion of these shares
of preferred stock into common stock. There will be shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option
and assuming no exercise after July 31, 1999 of outstanding options, after
giving effect to the sale of the shares of common stock in this offering. Upon
the closing of this offering, our amended and restated certificate of
incorporation will authorize 200,000,000 shares of common stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably dividends, if any, as may be declared from
time to time by the board of directors out of legally available funds. See
"Dividend Policy." In the event of the liquidation, dissolution or winding up
of CacheFlow, the holders of our common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, our amended and restated certificate of
incorporation will authorize 10,000,000 shares of preferred stock. The board
of directors has the authority to issue the preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting any series or the designation of such
series, without further vote or action by the stockholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of CacheFlow without further action by the stockholders. For
example, the board of directors could issue preferred stock that has the power
to prevent a change of control transaction. The issuance of preferred stock
with voting and conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to others. We
currently have no plans to issue any of the preferred stock.
Warrants
As of July 31, 1999, there were warrants outstanding to purchase 141,842
shares of common stock at an exercise price of $3.42 per share (assuming the
conversion of all of our preferred stock into common stock).
Warrants to purchase 562,850 shares of Series A Preferred Stock at an
exercise price of $.875 expire upon the closing of this offering, and we
anticipate that these warrants will be exercised prior to this offering and
the
58
<PAGE>
underlying shares of preferred stock converted into common stock upon the
closing of this offering. Warrants to purchase 110,000 shares of Series C
Preferred Stock at an exercise price of $4.575 expire upon the closing of this
offering, and we anticipate that these warrants will be exercised prior to
this offering and the underlying shares of preferred stock converted into
common stock upon the closing of this offering.
Antitakeover Effects of Provisions of the Certificate of Incorporation and
Delaware Law
Amended and Restated Certificate of Incorporation
The amended and restated certificate of incorporation provides that all
stockholder actions must be effected at a duly called meeting and not by a
consent in writing. This provision could discourage potential acquisition
proposals and could delay or prevent a change of control of CacheFlow because
a potential acquisition of CacheFlow could not be approved by the stockholders
without a duly called meeting. See "Risk Factors--Effect of Certain Charter
Provisions; Antitakeover Effects of Certificate of Incorporation and Delaware
Law."
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to various exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless: (A) 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; (B) 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 (C) 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 combination to include: (A) any merger or
consolidation involving the corporation and the interested stockholder; (B)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (C) subject to
various exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (D) 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 (E) 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 of the outstanding voting
stock of the corporation and any entity or person affiliated with or
controlling or controlled by such entity or person.
Registration Rights
After this offering, the holders of approximately 23,284,762 shares of
outstanding common stock will be entitled to rights with respect to the
registration of such shares under the Securities Act. The holders of
registration rights are those investors that purchased shares of our Series A,
Series B and Series C Preferred Stock, as well as some of our present and
former officers. Under the terms of the agreements between us and the holders
of these registrable securities, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, the holders
are entitled to notice of the registration and are entitled to include these
shares in the registration. Certain of the stockholders benefiting from these
rights may also require us to file a registration statement under the
Securities
59
<PAGE>
Act at our expense with respect to their shares of common stock, and we are
required to use our best efforts to effect a registration. Further, holders
may require us to file additional registration statements on Form S-3. These
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration in certain circumstances.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is .
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Therefore, future sales of substantial amounts of our common stock in the
public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of existing contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
our common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.
Upon completion of this offering, we will have shares of common stock
outstanding, assuming no exercise of options and warrants outstanding as of
July 31, 1999 other than warrants to purchase 672,850 shares of preferred
stock that we assume will be exercised prior to the closing of the offering
and the conversion of all these shares of preferred stock into common stock.
Of these shares, the shares sold in this offering will be freely
transferable without restriction or registration under the Securities Act,
except for any shares purchased by one of our existing "affiliates," as that
term is defined by the Securities Act, which shares will be subject to the
resale limitations of Rule 144 adopted under the Securities Act. The remaining
27,671,031 shares of common stock existing are "restricted securities" as
defined in Rule 144. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144 or 701 of the Securities Act. As a result of the contractual
restrictions described below and the provisions of Rules 144 and 701,
additional shares will be available for sale in the public market as follows:
(A) no restricted securities will be eligible for immediate sale on the date
of this prospectus, (B) 22,626,595 restricted securities will be eligible for
sale upon expiration of lock-up agreements 180 days after the date of this
prospectus subject to Rule 144 or Rule 701, (C) 4,371,586 restricted
securities will be eligible for sale as of May 28, 2000, and (D) 672,850
restricted securities will be eligible for sale between August 24, 2000 and
the date that is one year after the effective date of the offering.
Lock-Up Agreements
We, our executive officers, directors and our stockholders have agreed not
to offer, 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 to purchase, lend or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, or enter into any swap or
similar agreement that transfers, in whole or in part, the economic risk of
ownership of the common stock, for a period of 180 days after the date of this
prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated, subject to limited exceptions. However, these contractual
restrictions may be released prior to expiration of the lock-up period. In
addition, existing stockholders have agreed not to exercise any registration
rights they may have for a similar period of 180 days.
Rule 144
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who owns shares that were purchased from us (or any affiliate) at
least one year previously, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of our then-
outstanding shares of common stock ( shares immediately after this
offering) or the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person (or persons whose shares are aggregated) who is not deemed to have been
one of our affiliates at any time during the three months preceding a sale,
and who owns shares within the definition of "restricted securities" under
Rule 144 that were purchased from us (or any affiliate) at least two years
previously, would be entitled to sell such shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
61
<PAGE>
Rule 701
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers,
consultants or advisers prior to the date we become subject to the reporting
requirements of the Securities Exchange Act of 1934, or the Exchange Act,
pursuant to written compensatory benefit plans or written contracts relating
to the compensation of such persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements
of the Exchange Act, along with the shares acquired upon exercise of such
options (including exercises after the date of this prospectus). Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days after the date of
this prospectus, may be sold by persons other than affiliates subject only to
the manner of sale provisions of Rule 144 and by affiliates under Rule 144
without compliance with its minimum holding period requirements.
Registration Rights
After this offering pursuant to this prospectus, the holders of
approximately 23,284,762 shares of common stock, or their transferees, will be
entitled to various rights with respect to the registration of such shares
under the Securities Act. Registration of such shares under the Securities Act
would result in such shares becoming freely tradable without restriction under
the Securities Act (except for shares purchased by affiliates) immediately
upon the effectiveness of such registration. See "Description of Capital
Stock--Registration Rights."
Stock Options and Warrants
As of July 31, 1999, options to purchase a total of 3,401,251 shares of
common stock pursuant to our 1996 Stock Option Plan were outstanding and
exercisable. All of the shares subject to options are subject to lock-up
agreements. As of July 31, 1999, warrants to purchase up to 141,842 shares of
common stock (assuming the conversion of all of our preferred stock into
common stock) were outstanding and exercisable. An additional 33,217 shares of
common stock were available for future option grants under our 1996 Stock
Option Plan. On August 27, 1999, we amended our 1996 Stock Option Plan to
increase the number of shares authorized for issuance thereunder by 3,000,000
shares. Between August 1, 1999 and September 24, 1999, we granted options to
purchase 2,874,000 shares of common stock. On September 24, 1999, we adopted,
subject to stockholder approval, our 1999 Stock Incentive Plan to replace the
1996 Stock Option Plan, and reserved 5,000,000 shares for issuance thereunder,
plus an additional number of shares equal to 5% of the shares outstanding on
the first day of January 2000 and each year thereafter. We will not grant any
options under our 1996 Stock Option Plan after the completion of this
offering. In addition, on September 24, 1999, we adopted, subject to
stockholder approval, our Employee Stock Purchase Plan, and reserved 2,500,000
shares of common stock for issuance thereunder, plus an additional 500,000
shares on January 31 of 2000 and each year thereafter and our 1999 Director
Option Plan, and reserved 500,000 shares of common stock for issuance
thereunder, plus an additional 100,000 shares on January 1 of 2000 and each
year thereafter. See "Management--1999 Stock Incentive Plan," "--Employee
Stock Purchase Plan," "--1999 Director Option Plan," "Description of Capital
Stock--Warrants" and Notes 3, 4 and 9 of Notes to Financial Statements.
We intend to file registration statements under the Securities Act covering
approximately 5,000,000 shares of common stock subject to outstanding options
or issuable pursuant to our 1999 Stock Incentive Plan and 500,000 shares of
common stock issuable pursuant to our 1999 Director Option Plan, and 2,500,000
shares of common stock issuable pursuant to our Employee Stock Purchase Plan.
We expect to file the registration statement covering shares issuable pursuant
to the Employee Stock Purchase Plan within 5 days of the effective date of
this offering and to file the registration statement covering shares offered
pursuant to the 1999 Stock Incentive Plan and 1999 Director Option Plan within
approximately 30 days after the closing of this offering. Shares registered
under such registration statements will, subject to Rule 144 volume
limitations applicable to affiliates, be available for sale in the open
market, except to the extent that such shares are subject to vesting
restrictions with us or the contractual restrictions described above. See
"Management--1999 Stock Incentive Plan," "--Employee Stock Purchase Plan" and
"--1999 Director Option Plan."
62
<PAGE>
UNDERWRITERS
Under the terms and subject to conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation
and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, are
acting as representatives, have severally agreed to purchase, and CacheFlow
has agreed to sell to the underwriters, the respective number of shares of
common stock set forth opposite the names of such underwriters below:
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Credit Suisse First Boston Corporation.............................
Dain Rauscher Wessels..............................................
----
Total..............................................................
====
</TABLE>
The underwriters and the representatives are collectively referred to as
the underwriters and the representatives. The underwriters are offering the
shares of common stock subject to their acceptance of the shares from
CacheFlow. The underwriting agreement provides that the obligations of the
several underwriters to pay for and accept delivery of the shares of common
stock offered by us in this offering are subject to the approval of legal
matters by their counsel and to other conditions. The underwriters are
obligated to take and pay for all of the shares of common stock offered by us
in this offering, other than those covered by the over allotment option
described below, if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. Any underwriter may allow, and such dealers may reallow, a
concession not in excess of $ per share to other underwriters or to certain
dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives.
CacheFlow has granted to the underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price set forth on
the cover page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise such option solely for the purpose
of covering over-allotments, if any, made in connection with the offering of
the shares of common stock offered by this prospectus. To the extent such
option is exercised, each underwriter will become obligated, subject to
limited conditions to purchase approximately the same percentage of such
additional shares of common stock as the number set forth next to such
underwriter's name in the preceding table bears to the total number of shares
of common stock set forth next to the names of the underwriters in the
preceding table. If the underwriters' option is exercised in full, the total
price to the public would be $ million, the total underwriters' discounts and
commissions would be $ million and total proceeds to CacheFlow would be
$ million.
The underwriters have informed CacheFlow that the underwriters do not
intend sales to discretionary accounts to exceed five percent of the total
number of shares of common stock offered by them.
CacheFlow has filed an application for our common stock to be quoted on the
Nasdaq National Market under the symbol "CFLO."
At the request of CacheFlow, the underwriters will reserve up to shares
of common stock to be offered hereby for sale, at the initial public offering
price, to directors, officers, employees, business associates
63
<PAGE>
and related persons of CacheFlow. In addition, the underwriters have agreed to
reserve additional shares of common stock pursuant to an agreement we have
with the holders of our Series C Preferred Stock. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares which
are not so purchased will be offered by the underwriters to the general public
on the same basis as the other shares offered hereby.
In connection with our Series C Preferred Stock financing, we agreed to use
our best efforts to cause the managing underwriters of our initial public
offering to establish a directed share program whereby the managing
underwriters would offer the Series C Preferred Stock investors the
opportunity to purchase shares of our common stock in our initial public
offering. The dollar amount of the common stock to be offered to the Series C
Preferred Stock investors pursuant to the directed share program is not to
exceed $5,000,000, and is subject to reduction under certain circumstances.
The Series C Preferred Stock investors have no obligation to purchase any of
the shares offered to them. We intend that all offers to purchase shares
pursuant to the directed share program will be made in compliance with all
federal and state securities laws, including Rule 134 of the Securities Act of
1933, as amended, and all applicable rules and regulations promulgated by the
National Association of Securities Dealers, Inc.
CacheFlow, our directors and executive officers and our stockholders and
option holders have each agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated, on behalf of the underwriters, he, she or
it will not, for the period ending 180 days after the date of this prospectus:
. offer, 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 to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or
. enter into any swap or similar agreement that transfers, in whole or in
part, any of the consequences of ownership of the common stock.
The restrictions described in the previous paragraph do not apply to:
. the issuance by CacheFlow of shares of common stock upon the exercise of
an option or a warrant or the conversion of a security outstanding on
the date of this prospectus of which the underwriters have been advised
in writing;
. transactions by any person other than CacheFlow relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares;
. the granting of stock options pursuant to existing CacheFlow employee
benefit plans, provided that such options do not become exercisable and
such options do not vest during the such 180-day period; or
. certain gifts, distributions or transfers to trusts, provided that
transferees in transactions described in this clause enter into lock-up
agreements similar to those described in the previous paragraph.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may agree to sell or
allot more shares than the shares of common stock CacheFlow has agreed to
sell them. This over-allotment would create a short position in the common
stock for the underwriters' account. To cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
64
<PAGE>
CacheFlow and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
Pricing of the Offering
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be:
. the future prospects of CacheFlow and its industry in general;
. sales, earnings and certain other financial operating information of
CacheFlow in recent periods; and
. the price earnings ratios, price sales ratios, market prices of
securities and certain financial and operating information of companies
engaged in activities similar to those of CacheFlow.
The estimated public offering price range set forth on the cover page of
this prospectus is subject to change as a result of market conditions and
other factors.
65
<PAGE>
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, Menlo Park, California. Members of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP participating in the consideration of
legal matters relating to this offering beneficially own 91,452 shares of our
common stock (assuming the conversion of all of our preferred stock into
common stock). Legal matters in connection with this offering will be passed
upon for the underwriters by Shearman & Sterling, Menlo Park, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of April 30, 1998 and 1999, and for each of the three
years in the period ended April 30, 1999 as set forth in their report dated
September 24, 1999. We have included our consolidated financial statements in
the prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's report given on their authority as experts in auditing and
accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement and the
exhibits and schedules to the registration statement. For further information
with respect to us and our common stock, reference is made to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of the contract or document
filed as an exhibit to the registration statement. Each such statement is
qualified in all respects by reference to that exhibit. The registration
statement, including exhibits and schedules, may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from such office after payment of fees
prescribed by the Commission. The Commission maintains a World Wide web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the site is http://www.sec.gov.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective August 27, 1999, Ernst & Young LLP was engaged as our independent
auditors and replaced other auditors who were dismissed as our independent
accountants on the same date. The decision to change auditors was approved by
our board of directors on August 27, 1999. Prior to August 27, 1999, our
former auditors, which included two separate audit firms, issued reports on
the year ended April 30, 1998 and the period from inception (March 13, 1996)
to April 30, 1997. The reports of our former auditors did not contain an
adverse opinion or disclaimer of opinion qualified or modified as to audit
scope or accounting principle. The auditor's opinion for the year ended April
30, 1998 did contain an uncertainty as to substantial doubt regarding our
ability to continue as a going concern. In connection with the audits for the
period from inception (March 13, 1996) through April 30, 1997 and the year
ended April 30, 1998 and the period through August 27, 1999, there were no
disagreements with our former auditors on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of our former
auditors, would have caused them to make reference thereto in their report.
Our former auditors have not audited or reported on any of the financial
statements or information included in this prospectus. Prior to August 27,
1999, we have not consulted with Ernst & Young LLP on items that involved our
accounting principles or the form of audit opinion to be issued on our
financial statements. We have requested that our former auditors furnish us
with letters addressed to the Securities and Exchange Commission stating
whether or not they agree with the above statements. Copies of these letters
are filed as an exhibit to the registration statement of which this prospectus
forms a part.
66
<PAGE>
CACHEFLOW INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................. F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CacheFlow Inc.
We have audited the accompanying consolidated balance sheets of CacheFlow
Inc. as of April 30, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended April 30, 1999. 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 consolidated 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 consolidated financial position
of CacheFlow Inc. at April 30, 1998 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended April 30, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Walnut Creek, California
September 24, 1999
F-2
<PAGE>
CACHEFLOW INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
April 30, Equity at
----------------- July 31, July 31,
1998 1999 1999 1999
------- -------- ----------- -------------
(unaudited) (unaudited)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....... $ 7,349 $ 2,291 $ 17,825
Accounts receivable, net of
allowance for doubtful accounts
and sales returns of $121 and
$300 at April 30, and July 31,
1999, respectively............. -- 1,353 1,957
Inventories..................... 407 932 1,721
Prepaid expenses and other
current assets................. 53 60 152
------- -------- --------
Total current assets.............. 7,809 4,636 21,655
Property and equipment, net....... 642 1,351 1,706
Other assets...................... 10 729 658
------- -------- --------
Total assets................... $ 8,461 $ 6,716 $ 24,019
======= ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable................ $ 429 $ 1,464 $ 1,910
Borrowings under line of
credit......................... -- 643 639
Accrued payroll and related
benefits....................... 145 420 558
Deferred revenue................ -- 367 559
Other accrued liabilities....... 214 166 320
Current portion of long-term
obligations.................... 66 789 789
------- -------- --------
Total current liabilities......... 854 3,849 4,775
Long-term obligations, less
current portion.................. 7 3,211 3,211
------- -------- --------
Total liabilities................. 861 7,060 7,986
Commitments
Stockholders' equity (deficit):
Preferred stock, $0.0001 par
value, issuable in series:
30,000 shares authorized at
April 30, 1998 and 1999 and
July 31, 1999 (10,000 shares
pro forma), respectively;
9,970, 9,970, and 14,342 shares
issued and outstanding at April
30, 1998 and 1999 and July 31,
1999 (none pro forma),
respectively; aggregate
liquidation preference of
$14,457 at April 30, 1999 (none
pro forma)..................... 1 1 1 $ --
Common stock, $0.0001 par value,
60,000 shares authorized at
April 30, 1998 and 1999 and
July 31, 1999 (200,000 shares
pro forma), respectively;
6,017, 12,894 and 12,656 shares
issued and outstanding at April
30, 1998 and 1999 and July 31,
1999 (26,998 shares pro forma),
respectively................... 1 1 1 2
Additional paid-in capital...... 14,646 30,877 62,794 62,794
Note receivable from
stockholder.................... -- (1,004) (1,017) (1,017)
Deferred stock compensation..... (98) (10,067) (19,547) (19,547)
Accumulated deficit............. (6,950) (20,152) (26,199) (26,199)
------- -------- -------- -------
Total stockholders' equity
(deficit)..................... 7,600 (344) 16,033 16,033
------- -------- -------- -------
Total liabilities and
stockholders' equity
(deficit)..................... $ 8,461 $ 6,716 $ 24,019 $24,019
======= ======== ======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
CACHEFLOW INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Year Ended April 30, Ended July 31,
-------------------------- ----------------
1997 1998 1999 1998 1999
------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales........................ $ -- $ -- $ 7,036 $ 809 $ 3,612
Cost of goods sold............... -- -- 3,297 598 1,380
------- ------- -------- ------- -------
Gross profit..................... -- -- 3,739 211 2,232
Operating expenses:
Research and development....... 1,055 2,396 4,034 755 1,613
Sales and marketing............ 130 1,655 6,865 1,335 3,481
General and administrative..... 310 1,630 2,069 275 667
Stock compensation............. 4 59 3,776 219 2,482
------- ------- -------- ------- -------
Total operating expenses......... 1,499 5,740 16,744 2,584 8,243
------- ------- -------- ------- -------
Operating loss................... (1,499) (5,740) (13,005) (2,373) (6,011)
Interest income.................. 82 258 160 73 131
Interest expense................. (26) (25) (357) (2) (167)
------- ------- -------- ------- -------
Net loss......................... $(1,443) $(5,507) $(13,202) $(2,302) $(6,047)
======= ======= ======== ======= =======
Basic and diluted net loss per
common share.................... $ (1.54) $ (1.88) $ (3.06) $ (0.65) $ (0.97)
======= ======= ======== ======= =======
Shares used in computing basic
and diluted net loss per common
share........................... 939 2,936 4,316 3,517 6,214
======= ======= ======== ======= =======
Pro forma basic and diluted net
loss per common share
(unaudited)..................... $ -- $ -- $ (0.89) $ -- $ (0.30)
======= ======= ======== ======= =======
Shares used in computing pro
forma basic and diluted net loss
per common share (unaudited).... -- -- 14,849 -- 19,946
======= ======= ======== ======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
CACHEFLOW INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Preferred Note Total
Stock Common Stock Additional Receivable Deferred Stockholders'
------------- -------------- Paid-In From Stock Accumulated Equity
Shares Amount Shares Amount Capital Stockholder Compensation Deficit (Deficit)
------ ------ ------ ------ ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock to founders...... -- $ -- 6,600 $ 1 $ 32 $ -- $ -- $ -- $ 33
Issuance of Series A
preferred stock, net of
issuance costs......... 5,831 1 -- -- 5,101 -- -- -- 5,102
Issuance of common
stock to third parties
for services........... -- -- 84 -- 4 -- -- -- 4
Exercise of stock
options by employees... -- -- 500 -- 6 -- -- -- 6
Net and comprehensive
loss................... -- -- -- -- -- -- -- (1,443) (1,443)
------ ---- ------ --- ------- ------- -------- -------- --------
Balances at April 30,
1997.................... 5,831 1 7,184 1 5,143 -- -- (1,443) 3,702
Issuance of Series B
preferred stock, net of
issuance costs......... 4,139 -- -- -- 9,329 -- -- -- 9,329
Exercise of stock
options by employees... -- -- 340 -- 25 -- -- -- 25
Issuance of common
stock to third parties
for services........... -- -- 93 -- 7 -- -- -- 7
Repurchase of common
stock.................. -- -- (1,600) -- (8) -- -- -- (8)
Deferred stock
compensation........... -- -- -- -- 150 -- (150) -- --
Amortization of
deferred stock
compensation........... -- -- -- -- -- -- 52 -- 52
Net and comprehensive
loss................... -- -- -- -- -- -- -- (5,507) (5,507)
------ ---- ------ --- ------- ------- -------- -------- --------
Balances at April 30,
1998.................... 9,970 1 6,017 1 14,646 -- (98) (6,950) 7,600
Exercise of stock
options by employees... -- -- 6,843 -- 2,049 -- -- -- 2,049
Issuance of common
stock to third parties
for services........... -- -- 34 -- 20 -- -- -- 20
Stock compensation..... -- -- -- -- 156 -- -- -- 156
Issuance of warrants in
connection with debt
issuance............... -- -- -- -- 437 -- -- -- 437
Note receivable from
stockholder for the
exercise of stock
options................ -- -- -- -- -- (999) -- -- (999)
Interest on note
receivable from
stockholder for the
exercise of stock
options................ -- -- -- -- -- (5) -- -- (5)
Deferred stock
compensation........... -- -- -- -- 13,569 -- (13,569) -- --
Amortization of
deferred stock
compensation........... -- -- -- -- -- -- 3,600 -- 3,600
Net and comprehensive
loss................... -- -- -- -- -- -- -- (13,202) (13,202)
------ ---- ------ --- ------- ------- -------- -------- --------
Balances at April 30,
1999.................... 9,970 1 12,894 1 30,877 (1,004) (10,067) (20,152) (344)
Issuance of Series C
preferred stock, net of
issuance costs
(unaudited)............ 4,372 -- -- -- 19,976 -- -- -- 19,976
Exercise of stock
options by employees
(unaudited)............ -- -- 25 -- 7 -- -- -- 7
Issuance of common
stock to third parties
for services
(unaudited)............ -- -- 8 -- 16 -- -- -- 16
Repurchase of common
stock from employees
(unaudited)............ (271) (28) (28)
Interest on note
receivable from
stockholder for the
exercise of stock
options (unaudited).... -- -- -- -- -- (13) -- -- (13)
Deferred stock
compensation
(unaudited)............ -- -- -- -- 11,946 (11,946) -- --
Amortization of
deferred stock
compensation
(unaudited)............ -- -- -- -- -- -- 2,466 -- 2,466
Net and comprehensive
loss (unaudited)....... -- -- -- -- -- -- -- (6,047) (6,047)
------ ---- ------ --- ------- ------- -------- -------- --------
Balances at July 31,
1999 (unaudited)........ 14,342 $ 1 12,656 $ 1 $62,794 $(1,017) $(19,547) $(26,199) $ 16,033
====== ==== ====== === ======= ======= ======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-5
<PAGE>
CACHEFLOW INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended April 30, Ended July 31,
-------------------------- ----------------
1997 1998 1999 1998 1999
------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss........................ $(1,443) $(5,507) $(13,202) $(2,302) $(6,047)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization.. 13 91 261 45 117
Stock compensation............. 4 59 3,776 219 2,482
Interest on notes converted to
preferred stock............... 22 -- -- -- --
Interest on note receivable
from stockholder.............. -- -- (5) -- (13)
Debt issuance costs............ -- -- 437 -- --
Changes in operating assets and
liabilities:
Accounts receivable........... -- -- (1,353) (741) (604)
Inventories................... (38) (369) (525) (51) (789)
Prepaid expenses and other
current assets............... (13) (40) (7) (35) (92)
Other assets.................. (3) (7) (719) (179) 71
Accounts payable.............. 67 362 1,035 (187) 446
Accrued liabilities........... -- 359 594 278 484
------- ------- -------- ------- -------
Net cash used in operating
activities..................... (1,391) (5,052) (9,708) (2,953) (3,945)
Investing activities
Purchases of property and
equipment...................... (123) (623) (971) (151) (472)
Purchases of short-term
investments.................... (3,410) -- -- -- --
Proceeds from sale of short-term
investments.................... -- 3,410 -- -- --
------- ------- -------- ------- -------
Net cash provided by (used in)
investing activities........... (3,533) 2,787 (971) (151) (472)
Financing activities
Proceeds from issuance of
preferred stock................ 4,095 9,329 -- -- 19,976
Proceeds from issuance of common
stock.......................... 39 25 1,051 300 7
Repurchase of employee stock.... -- (8) -- -- (28)
Borrowings from line of credit.. -- -- 643 -- --
Proceeds from issuance of debt
obligations.................... 985 128 4,000 -- --
Payments on debt obligations.... -- (55) (73) (21) (4)
------- ------- -------- ------- -------
Net cash provided by financing
activities..................... 5,119 9,419 5,621 279 19,951
------- ------- -------- ------- -------
Net increase (decrease) in cash
and cash equivalents........... 195 7,154 (5,058) (2,825) 15,534
Cash and cash equivalents at
beginning of period............ -- 195 7,349 7,349 2,291
------- ------- -------- ------- -------
Cash and cash equivalents at end
of period...................... $ 195 $ 7,349 $ 2,291 $ 4,524 $17,825
======= ======= ======== ======= =======
Supplemental disclosures of cash
flow information
Cash paid for interest.......... $ 4 $ 10 $ 375 $ 2 $ 167
======= ======= ======== ======= =======
Noncash financing activities
Warrants issued in connection
with long-term debt agreements
and strategic customer
arrangements................... $ -- $ -- $ 437 $ -- $ --
======= ======= ======== ======= =======
Conversion of debt to preferred
stock.......................... $ 985 $ -- $ -- $ -- $ --
======= ======= ======== ======= =======
Issuance of note receivable to
stockholder for the exercise of
stock options and related
interest....................... $ -- $ -- $ (1,004) $ -- $ (13)
======= ======= ======== ======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-6
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three months
ended July 31, 1999 is unaudited)
1. Organization and Summary of Significant Accounting Policies
Organization
CacheFlow Inc. (the "Company") was organized and incorporated in the state
of Delaware on March 16, 1996. The Company operates in one segment to design,
develop, market and support high-performance Internet caching appliances.
Unaudited Interim Financial Information
The accompanying consolidated financial statements and related notes as of
July 31, 1999 and for the quarters ended July 31, 1998 and 1999 are unaudited,
but include all adjustments, consisting only of normal recurring adjustments,
that the Company considers necessary for a fair presentation of its
consolidated financial position, operating results, and cash flows for the
interim date and periods presented. Results for the quarter ended July 31,
1999 are not necessarily indicative of results for the entire fiscal year or
future periods.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated. From inception in March 1996 through April
30, 1998, the Company was considered to be in the development stage. The
Company's sales activities were initiated in the first quarter of fiscal 1999.
The accompanying statements of operations, stockholders' equity (deficit), and
cash flows for the year ended April 30, 1997 include $33,000 received upon
issuance of the initial capital stock of the Company and $7,000 expended
during the period from March 13, 1996 (inception) to April 30, 1996 for
general and administrative expenses. Due to the insignificance of the balances
as of April 30, 1996 and activity for the period from March 13, 1996
(inception) to April 30, 1996, financial statements have not been presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents. Cash
equivalents consisted of money market investments at April 30, 1998 and 1999.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist of demand deposit accounts, money market accounts, and trade
receivables. The Company maintains its demand deposit accounts and its money
market accounts primarily with one financial institution. The Company has
partially financed its operations through long-term debt with a lending
institution. Management believes the financial risks associated with these
financial instruments are minimal. The Company generally does not require
collateral for sales to customers. For the year ended April 30, 1999, three
customers individually accounted for over 10% of our net sales, for an
aggregate of approximately 33% of our net sales. For the three months ended
July 31, 1999, two customers individually accounted for over 10% of our net
sales, for an aggregate of approximately 22% of our net sales.
F-7
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentrations of Supply
The Company currently purchases several key parts and components used in
the manufacture of its Internet caching appliance products from limited
sources of supply.
Concentrations of Sales
The Company's Internet caching appliance product family and related
services have accounted for all of the Company's net sales for the year ended
April 30, 1999 and three month period ended July 31, 1999.
Inventories
Inventories consist of raw materials, work-in-process and finished goods.
Inventories are recorded at the lower of cost or market using the first-in,
first-out method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the lesser of the estimated useful life, generally three to five
years, or the lease term of the respective assets.
Revenue Recognition
The Company generally recognizes product revenue at the time of shipment,
net of allowances for estimated sales returns and uncollectible customer
accounts. Maintenance contract revenue is deferred and recorded evenly over
the term of the contract. Maintenance contract revenue for the year ended
April 30, 1999 and the three months ended July 31, 1999 was $25,000 and
$54,000, respectively.
Warranty Reserves
The Company's products generally carry a one-year warranty that includes
factory repair services as needed for replacement parts. Estimated expenses
for warranty obligations are generally accrued at the same time as related
product revenue is recognized.
Income Taxes
The Company uses the liability method to account for income taxes as
required by the Financial Accounting Standards Board's (FASB) Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.
Research and Development
Costs to develop the Company's products are expensed as incurred in
accordance with the FASB's Statement of Financial Accounting Standards No. 2,
"Accounting for Research and Development Costs," which establishes accounting
and reporting standards for research and development.
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with the
FASB's Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." The comprehensive net loss for the years ended April
30, 1997, 1998 and 1999 does not differ from the reported net loss.
F-8
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company accounts for its stock options and equity awards in accordance
with the provisions of the Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and has elected to follow the
"disclosure only" alternative prescribed by the FASB's Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123).
Fair Value of Financial Instruments
The fair value of long-term debt obligations are estimated based on current
interest rates available to the Company for debt instruments with similar
terms, degrees of risk, and remaining maturities. The carrying values of these
obligations approximate their fair values.
Net Loss Per Share
Basic net loss per common share and diluted net loss per common share are
presented in conformity with the FASB's Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS 128), for all periods presented.
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
No. 98, common stock and convertible preferred stock issued or granted for
nominal consideration prior to the anticipated effective date of the initial
public offering must be included in the calculation of basic and diluted net
loss per common share as if they had been outstanding for all periods
presented. To date, the Company has not had any issuances or grants for
nominal consideration.
In accordance with FAS 128, basic and diluted net loss per common share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less the weighted average number of shares of
common stock issued to founders, investors and employees that are subject to
repurchase. Pro forma basic and diluted net loss per common share, as
presented in the consolidated statements of operations, have been computed as
described above and also give effect, under Securities and Exchange Commission
guidance, to the conversion of the convertible preferred stock (using the if-
converted method) from the original date of issuance.
F-9
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the calculation of basic and diluted net loss
per common share and pro forma basic and diluted net loss per common share (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
Year Ended April 30, July 31,
-------------------------- --------------------
1997 1998 1999 1998 1999
------- ------- -------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Historical:
Net loss.................... $(1,443) $(5,507) $(13,202) $ (2,302) $ (6,047)
======= ======= ======== ========= =========
Weighted-average shares of
common stock outstanding.. 5,530 6,574 9,085 8,269 12,669
Less: Weighted-average
shares subject to
repurchase................ 4,591 3,638 4,769 4,752 6,455
------- ------- -------- --------- ---------
Weighted-average shares
used in computing basic
and diluted net loss per
common share.............. 939 2,936 4,316 3,517 6,214
======= ======= ======== ========= =========
Basic and diluted net loss
per common share.......... $ (1.54) $ (1.88) $ (3.06) $ (0.65) $ (0.97)
======= ======= ======== ========= =========
Pro forma:
Shares used above........... 939 2,936 4,316 3,517 6,214
Pro forma adjustment to
reflect the weighted effect
of the assumed conversion
of preferred stock......... 9,970 13,059
Pro forma adjustment to
reflect weighted effect of
assumed exercise and
conversion of preferred
stock warrants............. 563 673
-------- ---------
Shares used in computing pro
forma basic and diluted net
loss per common share
(unaudited)................ 14,849 19,946
======== =========
Pro forma basic and diluted
net loss per common share
(unaudited)................ $ (0.89) $ (0.30)
======== =========
</TABLE>
The Company has excluded all preferred stock, warrants for preferred stock,
outstanding stock options and shares subject to repurchase from the
calculation of diluted net loss per share because all such securities are
antidilutive for all periods presented. The total number of shares excluded
from the calculations of diluted net loss per common share were (in thousands)
7,244, 14,600, 12,707, 15,157, and 22,462 for the three years ended April 30,
1997, 1998 and 1999, and for the three months ended July 31, 1998 and 1999,
respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
for 1997, 1998 and 1999 were $13,000, $84,000 and $270,000, respectively, and
are included in sales and marketing expenses.
Unaudited Pro Forma Stockholders' Equity (Deficit)
If the offering contemplated by this prospectus is consummated, all of the
preferred stock outstanding will automatically be converted into common stock.
Unaudited pro forma stockholders' equity (deficit) at July 31, 1999, as
adjusted for the assumed conversion of preferred stock based on the shares of
preferred stock outstanding at July 31, 1999, is disclosed on the consolidated
balance sheet.
Segment Information
The Company has adopted the FASB's Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information." The Company operates in one segment to design, develop, market
and support high-performance Internet caching appliances.
F-10
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), which will be effective for the
Company's fiscal year ending April 30, 2002. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the consolidated balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company has not evaluated the impact of FAS
133; however, it believes the adoption of FAS 133 will not have a material
effect on the consolidated financial position, results of operations, or cash
flows as the Company has not entered into any derivative contracts.
2. Balance Sheet Details
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
April 30,
--------- July 31,
1998 1999 1999
---- ---- -----------
(unaudited)
<S> <C> <C> <C>
Raw materials.......................................... $407 $610 $1,263
Work-in-process........................................ -- 45 124
Finished goods......................................... -- 277 334
---- ---- ------
$407 $932 $1,721
==== ==== ======
</TABLE>
Property and equipment, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
April 30,
-------------
1998 1999
----- ------
<S> <C> <C>
Computer and office equipment................................. $ 588 $1,224
Furniture and fixtures........................................ 2 23
Software...................................................... 156 469
----- ------
746 1,716
Less accumulated depreciation and amortization................ (104) (365)
----- ------
$ 642 $1,351
===== ======
</TABLE>
Certain computer and office equipment are recorded under capital leases
that aggregated $29,000 as of April 30, 1999 (none were outstanding as of
April 30, 1998). Accumulated amortization on the assets recorded under capital
leases aggregated $8,000 as of April 30, 1999.
3. Stockholders' Equity (Deficit)
Stock Split
In June 1999, the Company's Board of Directors and stockholders approved a
2-for-1 stock split of the Company's authorized, issued and outstanding common
and preferred stock. All common and preferred share and per share amounts in
the accompanying consolidated financial statements have been retroactively
adjusted to reflect the 2-for-1 stock split.
F-11
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred Stock
Preferred stock consisted of the following series (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Shares Issued and
Shares Authorized at Outstanding at Per Share
---------------------- ----------------- ---------------------- Aggregate
April 30, April 30, Liquidation
------------- July 31, ----------------- Preference
July 31, Noncumulative at July 31, Liquidation
Series 1998 1999 1999 1998 1999 1999 Dividend 1999 Preference
------ ------ ------ -------- ----- ----------- -------- ------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A....................... 6,394 6,394 6,394 5,831 5,831 5,831 $0.070 $0.875 $ 5,102
B....................... 4,400 4,400 4,400 4,139 4,139 4,139 $0.225 $2.260 9,355
C....................... -- -- 4,500 -- -- 4,372 $0.460 $4.575 20,000
Undesignated............ 19,206 19,206 14,706 -- -- -- -- -- --
------ ------ ------ ----- ----- ------ -------
30,000 30,000 30,000 9,970 9,970 14,342 $34,457
====== ====== ====== ===== ===== ====== =======
</TABLE>
The holders of Series A, B, and C preferred stock are entitled to annual
noncumulative dividends per share as shown above when and if declared by the
board of directors. In the event of any voluntary or involuntary liquidation
of the Company, Series A, B, and C preferred stockholders are entitled to a
liquidation preference per share as shown above plus any declared but unpaid
dividends, all in preference to the holders of the common stock. If upon
occurrence of such event, the asset and funds thus distributed among the
holders of the preferred stock shall be insufficient to permit the payment to
such holders, then the entire assets and funds of the corporation legally
available for distribution shall distribute ratably among the holders of
Series A, B, and C preferred stock in proportion to the aggregate preferential
amounts each such holder is otherwise entitled to receive. Upon the completion
of a distribution, the holders of the common stock will ratably receive any
and all remaining assets of the Company.
The holders of Series A, B and C preferred stock have the right, at any
time after the date of issuance, to convert each of their shares into common
shares. The initial conversion ratio is one-to-one for shares of Series A, B,
and C preferred shares but is subject to adjustments for dilution. The holders
of each share of preferred stock have the right to one vote for each share of
common stock into which the preferred stock can be converted.
Preferred shares automatically convert into shares of common stock at the
conversion price in effect upon the earlier of the Company's sale of its
common stock in a public offering with cash proceeds to the Company of at
least $20,000,000 or upon the agreement of both the holders of a majority of
the outstanding shares of Series A, B, and C preferred stock, voting together
as a class, and the holders of a majority of the outstanding shares of Series
C preferred stock. In September 1999, the Company's Board of Directors
approved a decrease in authorized shares of preferred stock from 30,000,000 to
10,000,000 upon the completion of the Company's initial public offering of its
common stock.
Warrants
In October and November of 1996, the Company issued a total of 562,850
warrants to purchase Series A preferred stock at an exercise price of $0.875
per share. The warrants were immediately exercisable and expire at the earlier
of April 30, 2000 or at the completion of the Company's initial public
offering of its common stock.
In connection with the long-term debt agreements entered into in November
1998, the Company issued warrants to purchase 141,842 shares of Series B
preferred stock at an exercise price of $3.42 per share. The Company
calculated a value for the Series B warrants using the Black-Scholes valuation
model of approximately $507,000 and recorded this amount as deferred debt
issuance costs in other assets. This amount is being amortized over the term
of the agreement to interest expense.
F-12
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In April 1999, the Company entered into a strategic relationship with a
customer. As part of the arrangement the Company issued warrants to purchase
110,000 shares of Series C preferred stock at an exercise price of $4.575 per
share. A portion of the warrants were immediately exercisable and the
remaining warrants became exercisable in September 1999. The warrants expire
at the earlier of April 30, 2002 or at the completion of the Company's initial
public offering of its common stock. In April 1999, the Company recorded a
charge of $17,000 based on the fair value of the warrants. The Company intends
to record an additional charge of approximately $604,000 in the three months
ending October 31, 1999, which represents the fair value of the warrants. The
fair value of the warrants was determined using the Black-Scholes model.
Common Stock
The Company has entered into Stock Purchase Agreements in connection with
the sale of common stock to employees, consultants and directors. The Company
typically has the right to repurchase, at the original issue price, a
declining percentage of certain of the shares of common stock issued based on
the employees, consultants, and directors service periods. The repurchase
right generally declines on a percentage basis over four years based on the
length of the founder's and each respective employee's continued employment
with the Company, and the director's membership on the Board of Directors
under this agreement. As of April 30, 1998 and 1999 and July 31, 1999,
2,652,500, 7,310,671 and 6,015,498 shares, respectively, of common stock
issued under these agreements were subject to repurchase. In September 1999,
the Company's Board of Directors approved an increase in authorized shares of
common stock from 60,000,000 to 200,000,000 upon the completion of the
Company's initial public offering of its common stock.
Shares of Common Stock Reserved for Future Issuance
Common stock reserved for future issuance consisted of the following (in
thousands):
<TABLE>
<CAPTION>
April 30, July
------------- 31,
1998 1999 1999
------ ------ ------
<S> <C> <C> <C>
Common stock reserved for:
Preferred stock....................................... 10,794 10,794 15,294
1996 stock option plan................................ 7,841 9,241 9,643
Preferred stock warrants.............................. 563 814 814
------ ------ ------
19,198 20,849 25,751
====== ====== ======
</TABLE>
Note Receivable from Stockholder
In April 1999, the Company entered into a note for $999,900 with an officer
of the Company for the purchase of common stock. The note bears interest at
4.99% and the note and related interest are payable in full on April 13, 2004.
The note is secured by 2 million shares of common stock of the Company owned
by the officer. The note was issued with full recourse and is also secured by
all of the assets owned by the officer.
4. Stock Option Plan
In 1996, the Company established the 1996 Stock Option Plan (the 1996 Plan)
under which stock options may be granted to employees, directors and
consultants of the Company and authorized 1,000,000 shares of common stock
thereunder. Through various amendments, the Board of Directors and
stockholders approved the increase in the number of shares authorized for
issuance under the 1996 Plan to 9,241,000. Under the 1996 Plan, nonstatutory
stock options may be granted to employees and consultants, and incentive stock
options (ISO) may
F-13
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be granted only to employees. In the case of an ISO that is granted to an
employee who, at the time of the grant of such option, owns stock representing
more than 10% of the total combined voting power of all classes of stock of
the Company, the per share exercise price shall not be less than 110% of the
fair market value per share on the date of grant or, granted to any other
employee, the per share exercise price shall not be less than 100% of the fair
value per share on the date of grant. The exercise price for non-qualified
options may not be less than 85% of the fair value of common stock at the
option grant date. At April 30, 1998 and 1999 and July 31, 1999, the Company
had 321,000, 6,008,000, and 2,047,445 shares, respectively, which were subject
to repurchase rights under the 1996 Plan. No shares were repurchased under the
1996 plan during fiscal 1997, 1998 and 1999. For the three months ended July
31, 1999, 271,000 shares were repurchased under the 1996 Plan at the original
issuance price.
Options issued under the 1996 Plan are immediately exercisable, and shares
issued upon exercise of an option are subject to a right of repurchase by the
Company at the original issuance price. The repurchase right lapses as
determined by the Company's Board of Directors, generally 25% after one year
and 2.08% per month thereafter.
The 1996 Plan will continue in effect for a term of ten years unless
terminated by the Company's Board of Directors at an earlier date. Any option
granted under the 1996 plan shall be exercisable at such times and under such
conditions as determined by the Company's Board of Directors.
Stock option activity under the 1996 Plan and options issued outside the
1996 Plan were as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
Outstanding Options
--------------------------
Weighted-Average
Number of Exercise Price
Shares Per Share
--------- ----------------
<S> <C> <C>
Options granted................................. 850 $0.06
------
Balance at April 30, 1997......................... 850 $0.06
Options granted................................. 3,386 $0.09
Options exercised............................... (340) $0.08
Options canceled................................ (150) $0.08
------
Balance at April 30, 1998......................... 3,746 $0.09
Options granted................................. 5,371 $0.61
Options exercised............................... (6,843) $0.37
Options canceled................................ (406) $0.34
------
Balance at April 30, 1999......................... 1,868 $0.51
Options granted (unaudited)..................... 1,592 $2.00
Options exercised (unaudited)................... (25) $0.28
Options canceled (unaudited).................... (34) $0.75
------
Balance at July 31, 1999 (unaudited).............. 3,401 $1.21
======
</TABLE>
F-14
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At July 31, 1999, 33,000 shares were available for future option grants
under the 1996 Plan.
The following table summarizes information about stock options outstanding
at April 30, 1999 (in thousands except per share amounts).
<TABLE>
<CAPTION>
Options Outstanding Options exercisable
- ----------------------------------------------------------------- ----------------------------------
Range of Number of Options Weighted Average Weighted Average Number of Options Weighted Average
Exercise Outstanding at Contractual Life Exercise Exercisable at Exercise
Prices April 30, 1999 (Years) Price April 30, 1999 Price
-------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.075-$0.25 442 8.5 $0.15 263 $0.12
$0.375-$1.00 1,426 9.5 0.61 134 0.38
- ------------ ----- --- ----- --- -----
$0.075-$1.00 1,868 9.3 $0.51 397 $0.21
</TABLE>
For the three years ended April 30, 1997, 1998 and 1999 and the three
months ended July 31, 1999, the Company recorded deferred stock compensation
of $150,000, $13,569,000, and $11,946,000, respectively, representing the
difference between the exercise price and the deemed fair value of the
Company's common stock on the date such stock options were granted. For the
years ended April 30, 1998 and 1999 and the three months ended July 31, 1999,
the Company recorded amortization of deferred stock compensation of $52,000,
$3,600,000 and $2,466,000, respectively. At April 30, 1998 and 1999 and July
31, 1999, the Company had $98,000, $10,067,000 and $19,547,000, respectively,
of remaining unamortized deferred compensation. Such amounts are included as a
reduction of stockholders' equity (deficit) and are being amortized using a
graded method over the vesting period of each respective option.
Pro Forma Disclosures of the Effect of Stock-Based Compensation
Pro forma information regarding results of operations and net loss per
share is required by FAS 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
under the fair value method of FAS 123. The fair value for each option granted
was estimated at the date of grant using the minimum value option pricing
model with the following weighted-average assumptions: a risk-free interest
rate of 6.00%, no dividend yield, and an exercisable life of five years for
the years ended April 30, 1997, 1998 and 1999.
The option valuation models were developed for use in the estimation of the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and 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.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options' vesting periods. Pro forma
information follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Pro forma net loss............................. $(1,444) $(5,520) $(13,261)
------- ------- --------
Pro forma basic and diluted net loss per common
share......................................... $ (1.54) $ (1.88) $ (3.07)
======= ======= ========
</TABLE>
The per share weighted average grant date fair value of options granted,
which is the value assigned to the options under FAS 123, was $0.02, $0.02,
and $0.14 for options granted for the years ended April 30, 1997, 1998 and
1999, respectively.
F-15
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The pro forma impact of options on the net loss for the years ended April
30, 1997, 1998 and 1999 is not representative of the effects on net income
(loss) for future years, as future years will include the effects of
additional stock option grants.
5. Income Taxes
There has been no provision for U.S. federal, state, or foreign income
taxes for any period as the Company has incurred operating losses in all
periods and for all jurisdictions.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
April 30,
--------------
1998 1999
------ ------
<S> <C> <C>
Deferred tax assets:
Net operating losses....................................... $2,148 $5,384
Other...................................................... 344 729
------ ------
Total deferred tax assets.................................... 2,492 6,113
Valuation allowance.......................................... (2,492) (6,113)
------ ------
Net deferred tax assets...................................... $ -- $ --
====== ======
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $1,982,000 and $3,621,000 during 1998 and
1999, respectively.
As of April 30, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $14,140,000, which expire in
fiscal years 2011 through 2019.
The Company also had net operating loss carryforwards for state income tax
purposes of approximately $9,620,000, which expire in fiscal year 2006.
Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.
6. Lines of Credit and Long-Term Debt Obligations
In November 1996, the Company entered into a borrowing arrangement with a
financial institution for a line of credit of $400,000. The borrowings under
the line of credit bear interest at the prime rate plus 2% (10.5% at April 30,
1998) and would have expired in May 1999. In November 1998, the Company
amended the line of credit agreement with the same financial institution such
that the total available credit was increased from $400,000 to $3,000,000. A
portion of the credit line is limited such that the Company may not borrow in
excess of $2,500,000 or 80% of eligible domestic accounts receivable balances
plus 65% of foreign accounts receivable balances. The amended line of credit
expires in November 1999 and bears interest at the financial institution's
prime rate plus 0.75% (8.5% at April 30, 1999). As of April 30, 1999, the
outstanding balance under the amended line of credit was $643,000. The
remaining $500,000 of available credit, all of which is outstanding as of
April 30, 1999, is a three-year term loan which expires in November 2002 and
bears interest at the financial institution's prime rate plus 1.75% (9.5% at
April 30, 1999).
F-16
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 1998, the Company entered into an additional credit agreement
with another financial institution, which provided a total credit facility of
$3,850,000. A portion of the credit facility represents a $3,500,000 three-
year term loan, all of which is outstanding as of April 30, 1999. The
remaining $350,000 of available credit is related to an equipment line of
credit, of which no amount is outstanding as of April 30, 1999. The term loan
and equipment line of credit are secured by substantially all of the Company's
assets, bear interest at 13% and 11.4% and mature in November 2002 and May
2000, respectively.
The above agreements require the Company to maintain compliance with
certain financial covenants and prohibits the Company from paying dividends on
its common stock. As of April 30, and July 31, 1999 the Company was in
compliance with such financial covenants. As of April 30, and July 31, 1999,
the total amount available under the Company's financial arrangements was
$568,000 and $1,502,000, respectively.
Future payments due on the long-term debt obligations as of April 30, 1999
are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending April 30,
---------------------
<S> <C>
2000................................................................ $ 789
2001................................................................ 1,675
2002................................................................ 1,289
2003................................................................ 247
------
Total payments........................................................ $4,000
======
</TABLE>
7. Lease Commitments
The Company leases certain facilities and equipment under noncancelable
operating leases. Certain of the Company's facility leases provide for
periodic rent increases based on the general rate of inflation. Future minimum
lease payments under operating leases are as follows (in thousands):
<TABLE>
<S> <C>
Year ending April 30,
---------------------
2000............................................................... $1,384
2001............................................................... 1,386
2002............................................................... 1,431
2003............................................................... 1,357
2004 and thereafter................................................ 1,922
------
Total minimum lease payments......................................... $7,480
======
</TABLE>
Rent expense for the three years ended April 30, 1997, 1998 and 1999 was
$33,000, $329,000 and $1,300,000, respectively.
8. Geographic Information Reporting
The Company operates in one segment to design, develop, market and support
high-performance Internet caching appliances. Total export revenue consisted
of sales from the Company's U.S. operations to non-affiliated customers in
other geographic regions. Sales between geographic areas are accounted for at
prices that provide a profit, and are in accordance with the rules and
regulations of the respective governing authorities. No intraenterprise sales
occurred during fiscal 1999 and no long-lived assets reside in the Company's
foreign locations. No geographical information was provided for 1997 and 1998
as the Company's operations were limited to North America.
F-17
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of revenues by geographic area for the year
ended April 30, 1999 (in thousands):
<TABLE>
<CAPTION>
North
America Europe Japan Other Consolidated
------- ------ ------ ----- ------------
<S> <C> <C> <C> <C> <C>
Revenues............................ $3,919 $1,376 $1,565 $175 $7,035
====== ====== ====== ==== ======
</TABLE>
9. Subsequent Events (Unaudited)
Employee Stock Purchase Plan
In September 1999, the Company's Board of Directors adopted the Employee
Stock Purchase Plan. The plan becomes effective upon completion of the
Company's initial public offering of its common stock. A total of 2,500,000
shares of common stock have been reserved for issuance under the plan. Under
the plan, eligible employees may purchase common stock through payroll
deductions, which in any event may not exceed 15% of an employee's
compensation, at a price equal to the lower of 85% of the fair market value of
the common stock at the beginning of each offering period or at the end of
each purchase period. The number of shares reserved under the Employee Stock
Purchase Plan will automatically increase by 500,000 shares annually beginning
January 31, 2000. The Company's Board of Directors, at its discretion, may
reduce the automatic annual increase in reserved shares.
1999 Stock Incentive Plan
In September 1999, the Company's Board of Directors adopted the 1999 Stock
Incentive Plan (the "Incentive Plan") under which 5,000,000 shares have been
reserved for issuance. The plan becomes effective upon the completion of the
Company's initial public offering of its common stock. The number of shares
reserved under the Incentive Plan will automatically increase annually
beginning January 1, 2000 by the lesser of 5% of the total amount of common
stock shares outstanding or 2,000,000 shares. The exercise price for incentive
stock options and non-qualified stock options may not be less than 100% and
85%, respectively, of the fair market value of common stock on the option
grant date.
1999 Director Option Plan
In September 1999, the Company's Board of Directors adopted the 1999
Director Option Plan (the "Directors' Plan") under which 500,000 shares have
been reserved for issuance. The 1999 Director Option Plan became effective on
the date of its adoption. Each non-employee joining the Board of Directors
following the effective date of the initial public offering will automatically
receive options to purchase 25,000 shares of common stock. In addition, each
non-employee director will automatically receive options to purchase 5,000
shares of common stock at each annual meeting of the Board of Directors held
in the year 2000 and thereafter. Each option will have an exercise price equal
to the fair market value of the common stock on the option grant date. The
number of shares reserved under the Directors' Plan will automatically
increase by 100,000 shares annually beginning January 1, 2000. The Company's
Board of Directors, at its discretion, may reduce the automatic annual
increase in reserved shares.
Note Receivable from Stockholder
In August 1999, the Company entered into a five-year non-recourse, non-
interest bearing note for $800,000 with an officer of the Company. The note is
secured by 2 million shares of the Company's common stock owned by the
officer.
F-18
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Grants
Between August 1 and September 24, 1999, the Company granted options to
purchase 2,874,000 shares of common stock. The Company recorded additional
deferred stock compensation of approximately $17.6 million with respect to
stock option grants made during this period.
Litigation
On September 16, 1999, Nokia IP filed a lawsuit in Santa Clara County
Superior Court naming CacheFlow Inc., and certain officers of the company, as
defendants. These officers were formerly employed by Ipsilon Networks, Inc.,
which was acquired by Nokia in December 1997. Following the acquisition, these
officers became employees of Nokia upon completion of the acquisition. Nokia's
allegations against the Company include misappropriation of trade secrets,
unfair competition and inducing breach of contract. Nokia's allegations
against these officers include breach of contract, misappropriation of trade
secrets and unfair competition and, with respect to one of the officers of the
Company, breach of fiduciary duty. Nokia's claims are based upon Nokia's
allegation that a certain officer of the Company violated a non-competition
and non-solicitation provision contained in his employment agreement with
Nokia and that another officer of the Company has violated a non-solicitation
clause. Nokia is seeking compensatory and punitive damages, a decree that the
defendants' alleged acts were and are unfair acts of competition, orders
restraining and enjoining the defendants from disclosing or using Nokia's
trade secrets or confidential or proprietary information and acting in a
manner that violates these officers' contractual and fiduciary duties to
Nokia, attorneys' fees and other specified damages. The Company believes that
there are meritorious defenses to Nokia IP's allegations and plans to defend
the litigation vigorously. Although the Company believes that the ultimate
outcome of the dispute with Nokia will not have a material adverse effect on
the Company's consolidated financial position, results of operations and cash
flows, there can be no assurance that Nokia IP will not prevail in this
dispute. If Nokia IP were to prevail in this dispute, it could have a material
adverse effect on the Company's consolidated financial position, results of
operations, and cash flows.
F-19
<PAGE>
[COMPANY LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee................................................ $13,900
NASD fee............................................................ 5,500
Nasdaq National Market initial listing fee.......................... *
Printing and engraving.............................................. *
Legal fees and expenses of the Company.............................. *
Accounting fees and expenses........................................ *
Directors and Officers Liability Insurance.......................... *
Blue sky fees and expenses.......................................... *
Transfer agent fees................................................. *
Miscellaneous....................................................... *
-------
Total............................................................. *
=======
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933
(the "Act"). Article VI of the Registrant's Bylaws provides for mandatory
indemnification of its directors and officers and those serving at the
Registrant's request as directors, officers, employees or agents of other
organizations to the maximum extent permitted by the Delaware General
Corporation Law. The Registrant's Amended and Restated Certificate of
Incorporation provides that, pursuant to Delaware law, its directors shall not
be liable for monetary damages for breach of the directors' fiduciary duty as
directors to the Registrant and its stockholders. This provision in the
Amended and Restated Certificate of Incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into Indemnification Agreements with its officers and directors, a
form of which is attached as Exhibit 10.1 hereto and incorporated herein by
reference. The Indemnification Agreements provide the Registrant's officers
and directors with further indemnification to the maximum extent permitted by
the Delaware General Corporation Law. The Registrant maintains liability
insurance for its directors and officers. Reference is also made to Sections 7
and 8 of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Registrant against certain
liabilities, and Section 1.10 of the Amended and Restated Investors' Rights
Agreement contained in Exhibit 4.1 hereto, indemnifying certain of the
Company's stockholders, including controlling stockholders, against certain
liabilities.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since our formation, we have issued and sold the following securities:
(1) From inception through July 31, 1999, the Company granted stock
options to purchase 10,198,980 shares of Common Stock at exercise prices
ranging from $.005 to $2.00 per share to employees, consultants, directors
and other service providers pursuant to its 1996 Stock Option Plan.
Additionally, the Company granted stock options to purchase 1,000,000
shares of its Common Stock at an exercise price of $.50 per share to a
director outside of the 1996 Stock Option Plan.
(2) From inception through July 31, 1999, the Company issued and sold an
aggregate of 6,719,625 shares of its Common Stock to employees,
consultants, directors and other service providers for aggregate
consideration of approximately $535,000 pursuant to direct issuances or
exercises of options granted outside of the 1996 Stock Option Plan.
(3) From July 31, 1999 through September 24, 1999, the Company granted
stock options to purchase 2,874,000 shares of its Common Stock at exercise
prices ranging from $4.00 to $5.50 per share to employees, consultants and
directors pursuant to its 1996 Stock Option Plan.
(4) Between April 30, 1996 and June 21, 1996, the Company issued
warrants to purchase 562,850 shares of its Series A Preferred Stock at an
exercise price of $.875 per share.
(5) On October 29, 1996, we issued and sold 5,483,252 shares of Series A
Preferred Stock to a group of 18 investors for an aggregate purchase price
of $4,797,845.50.
(6) On November 13, 1996, we issued and sold an aggregate of 347,688
shares of its Series A Preferred Stock to seven investors for an aggregate
purchase price of $304,227.00
(7) On December 24, 1997, we issued and sold 3,816,376 shares of Series
B Preferred Stock to a group of 14 investors for an aggregate purchase
price of $8,625,009.76.
(8) On February 18, 1998, we issued and sold 323,010 shares of Series B
Preferred Stock to a group of two investors for our aggregate purchase
price of $730,002.60.
(9) On November 18, 1998, the Company issued warrants to purchase
141,842 shares of its Series B Preferred Stock at an exercise price of
$3.4175 per share.
(10) On April 30 1999, the Company issued warrants to purchase 110,000
shares of its Series C Preferred Stock at an exercise price of $4.575 per
share.
(11) On May 28, 1999, we issued and sold 4,371,586 shares of Series C
Preferred Stock to a group of 27 investors for an aggregate purchase price
of $20,000,005.95.
The sale of the above securities was deemed to be exempt from registration
under the Act in reliance upon Section 4(2) of the Act or Rule 701 promulgated
under Section 3(b) of the Act as transactions by an issuer not involving any
public offering or transactions pursuant to compensation benefit plans and
contracts relating to compensation as provided under Rule 701. The recipients
of securities in each such transaction represented their intentions to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with us, to
information about us.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant, as amended to date
3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant, to
be filed upon the closing of the offering made pursuant to this Registration
Statement
3.3 Bylaws of the Registrant
3.4 Form of Amended and Restated Bylaws of the Registrant to be effective upon the
closing of the offering made pursuant to this Registration Statement
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2 Amended and Restated Investors' Rights Agreement, dated May 28, 1999
4.3 Series C Preferred Stock Purchase Agreement, dated May 28, 1999
4.4* Specimen Certificate of the Registrant's Common Stock
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
to the Registrant
10.1* Form of Indemnification Agreement
10.2 1996 Stock Option Plan
10.3 1999 Stock Incentive Plan
10.4 1999 Director Option Plan
10.5 1999 Employee Stock Purchase Plan
10.6 Commercial Lease Agreement between Registrant, the Arrillaga Foundation and the
Perry Foundation, dated July 14, 1998
10.7 Commercial Lease Agreement between Registrant and Redmond Whitehall Associates,
Inc., dated February 19, 1997
10.8 Commercial Lease Agreement between CacheFlow Canada and Wiebe Property
Corporation Ltd., dated May 1, 1999
16.1 Letter from Deloitte and Touche LLP, former independent accountants to the
Registrant
16.2 Letter from PricewaterhouseCoopers LLP, former independent accountants to the
Registrant
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP, independent auditors
23.2* Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
to the Registrant. Reference is made to Exhibit 5.1
24.1 Power of Attorney. Reference is made to page II-5
27.1 Financial Data Schedule
</TABLE>
- --------
* To be supplied by amendment.
(b) Financial Statement Schedule
Schedule II--Valuations and Qualifying accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
Item 17. Undertakings
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Delaware General Corporation Law, the Amended and Restated
Certificate of Incorporation or the Bylaws of the Registrant, Indemnification
Agreements entered into between the Registrant and its officers and directors,
the Underwriting Agreement, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-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
Sunnyvale, State of California, on this 28th day of September, 1999.
CACHEFLOW, INC.
/s/ Brian M. NeSmith
By: _________________________________
Brian M. NeSmith
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Brian M. NeSmith and Michael J.
Johnson, and each of them, his or her true and lawful attorneys-in-fact and
agents with full power of substitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
sign any registration statement for the same offering covered by this
Registration Statement that is to be effective on filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or his or her or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ Brian M. NeSmith President, Chief Executive September 28, 1999
______________________________________ Officer and Director
Brian M. NeSmith (Principal Executive
Officer)
/s/ Michael J. Johnson Vice President, Chief September 28, 1999
______________________________________ Financial Officer and
Michael J. Johnson Secretary (Principal
Financial and Accounting
Officer)
/s/ David W. Hanna Director September 28, 1999
______________________________________
David W. Hanna
/s/ Michael A. Malcolm Chairman of the Board, September 28, 1999
______________________________________ Director
Michael A. Malcolm
/s/ Stuart G. Phillips Director September 28, 1999
______________________________________
Stuart G. Phillips
/s/ Andrew S. Rachleff Director September 28, 1999
______________________________________
Andrew S. Rachleff
</TABLE>
II-5
<PAGE>
SCHEDULE II
CACHEFLOW INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1997, 1998 AND 1999
AND QUARTER ENDED JULY 31, 1999
Allowance for Doubtful Accounts Receivable
<TABLE>
<CAPTION>
Additions-
Balance at Charged Balance at
Year Ended Beginning of to Costs and Deductions- End of
April 30, Period Expenses Write-offs Period
- ---------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
1997........................... -- -- -- --
1998........................... -- -- -- --
1999........................... -- 121,000 -- 121,000
</TABLE>
<TABLE>
<CAPTION>
Additions-
Balance at Charged Balance at
Quarter Ended Beginning of to Costs and Deductions- End of
July 31, Period Expenses Write-offs Period
- ------------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
1999........................... 121,000 264,000 85,000 300,000
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant, as amended to date
3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant, to
be filed upon the closing of the offering made pursuant to this Registration
Statement
3.3 Bylaws of the Registrant
3.4 Form of Amended and Restated Bylaws of the Registrant to be effective upon the
closing of the offering made pursuant to this Registration Statement
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2 Amended and Restated Investors' Rights Agreement, dated May 28, 1999
4.3 Series C Preferred Stock Purchase Agreement, dated May 28, 1999
4.4* Specimen Certificate of the Registrant's Common Stock
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
to the Registrant
10.1* Form of Indemnification Agreement
10.2 1996 Stock Option Plan
10.3 1999 Stock Incentive Plan
10.4 1999 Director Option Plan
10.5 1999 Employee Stock Purchase Plan
10.6 Commercial Lease Agreement between Registrant, the Arrillaga Foundation and the
Perry Foundation, dated July 14, 1998
10.7 Commercial Lease Agreement between Registrant and Redmond Whitehall Associates,
Inc., dated February 19, 1997
10.8 Commercial Lease Agreement between CacheFlow Canada and Wiebe Property
Corporation Ltd., dated May 1, 1999
16.1 Letter from Deloitte and Touche LLP, former independent accountants to the
Registrant
16.2 Letter from PricewaterhouseCoopers LLP, former independent accountants to the
Registrant
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP, independent auditors
23.2* Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
to the Registrant. Reference is made to Exhibit 5.1
24.1 Power of Attorney. Reference is made to page II-5
27.1 Financial Data Schedule
</TABLE>
- --------
* To be supplied by amendment.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
CACHEFLOW INC.,
a Delaware corporation
The undersigned, Brian NeSmith and Daniel O'Connor, hereby certify
that:
ONE: They are the duly elected and acting President and Assistant
Secretary, respectively, of said corporation.
TWO: The name of this corporation is CacheFlow Inc. and that this
corporation was originally incorporated on March 13, 1996, under the name Web
Appliance Inc., pursuant to the General Corporation Law.
THREE: The Certificate of Incorporation of said corporation shall be
amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is CacheFlow Inc.
ARTICLE II
The address of the registered office of this corporation in the State
of Delaware is 1013 Centre Road, in the City of Wilmington, 19805, County of New
Castle. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
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 Delaware.
ARTICLE IV
A. Classes of Stock. This corporation is authorized to issue two
----------------
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares that this corporation is authorized to issue
is ninety million (90,000,000) shares. Sixty million (60,000,000) shares shall
be Common Stock, par value $0.0001 per share, and thirty million (30,000,000)
shares shall be Preferred Stock, par value $0.0001 per share.
B. Rights, Preferences and Restrictions of Preferred Stock. The
-------------------------------------------------------
Preferred Stock authorized by this Restated Certificate of Incorporation may be
issued from time to time in one or more series. The rights, preferences,
privileges, and restrictions granted to and imposed
<PAGE>
on the Series A Preferred Stock, which series shall consist of six million three
hundred ninety-four thousand (6,394,000) shares (the "Series A Preferred
Stock"), the Series B Preferred Stock, which series shall consist of four
million four hundred thousand (4,400,000) shares (the "Series B Preferred
Stock"), and the Series C Preferred Stock, which series shall consist of four
million five hundred thousand (4,500,000) shares (the "Series C Preferred
Stock"), are as set forth below in this Article IV(B). The Board of Directors is
hereby authorized to fix or alter the rights, preferences, privileges and
restrictions granted to or imposed upon additional series of Preferred Stock,
and the number of shares constituting any such series and the designation
thereof, or of any of them. Subject to compliance with applicable protective
voting rights that have been or may be granted to the Preferred Stock or any
series thereof in Certificates of Determination or this corporation's Restated
Certificate of Incorporation ("Protective Provisions"), but notwithstanding any
other rights of the Preferred Stock or any series thereof, 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 written consent), or senior to any of
those of any present or future class or series of Preferred Stock or Common
Stock. Subject to compliance with applicable Protective Provisions, the Board of
Directors is also authorized to increase or decrease the number of shares of any
series (other than the Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock), 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 that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
Upon the filing of this Amended and Restated Certificate of
Incorporation, (i) each one (1) share of this corporation's outstanding Common
Stock shall be automatically split into two (2) shares of this corporation's
Common Stock, without any action by the holder thereof; (ii) each one (1) share
of this corporation's outstanding Series A Preferred Stock shall be
automatically split into two (2) shares of this corporation's Series A Preferred
Stock, without any action by the holder thereof; (iii) each one (1) share of
this corporation's outstanding Series B Preferred Stock shall be automatically
split into two (2) shares of this corporation's Series B Preferred Stock,
without any action by the holder thereof; and (iv) each one (1) share of this
corporation's outstanding Series C Preferred Stock shall be automatically split
into two (2) shares of this corporation's Series C Preferred Stock, without any
action by the holder thereof.
1. Dividend Provisions. Subject to the rights of series of Preferred
-------------------
Stock that may from time to time come into existence, the holders of shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
shall be entitled to receive dividends, out of any assets legally available
therefor, prior and in preference to any declaration or payment of any dividend
(payable other than in Common Stock or other securities and rights convertible
into or entitling the holder thereof to receive, directly or indirectly,
additional shares of Common Stock of this corporation) on the Common Stock of
this corporation, at the rate of (i) in the case of the Series A Preferred
Stock, $0.07 per share per annum (as adjusted for any stock dividends,
combinations or splits with respect to such shares, occurring after the date of
filing of this Amended and Restated Certificate of Incorporation), (ii) in the
case of the Series B
2
<PAGE>
Preferred Stock, $0.225 per share per annum (as adjusted for any stock
dividends, combinations or splits with respect to such shares, occurring after
the date of filing of this Amended and Restated Certificate of Incorporation),
and (iii) in the case of the Series C Preferred Stock, $0.46 per share per annum
(as adjusted for any stock dividends, combinations or splits with respect to
such shares, occurring after the date of filing of this Amended and Restated
Certificate of Incorporation) or, if greater (as determined on a per annum basis
and an as converted basis for the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock), an amount equal to that paid on any other
outstanding shares of this corporation, payable when, as and if declared by the
Board of Directors. Such dividends shall not be cumulative.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of
this corporation, either voluntary or involuntary, subject to the rights of
series of Preferred Stock that may from time to time come into existence, the
holders of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets of this corporation to the holders of Common
Stock by reason of their ownership thereof, (A) in the case of the Series A
Preferred Stock, an amount per share equal to the sum of (i) $.875 for each
outstanding share of Series A Preferred Stock (the "Original Series A Issue
Price"), as adjusted for any stock dividends, combinations or splits with
respect to such share occurring after the date of filing of this Amended and
Restated Certificate of Incorporation, and (ii) an amount equal to declared but
unpaid dividends on such share, (B) in the case of the Series B Preferred Stock,
an amount per share equal to the sum of (i) $2.26 for each outstanding share of
Series B Preferred Stock (the "Original Series B Issue Price"), as adjusted for
any stock dividends, combinations or splits with respect to such share occurring
after the date of filing of this Amended and Restated Certificate of
Incorporation, and (ii) an amount equal to declared but unpaid dividends on such
share, and (C) in the case of the Series C Preferred Stock, an amount per share
equal to the sum of (i) $4.575 for each outstanding share of Series C Preferred
Stock (the "Original Series C Issue Price"), as adjusted for any stock
dividends, combinations or splits with respect to such share occurring after the
date of filing of this Amended and Restated Certificate of Incorporation, and
(ii) an amount equal to declared but unpaid dividends on such share. If upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then, subject to the rights of series
of Preferred Stock that may from time to time come into existence, the entire
assets and funds of this corporation legally available for distribution shall be
distributed ratably among the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock so that each holder receives the
same percentage of the applicable preferential amount for each share of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock then held
by each such holder.
(b) Upon the completion of the distributions required by
subparagraph (a) of this Section 2 and any other distribution that may be
required with respect to series of Preferred Stock that may from time to time
come into existence, if assets remain in this corporation, the holders of the
Common Stock of this corporation shall receive all of the
3
<PAGE>
remaining assets of this corporation pro rata based on the number of shares of
Common Stock held by each.
(c) (i) For purposes of this Section 2, a liquidation,
dissolution or winding up of this corporation shall be deemed to be occasioned
by, and to include, (A) the acquisition of this corporation by another entity by
means of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) that results in the
transfer of fifty percent (50%) or more of the outstanding voting power of this
corporation; or (B) a sale of all or substantially all of the assets of this
corporation.
(ii) In any of such events, if the consideration received by
this corporation or its stockholders is other than cash, its value will be
deemed its fair market value. Any securities shall be valued as follows:
(A) Securities not subject to investment letter or
other similar restrictions on free marketability covered by (B) below:
1. If traded on a securities exchange or through
the National Market Tier of Nasdaq, the value shall be deemed to be the average
of the closing prices of the securities on such exchange over the thirty (30)
day period ending three (3) days prior to the closing;
2. If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty (30) day period ending three (3) days
prior to the closing; and
3. If there is no active public market, the
value shall be the fair market value thereof, as mutually determined by this
corporation and the holders of at least a majority of the voting power of all
then outstanding shares of Preferred Stock.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as mutually determined by this corporation and the holders
of at least a majority of the voting power of all then outstanding shares of
such Preferred Stock.
(iii) In the event the requirements of this subsection 2(c)
are not complied with, this corporation shall forthwith either:
(A) cause such closing to be postponed until such
time as the requirements of this Section 2 have been complied with; or
4
<PAGE>
(B) cancel such transaction, in which event the
rights, preferences and privileges of the holders of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall revert to and
be the same as such rights, preferences and privileges existing immediately
prior to the date of the first notice referred to in subsection 2(c)(iv) hereof.
(iv) This corporation shall give each holder of record of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
written notice of such impending transaction not later than twenty (20) days
prior to the stockholders' meeting called to approve such transaction, if any,
or twenty (20) days prior to the closing of such transaction, whichever is
earlier, and shall also notify such holders in writing of the final approval of
such transaction. The first of such notices shall describe the material terms
and conditions of the impending transaction and the provisions of this Section
2, and this corporation shall thereafter give such holders prompt notice of any
material changes. The transaction shall in no event take place sooner than
twenty (20) days after this corporation has given the first notice provided for
herein or sooner than ten (10) days after this corporation has given notice of
any material changes provided for herein; provided, however, that such periods
may be shortened upon the written consent of the holders of Preferred Stock that
are entitled to such notice rights or similar notice rights and that represent
at least a majority of the voting power of all then outstanding shares of such
Preferred Stock.
3. Redemption. Neither the Series A Preferred Stock, the Series B
----------
Preferred Stock nor the Series C Preferred Stock is redeemable.
4. Conversion. The holders of the Series A Preferred Stock, Series B
----------
Preferred Stock and Series C Preferred Stock shall have conversion rights as
follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock,
----------------
Series B Preferred Stock and Series C Preferred Stock shall be convertible, at
the option of the holder thereof, at any time after the date of issuance of such
share, at the office of this corporation or any transfer agent for such stock,
into such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing the Original Issue Price for such series by the
Conversion Price applicable to such share, determined as hereafter provided, in
effect on the date the certificate is surrendered for conversion. The initial
Conversion Price per share for shares of Series A Preferred Stock shall be the
Original Series A Issue Price, the initial Conversion Price per share for shares
of Series B Preferred Stock shall be the Original Series B Issue Price and the
initial Conversion Price per share for shares of Series C Preferred Stock shall
be the Original Series C Issue Price; provided, however, that the Conversion
Price for the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall be subject to adjustment as set forth in subsection 4(d).
(b) Automatic Conversion. Each share of Series A Preferred
--------------------
Stock, Series B Preferred Stock and Series C Preferred Stock shall automatically
be converted into shares of Common Stock at the Conversion Price at the time in
effect for such series
5
<PAGE>
immediately upon the earlier of (i) the consummation of this corporation's sale
of its Common Stock in a bona fide, firm commitment underwritten public offering
pursuant to a registration statement on Form S-1 or Form SB-2 under the
Securities Act of 1933, as amended, the public offering price of which is not
less than $20,000,000 in the aggregate, or (ii) the date specified by written
consent or agreement of the holders of both (A) a majority of the then
outstanding Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock (voting together as a single class and not as separate series,
and on an as-converted basis) and (B) a majority of the then outstanding Series
C Preferred Stock.
(c) Mechanics of Conversion. Before any holder of Series A
-----------------------
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be
entitled to convert the same into shares of Common Stock, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of this corporation or of any transfer agent for the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, and shall give written
notice to this corporation at its principal corporate office, of the election to
convert the same and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued. This
corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock to be converted, and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock as of such date. If the conversion is in connection with an
underwritten offering of securities registered pursuant to the Securities Act of
1933, as amended, the conversion may, at the option of any holder tendering
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock
for conversion, be conditioned upon the closing with the underwriters of the
sale of securities pursuant to such offering, in which event the person(s)
entitled to receive the Common Stock issuable upon such conversion of the Series
A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall
not be deemed to have converted such Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock until immediately prior to the
closing of such sale of securities.
(d) Conversion Price Adjustments of Preferred Stock for Certain
-----------------------------------------------------------
Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series
- -------------------------------------------
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall
be subject to adjustment from time to time as follows:
(i) (A) If this corporation shall issue, after the date
upon which any shares of Series C Preferred Stock were first issued (the
"Purchase Date"), any Additional Stock (as defined below) without consideration
or for a consideration per share less than the Conversion Price for the Series B
Preferred Stock or Series C Preferred Stock in effect immediately prior to the
issuance of such Additional Stock, the Conversion Price for such series in
effect immediately prior to each such issuance shall forthwith (except as
otherwise provided in
6
<PAGE>
this clause (i)) be adjusted to a price determined by multiplying such
Conversion Price for such series by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issuance (including shares of Common Stock deemed to be issued pursuant to
subsection 4(d)(i)(E)(1) or (2)) plus the number of shares of Common Stock that
the aggregate consideration received by this corporation for such issuance would
purchase at such Conversion Price; and the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to such issuance
(including shares of Common Stock deemed to be issued pursuant to subsection
4(d)(i)(E)(1) or (2)) plus the number of shares of such Additional Stock.
(B) No adjustment of the Conversion Price for the
Series B Preferred Stock or Series C Preferred Stock shall be made in an amount
less than one cent per share, provided that any adjustments that are not
required to be made by reason of this sentence shall be carried forward and
shall be either taken into account in any subsequent adjustment made prior to
three (3) years from the date of the event giving rise to the adjustment being
carried forward, or shall be made at the end of three (3) years from the date of
the event giving rise to the adjustment being carried forward. Except to the
limited extent provided for in subsections (E)(3) and (E)(4), no adjustment of
such Conversion Price for the Series B Preferred Stock or Series C Preferred
Stock pursuant to this subsection 4(d)(i) shall have the effect of increasing
the Conversion Price for such series above the Conversion Price for such series
in effect immediately prior to such adjustment.
(C) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by this corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock for
a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.
(E) In the case of the issuance (whether before, on or
after the applicable Purchase Date) of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock or options to purchase or rights to subscribe for
such convertible or exchangeable securities, the following provisions shall
apply for all purposes of this subsection 4(d)(i) and subsection 4(d)(ii):
1. The aggregate maximum number of shares of
Common Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of time,
but without taking into account potential antidilution adjustments) of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were
7
<PAGE>
issued and for a consideration equal to the consideration (determined in the
manner provided in subsections 4(d)(i)(C) and (d)(i)(D)), if any, received by
this corporation upon the issuance of such options or rights plus the minimum
exercise price provided in such options or rights (without taking into account
potential antidilution adjustments) for the Common Stock covered thereby.
2. The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability, including,
without limitation, the passage of time, but without taking into account
potential antidilution adjustments) for any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such securities
were issued or such options or rights were issued and for a consideration equal
to the consideration, if any, received by this corporation for any such
securities and related options or rights (excluding any cash received on account
of accrued interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by this corporation (without taking into
account potential antidilution adjustments) upon the conversion or exchange of
such securities or the exercise of any related options or rights (the
consideration in each case to be determined in the manner provided in
subsections 4(d)(i)(C) and (d)(i)(D)).
3. In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to this
corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof (unless
such options or rights or convertible or exchangeable securities were merely
deemed to be included in the numerator and denominator for purposes of
determining the number of shares of Common Stock outstanding for purposes of
subsection 4(d)(i)(A)), the Conversion Price for the Series B Preferred Stock or
Series C Preferred Stock, to the extent in any way affected by or computed using
such options, rights or securities, shall be recomputed to reflect such change,
but no further adjustment shall be made for the actual issuance of Common Stock
or any payment of such consideration upon the exercise of any such options or
rights or the conversion or exchange of such securities.
4. Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price for the Series B Preferred Stock or Series C
Preferred Stock, to the extent in any way affected by or computed using such
options, rights or securities or options or rights related to such securities
(unless such options or rights were merely deemed to be included in the
numerator and denominator for purposes of determining the number of shares of
Common Stock outstanding for purposes of subsection 4(d)(i)(A)), shall be
recomputed to reflect the issuance of only the number of shares of Common Stock
(and convertible or exchangeable securities that remain in effect)
8
<PAGE>
actually issued upon the exercise of such options or rights, upon the conversion
or exchange of such securities or upon the exercise of the options or rights
related to such securities.
5. The number of shares of Common Stock deemed issued and the
consideration deemed paid therefor pursuant to subsections 4(d)(i)(E)(1) and (2)
shall be appropriately adjusted to reflect any change, termination or expiration
of the type described in either subsection 4(d)(i)(E)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common Stock issued (or
deemed to have been issued pursuant to subsection 4(d)(i)(E)) by this
corporation after the Purchase Date other than
(A) Common Stock issued pursuant to a transaction described in
subsection 4(d)(iii) hereof (including the two-for-one split of the outstanding
shares of Common Stock, Series A Preferred Stock, Series B Preferred Stock, and
Series C Preferred Stock effected upon the filing of this Amended and Restated
Certificate of Incorporation);
(B) shares of Common Stock issuable or issued to employees,
consultants or directors of this corporation directly or pursuant to a stock
option plan or restricted stock plan approved by the Board of Directors of this
corporation; or
(C) Common Stock issued upon conversion of shares of the Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock.
(iii) In the event this corporation should at any time or from time to time
after the Purchase Date (specifically excluding the two-for-one split of the
outstanding shares of Common Stock, Series A Preferred Stock, Series B Preferred
Stock, and Series C Preferred Stock effected upon the filing of this Amended and
Restated Certificate of Incorporation) and without providing similar provisions
for the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock fix a record date for the effectuation of a split or subdivision
of the outstanding shares of Common Stock or the determination of holders of
Common Stock entitled to receive a dividend or other distribution payable in
additional shares of Common Stock or other securities or rights convertible
into, or entitling the holder thereof to receive directly or indirectly,
additional shares of Common Stock (hereinafter referred to as "Common Stock
Equivalents") without payment of any consideration by such holder for the
additional shares of Common Stock or the Common Stock Equivalents (including the
additional shares of Common Stock issuable upon conversion or exercise thereof),
then, as of such record date (or the date of such dividend distribution, split
or subdivision if no record date is fixed), the Conversion Price of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of such series shall be increased in proportion to such
increase of the aggregate of shares of Common Stock outstanding and those
issuable with respect to such Common Stock Equivalents.
9
<PAGE>
(iv) If the number of shares of Common Stock outstanding at any
time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock without similar combinations for the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock, then, following the record date of such combination, the Conversion
Price for the Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of each share of such series
shall be decreased in proportion to such decrease in outstanding shares.
(e) Other Distributions. In the event this corporation shall declare a
-------------------
distribution payable in securities of other persons, evidences of indebtedness
issued by this corporation or other persons, assets (excluding cash dividends)
or options or rights not referred to in subsection 4(d)(iii), specifically
excluding however, the two-for-one split of the outstanding shares of Common
Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock effected upon the filing of this Amended and Restated Certificate of
Incorporation, then, in each such case for the purpose of this subsection 4(e),
the holders of the Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of this corporation into which their shares of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock are convertible as of the
record date fixed for the determination of the holders of Common Stock of this
corporation entitled to receive such distribution.
(f) Recapitalizations. If at any time or from time to time there shall be
-----------------
a recapitalization of the Common Stock (other than a subdivision, combination or
merger or sale of assets transaction provided for elsewhere in this Section 4 or
in Section 2 or the two-for-one split of the outstanding shares of Common Stock,
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
effected upon the filing of this Amended and Restated Certificate of
Incorporation) provision shall be made so that the holders of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall
thereafter be entitled to receive upon conversion of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock the number of
shares of stock or other securities or property of the Company or otherwise, to
which a holder of Common Stock deliverable upon conversion would have been
entitled on such recapitalization. In any such case, appropriate adjustment
shall be made in the application of the provisions of this Section 4 with
respect to the rights of the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock after the recapitalization to the
end that the provisions of this Section 4 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock) shall be applicable after that event as nearly equivalent as
may be practicable.
(g) No Impairment. This corporation will not, by amendment of its
-------------
Restated Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be
10
<PAGE>
observed or performed hereunder by this corporation, but will at all times in
good faith assist in the carrying out of all the provisions of this Section 4
and in the taking of all such action as may be necessary or appropriate in order
to protect the Conversion Rights of the holders of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock against impairment.
(h) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon the conversion of any
share or shares of the Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock, and the number of shares of Common Stock to be issued
shall be rounded to the nearest whole share. Whether or not fractional shares
are issuable upon such conversion shall be determined on the basis of the total
number of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock the holder is at the time converting into Common Stock
and the number of shares of Common Stock issuable upon such aggregate
conversion.
(ii) Upon the occurrence of each adjustment or readjustment of the
Conversion Price of Series A Preferred Stock, Series B Preferred Stock or Series
C Preferred Stock pursuant to this Section 4, this corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. This corporation shall, upon the
written request at any time of any holder of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, furnish or cause to be furnished to
such holder a like certificate setting forth (A) such adjustment and
readjustment, (B) the Conversion Price for the Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock at the time in effect, and (C)
the number of shares of Common Stock and the amount, if any, of other property
that at the time would be received upon the conversion of a share of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock.
(i) Notices of Record Date. In the event of any taking by this
----------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, at least twenty (20) days prior to
the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. This corporation shall
---------------------------------------------
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A
11
<PAGE>
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, in
addition to such other remedies as shall be available to the holder of such
Preferred Stock, this corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes, including, without limitation, engaging in best efforts to obtain the
requisite stockholder approval of any necessary amendment to this certificate.
(k) Notices. Any notice required by the provisions of this Section 4
-------
to be given to the holders of shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock shall be deemed given if delivered
by confirmed facsimile or electronic transmission (with duplicate original sent
by United States mail) or three days after deposited in the United States mail,
postage prepaid, and addressed to each holder of record at his address appearing
on the books of this corporation.
5. Voting Rights.
-------------
(a) General. The holder of each share of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall have the right to
one vote for each share of Common Stock into which such Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock could then be
converted, and with respect to such vote, such holder shall have full voting
rights and powers equal to the voting rights and powers of the holders of Common
Stock, and shall be entitled, notwithstanding any provision hereof, to notice of
any stockholders' meeting in accordance with the bylaws of this corporation, and
shall be entitled to vote, together with holders of Common Stock, with respect
to any question upon which holders of Common Stock have the right to vote.
Fractional votes shall not, however, be permitted and any fractional voting
rights available on an as-converted basis (after aggregating all shares into
which shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half being rounded upward).
(b) Voting for the Election of Directors. As long as four million
------------------------------------
(4,000,000) or more of the shares of Series A Preferred Stock issued remain
outstanding, the holders of such shares of Series A Preferred Stock shall be
entitled to elect one (1) director of this corporation at each annual election
of directors. As long as one million five hundred thousand (1,500,000) or more
of the shares of Series B Preferred Stock issued remain outstanding, the holders
of such shares of Series B Preferred Stock shall be entitled to elect one (1)
director of this corporation at each annual election of directors. The holders
of outstanding Common Stock shall be entitled to elect two (2) directors of this
corporation at each annual election of directors. The holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Common
Stock (voting together as a single class and not as a
12
<PAGE>
separate series, and on an as-converted basis) shall be entitled to elect any
remaining directors of this corporation.
In the case of any vacancy (other than a vacancy caused by removal) in
the office of a director occurring among the directors elected by the holders of
a class or series of stock pursuant to this Section 5(b), the remaining
directors so elected by that class or series may by affirmative vote of a
majority thereof (or the remaining director so elected if there be but one, or
if there are no such directors remaining, by the affirmative vote of the holders
of a majority of the shares of that class or series), elect a successor or
successors to hold office for the unexpired term of the director or directors
whose place or places shall be vacant. Any director who shall have been elected
by the holders of a class or series of stock or by any directors so elected as
provided in the immediately preceding sentence hereof may be removed during the
aforesaid term of office, either with or without cause, by, and only by, the
affirmative vote of the holders of the shares of the class or series of stock
entitled to elect such director or directors, given either at a special meeting
of such stockholders duly called for that purpose or pursuant to a written
consent of stockholders, and any vacancy thereby created may be filled by the
holders of that class or series of stock represented at the meeting or pursuant
to unanimous written consent.
6. Protective Provisions.
---------------------
(a) Subject to the rights of series of Preferred Stock that
may from time to time come into existence, so long as at least a majority of the
shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock originally issued remain outstanding, this corporation shall not
without first obtaining the approval (by vote or written consent, as provided by
law) of the holders of at least a majority of the then outstanding shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
(voting together as a single class and not as separate series, and on an as-
converted basis):
(i) engage in any transaction described in subsection
2(c)(i) of this Article IV;
(ii) alter or change the rights, preferences or
privileges of the shares of Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock so as to affect adversely such shares;
(iii) increase or decrease (other than by conversion)
the total number of authorized shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock or authorize or issue a series of
Preferred Stock other than the Series A Preferred Stock, Series B Preferred
Stock or the Series C Preferred Stock;
(iv) authorize or issue, or obligate itself to issue,
any other equity security, including any other security convertible into or
exercisable for any equity security (i) having a preference over, or being on a
parity with, the Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock with respect to redemption, voting, dividends or upon
liquidation, or (ii) having rights similar to any of the rights of the Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock under this
Section 6;
13
<PAGE>
(v) pay any dividends on the Common Stock; and
(vi) amend this Restated Certificate of Incorporation.
(b) Subject to the rights of series of Preferred Stock that
may from time to time come into existence, this corporation shall not without
first obtaining the approval (by vote or written consent, as provided by law) of
the holders of at least a majority of the then outstanding shares of Series C
Preferred Stock:
(i) redeem, purchase or otherwise acquire (or pay into
or set aside for a sinking fund for such purpose) any share or shares of
Preferred Stock or Common Stock; provided, however, that this restriction shall
not apply to the repurchase of shares of Common Stock from employees, officers,
directors, consultants or other persons performing services for this corporation
or any subsidiary pursuant to agreements under which this corporation has the
option to repurchase such shares at cost or at cost upon the occurrence of
certain events, such as the termination of employment;
(ii) increase or decrease (other than by conversion)
the total number of authorized shares of Series C Preferred Stock; or
(iii) authorize or issue, or obligate itself to issue,
any other equity security, including any other security convertible into or
exercisable for any equity security having a preference over the Series C
Preferred Stock with respect to redemption, voting, dividends or upon
liquidation.
(c) This corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least a majority of the then outstanding shares of the Series C Preferred Stock,
amend this Amended and Restated Certificate of Incorporation to alter or change
the rights, preferences or privileges of the shares of such Series C Preferred
Stock, if such Series C Preferred Stock would be adversely affected by such
amendment in a manner different than other then outstanding series of this
corporation's Preferred Stock (it being understood that, without limiting the
foregoing, different series of Preferred Stock shall not be affected differently
because of proportional differences in the amounts of their respective issue
prices, liquidation preferences and redemption prices that arise out of
differences in the original issue price for each such series).
7. Status of Converted Stock. In the event any shares of Series
-------------------------
A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be
converted pursuant to Section 4 hereof, the shares so converted shall be
cancelled and shall not be issuable by this corporation. The Restated
Certificate of Incorporation of this corporation shall be appropriately amended
to effect the corresponding reduction in this corporation's authorized capital
stock.
C. Common Stock. The rights, preferences, privileges and restrictions
granted to and imposed on the Common Stock are as set forth below in this
Article IV(C).
14
<PAGE>
1. Dividend Rights. Subject to the prior rights of holders of
---------------
all classes of stock at the time outstanding having prior rights as to
dividends, the holders of the Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of any assets of this corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or
------------------
winding up of this corporation, the assets of this corporation shall be
distributed as provided in Section 2 of Division (B) of this Article IV hereof.
3. Voting Rights. The holder of each share of Common Stock
-------------
shall have the right to one vote, and shall be entitled to notice of any
stockholders' meeting in accordance with the bylaws of this corporation, and
shall be entitled to vote upon such matters and in such manner as may be
provided by law.
ARTICLE V
Except as otherwise provided in this Restated Certificate of
Incorporation, 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 this corporation.
ARTICLE VI
The number of directors of this corporation shall be fixed from time
to time by a bylaw or amendment thereof duly adopted by the Board of Directors
or by the stockholders.
ARTICLE VII
Elections of directors need not be by written ballot unless the Bylaws
of this corporation shall so provide.
ARTICLE VIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of this 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 this corporation.
ARTICLE IX
A director of this corporation shall, to the full extent permitted by
the Delaware General Corporation Law as it now exists or as it may hereafter be
amended, not be liable to this corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director.
15
<PAGE>
Neither any amendment nor repeal of this Article IX, nor the adoption of any
provision of this Restated Certificate of Incorporation inconsistent with this
Article IX, shall eliminate or reduce the effect of this Article IX in respect
of any matter occurring, or any cause of action, suit or claim that, but for
this Article IX, would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.
ARTICLE X
To the fullest extent permitted by applicable law, this corporation is
authorized to provide indemnification of (and advancement of expenses to) agents
of this corporation (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 General Corporation Law, subject only
to limits created by applicable Delaware law (statutory or non-statutory), with
respect to actions for breach of duty to this corporation, its stockholders, and
others.
ARTICLE XI
This corporation reserves the right to amend, alter, change or repeal
any provision contained in this 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.
* * *
FOUR: That thereafter said amendment and restatement was duly adopted
in accordance with the provisions of Section 242 and Section 245 of the General
Corporation Law by obtaining a majority vote of the Common Stock and Preferred
Stock, in favor of said amendment and restatement in the manner set forth in
Section 222 of the General Corporation Law.
16
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this certificate on
June 21, 1999.
/s/ Brian NeSmith
------------------------------
Brian NeSmith
President
/s/ Daniel O'Connor
------------------------------
Daniel O'Connor
Assistant Secretary
SIGNATURE PAGE TO CACHEFLOW INC.
RESTATED CERTIFICATE OF INCORPORATION
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
CACHEFLOW INC.
(originally incorporated on March 13, 1996 under the name Web Appliance Inc.)
ARTICLE I
The name of the corporation is CacheFlow Inc. (the "Corporation").
ARTICLE II
The address of the registered office of this corporation in the State
of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
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.
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated common stock ("Common Stock") and preferred stock ("Preferred
Stock"). The number of shares of Common Stock authorized to be issued is Two
Hundred Million (200,000,000), par value $.0001 per share, and the number of
shares of Preferred Stock authorized to be issued is Ten Million (10,000,000),
par value $.0001 per share.
The board of directors is authorized, subject to any limitations
prescribed by law, to provide for the issuance of shares of Preferred Stock in
series, and by filing a certificate pursuant to the applicable law of the State
of Delaware (such certificate being hereinafter referred to as a "Preferred
Stock Designation"), to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences,
and rights of the shares of each such series and any qualifications, limitations
or restrictions thereof. The number of authorized shares of Preferred Stock may
be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the Common
Stock, without a vote of the holders of the Preferred Stock, or of any series
thereof, unless a vote of any such holders is required pursuant to the terms of
any Preferred Stock Designation.
ARTICLE V
The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
<PAGE>
A. The business and affairs of the Corporation shall be managed by or under
the direction of the board of directors. In addition to the powers and
authority expressly conferred upon them by statute or by this Amended and
Restated Certificate of Incorporation or the Bylaws of the Corporation, the
directors are hereby empowered to exercise all such powers and do all such acts
and things as may be exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by written ballot
unless the Bylaws so provide.
C. Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
D. Special meetings of stockholders of the Corporation may be called only by
the Chairman of the Board or the President or by the board of directors acting
pursuant to a resolution adopted by a majority of the Whole Board. For purposes
of this Amended and Restated Certificate of Incorporation, the term "Whole
Board" shall mean the total number of authorized directors whether or not there
exist any vacancies in previously authorized directorships.
ARTICLE VI
A. Subject to the rights of the holders of any series of Preferred Stock to
elect additional directors under specified circumstances, the number of
directors shall be fixed from time to time by the board of directors pursuant to
a resolution adopted by a majority of the Whole Board.
B. Subject to the rights of the holders of any series of Preferred Stock then
outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the board of directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause shall, unless otherwise provided by law or by resolution
of the board of directors, be filled only by a majority vote of the directors
then in office, though less than a quorum.
C. Advance notice of stockholder nominations for the election of directors
and of business to be brought by stockholders before any meeting of the
stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
D. Subject to the rights of the holders of any series of Preferred Stock then
outstanding, any directors, or the entire board of directors, may be removed
from office at any time, but only for cause and only by the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class.
-2-
<PAGE>
ARTICLE VII
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (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) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this Article
by the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of, or increase
the liability of any director of this Corporation with respect to any acts or
omissions of such director occurring prior to, such repeal or modification.
ARTICLE VIII
The board of directors is expressly empowered to adopt, amend or
repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of the
Bylaws of the Corporation by the board of directors shall require the approval
of a majority of the Whole Board. The stockholders shall also have power to
adopt, amend or repeal the Bylaws of the Corporation; provided, however, that,
in addition to any vote of the holders of any class or series of stock of the
Corporation required by law or by this Amended and Restated Certificate of
Incorporation, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding
shares of the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
adopt, amend or repeal any provision of the Bylaws of the Corporation.
ARTICLE IX
In addition to any vote of the holders of any class or series of the
stock of this Corporation required by law or by this Amended and Restated
Certificate of Incorporation, the affirmative vote of the holders of a majority
of the voting power of all of the then outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to amend or repeal the provisions
of Article I, Article II, and Article III of this Amended and Restated
Certificate of Incorporation. Notwithstanding any other provision of this
Amended and Restated Certificate of Incorporation or any provision of law which
might otherwise permit a lesser vote or no vote, but in addition to any vote of
the holders of any class or series of the stock of this Corporation required by
law or by this Amended and Restated Certificate of Incorporation, the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to amend or
repeal any
-3-
<PAGE>
provision of this Amended and Restated Certificate of Incorporation not
specified in the preceding sentence.
* * * *
-4-
<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation, which restates and integrates and further amends the provisions
of the Corporation's Amended and Restated Certificate of Incorporation, and
which has been duly adopted in accordance with Sections 242 and 245 of the
Delaware General Corporation Law, has been executed by a duly authorized officer
of the Corporation this ___ day of ______________, 1999.
-----------------------------------
Brian NeSmith
President and Chief Executive Officer
-5-
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
CACHEFLOW INC.
ARTICLE I
OFFICES
-------
Section 1. The registered office shall be in the City of Wilmington,
County of Newcastle, State of Delaware.
Section 2. The corporation may also have offices at such other places 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 directors
shall be held in the City of Woodinville, State of Washington, 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.
1
<PAGE>
Section 2. Annual meetings of stockholders, commencing with the year 1997,
shall be held at such date and time as shall be designated from time to time by
the Board of Directors and stated in the notice of the meeting, at which they
shall elect by a plurality vote a board of directors, and transact such other
business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not fewer 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
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
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of stockholders owning at least ten
percent
2
<PAGE>
(10%) in amount of the entire capital stock of the corporation issued and
outstanding and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting.
Section 6. Written notice of a special meeting stating the place, 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
shall be limited to the purposes stated in the notice.
Section 8. The holders of fifty percent (50%) of the stock issued and
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 which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty 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
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide
3
<PAGE>
any question brought before such meeting, unless the question is one upon which
by express provision of the statutes or of the certificate of incorporation, a
different vote is required, in which case such express provision shall govern
and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of incorporation,
each stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of the capital stock having voting
power held by such stockholder, but no proxy shall be voted on after three years
from its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the certificate of incorporation,
any action required to be taken at any annual or special meeting of stockholders
of the corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
---------
Section 1. The number of directors which shall constitute the whole board
shall be determined by resolution of the Board of Directors or by the
stockholders at the annual
4
<PAGE>
meeting of the stockholders, except as provided in Section 2 of this Article,
and each director elected shall hold office until his successor is elected and
qualified. Directors need not be stockholders.
Section 2. Vacancies and new created directorships resulting from 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 annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent
(10%) of the total number of the shares at the time outstanding having the right
to vote for such directors, summarily order an election to be held to fill any
such vacancies or newly created directorships, or to replace the directors
chosen by the directors then in office.
Section 3. The business of the corporation shall be managed by or under
the direction of its board of directors which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the certificate of incorporation or by these bylaws directed or required to
be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
----------------------------------
Section 4. The Board of Directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
5
<PAGE>
Section 5. The first meeting of each newly elected Board of Directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to 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 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 president on
two (2) days' notice to each director by mail or forty-eight (48) hours notice
to each director either personally or by telegram; special meetings shall be
called by the president or secretary in like manner and on like notice on the
written request of two (2) directors 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.
Section 8. At all meetings of the board a majority of the directors 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
6
<PAGE>
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of incorporation
or these bylaws, any action required or permitted to be taken at any meeting of
the Board of Directors or of any committee thereof may be taken without a
meeting, if all members of the board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
-----------------------
Section 11. The Board of Directors may, by resolution passed by a majority
of the whole board, designate one or more committees, each committee to consist
of one or more of the directors of the corporation. The board may designate one
or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee.
In the absence or disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or
7
<PAGE>
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 the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
-------------------------
Section 13. Unless otherwise restricted by the certificate of
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
8
<PAGE>
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
--------------------
Section 14. Unless otherwise restricted by the certificate of
incorporation or these bylaws, any director or the entire Board of Directors may
be removed, with or without cause, by the holders of a majority of shares
entitled to vote at an election of directors.
ARTICLE IV
NOTICES
-------
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, 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 telegram.
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.
9
<PAGE>
ARTICLE V
OFFICERS
--------
Section 1. The officers of the corporation shall be chosen by the Board of
Directors and shall be a president, treasurer and a secretary. The Board of
Directors may elect from among its members a Chairman of the Board and a Vice
Chairman of the Board. The Board of Directors 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 treasurer, and a secretary
and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers and agents
as it shall deem necessary who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the board.
Section 4. The salaries of all officers and agents of the corporation shall
be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
10
<PAGE>
THE CHAIRMAN OF THE BOARD
-------------------------
Section 6. The Chairman of the Board, if any, shall preside at all meetings
of the Board of Directors and of the stockholders at which he shall be present.
He 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.
Section 7. In the absence of the Chairman of the Board, the Vice Chairman of
the Board, if any, shall preside at all meetings of the Board of Directors and
of the stockholders at which he shall be present. He shall have and may
exercise such powers as are, from time to time, assigned to him by the board and
as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
---------------------------------
Section 8. The president shall be the chief executive officer of the
corporation; and in the absence of the Chairman and Vice Chairman of the Board
he shall preside at all meetings of the stockholders and the Board of Directors;
he 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. He shall execute bonds, mortgages and other contracts requiring a
seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the corporation.
Section 10. In the absence of the president or in the event of his inability
or refusal to act, the vice-president, if any, (or in the event there be more
than one vice-president,
11
<PAGE>
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.
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 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 shall be. He shall have custody of the corporate
seal of the corporation and he, 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, 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
12
<PAGE>
and shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
--------------------------------------
Section 13. The treasurer 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 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 shall disburse the funds of the corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the president and the Board of Directors, at its regular
meetings, or when the Board of Directors so requires, an account of all his
transactions as treasurer and of the financial condition of the corporation.
Section 15. If required by the Board of Directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his 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 control belonging to the corporation.
Section 16. The assistant treasurer, or if there shall be more than one, the
assistant treasurers in the order determined by the Board of Directors (or if
there be no such determination,
13
<PAGE>
then in the order of their election) shall, in the absence of the treasurer or
in the event of his inability or refusal to act, perform the duties and exercise
the powers of the treasurer and shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
--------------------
Section 1. Every holder of stock in the corporation shall be entitled to have
a certificate, signed by, or in the name of the corporation by, the Chairman or
Vice 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 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 which 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
14
<PAGE>
forth on the face or back of the certificate which 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, 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.
Section 2. 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 were such
officer, transfer agent or registrar at the date of issue.
15
<PAGE>
LOST CERTIFICATES
-----------------
Section 3. 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
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 4. 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 new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
------------------
Section 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholder or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any
16
<PAGE>
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 nor less than ten
days before the date of such meeting, nor more than sixty 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 6. 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
---------
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.
17
<PAGE>
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
---------------
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,
18
<PAGE>
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 the foregoing, the corporation shall not be required
to advance such expenses to an agent who is
19
<PAGE>
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
20
<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 stockholders or by the Board of Directors, when such power is
conferred upon the Board of Directors by the certificate of incorporation 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 or incorporation it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal bylaws.
21
<PAGE>
CERTIFICATE OF ASSISTANT SECRETARY OF
CACHEFLOW INC.
The undersigned, Daniel E. O'Connor, hereby certifies that he is the duly
elected and acting Assistant Secretary of CacheFlow Inc., a Delaware corporation
(the "Corporation"), and that the Bylaws attached hereto constitute the Bylaws
of said Corporation as duly adopted by Action by Written Consent in Lieu of
Organizational Meeting by the Directors on March 26, 1996.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name this 26th
day of March, 1996.
/s/ Daniel E. O'Connor
----------------------
Daniel E. O'Connor
Assistant Secretary
22
<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED
BYLAWS OF
CACHEFLOW INC.,
A DELAWARE CORPORATION
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I OFFICE AND RECORDS.............................................. 1
Section 1.1 Delaware Office.......................................... 1
Section 1.2 Other Offices............................................ 1
Section 1.3 Books and Records........................................ 1
ARTICLE II STOCKHOLDERS................................................... 1
Section 2.1 Annual Meeting........................................... 1
Section 2.2 Special Meeting.......................................... 1
Section 2.3 Place of Meeting......................................... 1
Section 2.4 Notice of Meeting........................................ 1
Section 2.5 Quorum and Adjournment................................... 2
Section 2.6 Proxies.................................................. 2
Section 2.7 Notice of Stockholder Business and Nominations........... 2
Section 2.8 Procedure for Election of Directors...................... 4
Section 2.9 Inspectors of Elections; Opening and Closing the Polls... 5
Section 2.10 Consent of Stockholders in Lieu of Meeting............... 5
ARTICLE III BOARD OF DIRECTORS............................................ 5
Section 3.1 General Powers........................................... 5
Section 3.2 Number, Tenure and Qualifications........................ 5
Section 3.3 Regular Meetings......................................... 5
Section 3.4 Special Meetings......................................... 6
Section 3.5 Notice................................................... 6
Section 3.6 Conference Telephone Meetings............................ 6
Section 3.7 Quorum................................................... 6
Section 3.8 Vacancies................................................ 6
Section 3.9 Committee................................................ 7
Section 3.10 Removal.................................................. 7
ARTICLE IV OFFICERS....................................................... 7
Section 4.1 Elected Officers......................................... 7
Section 4.2 Election and Term of Office.............................. 7
Section 4.3 Chairman of the Board.................................... 8
Section 4.4 President and Chief Executive Officer.................... 8
Section 4.5 Secretary................................................ 8
Section 4.6 Treasurer................................................ 8
Section 4.7 Removal.................................................. 8
Section 4.8 Vacancies................................................ 9
ARTICLE V STOCK CERTIFICATES AND TRANSFERS................................ 9
Section 5.1 Stock Certificates and Transfers......................... 9
<PAGE>
ARTICLE VI INDEMNIFICATION................................................ 9
ARTICLE VII MISCELLANEOUS PROVISIONS...................................... 11
Section 7.1 Fiscal Year.............................................. 11
Section 7.2 Dividends................................................ 11
Section 7.3 Seal..................................................... 11
Section 7.4 Waiver of Notice......................................... 11
Section 7.5 Audits................................................... 11
Section 7.6 Resignations............................................. 12
Section 7.7 Contracts................................................ 12
Section 7.8 Proxies.................................................. 12
ARTICLE VIII AMENDMENTS................................................... 12
Section 8.1 Amendments............................................... 12
<PAGE>
ARTICLE I
OFFICES AND RECORDS
Section 1.1 Delaware Office. The registered office of the Corporation in
---------------
the State of Delaware shall be located in the City of Dover, County of Kent.
Section 1.2 Other Offices. The Corporation may have such other offices,
-------------
either within or without the State of Delaware, as the Board of Directors may
designate or as the business of the Corporation may from time to time require.
Section 1.3 Books and Records. The books and records of the Corporation
-----------------
may be kept at the Corporation's headquarters in Sunnyvale, California or at
such other locations outside the State of Delaware as may from time to time be
designated by the Board of Directors.
ARTICLE II
STOCKHOLDERS
Section 2.1 Annual Meeting. The annual meeting of the stockholders of the
--------------
Corporation shall be held at such date, place and/or time as may be fixed by
resolution of the Board of Directors.
Section 2.2 Special Meeting. Special meetings of stockholders of the
---------------
Corporation may be called only by the Chairman of the Board or the President or
by the Board of Directors acting pursuant to a resolution adopted by a majority
of the Whole Board. For purposes of these Amended and Restated Bylaws, the term
"Whole Board" shall mean the total number of authorized directors whether or not
there exist any vacancies in previously authorized directorships.
Section 2.3 Place of Meeting. The Board of Directors may designate the
----------------
place of meeting for any meeting of the stockholders. If no designation is made
by the Board of Directors, the place of meeting shall be the principal office of
the Corporation.
Section 2.4 Notice of Meeting. Except as otherwise required by law,
-----------------
written or printed notice, stating the place, day and hour of the meeting and
the purposes for which the meeting is called, shall be prepared and delivered by
the Corporation not less than ten days nor more than sixty days before the date
of the meeting, either personally, or by mail, to each stockholder of record
entitled to vote at such meeting. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail with postage thereon prepaid,
addressed to the stockholder at his address as it appears on the stock transfer
books of the Corporation. Such further notice shall be given as may be required
by law. Meetings may be held without notice if all stockholders entitled to vote
are present (except as otherwise provided by law), or if notice is waived by
those not present. Any previously scheduled meeting of the stockholders may be
postponed and (unless the Corporations's Amended and Restated Certificate of
Incorporation
<PAGE>
(the "Certificate of Incorporation") otherwise provides) any special meeting of
the stockholders may be cancelled, by resolution of the Board of Directors upon
public notice given prior to the time previously scheduled for such meeting of
stockholders.
Section 2.5 Quorum and Adjournment. Except as otherwise provided by law
----------------------
or by the Certificate of Incorporation, the holders of a majority of the voting
power of the outstanding shares of the Corporation entitled to vote generally in
the election of directors (the "Voting Stock"), represented in person or by
proxy, shall constitute a quorum at a meeting of stockholders, except that when
specified business is to be voted on by a class or series voting separately as a
class or series, the holders of a majority of the voting power of the shares of
such class or series shall constitute a quorum for the transaction of such
business. The chairman of the meeting or a majority of the shares of Voting
Stock so represented may adjourn the meeting from time to time, whether or not
there is such a quorum (or, in the case of specified business to be voted on by
a class or series, the chairman or a majority of the shares of such class or
series so represented may adjourn the meeting with respect to such specified
business). No notice of the time and place of adjourned meetings need be given
except as required by law. The stockholders present at a duly organized meeting
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
Section 2.6 Proxies. At all meetings of stockholders, a stockholder may
-------
vote by proxy executed in writing by the stockholder or as may be permitted by
law, or by his duly authorized attorney-in-fact. Such proxy must be filed with
the Secretary of the Corporation or his representative at or before the time of
the meeting.
Section 2.7 Notice of Stockholder Business and Nominations.
----------------------------------------------
A. Nominations of persons for election to the Board of Directors and
the proposal of business to be transacted by the stockholders may be made at an
annual meeting of stockholders (1) pursuant to the Corporation's notice with
respect to such meeting, (2) by or at the direction of the Board of Directors or
(3) by any stockholder of record of the Corporation who was a stockholder of
record at the time of the giving of the notice provided for in the following
paragraph, who is entitled to vote at the meeting and who has complied with the
notice procedures set forth in this Section 2.7.
B. For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to paragraph (A)(3) of this Section
2.7, (1) the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation, (2) such business must be a proper matter for
stockholder action under the Delaware General Corporation Law, (3) if the
stockholder, or the beneficial owner on whose behalf any such proposal or
nomination is made, has provided the Corporation with a Solicitation Notice, as
that term is defined in subclause (c)(iii) of this paragraph, such stockholder
or beneficial owner must, in the case of a proposal, have delivered a proxy
statement and form of proxy to holders of at least the percentage of the
Corporation's voting shares required under applicable law to carry any such
proposal, or, in the case of a nomination or nominations, have delivered a proxy
statement and form of proxy to holders of a percentage of the Corporation's
voting shares
2
<PAGE>
reasonably believed by such stockholder or beneficial holder to be sufficient to
elect the nominee or nominees proposed to be nominated by such stockholder, and
must, in either case, have included in such materials the Solicitation Notice
and (4) if no Solicitation Notice relating thereto has been timely provided
pursuant to this section, the stockholder or beneficial owner proposing such
business or nomination must not have solicited a number of proxies sufficient to
have required the delivery of such a Solicitation Notice under this section. To
be timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not less than 45 or more than 75
days prior to the first anniversary (the "Anniversary") of the date on which the
Corporation first mailed its proxy materials for the preceding year's annual
meeting of stockholders; provided, however, that if no proxy materials were
mailed by the Corporation in connection with the preceding year's annual
meeting, or if the date of the annual meeting is advanced more than 30 days
prior to or delayed by more than 30 days after the anniversary of the preceding
year's annual meeting, notice by the stockholder to be timely must be so
delivered not later than the close of business on the later of (x) the 90th day
prior to such annual meeting or (y) the 10th day following the day on which
public announcement of the date of such meeting is first made. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person as would be required to be disclosed in solicitations of
proxies for the election of such nominees as directors pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and such person's written consent to serve as a director if elected; (b) as to
any other business that the stockholder proposes to bring before the meeting, a
brief description of such business, the reasons for conducting such business at
the meeting and any material interest in such business of such stockholder and
the beneficial owner, if any, on whose behalf the proposal is made; and (c) as
to the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner, (ii) the class and number of shares of the Corporation that are owned
beneficially and of record by such stockholder and such beneficial owner, and
(iii) whether either such stockholder or beneficial owner intends to deliver a
proxy statement and form of proxy to holders of, in the case of a proposal, at
least the percentage of the Corporation's voting shares required under
applicable law to carry the proposal or, in the case of a nomination or
nominations, a sufficient number of holders of the Corporation's voting shares
to elect such nominee or nominees (an affirmative statement of such intent, a
"Solicitation Notice").
C. Notwithstanding anything in the second sentence of paragraph (B)
of this Section 2.7 to the contrary, in the event that the number of directors
to be elected to the Board of Directors is increased and there is no public
announcement naming all of the nominees for director or specifying the size of
the increased Board made by the Corporation at least 55 days prior to the
Anniversary, a stockholder's notice required by this Bylaw shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the Corporation.
3
<PAGE>
D. Only persons nominated in accordance with the procedures set forth
in this Section 2.7 shall be eligible to serve as directors and only such
business shall be conducted at an annual meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this Section 2.7. The chair of the meeting shall have the power and the duty to
determine whether a nomination or any business proposed to be brought before the
meeting has been made in accordance with the procedures set forth in these
Bylaws and, if any proposed nomination or business is not in compliance with
these Bylaws, to declare that such defective proposed business or nomination
shall not be presented for stockholder action at the meeting and shall be
disregarded.
E. Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Nominations of persons for election to the
Board of Directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the Corporation's notice of meeting (1)
by or at the direction of the Board of Directors or (2) by any stockholder of
record of the Corporation who is a stockholder of record at the time of giving
of notice provided for in this paragraph, who shall be entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section
2.7. Nominations by stockholders of persons for election to the Board of
Directors may be made at such a special meeting of stockholders if the
stockholder's notice required by paragraph (B) of this Section 2.7 shall be
delivered to the Secretary at the principal executive offices of the Corporation
not later than the close of business on the later of the 90th day prior to such
special meeting or the 10th day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the Board to be elected at such meeting.
F. For purposes of this Section 2.7, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or a comparable national news service or in a document publicly filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
G. Notwithstanding the foregoing provisions of this Section 2.7, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to matters set forth
in this Section 2.7. Nothing in this Section 2.7 shall be deemed to affect any
rights of stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 2.8 Procedure for Election of Directors. Election of directors at
-----------------------------------
all meetings of the stockholders at which directors are to be elected shall be
by written ballot, and, except as otherwise set forth in the Certificate of
Incorporation with respect to the right of the holders of any series of
Preferred Stock or any other series or class of stock to elect additional
directors under specified circumstances, a plurality of the votes cast thereat
shall elect directors. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, all matters other than the election of directors
submitted to the stockholders at any meeting shall be decided by the affirmative
vote of a majority of the voting power of the outstanding Voting Stock present
in person or represented by proxy at the meeting and entitled to vote thereon.
4
<PAGE>
Section 2.9 Inspectors of Elections; Opening and Closing the Polls.
------------------------------------------------------
A. The Board of Directors by resolution shall appoint one or more
inspectors, which inspector or inspectors may include individuals who serve the
Corporation in other capacities, including, without limitation, as officers,
employees, agents or representatives of the Corporation, to act at the meeting
and make a written report thereof. One or more persons may be designated as
alternate inspectors to replace any inspector who fails to act. If no inspector
or alternate has been appointed to act, or if all inspectors or alternates who
have been appointed are unable to act, at a meeting of stockholders, the
chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before discharging his or her duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors
shall have the duties prescribed by the Delaware General Corporation Law.
B. The chairman of the meeting shall fix and announce at the meeting
the date and time of the opening and the closing of the polls for each matter
upon which the stockholders will vote at a meeting.
Section 2.10 Consent of Stockholders in Lieu of Meeting. Any action
------------------------------------------
required or permitted to be taken by the stockholders of the Corporation must be
effected at a duly called annual or special meeting of stockholders of the
Corporation and may not be effected by any consent in writing by such
stockholders.
ARTICLE III
BOARD OF DIRECTORS
Section 3.1 General Powers. The business and affairs of the Corporation
--------------
shall be managed by or under the direction of the Board of Directors. In
addition to the powers and authority expressly conferred upon them by statute or
by the Certificate of Incorporation or by these Bylaws, the directors are hereby
empowered to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation.
Section 3.2 Number, Tenure and Qualifications. Subject to the rights of
---------------------------------
the holders of any series of Preferred Stock to elect additional directors under
specified circumstances, the number of directors shall be fixed from time to
time exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the Whole Board. The directors, other than those who may be elected
by the holders of any series of Preferred Stock under specified circumstances,
shall be divided into three classes pursuant to the Certificate of
Incorporation. At each annual meeting of stockholders, directors elected to
succeed those directors whose terms expire shall be elected for a term of office
to expire at the third succeeding annual meeting of stockholders after their
election.
Section 3.3 Regular Meetings. A regular meeting of the Board of Directors
----------------
shall be held without notice other than this Bylaw immediately after, and at the
same place as,
5
<PAGE>
each annual meeting of stockholders. The Board of Directors may, by resolution,
provide the time and place for the holding of additional regular meetings
without notice other than such resolution.
Section 3.4 Special Meetings. Special meetings of the Board of Directors
----------------
shall be called at the request of the Chairman of the Board, the President or a
majority of the Board of Directors. The person or persons authorized to call
special meetings of the Board of Directors may fix the place and time of the
meetings.
Section 3.5 Notice. Notice of any special meeting shall be given to each
------
director at his business or residence in writing or by telegram, facsimile
transmission or telephone communication. If mailed, such notice shall be deemed
adequately delivered when deposited in the United States mails so addressed,
with postage thereon prepaid, at least five days before such meeting. If by
telegram, such notice shall be deemed adequately delivered when the telegram is
delivered to the telegraph company at least 48 hours before such meeting. If by
facsimile transmission, such notice shall be transmitted at least 48 hours
before such meeting. If by telephone, the notice shall be given at least 48
hours prior to the time set for the meeting. A meeting may be held at any time
without notice if all the directors are present (except as otherwise provided by
law) or if those not present waive notice of the meeting in writing, either
before or after such meeting.
Section 3.6 Conference Telephone Meetings. Members of the Board of
-----------------------------
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such 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 such meeting.
Section 3.7 Quorum. A whole number of directors equal to at least a
------
majority of the Whole Board shall constitute a quorum for the transaction of
business, but if at any meeting of the Board of Directors there shall be less
than a quorum present, a majority of the directors present may adjourn the
meeting from time to time without further notice. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors.
Section 3.8 Vacancies. Subject to the rights of the holders of any series
---------
of Preferred Stock then outstanding, newly created directorships resulting from
any increase in the authorized number of directors or any vacancies in the Board
of Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause shall, unless otherwise provided by law or by
resolution of the Board of Directors, be filled only by a majority vote of the
directors then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been chosen expires. No
decrease in the authorized number of directors shall shorten the term of any
incumbent director.
6
<PAGE>
Section 3.9 Committees.
----------
A. The Board of Directors may designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee. In the absence or disqualification of a member of the
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 place of any such absent or disqualified member. Any such committee,
to the extent permitted by law and 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 the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it.
B. Unless the Board of Directors otherwise provides, each committee
designated by the Board of Directors may make, alter and repeal rules for the
conduct of its business. In the absence of such rules each committee shall
conduct its business in the same manner as the Board of Directors conducts its
business pursuant to these Bylaws.
Section 3.10 Removal. Subject to the rights of the holders of any series
-------
of Preferred Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, but only for cause and only
by the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the voting power of all of the then-outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
ARTICLE IV
OFFICERS
Section 4.1 Elected Officers. The elected officers of the Corporation
----------------
shall be a Chairman of the Board, a President, a Secretary, a Treasurer, and
such other officers as the Board of Directors from time to time may deem proper.
The Chairman of the Board shall be chosen from the directors. All officers
chosen by the Board of Directors shall each have such powers and duties as
generally pertain to their respective offices, subject to the specific
provisions of this Article IV. Such officers shall also have powers and duties
as from time to time may be conferred by the Board of Directors or by any
committee thereof.
Section 4.2 Election and Term of Office. The elected officers of the
---------------------------
Corporation shall be elected annually by the Board of Directors at the regular
meeting of the Board of Directors held after each annual meeting of the
stockholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as convenient. Subject to
Section 4.7 of these Bylaws, each officer shall hold office until his successor
shall have been duly elected and shall have qualified or until his death or
until he shall resign.
7
<PAGE>
Section 4.3 Chairman of the Board. The Chairman of the Board shall
---------------------
preside at all meetings of the Board.
Section 4.4 President and Chief Executive Officer. The President and
-------------------------------------
Chief Executive Officer shall be the general manager of the Corporation, subject
to the control of the Board of Directors, and as such shall preside at all
meetings of shareholders, shall have general supervision of the affairs of the
Corporation, shall sign or countersign or authorize another officer to sign all
certificates, contracts, and other instruments of the Corporation as authorized
by the Board of Directors, shall make reports to the Board of Directors and
shareholders, and shall perform all such other duties as are incident to such
office or are properly required by the Board of Directors. If the Board of
Directors creates the office of Chief Executive Officer as a separate office
from President, the President shall be the chief operating officer of the
corporation and shall be subject to the general supervision, direction, and
control of the Chief Executive Officer unless the Board of Directors provides
otherwise.
Section 4.5 Secretary. The Secretary shall give, or cause to be given,
---------
notice of all meetings of stockholders and directors and all other notices
required by law or by these Bylaws, and in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the Chairman of the Board or the President, or by the Board of Directors,
upon whose request the meeting is called as provided in these Bylaws. He shall
record all the proceedings of the meetings of the Board of Directors, any
committees thereof and the stockholders of the Corporation in a book to be kept
for that purpose, and shall perform such other duties as may be assigned to him
by the Board of Directors, the Chairman of the Board or the President. He shall
have custody of the seal of the Corporation and shall affix the same to all
instruments requiring it, when authorized by the Board of Directors, the
Chairman of the Board or the President, and attest to the same.
Section 4.6 Treasurer. The Treasurer shall have the custody of the
---------
corporate funds and securities and shall keep full and accurate receipts and
disbursements in books belonging to the Corporation. The Treasurer shall deposit
all moneys and other valuables in the name and to the credit of the Corporation
in such depositaries as may be designated by the Board of Directors. The
Treasurer shall disburse the funds of the Corporation as may be ordered by the
Board of Directors the Chairman of the Board, or the President, taking proper
vouchers for such disbursements. The Treasurer shall render to the Chairman of
the Board, the President and the Board of Directors, whenever requested, an
account of all his transactions as Treasurer and of the financial condition of
the Corporation. If required by the Board of Directors, the Treasurer shall give
the Corporation a bond for the faithful discharge of his duties in such amount
and with such surety as the Board of Directors shall prescribe.
Section 4.7 Removal. Any officer elected by the Board of Directors may be
-------
removed by the Board of Directors whenever, in their judgment, the best
interests of the Corporation would be served thereby. No elected officer shall
have any contractual rights against the Corporation for compensation by virtue
of such election beyond the date of the election of his successor, his death,
his resignation or his removal, whichever event shall first occur, except as
otherwise provided in an employment contract or an employee plan.
8
<PAGE>
Section 4.8 Vacancies. A newly created office and a vacancy in any office
---------
because of death, resignation, or removal may be filled by the Board of
Directors for the unexpired portion of the term at any meeting of the Board of
Directors.
ARTICLE V
STOCK CERTIFICATES AND TRANSFERS
Section 5.1 Stock Certificates and Transfers.
--------------------------------
A. The interest of each stockholder of the Corporation shall be
evidenced by certificates for shares of stock in such form as the appropriate
officers of the Corporation may from time to time prescribe. The shares of the
stock of the Corporation shall be transferred on the books of the Corporation by
the holder thereof in person or by his attorney, upon surrender for cancellation
of certificates for the same number of shares, with an assignment and power of
transfer endorsed thereon or attached thereto, duly executed, and with such
proof of the authenticity of the signature as the Corporation or its agents may
reasonably require.
B. The certificates of stock shall be signed, countersigned and
registered in such manner as the Board of Directors may by resolution prescribe,
which resolution may permit all or any of the signatures on such certificates to
be in facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate has 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 were such
officer, transfer agent or registrar at the date of issue.
ARTICLE VI
INDEMNIFICATION
Section 6.1 Right to Indemnification. Each person who was or is made a
------------------------
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably
9
<PAGE>
incurred or suffered by such indemnitee in connection therewith and such
indemnification shall continue as to an indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators; provided, however, that,
-------- -------
except as provided in Section 6.3 hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation.
Section 6.2 Right to Advancement of Expenses. The right to indemnification
--------------------------------
conferred in Section 6.1 shall include the right to be paid by the Corporation
the expenses incurred in defending any proceeding for which such right to
indemnification is applicable in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
-------- -------
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise.
Section 6.3 Right of Indemnitee to Bring Suit. The rights to
---------------------------------
indemnification and to the advancement of expenses conferred in Section 6.1 and
Section 6.2, respectively, shall be contract rights. If a claim under Section
6.1 or Section 6.2 is not paid in full by the Corporation within sixty days
after a written claim has been received by the Corporation, except in the case
of a claim for an advancement of expenses, in which case the applicable period
shall be twenty days, the indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If successful
in whole or in part in any such suit, or in a suit brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such suit. In (A) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense that,
and (B) in any suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking the Corporation shall be entitled to
recover such expenses upon a final adjudication that, the indemnitee has not met
any applicable standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of
10
<PAGE>
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Section or otherwise shall be on the Corporation.
Section 6.4 Non-Exclusivity of Rights. The rights to indemnification and
-------------------------
to the advancement of expenses conferred in this Section shall not be exclusive
of any other right which any person may have or hereafter acquire under the
Certificate of Incorporation, these Amended and Restated Bylaws, or any statute,
agreement, vote of stockholders or disinterested directors or otherwise.
Section 6.5 Insurance. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1 Fiscal Year. The fiscal year of the Corporation shall begin
-----------
on the first day of May and end on the thirtieth day of April of each year.
Section 7.2 Dividends. The Board of Directors may from time to time
---------
declare, and the Corporation may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law and its Certificate of
Incorporation.
Section 7.3 Seal. The corporate seal shall have inscribed the name of the
----
Corporation thereon and shall be in such form as may be approved from time to
time by the Board of Directors.
Section 7.4 Waiver of Notice. Whenever any notice is required to be given
----------------
to any stockholder or director of the Corporation under the provisions of the
Delaware General Corporation Law, a waiver thereof in writing, signed by the
person or persons entitled to such notice, whether before or after the time
stated therein, shall be deemed equivalent to the giving of such notice. Neither
the business to be transacted at, nor the purpose of, any annual or special
meeting of the stockholders of the Board of Directors need be specified in any
waiver of notice of such meeting.
Section 7.5 Audits. The accounts, books and records of the Corporation
------
shall be audited upon the conclusion of each fiscal year by an independent
certified public accountant selected by the Board of Directors, and it shall be
the duty of the Board of Directors to cause such audit to be made annually.
11
<PAGE>
Section 7.6 Resignations. Any director or any officer, whether elected or
------------
appointed, may resign at any time by serving written notice of such resignation
on the Chairman of the Board, the President or the Secretary, and such
resignation shall be deemed to be effective as of the close of business on the
date said notice is received by the Chairman of the Board, the President, or the
Secretary or at such later date as is stated therein. No formal action shall be
required of the Board of Directors or the stockholders to make any such
resignation effective.
Section 7.7 Contracts. Except as otherwise required by law, the
---------
Certificate of Incorporation or these Bylaws, any contracts or other instruments
may be executed and delivered in the name and on the behalf of the Corporation
by such officer or officers of the Corporation as the Board of Directors may
from time to time direct. Such authority may be general or confined to specific
instances as the Board may determine. The Chairman of the Board, the President
or any Vice President may execute bonds, contracts, deeds, leases and other
instruments to be made or executed for or on behalf of the Corporation. Subject
to any restrictions imposed by the Board of Directors or the Chairman of the
Board, the President or any Vice President of the Corporation may delegate
contractual powers to others under his jurisdiction, it being understood,
however, that any such delegation of power shall not relieve such officer of
responsibility with respect to the exercise of such delegated power.
Section 7.8 Proxies. Unless otherwise provided by resolution adopted by
-------
the Board of Directors, the Chairman of the Board, the President or any Vice
President may from time to time appoint any attorney or attorneys or agent or
agents of the Corporation, in the name and on behalf of the Corporation, to cast
the votes which the Corporation may be entitled to cast as the holder of stock
or other securities in any other corporation or other entity, any of whose stock
or other securities may be held by the Corporation, at meetings of the holders
of the stock and other securities of such other corporation or other entity, or
to consent in writing, in the name of the Corporation as such holder, to any
action by such other corporation or other entity, and may instruct the person or
persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed in the name and on behalf of
the Corporation and under its corporate seal or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the premises.
ARTICLE VIII
AMENDMENTS
Section 8.1 Amendments. Subject to the provisions of the Certificate of
----------
Incorporation, these Bylaws may be amended, altered, added to, rescinded or
repealed at any meeting of the Board of Directors or of the stockholders,
provided notice of the proposed change was given in the notice of the meeting
and, in the case of a meeting of the Board of Directors, in a notice given no
less than twenty-four hours prior to the meeting.
12
<PAGE>
CERTIFICATE OF SECRETARY OF
CACHEFLOW INC.
The undersigned, Michael Johnson, hereby certifies that he is the duly
elected and acting Secretary of CacheFlow Inc., a Delaware corporation (the
"Corporation"), and that the Bylaws attached hereto constitute the Bylaws of
said Corporation as duly adopted by the Directors on ____________, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this _____ day of __________, 1999.
_____________________________________
Michael Johnson
Secretary
<PAGE>
EXHIBIT 4.2
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
CACHEFLOW INC.
MAY 28, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. Registration Rights................................................. 1
1.1 Definitions................................................ 1
1.2 Request for Registration................................... 2
1.3 Company Registration....................................... 4
1.4 Obligations of the Company................................. 4
1.5 Furnish Information........................................ 5
1.6 Expenses of Demand Registration............................ 5
1.7 Expenses of Company Registration........................... 6
1.8 Underwriting Requirements.................................. 6
1.9 Delay of Registration...................................... 7
1.10 Indemnification............................................ 7
1.11 Reports Under Securities Exchange Act of 1934.............. 9
1.12 Form S-3 Registration...................................... 9
1.13 Assignment of Registration Rights.......................... 10
1.14 "Market Stand-Off" Agreement Rights........................ 11
1.15 Termination of Registration Rights......................... 11
2. Covenants of the Company............................................ 11
2.1 Delivery of Financial Statements........................... 11
2.2 Inspection................................................. 12
2.3 Termination of Covenants................................... 13
2.4 Right of First Offer....................................... 13
2.5 Board of Directors......................................... 14
3. Additional Covenants................................................ 14
3.1 Employee and Other Stock Arrangements...................... 14
3.2 Internal Revenue Code (S)1202.............................. 14
3.3 Termination of Additional Covenants........................ 15
4. Miscellaneous....................................................... 15
4.1 Successors and Assigns..................................... 15
4.2 Governing Law.............................................. 15
4.3 Counterparts............................................... 15
4.4 Titles and Subtitles....................................... 15
4.5 Notices.................................................... 15
4.6 Expenses................................................... 15
4.7 Amendments and Waivers..................................... 16
4.8 Severability............................................... 16
4.9 Aggregation of Stock....................................... 16
4.10 Entire Agreement........................................... 16
4.11 Additional Parties......................................... 16
4.12 Prior Agreement............................................ 16
Schedule A Schedule of Investors
Schedule B Schedule of Founders
<PAGE>
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (this
"Agreement") is made as of May 28, 1999, by and among CacheFlow Inc., a Delaware
corporation (the "Company"), and the investors listed on Schedule A hereto, each
of which is herein referred to as an "Investor", and the founders listed on
Schedule B hereto, each of which is herein referred to as a "Founder."
RECITALS
--------
WHEREAS, certain of the Investors (the "Prior Investors") and certain
of the Founders possess registration rights and certain of the Investors possess
other investor rights granted pursuant to that certain Amended and Restated
Investors' Rights Agreement, dated December 24, 1997, among the Company, certain
of the Founders and the persons listed on the Schedule of Investors attached
thereto (the "Prior Agreement");
WHEREAS, certain of the Investors (the "Series C Investors") are
parties to that certain Series C Preferred Stock Purchase Agreement of even date
herewith (the "Series C Agreement") among the Company and the investors listed
on the Schedule of Investors attached thereto, pursuant to which the Series C
Investors are purchasing shares of the Company's Series C Preferred Stock;
WHEREAS, certain of the Investors have been granted warrants (the
"Warrants") to purchase shares of the Company's Preferred Stock and in
connection with granting such Warrants the Company agreed to make such Investors
parties to this Agreement;
WHEREAS, in order to induce the Company to enter into the Series C
Agreement and to induce the Series C Investors to invest funds in the Company
pursuant to the Series C Agreement, the Prior Investors and the Founders that
are parties to the Prior Agreement hereby agree to waive their rights under the
Prior Agreement, and the Investors, the Founders and the Company hereby agree
that this Agreement shall govern the rights of the Investors and the Founders to
cause the Company to register shares of Common Stock issued or issuable to such
persons, and certain other matters as set forth herein; and
WHEREAS, the Series C Investors and the Company have agreed, pursuant
to the Series C Agreement, to enter into this Agreement;
NOW, THEREFORE, in consideration of the promises, covenants, and
conditions set forth herein, the parties hereto hereby agree as follows:
1. Registration Rights. The Company covenants and agrees as
-------------------
follows:
1.1 Definitions. For purposes of this Section 1:
-----------
(a) The term "Act" means the Securities Act of 1933, as amended.
<PAGE>
(b) The term "Form S-3" means such form under the Act as in effect on
the date hereof or any registration form under the Act subsequently adopted by
the SEC that permits either (i) inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC or
(ii) such registration statement to become effective without review by the SEC.
(c) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 1.13 hereof.
(d) The term "1934 Act" shall mean the Securities Exchange Act of
1934, as amended.
(e) The term "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document.
(f) The term "Registrable Securities" means: (i) the Common Stock
issuable or issued upon conversion of the Series A Preferred Stock, Series B
Preferred Stock and the Series C Preferred Stock; (ii) the shares of Common
Stock held by the Founders; provided, however, that such shares of Common Stock
shall not be deemed Registrable Securities and the Founders shall not be deemed
Holders for the purposes of Section 1.2, 1.12 and 4.7 (except as provided
therein); and (iii) any Common Stock of the Company issued as (or issuable upon
the conversion or exercise of any warrant, right or other security that is
issued as) a dividend or other distribution with respect to, or in exchange for,
or in replacement of, the shares referenced in (i) and (ii) above, excluding in
all cases, however, any Registrable Securities sold by a person in a transaction
in which his rights under this Section 1 are not assigned.
(g) The number of shares of "Registrable Securities then outstanding"
shall be determined by the number of shares of Common Stock outstanding that
are, and the number of shares of Common Stock issuable pursuant to then
exercisable or convertible securities that are, Registrable Securities.
(h) The term "Rule 144" shall mean Rule 144 promulgated under the
Act.
(i) The term "SEC" shall mean the Securities and Exchange Commission.
1.2 Request for Registration.
------------------------
(a) If the Company shall receive at any time after the earlier of (i)
December 19, 2002, or (ii) three (3) months after the effective date of the
first registration statement for a public offering of securities of the Company
(other than a registration statement relating either to the sale of securities
to employees of the Company pursuant to a stock option, stock purchase or
similar plan or a SEC Rule 145 transaction), a written request from the Holders
of a majority of the Registrable Securities then outstanding that the Company
file a registration statement under the Act covering the registration of at
least fifty percent (50%) of the Registrable Securities then outstanding (or
covering the registration of a lesser percent of such Registrable Securities if
the
2
<PAGE>
anticipated aggregate offering price, net of underwriting discounts and
commissions, would exceed $7,500,000), then the Company shall:
(i) within ten (10) days of the receipt thereof, give written
notice of such request to all Holders; and
(ii) effect as soon as practicable, and in any event within sixty
(60) days of the receipt of such request, the registration under the Act of all
Registrable Securities that the Holders request to be registered, subject to the
limitations of subsection 1.2(b), within twenty (20) days of the mailing of such
notice by the Company in accordance with Section 4.5.
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to subsection 1.2(a) and the Company
shall include such information in the written notice referred to in subsection
1.2(a). The underwriter will be selected by the Company and shall be reasonably
acceptable to a majority in interest of the Initiating Holders. In such event,
the right of any Holder to include his Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in subsection 1.4(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision of this
Section 1.2, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities that would otherwise be underwritten pursuant hereto, and
the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
that the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all other securities are first entirely
excluded from the underwriting.
(c) Notwithstanding the foregoing, if the Company shall furnish to
Holders requesting a registration statement pursuant to this Section 1.2, a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer taking action
with respect to such filing for a period of not more than one hundred twenty
(120) days after receipt of the request of the Initiating Holders; provided,
however, that the Company may not utilize this right more than once in any
twelve (12) month period.
(d) In addition, the Company shall not be obligated to effect, or to
take any action to effect, any registration pursuant to this Section 1.2:
3
<PAGE>
(i) After the Company has effected two (2) registrations
pursuant to this Section 1.2 and such registrations have been declared or
ordered effective;
(ii) During the period starting with the date ninety (90) days
prior to the Company's good faith estimate of the date of filing of, and ending
on a date ninety (90) days after the effective date of, a registration subject
to Section 1.3 hereof; provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective; or
(iii) If the Initiating Holders propose to dispose of shares of
Registrable Securities that may be immediately registered on Form S-3 pursuant
to a request made pursuant to Section 1.12 below.
1.3 Company Registration. If (but without any obligation to do so)
--------------------
the Company proposes to register any of its stock or other securities under the
Act in connection with the public offering of such securities solely for cash
(other than a registration relating solely to the sale of securities to
participants in a Company stock plan, a registration on any form that does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of the Registrable Securities or a
registration in which the only Common Stock being registered is Common Stock
issuable upon conversion of debt securities that are also being registered), the
Company shall, at such time, promptly give each Holder written notice of such
registration. Upon the written request of each Holder given within twenty (20)
days after mailing of such notice by the Company in accordance with Section 4.5,
the Company shall, subject to the provisions of Section 1.8, cause to be
registered under the Act all of the Registrable Securities that each such Holder
has requested to be registered.
1.4 Obligations of the Company. Whenever required under this Section
--------------------------
1 to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for a period of up to one hundred twenty (120)
days or until the distribution contemplated in the Registration Statement has
been completed.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
4
<PAGE>
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
1.5 Furnish Information.
-------------------
(a) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Section 1 with respect to the
Registrable Securities of any selling Holder that such Holder shall furnish to
the Company such information regarding itself, the Registrable Securities held
by it, and the intended method of disposition of such securities as shall be
required to effect the registration of such Holder's Registrable Securities.
(b) The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.12 if, due to the
operation of subsection 1.5(a), the number of shares or the anticipated
aggregate offering price of the Registrable Securities to be included in the
registration does not equal or exceed the number of shares or the anticipated
aggregate offering price required to originally trigger the Company's obligation
to initiate such registration as specified in subsection 1.2(a) or subsection
1.12(b)(2), whichever is applicable.
1.6 Expenses of Demand Registration. All expenses other than
-------------------------------
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company and the
reasonable fees and disbursements of one counsel for the selling Holders shall
be borne by the Company; provided, however, that the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to Section 1.2 if the registration request is
5
<PAGE>
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities to be registered (in which case all participating Holders
shall bear such expenses), unless the Holders of a majority of the Registrable
Securities agree to forfeit their right to one demand registration pursuant to
Section 1.2 or unless the registration request is withdrawn after a material
adverse change affecting the Company that was not known to the Holders at the
time of their request pursuant to Section 1.2.
1.7 Expenses of Company Registration. The Company shall bear and pay
--------------------------------
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.3 for each Holder (which right may be assigned as provided
in Section 1.13), including (without limitation) all registration, filing, and
qualification fees, printers and accounting fees relating or apportionable
thereto and the fees and disbursements of one counsel for the selling Holders
selected by them, but excluding underwriting discounts and commissions relating
to Registrable Securities.
1.8 Underwriting Requirements In connection with any offering
-------------------------
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by stockholders to be
included in such offering exceeds the amount of securities sold other than by
the Company that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of such securities, including
Registrable Securities, that the underwriters determine in their sole discretion
will not jeopardize the success of the offering; provided, however, that in the
event of such a limitation by the underwriters (i) no securities held by the
Company's security holders, other than the Holders, shall be included in such
registration unless all shares requested to be included by Holders are included,
(ii) if the securities to be included by Holders are limited, then each Holder
shall be entitled to include in such registration its pro rata share (which
shall be the proportion that the number of shares requested to be included by a
Holder bears to the total number of shares requested to be included by all
Holders) of the securities to be included in such registration for the account
of Holders, and (iii) in no event shall (A) the amount of securities of the
selling Holders included in the offering be reduced below twenty-five percent
(25%) of the total amount of securities included in such offering, unless such
offering is the initial public offering of the Company's securities, in which
case the selling stockholders may be excluded if the underwriters make the
determination described above and no other stockholder's securities are included
or (B) notwithstanding (A) above, any shares being sold by a stockholder
exercising a demand registration right similar to that granted in Section 1.2 be
excluded from such offering. For purposes of the preceding parenthetical
concerning apportionment, for any selling stockholder that is a holder of
Registrable Securities and that is a partnership or corporation, the partners,
retired partners and stockholders of such holder, or the estates and family
members of any such partners and retired partners and any trusts for the benefit
of any of the foregoing persons shall be deemed to be a single "selling
stockholder," and any pro-rata reduction with respect to such "selling
stockholder" shall be based upon the aggregate amount of shares
6
<PAGE>
carrying registration rights owned by all entities and individuals included in
such "selling stockholder," as defined in this sentence.
1.9 Delay of Registration. No Holder shall have any right to obtain
---------------------
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities are
---------------
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder, and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the 1934 Act, against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the Act,
the 1934 Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations
(collectively, a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Act, the 1934 Act, any state securities law or
any rule or regulation promulgated under the Act, the 1934 Act or any state
securities law; and the Company will pay to each such Holder, underwriter or
controlling person, as incurred, any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity agreement
contained in this subsection 1.10(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation that occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any such Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any other
Holder selling securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any losses, claims,
damages or liabilities (joint or several) to which any of the foregoing persons
may become subject under the Act, the 1934 Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished by such Holder expressly for
use in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any person intended
to be indemnified pursuant to this subsection 1.10(b) in connection with
investigating or defending any such loss, claim, damage, liability or action;
7
<PAGE>
provided, however, that the indemnity agreement contained in this subsection
1.10(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld; provided that,
in no event shall any indemnity under this subsection 1.10(b) exceed the gross
proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
1.10 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 1.10, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties that may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section 1.10 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
(f) The obligations of the Company and Holders under this Section 1.10
shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
8
<PAGE>
1.11 Reports Under Securities Exchange Act of 1934. With a view to
---------------------------------------------
making available to the Holders the benefits of Rule 144 and any other rule or
regulation of the SEC that may at any time permit a Holder to sell securities of
the Company to the public without registration or pursuant to a registration on
Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144, at all times after the effective date of the
first registration statement filed by the Company for the offering of its
securities to the general public;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company for the offering of
its securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(d) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144 (at any time after
ninety (90) days after the effective date of the first registration statement
filed by the Company), the Act and the 1934 Act (at any time after it has become
subject to such reporting requirements), or that it qualifies as a registrant
whose securities may be resold pursuant to Form S-3 (at any time after it so
qualifies), (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested in availing any Holder of
any rule or regulation of the SEC that permits the selling of any such
securities without registration or pursuant to such form.
1.12 Form S-3 Registration. In case the Company shall receive from
---------------------
any Holder or Holders a written request or requests that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, the Company will:
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within
fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this section 1.12: (1) if
Form S-3 is not available for such offering by the Holders; (2) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if
9
<PAGE>
any) at an aggregate price to the public (net of any underwriters' discounts or
commissions) of less than $1,000,000; (3) if the Company shall furnish to the
Holders a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its stockholders for such Form S-3
Registration to be effected at such time, in which event the Company shall have
the right to defer the filing of the Form S-3 registration statement for a
period of not more than one hundred twenty (120) days after receipt of the
request of the Holder or Holders under this Section 1.12; provided, however,
that the Company shall not utilize this right more than once in any twelve (12)
month period; (4) if the Company has, within the twelve (12) month period
preceding the date of such request, already effected one (1) registration on
Form S-3 for the Holders pursuant to this Section 1.12; or (5) in any particular
jurisdiction in which the Company would be required to qualify to do business or
to execute a general consent to service of process in effecting such
registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a registration
statement covering the Registrable Securities and other securities so requested
to be registered as soon as practicable after receipt of the request or requests
of the Holders. All expenses incurred in connection with a registration
requested pursuant to Section 1.12, including (without limitation) all
registration, filing, qualification, printer's and accounting fees and the
reasonable fees and disbursements of counsel for the selling Holder or Holders
and counsel for the Company and including any underwriters' discounts or
commissions associated with Registrable Securities, shall be borne pro rata by
the Holder or Holders participating in the Form S-3 Registration. Registrations
effected pursuant to this Section 1.12 shall not be counted as demands for
registration or registrations effected pursuant to Sections 1.2 or 1.3,
respectively.
1.13 Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities who, after such assignment or transfer, holds at
least 50,000 shares of Registrable Securities (subject to appropriate adjustment
for stock splits, stock dividends, combinations and other recapitalizations),
provided: (a) the Company is, within a reasonable time after such transfer,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights are
being assigned; (b) such transferee or assignee agrees in writing to be bound by
and subject to the terms and conditions of this Agreement, including without
limitation the provisions of Section 1.14 below; and (c) such assignment shall
be effective only if immediately following such transfer the further disposition
of such securities by the transferee or assignee is restricted under the Act.
For the purposes of determining the number of shares of Registrable Securities
held by a transferee or assignee, the holdings of transferees and assignees of a
partnership who are partners or retired partners of such partnership (including
spouses and ancestors, lineal descendants and siblings of such partners or
spouses who acquire Registrable Securities by gift, will or intestate
succession) shall be aggregated together and with the partnership; provided that
all assignees and transferees who would not qualify individually for assignment
of registration rights shall have a single attorney-in-fact for the purpose of
exercising any rights, receiving notices or taking any action under this Section
1.
10
<PAGE>
1.14 "Market Stand-Off" Agreement Rights. Each Investor and Founder
-----------------------------------
hereby agrees that, during the period of duration specified by the Company and
an underwriter of Common Stock or other securities of the Company, following the
effective date of a registration statement of the Company filed under the Act,
it shall not, to the extent requested by the Company and such underwriter,
directly or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase or otherwise transfer
or dispose of (other than to donees who agree to be similarly bound) any
Registrable Securities or other securities (excluding securities acquired in any
registered offering (other than shares acquired through a directed share program
if the underwriters of such offering require that shares acquired in such
program be subject to a lock-up agreement) or after such offering in the public
market in a broker transaction)) of the Company held by it at any time during
such period, except Common Stock included in such registration; provided,
however, that:
(a) such agreement shall be applicable only to the first such
registration statement of the Company that covers Common Stock (or other
securities) to be sold on its behalf to the public in an underwritten offering;
(b) all officers and directors of the Company and all holders of at
least one percent (1%) of the aggregate voting power of the Company enter into
similar agreements; and
(c) such market stand-off time period shall not exceed one hundred
eighty (180) days.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the securities of each Investor and
Founder (and the shares or securities of every other person subject to the
foregoing restriction) subject to this Section 1.14 until the end of such
period.
1.15 Termination of Registration Rights. No Holder shall be entitled
----------------------------------
to exercise any right provided for in this Section 1 after three (3) years
following the consummation of the sale of securities pursuant to a registration
statement filed by the Company under the Act in connection with the initial firm
commitment underwritten offering of its securities to the general public or, as
to any Holder, such earlier time at which all Registrable Securities held by
such Holder (aggregated with all affiliates of such Holder) can be sold in any
three (3) month period without registration in compliance with Rule 144 of the
Act so long the Company is a reporting company under the 1934 Act.
2. Covenants of the Company.
------------------------
2.1 Delivery of Financial Statements. The Company shall deliver to
--------------------------------
each Investor:
(a) as soon as practicable, but in any event within ninety (90) days
after the end of each fiscal year of the Company, an income statement for such
fiscal year, a balance sheet of the Company and statement of stockholder's
equity as of the end of such year, and a statement of cash flows for such year,
such year-end financial reports to be in reasonable detail, prepared in
accordance with generally accepted accounting principles ("GAAP"), and audited
and certified by independent public accountants of nationally recognized
standing selected by the Company;
11
<PAGE>
(b) so long as such Investor holds at least 350,000 shares of
Preferred Stock (either in the form of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock or Common Stock issued upon
conversion thereof, and as adjusted for subsequent stock splits, recombinations
or reclassifications), as soon as practicable, but in any event within forty-
five (45) days after the end of each of the first three (3) quarters of each
fiscal year of the Company, an unaudited income statement, statement of cash
flows for such fiscal quarter and an unaudited balance sheet and a statement of
stockholder's equity as of the end of such fiscal quarter;
(c) so long as such Investor holds at least 350,000 shares of
Preferred Stock (either in the form of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock or Common Stock issued upon
conversion thereof, and as adjusted for subsequent stock splits, recombinations
or reclassifications), within thirty (30) days of the end of each month, an
unaudited income statement and statement of cash flows and balance sheet for and
as of the end of such month, in reasonable detail;
(d) so long as such Investor holds at least 350,000 shares of
Preferred Stock (either in the form of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock or Common Stock issued upon
conversion thereof, and as adjusted for subsequent stock splits, recombinations
or reclassifications), as soon as practicable, but in any event thirty (30) days
prior to the end of each fiscal year, a budget for the next fiscal year,
prepared on a monthly basis, including balance sheets and statements of cash
flows, for such months, and, as soon as prepared, any other budgets or revised
budgets prepared by the Company; and
(e) with respect to the financial statements called for in
subsections (b) and (c) of this Section 2.1, an instrument executed by the Chief
Financial Officer or President of the Company certifying that such financials
were prepared in accordance with GAAP consistently applied with prior practice
for earlier periods (with the exception of footnotes that may be required by
GAAP) and fairly present the financial condition of the Company and its results
of operation for the period specified, subject to year-end audit adjustment.
2.2 Inspection. The Company shall permit such Investor, at such
----------
Investor'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, all at such reasonable times as may be requested
by the Investor; provided, however, that the Company shall not be obligated
pursuant to this Section 2.2 to provide access to any information that it
reasonably considers to be a trade secret or similar confidential information.
2.3 Termination of Covenants. The covenants set forth in Section
------------------------
2.1, Section 2.2, Section 2.4 and Section 2.5 shall terminate as to the
Investors and the Founders and be of no further force or effect when the sale of
securities pursuant to a registration statement filed by the Company under the
Act in connection with the firm commitment underwritten offering of its
securities to the general public is consummated or when the Company first
becomes subject to the periodic reporting requirements of Sections 12(g) or
15(d) of the 1934 Act, whichever event shall first occur.
12
<PAGE>
2.4 Right of First Offer. Subject to the terms and conditions
--------------------
specified in this paragraph 2.4, the Company hereby grants to each Investor a
right of first offer with respect to future sales by the Company of its Shares
(as hereinafter defined). An Investor shall be entitled to apportion the right
of first offer hereby granted it among itself and its partners and affiliates in
such proportions as it deems appropriate.
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for, any shares of any class of its capital
stock ("Shares"), the Company shall first make an offering of such Shares to
each Investor in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail ("Notice")
to the Investors stating (i) its bona fide intention to offer such Shares, (ii)
the number of such Shares to be offered, and (iii) the price and terms, if any,
upon which it proposes to offer such Shares.
(b) By written notification received by the Company, within twenty
(20) calendar days after giving of the Notice, the Investor may elect to
purchase or obtain, at the price and on the terms specified in the Notice, up to
that portion of such Shares that equals the proportion that the number of shares
of Common Stock then held by such Investor (assuming full conversion, exercise
and exchange of all convertible, exercisable or exchangeable securities held by
such Investor) bears to the total number of shares of Common Stock of the
Company then outstanding (assuming full conversion, exercise and exchange of all
convertible, exercisable or exchangeable securities).
(c) If all Shares that Investors are entitled to obtain pursuant to
subsection 2.4(b) are not elected to be obtained as provided in subsection
2.4(b) hereof, the Company may, during the ninety (90) day period following the
expiration of the period provided in subsection 2.4(b) hereof, offer the
remaining unsubscribed portion of such Shares to any person or persons at a
price not less than, and upon terms no more favorable to the offeree than those
specified in the Notice. If the Company does not enter into an agreement for
the sale of the Shares within such period, or if such agreement is not
consummated within sixty (60) days of the execution thereof, the right provided
hereunder shall be deemed to be revived and such Shares shall not be offered
unless first reoffered to the Investors in accordance herewith.
(d) The right of first offer in this paragraph 2.4 shall not be
applicable (i) to the issuance or sale of shares of Common Stock (or options
therefor) to employees or directors of or consultants to the Company for the
primary purpose of soliciting or retaining their services, (ii) to or after
consummation of a bona fide, firmly underwritten public offering of shares of
Common Stock, registered under the Act pursuant to a registration statement on
Form S-1 or SB-2, with aggregate proceeds to the Company of at least
$20,000,000, (iii) the issuance of securities pursuant to the conversion,
exercise or exchange of convertible, exercisable or exchangeable securities,
provided such securities were issued prior to the creation of or in compliance
with this Right of First Offer, (iv) the issuance of securities in connection
with a bona fide business acquisition of or by the Company, whether by merger,
consolidation, sale of assets, sale or exchange of stock or otherwise, (v) the
issuance of stock, warrants or other securities or rights to persons or entities
with which the Company has business relationships, provided such issuances are
for other than primarily equity financing purposes, or (vi) to the sale
13
<PAGE>
and issuance of shares of Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock of the Company.
2.5 Board of Directors.
------------------
With respect to those two (2) members of the Company's Board of
Directors that the Restated Certificate of Incorporation provides are to be
elected by the holders of Common Stock, the Founders and the Investors hereby
agree to vote all of their shares of Common Stock now owned or hereafter
acquired in favor of the election of (1) the Chief Executive Officer of the
Company (or, if there is no Chief Executive Officer of the Company, the
President), and (2) a person designated by the holders of at least a majority of
the Common Stock.
3. Additional Covenants.
--------------------
3.1 Employee and Other Stock Arrangements. Except as otherwise
-------------------------------------
approved by the Company's Board of Directors, all equity securities sold to
employees, consultants or other service providers of the Company henceforth
shall be subject to a market stand-off provision, right of first refusal (in
favor of the Company) and vesting in accordance with the following vesting
schedule: twenty five percent (25%) of such stock shall vest after one year of
service with the Company and the remainder of such stock shall vest in equal
monthly installments over the proceeding thirty-six (36) months.
3.2 Internal Revenue Code (S)1202. The Company shall furnish to each
-----------------------------
Investor and shall make such filings with the Internal Revenue Service, as shall
from time to time be required pursuant to Section 1202(d)(1) of the Code. In
addition, within ten (10) days after any Investor has delivered to the Company a
written request therefor, the Company shall deliver to such Investor a
certificate informing the Investor whether such Investor's interest in the
Company constitutes "qualified small business stock" as defined in Section 1202
of the Code. The Company's obligation to furnish this certificate pursuant to
this Section 3.2 shall continue notwithstanding the fact that a class of the
Company's stock may be traded on an established securities market. In addition,
the Company agrees that it will not make any purchases of its stock within the
meaning of and which would exceed the limitation contained in Section
1202(c)(3)(B) of the Code until May 31, 2000, unless such purchases have been
consented to by holders of a majority of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock (voting together as a single class
and not as separate series, and on an as-converted basis) or are required by
contractual obligations entered into prior to the Closing. Any such information
provided to the Investors under this Section 3.2 shall not be disclosed by any
Investor to any party except as required and solely in order for such Investor
to claim any benefits under Section 1202 of the Code.
3.3 Termination of Additional Covenants. The covenant set forth in
-----------------------------------
Section 3.1 shall terminate and be of no further force or effect when the sale
of securities pursuant to a registration statement filed by the Company under
the Act in connection with the firm commitment underwritten offering of its
securities to the general public is consummated or when the Company first
becomes subject to the periodic reporting requirements of Sections 12(g) or
15(d) of the 1934 Act, whichever event shall first occur.
14
<PAGE>
4. Miscellaneous.
-------------
4.1 Successors and Assigns. Except as otherwise provided herein, the
----------------------
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable Securities). Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
4.2 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.
4.3 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.
4.4 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.
4.5 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
delivery by confirmed facsimile transmission or nationally recognized overnight
courier service or three days after deposit with the United States Post Office,
by registered or certified mail, postage prepaid and addressed to the party to
be notified at the address indicated for such party on the signature page
hereof, or at such other address as such party may designate by ten (10) days'
advance written notice to the other parties.
4.6 Expenses. If any action at law or in equity 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.
4.7 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Registrable Securities then outstanding; provided, however,
that in the event such amendment or waiver adversely affects the rights and/or
obligations of the Founders under this Agreement in a different manner than the
other Holders, such amendment or waiver shall also require the written consent
of a majority of the Common Stock held by the Founders then employed by the
Company. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each holder of any Registrable Securities then
outstanding, each future holder of all such Registrable Securities, and the
Company.
15
<PAGE>
4.8 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
4.9 Aggregation of Stock. All shares of Registrable Securities held
--------------------
or acquired by affiliated entities or persons shall be aggregated together for
the purpose of determining the availability of any rights under this Agreement.
4.10 Entire Agreement. This Agreement (including the Exhibits hereto,
----------------
if any) constitutes the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof.
4.11 Additional Parties. In the event of a subsequent closing with an
------------------
investor as provided for in Section 1.3 of the Series C Agreement, such investor
shall become a party to this Agreement as an "Investor" upon receipt from such
investor of a fully executed signature page.
4.12 Prior Agreement. The Prior Agreement is hereby superseded in its
---------------
entirety and shall be of no further force or effect.
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CACHEFLOW INC.
By: _____________________________________
Brian NeSmith
President and Chief Executive Officer
Address: 650 Almanor Avenue
Sunnyvale, California 94086
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDMENT AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTORS:
TCV III (GP)
a Delaware General Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: __________________________________
Robert C. Bensky
Chief Financial Officer
TCV III, L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: __________________________________
Robert C. Bensky
Chief Financial Officer
TCV III (Q), L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: __________________________________
Robert C. Bensky
Chief Financial Officer
TCV III Strategic Partners, L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: __________________________________
Robert C. Bensky
Chief Financial Officer
Address: 56 Main Street, Suite 210
Millburn, NJ 07041
Attention: Robert C. Bensky
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDMENT AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
U.S. Venture Partners V, L.P.
USVP V International, L.P.
2180 Associates Fund V, L.P.
USVP V Entrepreneur Partners, L.P.
By Presidio Management Group V, L.L.C.
Its General Partner
By: _________________________________________
Address: 2180 Sand Hill Road, Suite 300
Menlo Park, California 94025
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDMENT AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
BENCHMARK CAPITAL PARTNERS, L.P.
By: BENCHMARK CAPITAL MANAGEMENT
CO., L.L.C.
Its General Partner
By: _________________________________
Member
BENCHMARK FOUNDERS' FUND, L.P.
By: BENCHMARK CAPITAL MANAGEMENT
CO., L.L.C.
Its General Partner
By: _________________________________
Member
Address: 2480 Sand Hill Road, Suite 200
Menlo Park, California 94025
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
K-H INVESTORS (1996-B), L.P.
By: _________________________________
Print Name: _________________________
Title: ______________________________
Address: c/o Hanna Capital Management
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
HANNA VENTURES - CACHEFLOW III, L.P.
By: ___________________________________
Print Name: ___________________________
Title: ________________________________
Address: c/o Hanna Capital Management
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
K-H INVESTORS (1998-A), L.P.
By: ___________________________________
Print Name: ___________________________
Title: ________________________________
Address: c/o Hanna Capital Management
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
DAVID WILLIAM HANNA TRUST
DATED 10/30/89
By: _________________________________
Print Name: _________________________
Title: ______________________________
Address: c/o Hanna Capital Management
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
_____________________________________
David W. Hanna
Address: c/o Hanna Capital Management, Inc.
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
______________________________________
Virginia L. Hanna
Address: c/o Hanna Capital Management
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
_________________________________
Brian NeSmith
Address: c/o CacheFlow Inc.
650 Almanor Avenue
Sunnyvale, California 94086
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
____________________________________
Joseph J. Pruskowski
Address: 18109 236/th/ Avenue N.E.
Woodinville, Washington 98072
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
ROBERT D. KELLY LIVING TRUST DTD
12/7/89
________________________________________
Robert D. Kelly, Trustee
Address: 3102 Flavin Lane
Pebble Beach, California 93953
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
F Terry Eger & Carol E Eger Trust
U/T/A DTD 10/17/91
______________________________________
Frank Terry Eger, Trustee
Address: P.O. Box 1624
Los Altos, California 94023-1624
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
_____________________________________
R. Randolph Scott
Address: 312 Coleridge Avenue
Palo Alto, California 94301
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
___________________________________
John S. Troedson
Address: 165 Sausal Drive
Portola Valley, California 94028
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
_________________________________
Michael A. Malcolm
Address: 521 Shelby Lane
Los Altos, California 94024
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
____________________________
Doug Richardson
Address: 3328 99/th/ NE
Bellevue, Washington 98004
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
__________________________
Earl Anderson
Address: 2304 Killarney Way S.E.
Bellevue, Washington 98004
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
___________________________________
David Hartley
Address: 10446 S.E. 25/th/ Street
Bellevue, Washington 98004
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
____________________________________
Bruce Milne
Address: 10500 N.E. 8/th/ Street
1910 Bellevue Place
Bellevue, Washington 98004
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
________________________________
Gordon Bell
Address: 450 Old Oak Court
Los Altos, California 94022
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
G & H Partners
By: _____________________________________________
Partner
Address: c/o Gunderson Dettmer Stough Villeneuve Franklin
& Hachigian, LLP
155 Constitution Drive
Menlo Park, California 94025
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
______________________________
Karl Johnson
Address: 544 Tennyson Avenue
Palo Alto, California 94301
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
_________________________________
Ray Myers
_________________________________
Janet Myers
Address: 783 West Greenwich Place
Palo Alto, California 94303
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
BARTON INVESTMENTS LLC
By: ______________________________
Title: ___________________________
Address: 19607 Farwell Avenue
Saratoga, California 95070
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
Katzman Revocable Trust under Agreement
dated June 11, 1997, as amended
By: _____________________________________
Title: __________________________________
Address: 19607 Farwell Avenue
Saratoga, California 95070
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
The McMurtry Family Trust
By: _____________________________________
Title: __________________________________
Address: 2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
____________________________________
Brent Silver
Address: 139 Hillcrest Terrace
Santa Cruz, California 95060
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
Walter Loewenstern, Jr. Separate Property Trust
By: ___________________________________________
Walter Loewenstern, Jr., Trustee
Address: 825 Holden Road
P. O. Box 1499
Avon, Colorado 81620
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
_________________________________
Vinod Vyas
Address: 1568 Country Club Drive
Los Altos, California 94024
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
_______________________________________
Murat Divringi
Address: 12411 N.E. 36/th/ Place
Bellevue, Washington 98005
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
Gresham Venture Partners, L.L.C.
By: ________________________________
Larry R. Jasper, Manager
Address: 11 McBride Corporate Center Drive
Suite 250
Chesterfield, Missouri 63005-1407
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
AN "INVESTOR" ONLY FOR PURPOSES OF SECTION 1 AND
SECTION 2.1 OF THIS AGREEMENT, AND SPECIFICALLY
NOT FOR ANY OTHER SECTION OF THIS AGREEMENT:
---
SERVICE CO LLC
By: _____________________________________________
Name: ___________________________________________
Title: __________________________________________
Address: _____________________________________
_____________________________________
_____________________________________
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
_____________________________________________
(Name of Investor as it should appear on the
Series C Preferred Stock Certificate)
By: _________________________________________
Print Name: _________________________________
Title: ______________________________________
Address: _____________________________________________
_____________________________________________
Telephone: ____________________________________________
Facsimile: ___________________________________________
PLEASE PROVIDE ALL OF THE ABOVE-REQUESTED INFORMATION
-----------------------------------------------------
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
FOUNDERS:
______________________________________
Joseph J. Pruskowski
Address: 18109 236/th/ Avenue N.E.
Woodinville, Washington 98072
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
_____________________________________
Michael A. Malcolm
Address: 521 Shelby Lane
Los Altos, California 94024
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
_________________________________
Douglas Crow
Address: 24133 Southeast 45/th/ Place
Issaquah, Washington 98029
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
______________________________________
Brian NeSmith
Address: c/o CacheFlow Inc.
650 Almanor Avenue
Sunnyvale, California 94086
SIGNATURE PAGE TO CACHEFLOW INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
SCHEDULE A
----------
Schedule of Investors
INVESTORS:
- ---------
TCV III (GP)
TCV III, L.P.
TCV III (Q), L.P.
TCV III Strategic Partners, L.P.
c/o Robert C. Bensky
Technology Crossover Ventures
56 Main Street, Suite 210
Millburn, NJ 07041
U.S. Venture Partners V, L.P.
USVP V International, L.P.
2180 Associates Fund V, L.P.
USVP V Entrepreneur Partners, L.P.
2180 Sand Hill Road, Suite 300
Menlo Park, California 94025
Benchmark Capital Partners, L.P.
Benchmark Founders' Fund, L.P.
2480 Sand Hill Road, Suite 200
Menlo Park, California 94025
K-H Investors (1996-B), L.P.
K-H Investors (1998-A), L.P.
Hanna Capital Management, Inc.
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
Robert D. Kelly Living Trust DTD 12/7/89,
Robert D. Kelly Trustee
Robert Kelly Clients
3102 Flavin Lane
Pebble Beach, California 93953
David W. Hanna
c/o Hanna Capital Management, Inc.
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
S-1
<PAGE>
INVESTORS:
- ---------
Virginia L. Hanna
c/o Hanna Capital Management, Inc.
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
Joseph J. Pruskowski
18109 236/th/ Avenue N.E.
Woodinville, Washington 98072
F Terry Eger & Carol E Eger Trust
U/T/A DTD 10/17/91
P.O. Box 1624
Los Altos, California 94023-1624
R. Randolph Scott
312 Coleridge Avenue
Palo Alto, California 94301
John S. Troedson
165 Sausal Drive
Portola Valley, California 94028
Michael A. Malcolm
521 Shelby Lane
Los Altos, California 94024
Douglas Richardson
3328 99/th/ NE
Bellevue, Washington 98004
Earl Anderson
2304 Killarney Way S.E.
Bellevue, Washington 98004
David Hartley
3025 52/nd/ Avenue, Southwest
Seattle, Washington 98116
Bruce Milne
10500 N.E. 8/th/ Street, Suite 1910
Bellevue, Washington 98004-4300
Gordon Bell
450 Old Oak Court
Los Altos, California 94022
S-2
<PAGE>
INVESTORS:
- ---------
G & H Partners
c/o Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, California 94025
Karl Johnson
544 Tennyson Avenue
Palo Alto, California 94301
Ray Myers and Janet Myers
783 West Greenwich Place
Palo Alto, California 94303
Katzman Revocable Trust under Agreement
dated June 11, 1997, as amended
Barton Investments LLC
19607 Farwell Avenue
Saratoga, California 95070
The McMurtry Family Trust
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
Brent Silver
139 Hillcrest Terrace
Santa Cruz, California 95060
Walter Loewenstern, Jr. Separate Property Trust
c/o Walter Loewenstern, Jr., Trustee
825 Holden Road
P.O. Box 1499
Avon, Colorado 81620
Vinod Vyas
1568 Country Club Drive
Los Altos, California 94024
Murat Divringi
12411 N.E. 36/th/ Place
Bellevue, Washington 98005
S-3
<PAGE>
INVESTORS:
- ---------
Gresham Venture Partners, L.L.C.
c/o Larry R. Jasper, Manager
11 McBride Corporate Center Drive, Suite 250
Chesterfield, Missouri 63005-1407
Service Co LLC
(An "Investor" only for purposes of Section 1 and Section 2.1 of this Agreement,
and specifically not for any other sections of this Agreement)
____________________________
____________________________
____________________________
S-4
<PAGE>
SCHEDULE B
----------
Schedule of Founders
Name and Address
- ----------------
Joseph J. Pruskowski
18109 236/th/ Avenue N.E.
Woodinville, Washington 98072
Michael A. Malcolm
521 Shelby Lane
Los Altos, California 94024
Douglas Crow
24133 Southeast 45/th/ Place
Issaquah, Washington 98029
Brian NeSmith
c/o CacheFlow Inc.
650 Almanor Avenue
Sunnyvale, California 94086
S-5
<PAGE>
EXHIBIT 4.3
CACHEFLOW INC.
SERIES C PREFERRED
STOCK PURCHASE AGREEMENT
MAY 28, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. Purchase and Sale of Stock........................................ 1
1.1 Sale and Issuance of Series C Preferred Stock............ 1
1.2 Closing.................................................. 1
1.3 Subsequent Sale of Series C Preferred Stock.............. 1
2. Representations and Warranties of the Company..................... 2
2.1 Organization, Good Standing and Qualification............ 2
2.2 Capitalization and Voting Rights......................... 2
2.3 Subsidiaries............................................. 3
2.4 Authorization............................................ 3
2.5 Valid Issuance of Preferred and Common Stock............. 3
2.6 Governmental Consents.................................... 4
2.7 Offering................................................. 4
2.8 Litigation............................................... 4
2.9 Proprietary Information and Inventions Agreements........ 4
2.10 Patents and Trademarks................................... 5
2.11 Compliance with Other Instruments........................ 5
2.12 Agreements; Action....................................... 6
2.13 Permits.................................................. 6
2.14 Disclosure............................................... 6
2.15 Registration Rights...................................... 7
2.16 Corporate Documents...................................... 7
2.17 Title to Property and Assets............................. 7
2.18 Financial Statements..................................... 7
2.19 Changes.................................................. 7
2.20 Insurance................................................ 8
2.21 Related Party Transactions............................... 9
2.22 Employee Benefit Plans................................... 9
2.23 Tax Returns and Payments................................. 9
2.24 Labor Agreements and Actions............................. 9
2.25 Environmental and Safety Laws............................ 9
2.26 Minute Books............................................. 9
2.27 Section 1202 of the Internal Revenue Code................ 10
2.28 Brokers' or Finders' Fees................................ 10
2.29 Year 2000 Compliance..................................... 10
3. Representations and Warranties of the Investors................... 11
3.1 Authorization............................................ 11
3.2 Purchase Entirely for Own Account........................ 11
3.3 Disclosure of Information................................ 11
3.4 Investment Experience.................................... 11
3.5 Accredited Investor...................................... 12
i
<PAGE>
3.6 Restricted Securities...................................... 12
3.7 Further Limitations on Disposition......................... 12
3.8 Legends.................................................... 12
3.9 Brokers' or Finders' Fees.................................. 13
4. California Commissioner of Corporations............................. 13
4.1 Corporate Securities Law................................... 13
5. Conditions of Investor's Obligations at Closing..................... 13
5.1 Representations and Warranties............................. 13
5.2 Performance................................................ 13
5.3 Compliance Certificate..................................... 13
5.4 Qualifications............................................. 13
5.5 Proceedings and Documents.................................. 14
5.6 Board of Directors......................................... 14
5.7 Opinion of Company Counsel................................. 14
5.8 Amended and Restated Investors' Rights Agreement........... 14
5.9 Amended and Restated First Refusal and Co-Sale Agreement... 14
5.10 Management Rights Agreement................................ 14
5.11 Restated Certificate....................................... 14
6. Conditions of the Company's Obligations at Closing.................. 14
6.1 Representations and Warranties............................. 14
6.2 Qualifications............................................. 14
7. Miscellaneous....................................................... 15
7.1 Survival of Warranties..................................... 15
7.2 Successors and Assigns..................................... 15
7.3 Governing Law.............................................. 15
7.4 Counterparts............................................... 15
7.5 Titles and Subtitles....................................... 15
7.6 Notices.................................................... 15
7.7 Indemnification for Finder's Fee........................... 15
7.8 Expenses................................................... 16
7.9 Amendments and Waivers..................................... 16
7.10 Severability............................................... 16
7.11 Aggregation of Stock....................................... 16
7.12 Entire Agreement........................................... 16
7.13 Waiver of Conflicts........................................ 16
7.14 Right to Participate in Initial Public Offering............ 17
SCHEDULE A Schedule of Investors
SCHEDULE B Schedule of Exceptions
EXHIBIT A Restated Certificate of Incorporation
EXHIBIT B Amended and Restated Investors' Rights Agreement
ii
<PAGE>
EXHIBIT C Amended and Restated First Refusal and Co-Sale Agreement
EXHIBIT D Management Rights Agreement
EXHIBIT E Opinion of Counsel for the Company
iii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of May 28, 1999, by and among
CacheFlow Inc., a Delaware corporation (the "Company"), and the investors listed
on Schedule A hereto, each of which is herein referred to as an "Investor."
----------
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Series C Preferred Stock.
---------------------------------------------
(a) The Company shall adopt and file with the Secretary of
State of Delaware on or before the Closing (as defined below) the Restated
Certificate of Incorporation in the form attached hereto as Exhibit A (the
---------
"Restated Certificate").
(b) Subject to the terms and conditions of this Agreement,
each Investor agrees, severally, to purchase at the Closing or pursuant to
Section 1.3 and the Company agrees to sell and issue to each Investor at the
Closing or pursuant to Section 1.3, that number of shares of the Company's
Series C Preferred Stock set forth opposite each Investor's name on Schedule A
----------
hereto for the purchase price set forth thereon.
1.2 Closing. The purchase and sale of the Series C Preferred
-------
Stock shall take place at the offices of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, 155 Constitution Drive, Menlo Park, California, at
2:00 p.m., on May 28, 1999, or at such other time and place as the Company and
Investors acquiring in the aggregate more than half the shares of Series C
Preferred Stock sold pursuant hereto mutually agree upon orally or in writing
(which time and place are designated as the "Closing"). At the Closing, the
Company shall deliver to each Investor a certificate representing the Series C
Preferred Stock that such Investor is purchasing against payment of the purchase
price therefor by check or wire transfer.
1.3 Subsequent Sale of Series C Preferred Stock. The Company
-------------------------------------------
may sell up to the balance of the authorized number of shares of Series C
Preferred Stock not sold at the Closing to such purchasers as it shall select at
a price not less than $9.15 per share, provided the agreement for sale is
executed not later than July 31, 1999 and such purchasers are acceptable to
Technology Crossover Management III, L.L.C. (provided that any pro rata
investments by existing holders of the Company's Preferred Stock shall not
require any such approval). Any such purchaser shall become a party to this
Agreement, that certain Amended and Restated Investors' Rights Agreement of even
date herewith, by and among the Company, the Investors and the Founders (as
defined therein), the form of which is attached hereto as Exhibit B (the
---------
"Investors' Rights Agreement"), and that certain Amended and Restated First
Refusal and Co-Sale Agreement of even date herewith, by and among the Company,
the Investors and the Founders (as defined therein), the form of which is
attached hereto as Exhibit C (the "Co-Sale Agreement") and shall have the rights
---------
and obligations hereunder and thereunder, unless such purchaser enters into an
acquisition agreement that provides otherwise.
<PAGE>
2. Representations and Warranties of the Company. The Company
---------------------------------------------
hereby represents and warrants to each Investor that, except as set forth on a
Schedule of Exceptions attached hereto as Schedule B (the "Schedule of
----------
Exceptions") furnished each Investor, which exceptions shall be deemed to be
representations and warranties as if made hereunder:
2.1 Organization, Good Standing and Qualification. The Company
---------------------------------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own and operate its properties and assets, and to carry on its
business as now conducted and as proposed to be conducted. The Company is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure to so qualify would have a material adverse effect on its
business or properties.
2.2 Capitalization and Voting Rights. The authorized capital of
--------------------------------
the Company consists of:
(a) Preferred Stock. Fifteen million (15,000,000) shares
---------------
of Preferred Stock (the "Preferred Stock"), of which (i) three million one
hundred ninety-seven thousand (3,197,000) shares have been designated Series A
Preferred Stock (the "Series A Preferred Stock"), two million nine hundred
fifteen thousand four hundred seventy (2,915,470) of which are outstanding, (ii)
two million two hundred thousand (2,200,000) shares have been designated Series
B Preferred Stock (the "Series B Preferred Stock"), two million sixty-nine
thousand six hundred ninety-three (2,069,693) of which are outstanding, and
(iii) two million two hundred fifty thousand (2,250,000) shares have been
designated Series C Preferred Stock (the "Series C Preferred Stock"), none of
which will be outstanding immediately prior to the Closing and up to all of
which may be sold pursuant to this Agreement. The rights, privileges and
preferences of the Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock will be as stated in the Company's Restated Certificate.
(b) Common Stock. Thirty million (30,000,000) shares of
------------
common stock ("Common Stock"), six million three hundred twenty-one thousand
four hundred thirty (6,321,430) of which shares are outstanding.
(c) Except for (A) the conversion privileges of the Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, (B)
the rights provided in Section 2.4 of the Investors' Rights Agreement, (C)
currently outstanding options to purchase nine hundred twenty-four thousand one
(924,001) shares of the Company's Common Stock, (D) currently outstanding
warrants to purchase two hundred eighty-one thousand four hundred eighteen
(281,418) shares of the Company's Series A Preferred Stock, (E) currently
outstanding warrants to purchase seventy thousand nine hundred twenty-one
(70,921) shares of the Company's Series B Preferred Stock, and (F) currently
outstanding warrants to purchase fifty-five thousand (55,000) shares of the
Company's Preferred Stock (certain terms of such warrants are described in the
Schedule of Exceptions), there are not outstanding any options, warrants, rights
(including conversion or preemptive rights) or agreements for the purchase or
acquisition from the Company of any shares of its capital stock. The Company has
reserved seven hundred ninety-five thousand nine hundred (795,900) shares of its
Common Stock for purchase upon
2
<PAGE>
exercise of options to be granted in the future under the Company's 1996 Stock
Option Plan. The Company is not a party or subject to any agreement or
understanding, and, to the best of the Company's knowledge, there is no
agreement or understanding between any persons and/or entities, which affects or
relates to the voting or giving of written consents with respect to any security
or by a director of the Company other than as set forth in the Investors' Rights
Agreement.
(d) All outstanding shares of Preferred Stock and Common
Stock are validly issued, fully paid and non-assessable and were issued in
compliance with applicable federal and state securities laws. In addition, all
outstanding warrants to purchase Preferred Stock and options to purchase Common
Stock are validly issued and were issued in compliance with applicable federal
and state securities laws. The shares of Preferred Stock issuable upon exercise
of the warrants therefor, and the shares of Common Stock issuable upon
conversion of outstanding Preferred Stock, issuable upon conversion of Preferred
Stock issuable upon exercise of outstanding warrants therefor and issuable upon
exercise of outstanding options will, upon issuance, be validly issued, fully
paid, non-assessable and issued in compliance with applicable federal and state
laws.
2.3 Subsidiaries. The Company does not presently own or
------------
control, directly or indirectly, any interest in any other corporation,
association, or other business entity. The Company is not a participant in any
joint venture, partnership, or similar arrangement.
2.4 Authorization. All corporate action on the part of the
-------------
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the Investors' Rights
Agreement, the Management Rights Agreement by and between the Company and TCV
III (Q), L.P., in the form attached hereto as Exhibit D (the "Management Rights
---------
Agreement") and the Co-Sale Agreement, the performance of all obligations of the
Company hereunder and thereunder, and the authorization, issuance (or
reservation for issuance), sale and delivery of the Series C Preferred Stock
being sold hereunder and the Common Stock issuable upon conversion of the Series
C Preferred Stock has been taken, and this Agreement, the Investors' Rights
Agreement, the Management Rights Agreement and the Co-Sale Agreement constitute
valid and legally binding obligations of the Company, enforceable in accordance
with their respective terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
affecting enforcement of creditors' rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief, or
other equitable remedies, and (iii) to the extent the indemnification provisions
contained in the Investors' Rights Agreement may be limited by applicable
federal or state securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The Series C
--------------------------------------------
Preferred Stock that is being purchased by the Investors hereunder, when issued,
sold and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid, and
nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and the Investors' Rights
Agreement and under applicable state and federal securities laws. The Common
Stock issuable
3
<PAGE>
upon conversion of the Series C Preferred Stock purchased under this Agreement
has been duly and validly reserved for issuance and, upon issuance in accordance
with the terms of the Restated Certificate, will be duly and validly issued,
fully paid, and nonassessable and will be free of restrictions on transfer other
than restrictions on transfer under this Agreement and the Investors' Rights
Agreement and under applicable state and federal securities laws.
2.6 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for the filing pursuant to Section
25102(f) of the California Corporate Securities Law of 1968, as amended, and the
rules thereunder, which filing will be effected within 15 days of the sale of
the Series C Preferred Stock hereunder.
2.7 Offering. Subject in part to the truth and accuracy of each
--------
Investor's representations set forth in Section 3 of this Agreement, the offer,
sale and issuance of the Series C Preferred Stock as contemplated by this
Agreement are exempt from the registration requirements of the Securities Act of
1933, as amended (the "Act"), and the qualification or registration requirements
under applicable state securities laws and neither the Company nor any
authorized agent acting on its behalf will take any action hereafter that would
cause the loss of such exemption.
2.8 Litigation. There is no action, suit, proceeding or
----------
investigation pending or currently threatened against the Company that questions
the validity of this Agreement, the Investors' Rights Agreement or the Co-Sale
Agreement, or the right of the Company to enter into such agreements, or to
consummate the transactions contemplated hereby or thereby, or that might
result, either individually or in the aggregate, in any material adverse changes
in the assets, condition, affairs or prospects of the Company, financially or
otherwise, or any change in the current equity ownership of the Company. The
foregoing includes, without limitation, actions, suits, proceedings or
investigations pending or threatened involving the prior employment of any of
the Company's employees, their use in connection with the Company's business of
any information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers. The
Company is not a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.
2.9 Proprietary Information and Inventions Agreements. Each
-------------------------------------------------
employee, officer and consultant of the Company has executed a Proprietary
Information and Inventions Agreement or Consulting Agreement in the form made
available to the Investors. The Company, after reasonable investigation, is not
aware that any of its employees, officers or consultants are in violation
thereof, and the Company will use its best efforts to prevent any such
violation.
4
<PAGE>
2.10 Patents and Trademarks. To the best of its knowledge (but
----------------------
without having conducted any special investigation or patent search), the
Company has sufficient title and ownership of all patents, trademarks, service
marks, trade names, copyrights, trade secrets, information, proprietary rights
and processes necessary for its business as now conducted and as proposed to be
conducted without any conflict with or infringement of the rights of others.
There are no outstanding options, licenses, or agreements of any kind relating
to the foregoing, nor is the Company bound by or a party to any options,
licenses or agreements of any kind with respect to the patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses, information,
proprietary rights and processes of any other person or entity. The Company has
not received any communications alleging that the Company has violated or, by
conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. The Company is not aware that
any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Company or that would conflict with the Company's business as proposed to be
conducted, nor has the Company received any communications from any other party
to the contrary. Neither the execution nor delivery of this Agreement, the
Investors' Rights Agreement or the Co-Sale Agreement, nor the carrying on of the
Company's business by the employees of the Company, nor the conduct of the
Company's business as proposed, will, to the best of the Company's knowledge,
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any of such employees is now obligated. The Company does not believe it is or
will be necessary to utilize any inventions of any of its employees (or people
it currently intends to hire) made prior to their employment by the Company. To
the best of the Company's knowledge, no employee, consultant or officer has
taken, removed or made use of any proprietary documentation, manuals, products,
materials or any other tangible items from the employee's previous employers
relating to the Company's business.
2.11 Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default in any material respect of any provision of its Restated
Certificate or Bylaws, or in any material respect of any instrument, judgment,
order, writ, decree or contract to which it is a party or by which it is bound,
or, to the best of its knowledge, of any provision of any federal or state
statute, rule or regulation applicable to the Company. The execution, delivery
and performance of this Agreement, the Investors' Rights Agreement and the Co-
Sale Agreement, and the consummation of the transactions contemplated hereby and
thereby will not result in any such violation or be in conflict with or
constitute, with or without the passage of time or giving of notice, either a
default under any such provision, instrument, judgment, order, writ, decree or
contract or an event that results in the creation of any lien, charge or
encumbrance upon any assets of the Company or the suspension, revocation,
impairment, forfeiture, or nonrenewal of any material permit, license,
authorization, or approval applicable to the Company, its business or operations
or any of its assets or properties.
5
<PAGE>
2.12 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated hereby
and by the Investors' Rights Agreement and the Co-Sale Agreement, there are no
agreements, understandings or proposed transactions between the Company and any
of its officers, directors, affiliates, or any affiliate thereof.
(b) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to which
the Company is a party or by which it is bound that may involve (i) obligations
(contingent or otherwise) of, or payments to the Company in excess of $50,000,
or (ii) the license of any patent, copyright, trade secret or other proprietary
right to or from the Company (other than the license of the Company's software
and products in the ordinary course of business), or (iii) provisions
restricting or affecting the development, manufacture or distribution of the
Company's products or services.
(c) The Company has not (i) declared or paid any dividends
or authorized or made any distribution upon or with respect to any class or
series of its capital stock, (ii) incurred any indebtedness for money borrowed
or any other liabilities individually in excess of $50,000 or, in the case of
indebtedness and/or liabilities individually less than $50,000, in excess of
$200,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory in
the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
2.13 Permits. The Company has all franchises, permits, licenses,
-------
and any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company, and the
Company believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default in any material respect under any of such franchises,
permits, licenses or other similar authority.
2.14 Disclosure. The Company has fully provided each Investor
----------
with all the information that such Investor has requested for deciding whether
to purchase the Series C Preferred Stock. To the best of its knowledge, neither
this Agreement, the Investors' Rights Agreement, the Co-Sale Agreement, nor any
other statements or certificates made or delivered in connection herewith or
therewith contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements herein or therein not misleading.
6
<PAGE>
2.15 Registration Rights. Except as provided in the Investors'
-------------------
Rights Agreement, the Company has not granted or agreed to grant any
registration rights, including piggyback rights, to any person or entity.
2.16 Corporate Documents. Except for amendments necessary to
-------------------
satisfy representations and warranties or conditions contained herein (the form
of which amendments has been approved by the Investors), the Restated
Certificate and Bylaws of the Company are in the form previously made available
to the Investors.
2.17 Title to Property and Assets. The Company owns its property
----------------------------
and assets free and clear of all mortgages, liens, loans and encumbrances,
except such encumbrances and liens that arise in the ordinary course of business
and do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to the best of its knowledge, holds a valid
leasehold interest free of any liens, claims or encumbrances. The Company's
material properties and assets are in good condition, repair, ordinary wear and
tear excepted, in all material respects.
2.18 Financial Statements. The Company has delivered to each
--------------------
Investor its audited financial statements at April 30, 1998, and for the year
then ended, and its unaudited financial statements (balance sheet and income
statement) at April 30, 1999, and for the year then ended (the "Financial
Statements"). The Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated and with each other, except that the unaudited
Financial Statements do not contain all footnotes required by generally accepted
accounting principles. The Financial Statements fairly present the financial
condition and operating results of the Company as of the dates, and for the
periods, indicated therein, subject in the case of the unaudited Financial
Statements to normal year-end audit adjustments. Except as set forth in the
Financial Statements, the Company has no material liabilities, contingent or
otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to April 30, 1999, and (ii) obligations under contracts and
commitments incurred in the ordinary course of business and not required under
generally accepted accounting principles to be reflected in the Financial
Statements, which, in either case, individually or in the aggregate, are not
material to the financial condition or operating results of the Company.
2.19 Changes. Since April 30, 1999, there has not been:
-------
(a) any change in the assets, liabilities, financial
condition or operating results of the Company from that reflected in the
Financial Statements, except changes in the ordinary course of business that
have not been materially adverse;
(b) any damage, destruction or loss, whether or not covered
by insurance, materially and adversely affecting the assets, properties,
financial condition, operating results, prospects or business of the Company (as
such business is presently conducted and as it is proposed to be conducted);
7
<PAGE>
(c) any waiver by the Company of a valuable right or of a
material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and that is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and as it is proposed to be conducted);
(e) any material change or amendment to a material contract
or arrangement by which the Company or any of its assets or properties is bound
or subject;
(f) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;
(g) any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets, other than in
the ordinary course of business;
(h) any resignation or termination of employment of any
officer of the Company; and the Company, to the best of its knowledge, does not
know of any impending resignation or termination of employment of any such
officers;
(i) receipt of notice that there has been a loss of, or
material order cancellation by, any major customer of the Company;
(j) any mortgage, pledge, transfer of a security interest
in, or lien, created by the Company, with respect to any of its material
properties or assets, except liens for taxes not yet due or payable;
(k) any loans or guarantees made by the Company to or for
the benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(l) any declaration, setting aside or payment or other
distribution in respect to any of the Company's capital stock, or any direct or
indirect redemption, purchase, or other acquisition of any of such stock by the
Company;
(m) to the best of the Company's knowledge, any other event
or condition of any character that might materially and adversely affect the
assets, properties, financial condition, operating results or business of the
Company (as such business is presently conducted and as it is proposed to be
conducted); or
(n) any agreement or commitment by the Company to do any of
the things described in this Section 2.19.
2.20 Insurance. The Company has in full force and effect fire,
---------
casualty and liability insurance policies with recognized insurers with such
coverages as are sufficient in
8
<PAGE>
amount to allow replacement of the tangible properties of the Company that might
be damaged or destroyed.
2.21 Related Party Transactions. No employee, officer, or
--------------------------
director of the Company or member of his or her immediate family is indebted to
the Company, nor is the Company indebted (or committed to make loans or extend
or guarantee credit) to any of them. To the best of the Company's knowledge,
none of such persons has any direct or indirect ownership interest in any firm
or corporation with which the Company is affiliated or with which the Company
has a business relationship, or any firm or corporation that competes with the
Company, except that employees, officers, or directors of the Company and
members of their immediate families may own stock in publicly traded companies
that may compete with the Company. No member of the immediate family of any
officer or director of the Company is directly or indirectly interested in any
material contract with the Company.
2.22 Employee Benefit Plans. The Company does not have any
----------------------
Employee Benefit Plan as defined in the Employee Retirement Income Security Act
of 1974.
2.23 Tax Returns and Payments. The Company has filed all tax
------------------------
returns and reports as required by law. These returns and reports are true and
correct in all material respects. The Company has paid all taxes and other
assessments due.
2.24 Labor Agreements and Actions. The Company is not bound by
----------------------------
or subject to (and none of its assets or properties is bound by or subject to)
any written or oral, express or implied, contract, commitment or arrangement
with any labor union, and no labor union has requested or, to the best knowledge
of the Company, has sought to represent any of the employees, representatives or
agents of the Company. There is no strike or other labor dispute involving the
Company pending, or to the best knowledge of the Company threatened, which could
have a material adverse effect on the assets, properties, financial condition,
operating results, or business of the Company (as such business is presently
conducted and as it is proposed to be conducted), nor is the Company aware of
any labor organization activity involving its employees. The Company is not
aware that any officer or key employee, or that any group of key employees,
intends to terminate their employment with the Company, nor does the Company
have a present intention to terminate the employment of any of the foregoing.
There are no claims against the Company under any workers' compensation plan or
for long-term disability. There are no controversies pending or threatened
between the Company or its officers and any of its employees.
2.25 Environmental and Safety Laws. To the best of the
-----------------------------
Company's knowledge, it is not in violation of any applicable statute, law or
regulation relating to the environment or occupational health and safety which
would have a material effect on the employees, and to the best of its knowledge,
no material expenditures are or will be required in order to comply with any
such existing statute, law or regulation.
2.26 Minute Books. The copy of the minute books of the Company
------------
provided to the counsel for the Investors contains minutes of all meetings of
directors and stockholders and all actions by written consent without a meeting
by the directors and
9
<PAGE>
stockholders since the date of incorporation and reflects all actions by the
directors (and any committee of directors) and stockholders with respect to all
transactions referred to in such minutes accurately in all material respects.
2.27 Section 1202 of the Internal Revenue Code.
-----------------------------------------
(a) The Company is a "C" corporation for federal income tax
purposes, is an "eligible corporation" as defined in Section 1202(e)(4) of the
Internal Revenue Code of 1986, as amended (the "Code") and is engaged in a
"qualified trade or business" as defined in Section 1202(e)(3) of the Code.
(b) During the one-year period beginning on the date one
year before the date of this Agreement (the "Initial Closing"), the Company has
not made one or more purchases of its stock with an aggregate value (as of the
time of the respective purchases) exceeding 5% of the aggregate value of all of
its stock as of the beginning of such period.
(c) At all times during the period that began with the
formation of the Company and ends on the Initial Closing, the aggregate gross
assets of the Company did not exceed $50,000,000. For purposes of this
representation, (i) the amount received by the Company from the sale of its
stock as contemplated herein shall be taken into account, (ii) "aggregate gross
assets" shall mean the amount of (A) cash, (B) the aggregate fair market value
of all property contributed to the Company (or other property with a basis
determined in whole or part for federal income tax purposes by reference to the
adjusted basis of property so contributed) as of the date of such contribution,
and (C) the aggregate adjusted basis for federal income tax purposes of other
property held by the Company, and (iii) the Company shall be deemed to own its
ratable share of the assets of its subsidiaries, if any.
(d) Ten percent or less of the total value of the Company's
assets as of the Initial Closing consists of real property that is not used in
the Company's business.
(e) Ten percent or less of the total value of the Company's
assets (in excess of liabilities) as of the Initial Closing consists of stock or
securities in other corporations that are not subsidiaries of the Company (other
than assets described in Section 1202(e)(6) of the Code).
2.28 Brokers' or Finders' Fees. The Company has not incurred,
-------------------------
and will not incur, directly or indirectly, as a result of any action taken by
the Company, any liability for brokers' or finders' fees or agents' commissions
or any similar charges in connection with this transaction.
2.29 Year 2000 Compliance. To the best of its knowledge, all of
--------------------
the Company's products (including products currently under development) will
record, store, process, calculate and present calendar dates falling on and
after (and if applicable, spans of time including) September 9, 1999 and January
1, 2000, and will calculate any information dependent on or relating to such
dates in the same manner, and with the same functionality, data integrity
10
<PAGE>
and performance, as the products record, store, process, calculate and present
calendar dates on or before September 8, 1999 and December 31, 1999, or
calculate any information dependent on or relating to such dates (collectively,
"Year 2000 Compliant"). To the best of its knowledge, the Company's internal
computer and technology products and systems are Year 2000 Compliant.
3. Representations and Warranties of the Investors. Each Investor
-----------------------------------------------
hereby represents and warrants that:
3.1 Authorization. Such Investor has full power and authority
-------------
to enter into this Agreement, the Investors' Rights Agreement and the Co-Sale
Agreement, and each such Agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, (ii)
as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in the Investors' Rights Agreement may be
limited by applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made
---------------------------------
with such Investor in reliance upon such Investor's representation to the
Company, which by such Investor's execution of this Agreement such Investor
hereby confirms, that the Series C Preferred Stock to be received by such
Investor and the Common Stock issuable upon conversion thereof (collectively,
the "Securities") will be acquired for investment for such Investor's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that such Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, such Investor further represents that
such Investor does not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participations to such person or to
any third person, with respect to any of the Securities.
3.3 Disclosure of Information. Such Investor believes it has
-------------------------
received all the information it considers necessary or appropriate for deciding
whether to purchase the Series C Preferred Stock. Such Investor further
represents that it has had an opportunity to ask questions and receive answers
from the Company regarding the terms and conditions of the offering of the
Series C Preferred Stock and the business, properties, prospects and financial
condition of the Company. The foregoing, however, does not limit or modify the
representations and warranties of the Company in Section 2 of this Agreement or
the right of the Investors to rely thereon.
3.4 Investment Experience. Such Investor is an investor in
---------------------
securities of companies in the development stage and acknowledges that it is
able to fend for itself, 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 Series C
Preferred Stock. If other than an individual, Investor also represents it has
not been organized for the purpose of acquiring the Series C Preferred Stock.
11
<PAGE>
3.5 Accredited Investor. Such Investor is an "accredited
-------------------
investor" within the meaning of Securities and Exchange Commission ("SEC") Rule
501 of Regulation D, as presently in effect.
3.6 Restricted Securities. Such Investor understands that the
---------------------
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
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 Act only in certain limited circumstances. In this connection, such
Investor represents that it is familiar with SEC Rule 144, as presently in
effect, and understands the resale limitations imposed thereby and by the Act.
3.7 Further Limitations on Disposition. Without in any way
----------------------------------
limiting the representations set forth above, such Investor further agrees not
to make any disposition of all or any portion of the Securities unless and
until:
(a) There is then in effect a registration statement under
the Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, such Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company that
such disposition will not require registration of such shares under the Act. It
is agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 except in unusual circumstances.
(c) Notwithstanding the provisions of paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by an Investor that is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner or the transfer
by gift, will or intestate succession by any partner to his or her spouse or to
the siblings, lineal descendants or ancestors of such partner or his or her
spouse, if the transferee agrees in writing to be subject to the terms hereof to
the same extent as if he or she were an original Investor hereunder.
3.8 Legends. It is understood that the certificates evidencing
-------
the Securities may bear one or all of the following legends:
(a) "These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement in effect
with respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or unless
sold pursuant to Rule 144 of such Act."
12
<PAGE>
(b) Any legend required by the laws of the State of
California, including any legend required by the California Department of
Corporations and Sections 417 and 418 of the California Corporations Code.
3.9 Brokers' or Finders' Fees. No Investor has incurred, nor
-------------------------
will incur, directly or indirectly, as a result of any action taken by it, any
liability for brokers' or finders' fees or agents' commissions or any similar
charges in connection with this transaction.
4. California Commissioner of Corporations.
---------------------------------------
4.1 Corporate Securities Law. THE SALE OF THE SECURITIES THAT
------------------------
ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES
OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
5. Conditions of Investor's Obligations at Closing. The obligations
-----------------------------------------------
of each Investor under subsection 1.1(b) of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against any Investor who does not consent
thereto:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
5.2 Performance. The Company shall have performed and complied
-----------
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
5.3 Compliance Certificate. The President of the Company shall
----------------------
deliver to each Investor at the Closing a certificate stating that the
conditions specified in Sections 5.1 and 5.2 have been fulfilled and stating
that there shall have been no adverse change in the business, affairs,
operations, properties, assets or condition of the Company since April 30, 1999.
5.4 Qualifications. All authorizations, approvals, or permits,
--------------
if any, of any governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful issuance and sale
of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
13
<PAGE>
5.5 Proceedings and Documents. All corporate and other
-------------------------
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to the Investors, and they shall have received all such counterpart
original and certified or other copies of such documents as they may reasonably
request.
5.6 Board of Directors. The Board of Directors of the Company
------------------
shall consist of five (5) persons. The directors of the Company at the Closing
shall be Brian NeSmith, Michael Malcolm, David Hanna, Andrew S. Rachleff and
Stuart Phillips, and there shall be no vacancies on the Board of Directors.
5.7 Opinion of Company Counsel. Each Investor shall have
--------------------------
received from Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
counsel for the Company, an opinion, dated as of the Closing, in the form
attached hereto as Exhibit E.
---------
5.8 Amended and Restated Investors' Rights Agreement. The
------------------------------------------------
Company and each Investor and Founder (as defined therein) shall have entered
into the Amended and Restated Investors' Rights Agreement in the form attached
as Exhibit B.
---------
5.9 Amended and Restated First Refusal and Co-Sale Agreement.
--------------------------------------------------------
The Company and each Investor and Founder (as defined therein) shall have
entered into the Amended and Restated First Refusal and Co-Sale Agreement in the
form attached as Exhibit C.
---------
5.10 Management Rights Agreement. The Company shall have
---------------------------
executed and delivered to TCV III (Q), L.P., a Management Rights Agreement in
the form attached hereto as Exhibit D.
---------
5.11 Restated Certificate. The Restated Certificate in the form
--------------------
attached hereto as Exhibit A, shall have been accepted for filing by the
---------
Secretary of State of the State of Delaware.
6. Conditions of the Company's Obligations at Closing. The
--------------------------------------------------
obligations of the Company to each Investor under this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions by
that Investor:
6.1 Representations and Warranties. The representations and
------------------------------
warranties of the Investor contained in Section 3 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the Closing.
6.2 Qualifications. All authorizations, approvals, or permits,
--------------
if any, of any governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful issuance and sale
of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
14
<PAGE>
7. Miscellaneous.
-------------
7.1 Survival of Warranties. The warranties, representations and
----------------------
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
7.2 Successors and Assigns. Except as otherwise provided
----------------------
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties
(including transferees of any Securities). Nothing in this Agreement, express
or implied, is intended to confer upon any party other than the parties hereto
or their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
7.3 Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
7.4 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.
7.5 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.
7.6 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
delivery by confirmed facsimile transmission or nationally recognized overnight
courier service or three days after deposit with the United States Post Office,
by registered or certified mail, postage prepaid and addressed to the party to
be notified at the address indicated for such party on the signature page
hereof, or at such other address as such party may designate by ten (10) days'
advance written notice to the other parties.
7.7 Indemnification for Finders' Fee. Each Investor agrees to
--------------------------------
indemnify and to hold harmless the Company from any liability for any commission
or compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which such Investor
or any of its officers, partners, employees, or representatives is responsible.
The Company agrees to indemnify and hold harmless each Investor from
any liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
15
<PAGE>
7.8 Expenses. If any action at law or in equity is necessary to
--------
enforce or interpret the terms of this Agreement, the Investors' Rights
Agreement, the Management Rights Agreement, the Co-Sale Agreement or the
Restated Certificate, 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. If the Closing is effected, the
Company shall, at the Closing, reimburse the reasonable fees of special counsel
for the Investors, not to exceed $15,000. Irrespective of whether the Closing
is effected, the Company shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement.
7.9 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
at least a majority of the Common Stock issuable or issued upon conversion of
the Series C Preferred Stock; provided, however, that any amendment or waiver of
Section 7.14 of this Agreement shall require the written consent of the Company
and the holders of at least sixty-seven percent (67%) of the Common Stock
issuable or issued upon conversion of the Series C Preferred Stock. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each holder of any securities purchased under this Agreement at the time
outstanding (including securities into which such securities are convertible),
each future holder of all such securities, and the Company.
7.10 Severability. If one or more provisions of this Agreement
------------
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
7.11 Aggregation of Stock. All shares of the Series C Preferred
--------------------
Stock held or acquired by affiliated entities or persons shall be aggregated
together for the purpose of determining the availability of any rights under
this Agreement.
7.12 Entire Agreement. This Agreement and the documents referred
----------------
to herein constitute the entire agreement among the parties and no party shall
be liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or
therein.
7.13 Waiver of Conflicts. Each party to this Agreement
-------------------
acknowledges that Gunderson Dettmer, counsel for the Company, has in the past
and may continue to perform legal services for certain of the Investors in
matters unrelated to the transactions described in this Agreement, including the
representation of such Investors in venture capital financings and other
matters. Accordingly, each party to this Agreement hereby (1) acknowledges that
they have had an opportunity to ask for information relevant to this disclosure;
(2) acknowledges that Gunderson Dettmer represented the Company in the
transaction contemplated by this Agreement and has not represented any
individual Investor or any individual shareholder or employee of the Company in
connection with such transaction; and (3) gives its informed consent to
Gunderson
16
<PAGE>
Dettmer's representation of certain of the Investors in such unrelated matters
and to Gunderson Dettmer's representation of the Company in connection with this
Agreement and the transactions contemplated hereby.
7.14 Right to Participate in Initial Public Offering. In
-----------------------------------------------
connection with the Company's initial firm commitment underwritten public
offering (the "IPO"), the Company shall use its best efforts to cause the
managing underwriter or underwriters of such IPO to establish a program (the
"Program") whereby such managing underwriter or underwriters give the Investors
priority, as described herein, with respect to the purchase of shares of the
Company's Common Stock available for sale pursuant to the Program.
Subject to the terms hereof, the number of shares of Common Stock
available for sale pursuant to the Program (the "Program Shares") shall equal no
less than the quotient obtained by dividing (i) the lesser of (A) five million
dollars ($5,000,000), or (B) eight percent (8%) of the aggregate gross proceeds
to the Company from the IPO, by (ii) the gross price per share negotiated by the
Company with the managing underwriter or underwriters as reflected on the final
prospectus; provided, however, that such number of Program Shares shall be
subject to reasonable reduction by the Company if (i) the Company's Board of
Directors determines in good faith, by a duly adopted resolution (based in part
on the advice of the managing underwriter or underwriters), that the purchase by
the Investors of the number of Program Shares determined in accordance with the
provisions hereof would be materially detrimental to the success of the IPO, or
(ii) necessary to guarantee that at least one percent (1%) of the total shares
offered to the public in the IPO is available for distribution to insiders of
the Company and their friends and family.
The managing underwriter or underwriters shall offer to each Investor
the right to purchase its Pro-Rata Share of the Program Shares. Each Investor's
"Pro-Rata Share" shall equal the quotient obtained by dividing (i) the number of
shares of Common Stock issuable or issued upon conversion of shares of Series C
Preferred Stock then held by such Investor, by (ii) the number of shares of
Common Stock issuable or issued upon conversion of shares of Series C Preferred
Stock then held by all Investors.
To the extent that one or more of the Investors do not purchase their
full Pro-Rata Share of the Program Shares, the Company shall use its best
efforts to cause the managing underwriter or underwriters to offer to each
Investor that elects to purchase its full Pro-Rata Share (a "Fully-Exercising
Investor") that portion of the Program Shares for which Investors were entitled
to subscribe but which were not subscribed for by the Investors (the
"Unsubscribed Program Shares") that is equal to the proportion that the number
of shares of Common Stock issuable or issued upon conversion of shares of Series
C Preferred Stock then held by such Fully-Exercising Investor bears to the total
number of shares of Common Stock issuable or issued upon conversion of shares of
Series C Preferred Stock then held by all Fully-Exercising Investors who wish to
purchase any of the Unsubscribed Program Shares.
The Program may be amended, modified or eliminated if in the
reasonable discretion of the Company's Board of Directors, such action is
necessary to comply with all
17
<PAGE>
federal and state securities laws and regulations, including, without
limitation, Rule 134 of the Securities Act of 1933, as amended, and all
applicable rules and regulations promulgated by the National Association of
Securities Dealers, Inc. and other such self-regulating or quasi-public
regulatory organizations.
Notwithstanding the foregoing, the Investors participating in the
Program shall comply with all requirements and procedures required by the
managing underwriter or underwriters of the IPO of purchasers participating in a
directed share program, if any, or of purchasers in the IPO generally.
Furthermore, the Investors agree to furnish upon request to the Company and the
managing underwriter or underwriters of the IPO such further information, to
execute and deliver to the Company and the managing underwriter or underwriters
of the IPO such other documents, and to do such other acts and things, all as
the Company and the managing underwriter or underwriters of the IPO may request
for the purpose of carrying out the intent of this Section 7.14.
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CACHEFLOW INC.
By: _________________________________
Brian NeSmith
President
Address: 650 Almanor Avenue
Sunnyvale, California 94086
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
INVESTORS:
TCV III (GP)
a Delaware General Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: __________________________________
Robert C. Bensky
Chief Financial Officer
TCV III, L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: __________________________________
Robert C. Bensky
Chief Financial Officer
TCV III (Q), L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: __________________________________
Robert C. Bensky
Chief Financial Officer
TCV III Strategic Partners, L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: __________________________________
Robert C. Bensky
Chief Financial Officer
Address: 56 Main Street, Suite 210
Millburn, NJ 07041
Attention: Robert C. Bensky
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
U.S. Venture Partners V, L.P.
USVP V International, L.P.
2180 Associates Fund V, L.P.
USVP V Entrepreneur Partners, L.P.
By Presidio Management Group V, L.L.C.
Its General Partner
By: ______________________________________
Address: 2180 Sand Hill Road, Suite 300
Menlo Park, California 94025
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
BENCHMARK CAPITAL PARTNERS, L.P.
By: BENCHMARK CAPITAL MANAGEMENT
CO., L.L.C.
Its General Partner
By: ________________________________________
Member
BENCHMARK FOUNDERS' FUND, L.P.
By: BENCHMARK CAPITAL MANAGEMENT
CO., L.L.C.
Its General Partner
By: ________________________________________
Member
Address: 2480 Sand Hill Road, Suite 200
Menlo Park, California 94025
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
K-H INVESTORS (1996-B), L.P.
By: ________________________________
Print Name: ________________________
Title: _____________________________
Address: c/o Hanna Capital Management
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
K-H INVESTORS (1998-A), L.P.
By: ________________________________
Print Name: ________________________
Title: _____________________________
Address: c/o Hanna Capital Management
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
HANNA VENTURES - CACHEFLOW III, L.P.
By: ____________________________________
Print Name: ____________________________
Title: _________________________________
Address: c/o Hanna Capital Management
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
DAVID WILLIAM HANNA TRUST
DATED 10/30/89
By: _________________________________
Print Name: _________________________
Title: ______________________________
Address: c/o Hanna Capital Management
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
__________________________________
Virginia L. Hanna
Address: c/o Hanna Capital Management
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
_____________________________________
Michael A. Malcolm
Address: 521 Shelby Lane
Los Altos, California 94024
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
Eger Family L.P.
_________________________________
Frank Terry Eger, Trustee
Address: P.O. Box 1624
Los Altos, California 94023-1624
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
_________________________________
R. Randolph Scott
Address: 312 Coleridge Avenue
Palo Alto, California 94301
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
____________________________________
John S. Troedson
Address: 165 Sausal Drive
Portola Valley, California 94028
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
_________________________________
Brent Silver
Address: 139 Hillcrest Terrace
Santa Cruz, California 95060
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
Barton Investments LLC
By: _________________________________
Title: ______________________________
Address: 19607 Farwell Avenue
Saratoga, California 95070
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
Gresham Venture Partners, L.L.C.
By: __________________________________
Larry R. Jasper, Manager
Address: 11 McBride Corporate Center Drive
Suite 250
Chesterfield, Missouri 63005-1407
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
ROBERT D. KELLY LIVING TRUST DTD
12/7/89
_________________________________________
Robert D. Kelly, Trustee
Address: 3102 Flavin Lane
Pebble Beach, California 93953
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
_______________________________
Doug Richardson
Address: 3570 Admiral Way S.W.
Seattle, Washington 98126
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
__________________________________
David Hartley
Address: 10446 S.E. 25/th/ Street
Bellevue, Washington 98004
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
G & H Partners
By: ___________________________________
Partner
Address: c/o Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, California 94025
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
____________________________________
Karl Johnson
Address: 544 Tennyson Avenue
Palo Alto, California 94301
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
_____________________________________
Ray Myers
_____________________________________
Janet Myers
Address: 783 West Greenwich Place
Palo Alto, California 94303
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
______________________________________
Earl Anderson
Address: 2304 Killarney Way S.E.
Bellevue, Washington 98004
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
_____________________________________________
(Name of Investor as it should appear on the
Series C Preferred Stock Certificate)
By: _________________________________________
Print Name: _________________________________
Title: ______________________________________
Address: _____________________________________________
_____________________________________________
Telephone: ___________________________________________
Facsimile: __________________________________________
PLEASE PROVIDE ALL OF THE ABOVE-REQUESTED INFORMATION
-----------------------------------------------------
SIGNATURE PAGE TO CACHEFLOW INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
SCHEDULE A
----------
Schedule of Investors
<TABLE>
<CAPTION>
Number Total Purchase
Name and Address of Shares Price of Shares
- ---------------- --------- ---------------
<S> <C> <C>
TCV III (GP) 6,865 $ 62,814.75
TCV III, L.P. 32,608 298,363.20
TCV III (Q), L.P. 866,687 7,930,186.05
TCV III Strategic Partners, L.P. 39,248 359,119.20
c/o Robert C. Bensky
Technology Crossover Ventures
56 Main Street, Suite 210
Millburn, NJ 07041
with a copy to:
Jay C. Hoag
Technology Crossover Ventures
575 High Street, Suite 400
Palo Alto, CA 94301
Benchmark Capital Partners, L.P. 323,781 2,962,596.15
Benchmark Founders' Fund, L.P. 45,253 414,064.95
2480 Sand Hill Road, Suite 200
Menlo Park, California 94025
Michael A. Malcolm 400,558 3,665,105.70
521 Shelby Lane
Los Altos, California 94024
U.S. Venture Partners V, L.P. 205,029 1,876,015.35
USVP V International, L.P. 11,391 104,227.65
USVP V Entrepreneur Partners, L.P. 5,012 45,859.80
2180 Associates Fund V, L.P. 6,379 58,367.85
2180 Sand Hill Road, Suite 300
Menlo Park, California 94025
Hanna Ventures - CacheFlow III, L.P. 61,000 558,150.00
c/o Hanna Capital Management, Inc.
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
David William Hanna Trust Dated 10/30/89 43,716 400,001.40
c/o Hanna Capital Management, Inc.
620 Newport Center Drive, Suite 500
Newport Beach, California 92660
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Total Purchase
Name and Address of Shares Price of Shares
- ---------------- --------- ---------------
<S> <C> <C>
Eger Family L.P. 38,251 349,996.65
P.O. Box 1624
Los Altos, California 94023-1624
Gresham Venture Partners, L.L.C. 24,590 224,998.50
c/o Larry R. Jasper, Manager
11 McBride Corporate Center Drive, Suite 250
Chesterfield, Missouri 63005-1407
Ray Myers and Janet Myers 21,858 200,000.70
783 West Greenwich Place
Palo Alto, California 94303
Barton Investments LLC 9,863 90,246.45
19607 Farwell Avenue
Saratoga, California 95070
Earl Anderson 7,478 68,423.70
2304 Killarney Way S.E.
Bellevue, Washington 98004
David Hartley 7,478 68,423.70
3025 52/nd/ Avenue, Southwest
Seattle, Washington 98116
G & H Partners 6,698 61,286.70
c/o Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, California 94025
Robert D. Kelly Living Trust DTD 12/7/89, 3,047 27,880.05
Robert D. Kelly Trustee 1,455 13,313.25
Richard Greenberg 1,000 9150.00
John and Margaret Langley Revocable Trust
DTD 11/5/91
c/o R.D. Kelly Capital Management
200 Clock Tower Place, Suite A-102
Carmel, California 93923-8783
Karl Johnson 5,464 49,995.60
544 Tennyson Avenue
Palo Alto, California 94301
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Total Purchase
Name and Address of Shares Price of Shares
- ---------------- --------- ---------------
<S> <C> <C>
Douglas Richardson 5,464 49,995.60
3570 Admiral Way S.W.
Seattle, Washington 98126
Brent Silver 4,671 42,739.65
139 Hillcrest Terrace
Santa Cruz, California 95060
John S. Troedson 949 8,683.35
165 Sausal Drive
Portola Valley, California 94028
TOTAL: 2,185,793 $20,000,005.95
========= ==============
</TABLE>
<PAGE>
SCHEDULE B
----------
Schedule of Exceptions
See Tab 2
<PAGE>
EXHIBIT A
---------
Restated Certificate of Incorporation
See Tab 7
<PAGE>
EXHIBIT B
---------
Amended and Restated Investors' Rights Agreement
See Tab 3
<PAGE>
EXHIBIT C
---------
Amended and Restated First Refusal and Co-Sale Agreement
See Tab 4
<PAGE>
EXHIBIT D
---------
Management Rights Agreement
<PAGE>
EXHIBIT E
---------
Opinion of Company Counsel
See Tab 17
<PAGE>
EXHIBIT 10.2
CACHEFLOW INC.
1996 STOCK OPTION PLAN
ARTICLE 1
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1996 Stock Option Plan is intended to promote the interests of
CacheFlow Inc., a Delaware corporation, by providing eligible persons 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
the service of the Corporation.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. 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.
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 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 shares issued thereunder.
III. ELIGIBILITY
A. The persons eligible to receive option grants under the Plan are
as follows:
(i) Employees, and
(ii) non-employee members of the Board or the non-employee
members of the board of directors of any Parent or Subsidiary.
B. The Plan Administrator shall have full authority to determine
which eligible persons are to receive option grants under the Plan, the time or
times when such option 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 at
<PAGE>
which 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.
IV. 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
4,821,390/1/ shares.
B. 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. All shares issued under the Plan, whether or not those shares are
subsequently repurchased by the Corporation pursuant to its repurchase rights
under the Plan, shall reduce on a share-for-share basis the number of shares of
Common Stock available for subsequent issuance under the Plan.
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/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.
- -----------------
/1/ Share number represents original pool of 500,000 shares, approved by the
Board upon adoption of the Plan on June 28, 1996; increase of 788,098 shares,
approved by the Board on October 25, 1996; increase of 800,000 shares, approved
by the Board on June 18, 1997; increase of 1,832,333 shares, approved by the
Board on December 11, 1997; increase of 700,000 shares, approved by the Board on
March 2, 1999; increase of 200,959 shares, approved by the Board on May 19,
1999; a two-for-one stock split, approved by the Board on June 18, 1999, and an
increase of 3,000,000 shares (post-split), approved by the Board on August 27,
1999.
2
<PAGE>
ARTICLE 2
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%
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.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Three 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(g) 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 written 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 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.
3
<PAGE>
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.
C. Effect of Termination of Service. 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 Permanent Disability or death, 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 such Service terminate by reason of Disability,
then the Optionee shall have a period of six (6) months following the date of
such cessation of Service during which to exercise each outstanding option held
by such Optionee. However, should such Disability be deemed to constitute
Permanent Disability, then the period during which each outstanding option held
by the Optionee is to remain exercisable shall be extended by an additional six
(6) months so that the exercise period shall be the twelve (12)-month period
following the date of the Optionee's cessation of Service by reason of such
Permanent Disability.
(iii) Should the Optionee die while holding one or more
outstanding options, then 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 in accordance with the laws of descent and distribution shall
have a period of twelve (12) months following the date of the Optionee's death
during which to exercise each 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 to the extent it is
not exercisable for vested shares on the date of such cessation of Service.
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. Unvested Shares. The Plan Administrator shall have the
---------------
discretion to grant options which are exercisable for unvested shares of Common
Stock under the Plan. 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, all or (at the discretion of the Corporation and
with the consent of the Optionee) any of those unvested shares. The terms upon
4
<PAGE>
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 any option grant or any shares of Common Stock subject
to the option which is more restrictive than twenty percent (20%) per year
vesting, with the initial vesting to occur one (1) year after the option grant
date. However, this minimum vesting requirement shall not be applicable with
respect to any option granted to an officer, director or consultant.
F. First Refusal Rights. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) 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.
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. However, a Non-Statutory Option may
be assigned in whole or in part during Optionee's lifetime in accordance with
the terms of a Qualified Domestic Relations Order. The assigned portion may only
be exercised by the person or persons who acquire a proprietary interest in the
option pursuant to such Qualified Domestic Relations Order. 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.
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 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. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the option term shall not exceed five (5)
years measured from the option grant date.
5
<PAGE>
III. CORPORATE TRANSACTION
A. In the event of any Corporate Transaction, each outstanding
option shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or parent thereof) in connection with such
Corporate Transaction. All outstanding Repurchase Rights shall lapse except to
the extent assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction.
B. 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 the 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.
C. 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.
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.
6
<PAGE>
ARTICLE 3
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee to pay the option
exercise price by delivering a 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. Promissory notes may be authorized with or without
security or collateral. In all events, the maximum credit available to the
Optionee may not exceed the sum of (i) the aggregate option exercise price
---
payable for the purchased shares (less the par value of such shares) plus (ii)
any Federal, state and local income and employment tax liability incurred by the
Optionee in connection with the option exercise.
II. ADDITIONAL AUTHORITY
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 extend the period of time for which the option is to remain
exercisable following the 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.
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan became effective when adopted by the Board and the
Corporation's stockholders approved the Plan. The Plan has been amended on
several occasions to increase the number of shares reserved for issuance, most
recently on March 2 and May 19, 1999 to increase the share reserve by 700,000
shares and 200,959, respectively, but no option granted under the Plan on the
basis of the most recent increases may be exercised until the share increases
are approved by the Corporation's stockholders. If such stockholder approval is
not obtained within twelve (12) months after the date of the Board's approval of
the amendment of the Plan, then all options previously granted under the Plan on
the basis of such share increase shall terminate and cease to be outstanding,
and no further options shall be granted on the basis of such increase. Subject
to such limitation, the Plan Administrator may grant options under the Plan at
any time after the effective date of the Plan and before the date fixed herein
for termination of the Plan.
B. The Plan shall terminate upon the earliest of (i) the expiration
--------
of the ten (10)-year period measured from the date the Plan is adopted by the
Board, (ii) the date on which all shares available for issuance under the Plan
shall have been issued or (iii) the termination of all outstanding options in
connection with a Corporate Transaction. Upon such Plan termination, all options
and unvested stock issuances outstanding under the Plan shall continue to have
full force and effect in accordance with the provisions of the documents
evidencing such options or issuances.
7
<PAGE>
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, without the consent of the Optionees, adversely affect
their rights and obligations under their outstanding options. In addition, the
Board shall not, without the approval of the Corporation's stockholders, (i)
increase the maximum number of shares issuable under the Plan, except for
permissible adjustments in the event of certain changes in the Corporation's
capitalization, (ii) materially modify the eligibility requirements for Plan
participation or (iii) materially increase the benefits accruing to Plan
participants.
B. Options may be granted under the Plan to purchase shares of
Common Stock in excess of the number of shares then available for issuance under
the Plan, provided any such options actually granted may not be exercised 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 excess grants are first made, then any options granted on the basis of
such excess shares shall terminate 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
The implementation of the Plan, the granting of any options under the
Plan and the issuance of any shares of Common Stock upon the exercise of any
option 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 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 Optionee) or of the Optionee, which rights are
hereby expressly reserved by each, to terminate the Optionee'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.
8
<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 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.
F. Corporation shall mean CacheFlow Inc., a Delaware corporation.
-----------
G. Disability shall mean the inability of the Optionee 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. Disability shall be deemed to constitute Permanent Disability in
the event that such Disability is expected to result in death or has lasted or
can be expected to last for a continuous period of twelve (12) months or more.
H. Domestic Relations Order shall mean any judgment, decree or order
------------------------
(including approval of a property settlement agreement) which provides or
otherwise conveys, pursuant to applicable State domestic relations laws
(including community property laws), marital property rights to any spouse or
former spouse of the Optionee.
I. 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.
J. Exercise Date shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
K. 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 or
any successor system. 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.
L. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
M. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
--------
N. Non-Statutory Option shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
O. Optionee shall mean any person to whom an option is granted under the
--------
Plan.
P. 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.
Q. Plan shall mean the Corporation's 1996 Stock Option Plan, as set
----
forth in this document.
R. Plan Administrator shall mean either the Board or the Committee, to
------------------
the extent the Committee is at the time responsible for the administration of
the Plan.
S. Qualified Domestic Relations Order shall mean a Domestic Relations
----------------------------------
Order which substantially complies with the requirements of Code Section 414(p).
The Plan Administrator shall have the sole discretion to determine whether a
Domestic Relations Order is a Qualified Domestic Relations Order.
A-2
<PAGE>
T. 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, except to the extent
otherwise specifically provided in the documents evidencing the option grant.
U. Stock Exchange shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
V. 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.
W. 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).
A-3
<PAGE>
EXHIBIT 10.3
CACHEFLOW INC.
1999 STOCK INCENTIVE PLAN
(AS ADOPTED SEPTEMBER __, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I. INTRODUCTION................................................. 1
ARTICLE II. ADMINISTRATION.............................................. 1
2.1 Committee Composition.......................................... 1
2.2 Committee Responsibilities..................................... 1
2.3 Committee for Non-Officer Grants............................... 1
ARTICLE III. SHARES AVAILABLE FOR GRANTS................................ 2
3.1 Basic Limitation............................................... 2
3.2 Annual Increase in Shares...................................... 2
3.3 Additional Shares.............................................. 2
3.4 Dividend Equivalents........................................... 2
ARTICLE IV. ELIGIBILITY................................................. 2
4.1 Incentive Stock Options........................................ 2
4.2 Other Grants................................................... 3
ARTICLE V. OPTIONS...................................................... 3
5.1 Stock Option Agreement......................................... 3
5.2 Number of Shares............................................... 3
5.3 Exercise Price................................................. 3
5.4 Exercisability and Term........................................ 3
5.5 Modification or Assumption of Options.......................... 3
5.6 Buyout Provisions.............................................. 4
ARTICLE VI. PAYMENT FOR OPTION SHARES................................... 4
6.1 General Rule................................................... 4
6.2 Surrender of Stock............................................. 4
6.3 Exercise/Sale.................................................. 4
6.4 Exercise/Pledge................................................ 4
6.5 Promissory Note................................................ 4
6.6 Other Forms of Payment......................................... 5
ARTICLE VII. STOCK APPRECIATION RIGHTS.................................. 5
7.1 SAR Agreement.................................................. 5
7.2 Number of Shares............................................... 5
7.3 Exercise Price................................................. 5
7.4 Exercisability and Term........................................ 5
7.5 Exercise of SARs............................................... 5
7.6 Modification or Assumption of SARs............................. 6
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE VIII. RESTRICTED SHARES......................................... 6
8.1 Restricted Stock Agreement..................................... 6
8.2 Payment for Awards............................................. 6
8.3 Vesting Conditions............................................. 6
8.4 Voting and Dividend Rights..................................... 6
ARTICLE IX. STOCK UNITS................................................. 6
9.1 Stock Unit Agreement........................................... 6
9.2 Payment for Awards............................................. 7
9.3 Vesting Conditions............................................. 7
9.4 Voting and Dividend Rights..................................... 7
9.5 Form and Time of Settlement of Stock Units..................... 7
9.6 Death of Recipient............................................. 7
9.7 Creditors' Rights.............................................. 7
ARTICLE X. CHANGE IN CONTROL............................................ 8
10.1 Effect of Change in Control................................... 8
10.2 Involuntary Termination....................................... 8
ARTICLE XI. PROTECTION AGAINST DILUTION................................. 8
11.1 Adjustments................................................... 8
11.2 Dissolution or Liquidation.................................... 9
11.3 Reorganizations............................................... 9
ARTICLE XII. DEFERRAL OF AWARDS......................................... 9
ARTICLE XIII. AWARDS UNDER OTHER PLANS.................................. 9
ARTICLE XIV. PAYMENT OF FEES IN SECURITIES.............................. 10
14.1 Effective Date................................................ 10
14.2 Elections to Receive NSOs, Restricted Shares or Stock Units... 10
14.3 Number and Terms of NSOs, Restricted Shares or Stock Units.... 10
ARTICLE XV. LIMITATION ON RIGHTS........................................ 10
15.1 Retention Rights.............................................. 10
15.2 Stockholders' Rights.......................................... 10
15.3 Regulatory Requirements....................................... 10
ARTICLE XVI. WITHHOLDING TAXES.......................................... 11
16.1 General....................................................... 11
16.2 Share Withholding............................................. 11
ARTICLE XVII. FUTURE OF THE PLAN........................................ 11
17.1 Term of the Plan.............................................. 11
17.2 Amendment or Termination...................................... 11
ARTICLE XVIII. LIMITATION ON PAYMENTS................................... 11
18.1 Scope of Limitation........................................... 11
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
18.2 Application to Award.......................................... 12
18.3 Basic Rule.................................................... 12
18.4 Reduction of Payments......................................... 12
18.5 Overpayments and Underpayments................................ 12
18.6 Related Corporations.......................................... 13
ARTICLE XIX. DEFINITIONS................................................ 13
</TABLE>
iii
<PAGE>
CACHEFLOW INC.
1999 STOCK INCENTIVE PLAN
ARTICLE I. INTRODUCTION.
The Plan was adopted by the Board to be effective at the IPO. The
purpose of the Plan is to promote the long-term success of the Company and the
creation of stockholder value by (a) encouraging Employees, Outside Directors
and Consultants to focus on critical long-range objectives, (b) encouraging the
attraction and retention of Employees, Outside Directors and Consultants with
exceptional qualifications, and (c) linking Employees, Outside Directors and
Consultants directly to stockholder interests through increased stock ownership.
The Plan seeks to achieve this purpose by providing for Awards in the form of
Restricted Shares, Stock Units, Options (which may constitute incentive stock
options or nonstatutory stock options) or stock appreciation rights.
The Plan shall be governed by, and construed in accordance with, the
laws of the State of Delaware (except their choice-of-law provisions).
ARTICLE II. ADMINISTRATION.
2.1 Committee Composition. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of two or more directors of
the Company, who shall be appointed by the Board. In addition, the composition
of the Committee shall satisfy:
(a) Such requirements as the Securities and Exchange Commission
may establish for administrators acting under plans intended to qualify for
exemption under Rule 16b-3 (or its successor) under the Exchange Act; and
(b) Such requirements as the Internal Revenue Service may
establish for outside directors acting under plans intended to qualify for
exemption under section 162(m)(4)(C) of the Code.
2.2 Committee Responsibilities. The Committee shall (a) select the
Employees, Outside Directors and Consultants who are to receive Awards under the
Plan, (b) determine the type, number, vesting requirements and other features
and conditions of such Awards, (c) interpret the Plan and (d) make all other
decisions relating to the operation of the Plan. The Committee may adopt such
rules or guidelines as it deems appropriate to implement the Plan. The
Committee's determinations under the Plan shall be final and binding on all
persons.
2.3 Committee for Non-Officer Grants. The Board may also appoint a
secondary committee of the Board, which shall be composed of one or more
directors of the Company who need not satisfy the requirements of Section 2.1.
Such secondary committee may administer the Plan with respect to Employees and
Consultants who are not considered officers or directors of the Company under
section 16 of the Exchange Act, may grant Awards under the
<PAGE>
Plan to such Employees and Consultants and may determine all features and
conditions of such Awards. Within the limitations of this Section 2.3, any
reference in the Plan to the Committee shall include such secondary committee.
ARTICLE III. SHARES AVAILABLE FOR GRANTS.
3.1 Basic Limitation. Shares of Common Stock issued pursuant to the
Plan may be authorized but unissued shares or treasury shares. The aggregate
number of Options, SARs, Stock Units and Restricted Shares awarded under the
Plan shall not exceed (a) 5,000,000 plus (b) the additional shares of Common
Stock described in Sections 3.2 and 3.3. The initial reserve includes any shares
remaining available for issuance under the Predecessor Plan. The limitations of
this Section 3.1 and Section 3.2 shall be subject to adjustment pursuant to
Article 11.
3.2 Annual Increase in Shares. As of January 1 of each year,
commencing with the year 2000, the aggregate number of Options, SARs, Stock
Units and Restricted Shares that may be awarded under the Plan shall
automatically increase by a number equal to the lesser of 5% of the total number
of shares of Common Stock then outstanding, or 2,000,000 shares.
3.3 Additional Shares. If Restricted Shares or shares of Common
Stock issued upon the exercise of Options are forfeited (including any Options
incorporated from the Predecessor Plan), then such shares of Common Stock shall
again become available for Awards under the Plan. If Stock Units, Options or
SARs are forfeited or terminate for any other reason before being exercised,
then the corresponding shares of Common Stock shall again become available for
Awards under the Plan. If Stock Units are settled, then only the number of
shares of Common Stock (if any) actually issued in settlement of such Stock
Units shall reduce the number available under Section 3.1 and the balance shall
again become available for Awards under the Plan. If SARs are exercised, then
only the number of shares of Common Stock (if any) actually issued in settlement
of such SARs shall reduce the number available under Section 3.1 and the balance
shall again become available for Awards under the Plan. The foregoing
notwithstanding, the aggregate number of shares of Common Stock that may be
issued under the Plan upon the exercise of ISOs shall not be increased when
Restricted Shares or other shares of Common Stock are forfeited.
3.4 Dividend Equivalents. Any dividend equivalents paid or credited under
the Plan shall not be applied against the number of Restricted Shares, Stock
Units, Options or SARs available for Awards, whether or not such dividend
equivalents are converted into Stock Units.
ARTICLE IV. ELIGIBILITY.
4.1 Incentive Stock Options. Only Employees who are common-law
employees of the Company, a Parent or a Subsidiary shall be eligible for the
grant of ISOs. In addition, an Employee who owns more than 10% of the total
combined voting power of all classes of outstanding stock of the Company or any
of its Parents or Subsidiaries shall not be eligible for the grant of an ISO
unless the requirements set forth in section 422(c)(6) of the Code are
satisfied.
2
<PAGE>
4.2 Other Grants. Only Employees, Outside Directors and Consultants shall
be eligible for the grant of Restricted Shares, Stock Units, NSOs or SARs.
ARTICLE V. OPTIONS.
5.1 Stock Option Agreement. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms of the Plan and
may be subject to any other terms that are not inconsistent with the Plan. The
Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The
provisions of the various Stock Option Agreements entered into under the Plan
need not be identical. Options may be granted in consideration of a reduction in
the Optionee's other compensation. A Stock Option Agreement may provide that a
new Option will be granted automatically to the Optionee when he or she
exercises a prior Option and pays the Exercise Price in the form described in
Section 6.2.
5.2 Number of Shares. Each Stock Option Agreement shall specify the
number of shares of Common Stock subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Options granted to any
Optionee in a single fiscal year of the Company shall not cover more than
1,500,000 shares of Common Stock, except that Options granted to a new Employee
in the fiscal year of the Company in which his or her service as an Employee
first commences shall not cover more than 2,000,000 shares of Common Stock. The
limitations set forth in the preceding sentence shall be subject to adjustment
in accordance with Article 11.
5.3 Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price; provided that the Exercise Price under an ISO shall in no event
be less than 100% of the Fair Market Value of a Common Share on the date of
grant and the Exercise Price under an NSO shall in no event be less than 85% of
the Fair Market Value of a Common Share on the date of grant. In the case of an
NSO, a Stock Option Agreement may specify an Exercise Price that varies in
accordance with a predetermined formula while the NSO is outstanding.
5.4 Exercisability and Term. Each Stock Option Agreement shall
specify the date or event when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option; provided that the term of an ISO shall in no event exceed 10 years from
the date of grant. A Stock Option Agreement may provide for accelerated
exercisability in the event of the Optionee's death, disability or retirement or
other events and may provide for expiration prior to the end of its term in the
event of the termination of the Optionee's service. Options may be awarded in
combination with SARs, and such an Award may provide that the Options will not
be exercisable unless the related SARs are forfeited.
5.5 Modification or Assumption of Options. Within the limitations of
the Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the Company
or by another issuer) in return for the grant of new options for the same or a
different number of shares and at the same or a different exercise price. The
foregoing notwithstanding, no modification of an Option shall,
3
<PAGE>
without the consent of the Optionee, alter or impair his or her rights or
obligations under such Option.
5.6 Buyout Provisions. The Committee may at any time (a) offer to
buy out for a payment in cash or cash equivalents an Option previously granted
or (b) authorize an Optionee to elect to cash out an Option previously granted,
in either case at such time and based upon such terms and conditions as the
Committee shall establish.
ARTICLE VI. PAYMENT FOR OPTION SHARES.
6.1 General Rule. The entire Exercise Price of shares of Common
Stock issued upon exercise of Options shall be payable in cash or cash
equivalents at the time when such shares of Common Stock are purchased, except
as follows:
(a) In the case of an ISO granted under the Plan, payment shall
be made only pursuant to the express provisions of the applicable Stock Option
Agreement. The Stock Option Agreement may specify that payment may be made in
any form(s) described in this Article 6.
(b) In the case of an NSO, the Committee may at any time accept
payment in any form(s) described in this Article 6.
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, all or any part of the Exercise Price may be paid by surrendering,
or attesting to the ownership of, shares of Common Stock that are already owned
by the Optionee. Such shares of Common Stock shall be valued at their Fair
Market Value on the date when the new shares of Common Stock are purchased under
the Plan. The Optionee shall not surrender, or attest to the ownership of,
shares of Common Stock in payment of the Exercise Price if such action would
cause the Company to recognize compensation expense (or additional compensation
expense) with respect to the Option for financial reporting purposes.
6.3 Exercise/Sale. To the extent that this Section 6.3 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid by delivering (on a form prescribed by the Company) an irrevocable
direction to a securities broker approved by the Company to sell all or part of
the shares of Common Stock being purchased under the Plan and to deliver all or
part of the sales proceeds to the Company.
6.4 Exercise/Pledge. To the extent that this Section 6.4 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid by delivering (on a form prescribed by the Company) an irrevocable
direction to pledge all or part of the shares of Common Stock being purchased
under the Plan to a securities broker or lender approved by the Company, as
security for a loan, and to deliver all or part of the loan proceeds to the
Company.
6.5 Promissory Note. To the extent that this Section 6.5 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid by delivering (on a form prescribed by the Company) a full-recourse
promissory note. However, the par value of the shares of Common Stock being
purchased under the Plan, if newly issued, shall be paid in cash or cash
equivalents.
4
<PAGE>
6.6 Other Forms of Payment. To the extent that this Section 6.6 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid in any other form that is consistent with applicable laws, regulations
and rules.
ARTICLE VII. STOCK APPRECIATION RIGHTS.
7.1 SAR Agreement. Each grant of an SAR under the Plan shall be
evidenced by an SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the Plan need not be identical. SARs
may be granted in consideration of a reduction in the Optionee's other
compensation.
7.2 Number of Shares. Each SAR Agreement shall specify the number of
shares of Common Stock to which the SAR pertains and shall provide for the
adjustment of such number in accordance with Article 11. SARs granted to any
Optionee in a single calendar year shall in no event pertain to more than
1,500,000 shares of Common Stock, except that SARs granted to a new Employee in
the fiscal year of the Company in which his or her service as an Employee first
commences shall not pertain to more than 2,000,000 shares of Common Stock. The
limitations set forth in the preceding sentence shall be subject to adjustment
in accordance with Article 11.
7.3 Exercise Price. Each SAR Agreement shall specify the Exercise
Price. An SAR Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the SAR is outstanding.
7.4 Exercisability and Term. Each SAR Agreement shall specify the
date when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. An SAR Agreement may provide
for accelerated exercisability in the event of the Optionee's death, disability
or retirement or other events and may provide for expiration prior to the end of
its term in the event of the termination of the Optionee's service. SARs may be
awarded in combination with Options, and such an Award may provide that the SARs
will not be exercisable unless the related Options are forfeited. An SAR may be
included in an ISO only at the time of grant but may be included in an NSO at
the time of grant or thereafter. An SAR granted under the Plan may provide that
it will be exercisable only in the event of a Change in Control.
7.5 Exercise of SARs. Upon exercise of an SAR, the Optionee (or any
person having the right to exercise the SAR after his or her death) shall
receive from the Company (a) shares of Common Stock, (b) cash or (c) a
combination of shares of Common Stock and cash, as the Committee shall
determine. The amount of cash and/or the Fair Market Value of shares of Common
Stock received upon exercise of SARs shall, in the aggregate, be equal to the
amount by which the Fair Market Value (on the date of surrender) of the shares
of Common Stock subject to the SARs exceeds the Exercise Price. If, on the date
when an SAR expires, the Exercise Price under such SAR is less than the Fair
Market Value on such date but any portion of such SAR has not been exercised or
surrendered, then such SAR shall automatically be deemed to be exercised as of
such date with respect to such portion.
5
<PAGE>
7.6 Modification or Assumption of SARs. Within the limitations of
the Plan, the Committee may modify, extend or assume outstanding SARs or may
accept the cancellation of outstanding SARs (whether granted by the Company or
by another issuer) in return for the grant of new SARs for the same or a
different number of shares and at the same or a different exercise price. The
foregoing notwithstanding, no modification of an SAR shall, without the consent
of the Optionee, alter or impair his or her rights or obligations under such
SAR.
ARTICLE VIII. RESTRICTED SHARES.
8.1 Restricted Stock Agreement. Each grant of Restricted Shares
under the Plan shall be evidenced by a Restricted Stock Agreement between the
recipient and the Company. Such Restricted Shares shall be subject to all
applicable terms of the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The provisions of the various Restricted Stock
Agreements entered into under the Plan need not be identical.
8.2 Payment for Awards. Subject to the following sentence,
Restricted Shares may be sold or awarded under the Plan for such consideration
as the Committee may determine, including (without limitation) cash, cash
equivalents, full-recourse promissory notes, past services and future services.
To the extent that an Award consists of newly issued Restricted Shares, the
consideration shall consist exclusively of cash, cash equivalents or past
services rendered to the Company (or a Parent or Subsidiary) or, for the amount
in excess of the par value of such newly issued Restricted Shares, full-recourse
promissory notes, as the Committee may determine.
8.3 Vesting Conditions. Each Award of Restricted Shares may or may
not be subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Restricted Stock Agreement. A
Restricted Stock Agreement may provide for accelerated vesting in the event of
the Participant's death, disability or retirement or other events.
8.4 Voting and Dividend Rights. The holders of Restricted Shares
awarded under the Plan shall have the same voting, dividend and other rights as
the Company's other stockholders. A Restricted Stock Agreement, however, may
require that the holders of Restricted Shares invest any cash dividends received
in additional Restricted Shares. Such additional Restricted Shares shall be
subject to the same conditions and restrictions as the Award with respect to
which the dividends were paid.
ARTICLE IX. STOCK UNITS.
9.1 Stock Unit Agreement. Each grant of Stock Units under the Plan
shall be evidenced by a Stock Unit Agreement between the recipient and the
Company. Such Stock Units shall be subject to all applicable terms of the Plan
and may be subject to any other terms that are not inconsistent with the Plan.
The provisions of the various Stock Unit Agreements entered into under the Plan
need not be identical. Stock Units may be granted in consideration of a
reduction in the recipient's other compensation.
6
<PAGE>
9.2 Payment for Awards. To the extent that an Award is granted in
the form of Stock Units, no cash consideration shall be required of the Award
recipients.
9.3 Vesting Conditions. Each Award of Stock Units may or may not be
subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Stock Unit Agreement. A Stock
Unit Agreement may provide for accelerated vesting in the event of the
Participant's death, disability or retirement or other events.
9.4 Voting and Dividend Rights. The holders of Stock Units shall
have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded
under the Plan may, at the Committee's discretion, carry with it a right to
dividend equivalents. Such right entitles the holder to be credited with an
amount equal to all cash dividends paid on one Common Share while the Stock Unit
is outstanding. Dividend equivalents may be converted into additional Stock
Units. Settlement of dividend equivalents may be made in the form of cash, in
the form of shares of Common Stock, or in a combination of both. Prior to
distribution, any dividend equivalents which are not paid shall be subject to
the same conditions and restrictions as the Stock Units to which they attach.
9.5 Form and Time of Settlement of Stock Units. Settlement of vested
Stock Units may be made in the form of (a) cash, (b) shares of Common Stock or
(c) any combination of both, as determined by the Committee. The actual number
of Stock Units eligible for settlement may be larger or smaller than the number
included in the original Award, based on predetermined performance factors.
Methods of converting Stock Units into cash may include (without limitation) a
method based on the average Fair Market Value of shares of Common Stock over a
series of trading days. Vested Stock Units may be settled in a lump sum or in
installments. The distribution may occur or commence when all vesting conditions
applicable to the Stock Units have been satisfied or have lapsed, or it may be
deferred to any later date. The amount of a deferred distribution may be
increased by an interest factor or by dividend equivalents. Until an Award of
Stock Units is settled, the number of such Stock Units shall be subject to
adjustment pursuant to Article 11.
9.6 Death of Recipient. Any Stock Units Award that becomes payable
after the recipient's death shall be distributed to the recipient's beneficiary
or beneficiaries. Each recipient of a Stock Units Award under the Plan shall
designate one or more beneficiaries for this purpose by filing the prescribed
form with the Company. A beneficiary designation may be changed by filing the
prescribed form with the Company at any time before the Award recipient's death.
If no beneficiary was designated or if no designated beneficiary survives the
Award recipient, then any Stock Units Award that becomes payable after the
recipient's death shall be distributed to the recipient's estate.
9.7 Creditors' Rights'. A holder of Stock Units shall have no rights
other than those of a general creditor of the Company. Stock Units represent an
unfunded and unsecured obligation of the Company, subject to the terms and
conditions of the applicable Stock Unit Agreement.
7
<PAGE>
ARTICLE X. CHANGE IN CONTROL.
10.1 Effect of Change in Control. In the event of any Change in
Control, each outstanding Award shall automatically accelerate so that each such
Award 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 Award and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. However, an outstanding Award shall not so
accelerate if and to the extent such Award is, in connection with the Change in
Control, either to be assumed by the successor corporation (or parent thereof)
or to be replaced with a comparable Award for shares of the capital stock of the
successor corporation (or parent thereof). The determination of Award
comparability shall be made by the Plan Administrator, and its determination
shall be final, binding and conclusive.
10.2 Involuntary Termination. In addition, in the event that the
Award is assumed by the successor corporation (or parent thereof) and the
Participant experiences an Involuntary Termination within eighteen months
following a Change in Control, each outstanding Award shall automatically
accelerate so that each such Award shall, immediately prior to the effective
date of the Involuntary Termination, become fully exercisable for all of the
shares of Common Stock at the time subject to such Award and may be exercised
for any or all of those shares as fully-vested shares of Common Stock.
ARTICLE XI. PROTECTION AGAINST DILUTION.
11.1 Adjustments. In the event of a subdivision of the outstanding
shares of Common Stock, a declaration of a dividend payable in shares of Common
Stock, a declaration of a dividend payable in a form other than shares of Common
Stock in an amount that has a material affect on the price of shares of Common
Stock, a combination or consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise) into a lesser number of shares of Common
Stock, a recapitalization, a spin-off or a similar occurrence, the Committee
shall make such adjustments as it, in its sole discretion, deems appropriate in
one or more of:
(a) The number of Options, SARs, Restricted Shares and Stock
Units available for future Awards under Article 3;
(b) The limitations set forth in Sections 5.2 and 7.2;
(c) The number of shares of Common Stock covered by each
outstanding Option and SAR;
(d) The Exercise Price under each outstanding Option and SAR; or
(e) The number of Stock Units included in any prior Award which
has not yet been settled.
Except as provided in this Article 11, a Participant shall have no rights by
reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of shares
of stock of any class, the payment of any stock dividend or any other increase
or decrease in the number of shares of stock of any class.
8
<PAGE>
11.2 Dissolution or Liquidation. To the extent not previously
exercised or settled, Options, SARs and Stock Units shall terminate immediately
prior to the dissolution or liquidation of the Company.
11.3 Reorganizations. In the event that the Company is a party to a
merger or other reorganization, outstanding Awards shall be subject to the
agreement of merger or reorganization. Such agreement shall provide for (a) the
continuation of the outstanding Awards by the Company, if the Company is a
surviving corporation, (b) the assumption of the outstanding Awards by the
surviving corporation or its parent or subsidiary, (c) the substitution by the
surviving corporation or its parent or subsidiary of its own awards for the
outstanding Awards, (d) full exercisability or vesting and accelerated
expiration of the outstanding Awards or (e) settlement of the full value of the
outstanding Awards in cash or cash equivalents followed by cancellation of such
Awards.
ARTICLE XII. DEFERRAL OF AWARDS.
The Committee (in its sole discretion) may permit or require a
Participant to:
(a) Have cash that otherwise would be paid to such Participant
as a result of the exercise of an SAR or the settlement of Stock Units credited
to a deferred compensation account established for such Participant by the
Committee as an entry on the Company's books;
(b) Have shares of Common Stock that otherwise would be
delivered to such Participant as a result of the exercise of an Option or SAR
converted into an equal number of Stock Units; or
(c) Have shares of Common Stock that otherwise would be
delivered to such Participant as a result of the exercise of an Option or SAR or
the settlement of Stock Units converted into amounts credited to a deferred
compensation account established for such Participant by the Committee as an
entry on the Company's books. Such amounts shall be determined by reference to
the Fair Market Value of such shares of Common Stock as of the date when they
otherwise would have been delivered to such Participant.
A deferred compensation account established under this Article 12 may be
credited with interest or other forms of investment return, as determined by the
Committee. A Participant for whom such an account is established shall have no
rights other than those of a general creditor of the Company. Such an account
shall represent an unfunded and unsecured obligation of the Company and shall be
subject to the terms and conditions of the applicable agreement between such
Participant and the Company. If the deferral or conversion of Awards is
permitted or required, the Committee (in its sole discretion) may establish
rules, procedures and forms pertaining to such Awards, including (without
limitation) the settlement of deferred compensation accounts established under
this Article 12.
ARTICLE XIII. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such
awards may be settled in the form of shares of Common Stock issued under this
Plan. Such shares of
9
<PAGE>
Common Stock shall be treated for all purposes under the Plan like shares of
Common Stock issued in settlement of Stock Units and shall, when issued, reduce
the number of shares of Common Stock available under Article 3.
ARTICLE XIV. PAYMENT OF FEES IN SECURITIES.
14.1 Effective Date. No provision of this Article 14 shall be
effective unless and until the Board has determined to implement such provision.
14.2 Elections to Receive NSOs, Restricted Shares or Stock Units. An
Outside Director may elect to receive his or her annual retainer payments or
meeting fees from the Company in the form of cash, NSOs, Restricted Shares or
Stock Units, or a combination thereof, as determined by the Board. Such NSOs,
Restricted Shares and Stock Units shall be issued under the Plan. An election
under this Article 14 shall be filed with the Company on the prescribed form.
14.3 Number and Terms of NSOs, Restricted Shares or Stock Units. The
number of NSOs, Restricted Shares or Stock Units to be granted to Outside
Directors in lieu of annual retainers or meeting fees that would otherwise be
paid in cash shall be calculated in a manner determined by the Board. The Board
shall also determine the terms of such NSOs, Restricted Shares or Stock Units.
ARTICLE XV. LIMITATION ON RIGHTS.
15.1 Retention Rights. Neither the Plan nor any Award granted under
the Plan shall be deemed to give any individual a right to remain an Employee,
Outside Director or Consultant. The Company and its Parents, Subsidiaries and
Affiliates reserve the right to terminate the service of any Employee, Outside
Director or Consultant at any time, with or without cause, subject to applicable
laws, the Company's certificate of incorporation and by-laws and a written
employment agreement (if any).
15.2 Stockholders' Rights. A Participant shall have no dividend
rights, voting rights or other rights as a stockholder with respect to any
shares of Common Stock covered by his or her Award prior to the time when a
stock certificate for such shares of Common Stock is issued or, if applicable,
the time when he or she becomes entitled to receive such shares of Common Stock
by filing any required notice of exercise and paying any required Exercise
Price. No adjustment shall be made for cash dividends or other rights for which
the record date is prior to such time, except as expressly provided in the Plan.
15.3 Regulatory Requirements. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue shares of Common Stock
under the Plan shall be subject to all applicable laws, rules and regulations
and such approval by any regulatory body as may be required. The Company
reserves the right to restrict, in whole or in part, the delivery of shares of
Common Stock pursuant to any Award prior to the satisfaction of all legal
requirements relating to the issuance of such shares of Common Stock, to their
registration, qualification or listing or to an exemption from registration,
qualification or listing.
10
<PAGE>
ARTICLE XVI. WITHHOLDING TAXES.
16.1 General. To the extent required by applicable federal, state,
local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any withholding
tax obligations that arise in connection with the Plan. The Company shall not be
required to issue any shares of Common Stock or make any cash payment under the
Plan until such obligations are satisfied.
16.2 Share Withholding. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any shares of Common Stock that
otherwise would be issued to him or her or by surrendering all or a portion of
any shares of Common Stock that he or she previously acquired. Such shares of
Common Stock shall be valued at their Fair Market Value on the date when taxes
otherwise would be withheld in cash.
ARTICLE XVII. FUTURE OF THE PLAN.
17.1 Term of the Plan. The Plan, as set forth herein, shall become
effective the date of effectiveness of the IPO. The Plan shall remain in effect
until it is terminated under Section 17.2, except that no ISOs shall be granted
on or after the 10th anniversary of the later of (a) the date when the Board
adopted the Plan or (b) the date when the Board adopted the most recent increase
in the number of shares of Common Stock available under Article 3 which was
approved by the Company's stockholders. The Plan shall serve as the successor to
the Predecessor Plan, and no further option grants shall be made under the
Predecessor Plan after the Plan effective date. All options outstanding under
the Predecessor Plan as of such date shall, immediately upon effectiveness of
the Plan, be incorporated into the Plan and 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, except that the vesting acceleration
provisions of Article 10 relating to Change in Control shall be extended to the
options incorporated from the Predecessor Plan.
17.2 Amendment or Termination. The Board may, at any time and for
any reason, amend or terminate the Plan. An amendment of the Plan shall be
subject to the approval of the Company's stockholders only to the extent
required by applicable laws, regulations or rules. No Awards shall be granted
under the Plan after the termination thereof. The termination of the Plan, or
any amendment thereof, shall not affect any Award previously granted under the
Plan.
ARTICLE XVIII. LIMITATION ON PAYMENTS.
18.1 Scope of Limitation. This Article 18 shall apply to an Award
only if:
(a) The independent auditors most recently selected by the Board
(the "Auditors") determine that the after-tax value of such Award to the
Participant, taking into account the effect of all federal, state and local
income taxes, employment taxes and excise taxes applicable to the Participant
(including the excise tax under section 4999 of the Code), will be
11
<PAGE>
greater after the application of this Article 18 than it was before the
application of this Article 18; or
(b) The Committee, at the time of making an Award under the Plan
or at any time thereafter, specifies in writing that such Award shall be subject
to this Article 18 (regardless of the after-tax value of such Award to the
Participant).
18.2 Application to Award. If this Article 18 applies to an Award,
it shall supersede any contrary provision of the Plan or of any Award granted
under the Plan.
18.3 Basic Rule. In the event that the Auditors determine that any
payment or transfer by the Company under the Plan to or for the benefit of a
Participant (a "Payment") would be nondeductible by the Company for federal
income tax purposes because of the provisions concerning "excess parachute
payments" in section 280G of the Code, then the aggregate present value of all
Payments shall be reduced (but not below zero) to the Reduced Amount. For
purposes of this Article 18, the "Reduced Amount" shall be the amount, expressed
as a present value, which maximizes the aggregate present value of the Payments
without causing any Payment to be nondeductible by the Company because of
section 280G of the Code.
18.4 Reduction of Payments. If the Auditors determine that any
Payment would be nondeductible by the Company because of section 280G of the
Code, then the Company shall promptly give the Participant notice to that effect
and a copy of the detailed calculation thereof and of the Reduced Amount, and
the Participant may then elect, in his or her sole discretion, which and how
much of the Payments shall be eliminated or reduced (as long as after such
election the aggregate present value of the Payments equals the Reduced Amount)
and shall advise the Company in writing of his or her election within 10 days of
receipt of notice. If no such election is made by the Participant within such
10-day period, then the Company may elect which and how much of the Payments
shall be eliminated or reduced (as long as after such election the aggregate
present value of the Payments equals the Reduced Amount) and shall notify the
Participant promptly of such election. For purposes of this Article 18, present
value shall be determined in accordance with section 280G(d)(4) of the Code. All
determinations made by the Auditors under this Article 18 shall be binding upon
the Company and the Participant and shall be made within 60 days of the date
when a Payment becomes payable or transferable. As promptly as practicable
following such determination and the elections hereunder, the Company shall pay
or transfer to or for the benefit of the Participant such amounts as are then
due to him or her under the Plan and shall promptly pay or transfer to or for
the benefit of the Participant in the future such amounts as become due to him
or her under the Plan.
18.5 Overpayments and Underpayments. As a result of uncertainty in
the application of section 280G of the Code at the time of an initial
determination by the Auditors hereunder, it is possible that Payments will have
been made by the Company which should not have been made (an "Overpayment") or
that additional Payments which will not have been made by the Company could have
been made (an "Underpayment"), consistent in each case with the calculation of
the Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
the Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which
12
<PAGE>
he or she shall repay to the Company, together with interest at the applicable
federal rate provided in section 7872(f)(2) of the Code; provided, however, that
no amount shall be payable by the Participant to the Company if and to the
extent that such payment would not reduce the amount which is subject to
taxation under section 4999 of the Code. In the event that the Auditors
determine that an Underpayment has occurred, such Underpayment shall promptly be
paid or transferred by the Company to or for the benefit of the Participant,
together with interest at the applicable federal rate provided in section
7872(f)(2) of the Code.
18.6 Related Corporations. For purposes of this Article 18, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with section 280G(d)(5) of the Code.
ARTICLE XIX. DEFINITIONS.
19.1 "Affiliate" means any entity other than a Subsidiary, if the
Company and/or one or more Subsidiaries own not less than 50% of such entity.
19.2 "Award" means any award of an Option, an SAR, a Restricted Share
or a Stock Unit under the Plan.
19.3 "Board" means the Company's Board of Directors, as constituted
from time to time.
19.4 "Change in Control" shall mean:
(a) The consummation of a merger or consolidation of the Company
with or into another entity or any other corporate reorganization, if persons
who were not stockholders of the Company immediately prior to such merger,
consolidation or other reorganization own immediately after such merger,
consolidation or other reorganization 50% or more of the voting power of the
outstanding securities of each of (i) the continuing or surviving entity and
(ii) any direct or indirect parent corporation of such continuing or surviving
entity;
(b) The sale, transfer or other disposition of all or
substantially all of the Company's assets;
(c) A change in the composition of the Board, as a result of
which fewer than 50% of the incumbent directors are directors who either (i) had
been directors of the Company on the date 24 months prior to the date of the
event that may constitute a Change in Control (the "original directors") or (ii)
were elected, or nominated for election, to the Board with the affirmative votes
of at least a majority of the aggregate of the original directors who were still
in office at the time of the election or nomination and the directors whose
election or nomination was previously so approved; or
(d) Any transaction as a result of which any person is the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing at least 50% of the
total voting power represented by the Company's then outstanding voting
securities. For purposes of this Paragraph (d), the term "person" shall have the
same meaning as when used in sections 13(d) and 14(d) of the Exchange Act but
shall
13
<PAGE>
exclude(i) a trustee or other fiduciary holding securities under an employee
benefit plan of the Company or of a Parent or Subsidiary and (ii) a corporation
owned directly or indirectly by the stockholders of the Company in substantially
the same proportions as their ownership of the common stock of the Company.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
19.5 "Code" means the Internal Revenue Code of 1986, as amended.
19.6 "Committee" means a committee of the Board, as described in
Article 2.
19.7 "Common Stock" means the common stock of the Company.
19.8 "Company" means CacheFlow Inc., a Delaware corporation.
19.9 "Consultant" means a consultant or adviser who provides bona
fide services to the Company, a Parent, a Subsidiary or an Affiliate as an
independent contractor. Service as a Consultant shall be considered employment
for all purposes of the Plan, except as provided in Section 4.1.
19.10 "Employee" means a common-law employee of the Company, a
Parent, a Subsidiary or an Affiliate.
19.11 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
19.12 "Exercise Price," in the case of an Option, means the amount
for which one Common Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement. "Exercise Price," in the
case of an SAR, means an amount, as specified in the applicable SAR Agreement,
which is subtracted from the Fair Market Value of one Common Share in
determining the amount payable upon exercise of such SAR.
19.13 "Fair Market Value" means the market price of one share of
Common Stock, determined by the Committee in good faith on such basis as it
deems appropriate. Whenever possible, the determination of Fair Market Value by
the Committee shall be based on the prices reported in The Wall Street Journal.
-----------------------
Such determination shall be conclusive and binding on all persons.
19.14 "Involuntary Termination" means the termination of the Service
of any individual which occurs by reason of:
(a) such individual's involuntary dismissal or discharge by the
Company for reasons other than Misconduct, or
(b) such individual's voluntary resignation following (A) a
change in his or her position with the Company which materially reduces his or
her level of responsibility,
14
<PAGE>
(B) a reduction in his or her level of compensation (including base salary,
fringe benefits and participation in bonus or incentive programs) 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 Company without the individual's consent.
19.15 "ISO" means an incentive stock option described in section
422(b) of the Code.
19.16 "Misconduct" means 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
Company (or any Parent or Subsidiary), or any other intentional misconduct by
such person adversely affecting the business or affairs of the Company (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 Company (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
any Optionee or Participant or other person in the Service of the Company (or
any Parent or Subsidiary).
19.17 "NSO" means a stock option not described in sections 422 or 423
of the Code.
19.18 "Option" means an ISO or NSO granted under the Plan and
entitling the holder to purchase shares of Common Stock.
19.19 "Optionee" means an individual or estate who holds an Option or
SAR.
19.20 "Outside Director" shall mean a member of the Board who is not
an Employee. Service as an Outside Director shall be considered employment for
all purposes of the Plan, except as provided in Section 4.1.
19.21 "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.
19.22 "Participant" means an individual or estate who holds an Award.
19.23 "Plan" means this CacheFlow Inc. 1999 Stock Incentive Plan, as
amended from time to time.
19.24 "Predecessor Plan" means the Company's existing 1996 Stock
Option Plan.
19.25 "Restricted Share" means a Common Share awarded under the Plan.
15
<PAGE>
19.26 "Restricted Stock Agreement" means the agreement between the
Company and the recipient of a Restricted Share which contains the terms,
conditions and restrictions pertaining to such Restricted Share.
19.27 "SAR" means a stock appreciation right granted under the Plan.
19.28 "SAR Agreement" means the agreement between the Company and an
Optionee which contains the terms, conditions and restrictions pertaining to his
or her SAR.
19.29 "Stock Option Agreement" means the agreement between the
Company and an Optionee that contains the terms, conditions and restrictions
pertaining to his or her Option.
19.30 "Stock Unit" means a bookkeeping entry representing the
equivalent of one Common Share, as awarded under the Plan.
19.31 "Stock Unit Agreement" means the agreement between the Company
and the recipient of a Stock Unit which contains the terms, conditions and
restrictions pertaining to such Stock Unit.
19.32 "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.
16
<PAGE>
EXHIBIT 10.4
CacheFlow Inc.
1999 Director Option Plan
(As Adopted September 24, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1. INTRODUCTION........................................ 1
ARTICLE 2. ADMINISTRATION...................................... 1
2.1 Committee Composition................................. 1
2.2 Committee Responsibilities............................ 1
ARTICLE 3. SHARES AVAILABLE FOR GRANTS......................... 1
3.1 Basic Limitation...................................... 1
3.2 Additional Shares..................................... 2
ARTICLE 4. AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS... 2
4.1 Eligibility........................................... 2
4.2 Initial Grants........................................ 2
4.3 Annual Grants......................................... 2
4.4 Accelerated Exercisability............................ 2
4.5 Exercise Price........................................ 2
4.6 Term.................................................. 2
4.7 Affiliates of Non-Employee Directors.................. 3
4.8 Stock Option Agreement................................ 3
ARTICLE 5. PAYMENT FOR OPTION SHARES........................... 3
5.1 Cash.................................................. 3
5.2 Surrender of Stock.................................... 3
5.3 Exercise/Sale......................................... 3
5.4 Other Forms of Payment................................ 3
ARTICLE 6. PROTECTION AGAINST DILUTION......................... 3
6.1 Adjustments........................................... 3
6.2 Dissolution or Liquidation............................ 4
6.3 Reorganizations....................................... 4
ARTICLE 7. LIMITATION ON RIGHTS................................ 4
7.1 Stockholders' Rights.................................. 4
7.2 Regulatory Requirements............................... 4
7.3 Withholding Taxes..................................... 4
ARTICLE 8. FUTURE OF THE PLAN.................................. 5
8.1 Term of the Plan...................................... 5
8.2 Amendment or Termination.............................. 5
ARTICLE 9. DEFINITIONS......................................... 5
</TABLE>
i
<PAGE>
CacheFlow Inc.
1999 Director Option Plan
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board on September __, 1999 to be
effective at the effectiveness of the IPO. The purpose of the Plan is to
promote the long-term success of the Company and the creation of stockholder
value by (a) encouraging Non-Employee Directors to focus on critical long-range
objectives, (b) encouraging the attraction and retention of Non-Employee
Directors with exceptional qualifications and (c) linking Non-Employee Directors
directly to stockholder interests through increased stock ownership. The Plan
seeks to achieve this purpose by providing for automatic and non-discretionary
grants of Options to Non-Employee Directors.
The Plan shall be governed by, and construed in accordance with, the
laws of the State of Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 Committee Composition. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of two or more directors of
the Company, who shall be appointed by the Board. In addition, the composition
of the Committee shall satisfy such requirements as the Securities and Exchange
Commission may establish for administrators acting under plans intended to
qualify for exemption under Rule 16b-3 (or its successor) under the Exchange
Act.
2.2 Committee Responsibilities. The Committee shall interpret the Plan and
make all decisions relating to the operation of the Plan. The Committee may
adopt such rules or guidelines as it deems appropriate to implement the Plan.
The Committee's determinations under the Plan shall be final and binding on all
persons.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 Basic Limitation. Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares. The aggregate number of
Common Shares subject to Options granted under the Plan shall not exceed (a)
500,000 plus (b) the additional Common Shares described in Section 3.2. The
limitations of this Section 3.1 shall be subject to adjustment pursuant to
Article 6.
3.2 Additional Shares. If Options are forfeited or terminate for any other
reason before being exercised, then the Common Shares subject to such Options
shall again become available for the grant of Options under the Plan. On
January 1 of each year, commencing with January 1, 2000, the aggregate number
of shares of Stock available for purchase during the life of the Plan shall
automatically be increased by 100,000 shares or such lesser number of shares as
the Board may determine (subject to adjustment pursuant to this Section 13).
<PAGE>
ARTICLE 4. AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS.
4.1 Eligibility. Only Non-Employee Directors shall be eligible for the
grant of Options under the Plan.
4.2 Initial Grants. Each Non-Employee Director who first becomes a member
of the Board after the date of the IPO shall receive a one-time grant of an
Option covering 25,000 Common Shares (subject to adjustment under Article 6).
Such Option shall be granted on the date when such Non-Employee Director first
joins the Board and shall become exercisable for 25% of the shares upon the
optionee's completion of 12 months of service from the date of grant and as to
the balance of the shares over the thirty-six month period thereafter. A Non-
Employee Director who previously was an Employee shall not receive a grant under
this Section 4.2.
4.3 Annual Grants. Upon the conclusion of each regular annual meeting of
the Company's stockholders held in the year 2000 or thereafter, each Non-
Employee Director who will continue serving as a member of the Board thereafter
shall receive an Option covering 5,000 Common Shares (subject to adjustment
under Article 6), except that such Option shall not be granted in the calendar
year in which the same Non-Employee Director received the Option described in
Section 4.2. Options granted under this Section 4.3 shall become exercisable in
full on the first anniversary of the date of grant. A Non-Employee Director who
previously was an Employee shall be eligible to receive grants under this
Section 4.3.
4.4 Accelerated Exercisability. All Options granted to a Non-Employee
Director under this Article 4 shall also become exercisable in full in the event
of a Change in Control with respect to the Company.
4.5 Exercise Price. The Exercise Price under all Options granted to a Non-
Employee Director under this Article 4 shall be equal to 100% of the Fair Market
Value of a Common Share on the date of grant, payable in one of the forms
described in Article 5.
4.6 Term. All Options granted to a Non-Employee Director under this
Article 4 shall terminate on the earliest of (a) the 10th anniversary of the
date of grant, (b) the date 12 months after the termination of such Non-Employee
Director's service for any reason.
4.7 Affiliates of Non-Employee Directors. The Committee may provide that
the Options that otherwise would be granted to a Non-Employee Director under
this Article 4 shall instead be granted to an affiliate of such Non-Employee
Director. Such affiliate shall then be deemed to be a Non-Employee Director for
purposes of the Plan, provided that the service-related vesting and termination
provisions pertaining to the Options shall be applied with regard to the service
of the Non-Employee Director.
4.8 Stock Option Agreement. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms of the Plan and may be
subject to any other terms that are not inconsistent with the Plan.
2
<PAGE>
ARTICLE 5. PAYMENT FOR OPTION SHARES.
5.1 Cash. All or any part of the Exercise Price may be paid in cash or
cash equivalents.
5.2 Surrender of Stock. All or any part of the Exercise Price may be paid
by surrendering, or attesting to the ownership of, Common Shares that are
already owned by the Optionee. Such Common Shares shall be valued at their Fair
Market Value on the date when the new Common Shares are purchased under the
Plan. The Optionee shall not surrender, or attest to the ownership of, Common
Shares in payment of the Exercise Price if such action would cause the Company
to recognize compensation expense (or additional compensation expense) with
respect to the Option for financial reporting purposes.
5.3 Exercise/Sale. All or any part of the Exercise Price and any
withholding taxes may be paid by delivering (on a form prescribed by the
Company) an irrevocable direction to a securities broker approved by the Company
to sell all or part of the Common Shares being purchased under the Plan and to
deliver all or part of the sales proceeds to the Company.
5.4 Other Forms of Payment. At the sole discretion of the Committee, all
or any part of the Exercise Price and any withholding taxes may be paid in any
other form that is consistent with applicable laws, regulations and rules.
ARTICLE 6. PROTECTION AGAINST DILUTION.
6.1 Adjustments. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a form other than Common Shares in an amount that has a
material effect on the price of Common Shares, a combination or consolidation of
the outstanding Common Shares (by reclassification or otherwise) into a lesser
number of Common Shares, a recapitalization, a spin-off or a similar occurrence,
the Committee shall make such adjustments as it, in its sole discretion, deems
appropriate in one or more of (a) the number of Common Shares available for
future grants under Article 3, (b) the number of Options to be granted to Non-
Employee Directors under Article 4, (c) the number of Common Shares covered by
each outstanding Option or (d) the Exercise Price under each outstanding Option.
Except as provided in this Article 6, an Optionee shall have no rights by reason
of any issue by the Company of stock of any class or securities convertible into
stock of any class, any subdivision or consolidation of shares of stock of any
class, the payment of any stock dividend or any other increase or decrease in
the number of shares of stock of any class.
6.2 Dissolution or Liquidation. To the extent not previously exercised,
Options shall terminate immediately prior to the dissolution or liquidation of
the Company.
6.3 Reorganizations. In the event that the Company is a party to a merger
or other reorganization, outstanding Options shall be subject to the agreement
of merger or reorganization. Such agreement shall provide for (a) the
continuation of the outstanding Options by the Company, if the Company is a
surviving corporation, (b) the assumption of the outstanding Options by the
surviving corporation or its parent or subsidiary, (c) the substitution
3
<PAGE>
by the surviving corporation or its parent or subsidiary of its own options for
the outstanding Options, (d) full exercisability and accelerated expiration of
the outstanding Options or (e) settlement of the full value of the outstanding
Options in cash or cash equivalents followed by cancellation of such Options.
ARTICLE 7. LIMITATION ON RIGHTS.
7.1 Stockholders' Rights. An Optionee shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Option prior to the time when he or she becomes entitled
to receive such Common Shares by filing a notice of exercise and paying the
Exercise Price. No adjustment shall be made for cash dividends or other rights
for which the record date is prior to such time, except as expressly provided in
the Plan.
7.2 Regulatory Requirements. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Option prior to the satisfaction of all legal requirements relating to
the issuance of such Common Shares, to their registration, qualification or
listing or to an exemption from registration, qualification or listing.
7.3 Withholding Taxes. To the extent required by applicable federal,
state, local or foreign law, an Optionee or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any withholding
tax obligations that arise in connection with the Plan. The Company shall not be
required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.
ARTICLE 8. FUTURE OF THE PLAN.
8.1 Term of the Plan. The Plan, as set forth herein, shall become
effective on effectiveness of the IPO. The Plan shall remain in effect until it
is terminated under Section 8.2.
8.2 Amendment or Termination. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be subject
to the approval of the Company's stockholders only to the extent required by
applicable laws, regulations or rules. No Options shall be granted under the
Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Option previously granted under the
Plan.
ARTICLE 9. DEFINITIONS.
9.1 "Board" means the Company's Board of Directors, as constituted from
time to time.
4
<PAGE>
9.2 "Change in Control" means:
(a) The consummation of a merger or consolidation of the Company with
or into another entity or any other corporate reorganization, if persons who
were not stockholders of the Company immediately prior to such merger,
consolidation or other reorganization own immediately after such merger,
consolidation or other reorganization 50% or more of the voting power of the
outstanding securities of each of (i) the continuing or surviving entity and
(ii) any direct or indirect parent corporation of such continuing or surviving
entity;
(b) The sale, transfer or other disposition of all or substantially
all of the Company's assets;
(c) A change in the composition of the Board, as a result of which
fewer than 50% of the incumbent directors are directors who either (i) had been
directors of the Company on the date 24 months prior to the date of the event
that may constitute a Change in Control (the "original directors") or (ii) were
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the aggregate of the original directors who were still in
office at the time of the election or nomination and the directors whose
election or nomination was previously so approved; or
(d) Any transaction as a result of which any person is the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing at least 50% of the
total voting power represented by the Company's then outstanding voting
securities. For purposes of this Subsection (d), the term "person" shall have
the same meaning as when used in sections 13(d) and 14(d) of the Exchange Act
but shall exclude (i) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or of a Parent or Subsidiary and (ii) a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of the common stock of the
Company.
A transaction shall not constitute a Change in Control if its sole purpose
is to change the state of the Company's incorporation or to create a holding
company that will be owned in substantially the same proportions by the persons
who held the Company's securities immediately before such transaction.
9.3 "Code" means the Internal Revenue Code of 1986, as amended.
9.4 "Committee" means a committee of the Board, as described in Article 2.
9.5 "Common Share" means one share of the common stock of the Company.
9.6 "Company" means CacheFlow Inc., a Delaware corporation.
9.7 "Employee" means a common-law employee of the Company, a Parent or a
Subsidiary.
9.8 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
5
<PAGE>
9.9 "Exercise Price" means the amount for which one Common Share may be
purchased upon exercise of such Option, as specified in the applicable Stock
Option Agreement.
9.10 "Fair Market Value" means the market price of Common Shares,
determined by the Committee in good faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in The Wall Street Journal. Such determination
-----------------------
shall be conclusive and binding on all persons.
9.11 "IPO" means the initial offering of common stock of the Company to
the public pursuant to a registration statement filed by the Company with the
Securities and Exchange Commission.
9.12 "Non-Employee Director" means a member of the Board who is not an
Employee.
9.13 "Option" means an option granted under the Plan and entitling the
holder to purchase Common Shares. Options do not qualify as incentive stock
options described in section 422(b) of the Code.
9.14 "Optionee" means an individual or estate who holds an Option.
9.15 "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.
9.16 "Plan" means this CacheFlow Inc. 1999 Director Option Plan, as
amended from time to time.
9.17 "Stock Option Agreement" means the agreement between the Company and
an Optionee that contains the terms, conditions and restrictions pertaining to
his or her Option.
9.18 "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.
6
<PAGE>
EXHIBIT 10.5
CacheFlow Inc.
Employee Stock Purchase Plan
(As Adopted September 24, 1999)
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. PURPOSE OF THE PLAN.................................... 1
SECTION 2. ADMINISTRATION OF THE PLAN............................. 1
(a) Committee Composition.................................... 1
(b) Committee Responsibilities............................... 1
SECTION 3. ENROLLMENT AND PARTICIPATION........................... 1
(a) Offering Periods......................................... 1
(b) Accumulation Periods..................................... 1
(c) Enrollment............................................... 1
(d) Duration of Participation................................ 2
(e) Applicable Offering Period............................... 2
SECTION 4. EMPLOYEE CONTRIBUTIONS................................. 2
(a) Frequency of Payroll Deductions.......................... 2
(b) Amount of Payroll Deductions............................. 2
(c) Changing Withholding Rate................................ 3
(d) Discontinuing Payroll Deductions......................... 3
(e) Limit on Number of Elections............................. 3
SECTION 5. WITHDRAWAL FROM THE PLAN............................... 3
(a) Withdrawal............................................... 3
(b) Re-Enrollment After Withdrawal........................... 3
SECTION 6. CHANGE IN EMPLOYMENT STATUS............................ 3
(a) Termination of Employment................................ 3
(b) Leave of Absence......................................... 3
(c) Death.................................................... 4
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES................... 4
(a) Plan Accounts............................................ 4
(b) Purchase Price........................................... 4
(c) Number of Shares Purchased............................... 4
(d) Available Shares Insufficient............................ 4
(e) Issuance of Stock........................................ 5
(f) Unused Cash Balances..................................... 5
(g) Stockholder Approval..................................... 5
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP......................... 5
(a) Five Percent Limit....................................... 5
(b) Dollar Limit............................................. 6
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 9. RIGHTS NOT TRANSFERABLE................................ 6
SECTION 10. NO RIGHTS AS AN EMPLOYEE.............................. 6
SECTION 11. NO RIGHTS AS A STOCKHOLDER............................ 7
SECTION 12. SECURITIES LAW REQUIREMENTS........................... 7
SECTION 13. STOCK OFFERED UNDER THE PLAN.......................... 7
(a) Authorized Shares........................................ 7
(b) Anti-Dilution Adjustments................................ 7
(c) Reorganizations.......................................... 7
SECTION 14. AMENDMENT OR DISCONTINUANCE........................... 8
SECTION 15. DEFINITIONS........................................... 8
(a) Accumulation Period...................................... 8
(b) Board.................................................... 8
(c) Code..................................................... 8
(d) Committee................................................ 8
(e) Company.................................................. 8
(f) Compensation............................................. 8
(g) Corporate Reorganization................................. 8
(h) Eligible Employee........................................ 9
(i) Exchange Act............................................. 9
(j) Fair Market Value........................................ 9
(k) IPO...................................................... 9
(l) Offering Period.......................................... 9
(m) Participant.............................................. 9
(n) Participating Company.................................... 10
(o) Plan..................................................... 10
(p) Plan Account............................................. 10
(q) Purchase Price........................................... 10
(r) Stock.................................................... 10
(s) Subsidiary............................................... 10
</TABLE>
ii
<PAGE>
CacheFlow Inc.
Employee Stock Purchase Plan
SECTION 1. PURPOSE OF THE PLAN.
The Plan was adopted by the Board effective as of the date of the IPO. The
purpose of the Plan is to provide Eligible Employees with an opportunity to
increase their proprietary interest in the success of the Company by purchasing
Stock from the Company on favorable terms and to pay for such purchases through
payroll deductions. The Plan is intended to qualify under section 423 of the
Code.
SECTION 2. ADMINISTRATION OF THE PLAN.
(a) Committee Composition. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of one or more directors of
the Company, who shall be appointed by the Board.
(b) Committee Responsibilities. The Committee shall interpret the Plan and
make all other policy decisions relating to the operation of the Plan. The
Committee may adopt such rules, guidelines and forms as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be final
and binding on all persons.
SECTION 3. ENROLLMENT AND PARTICIPATION.
(a) Offering Periods. While the Plan is in effect, two overlapping
Offering Periods shall commence in each calendar year. The Offering Periods
shall consist of the 24-month periods commencing on each August 1 and February
1, except that the first Offering Period shall commence on the date of the IPO
and end on January 31, 2002.
(b) Accumulation Periods. While the Plan is in effect, two Accumulation
Periods shall commence in each calendar year. The Accumulation Periods shall
consist of the six-month periods commencing on each August 1 and February 1,
except that the first Accumulation Period shall commence on the date of the IPO
and end on July 31, 2000.
(c) Enrollment. Any individual who, on the day preceding the first day of
an Offering Period, qualifies as an Eligible Employee may elect to become a
Participant in the Plan for such Offering Period by executing the enrollment
form prescribed for this purpose by the Committee. The enrollment form shall be
filed with the Company at the prescribed location on or before the start date of
such Offering Period.
(d) Duration of Participation. Once enrolled in the Plan, a Participant
shall continue to participate in the Plan until he or she ceases to be an
Eligible Employee, withdraws from the Plan under Section 5(a) or reaches the end
of the Accumulation Period in which his or her employee contributions were
discontinued under Section 4(d) or 8(b). A Participant who
<PAGE>
discontinued employee contributions under Section 4(d) or withdrew from the Plan
under Section 5(a) may again become a Participant, if he or she then is an
Eligible Employee, by following the procedure described in Subsection (c) above.
A Participant whose employee contributions were discontinued automatically under
Section 8(b) shall automatically resume participation at the beginning of the
earliest Accumulation Period ending in the next calendar year, if he or she then
is an Eligible Employee.
(e) Applicable Offering Period. For purposes of calculating the Purchase
Price under Section 7(b), the applicable Offering Period shall be determined as
follows:
(i) Once a Participant is enrolled in the Plan for an Offering
Period, such Offering Period shall continue to apply to him or her until the
earliest of (A) the end of such Offering Period, (B) the end of his or her
participation under Subsection (d) above or (C) re-enrollment for a subsequent
Offering Period under Paragraph (ii) or (iii) below.
(ii) In the event that the Fair Market Value of Stock on the last
trading day before the commencement of the Offering Period for which the
Participant is enrolled is higher than on the last trading day before the
commencement of any subsequent Offering Period, the Participant shall
automatically be re-enrolled for such subsequent Offering Period.
(iii) Any other provision of the Plan notwithstanding, the Company
(at its sole discretion) may determine prior to the commencement of any new
Offering Period that all Participants shall be re-enrolled for such new Offering
Period.
(iv) When a Participant reaches the end of an Offering Period but
his or her participation is to continue, then such Participant shall
automatically be re-enrolled for the Offering Period that commences immediately
after the end of the prior Offering Period.
SECTION 4. EMPLOYEE CONTRIBUTIONS.
(a) Frequency of Payroll Deductions. A Participant may purchase shares of
Stock under the Plan solely by means of payroll deductions. Payroll deductions,
as designated by the Participant pursuant to Subsection (b) below, shall occur
on each payday during participation in the Plan.
(b) Amount of Payroll Deductions. An Eligible Employee shall designate on
the enrollment form the portion of his or her Compensation that he or she elects
to have withheld for the purchase of Stock. Such portion shall be a whole
percentage of the Eligible Employee's Compensation, but not less than 1% nor
more than 15%.
(c) Changing Withholding Rate. If a Participant wishes to change the rate
of payroll withholding, he or she may do so by filing a new enrollment form with
the Company at the prescribed location at any time. The new withholding rate
shall be effective as soon as reasonably practicable after such form has been
received by the Company. The new withholding rate shall be a whole percentage of
the Eligible Employee's Compensation, but not less than 1% nor more than 15%.
2
<PAGE>
(d) Discontinuing Payroll Deductions. If a Participant wishes to
discontinue employee contributions entirely, he or she may do so by filing a new
enrollment form with the Company at the prescribed location at any time. Payroll
withholding shall cease as soon as reasonably practicable after such form has
been received by the Company. (In addition, employee contributions may be
discontinued automatically pursuant to Section 8(b).) A Participant who has
discontinued employee contributions may resume such contributions by filing a
new enrollment form with the Company at the prescribed location. Payroll
withholding shall resume as soon as reasonably practicable after such form has
been received by the Company.
(e) Limit on Number of Elections. No Participant shall make more than 2
elections under Subsection (c) or (d) above during any Accumulation Period.
5. WITHDRAWAL FROM THE PLAN.
(a) Withdrawal. A Participant may elect to withdraw from the Plan by
filing the prescribed form with the Company at the prescribed location at any
time before the last day of an Accumulation Period. As soon as reasonably
practicable thereafter, payroll deductions shall cease and the entire amount
credited to the Participant's Plan Account shall be refunded to him or her in
cash, without interest. No partial withdrawals shall be permitted.
(b) Re-Enrollment After Withdrawal. A former Participant who has withdrawn
from the Plan shall not be a Participant until he or she re-enrolls in the Plan
under Section 3(c). Re-enrollment may be effective only at the commencement of
an Offering Period.
SECTION 6. CHANGE IN EMPLOYMENT STATUS.
(a) Termination of Employment. Termination of employment as an Eligible
Employee for any reason, including death, shall be treated as an automatic
withdrawal from the Plan under Section 5(a). (A transfer from one Participating
Company to another shall not be treated as a termination of employment.)
(b) Leave of Absence. For purposes of the Plan, employment shall not be
deemed to terminate when the Participant goes on a military leave, a sick leave
or another bona fide leave of absence, if the leave was approved by the Company
in writing. Employment, however, shall be deemed to terminate 90 days after the
Participant goes on a leave, unless a contract or statute guarantees his or her
right to return to work. Employment shall be deemed to terminate in any event
when the approved leave ends, unless the Participant immediately returns to
work.
(c) Death. In the event of the Participant's death, the amount credited
to his or her Plan Account shall be paid to a beneficiary designated by him or
her for this purpose on the prescribed form or, if none, to the Participant's
estate. Such form shall be valid only if it was filed with the Company at the
prescribed location before the Participant's death.
3
<PAGE>
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES.
(a) Plan Accounts. The Company shall maintain a Plan Account on its books
in the name of each Participant. Whenever an amount is deducted from the
Participant's Compensation under the Plan, such amount shall be credited to the
Participant's Plan Account. Amounts credited to Plan Accounts shall not be trust
funds and may be commingled with the Company's general assets and applied to
general corporate purposes. No interest shall be credited to Plan Accounts.
(b) Purchase Price. The Purchase Price for each share of Stock purchased
at the close of an Accumulation Period shall be the lower of:
(i) 85% of the Fair Market Value of such share on the last trading day
in such Accumulation Period; or
(ii) 85% of the Fair Market Value of such share on the last trading
day before the commencement of the applicable Offering Period (as determined
under Section 3(e)) or, in the case of the first Offering Period under the Plan,
the lower of: (A) 85% of the price at which one share of Stock is offered to the
public in the IPO; or (B) 85% of the Fair Market Value of such share on the
purchase date.
(c) Number of Shares Purchased. As of the last day of each Accumulation
Period, each Participant shall be deemed to have elected to purchase the number
of shares of Stock calculated in accordance with this Subsection (c), unless the
Participant has previously elected to withdraw from the Plan in accordance with
Section 5(a). The amount then in the Participant's Plan Account shall be divided
by the Purchase Price, and the number of shares that results shall be purchased
from the Company with the funds in the Participant's Plan Account. The foregoing
notwithstanding, no Participant shall purchase more than 2000 shares of Stock
with respect to any Accumulation Period nor more than the amounts of Stock set
forth in Sections 8(b) and 13(a). The Committee may determine with respect to
all Participants that any fractional share, as calculated under this Subsection
(c), shall be (i) rounded down to the next lower whole share or (ii) credited as
a fractional share.
(d) Available Shares Insufficient. In the event that the aggregate number
of shares that all Participants elect to purchase during an Accumulation Period
exceeds the maximum number of shares remaining available for issuance under
Section 13(a), then the number of shares to which each Participant is entitled
shall be determined by multiplying the number of shares available for issuance
by a fraction, the numerator of which is the number of shares that such
Participant has elected to purchase and the denominator of which is the number
of shares that all Participants have elected to purchase.
(e) Issuance of Stock. Certificates representing the shares of Stock
purchased by a Participant under the Plan shall be issued to him or her as soon
as reasonably practicable after the close of the applicable Accumulation Period,
except that the Committee may determine that such shares shall be held for each
Participant's benefit by a broker designated by the Committee (unless the
Participant has elected that certificates be issued to him or her). Shares may
be
4
<PAGE>
registered in the name of the Participant or jointly in the name of the
Participant and his or her spouse as joint tenants with right of survivorship or
as community property.
(f) Unused Cash Balances. An amount remaining in the Participant's Plan
Account that represents the Purchase Price for any fractional share shall be
carried over in the Participant's Plan Account to the next Accumulation Period.
Any amount remaining in the Participant's Plan Account that represents the
Purchase Price for whole shares that could not be purchased by reason of
Subsection (c) above, Section 8(b) or Section 13(a) shall be refunded to the
Participant in cash, without interest.
(g) Stockholder Approval. Any other provision of the Plan
notwithstanding, no shares of Stock shall be purchased under the Plan unless and
until the Company's stockholders have approved the adoption of the Plan.
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP.
(a) Five Percent Limit. Any other provision of the Plan notwithstanding,
no Participant shall be granted a right to purchase Stock under the Plan if such
Participant, immediately after his or her election to purchase such Stock, would
own stock possessing more than 5% of the total combined voting power or value of
all classes of stock of the Company or any parent or Subsidiary of the Company.
For purposes of this Subsection (a), the following rules shall apply:
(i) Ownership of stock shall be determined after applying the
attribution rules of section 424(d) of the Code;
(ii) Each Participant shall be deemed to own any stock that he or she
has a right or option to purchase under this or any other plan; and
(iii) Each Participant shall be deemed to have the right to purchase
2000 shares of Stock under this Plan with respect to each Accumulation Period.
(b) Dollar Limit. Any other provision of the Plan notwithstanding, no
Participant shall purchase Stock with a Fair Market Value in excess of the
following limit:
(i) In the case of Stock purchased during an Offering Period that
commenced in the current calendar year, the limit shall be equal to (A) $25,000
minus (B) the Fair Market Value of the Stock that the Participant previously
purchased in the current calendar year (under this Plan and all other employee
stock purchase plans of the Company or any parent or Subsidiary of the Company).
(ii) In the case of Stock purchased during an Offering Period that
commenced in the immediately preceding calendar year, the limit shall be equal
to (A) $50,000 minus (B) the Fair Market Value of the Stock that the Participant
previously purchased (under this Plan and all other employee stock purchase
plans of the Company or any parent or Subsidiary of the Company) in the current
calendar year and in the immediately preceding calendar year.
5
<PAGE>
(iii) In the case of Stock purchased during an Offering Period that
commenced in the second preceding calendar year, the limit shall be equal to (A)
$75,000 minus (B) the Fair Market Value of the Stock that the Participant
previously purchased (under this Plan and all other employee stock purchase
plans of the Company or any parent or Subsidiary of the Company) in the current
calendar year and in the two preceding calendar years.
For purposes of this Subsection (b), the Fair Market Value of Stock shall
be determined in each case as of the beginning of the Offering Period in which
such Stock is purchased. Employee stock purchase plans not described in section
423 of the Code shall be disregarded. If a Participant is precluded by this
Subsection (b) from purchasing additional Stock under the Plan, then his or her
employee contributions shall automatically be discontinued and shall resume at
the beginning of the earliest Accumulation Period ending in the next calendar
year (if he or she then is an Eligible Employee).
SECTION 9. RIGHTS NOT TRANSFERABLE.
The rights of any Participant under the Plan, or any Participant's interest
in any Stock or moneys to which he or she may be entitled under the Plan, shall
not be transferable by voluntary or involuntary assignment or by operation of
law, or in any other manner other than by beneficiary designation or the laws of
descent and distribution. If a Participant in any manner attempts to transfer,
assign or otherwise encumber his or her rights or interest under the Plan, other
than by beneficiary designation or the laws of descent and distribution, then
such act shall be treated as an election by the Participant to withdraw from the
Plan under Section 5(a).
SECTION 10. NO RIGHTS AS AN EMPLOYEE.
Nothing in the Plan or in any right granted under the Plan shall confer
upon the Participant any right to continue in the employ of a Participating
Company for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Participating Companies or of the
Participant, which rights are hereby expressly reserved by each, to terminate
his or her employment at any time and for any reason, with or without cause.
SECTION 11. NO RIGHTS AS A STOCKHOLDER.
A Participant shall have no rights as a stockholder with respect to any
shares of Stock that he or she may have a right to purchase under the Plan until
such shares have been purchased on the last day of the applicable Accumulation
Period.
SECTION 12. SECURITIES LAW REQUIREMENTS.
Shares of Stock shall not be issued under the Plan unless the issuance and
delivery of such shares comply with (or are exempt from) all applicable
requirements of law, including (without limitation) the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, state securities
laws and regulations, and the regulations of any stock exchange or other
securities market on which the Company's securities may then be traded.
6
<PAGE>
SECTION 13. STOCK OFFERED UNDER THE PLAN.
(a) Authorized Shares. The number of shares of Stock available for purchase
under the Plan shall be 2,500,000 (subject to adjustment pursuant to this
Section 13). On January 31 of each year, commencing with January 31, 2000, the
aggregate number of shares of Stock available for purchase during the life of
the Plan shall automatically be increased by 500,000 shares or such lesser
number of shares as the Board may determine (subject to adjustment pursuant to
this Section 13).
(b) Anti-Dilution Adjustments. The aggregate number of shares of Stock
offered under the Plan, the 2,000-share limitation described in Section 7(c),
the 2,500,000-share limitation described in Section 13(a), and the price of
shares that any Participant has elected to purchase shall be adjusted
proportionately by the Committee for any increase or decrease in the number of
outstanding shares of Stock resulting from a subdivision or consolidation of
shares or the payment of a stock dividend, any other increase or decrease in
such shares effected without receipt or payment of consideration by the Company,
the distribution of the shares of a Subsidiary to the Company's stockholders or
a similar event.
(c) Reorganizations. Any other provision of the Plan notwithstanding,
immediately prior to the effective time of a Corporate Reorganization, the
Offering Period and Accumulation Period then in progress shall terminate and
shares shall be purchased pursuant to Section 7, unless the Plan is continued or
assumed by the surviving corporation or its parent corporation. The Plan shall
in no event be construed to restrict in any way the Company's right to undertake
a dissolution, liquidation, merger, consolidation or other reorganization.
SECTION 14. AMENDMENT OR DISCONTINUANCE.
The Board shall have the right to amend, suspend or terminate the Plan at
any time and without notice. The Company's Chief Executive Officer may also
amend the Plan in certain respects. Except as provided in Section 13, any
increase in the aggregate number of shares of Stock to be issued under the Plan
shall be subject to approval by a vote of the stockholders of the Company. In
addition, any other amendment of the Plan shall be subject to approval by a vote
of the stockholders of the Company to the extent required by an applicable law
or regulation.
SECTION 15. DEFINITIONS.
(a) "Accumulation Period" means a six-month period during which
contributions may be made toward the purchase of Stock under the Plan, as
determined pursuant to Section 3(b).
(b) "Board" means the Board of Directors of the Company, as constituted
from time to time.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means a committee of the Board, as described in Section 2.
(e) "Company" means CacheFlow Inc., a Delaware corporation.
(f) "Compensation" means (i) the total compensation paid in cash to a
Participant by a Participating Company, including salaries, wages, bonuses,
incentive compensation,
7
<PAGE>
commissions, overtime pay and shift premiums, plus (ii) any pre-tax
contributions made by the Participant under section 401(k) or 125 of the Code.
"Compensation" shall exclude all non-cash items, moving or relocation
allowances, cost-of-living equalization payments, car allowances, tuition
reimbursements, imputed income attributable to cars or life insurance, severance
pay, fringe benefits, contributions or benefits received under employee benefit
plans, income attributable to the exercise of stock options, and similar items.
The Committee shall determine whether a particular item is included in
Compensation.
(g) "Corporate Reorganization" means:
(i) The consummation of a merger or consolidation of the Company with
or into another entity or any other corporate reorganization; or
(ii) The sale, transfer or other disposition of all or substantially
all of the Company's assets or the complete liquidation or dissolution of the
Company.
(h) "Eligible Employee" means any employee of a Participating Company who
meets both of the following requirements:
(i) His or her customary employment is for more than five months per
calendar year and for more than 20 hours per week; and
(ii) He or she has been an employee of a Participating Company for not
less than five consecutive months.
The foregoing notwithstanding, an individual shall not be considered an
Eligible Employee if his or her participation in the Plan is prohibited by the
law of any country which has jurisdiction over him or her or if he or she is
subject to a collective bargaining agreement that does not provide for
participation in the Plan.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(j) "Fair Market Value" means the market price of Stock, determined by the
Committee as follows:
(i) If the Stock was traded on The Nasdaq National Market on the date in
question, then the Fair Market Value shall be equal to the last-transaction
price quoted for such date by The Nasdaq National Market;
(ii) If the Stock was traded on a stock exchange on the date in question,
then the Fair Market Value shall be equal to the closing price reported by the
applicable composite transactions report for such date; or
(iii) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such basis as
it deems appropriate.
8
<PAGE>
Whenever possible, the determination of Fair Market Value by the Committee
shall be based on the prices reported in The Wall Street Journal or as reported
-----------------------
directly to the Company by Nasdaq or a stock exchange. Such determination shall
be conclusive and binding on all persons.
(k) "IPO" means the initial offering of Stock to the public pursuant to a
registration statement filed by the Company with the Securities and
Exchange Commission.
(l) "Offering Period" means a 24-month period with respect to which the
right to purchase Stock may be granted under the Plan, as determined pursuant to
Section 3(a).
(m) "Participant" means an Eligible Employee who elects to participate in
the Plan, as provided in Section 3(c).
(n) "Participating Company" means (i) the Company and (ii) each present or
future Subsidiary designated by the Committee as a Participating Company.
(o) "Plan" means this CacheFlow Inc. Employee Stock Purchase Plan, as it
may be amended from time to time.
(p) "Plan Account" means the account established for each Participant
pursuant to Section 7(a).
(q) "Purchase Price" means the price at which Participants may purchase
Stock under the Plan, as determined pursuant to Section 7(b).
(r) "Stock" means the Common Stock of the Company.
(s) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
9
<PAGE>
EXHIBIT 10.6
LEASE AGREEMENT
THIS LEASE, made this 14th day of July , 1998 between THE ARRILLAGA
---- -------- -- -------------
FOUNDATION and THE PEERY FOUNDATION (d.b.a. A&P FOUNDATIONS)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -----------, hereinafter called Landlord, and
CACHEFLOW, INC., a Delaware corporation
- ----------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- --------------------------------------------------------, hereinafter called
Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord
those certain premises (the "Premises") outlined in red on Exhibit "A", attached
hereto and incorporated herein by this reference thereto more particularly
described as follows:
A portion of that certain 52,825+ square foot, two-story building located at 650
Almanor Avenue, Sunnyvale, California 94086, consisting of approximately 39,115+
square feet on the first floor of the building. Said Premises is more
particularly shown within the area outlined in Red on Exhibit A attached hereto.
----------
The entire parcel, of which the Premises is a part, is shown within the area
outlined in Green on Exhibit A attached. The Premises shall be improved by
----------
Landlord as shown on Exhibit B attached hereto, and is leased on an "as-is"
----------
basis, in its present condition, and in the configuration as shown in Red on
Exhibit B attached hereto.
- ----------
The word "Premises as used throughout this lease is hereby defined to include
the nonexclusive use of landscaped areas, sidewalks and driveways in front of or
adjacent to the Premises, and the nonexclusive use of the area directly
underneath or over such sidewalks and driveways. The gross leasable area of the
building shall be measured from outside of exterior walls to outside of exterior
walls, and shall include any atriums, covered entrances or egresses and covered
loading areas.
Said letting and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth and Tenant covenants as a material part of the
consideration for this Lease to perform and observe each and all of said terms,
covenants and conditions. This Lease is made upon the conditions of such
performance and observance.
1. USE Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of general
-------
office, light manufacturing, research and development, and storage and other
- ----------------------------------------------------------------------------
uses necessary for Tenant to conduct Tenant's business, provided that such uses
- -------------------------------------------------------------------------------
shall be in accordance with all applicable governmental laws and ordinances
- ----------------------------------------------------------------------------
, and for no other purpose. Tenant shall not do or permit to
- -----------------
be done in or about the Premises nor bring or keep or permit to be brought or
kept in or about the Premises anything which is prohibited by or will in any
way increase the existing rate of (or otherwise affect) fire or any insurance
covering the Premises or any part thereof, or any of its contents, or will
cause a cancellation of any insurance covering the Premises or any part
thereof, or any of its contents. Tenant shall not do or permit to be done
anything in, on or about the Premises which will in any way obstruct or
interfere with the rights of other tenants or occupants of the Premises or
neighboring premises or Injure or annoy them, or use or allow the Premises to
be used for any improper, immoral, unlawful or objectionable purpose, nor
shall Tenant cause, maintain or permit any nuisance in, on or about the
Premises. No sale by auction shall be permitted on the Premises. Tenant shall
not place any upon the floors, walls, or ceiling which endanger the structure,
or place any harmful fluids or other materials in the drainage system of the
building, or overload existing electrical or other mechanical systems. No
waste materials or refuse shall be dumped upon or permitted to remain upon any
part of the Premises or outside of the building in which the Premises are a
part, except in trash containers placed inside exterior enclosures designated
by Landlord for that purpose or inside of the building proper where designated
by Landlord. No materials, supplies, equipment, finished products or semi-
finished products, raw materials or articles of any nature shall be stored
upon or permitted to remain outside the Premises. Tenant shall not place
anything or allow anything to be placed near the glass of any window, door
partition or wall which may appear unsightly from outside the Premises. No
loudspeaker or other device, system or apparatus which can be heard outside
the Premises shall be used in or at the Premises without the prior written
consent of Landlord. Tenant shall not commit or suffer to be committed any
waste in or upon the Premises. Tenant shall indemnify, defend and hold
Landlord harmless against any loss, expense, damage, reasonable attorneys'
fees, or liability arising out of failure of Tenant to comply with any
applicable law. Tenant shall comply with any covenant, condition, or
restriction ("CC&R's") affecting the Premises. The provisions of this
paragraph are for the benefit of Landlord only and shall not be construed to
be for the benefit of any tenant or occupant of the Premises.
2. TERM *
A. The term of this Lease shall be for a period of SEVEN ( 7 )
----- --------
SEVENTEEN (17) DAYS years (unless sooner terminated as hereinafter provided)
- -------------------
and, subject to Paragraphs 2B and 3, shall commence on the 15th day
----------
of August ,19 98
----------------------- --
and end on the 31st day of August , 2005.
----- ------------------------- ----
B. Possession of the Premises shall be deemed tendered and the term of the
Lease shall commence when the first of the following occurs:
(a) One day after a Certificate of Occupancy is granted by the proper
governmental agency, or, if the governmental agency having jurisdiction over the
area in which the Premises are situated does not issue certificates of
occupancy, then the same number of days after certification by Tenant's
architect or contractor that Landlord's construction work has been completed; or
(b) Upon the occupancy of the Premises by any of Tenant's operating
personnel; or
(c) When the Tenant Improvements have been substantially completed for
------------------------------------------------------------------
Tenant's use and occupancy, in accordance and compliance with Exhibit B of
- --------------------------------------------------------------------------
this Lease Agreement; or
- ------------------------
(d) As otherwise agreed in writing.
* It is agreed in the event said Lease commences on a date other than the
first day of the month the term of the Lease will be extended to account for
the number of days in the partial month. The Basic Rent during the resulting
partial month will be pro-rated (for the number of days in the partial
month) at the Basic Rent rate scheduled for the projected commencement date
as shown in Paragraph 39.
1
<PAGE>
3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver
possession of said premises to Tenant at the commencement of the said term, as
hereinbefore specified, this Lease shall not be void or voidable; no obligation
of Tenant shall be affected thereby; nor shall Landlord or Landlord's agents be
liable to Tenant for any loss or damage resulting therefrom; but in that event
the commencement and termination dates of the Lease, and all other dates
affected thereby shall be revised to conform to the date of Landlord's delivery
of possession, as specified in Paragraph 2B, above. The above is, however,
subject to the provision that the period of delay of delivery of the Premises
shall not exceed 30 days from the commencement date herein
-------------------
(except those delays caused by Acts of God, strikes, war, utilities,
governmental bodies, weather, unavailable materials, and delays beyond
Landlord's control shall be excluded in calculating such period) in which
instance Tenant, at its option, may, by written notice to Landlord, terminate
this Lease.
4. RENT
A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord may
designate without deduction, offset, prior notice, or demand, and Landlord
agrees to accept as Basic Rent for the leased Premises the total sum of NINE
----
MILLION TWO HUNDRED FIFTY THREE THOUSAND FOUR HUNDRED SEVENTY THREE AND 40/100
- ------------------------------------------------------------------------------
Dollars ($ 9,253,473.40 -------------------------------------- )
---------------------------------------------------------
in lawful money of the United States of America, payable as follows:
See Paragraph 39 for Basic Rent Schedule
B. Time for Payment. Full monthly rent is due in advance on the first day of
each calendar month. In the event that the term of this Lease commences on a
date other than the first day of a calendar month, on the date of commencement
of the term hereof Tenant shall pay to Landlord as rent for the period from such
date of commencement to the first day of the next succeeding calendar month that
proportion of the monthly rent hereunder which the number of days between such
date of commencement and the first day of the next succeeding calendar month
bears to thirty (30). In the event that the term of this Lease for any reason
ends on a date other than the last day of a calendar month, on the first day of
the last calendar month of the term hereof Tenant shall pay to Landlord as rent
for the period from said first day of said last calendar month to and including
the last day of the term hereof that proportion of the monthly rent hereunder
which the number of days between said first day of said last calendar month and
the last day of the term hereof bears to thirty (30).
C. Late Charge. Notwithstanding any other provision of this Lease, if Tenant
is in default in the payment of rental as set forth in this Paragraph 4 when
due, or any part thereof, Tenant agrees to pay Landlord, in addition to the
delinquent rental due, a late charge for each rental payment in default ten (10)
days. Said late charge shall equal ten percent (10%) of each rental payment so
in default.
D. Additional Rent. Beginning with the commencement date of the term of this
Lease, Tenant shall pay to Landlord or to Landlord's designated agent in
addition to the Basic Rent and as Additional Rent the following:
(a) All Taxes relating to the Premises as set forth in Paragraph 9, and
(b) All insurance premiums relating to the Premises, as set forth in
Paragraph 12, and
(c) All charges, costs and expenses, which Tenant is required to pay
hereunder, together with all interest and penalties, costs and expenses
including reasonable attorneys' fees and legal expenses, that may accrue thereto
in the event of Tenant's failure to pay such amounts, and all damages,
reasonable costs and expenses which Landlord may incur by reason of default of
Tenant or failure on Tenant's part to comply with the terms of this Lease. In
the event of nonpayment by Tenant of Additional Rent, Landlord shall have all
the rights and remedies with respect thereto as Landlord has for nonpayment of
rent.
The Additional Rent due hereunder shall be paid to Landlord or Landlord's
agent (i) within five days for taxes and insurance and within thirty days for
all other Additional Rent items after presentation of invoice from Landlord or
Landlord's agent setting forth such Additional Rent and/or (ii) at the option of
Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorata
share of an amount estimated by Landlord to be Landlord's approximate average
monthly expenditure for such Additional Rent items, which estimated amount shall
be reconciled within 120 days of the end of each calendar year or more
frequently if Landlord elects to do so at Landlord's sole and absolute
discretion as compared to Landlord's actual expenditure for said Additional Rent
items, with Tenant paying to Landlord, upon demand, any amount of actual
expenses expended by Landlord in excess of said estimated amount, or Landlord
crediting to Tenant (providing Tenant is not in default in the performance of
any of the terms, covenants and conditions of this Lease) any amount of
estimated payments made by Tenant in excess of Landlord's actual expenditures
for said Additional Rent Items. Within thirty (30) days after receipt of
Landlord's reconciliation, Tenant shall have the right, at Tenant's sole
expense, to audit, at a mutually convenient time at Landlord's office,
Landlord's records relating to the foregoing expenses. Such audit must be
conducted by Tenant or an independent nationally recognized accounting firm that
is not being compensated by Tenant or other third party on a contingency fee
basis. Landlord shall be provided a complete copy of said audit at no expense to
Landlord. If such audit reveals that Landlord has overcharged Tenant and the
audit is not challenged by Landlord, the amount overcharged shall be credited to
Tenant's account within thirty (30) days after the audit is concluded.
The respective obligations of Landlord and Tenant under this paragraph shall
survive the expiration or other termination of the term of this Lease, and if
the term hereof shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent incurred for the
calendar year in which the term hereof expires or otherwise terminates shall be
determined and settled on the basis of the statement of actual Additional Rent
for such calendar year and shall be prorated in the proportion which the number
of days in such calendar year preceding such expiration or termination bears to
365.
E. Fixed Management Fee. Beginning with the Commencement Date of the Term of
--------------------
this Lease, Tenant shall pay to Landlord, in addition to the Basic Rent and
Additional Rent, a fixed monthly management fee ("Management Fee") equal to 3%
of the Basic Rent due for each month during the Lease Term.
F. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder and
all payments hereunder for Additional Rent shall be paid to Landlord at the
office of Landlord at A&P Foundations, 2560 Mission College Blvd., Suite 101,
-------------------------------------------------------
Santa Clara, CA 95054 or to such other person or to such other place as Landlord
- ---------------------
may from time to time designate in writing.
* G. Security Deposit. Concurrently with Tenant's execution of this Lease,
Tenant shall deposit with Landlord the sum of TWO HUNDRED FORTY TWO THOUSAND
---------------------------------
FIVE HUNDRED THIRTEEN AND NO/100 Dollars ($ 242,513.00 ----------------------).
- -------------------------------- -----------------------------------
Said sum shall be held by Landlord as a Security Deposit for the faithful
performance by Tenant of all of the terms, covenants, and conditions of this
Lease to be kept and performed by Tenant during the term hereof. If Tenant
defaults with respect to any provision of this Lease, including, but not limited
to, the provisions relating to the payment of rent and any of the monetary sums
due herewith, Landlord may (but shall not be required to) use, apply or retain
all or any part of this Security Deposit for the payment of any other amount
which Landlord may spend by reason of Tenant's default or to compensate Landlord
for
*$121,256.50 Cash due upon Lease execution.
$121,256.50 Promissory Note due November 1, 1998
2
<PAGE>
any other loss or damage which Landlord may suffer by reason of Tenant's
default. If any portion of said Deposit is so used or applied, Tenant shall,
within ten (10) days after written demand therefor, deposit cash with Landlord
in the amount sufficient to restore the Security Deposit to its original amount.
Tenant's failure to do so shall be a material breach of this Lease. Landlord
shall not be required to keep this Security Deposit separate from its general
funds, and Tenant shall not be entitled to interest on such Deposit. If Tenant
fully and faithfully performs every provision of this Lease to be performed by
it, the Security Deposit or any balance thereof shall be returned to Tenant (or
at Landlord's option, to the last assignee of Tenant's interest hereunder) at
the expiration of the Lease term and after Tenant has vacated the Premises. In
the event of termination of Landlord's interest in this Lease, Landlord shall
transfer said Deposit to Landlord's successor in interest whereupon Tenant
agrees to release Landlord from liability for the return of such Deposit or the
accounting therefor.
5. ACCEPTANCE AND SURRENDER OF PREMISES By entry hereunder Tenant accepts the
Premises as being included in good and sanitary order, condition and repair, and
accepts the building and improvements included in the Premises in their present
condition, subject to Landlord's obligation to complete the improvements
described in Exhibit B hereto and to Paragraph 52, and without representation or
---------
warranty by Landlord as to the condition of such building or as to the use or
occupancy which may be made thereof. Any exceptions to the foregoing must be by
written agreement executed by Landlord and Tenant. Tenant agrees on the last day
of the Lease term, or on the sooner termination of this Lease, to surrender the
Premises promptly and peaceably to Landlord in good condition and repair (damage
by Acts of God, fire, normal wear and tear excepted), with all interior walls
painted, or cleaned so that they appear freshly painted, and repaired and
replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and
shampooed; all broken, marred or nonconforming accoustical ceiling tiles
replaced; all windows washed; the airconditioning and heating systems serviced
by a reputable and licensed service firm and in good operating condition and
repair; the plumbing and electrical systems and lighting in good order and
repair, including replacement of any burned out or broken light bulbs or
ballasts; the lawn and shrubs in good condition including the replacement of any
dead or damaged plantings; the sidewalk, driveways and parking areas in good
order, condition and repair; together with all alterations, additions, and
improvements which may have been made in, to, or on the Premises (except
moveable trade fixtures installed at the expense of Tenant) except that Tenant
shall ascertain from Landlord within thirty (30) days before the end of the term
of this Lease whether Landlord desires to have the Premises or any part or parts
thereof restored to their condition and configuration as when the Premises were
delivered to Tenant and if Landlord shall so desire, then Tenant shall restore
said Premises or such part or parts thereof before the end of this Lease at
Tenant's sole cost and expense. Tenant, on or before the end of the term or
sooner termination of this Lease; shall remove all of Tenant's personal property
and trade fixtures from the Premises, and all property not so removed on or
before the end of the term or sooner termination of this Lease shall be deemed
abandoned by Tenant and title to same shall thereupon pass to Landlord without
compensation to Tenant. Landlord may, upon termination of this Lease, remove all
moveable furniture and equipment so abandoned by Tenant, at Tenant's sole cost,
and repair any damage caused by such removal at Tenant's sole cost. If the
Premises be not surrendered at the end of the term or sooner termination of this
Lease, Tenant shall indemnify Landlord against loss or liability resulting from
the delay by Tenant in so surrendering the Premises including, without
limitation, any claims made by any succeeding tenant founded on such delay.
Nothing contained herein shall be construed as an extension of the term hereof
or as a consent of Landlord to any holding over by Tenant. The voluntary or
other surrender of this Lease or the Premises by Tenant or a mutual cancellation
of this Lease shall not work as a merger and, at the option of Landlord, shall
either terminate all or any existing subleases or subtenancies or operate as an
assignment to Landlord of all or any such subleases or subtenancies.
6. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any
alteration or addition to the Premises, or any part thereof, without the written
consent of Landlord first had and obtained by Tenant (such consent not to be
unreasonably withheld), but at the cost of Tenant, and any addition to, or
alteration of, the Premises, except moveable furniture and trade fixtures, shall
at once become a part of the Premises and belong to Landlord. Landlord reserves
the right to reasonably approve all contractors and mechanics proposed by Tenant
to make such alterations and additions. Tenant shall retain title to all
moveable furniture and trade fixtures placed in the Premises. All heating,
lighting, electrical, airconditioning, floor to ceiling partitioning, drapery,
carpeting, and floor installations made by Tenant, together with all property
that has become an integral part of the Premises, shall not be deemed trade
fixtures. Tenant agrees that it will not proceed to make such alteration or
additions, without having obtained consent from Landlord to do so, (which
consent shall not be unreasonably withheld by Landlord), and until five (5) days
from the receipt of such consent, in order that Landlord may post appropriate
notices to avoid any liability to contractors or material supplies for payment
for Tenant's improvements. Tenant will at all times permit such notices to be
posted and to remain posted until the completion of work. Tartar shall, if
required by Landlord, secure at Tenant's own cost and expense, a completion and
lien indemnity bond, satisfactory to Landlord, for such work. Tenant further
covenants and agrees that any mechanic's lien filed against the Premises for
work claimed to have been done for, or materials claimed to have been furnished
to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10)
days after the filing thereof, at the cost and expense of Tenant. Any exceptions
to the foregoing must be made in writing and executed by both Landlord and
Tenant.
7. TENANT MAINTENANCE Tenant shall, at its sole cost and expense, keep and
maintain the Premises (including appurtenances) and every part thereof in a high
standard of maintenance and repair, and in good and sanitary condition. Tenant's
maintenance and repair responsibilities herein referred to include, but are not
limited to janitorization, plumbing systems within the non-common areas of the
Premises (such as water and drain lines, sinks), electrical systems within the
non-common areas of the Premises (such as outlets, lighting fixtures, lamps,
bulbs, tubes, ballasts), heating and airconditioning controls within the non-
common areas of the Premises (such as mixing boxes, thermostats, time clocks,
supply and return grills), all interior improvements within the premises
including but not limited to: wall coverings, window coverings, acoustical
ceilings, vinyl tile, carpeting, partitioning, doors (both interior and
exterior, including closing mechanisms, latches, locks), and all other interior
improvements of any nature whatsoever. Tenant agrees to provide carpet shields
under all rolling chairs or to otherwise be responsible for war and tear of the
carpet caused by such rolling chairs if such wear and tear exceeds that caused
by normal foot traffic in surrounding areas. Areas of excessive wear shall be
replace at Tenant's sole expense upon Lease termination.
8. [DELETED]
9. TAXES
A. As Additional Rent and in accordance with Paragraph 4D of this Lease,
Tenant shall pay to Landlord, or if Landlord so directs, directly to the Tax
Collector, all Real Property Taxes relating to the Premises. In the event the
Premises leased hereunder consist of only a portion of the entire tax parcel,
Tenant shall pay to Landlord Tenant's proportionate share of such real estate
taxes allocated to the leased Premises by square footage or other reasonable
basis as calculated and determined by Landlord. If the tax billing pertains 100%
to the leased Premises, and Landlord chooses to have Tenant pay said real estate
taxes directly to the Tax Collector, then in such event it shall be the
responsibility of Tenant to obtain the tax and assessment bills and pay, prior
to delinquency, the applicable real property taxes and assessments pertaining to
the leased Premises, and failure to receive a bill for taxes and/or assessments
shall not provide a basis for cancellation of or nonresponsibility for payment
of penalties for nonpayment or late payment by Tenant. The term "Real Property
Taxes", as used herein, shall mean (i) all taxes, assessments, levies and other
charges of any kind or nature whatsoever, general and special, foreseen and
unforeseen (including all installments of principal and interest required to pay
any general or special assessments for public improvements and any increases
resulting from reassessments caused by any change in ownership of the Premises)
now or hereafter imposed by any governmental or quasi-governmental authority or
special district having the direct or indirect power to tax or levy assessments,
which are levied or assessed against, or with respect to the value, occupancy or
use of, all or any portion of the Premises (as now constructed or as may at any
time hereafter be constructed, altered or otherwise changed) or Landlord's
interest therein; any improvements located within the Premises (regardless of
ownership); the fixtures, equipment and other property of Landlord, real or
personal, that are an integral part of and located in the Premises; or parking
areas, public utilities, or energy within the Premises; (ii) all charges, levies
or fees imposed by reason of environmental regulation or other governmental
control of the Premises; and (iii) all costs and fees (including
3
<PAGE>
reasonable attorneys' fees) incurred by Landlord in reasonably contesting any
Real Property Tax and in negotiating with public authorities as to any Real
Property Tax. If at any time during the term of this Lease the taxation or
assessment of the Premises prevailing as of the commencement date of this Lease
shall be altered so that in lieu of or in addition to any Real Property Tax
described above there shall be levied, assessed or imposed (whether by reason of
a change in the method of taxation or assessment, creation of a new tax or
charge, or any other cause) an alternate or additional tax or charge (i) on the
use or occupancy of the Premises or Landlord's interest therein or (ii)
on ore measured by the gross receipts, income or rentals from the Premises, on
Landlord's business of leasing the Premises, or computed in any manner with
respect to the operation of the Premises, then any such tax or charge, however
designated shall be included within the meaning of the term "Real Property
Taxes" for purposes of this Lease. If any Real Property Tax is based upon
property or rents unrelated to the Premises, then only that part of such Real
Property Tax that is fairly allocable to the Premises shall be included within
the meaning of the term "Real Property Taxes". Notwithstanding the foregoing,
the term "Real Property Taxes" shall not include estate, inheritance, gift or
franchise taxes of Landlord or the federal or state net income tax imposed on
Landlord's income from all sources.
B. Taxes on Tenant's Property. Tenant shall be liable for and shall pay ten
days before delinquency, taxes levied against any personal property or trade
fixtures placed by Tenant in or about the Premises. If any such taxes on
Tenant's personal property or trade fixtures are levied against Landlord or
Landlord's property or of the assessed value of the Premises is increased by the
inclusion therein of a value placed upon such personal property or trade
fixtures of Tenant and if Landlord, after written notice to Tenant, pays the
taxes based on such increased assessment, which Landlord shall have the right to
do regardless of the validity thereof, but only under proper protest if
requested by Tenant. Tenant shall upon demand, as the case may be, repay to
Landlord the taxes so levied against Landlord, or the proportion of such taxes
resulting from such increase in the assessment; provided that in any such event
Tenant shall have the right, in the name of Landlord and with Landlord's full
cooperation, to bring suit in any court of competent jurisdiction to recover
the amount of such taxes so paid under protest, and any amount so recovered
shall belong to Tenant.
10. LIABILITY INSURANCE Tenant, at Tenant's expense, agrees to keep in force
during the term of this Lease a policy of commercial general liability insurance
with combined single limit coverage of not less than Two Million Dollars
($2,000,000) per occurrence for bodily injury and property damage occurring in,
on or about the Premises, including parking and landscaped areas. Such insurance
shall be primary and noncontributory as respects any insurance carried by
Landlord. The policy or policies effecting such insurance shall name Landlord
as additional insureds, and shall insure any liability of Landlord, contingent
or otherwise, as respects acts or omissions of Tenant, its agents, employees or
invitees or otherwise by any conduct or transactions of any of said persons in
or about or concerning the Premises, including any failure of Tenant to observe
or perform any of its obligations hereunder; shall be issued by an insurance
company admitted to transact business in the State of California; and shall
provide that the insurance effected thereby shall not be canceled, except upon
thirty (30) days prior written notice to Landlord. A certificate of insurance of
said policy shall be delivered to Landlord. If, during the term of this Lease,
in the considered opinion of Landlord's Lender, insurance advisor, or counsel,
the amount of insurance described in this Paragraph 10 is not adequate, Tenant
agrees to increase said coverage to such reasonable amount as Landlord's Lender,
insurance advisor, or counsel shall deem adequate.
11. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE
Tenant shall maintain a policy or policies of fire and property damage insurance
in "all risk" form with a sprinkler leakage endorsement insuring the personal
property, inventory, trade fixtures, and leasehold improvements within the
leased Premises for the full replacement value thereof. The proceeds from any of
such policies shall be used for the repair or replacement of such items so
insured.
Tenant shall also maintain a policy or policies of workman's compensation
insurance and any other employee benefit insurance sufficient to comply with all
laws.
12. PROPERTY INSURANCE Landlord shall purchase and keep in force, and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (allocated to the leased Premises by square footage or
other equitable basis as calculated and determined by Landlord) of the
deductibles on insurance claims and the cost of, policy or policies of insurance
covering loss or damage to the Premises (excluding routine maintenance and
repairs and incidental damage or destruction caused by accidents or vandalism
for which Tenant is responsible under Paragraph 7) in the amount of the full
replacement value thereof, providing protection against those perils included
within the classification of "all risks" insurance and flood and/or earthquake
insurance, if available, plus a policy of rental income insurance in the amount
of one hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid
as Additional Rent. If such insurance cost is increased due to Tenant's use of
the Premises, Tenant agrees to pay to Landlord the full cost of such increase.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by Landlord for the Premises.
Landlord and Tenant do each hereby respectively release the other, to the
extent of insurance coverage of the releasing party, from any liability for loss
or damage caused by fire or any of the extended coverage casualties included in
the releasing party's insurance policies, irrespective of the cause of such fire
or casualty; provided, however, that if the Insurance policy of either releasing
party prohibits such waiver, then this waiver shall not take effect until
consent to such waiver is obtained. If such waiver is so prohibited, the
insured party affected shall promptly notify the other party thereof.
13. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person or
damage to or destruction of property in or about the Premises by or from any
cause whatsoever, including, without limitation, gas, fire, oil, electricity
or leakage of any character from the roof, walls, basement or other portion of
the Premises but excluding, however, the willful misconduct or negligence of
Landlord, its agents, servants, employees, invitees, or contractors of which
negligence Landlord has knowledge and reasonable time to correct. Except as to
injury to persons or damage to property to the extent arising from the willful
misconduct or the negligence of Landlord, its agents, servants, employees,
invitees, or contractors. Tenant shall hold Landlord harmless from and defend
Landlord against any and all expenses, including reasonable attorneys' fees,
in connection therewith, arising out of any injury to or death of any person
or damage to or destruction of property occurring in, on or about the
Premises, or any part thereof, from any cause whatsoever.
14. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply
with all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter in effect; with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate issued pursuant to law by any public
officer pertaining to Tenant's business and operations within the Premises or
Tenant's use of the Premises; provided, however, that no such failure shall be
deemed a breach of the provisions if Tenant, immediately upon notification,
commences to remedy or rectify said failure. The judgement of any court of
competent jurisdiction of the admission of Tenant in any action against Tenant,
whether Landlord be a party thereto or not, that Tenant has violated any such
law, statute, ordinance or governmental rule, regulation, requirement, direction
or provision, shall be conclusive of that fact as between Landlord and Tenant.
Tenant shall, at its sole cost and expense, comply with any and all requirements
pertaining to said Premises, of any insurance organization or company, necessary
for the maintenance of reasonable fire and public liability insurance covering
requirements pertaining to said Premises.
15. LIENS Tenant shall keep the Premises free from any liens arising out of any
work performed, materials furnished or obligation incurred by Tenant. In the
event that Tenant shall not, within ten (10) days following the imposition of
such lien, cause the same to be released of record, Landlord shall have, in
addition to all other remedies provided herein and by law, the right, but no
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All sums paid
by Landlord for such purpose, and all expenses incurred by it in connection
therewith, shall be payable to Landlord by Tenant on demand with interest at
the prime rate of interest as quoted by the Bank of America.
16. ASSIGNMENT AND SUBLETTING Tenant shall not assign, transfer, or
hypothecate the leasehold estate under this Lease, or any interest therein, and
shall not sublet the Premises, or any part thereof, or any right or privilege
appurtenant thereto, or suffer any other person or entity to occupy or use the
Premises, or any portion thereof, without, in each case, the prior written
consent of Landlord which consent will not be unreasonably withheld. As a
condition for granting this consent to any assignment, transfer, or subletting,
Landlord shall require Tenant to pay to Landlord, as Additional Rent, all rents
and/or additional consideration due Tenant from its assignees, transferees, or
subtenants in excess of the Rent payable by Tenant to Landlord hereunder for the
assigned, transferred and/or subleased space. Tenant shall, by thirty (30) days
written notice, advise Landlord of its intent to assign or transfer Tenant's
interest in the Lease or sublet the Premises or any portion thereof for any part
of the term hereof. Within thirty (30) days after receipt of said written
notice, Landlord may, in its sole discretion, elect to terminate this Lease as
to the portion of the Premises described in Tenant's notice on the date
specified in Tenant's notice by giving written notice of such election
terminate. Notwithstanding the above, Landlord shall not have a right to
terminate said Lease as related to a sublease unless Tenant subleases more than
thirty percent (30%) of the entire Leased Premises. If no such notice to
terminate is given to Tenant with said thirty (30) day period, tenant may
proceed to locate an acceptable sublessee, assignee, or other transferee for
presentment to Landlord for Landlord's approval, all in accordance with the
terms, covenants, and conditions of this paragraph 16. If Tenant intends to
sublet the entire Premises and Landlord elects to terminate this Lease, this
Lease shall be terminated on the date specified in Tenant's notice. If, however,
this Lease shall terminate pursuant to the foregoing with respect to less than
all the Premises, the rent, as defined and reserved hereinabove shall be
adjusted on a pro rata basis to the number of square feet retained by Tenant,
and this Lease as so amended shall continue in full force and effect. In the
event Tenant is allowed to assign, transfer or sublet the whole or any part of
the Premises, with the prior written
4
<PAGE>
consent of Landlord, no assignee, transferee or subtenant shall assign or
transfer this Lease, either in whole or in part, or sublet the whole or any part
of the Premises, without also having obtained the prior written consent of
Landlord. A consent of Landlord to one assignment, transfer, hypothecation,
subletting, occupation or use by any other person shall not release Tenant from
any of Tenant's obligations hereunder or be deemed to be a consent to any
subsequent similar or dissimilar assignment, transfer, hypothecation,
subletting, occupation or use by any other person. Any such assignment,
transfer, hypothecation, subletting, occupation or use without such consent
shall be void and shall constitute a breach of this Lease by Tenant and shall,
at the option of Landlord exercised by written notice to Tenant, terminate this
Lease. The leasehold estate under this Lease shall not, nor shall any interest
therein, be assignable for any purpose by operation of law without the written
consent of Landlord. As a condition to its consent, Landlord shall require
Tenant to pay all expenses in connection with the assignment, and Landlord shall
require Tenant's assignee to transferee (or other assignees or transferees) to
assume in writing all of the obligations under this Lease and for Tenant to
remain liable to Landlord under the Lease. Notwithstanding the above, in no
event will Landlord consent to a sub-sublease.
17. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold
interest is now or hereafter encumbered by a deed of trust, upon the interest of
Landlord in the land and buildings in which the demised Premises are located, to
secure a loan from a lender (hereinafter referred to as "Lender") to Landlord,
Tenant shall, at the request of Landlord or Lender, execute in writing an
agreement subordinating its rights under this Lease to the lien of such deed of
trust, or, if so requested, agreeing that the lien of Lender's deed of trust
shall be or remain subject and subordinate to the rights of Tenant under this
Lease provided that such Lender shall execute a "Non-Disturbance" agreement
reasonably acceptable to Tenant. Notwithstanding any such subordination,
Tenant's possession under this Lease shall not be disturbed if Tenant is not in
default and so long as Tenant shall pay all rent and observe and perform all of
the provisions set forth in this Lease.
18. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times after
at least 24 hours notice (except in emergencies) have, the right to enter the
Premises to inspect them; to perform any services to be provided by Landlord
hereunder; to make repairs or provide any services to a contiguous tenant(s); to
submit the Premises to prospective purchasers, mortgagers or tenants; to post
notices of nonresponsibility; and to alter, improve or repair the Premises or
other parts of the building, all without abatement of rent, and may erect
scaffolding and other necessary structures in or through the Premises where
reasonably required by the character of the work to be performed; provided,
however that the business of Tenant shall be interfered with to the least extent
that is reasonably practical. Any entry to the Premises by Landlord for the
purposes provided for herein 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.
19. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of creditors, or any similar action
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option,
constitute a breach of this Lease by Tenant. If the trustee or receiver
appointed to serve during a bankruptcy, liquidation, reorganization, insolvency
or similar action elects to reject Tenant's unexpired Lease, the trustee or
receiver shall notify Landlord in writing of its election within thirty (30)
days after an order for relief in a liquidation action or within thirty (30)
days after the commencement of any action.
Within thirty (30) days after court approval of the assumption of this Lease,
the trustee or receiver shall cure (or provide adequate assurance to the
reasonable satisfaction of Landlord that the trustee or receiver shall cure) any
and all previous defaults under the unexpired Lease and shall compensate
Landlord for all actual pecuniary loss and shall provide adequate assurance of
future performance under said Lease to the reasonable satisfaction of Landlord.
Adequate assurance of future performance, as used herein, includes, but shall
not be limited to: (i) assurance of source and payment of rent, and other
consideration due under this Lease; (ii) assurance that the assumption or
assignment of this Lease will not breach substantially any provision, such as
radius, location, use, or exclusivity provision, in any agreement relating to
the above described Premises.
Nothing contained in this section shall affect the existing right of Landlord
to refuse to accept an assignment upon commencement of or in connection with a
bankruptcy, liquidation, reorganization or insolvency action or an assignment of
Tenant for the benefit of creditors or other similar act. Nothing contained in
this Lease shall be construed as giving or granting or creating an equity in the
demised Premises to Tenant. In no event shall the leasehold estate under this
Lease. or any interest therein, be assigned by voluntary or involuntary
bankruptcy proceeding without the prior written consent of Landlord. In no event
shall this Lease or any rights or privileges hereunder be an asset of Tenant
under any bankruptcy, insolvency or reorganization proceedings.
The failure to perform or honor any covenant, condition or representation
made under this Lease shall constitute a default hereunder by Tenant upon
expiration of the appropriate grace period hereinafter provided. Tenant shall
have a period of five (5) days from the date of written notice from Landlord
within which to cure any default in the payment of rental or adjustment thereto.
Tenant shall have a period of thirty (30) days from the date of written notice
from Landlord within which to cure any other default under this Lease. Upon an
uncured default of this Lease by Tenant, Landlord shall have the following
rights and remedies in addition to any other rights or remedies available to
Landlord at law or in equity:
(a) The rights and remedies provided for by California Civil Code Section
1951.2, including but not limited to, recovery of the worth at the time of award
of the amount by which the unpaid rent for the balance of the term after the
time of award exceeds the amount of rental loss for the same period that Tenant
proves could be reasonably avoided, as computed pursuant to subsection (b) of
said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of
Section 1951.2 of the California Civil Code of the amount of rental loss that
could be reasonably avoided shall be made in the following manner: Landlord and
Tenant shall each select a licensed real estate broker in the business of
renting property of the same type and use as the Premises and in the same
geographic vicinity. Such two real estate brokers shall select a third licensed
real estate broker, and the three licensed real estate brokers so selected shall
determine the amount of the rental loss that could be reasonably avoided from
the balance of the term of this Lease after the time of award. The decision of
the majority of said licensed real estate brokers shall be final and binding
upon the parties hereto.
(b) The rights and remedies provided by California Civil Code Section which
allows Landlord to continue the Lease in effect and to enforce all of its rights
and remedies under this Lease, including the right to recover rent as it becomes
due, for so long as Landlord does not terminate Tenant's right to possession;
acts of maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver upon Landlord's initiative to protect its interest
under this Lease shall not constitute a termination of Tenant's right to
possession.
(c) The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law.
(d) To the extent permitted by law, the right and power, to enter the
Premises and remove therefrom all persons and property, to store such property
in a public warehouse or elsewhere at the cost of and for the account of Tenant,
and to sell such property and apply such proceeds therefrom pursuant to
applicable California law. Landlord, may from time to time sublet the Premises
or any part thereof for such term or terms (which may extend beyond the term of
this Lease) and at such rent and such other terms as Landlord in its reasonable
sole discretion may deem advisable, with the right to make alterations and
repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately
liable to pay Landlord, in addition to indebtedness other than rent due
hereunder, the reasonable cost of such subletting, including, but not limited
to, reasonable attorneys' fees, and any real estate commissions actually paid,
and the cost of such reasonable alterations and repairs incurred by Landlord and
the amount, if any, by which the rent hereunder for the period of such
subletting(to the extent such period does not exceed the term hereof) exceeds
the amount to be paid as rent for the Premises for such period or (ii) at the
option of Landlord, rents received from such subletting shall be applied first
to payment of indebtedness other than rent due hereunder from Tenant to
Landlord; second, to the payment of any costs of such subletting and of such
alterations and repairs; third to payment of rent due and unpaid hereunder; and
the residue, if any, shall be held by Landlord and applied in payment of future
rent as the same becomes due hereunder. If Tenant has been credited with any
rent to be received by such subletting under option (i) and such rent shall not
be promptly paid to Landlord by the subtenant(s), or if such rentals received
from such subletting under option (ii) during any month be less than that to be
paid during that month by Tenant hereunder, Tenant shall pay any such deficiency
to Landlord. Such deficiency shall be calculated and paid monthly. No taking
possession of the Premises by Landlord, shall be construed as an election on its
part to terminate this Lease unless a written notice of such intention be given
to Tenant. Notwithstanding any such subletting without termination, Landlord may
at any time hereafter elect to terminate this Lease for such previous breach.
(e) The right to have a receiver appointed for Tenant upon application by
Landlord, to take possession of the Premises and to apply any rental
collected from the Premises and to exercise all other rights and remedies
granted to Landlord pursuant to subparagraph d above.
20. ABANDONMENT Tenant shall not vacate or abandon the Premises at any time
during the term of this Lease and if Tenant shall abandon, vacate or surrender
said Premises, or be dispossessed by the process of law, or otherwise, any
personal property belonging to Tenant and left on the Premises shall be deemed
to be abandoned, at the option of Landlord, except such property as may be
mortgaged to Landlord.
21. DESTRUCTION In the event the Premises are destroyed in whole or in part
from any cause, except for routine maintenance and repairs and incidental
5
<PAGE>
damage and destruction caused from vandalism and accidents for which Tenant is
responsible under Paragraph 7, Landlord may, at its option:
(a) Rebuild or restore the Premises to their condition prior to the damage or
destruction, or
(b) Terminate this Lease. (providing that the Premises is damaged to the
extent of 33 1/3% of the replacement cost)
If Landlord does not give Tenant notice in writing within thirty (30) days
from the destruction of the Premises of its election to either rebuild and
restore them, or to terminate this Lease, Landlord shall be deemed to have
elected to rebuild or restore them, in which event Landlord agrees, at its
expense except for any deductible, which is the responsibility of Tenant,
promptly to rebuild or restore the Premises to their condition prior to the
damage or destruction. Tenant shall be entitled to a reduction in rent while
such repair is being made in the proportion that the area of the Premises
rendered untenantable by such damage bears to the total area of the Premises.
If Landlord initially reasonably estimates that the rebuilding or restoration
will exceed 180 days, or if the damage occurs during the last six months of the
initial Term and the restoration will exceed 30 days, or if Landlord does not
complete the rebuilding or restoration within one hundred eighty (180) days
following the date of destruction (such period of time to be extended for
delays caused by the fault or neglect of Tenant or because of Acts of God, acts
of public agencies, labor disputes, strikes, fires, freight embargos, rainy or
stormy weather, inability to obtain materials, supplies or fuels, acts of
contractors or subcontractors, or delay of the contractors or subcontractors
due to such causes or other contingencies beyond the control of Landlord), then
Tenant shall have the right to terminate this Lease by giving fifteen (15) days
prior written notice to Landlord. Notwithstanding anything herein to the
contrary, Landlord's obligation to rebuild or restore shall be limited to the
building and interior improvements constructed by Landlord as they existed as
of the commencement date of the Lease and shall not include restoration of
Tenant's trade fixtures, equipment, merchandise, or any improvements,
alterations or additions made by Tenant to the Premises, which Tenant shall
forthwith replace or fully repair at Tenant's sole cost and expense provided
this Lease is not cancelled according to the provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions, this
Lease shall remain in full force and effect. Tenant hereby expressly waives the
provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of
the California Civil Code.
In the event that the building in which the Premises are situated is damaged
or destroyed to the extent of not less than 33 1/3% of the replacement cost
thereof, Landlord may elect to terminate this Lease, whether the Premises be
injured or not. Notwithstanding anything to the contrary herein, Landlord may
terminate this Lease in the event of an uninsured event or if insurance
proceeds are insufficient to cover one hundred percent of the rebuilding costs
net of the deductible provided, however, Tenant shall have the right, in its
discretion, to contribute such excess funds (within 30 days of Tenant's receipt
of an invoice from Landlord) to permit Landlord to repair the Premises.
22. EMINENT DOMAIN If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or
conveyance in lieu thereof, this Lease shall terminate as to any portion of the
Premises so taken or conveyed on the date when title vests to the condemnor,
and Landlord shall be entitled to any and all payment, income, rent, award, or
any interest therein whatsoever which may be paid or made in connection with
such taking or conveyance, and Tenant shall have no claim against Landlord or
otherwise for the value of any unexpired term of this Lease. Notwithstanding
the foregoing paragraph, any compensation specifically awarded Tenant for loss
of business, Tenant's personal property, moving cost or loss of goodwill, shall
be and remain the property of Tenant.
If any action or proceeding is commenced for such taking of the Premises or
any part thereof, or if Landlord is advised in writing by any entity or body
having the right or power of condemnation of its intention to condemn the
premises or any portion thereof, then Landlord shall have the right to
terminate this Lease by giving Tenant written notice thereof within sixty (60)
days of the date of receipt of said written advice, or commencement of said
action or proceeding, or taking conveyance, which termination shall take place
as of the first to occur of the last day of the calendar month next following
the month in which such notice is given or the date on which title to the
Premises shall vest in the condemnor.
In the event of such a partial taking or conveyance of the Premises, if the
portion of the Premises taken or conveyed is so substantial that the Tenant can
no longer reasonably conduct its business in the manner prior to the taking,
Tenant shall have the privilege of terminating this Lease within sixty (60)
days from the date of such taking or conveyance, upon written notice to
Landlord of its intention so to do, and upon giving of such notice this Lease
shall terminate on the last day of the calendar month next following the month
in which such notice is given, upon payment by Tenant of the rent from the date
of such taking or conveyance to the date of termination.
If a portion of the Premises be taken by condemnation or conveyance in lieu
thereof and neither Landlord nor Tenant shall terminate this Lease as provided
herein, this Lease shall continue in full force and effect as to the part of
the Premises not so taken or conveyed, and the rent herein shall be apportioned
as of the date of such taking or conveyance so that thereafter the rent to be
paid by Tenant shall be in the ratio that the area of the portion of the
Premises not so taken or conveyed bears to the total area of the Premises prior
to such taking.
23. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the
Premises or any interest therein, by any owner of the reversion then
constituting Landlord upon assumption in writing of Landlord's obligations
under this Lease by the transferee, the transferor shall thereby be released
from any further liability upon any of the terms, covenants or conditions
(express or implied) herein contained in favor of Tenant, and in such event,
insofar as such transfer is concerned, Tenant agrees to look solely to the
responsibility of the successor in interest of such transferor in and to the
Premises and this Lease. This Lease shall not be affected by any such sale or
conveyance, and Tenant agrees to attorn to the successor in interest of such
transferor.
24. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of Landlord
in the land and buildings in which the leased Premises are located (whether
such interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust, and such interest is acquired by the lender or any
third party through judicial foreclosure or by exercise of a power of sale at
private trustee's foreclosure sale provided that such Lender or third party had
executed a "Non-Disturbance Agreement" with Tenant in accordance with Paragraph
17 hereto, Tenant hereby agrees to attorn to the purchaser at any such
foreclosure sale and to recognize Such purchaser as the Landlord under this
Lease. In the event the lien of the deed of trust securing the loan from a
Lender to Landlord is prior and paramount to the Lease, this Lease shall
nonetheless continue in full force and effect for the remainder of the
unexpired term hereof, at the same rental herein reserved and upon all the
other terms, conditions and covenants herein contained.
25. HOLDING OVER Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the leased Premises except as expressly
provided in this Lease. Any holding over after the expiration or other
termination of the term of this Lease, with the consent of Landlord, shall be
construed to be a tenancy from month to month, on the same terms and conditions
herein specified insofar as applicable except that the monthly Basic Rent shall
be increased to an amount equal to one hundred fifty (150%) percent of the
monthly Basic Rent required during the last month of the Lease term.
26. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than ten
(10) days prior written notice from Landlord execute, acknowledge and deliver
to Landlord a statement in writing (i) certifying that this Lease is unmodified
and in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or
specifying such defaults, if any, are claimed. Any such statement may be
conclusively relied upon by any prospective purchaser or encumbrancer of the
Premises. Tenant's failure to deliver such statement within such time shall be
conclusive upon Tenant that this Lease is in full force and effect, without
modification except as may be represented by Landlord; that there are no
uncured defaults in Landlord's performance, and that not more than one month's
rent has been paid in advance.
27. CONSTRUCTION CHANGES It is understood that the description of the Premises
and the location of ductwork, plumbing and other facilities therein are subject
to such minor changes as Landlord or Landlord's architect determines to be
desirable in the course of construction of the Premises, and no such changes
shall affect this Lease or entitle Tenant to any reduction of rent hereunder or
result in any liability of Landlord to Tenant. Landlord does not guarantee the
accuracy of any drawings supplied to Tenant and verification of the accuracy of
such drawings rests with Tenant.
28. RIGHT OF LANDLORD TO PERFORM All terms, covenants and conditions of this
Lease to be performed or observed by Tenant shall performed or observed by
Tenant at Tenant's sole cost and expense and without any reduction of rent. If
Tenant shall fail to pay any sum of money, or other rent, required to be paid
by it hereunder and such failure shall continue for five (5) days after written
notice by Landlord, or shall fail to perform any other term or covenant
hereunder on its part to be performed, and such failure shall continue for
thirty (30) days after written notice thereof by Landlord, Landlord, without
waiving or releasing Tenant from any obligation of Tenant hereunder, may, but
shall not be obliged to, make any such payment or perform any such other term
or covenant on Tenant's part to be performed. All sums so paid by Landlord and
all necessary costs of such performance by Landlord together with interest
thereon at the rate of the prime rate of interest per annum as quoted by the
Bank of America from the date of such payment on performance by Landlord, shall
be paid (and Tenant covenants to make such payment) to Landlord on demand by
Landlord, and Landlord shall have (in addition to any other right or remedy of
Landlord) the same rights and remedies in the event of nonpayment by Tenant as
in the case of failure by Tenant in the payment of rent hereunder.
29. ATTORNEYS' FEES
A. In the event that either Landlord or Tenant should bring suit for the
possession of the Premises, for the recovery of any sum due under this Lease,
or because of the breach of any provision of this Lease, or for any other
relief against the other party hereunder, then all costs and expenses,
including reasonable attorneys' fees,
6
<PAGE>
incurred by the prevailing party therein shall be paid by the other party,
which obligation on the part of the other party shall be deemed to have accrued
on the date of the commencement of such action and shall be enforceable whether
or not the action is prosecuted to judgment.
B. Should Landlord be named as a defendant in any suit brought against Tenant
in connection with or arising out of Tenant's occupancy hereunder, Tenant shall
pay to Landlord its costs and expenses incurred in such suit, including a
reasonable attorney's fee.
30. WAIVER The waiver by either party of the other party's failure to perform
or observe any term, covenant or condition herein contained to be performed or
observed by such waiving party shall not be deemed to be a waiver of such term,
covenant or condition or of any subsequent failure of the party failing to
perform or observe the same or any other such term, covenant or condition
therein contained, and no custom or practice which may develop between the
parties hereto during the term hereof shall be deemed a waiver of, or in any
way affect, the right of either party to insist upon performance and observance
by the other party in strict accordance with the terms hereof.
31. NOTICES All notices, demands, requests, advices or designations which may
be or are required to be given by either party to the other hereunder shall be
in writing. All notices, demands, requests, advices or designations by Landlord
to Tenant shall be sufficiently given, made or delivered if personally served
on Tenant by leaving the same at the Premises of if sent by United Stated
certified or registered mail, postage prepaid, addressed to Tenant at the
Premises. All notices, demands, requests, advices or designations by Tenant to
Landlord shall be sent by United States certified or registered mail, postage
prepaid, addressed to Landlord at its offices at A&P Foundations, 2560
---------------------
Mission College Blvd., Suite 101, Santa Clara, CA 95054.
-------------------------------------------------------
Each notice, request, demand, advice or designation referred to in this
paragraph shall be deemed received on the date of the personal service or
mailing thereof in the manner herein provided, as the case may be.
32. EXAMINATION OF LEASE Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a lease,
and this instrument is not effective as a lease or otherwise until its
execution and delivery by both Landlord and Tenant.
33. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails
to perform obligations required of Landlord within a reasonable time, but in no
event earlier than (30) days after written notice by Tenant to Landlord and to
the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have heretofore been furnished to Tenant in writing,
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligations is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period
and thereafter diligently prosecutes the same to completion.
34. CORPORATE AUTHORITY If Tenant is a corporation (or a partnership), each
individual executing this Lease on behalf of said corporation (or partnership)
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of said corporation (or partnership) in accordance with the by-
laws of said corporation (or partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation (or
partnership) in accordance with its terms. If Tenant is a corporation, Tenant
shall, within thirty (30) days after execution of this Lease, deliver to
Landlord a certified copy of the resolution of the Board of Directors of said
corporation authorizing or ratifying the execution of this Lease.
35. [DELETED]
36. LIMITATION OF LIABILITY In consideration of the benefits accruing
hereunder. Tenant and all successors and assigns covenant and agree that, in
the event of any actual or alleged failure, breach or default hereunder by
Landlord:
(a) the sole and exclusive remedy shall be against Landlord's interest in the
Premises leased herein;
(b) no partner of Landlord shall be sued or named as a party in any suit or
action (except as may be necessary to secure jurisdiction of the partnership);
(c) no service of process shall be made against any partner of Landlord
(except as may be necessary to secure jurisdiction of the partnership);
(d) no partner of Landlord shall be required to answer or otherwise plead to
any service of process;
(e) no judgment will be taken against any partner of Landlord;
(f) any judgment taken against any partner of Landlord may be vacated and set
aside at any time without hearing;
(g) no writ of execution will ever by levied against the assets of any
partner of Landlord;
(h) these covenants and agreements are enforceable both by Landlord and also
by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall be
applicable to any covenant or agreement either expressly contained in this
Lease or imposed by statute or at common law.
37. SIGNS No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written
consent of Landlord first had and obtained and Landlord shall have the right to
remove any such sign, placard, picture, advertisement, name or notice without
notice to and at the expense of Tenant. If Tenant is allowed to print or affix
or in any way place a sign in, on, or about the Premises, upon expiration or
other sooner termination of this Lease, Tenant at Tenant's sole cost and
expense shall both remove such sign and repair all damage in such a manner as
to restore all aspects of the appearance of the Premises to the condition prior
to the placement of said sign.
All approved signs or lettering on outside doors shall be printed, painted,
affixed or inscribed at the expense of Tenant by a person approved of by
Landlord.
Tenant shall not place anything or allow anything to be placed near the glass
of any window, door partition or wall which may appear unsightly from outside
the Premises.
38. MISCELLANEOUS AND GENERAL PROVISIONS
A. Use of Building Name. Tenant shall not, without the written consent of
Landlord, use the name of the building for any purpose other than as the
address of the business conducted by Tenant in the Premises.
7
<PAGE>
B. Choice of Law; Severability. This Lease shall in all respects be governed
by and construed in accordance with the laws of the State of California. If any
provision of this Lease shall be invalid, unenforceable or ineffective for any
reason whatsoever, all other provisions hereof shall be and remain in full
force and effect.
C. Definition of Terms. The term "Premises" includes the space leased hereby
and any improvements now or hereafter installed therein or attached thereto.
The term "Landlord" or any pronoun used in place thereof includes the plural as
well as the singular and the successors and assigns of Landlord. The term
"Tenant" or any pronoun used in place thereof includes the plural as well as
the singular and individuals, firms, associations, partnerships and
corporations, and their and each of their respective heirs, executors,
administrators, successors and permitted assigns, according to the context
hereof, and the provisions of this Lease shall inure to the benefit of and bind
such heirs, executors, administrators, successors and permitted assigns.
The term "person" includes the plural as well as the singular and
individuals, firms, associations, partnerships and corporations. Words used in
any gender include other genders. If there be more than one Tenant the
obligations of Tenant hereunder are joint and several. The paragraph headings
of this Lease are for convenience of reference only and shall have no effect
upon the construction interpretation of any provision hereof.
D. Time of Essence. Time is of the essence of this Lease and of each and all
of its provisions.
E. Quitclaim. At the expiration or earlier termination of this Lease, Tenant
shall execute, acknowledge and deliver to Landlord, within ten (10) days after
written demand from Landlord to Tenant, any quitclaim deed or other document
required by any reputable title company, licensed to operate in the State of
California, to remove the cloud or encumbrance created by this Lease from the
real property of which Tenant's Premises are a part.
F. Incorporation of Prior Agreements; Amendments. This instrument along with
any exhibits and attachments hereto constitutes the entire agreement between
Landlord and Tenant relative to the Premises and this agreement and the
exhibits and attachments may be altered, amended or revoked only by an
instrument in writing signed by both Landlord and Tenant. Landlord and Tenant
agree hereby that all prior or contemporaneous oral agreements between and
among themselves and their agents or representatives relative to the leasing of
the Premises are merged in or revoked by this agreement.
G. Recording. Neither Landlord nor Tenant shall record this Lease or a short
form memorandum hereof without the consent of the other.
H. Amendments for Financing. Tenant further agrees to execute any amendments
required by a lender to enable Landlord to obtain financing, so long as
Tenant's rights hereunder are not materially affected.
I. Additional Paragraphs. Paragraphs 39 through 55 are added
-- --
hereto and are included as a part of this lease.
J. Clauses, Plats and Riders. Clauses, plats and riders, if any, signed by
Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof.
K. Diminution of Light, Air or View. Tenant covenants and agrees that no
diminution or shutting off of light, air or view by any structure which may be
hereafter erected (whether or not by Landlord) shall in any way affect his
Lease, entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year last written below,
LANDLORD: TENANT:
THE ARRILLAGA FOUNDATION CACHEFLOW, INC.,
a Delaware corporation
By /s/ John Arrillaga By /s/ Ray G. Myers
------------------ -----------------------
John Arrillaga, President
Date: 7/29/98 Title VP Cust. Support & Mfg.
------------------ -----------------------
THE PEERY FOUNDATION
Type or Print Name Ray G. Myers
---------------
By /s/ Richard Peery Date: 7-24-98
------------------ -----------
Richard T. Peery, President
Date: 8/3/98
---------
<PAGE>
Paragraphs 39 through 55 to Lease Agreement dated July 14, 1998, By and Between
the Arrillaga Foundation and the Peery Foundation, as Landlord, and CacheFlow,
Inc., a Delaware corporation, as Tenant for 39,115+ Square Feet of Space
Located at 650 Almanor Avenue, Sunnyvale, California.
39. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate
sum of NINE MILLION TWO HUNDRED FIFTY THREE THOUSAND FOUR HUNDRED SEVENTY THREE
AND 40/100 DOLLARS ($9,253,473.40), shall be payable as follows:
On August 15, 1998, the sum of FIFTY THREE THOUSAND SIX HUNDRED TWENTY FIVE
AND 40/100 DOLLARS ($53,625.40) shall be due, representing the prorated Basic
Rent for the period August 15, 1998 through August 31, 1998.
On September 1, 1998, the sum of NINETY SEVEN THOUSAND SEVEN HUNDRED EIGHTY
SEVEN AND 50/100 DOLLARS ($97,787.50) shall be due, and a like sum due on the
first day of each month thereafter, through and including August 1, 1999.
On September 1, 1999, the sum of ONE HUNDRED ONE THOUSAND SIX HUNDRED
NINETY NINE AND NO/100 DOLLARS ($101,699.00) shall be due, and a like sum due on
the first day of each month thereafter, through and including August 1, 2000.
On September 1, 2000, the sum of ONE HUNDRED FIVE THOUSAND SIX HUNDRED TEN
AND 50/100 DOLLARS ($105,610.50) shall be due, and a like sum due on the first
day of each month thereafter, through and including August 1, 2001.
On September 1, 2001, the sum of ONE HUNDRED NINE THOUSAND FIVE HUNDRED
TWENTY TWO AND NO/100 DOLLARS ($109,522.00) shall be due, and a like sum due on
the first day of each month thereafter, through and including August 1, 2002.
On September 1, 2002, the sum of ONE HUNDRED THIRTEEN THOUSAND FOUR HUNDRED
THIRTY THREE AND 50/100 DOLLARS ($113,433.50) shall be due, and a like sum due
on the first day of each month thereafter, through and including August 1, 2003.
On September 1, 2003, the sum of ONE HUNDRED SEVENTEEN THOUSAND THREE
8
<PAGE>
HUNDRED FORTY FIVE AND NO/100 DOLLARS ($117,345.00) shall be due, and a like sum
due on the first day of each month thereafter, through and including August 1,
2004.
On September 1, 2004, the sum of ONE HUNDRED TWENTY ONE THOUSAND TWO
HUNDRED FIFTY SIX AND 50/100 DOLLARS ($121,256.50) shall be due, and a like sum
due on the first day of each month thereafter, through and including August 1,
2005; or until the entire aggregate sum of NINE MILLION TWO HUNDRED FIFTY THREE
THOUSAND FOUR HUNDRED SEVENTY THREE AND 40/100 DOLLARS ($9,253,473.40) has been
paid.
40. "AS-IS" - BASIS: Subject only to Paragraphs 52, 53 and 54 and to Landlord,
---------------
at Landlord's expense, making the improvements shown on Exhibit B attached
---------
hereto, it is hereby agreed that the Premises leased hereunder is leased
strictly on an "as-is" basis and in its present condition, and in the
configuration as shown on Exhibit B attached hereto, and by reference made a
---------
part hereof. It is specifically agreed between the parties that after Landlord
makes the interior improvements as shown on Exhibit B, Landlord shall not be
---------
required to make, nor be responsible for any cost, in connection with any
repair, restoration, and/or improvement to the Premises in order for this Lease
to commence, or thereafter, throughout the Term of this Lease. Notwithstanding
anything to the contrary within this Lease, Landlord makes no warranty or
representation of any kind or nature whatsoever as to the condition or repair of
the Premises, nor as to the use or occupancy which may be made thereof.
41. RULES AND REGULATIONS AND COMMON AREA: Subject to the terms and conditions
-------------------------------------
of this Lease and such Rules and Regulations as Landlord may from time to time
prescribe, Tenant and Tenant's employees, invitees and customers shall, in
common with other occupants of the Parcel/Building in which the premises are
located, and their respective employees, invitees and customers, and others
entitled to the use thereof, have the non-exclusive right to use the access
roads, parking areas, and facilities provided and designated by Landlord for the
general use and convenience of the occupants of the Parcel/Building in which the
Premises are located,
9
<PAGE>
which areas and facilities are referred to herein as "Common Area". This right
shall terminate upon the termination of this Lease. Landlord reserves the right
from time to time to make changes in the shape, size, location, amount and
extent of Common Area. Landlord further reserves the right to promulgate such
reasonable rules and regulations relating to the use of the Common Area, and any
part or parts thereof, as Landlord may deem appropriate for the best interests
of the occupants of the Parcel/Building. Such Rules and Regulations may be
amended by Landlord from time to time, with or without advance notice, and all
amendments shall be effective upon delivery of a copy to Tenant. Landlord shall
not be responsible to Tenant for the non-performance by any other tenant or
occupant of the Parcel/Building of any of said Rules and Regulations.
Landlord shall operate, manage and maintain the Common Area. The manner in which
the Common Area shall be maintained and the expenditures for such maintenance
shall be at the discretion of Landlord.
42. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF
-------------------------------------------------------------------------
THE PARCEL AND BUILDING IN WHICH THE PREMISES ARE LOCATED: As Additional Rent
- ---------------------------------------------------------
and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord
Tenant's proportionate share (calculated on a square footage or other equitable
basis as calculated by landlord) of all expenses of operation, management,
maintenance and repair of the Common Areas of the Parcel including, but not
limited to, license, permit, and inspection fees; security; utility charges
associated with exterior landscaping and lighting (including water and sewer
charges); all charges incurred in the maintenance and replacement of landscaped
areas, lakes, parking lots and paved areas (including repairs, replacement,
resealing and restriping), sidewalks, driveways, maintenance, repair and
replacement of all fixtures and electrical, mechanical and plumbing systems;
supplies, materials, equipment and tools; the cost of capital expenditures which
have the effect of reducing operating expenses, provided, however, that in the
event Landlord makes such capital improvements, Landlord may amortize its
investment in said improvements (together with interest at the rate of fifteen
(15 %) percent per annum on the unamortized balance) as an operating expense
over the useful life of the improvements in accordance with standard accounting
practices, provided, that such amortization is not at a rate greater than the
anticipated savings in the operating expenses.
As Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant
shall pay its proportionate share (calculated on a square footage or other
equitable basis as calculated by Landlord) of the cost of operation (including
common utilities), management, maintenance, and repair of the building
(including structural and common areas such as lobbies, restrooms, janitor's
closets, hallways, elevators, mechanical and telephone rooms, stairwells,
entrances, spaces above the ceilings and janitorization of said common areas) in
which the Premises are located. The maintenance items herein referred to
include, but are not limited to, all windows, window frames, plate glass,
glazing, truck doors, main plumbing systems of the building (such as water drain
lines, sinks, toilets, faucets, drains, showers and water fountains), main
electrical systems (such as panels and conduits), heating and airconditioning
systems (such as compressors, fans, air handlers, ducts, boilers, heaters),
structural elements and exterior surfaces of the building; store fronts, roof,
downspouts, building common area interiors (such as wall coverings, window
coverings, floor coverings and partitioning), ceilings, building exterior doors,
skylights (if any), automatic fire extinguishing systems, and elevators (if
any); license, permit and inspection fees; security, supplies, materials,
equipment and tools; the cost of capital expenditures which have the effect of
reducing operating expenses, provided, however, that in the event Landlord makes
such capital improvements, Landlord may amortize its investment in said
improvements (together with interest at the rate of fifteen (15 %) percent per
annum on the unamortized balance) as an operating expense over the useful life
of the improvements in accordance with standard accounting practices, provided,
that such amortization is not at a rate greater than the anticipated savings in
the operating expenses. Tenant hereby waives all rights hereunder, and benefits
of, subsection 1 of Section 1932 and Sections 1941 and 1942 of the California
Civil Code and under any similar law, statute or ordinance now or hereafter in
effect.
"Additional Rent" as used herein shall not include Landlord's debt repayments;
interest on charges, expenses directly or indirectly incurred by Landlord for
the benefit of any other tenant; cost for the installation of partitioning or
any other tenant improvements; cost of attracting tenants; depreciation;
interest; or executive salaries.
43. UTILITIES OF THE BUILDING IN WHICH THE PREMISES ARE LOCATED: As Additional
-----------------------------------------------------------
Rent and in accordance with Paragraph 4D of this Lease Tenant shall pay its
10
<PAGE>
proportionate share (calculated on a square footage or other equitable basis as
calculated by Landlord) of the cost of all utility charges such as water, gas,
electricity, (telephone, telex and other electronic communications service, if
applicable) sewer service, waste pick-up and any other utilities, materials or
services furnished directly to the building in which the Premises are located,
including, without limitation, any temporary or permanent utility surcharge or
other exactions whether or not hereinafter imposed.
Landlord shall not be liable for and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any interruption or failure of
utility services to the Premises when such interruption or failure is caused by
accident, breakage, repair, strikes, lockouts, or other labor disturbances or
labor disputes of any nature, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord.
Provided that Tenant is not in default in the performance or observance of any
of the terms, covenants or conditions of this Lease to be performed or observed
by it, Landlord shall furnish to the Premises between the hours of 8:00 am and
6:00 pm, Mondays through Fridays (holidays excepted) and subject to the rules
and regulations of the Common Area hereinbefore referred to, reasonable
quantities of water, gas and electricity suitable for the intended use of the
Premises and heat and airconditioning required in Landlord's judgment for the
comfortable use and occupation of the Premises for such purposes. Tenant may,
from time to time, have its staff and equipment operate on a twenty-four (24)
hour-a-day, seven (7) day-a-week schedule, and Tenant shall pay for any extra
utilities used by Tenant. Tenant agrees that at all times it will cooperate
fully with Landlord and abide by all regulations and requirements that Landlord
may prescribe for the proper functioning and protection of the building heating,
ventilating and airconditioning systems. Whenever heat generating machines,
equipment, or any other devices (including exhaust fans) are used in the
Premises by Tenant which affect the temperature or otherwise maintained by the
airconditioning system, Landlord shall have the right to install supplementary
airconditioning units in the Premises and the cost thereof, including the cost
of installation and the cost of operation and maintenance thereof, shall be paid
by Tenant to Landlord upon demand by Landlord. Tenant will not, without the
written consent of Landlord, use any apparatus or device in the Premises
(including, without limitation), electronic data processing machines or machines
using current in excess of 110 Volts which will in any way increase the amount
of electricity, gas, water or airconditioning usually furnished or supplied to
premises being used as general office space, or connect with electric current
(except through existing electrical outlets in the Premises), or with gas or
water pipes any apparatus or device for the purposes of using electric current,
gas, or water. Landlord acknowledges that Tenant may use electrical current up
to 220 Volts subject to the terms and conditions of this Paragraph 43. If Tenant
shall require water, gas, or electric current in excess of that usually
furnished or supplied to premises being used as general office space, Tenant
shall first obtain the written consent of Landlord, which consent shall not be
unreasonably withheld and Landlord may cause an electric current, gas or water
meter to be installed in the Premises in order to measure the amount of electric
current, gas or water consumed for any such excess use. The cost of any such
meter and of the installation, maintenance and repair thereof, all charges for
such excess water, gas and electric current consumed (as shown by such meters
and at the rates then charged by the furnishing public utility); and any
additional expense incurred by Landlord in keeping account of electric current,
gas, or water so consumed shall be paid by Tenant, and Tenant agrees to pay
Landlord therefor promptly upon demand by Landlord.
It is understood that Tenant as of the Lease Commencement Date, Tenant shall be
the sole occupant of the building located at 650 Almanor Avenue, Sunnyvale, of
which the Leased Premises is a part. Tenant agrees to be responsible for paying
100 % of the utilities, including, but not limited to, water, sewer, gas and
electricity, for the entire building until such time as the remaining vacant
space in the building is leased. Tenant agrees that the utilities for said
building will be placed in Tenant's name and that Tenant will pay all utilities
directly to the respective company(s). When any of the remaining vacant space in
said building is leased, Landlord will notify Tenant and Landlord will transfer
all utilities into Landlord's name and subject to the entire provisions of this
Paragraph 43, Tenant will pay its pro rata charge for said utilities monthly in
advance as described in and subject to Paragraph 4 ("Rent") and this Paragraph
43 ("Utilities").
44. PARKING: Tenant shall have the right to the nonexclusive use of one
-------
hundred thirty (130) parking spaces in the common parking area of the building.
Tenant agrees that Tenant, Tenant's employees, agents, representatives, and/or
invitees shall not use parking spaces in excess of said one hundred thirty
parking spaces allocated to Tenant hereunder. Landlord shall have the right, at
Landlord's sole discretion, to specifically designate the location of Tenant's
parking spaces within the common parking area of the building in the event of a
dispute among the tenants occupying the building referred to herein, in which
event Tenant agrees that Tenant, Tenant's employees, agents,
11
<PAGE>
representatives and/or invitees shall not use any parking spaces other than
those parking spaces specifically designated by Landlord for Tenant's use. Said
parking spaces, if specifically designated by Landlord to Tenant, may be
relocated by Landlord at any time, and from time to time. Landlord reserves the
right, at Landlord's sole discretion, to rescind any specific designation of
parking spaces, thereby returning Tenant's parking spaces to the common parking
arena. Landlord shall give Tenant written notice of any change in Tenant's
parking spaces. Tenant shall not, at any time, park, or permit to be parked, any
trucks or vehicles adjacent to the loading area so as to interfere in any way
with the use of such areas, nor shall Tenant, at any time, park or permit the
parking of Tenant's trucks and other vehicles or the trucks and vehicles of
Tenant's suppliers or others, in any portion of the common areas not designated
by Landlord for such use by Tenant. Tenant shall not park nor permit to be
parked, any inoperative vehicles or equipment on any portion of the common
parking area or other common areas of the building. Tenant agrees to assume
responsibility for compliance by its employees with the parking provision
contained herein. If Tenant or its employees park in other than designated
parking areas, then Landlord may charge Tenant, as an additional charge, and
Tenant agrees to pay Ten Dollars ($10.00) per day for each day or partial day
each such vehicle is parking in any area other than that designated. Tenant
hereby authorizes Landlord, at Tenant's sole expense, to tow away from the
building any vehicle belonging to Tenant or Tenant's employees parked in
violation of these provisions, or to attach violation stickers or notices to
such vehicles. Tenant shall use the parking area for vehicle parking only and
shall not use the parking areas for storage.
45. ASSESSMENT CREDITS: The demised property herein may be subject to a
------------------
special assessment levied by the City of Sunnyvale as part of an Improvement
District. As a part of said special assessment proceedings (if any), additional
bonds were or may be sold and assessments were or may be levied to provide for
construction contingencies and reserve funds. Interest shall be earned on such
funds created for contingencies and on reserve funds which will be credited for
the benefit of said assessment district. To the extent surpluses are created in
said district through unused contingency funds, interest earnings or reserve
funds, such surpluses shall be deemed the property of Landlord, Notwithstanding
that such surpluses may be credited on assessments otherwise due against the
Leased Premises, Tenant shall pay to Landlord, as additional rent if, and at the
time of any such credit of surpluses, an amount equal to all such surpluses so
credited. For example: if (i) the property is subject to an annual assessment of
$1,000.00, and (ii) a surplus of $200.00 is credited towards the current year's
assessment which reduces the assessment amount shown on the property tax bill
from $1,000.00 to $800.00, Tenant shall, upon receipt of notice from Landlord,
pay to Landlord said $200.00 credit as Additional Rent.
46. ASSIGNMENT AND SUBLETTING (CONTINUED):
-------------------------------------
A. Notwithstanding the foregoing, Landlord and Tenant agree that it shall
not be unreasonable for Landlord to refuse to consent to a proposed assignment,
sublease or other transfer ("Proposed Transfer") if the Premises or ant other
portion of the Property would become subject to additional or different
Government Requirements as a direct or indirect consequence of the Proposed
Transfer and/or the Proposed Transferee's use and occupancy of the Premises and
the Property. However, Landlord may, in its sole discretion, consent to such a
Proposed Transfer where Landlord is indemnified by Tenant and (i) Subtenant or
(ii) Assignee, in form and substance satisfactory to Landlord's counsel, by
Tenant and/or the Proposed Transferee from and against any and all costs,
expenses, obligations and liability arising out of the Proposed Transfer and/or
the Proposed Transferee's use and occupancy of the Premises and the Property.
B. Any and all sublease agreement(s) between Tenant and any and all
subtenant(s) (which agreements must be consented to by Landlord, pursuant to the
requirements of this Lease) shall contain the following language:
"If Landlord and Tenant jointly and voluntarily elect, for any reason
whatsoever, to terminate the Master Lease prior to the scheduled Master Lease
termination date, then this Sublease (if then still in effect) shall terminate
concurrently with the termination of the Master Lease. Subtenant expressly
acknowledges and agrees that (1) the voluntary termination of the Master Lease
by Landlord and Tenant and the resulting termination of this Sublease shall not
give Subtenant any right or power to make any legal or equitable claim against
Landlord, including without limitation any claim for interference with contract
or interference with prospective economic advantage, and (2) Subtenant hereby
waives any and all rights it may have under law or at equity against Landlord to
challenge such an early termination of the
12
<PAGE>
Sublease, and unconditionally releases and relieves Landlord, and its officers,
directors, employees and agents, from any and all claims, demands, and/or causes
of action whatsoever (collectively, "Claims"), whether such matters are known or
unknown, latent or apparent, suspected or unsuspected, foreseeable or
unforeseeable, which Subtenant may have arising out of or in connection with any
such early termination of this Sublease. Subtenant knowingly and intentionally
waives any and all protection which is or may be given by Section 1542 of the
California Civil Code which provides as follows: "A general release does not
extend to claims which the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if known by him must have
materially affected his settlement with debtor.
The term of this Sublease is therefore subject to early termination.
Subtenant's initials here below evidence (a) Subtenant's consideration of and
agreement to this early termination provision, (b) Subtenant's acknowledgment
that, in determining the net benefits to be derived by Subtenant under the terms
of this Sublease, Subtenant has anticipated the potential for early termination,
and (c) Subtenant's agreement to the general waiver and release of Claims above.
Initials: Initials:
---------- ---------
Subtenant Tenant
47. BANKRUPTCY AND DEFAULT: Paragraph 19 is modified to provide that with
----------------------
respect to non-monetary defaults not involving Tenant's failure to pay Basic
Rent or Additional Rent, Tenant shall not be in default of any non-monetary
obligation if (i) more than thirty (30) days is required to cure such non-
monetary default, and (ii) Tenant commences cure of such default as soon as
reasonably practicable after receiving written notice of such default from
Landlord and thereafter continuously and with due diligence prosecutes such cure
to completion.
48. ABANDONMENT: Paragraph 20 is modified to provide that Tenant shall not be
-----------
in default under the Lease if it leaves all or any part of Premises vacant so
long as (i) Tenant is performing all of its other obligations under the Lease
including the obligation to pay Basic Rent and Additional Rent (ii) Tenant
provides on-site security during normal business hours for those parts of the
Premises left vacant, (iii) such vacancy does not materially and adversely
affect the validity or coverage of any policy of insurance carried by Landlord
with respect to the Premises, and (iv) the utilities and heating and ventilation
system are operated and maintained to the extent necessary to prevent damage to
the Premises or its systems.
49. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to
-------------------
the existence or use of "Hazardous Materials" (as defined herein) on, in, under
or about the Premises and real property located beneath said Premises and the
common areas of the Parcel, which includes the entire parcel of land on which
the Premises are located as shown in Green on Exhibit A attached hereto
---------
(hereinafter collectively referred to as the "Property"):
A. As used herein, the term "Hazardous Materials" shall mean any material,
waste, chemical, mixture or byproduct which is or hereafter is defined, listed
or designated under Environmental Laws (defined below) as a pollutant, or as a
contaminant, or as a toxic or hazardous substance, waste or material, or any
other unwholesome, hazardous, toxic, biohazardous, or radioactive material,
waste, chemical, mixture or byproduct, or which is listed, regulated or
restricted by any Environmental Law (including, without limitation, petroleum
hydrocarbons or any distillates or derivatives or fractions thereof,
polychlorinated biphenyls, or asbestos). As used herein, the term "Environmental
Laws" shall mean any applicable Federal, State of California or local government
law (including common law), statute, regulation, rule, ordinance, permit,
license, order, requirement, agreement, or approval, or any determination,
judgment, directive, or order of any executive or judicial authority at any
level of Federal, State of California or local government (whether now existing
or subsequently adopted or promulgated) relating to pollution or the protection
of the environment, ecology, natural resources, or public health and safety.
B. Tenant shall obtain Landlord's written consent, which may be withheld
in Landlord's discretion, prior to the occurrence of any Tenant's Hazardous
Materials Activities
13
<PAGE>
(defined below); provided, however, that Landlord's consent shall not be
required for normal use in compliance with applicable Environmental Laws of
customary household and office supplies (Tenant shall first provide Landlord
with a list of said materials use), such as mild cleaners, lubricants and copier
toner. As used herein, the term "Tenant's Hazardous Materials Activities" shall
mean any and all use, handling, generation, storage, disposal, treatment,
transportation, release, discharge, or emission of any Hazardous Materials on,
in, beneath, to, from, at or about the Property, in connection with Tenant's use
of the Property, or by Tenant or by any of Tenant's agents, employees,
contractors, vendors, invitees, visitors or its future subtenants or assignees.
Tenant agrees that any and all Tenant's Hazardous Materials Activities shall be
conducted in strict, full compliance with applicable Environmental Laws at
Tenant's expense, and shall not result in any contamination of the Property or
the environment. Tenant agrees to provide Landlord with prompt written notice of
any spill or release of Hazardous Materials at the Property during the term of
the Lease of which Tenant becomes aware, and further agrees to provide Landlord
with prompt written notice of any violation of Environmental Laws in connection
with Tenant's Hazardous Materials Activities of which Tenant becomes aware. If
Tenant's Hazardous Materials Activities involve Hazardous Materials other than
normal use of customary household and office supplies, Tenant also agrees at
Tenant's expense: (i) to install such Hazardous Materials monitoring, storage
and containment devices as Landlord reasonably deems necessary (Landlord shall
have no obligation to evaluate the need for any such installation or to require
any such installation); (ii) provide Landlord with a written inventory of such
Hazardous Materials, including an update of same each year upon the anniversary
date of the Commencement Date of the Lease ("Anniversary Date"); and (iii) on
each Anniversary Date, to retain a qualified environmental consultant,
acceptable to Landlord, to evaluate whether Tenant is in compliance with all
applicable Environmental Laws with respect to Tenant's Hazardous Materials
Activities. Tenant, at its expense, shall submit to Landlord a report from such
environmental consultant which discusses the environmental consultant's findings
within two (2) months of each Anniversary Date. Tenant, at its expense, shall
promptly undertake and complete any and all steps necessary, and in full
compliance with applicable Environmental Laws, to fully correct any and all
problems or deficiencies identified by the environmental consultant, and
promptly provide Landlord with documentation of all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at its
expense, shall (i) properly remove from the Property all Hazardous Materials
which come to be located at the Property in connection with Tenant's Hazardous
Materials Activities, and (ii) fully comply with and complete all facility
closure requirements of applicable Environmental Laws regarding Tenant's
Hazardous Materials Activities, including but not limited to (x) properly
restoring and repairing the Property to the extent damaged by such closure
activities, and (y) obtaining from the local Fire Department or other
appropriate governmental authority with jurisdiction a written concurrence that
closure has been completed in compliance with applicable Environmental Laws.
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
such closure activities.
D. If Landlord, in its sole discretion, believes that the Property has
become contaminated as a result of Tenant's Hazardous Materials Activities,
Landlord in addition to any other rights it may have under this Lease or under
Environmental Laws or other laws, may enter upon the Property and conduct
inspection, sampling and analysis, including but not limited to obtaining and
analyzing samples of soil and groundwater, for the purpose of determining the
nature and extent of such contamination. Tenant shall promptly reimburse
Landlord for the costs of such an investigation, including but not limited to
reasonable attorneys' fees Landlord incurs with respect to such investigation,
that discloses Hazardous Materials contamination for which Tenant is liable
under this Lease. Notwithstanding the above, Landlord may, at its option and in
its sole and absolute discretion, choose to perform remediation and obtain
reimbursement for cleanup costs as set forth herein from Tenant. Any cleanup
costs incurred by Landlord as the result of Tenant's Hazardous Materials
Activities shall be reimbursed by Tenant within thirty (30) days of presentation
of written documentation of the expense to Tenant by Landlord. Such reimbursable
costs shall include, but not be limited to, any reasonable consultant and
attorney fees incurred by Landlord. Tenant shall take all actions necessary to
preserve any claims it has against third parties, including, but not limited
to, its insurers, for claims related to its operation, management of Hazardous
Materials or contamination of the Property. Except as may be required of Tenant
by applicable Environmental Laws, Tenant shall not perform any sampling,
testing, or drilling to identify the presence of any Hazardous Materials at the
Property, without Landlord's prior written consent which may be withheld in
Landlord's discretion. Tenant shall promptly provide Landlord with copies of any
claims, notices, work plans, data and reports prepared, received or submitted in
connection with any sampling, testing or drilling performed pursuant to the
preceding sentence.
14
<PAGE>
E. Tenant shall indemnify, defend (with legal counsel acceptable to Landlord,
whose consent shall not unreasonably be withheld) and hold harmless Landlord,
its employees, assigns, successors, successors-in-interest, agents and
representatives from and against any and all claims (including but not limited
to third party claims from a private party or a government authority),
liabilities, obligations, losses, causes of action, demands, governmental
proceedings or directives, fines, penalties, expenses, costs (including but not
limited to reasonable attorneys', consultants' and other experts' fees and
costs), and damages, which arise from or relate to: (i) Tenant's Hazardous
Materials Activities; (ii) any Hazardous Materials contamination caused by
Tenant prior to the Commencement Date of the Lease; or (iii) the breach of any
obligation of Tenant under this Paragraph 49 (collectively, "Tenant's
Environmental Indemnification"). Tenant's Environmental Indemnification shall
include but is not limited to the obligation to promptly and fully reimburse
Landlord for losses in or reductions to rental income, and diminution in fair
market value of the Property. Tenant's Environmental Indemnification shall
further include but is not limited to the obligation to diligently and properly
implement to completion, at Tenant's expense, any and all environmental
investigation, removal, remediation, monitoring, reporting, closure activities,
or other environmental response action (collectively, "Response Actions").
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
Response Actions.
It is agreed that the Tenant's responsibilities related to Hazardous Materials
will survive the expiration or termination of this Lease and that Landlord may
obtain specific performance of Tenant's responsibilities under this Paragraph
49.
50. CONSENT: Whenever the consent of one party to the other is required
-------
hereunder, such consent shall not be unreasonably withheld.
51. AUTHORITY TO EXECUTE: The parties executing this Lease Agreement hereby
--------------------
warrant and represent that they are properly authorized to execute this Lease
Agreement and bind the parties on behalf of whom they execute this Lease
Agreement and to all of the terms, covenants and conditions of this Lease
Agreement as they relate to the respective parties hereto.
52. PUNCH LIST: In addition to and notwithstanding anything to the contrary in
----------
Paragraphs 5 and 40 of this Lease, Tenant shall have thirty (30) days after the
Commencement Date to provide Landlord with a written "punch list" pertaining to
defects in the interior improvements constructed by Landlord for Tenant. As soon
as reasonably possible thereafter, Landlord, or one of Landlord's
representatives (if so approved by Landlord), and Tenant shall conduct a joint
walk-through of the Premises (if Landlord so requires), and inspect such Tenant
Improvements, using their best efforts to agree on the incomplete or defective
construction related to the Tenant Improvements installed for Tenant by
Landlord. After such inspection has been completed, Landlord shall prepare, mid
both parties shall sign, a list of all "punch list" items which the parties
reasonably agree are (i) to be corrected by Landlord (but which shall exclude
any damage or defects caused by Tenant, its employees, agents or parties Tenant
has contracted with to work on the Premises) or (ii) if said defects and/or
damaged item(s) are not material, Landlord may elect, in its sole and absolute
discretion, not to repair such item(s), but to acknowledge in written form the
defect and/or damaged item(s):in which case, notwithstanding anything to the
contrary in said Lease Paragraph 5 ("Acceptance and Surrender"), Tenant shall
not be responsible upon Lease Termination to repair said item(s) so noted by
Landlord. Landlord shall have thirty (30) days thereafter (or longer if
necessary, provided Landlord is diligently pursuing the completion of the same)
to complete, at Landlord's expense, the "punch list" items without the
Commencement Date of the Lease and Tenant's obligation to pay Rental thereunder
being affected. Notwithstanding the foregoing, a crack in the foundation, or
exterior walls or any other defect in the structure or Building that does not
endanger the structural integrity of the building, or which is not life-
threatening, shall not be considered material, nor shall Landlord be responsible
for repair of same. This Paragraph shall be of no force and effect if Tenant
shall fail to give any such notice to Landlord within thirty (30) days after the
Commencement Date of this Lease.
53. MAINTENANCE OF THE PREMISES: Notwithstanding anything to the contrary in
---------------------------
Paragraph 7, Landlord shall repair, damage to the structural shell, foundation,
and roof structure (but not the interior improvements, roof membrane, or
glazing) of the building leased hereunder at Landlord's cost and expense
provided Tenant has not caused such damage, in which event Tenant shall be
responsible for 100 percent of any such costs for repair or damage so caused by
the Tenant. Notwithstanding the foregoing, a crack in the foundation or exterior
walls, or any other defect in the Building that does not
15
<PAGE>
endanger the structural integrity of the building for which Tenant is not
responsible, or which is not life-threatening, shall not be considered material,
and Landlord may elect, in its sole and absolute discretion, not to repair
and/or replace the same.
54. COMPLIANCE CONTINUED: Any non-conformance of the improvements installed and
--------------------
paid for by Landlord as set forth on Exhibit B, required to be corrected by the
---------
governing agency, shall be corrected at the cost and expense of Landlord if such
non-conformance exists as of the Commencement Date of the Lease and further
provided that such governing agency's requirement to correct the non-conformance
is not initiated as a result of: (i) any future improvements made by or for
Tenant; or (ii) any permit request made to a governing agency by or for Tenant.
Any nonconformance of the Premises occurring after the Commencement Date of this
Lease Agreement shall be the responsibility of Tenant to correct at Tenant's
cost and expense.
55. ADDITIONAL RENT CONTINUED: The following costs and expenses shall be
-------------------------
excluded from Additional Rent provided they are not related to the Premises
leased by Tenant:
A. Leasing commissions, attorney's fees, costs, disbursements, and other
expenses incurred in connection with negotiations with other third party tenants
(provided said third party tenant is not a subtenant and/or assignee of Tenant),
or disputes between Landlord and other third party tenants, or in connection
with marketing, leasing, renovating, or improving space for other current or
prospective third party tenants or other current or prospective third party
occupants of the Complex; notwithstanding anything to the contrary in Paragraph
4D, any costs mid expenses Landlord is entitled to be reimbursed for as stated
under Paragraph 19 (Bankruptcy and Default") are not included in the "excluded
Additional Rent items" reflected in this Paragraph 55.
B. The cost of any service sold to any other third party tenant or other
third party occupant (provided said third party tenant or third party occupant
is not a subtenant and/or assignee of Tenant) for which Landlord is entitled to
be reimbursed as an additional charge or rental over and above the basic rent
and additional rent payable under the lease agreement with said other third
party tenant (including, without limitation, after-hours HVAC costs or over-
standard electrical consumption costs incurred by such other third party
tenants).
16
<PAGE>
CHECK No. 2655 for $121,256,50
Paid to A&P Foundations
2560 Missions College Blvd., Suite 101, Santa Clara, CA 95054
12/09/1998
17
<PAGE>
$121,256.50 Building: Siri B
Date Due: November 1, 1998
PROMISSORY NOTE
THE UNDERSIGNED, CacheFlow, Inc., a Delaware corporation, hereby
promises, covenants and agrees to pay to the Arrillaga Foundation and the Peery
Foundation, at Santa Clara, California, the principal sum of ONE HUNDRED TWENTY
ONE THOUSAND TWO HUNDRED FIFTY SIX AND 50/100 DOLLARS ($121,256.50) without
interest on or before November 1, 1998. This sum is final payment of a Security
Deposit provided for in accordance with the Lease Agreement between the parties
dated July 14, 1998, for approximately 39,115+ square feet of space located at
650 Almanor Avenue, Sunnyvale, California. The parties' rights to payment,
nonpayment or refund of the sum due under this Note shall be governed solely by
the above Lease Agreement.
IN THE EVENT the undersigned defaults in the timely payment of this Note,
the undersigned shall pay to Holder, in addition to the principal sum due
hereunder, interest thereon at the then existing highest interest rate
chargeable by law from August 15, 1998 until this Note is paid in full.
IN THE EVENT legal action is taken to enforce the provisions of this
Note, the undersigned, does promise, covenant, and agree to pay, in addition to
the principal due hereunder and any interest accrued thereon, attorney fees
and/or court costs incurred by Holder by reason of such enforcement of the
provisions herein contained whether or not such action is prosecuted to
judgement.
THIS NOTE shall be governed and construed according to the laws of the
State of California.
IN WITNESS WHEREOF, the undersigned have/has executed this Promissory
Note as of the 24 day of July, 1998.
--
CACHEFLOW, INC.
a Delaware corporation
By /s/ Ray G. Myers
----------------
Ray G. Myers
------------
Type or Print Name
Title V.P. Cust. Support & Mfg
------------------------
By _____________________________
18
<PAGE>
EXHIBIT 10.7
REDMOND CORPORATE CENTER LEASE
------------------------------
This LEASE (this "Lease") is made and entered into this 19th day of February,
1997, by and between REDMOND WHITEHALL ASSOCIATES, INC., a Washington General
Partnership ("Landlord") and CASHEFLOW, INC., a Delaware Corporation ("Tenant").
In consideration of the mutual promises and covenants contained in this Lease,
Landlord and Tenant do hereby agree:
Section 1. Fundamental Lease Provisions, Exhibits, Defined Terms.
-----------------------------------------------------
In addition to definitions set forth elsewhere in this Lease and subject to
other provisions of this Lease, the following terms shall have the following
meanings:
(1) Building. Redmond Corporate Center, situated on a portion of the Land,
--------
and with a postal address of 16701 NE 80th Street, Redmond, Washington, 98052.
(2) Premises. Suite number 100, consisting of the area on the first floor(s)
--------
of the Building located as indicated on the floor plan(s) attached hereto as
Exhibit A, including the Tenant Improvements, if any.
(3) Tenant's Percentage. Fifty-one and nine hundredths percent (51.09%) based
-------------------
upon the rentable area of the Premises, which is stipulated for the purposes of
this Lease to be 6,843 rentable square feet, which is based on 6,221 useable
square feet plus a ten percent (10%) common area load factor, compared to the
applicable rentable area of the Building, which is stipulated for the purposes
of this Lease to be 13,395 rentable square feet.
(4) Projected Commencement Date. March 15, 1997 (The actual Commencement Date
---------------------------
shall be established pursuant to Section 3).
(5) Term. Sixty (60) full calendar months, plus any partial month following
----
the Commencement Date, as provided in Section 3.3.
(6) Rate Months Monthly Rental
---- ------ --------------
$18.00/SF/Year 01-24 $10,264.50
$19.00/SF/Year 25-48 $10,834.75
$19.50/SF/Year 49-60 $11,119.88
(7) Additional Rent. All amounts payable by Tenant to Landlord under this
-----------------
Lease, pursuant to Sections 6, 8, 9.8 and 16.
(8) Security Deposit. Eleven Thousand One Hundred Nineteen and 88/100's
-----------------
Dollars ($11,119.88).
(9) Landlord's Address. REDMOND WHITEHALL ASSOCIATES
------------------ 2105 112th Avenue NE Suite 100
Bellevue, Washington 98004
(10) Tenant's Address.
----------------
Prior to Commencement Date: After Commencement Date:
Cacheflow, Inc. Redmond Corporate Center
8563 - 154th Avenue NE 16701 NE 80th Street Suite 100
Redmond, Washington 98052 Redmond, Washington, 98052
(11) Tenant Improvements. The improvements to be made to the Premises by the
-------------------
Tenant pursuant to the Space Description.
1
<PAGE>
(12) Improvements. Improvements constructed by the Tenant pursuant to, and
------------
defined in Section 10 hereof, if any.
(13) Building Standard. The standard of work defined in the Space
-----------------
Description.
(14) Space Description. Exhibit D hereto, as the same may be amended or
-----------------
supplemented in writing by Landlord and Tenant after the date hereof.
(15) Guarantor. Any other Person who hereafter in whole or in part guarantees
---------
Tenant's performance under this Lease.
(16) Person. Individuals, partnerships, firms, associations, corporations
------
and/or any other form of business or legal entity.
(17) Land. The real property described in Exhibit B hereto.
----
(18) Occupant. Any Person, including Tenant, entitled to occupy or use a
--------
portion or portions of the Building under a Lease or other arrangement with
Landlord.
(19) Permitted Use. General offices including computer research and
-------------
development.
(20) Tenant's Broker. Chris Langer of CB Commercial.
---------------
Exhibits. The following Exhibits are attached to this Lease and
--------
incorporated herein by this reference as if fully set forth:
Exhibit A Floor Plan
Exhibit B Legal Description of Land
Exhibit C Rules and Regulations
Exhibit D Space Description
Rider #1 Renewal Option
Rider #2 Cancellation Option
Rider #3 Right of First Refusal
Section 2. Premises and Common Areas.
-------------------------
2.1 Premises. Landlord hereby leases to Tenant and Tenant hereby leases from
--------
Landlord, the interior of the Premises, for the term and subject to and with the
benefit of the covenants and conditions set forth in this Lease. The perimeter
walls, floors and ceiling of the Premises and any space in the Premises used for
shafts, stacks, pipes, conduits, ducts, electrical or other utilities or
Building facilities and the use thereof, as well as access thereto through the
Premises for the purposes of operation, maintenance, decoration, installation,
inspection, repair and replacement, are expressly reserved to Landlord and are
expressly excluded from the Premises leased hereby.
2.2 Common Areas. Landlord shall make available such areas and facilities for
------------
the common use of all tenants of the Building (including, but not limited to
parking areas, driveways, truckways, delivery passages, truck-loading areas,
access roads, walkways and landscaped and planted areas) as Landlord shall
reasonably deem appropriate ("Common Areas"). All elements of the Building not
leased exclusively to Tenant or another tenant of the Building, including the
utility systems up to the boundaries of the Premises, are Common Areas. Landlord
or its agents shall operate, manage, equip, light, repair, replace and maintain
the Common Areas for their intended purposes in such manner as Landlord shall
reasonably, in its sole discretion, determine. Landlord may, from time to time,
change the size, location, nature and use of any Common Area and make
installations therein and to move and remove the same, provided that Tenant's
access to the Premises is not materially reduced. All expenses in connection
with the Common Areas are Operating Costs for the purposes of Section 6 of this
Lease. Tenant and its employees, agents and invitees shall have the non-
exclusive right (in common with other tenants of the Building and Landlord) to
use the Common Areas, subject to any Rules and Regulations adopted pursuant to
Section 9.1 of this Lease. The Rules and Regulations may include the designation
of specific areas in which cars owned by Tenant, its employees and agents must
be parked. Landlord may at any time temporarily close any Common Areas due to
construction, maintenance, repair or changes to any part of the building or
Land. Tenant shall be entitled to use, on a non-reserved basis, a pro rata share
of available parking. Tenant's prorated share of parking shall be determined by
comparing the rentable square feet in the Building and any other adjacent
buildings that will be using the available parking subject to any restrictions
contained in applicable Covenants and Easements of record. Tenant shall not at
any time interfere with the rights of
2
<PAGE>
Landlord or of other tenants of the Building or other adjacent buildings or
invitees of the same to use any of the parking areas.
Section 3. Lease Commencement and Expiration Dates.
---------------------------------------
3.1 Lease Commencement Date. The Commencement Date shall be the earlier of (i)
-----------------------
the date the Tenant Improvements to the Premises, together with the common
facilities for access and service thereto, have been completed in accordance
with the Space Description, subject to punch-list items as described in Section
3.4 which do not materially interfere with Tenant's use and enjoyment of the
Premises ("Substantial Completion"), or (ii) the date Tenant occupies any of the
Premises for any Permitted Uses. If Substantial Completion of the Tenant
Improvements to the Premises is delayed due to any act or omission of Tenant,
including Tenant's failure to perform its obligations under the terms of the
Space Description, the Commencement Date shall be deemed to be the date upon
which substantial completion of the Tenant Improvements would have occurred, but
for such delay. It is understood and agreed that March 15, 1997 is intended by
the parties as the Commencement Date, provided that this Lease is executed and
delivered by Tenant to Landlord no later than February 10, 1997.
3.2 Confirmation of Commencement Date. Landlord shall confirm the
---------------------------------
Commencement Date to Tenant in writing.
3.3 Term. The term of this Lease shall commence on the Commencement Date
----
and continue for the number of full calendar months specified in Section 1(5)
plus any partial calendar month at the beginning of the Term, unless sooner
terminated or extended as provided in this Lease.
3.4 Possession. If Landlord is unable to deliver the Premises or any portion
---------
thereof on or before the Projected Commencement Date, Landlord shall not be
liable for any damage caused thereby, nor shall this Lease thereby become void
or voidable, but in such event, (i) Tenant shall not be liable for payment of
any Rent or Additional Rent until such time as Landlord delivers possession, and
(ii) the Term shall not commence until the Premises are so delivered. In the
event Landlord is unable to deliver the Premises on or before June 30, 1997,
Tenant may terminate the Lease by providing Landlord written notice after June
30, 1997.
Section 4. Rent.
----
4.1 Rent. Commencing on the Commencement Date, Tenant shall pay Landlord at
----
Landlord's Address, or to such other person or place or account as Landlord may
hereafter from time to time designate in writing, the Rent specified in Section
1 (at times referred to herein as "Rent"), and any other charges due under this
Lease, without notice or demand except as otherwise specifically provided in
this Lease and without deduction or offset or abatement or counterclaim. Such
payment shall be made in lawful money of the United States in advance on or
before the Commencement Date and on or before the first (1st) day of each
succeeding month. Rent and any payments for any partial month at the beginning
or end of the term of this Lease shall be prorated based upon the actual number
of days of such month. As partial consideration for the execution of this Lease,
Tenant has paid to Landlord the sum of Ten Thousand Two Hundred Sixty Four and
50/100's Dollars ($10,264.58). Said sum shall be credited toward the payment of
the Rent for the first (1st) month base rent which is due for the Initial
Term. If Tenant fails to comply fully with and perform all of the terms of this
Lease, said sum shall automatically be converted into any additional security
deposit to be disposed of in accordance with the terms in Section 5.
3
<PAGE>
Section 5. Security Deposit.
----------------
As security for the full and faithful performance of every covenant and
condition of this Lease to be performed by Tenant, Tenant has paid the Security
Deposit as set forth in Section 1(8) to Landlord, and Landlord acknowledges
receipt of said Security Deposit. If Tenant shall default with respect to any
covenant or condition of this Lease, including, but not limited to the payment
of Rent or any other amount or change due hereunder, Landlord may apply all or
any part of the Security Deposit to the payment of any sum in default, or any
other sum which Landlord may be required to spend or incur by reason of Tenant's
default, and any other sum which Landlord may in its reasonable discretion deem
necessary to spend or incur on Tenant's behalf or by reason of Tenant's default,
to the extent of the damage. In any such event, Tenant shall within ten (10)
days of demand, deposit with Landlord the amount so applied, expended or
incurred. Only if Tenant shall have fully complied with all of the covenants and
conditions of this Lease and shall have delivered the Premises to Landlord in
the condition required by the terms of this Lease, but not otherwise, the amount
of the Security Deposit then held by Landlord shall be repaid to Tenant (or, at
Landlord's option, to the last assignee of Tenant's interest hereunder) within
thirty (30) days after the expiration or sooner termination of this Lease. In
the event of Tenant's default under this Lease, Landlord shall have the right to
retain the Security Deposit to the extent of the damage, in addition to any
and all other rights and remedies at law or in equity available to Landlord.
Tenant shall not assign or encumber the Security Deposit and neither Landlord
nor its successors or assigns shall be bound by any such assignment or
encumbrance. Landlord may commingle the Security Deposit with other funds and
Tenant shall not be entitled to interest or other return thereon.
Section 6. Cost of Operations and Real Estate Taxes.
----------------------------------------
6.1 Definitions. The following terms shall have the following meanings:
-----------
Operating Costs. Any and all amounts incurred or expended by Landlord in
----------------
connection with the management, maintenance, operation, security or repair of
the Premises or the Building or the Land or all or any portion thereof, or any
improvements, fixtures, or equipment situated thereon or therein including, but
not by way of limitation, the cost of operating, maintaining and repairing
elevators; wages and salaries of all employees engaged in operation, maintenance
or security of the building, including all taxes, insurance and benefits
relating to such employees; insurance costs of every kind and nature; energy
costs, including costs of heating, ventilating, air conditioning and
electricity; water, sewer, gas and other utility costs; the total customary
charges of any agent or independent contractor employed in the repair, care,
operation, management, maintenance or security of the Building or the Land; Real
Property Taxes, as defined below; and any other expenses or charges whether or
not hereinabove described, which in accordance with generally accepted
accounting and management practices would be considered and expense of
maintaining, managing, operating or repairing the Building, excluding or
deducting, as appropriate: (i) initial leasing costs including tenant
improvements and leasing commissions for other tenants; (ii) costs of any
special services rendered to individual tenants (including Tenant) for which a
special charge is collected; and (iii) depreciation or amortization of costs
required to be capitalized in accordance with generally accepted accounting
principles (except Operating Costs shall include amortization, including
interest at the rate incurred by Landlord in connection therewith or, if
Landlord has paid cash, at the Prime Rate of Seattle First National Bank) of
capital improvements made subsequent to the initial development of the Building
which are designed with a reasonable probability of improving the operating
efficiency of the Building or which are required under any governmental laws or
regulations not applicable to the Building at the time it was constructed.
Real Property Taxes. Taxes, charges, assessments (or any installment
-------------------
thereof due during the Fiscal Year) and other impositions, however denominated,
levied from time to time with respect to the Land, the Building, or any
improvements, fixtures and equipment and all other property of Landlord, real or
personal, used directly in the operation of the Building and located in, on or
about the Building; any taxes levied or assessed (or any installment thereof due
during the Fiscal Year) in addition to or in lieu of, in whole or in part, such
taxes; any other tax upon leasing of the Building or rents; any other tax or
surcharge such as, for example, payments to or on account of public transit or
car pooling or environmental facilities; and all costs and expenses
4
<PAGE>
incurred by Landlord in connection with the attempt to reduce any of the
foregoing, whether by negotiation or contest. Real Property Taxes, however,
shall not include any franchise or state income tax, inheritance tax, estate
tax, business and occupation tax, or any other similar tax. Real Property Tax
assessments shall be spread over the longest permitted payment period.
Fiscal Year. The period of January 1 through December 31.
-----------
Operating Costs and Real Estate Taxes Base Amount. Tenant's Square
-------------------------------------------------
Footage as defined in Section 1(3) multiplied by Six and 50/100's Dollars
($6.50). Tenant shall be notified of said amount in writing.
6.2 Additional Rent for Operating Costs. If, in any Fiscal Year, Operating
-----------------------------------
Costs multiplied by Tenant's Percentage is in excess of the Operating Costs Base
Amount, then, in addition to all other amounts due hereunder and as Additional
Rent, Tenant shall pay Landlord the amount of such excess ("Tenant's Share of
Operating Costs"), such payments to be made in accordance with Section 6.3. In
any partial year, Section 6.4.2 of this Lease shall apply.
6.3 Estimated Increases. During December of each Fiscal Year or as soon
-------------------
thereafter as practicable, Landlord shall give Tenant written notice of the
estimated amount payable by Tenant under this Section 6.3 for the following
Fiscal Year. On or before the first (1st) day of each month thereafter, Tenant
shall pay Landlord one-twelfth (1/12th) of such estimated amounts, provided
Landlord may, by written notice to Tenant, revise its estimate whereupon
subsequent payments by Tenant for the remainder of the Fiscal Year shall be
based upon such revised estimate. Within ninety (90) days after the close of
each Fiscal Year during the term of this Lease, or as soon thereafter as
practicable, Landlord shall deliver to Tenant a statement setting forth the
total amount of Tenant's Share of Operating Costs for such Fiscal Year, where
upon there shall be a final adjustment between Landlord and Tenant in connection
with amounts due Landlord under this Section 6.3 and Tenant shall pay Landlord
any amount due Landlord within thirty (30) days of receipt of such statement,
and any amount due Tenant shall be credited to the next accruing amounts due
Landlord pursuant to this Section 6.3 or if the Lease has terminated or expired,
such amount shall be credited against any amounts still due Landlord and the
balance shall be refunded to Tenant.
6.4 Further Adjustments.
-------------------
6.4.2. For the Fiscal Year in which the term of this Lease commences or
expires, Tenant shall pay only that proportion of the amount otherwise payable
under this Section 6 which the number of days of the term of the Lease failing
within such year bears to three hundred sixty-five (365) days, based upon the
estimated amounts due pursuant to Section 6.3 for the Fiscal Year or
commencement or termination.
6.5 Personal Property Taxes. Tenant shall pay, prior to delinquency, all
-----------------------
personal property taxes payable with respect to all property of Tenant located
on or about the Premises or the Building and shall, promptly upon request of
Landlord, provide written proof of such payment to Landlord. As used herein
"property of Tenant" shall include all improvements which are paid for by Tenant
and "personal property taxes" shall include all property taxes assessed against
the property of Tenant, whether assessed as real or personal property. If any
personal property taxes are assessed and taxed with the Building or the Land,
Tenant shall pay to Landlord its share of such taxes within ten (10) days after
receipt of a written statement setting forth the amount of such taxes that
Landlord has determined are applicable to Tenant's property.
Section 7. Uses; Hazardous Materials.
-------------------------
7.1 Permitted Uses; Waste. Tenant shall use the Premises only for the
---------------------
Permitted Use as set forth in Section 1(19) and for no other business or purpose
without the prior written consent of Landlord. Tenant shall not commit or allow
to be committed any waste upon the Premises, or any public or private nuisance
or other act or thing which disturbs the quiet enjoyment of any other Occupant
in the Building, or is reasonably expected to injure the reputation of the
Building, or is unlawful.
5
<PAGE>
7.2 Hazardous Materials. Any matter (whether gaseous, liquid or solid) which
-------------------
is designated as a "Hazardous Substance" pursuant to Section 101 of the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
US4 9601, et seq., or as a Hazardous Substance, Hazardous Household Substance,
------
Moderate Risk Waste or Hazardous Waste under RCW 70.105.010, or which is
regulated by any federal, state, or local law, statute, ordinance or regulation
pertaining to health, industrial hygiene or the environment now or as hereafter
amended. "Hazardous Material" shall not include ordinary household cleaning and
maintenance products, in reasonable quantities as deemed by Landlord in its sole
discretion, which are used with due care and in accordance with the instructions
of the manufacturer of such products in the reasonable and prudent conduct of
Tenant's business on the Premises. Tenant shall not store, use or dispose of any
Hazardous Materials in, on or about the Premises, the Building or the Land.
Tenant shall be solely responsible for and shall defend, indemnify and hold
Landlord, its agents and employees harmless from and against all claims, costs
and liabilities, including attorneys' fees and costs, arising out of or in
connection with Tenant's breach of its obligations contained in this Section
7.2. Tenant shall be solely responsible for and shall defend, indemnify and hold
Landlord, its agents and employees harmless from and against any and all claims,
costs and liabilities, including attorneys' fees and costs, arising out of or in
connection with the removal, cleanup and restoration work and materials
necessary to return the Premises, the Building, the Land and any other property
of whatever nature, to their condition existing prior to the appearance of
Tenant's Hazardous Materials on or about the Premises. Tenant's obligations
under this Section 7.2 shall survive the expiration or other termination of this
Lease.
Section 8. Covenants of Landlord.
---------------------
8.1 Basic Services. Landlord shall repair and maintain the structural portions
--------------
of the Building, including the basic plumbing, air conditioning, heating and
electrical systems installed or furnished by Landlord, unless such maintenance
and repairs are caused in part or in whole by the act, neglect, fault, or
omission by of any duty by the Tenant, its agents, servants, employees, or
invitees, in which case Tenant shall pay to Landlord the reasonable cost of such
maintenance and repairs. Except as provided in Section 11 of this Lease, there
shall be no abatement of rent and no liability of Landlord by reason of any
injury 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 hereinafter in effect. All costs incurred by Landlord in
complying with this Section 8.1 are Operating Costs for the purposes of Section
6 of this Lease. Landlord shall provide Tenant twenty four (24) hours prior
notice of its intent to access the Premises except in the event of an
emergency.
8.2 Extraordinary Services. Should Tenant require special services from
----------------------
time to time on days or hours other than those specified in the Rules and
Regulations attached as Exhibit C, Landlord shall, upon reasonable advance
notice by Tenant, furnish such additional service and Tenant agrees to pay to
Landlord, concurrently with payment of monthly Rent, as Additional Rent,
Landlord's cost of labor, materials supplied and utilities consumed in providing
such additional service plus reasonable administrative costs. The amount of such
payment and expenses shall be excluded from the determination of Operating
Costs.
8.3 Landlord Not Liable. Landlord does not warrant that any of the services
-------------------
referred to in this Lease, or any other services which Landlord may supply, will
be free from power surge, interruption, curtailment or suspension, Tenant
acknowledging that any one or more of such events or services may be suspended
by reason of accident or repairs, alterations or improvements, or by reason of
causes beyond the reasonable control of Landlord. No interruption, curtailment
or suspension of service shall be deemed an eviction or disturbance of Tenant's
use and possession of the Premises or any part thereof, or render Landlord
liable to Tenant for damages, or relieve Tenant from the full and complete
performance of all of Tenant's obligations under this Lease, nor shall there be
any abatement of Rent or other charges, unless damages are the result of
Landlord's gross negligence or willful misconduct.
Section 9. Covenants of Tenant.
-------------------
Tenant agrees, for itself, its employees, agents and invitees, that it shall:
9.1 Rules and Regulations. Comply with the Rules and Regulations, and such
---------------------
reasonable amendments and additions as from time to time may be adopted by
Landlord to
6
<PAGE>
govern the use, occupancy and operation of the Building (the existing rules and
regulations, as so amended or supplemented from time to time, being the "Rules
and Regulations"). Landlord shall not be responsible to Tenant for the
noncompliance by any other Occupant with any of the Rules and Regulations, and
any failure by Landlord to enforce any Rules and Regulations against either
Tenant or any other Occupant shall not constitute a waiver thereof.
9.2 Landlord's Right of Access. Give Landlord, its agents, employees, lessors
--------------------------
and mortgagees and any other person or persons authorized by Landlord, access to
the Premises at all reasonable times, and at any time in the event of an
emergency, to enable them to inspect, examine, show for lease or sale, and to
make such repairs, additions and alterations to the Premises or the Building, or
to the fixtures, appurtenances or equipment therein, as Landlord may deem
advisable; provided that Landlord shall use reasonable efforts to (i) minimize
any disruption of Tenant's business caused by such access and (ii) provide
Tenant reasonable advance notice when feasible. Landlord shall also be entitled
to install and operate at Tenant's cost a monitoring/metering system in the
Premises to measure the added demands on electrical, heating, ventilating and
air conditioning systems, resulting from Tenant's equipment and lights or from
Tenant's after hours heating, ventilating and air conditioning service
requirements. There shall be no allowance to Tenant or diminution of Rent and no
liability on the part of Landlord by reason of inconvenience, annoyance or
injury to business arising from such right of access or the making of any
repairs, alterations, additions or improvements in or to any portion of the
Building or the Premises, or in or to the fixtures, appurtenances and equipment
thereof.
9.3 Repair. Keep the Premises and all portions thereof in good order and
------
condition, not damage or deface the Premises, Building or Land, make all repairs
to the Premises which are not Landlord's obligation pursuant to Section 8 or
Section 11, repair any damage to the Premises, Building or Land or their
contents caused by the failure of Tenant to comply with its obligations under
this Lease, and any damage to the Premises, Building or Land arising our of
misuse or negligence of Tenant, its employees, agents, invitees or visitors, and
commit no waste in, about or to the Premises, Building, or Land.
9.4 Quit and Remove. Upon the termination of this Lease for any reason, quit
---------------
and deliver up the Premises to Landlord peaceably and quietly in as good order
and condition as the Premises shall be on the Commencement Date or may
thereafter be improved by Landlord or Tenant, reasonable use and wear and
repairs which are Landlord's obligations excepted, and, if Tenant is not in
default under the terms of this Lease, remove Tenant's goods and effects and
those of any other persons claiming under Tenant. Goods and effects not removed
by Tenant at the termination of this Lease (or within 48 hours after a
termination by reason of Tenant's default), shall be considered abandoned and
Landlord may dispose of the same as it deems expedient and for its own account.
Tenant shall promptly upon demand reimburse Landlord for any expenses incurred
by Landlord in disposing of such abandoned goods and effects, and Landlord shall
not be liable to Tenant for any net proceeds from such disposal. Landlord will
notify Tenant if any goods or effects have not been removed upon Tenant vacating
Premises.
9.5 Advertising. Not place in or on or about the Premises signs, lettering,
-----------
displays, advertising or pictures which are visible from outside the Premises
(including public corridors) without the prior written approval of Landlord.
9.6 Liens. At its expense, cause to be fully and completely discharged of
-----
record, within ten (10) days of Landlord's demand, any labor or materialman's
lien claim or other lien or claim filed against the Premises or the Building for
work claimed to have been done for, or materials claimed to have been furnished
to, or on behalf of Tenant.
9.7 Comply with Laws. At its expense, comply with all laws, orders, ordinances
----------------
and regulations of federal, state, county and municipal authorities and with any
direction made pursuant to law of any public officer or officers, which shall,
with respect to the Tenant's particular use of the Premises or to any abatement
of nuisance, impose any violation, order or duty upon Landlord or Tenant arising
from Tenant's particular use of the Premises or from conditions which have been
created by or at the instance of Tenant or are required by reason of a breach of
any of Tenant's obligations hereunder.
9.8 Not Invalidate Insurance. Not do or permit to be done any act or thing
------------------------
upon the Premises which will invalidate or be in conflict with the Certificate
of Occupancy or the terms of the property, boiler, sprinkler, water damage or
other insurance policies covering the Building and the fixtures and property
therein or do or permit anything to be done in or upon the Premises or bring or
keep anything therein or use the Premises in a manner which may make insurance
unavailable or increase the premium for insurance upon the Building or on any
Property or equipment located therein. If Landlord's insurance premiums are
increased because of Tenant's failure to comply
7
<PAGE>
with its obligations under this Lease, then Tenant shall pay the cost of any
such increase, as additional rent, immediately upon demand.
9.9 Insurance. At its expense, obtain and carry at all times during the term
---------
of this Lease (i) comprehensive general liability insurance covering the
Premises with combined single limits of at lease One Million Dollars
($1,000,000.00) per person and per occurrence for personal injury (including
bodily injury and death) and broad form property damage having combined single
limits of at least Five Hundred Thousand Dollars ($500,000.00) per person and
per occurrence, or such higher amounts as Landlord may from time to time
reasonably designate by not less than thirty (30) days written notice to Tenant,
for injury to persons (including death) and property arising out of the
ownership, maintenance, use or occupancy of the Premises, and which insurance
shall contain a contractual liability endorsement covering the matters set forth
in Section 10 and Section 13 and shall not contain deductible amounts in excess
of Twenty Five Thousand Dollars ($25,000.00) without Landlord's prior written
consent; and (ii) fire and extended coverage insurance (with endorsements
covering vandalism, malicious mischief, sprinkler leakage, water damage and
business interruption for Tenant's fixtures, trade fixtures and furniture, and
all other property owned or leased by Tenant and located in the Premises or
Building. Such policies shall be written by insurers acceptable to Landlord
having a rating in accordance with Best's Key Rating Guide of A-X or better and
shall name both Landlord and its mortgagees as additional insured, as their
interests may appear, and all such insurers shall agree not to cancel or amend
(including as to scope or amount of coverage) such policies without at least
thirty (30) days prior written notice to Landlord. Each such policy shall also
provide that no act or default of any person other than Landlord or its agent
shall render the policy void as to Landlord or affect Landlord's right to
recover thereon. Tenant shall furnish Landlord with certificates of insurance
evidencing coverage at all times during the term of this Lease. The insurance
required by this Section 9 shall be on an occurrence basis. If Tenant is unable
to obtain said insurance on an occurrence basis, it may be on a claims-made
basis provided that, in addition, Tenant, at Tenant's expense, obtains an
Owner's Protective Policy, issued in the name of Landlord only, which is on an
occurrence basis for the limits required by this Section 9. Any policy required
by this Section 9 shall be written as a primary policy not contributing with and
not in excess of coverage which Landlord may carry.
Section 10. Alterations and Improvements.
----------------------------
Tenant shall not make or install any alteration, installation, addition,
hardware, window treatment, floor covering, fixture or other improvements to the
Premises, or add to, disturb or in any way change any plumbing or wiring,
without in each and every of such cases (Individually and collectively
"Improvements") the prior written consent of Landlord. Landlord's written
consent shall include any requirement to remove said alteration upon expiration
or termination of the lease. Landlord's approval of plans or specifications for
improvements shall not constitute an assumption of the responsibility for the
accuracy or sufficiency of such plans and specifications, or their compliance
with applicable codes, regulations or statutes, which responsibility shall be
solely Tenant's. All such improvements shall be made at Tenant's sole cost and
expense and any contractor or person selected by Tenant to make improvements
must first be approved in writing by Landlord. Landlord may require that the
contractor provide payment and performance bonds. All improvements and all
repairs required to be made by Tenant shall be made in a good and workmanlike
manner and in compliance with all governmental requirements, codes and rating
bureau recommendations, and shall be performed by competent workmen approved in
advance by Landlord. Tenant shall hold Landlord harmless and indemnified from
all injury, loss, claims or damage to any person or property occasioned by, or
in connection with the construction or installation of improvements. Tenant
shall obtain all necessary permits from governmental authorities. Tenant shall
repair any damage and perform any necessary clean-up to the Building or its
contents resulting from any improvements made by Tenant. All Improvements,
temporary or permanent, including wall paneling, built in cabinets, sinks,
doors, floor coverings, or other built in units of any kind, however attached
(except trade fixtures, medical equipment or devices, furniture and equipment
belonging to Tenant which are removable without causing damage to the Building)
or installed by Tenant in, on or about the Premises, shall, upon expiration or
sooner termination of this Lease, become Landlord's property, and remain upon
the Premises, all without compensation, allowance or credit to Tenant provided,
Tenant shall at the expiration or termination of this Lease remove any
improvements placed in the Premises by or on behalf of Tenant and so designated
in the notice. Tenant shall, at Tenant's sole expense, repair any damage to the
Premises or the Building resulting from such removal, and Landlord may require a
payment and performance bond for the work of such removal. If Tenant fails to
remove such designated improvements, they will be deemed to be abandoned by
Tenant and Landlord may remove the same at Tenant's sole cost and expense.
8
<PAGE>
Section 11. Damage or Destruction.
---------------------
If the Premises are rendered partially or totally untenantable by fire or
other casualty, the damage does not occur within the last twelve months of the
then-effective Lease Term, and if the damage is repairable within one hundred
twenty (120) days from the date of the occurrence, then if insurance proceeds
are available to pay the full cost of the repairs, exclusive of deductible,
Landlord shall diligently proceed to repair or restore the basic Building
Structure, Tenant Improvements, and Improvements made or installed by or with
the written approval of Landlord and which are or shall become the Property of
Landlord (except Tenant and not Landlord shall fully and completely repair any
damage to and shall replace the contents of the Premises such as trade fixtures,
furniture, equipment or other Improvements belonging to Tenant); otherwise
Landlord may elect to terminate this Lease. If Landlord elects to repair, the
Rent and Additional Rent shall be abated in the portion that the untenantable
portion of Premises bears to the whole thereof, as reasonably determined by
Landlord, for the period from the date of the casualty to the completion of the
repairs, unless the casualty results from the deliberate and intentional
misconduct of Tenant or its contractors, agents or employees, in which case
there shall be no abatement. If sixty percent (60%) or more of the Building
Rentable Area is destroyed or damaged, then regardless of whether the Premises
are damaged, Landlord may terminate this Lease. Landlord shall advise Tenant of
Landlord's election to repair or terminate and, if it elects to repair, of the
estimated repair period, by giving notice to Tenant thereof within thirty (30)
days after the occurrence, and if Landlord advises Tenant that the repairs to
the Premises will take longer than one hundred twenty (120) days from the
casualty, Tenant shall have the right to terminate this Lease by so advising
Landlord in writing thereof within fifteen (15) days thereafter. In the event of
damage by casualty, Tenant shall, at its sole cost and expense, repair all
damage to its own personal property and to all Improvements that are the
property of Tenant. Landlord shall not be liable to Tenant for damages,
compensation or other sums for inconvenience, loss or business or disruption
arising from any casualty or any repairs to or restoration of any portion of the
Building or Premises.
Section 12. Waiver of Subrogation.
---------------------
It is the intention of the parties that each of them shall insure its real and
personal property and interests therein, including economic interests, as and to
the extent it sees fit. Each of Landlord and Tenant on behalf of its insurers
and itself hereby fully and completely waives and releases and relieves the
other, its agents, partners, officers, directors and employees, from
responsibility for, and waives its entire claim of recovery against the other
for, any loss of or damage hereafter occurring to that party's real or personal
property located anywhere in, on or about the Building or the Land, including
the Building itself, and from any loss of rental income from the Building
resulting therefrom; except, in any of such cases, only to the extent that loss
or damage is caused by the deliberate and intentional wrongdoing or gross
negligence of the other, its agents, partners, officers, directors or employees.
Section 13. Indemnification and Release.
--------------------------
(a) Tenant's Indemnity. Tenant shall, at its expense, indemnify, defend and
------------------
hold harmless from Landlord, its Mortgagees, partners, officers, agents and
employees from and against any and all claims, losses, expenses (including
attorney's fees), fines or penalties, or other liabilities, arising out of or in
connection with the occupancy or use of the Premises, Building or Land by
Tenant, its agents, customers, or employees (including, without limitation, any
work undertaken or contracted for by Tenant, its agents or employees, whether
pursuant to Section 10, and Exhibit to this Lease, or otherwise) unless caused
by Landlord's gross negligence or willful misconduct. The indemnity and hold
harmless provisions of this Section 13 shall survive expiration or termination
of this Lease and shall include, but not be limited to, all claims against
Landlord by any employee or former employee of Tenant, and Tenant thereby waives
all immunity and limitation on liability of any industrial insurance act,
including Title 51 of the Revised Code of Washington as now or hereafter
amended, or other worker's compensation act, disability benefit act, or any
other employee benefit act of any jurisdiction which would otherwise be
applicable in the case of such a claim, but such waiver is not intended and
shall not be construed or interpreted as applying to or benefiting any Person
except Landlord or Tenant. LANDLORD AND TENANT HEREBY CERTIFY AND AGREE THAT
THIS SECTION 13 HAS BEEN FREELY AND MUTUALLY NEGOTIATED.
(b) Release of Certain Claims. Tenant hereby fully and completely waives
-------------------------
and releases all claims against Landlord for any losses or other damages
sustained by Tenant or any Person claiming through Tenant resulting from any
accident or occurrence in or upon the Premises, Building or Land including but
not limited to claims resulting from: any equipment or appurtenances, including
the HVAC system, becoming out of repair; injury done or occasioned by
9
<PAGE>
wind; any defect in or failure of plumbing, heating or air-conditioning
equipment, electric wiring or insulation thereof, any defect in or failure of
gas, water and steam pipes, stairs, railings or walks, broken glass, leaking or
running of any sewer pipe or downspout; the bursting, leaking or running of any
HVAC system, tank, tub, wash stand, water closet, waste pipe, drain or any other
pipe or tank; the escape of steam or hot water, water, snow or ice being upon or
coming through the roof, skylight, trap door, stairs, doorway, show windows,
walks or any other place; the falling of any fixture, plaster, tile or stucco;
or any act, omission, or negligence of co-tenants, licensees, or any other
persons or occupants of the Building or of an adjoining or contiguous Building
or of any tenant or adjacent or contiguous space or property unless caused by
Landlord's gross negligence or willful misconduct.
Section 14. Eminent Domain.
--------------
If the whole or substantially the whole of the Building or of the Premises
shall be condemned or taken in any manner for any public or quasi-public use or
purpose, including any purchase or other acquisition in lieu of condemnation,
this Lease and the term and estate hereby granted shall cease and terminate as
of the date of taking of possession for such use or purpose. If less than the
whole or substantially the whole of the Building or of the Premises shall be so
condemned or taken, the Landlord (whether or not the Premises be affected) may,
at its option, by notice to Tenant, terminate this Lease and the term and estate
hereby granted as of the date of the taking of possession for such use or
purpose. In the event Landlord does not elect to terminate this Lease, then as
to that portion of the Premises not so taken or condemned, the Rent, and the
Operating Costs Base Amount shall be reduced pro-rata in accordance with the
floor area of the Premises which may be so condemned or taken. Tenant's
Percentage shall be equitably adjusted, and Landlord shall, at its expense,
proceed with reasonable diligence to repair, alter and restore the remaining
part of the Premises to substantially their former condition to the extent that
the same may be reasonably feasible. Landlord shall be entitled to receive the
entire award in any condemnation proceeding, including any award for the value
of any unexpired term of this Lease, and Tenant shall have no claim against
Landlord or against the proceeds of the condemnation (and Tenant shall also
execute and deliver to Landlord such documents, in recordable form, as Landlord
may require to confirm the same) except that Tenant shall have the right to
claim and recover from the condemning authority compensation for Tenant's moving
expenses, business interruption or taking of Tenant's personal property (not
including Tenant's leasehold interest); provided that such damages may be
claimed only if they are separately awarded and not out of or as part of the
damages recoverable by Landlord.
Section 15. Assignment and Subletting.
-------------------------
15.1 Assignment or Sublease. Tenant shall not voluntarily, involuntarily or by
----------------------
operation of law, assign, sell, pledge, transfer, mortgage or encumber this
Lease or any interest therein, or sublet the whole or any part of the Premises
or allow any other person, except the employees, agents or invitees of Tenant to
occupy or use any portion of the Premises (any of which events being a
"Transfer" and any such assignee, purchaser, mortgagee, pledgee or other
transferee being a "Transferee" for purposes of this Section 15) without first
obtaining Landlord's written consent, which shall not be unreasonably withheld
if all of the following conditions precedent are fully and completely satisfied.
(a) The proposed Transferee is at least as credit worthy as Tenant when
Tenant entered into this Lease, and satisfies Landlord's then current credit
standards for tenants of the Building, and in Landlord's option has the
financial strength and stability to perform all obligations under this Lease to
be performed by Tenant as and when they fall due.
10
<PAGE>
(b) The proposed Transferee will use the Premises for a purpose which in
Landlord's opinion (i) is lawful, (ii) is consistent with the permitted use of
the Premises under this Lease, (iii) is consistent with the general character of
business carried on by tenants of a first class office building, (iv) does not
conflict with any exclusive rights or covenants not to compete in favor of any
other tenant or proposed tenant in the Building, (v) will not increase the
likelihood of damage or destruction, (vi) will not increase the rate of wear and
tear to the Premises or common areas, (vii) will not likely cause an increase in
insurance premiums for insurance policies applicable to the Building (unless the
proposed Transferee agrees to pay such additional cost), and (viii) will not
require new tenant improvements incompatible with then existing Building systems
and components.
(c) Tenant pays Landlord's reasonable attorneys' fees and costs incurred
in connection with negotiation, review and processing of the Transfer, plus a
processing fee not to exceed Five Hundred Dollars ($500.00) for each such
request.
(d) Any security deposit paid by Transferee to Tenant in excess of the
Security Deposit held by Landlord will be paid to Landlord as additional
Security Deposit.
(e) At the time of the proposed Transfer, Tenant is not in default under
or in breach of any term, provision or covenant of this Lease.
(f)
(g) The Transfer will not otherwise have or cause a material adverse
impact on Landlord's interests in the Building or the Premises.
Tenant shall have the burden of demonstrating that each of the foregoing
conditions is satisfied. No Transfer shall relieve Tenant of any liability under
this Lease. An assignment or sublease consented to by Landlord shall not be
binding upon Landlord unless the assignee or subtenant delivers to Landlord: (i)
an original executed assignment or sublease; (ii) any collateral agreement; and
(iii) an instrument containing said assignee's or sublessee's assumption of all
of the obligations of Tenant under this Lease, in form and substance
satisfactory to Landlord. The assignee or sublessee's failure to execute such a
covenant shall not waive, release or discharge the assignee or sublessee from
its liability for performance of Tenant's obligations under this Lease.
15.2 Entity Ownership. The cumulative (i.e. in one or more sales or transfers,
----------------
by operation of law or otherwise) transfer of an aggregate of fifty percent
(50%) or more of the voting stock issued and outstanding on the date of this
Lease is executed by Landlord, including by creation or issuance of new stock,
of a corporation which is (i) Tenant, (ii) the corporate assignee of Tenant,
(iii) or any corporation which is a general partner in a general or limited
partnership which is Tenant or assignee of this Lease; or the cumulative (i.e,
in one or more sales or transfers, by operation of law or otherwise) transfer of
an aggregate of fifty percent (50%) or more of the ownership interest in a
general or limited partnership which is Tenant or assignee of Tenant, by which
an aggregate of fifty percent (50%) or more of such ownership interest is vested
in a Person or persons who are not general partners (except as the result of
transfers by gift or inheritance), shall be deemed a Transfer of this Lease and
shall be subject to the provisions of Section 15.1. For the purpose of Section
15.1, any entity which has undergone any of the changes described in the Section
15.3 shall be deemed to be a Transferee excluding any Initial Public Offering
or stock transfer for additional funding.
15.3 Recovery by Landlord. If Tenant at any time desires to Transfer this
--------------------
Lease, it shall give notice (a "Tenant Transfer Notice") to Landlord of its
desire to do so which notice shall state the rent at which it proposes so to
Transfer and shall contain full and complete financial and business information
on its Intended Transferee. In addition to Landlord's rights under Section 15.1,
Landlord may elect by notice to Tenant (a "Landlord's Repossession Notice"),
within forty-five (45) days of receipt of the Tenant Transfer Notice, to
terminate this Lease as to that portion of the Premises subject of Tenant
Transfer Notice. If Landlord exercises such right to terminate, Landlord shall
be entitled to recover possession of the portion of the Premises subject of the
Tenant Transfer Notice on the later of (i) the proposed date for possession by
such Transferee, as
11
<PAGE>
set out in the Tenant Transfer Notice, or (ii) forty-five (45) days after the
date of Landlord's Repossession Notice. All costs incurred by Landlord in
construction improvements, such as doors or partitions, separating the remaining
Premises from the repossessed area of the Premises shall be paid by Tenant
within thirty (30) days of demand. If Landlord does not exercise such right to
terminate, Tenant may thereafter Transfer this Lease or a portion of the
Premises subject thereof, but at a rental not less than that offered to Landlord
in the Tenant Transfer Notice and not later than forty-five (45) days after
delivery of the Tenant Transfer Notice to Landlord, unless a further notice is
given pursuant to this Section, provided (i) Landlord consents thereto pursuant
to Section 15.1, (ii) Tenant delivers to Landlord prior to the effective date
of any such Transfer duplicate originals of any instruments effecting such
Transfer, in form and content satisfactory to Landlord, and (iii) all amounts
received by Tenant from the Transferee in excess of the Rent payable hereunder
for the area of the Premises so Transferred shall belong to and shall
immediately be paid to Landlord as Additional Rent. No action or inaction by
Landlord in connection with its rights under this Section 15.3 shall constitute
or be deemed to constitute an approval of a proposed Transfer for purposes of
Section 15.1 except as specifically set forth in a notice from Landlord to
Tenant.
15.4 Assignee Obligation. Any assignee or purchaser approved by Landlord shall
-------------------
assume all obligations of Tenant and shall be jointly and severally liable with
Tenant for the payment of Rent, Additional Rent and other charges and
performance of all of Tenant's obligations under this Lease. Tenant shall
provide Landlord with full and complete duplicate originals of all instruments
of assignment, sublease or assumption.
Section 16. Insolvency and Default.
----------------------
16.1 Insolvency. The continuing rights granted to Tenant under this Lease are
----------
expressly made conditional upon the Tenant remaining solvent and capable of
meeting the financial and other obligations imposed upon the Tenant under this
Lease at all timed during the Term. Failure of the Tenant to satisfy this
condition shall constitute a default entitling Landlord to cancel and terminate
this Lease as hereinafter provided. Without limitation upon the right of the
Landlord to demonstrate non-compliance by the Tenant with the provisions of this
Section 16.1, Tenant shall be deemed to be in default under this Section 16.1
upon the occurrence of one or more of the following event: (i) any judicial
determination of the insolvency of the Tenant or any Tenant's Guarantor of the
Tenant's obligations hereunder including, without limitation, the entry of an
Order for Relief pursuant to the provisions of the Bankruptcy Code whether
voluntary or involuntary; (ii) appointment of a receiver or a custodian or other
similar officer for any portion of the Tenant's property or the property of any
Tenant's Guarantor; (iii) the assignment for the benefit of creditors of any
portion of the Tenant's property or the property of any Tenant's Guarantor; (iv)
a determination, judicial or otherwise, that the Tenant or any Tenant's
Guarantor is not generally paying its debts as such debts become due; or (v) any
fact, event or circumstance which in the reasonable opinion of Landlord
indicates that the Tenant or Tenant's Guarantor is insolvent or otherwise
incapable of meeting the financial and other obligations imposed upon the Tenant
under this Lease; (provided, however, that if any such action, case or petition
has been commenced against Tenant or any Tenant's Guarantor and the same is
dismissed within a period of sixty (60) days, then the event of default shall be
deemed cured for purposes hereof) whereupon Landlord may elect, by notice to
Tenant, to cancel and terminate this Lease, in which event neither Tenant nor
any person claiming through or under Tenant by virtue of any statute or of an
order of any court shall be entitled to possession or to remain in possession of
the Premises but shall forthwith quit and surrender the same, and Landlord, in
addition to the other rights and remedies Landlord has by virtue of this Lease
or any statute or rule of law, may retain as security for its damages any Rent,
Security Deposit or monies received by Landlord from Tenant or others on behalf
of Tenant not to exceed the actual damage amount as determined by the court.
This Lease is upon the further condition that if a petition for relief under any
chapter of the Bankruptcy Code is filed by or against Tenant or any Tenant's
Guarantor and the trustee or debtor in possession has not cured all defaults
hereunder and assigned or assumed his Lease under the Bankruptcy Code within
sixty (60) days after the entry of the Order for Relief, then this Lease shall
automatically terminate without the necessity of further action by or notice
from either party. In case of termination pursuant to any of the foregoing
provisions of this Section 16.1, Tenant shall indemnify Landlord against all
costs and expenses and loss of Rent and Additional Rent, including, without
limitation, amounts due under Section 16.3.
16.2 Other Defaults. Tenant shall be in default of this Lease if:
--------------
(i) Tenant fails to pay any installment of Rent or Additional Rent or
other charges hereunder when due; or
12
<PAGE>
(ii) Tenant fails to perform any other covenant, term, agreement or
condition of this Lease when such performance becomes due, including but not
limited to compliance with Section 15 of this Lease; or
(iii) Tenant vacates or abandons or ceases to do business in the
Premises.
In the event Tenant fails to timely cure any such default, after notice as set
forth in the last paragraph of this Section 16.2, Landlord may, immediately or
at any time thereafter, elect to terminate this Lease by notice, lawful entry or
otherwise, whereupon Landlord shall be entitled to recover possession of the
Premises from Tenant and those claiming through or under Tenant. Such
termination of this Lease and any repossession of the Premises shall be without
prejudice to any remedies which Landlord might otherwise have for arrears of
Rent or for a prior breach of any of the provisions of this Lease. Landlord and
Tenant agree that a notice by Landlord requesting cure of a pre-existing default
hereunder shall constitute a statutory notice to quit.
In case of such termination, Tenant shall indemnify Landlord against all costs
and expenses including the amounts due under Section 16.3 and loss of Rent. This
Lease is upon the further condition that if Tenant shall neglect or fail to
perform or observe any of Tenant's covenants which Tenant has neglected or
failed to perform or observe at least once previously in any 12 month period
(although Tenant shall have cured any such previous breach or breaches after
notice from Landlord, and within the notice period), then Landlord lawfully may,
but shall not be obligated to, immediately or at any time thereafter and without
demand or further notice avail itself of and/or exercise any remedies and/or
avail itself of any benefits permitted by this Section 16 or by law, including
but not limited to termination of this Lease.
With respect to a default occurring under clause (i) of the first sentence of
this Section 16.2, Tenant shall have three (3) days following receipt of notice
to cure from the Landlord within which to cure any such default. With respect to
a default arising under clause (ii) of the first sentence of this Section 16.2,
Tenant shall have thirty (30) days following the receipt of notice to
cure from the Landlord within which to cure any such default; provided, however,
that if the nature of such default other than for non-payment is such that the
same cannot reasonably be cured within such thirty (30) day period, Tenant
shall be deemed to have cured the default if Tenant shall commence such cure
within said 10 day period and thereafter diligently prosecute the same to
completion and shall furnish Landlord with such assurances and indemnities that
Landlord may require to ensure completion thereof and fully and completely
protect Landlord from any loss or liability by reason of any delay. With respect
to a default arising under clause (iii) of the first sentence of this Section
16.2, Landlord shall not be required to provide any notice to cure to Tenant
prior to exercising Landlord's right of termination.
16.3 Expense Recovery. Items of expense for which Tenant shall indemnify
----------------
Landlord shall include but not be limited to all costs and expenses incurred in
collecting amounts due from Tenant under this Lease (including attorneys' fees,
litigation expenses and the like); the unamortized portion of (i) amounts in the
nature of commissions paid by Landlord to leasing agents in connection with this
Lease and (ii) all costs and expenses incurred by Landlord to improve the
Premises pursuant to this Lease and/or the Space Description and (iii) any
additional amount furnished in the nature of an allowance (all of such
amortization to be based upon the assumption that such costs and expenses are
amortized on a straight line basis over the initial Lease Term); any abated
Rent, Additional Rent or concessions which may have been granted Tenant; and all
Landlord's other reasonable expenditures proximately caused by the
termination. All sums due in respect of the foregoing shall be due and payable
immediately upon notice from Landlord that a cost or expense has been incurred
without regard to whether the cost or expense was incurred before or after the
termination of this Lease. In the event proceedings are brought under the
Bankruptcy Code, including proceedings brought by Landlord, which relate in any
way to this Lease including, without limitation, proceedings for the
termination, assumption or assignment thereof or proceedings to secure adequate
protection for Landlord or proceedings involving objections to the allowance of
Landlord's claim (in any of such cases a "Proceeding"), then Landlord shall be
paid in addition to any and all amounts due Landlord pursuant to the terms of
this Lease such further amount as shall be sufficient to cover all costs and
expenses incurred by Landlord with respect to the Proceeding, which costs and
expenses shall include the reasonable compensation costs, expenses,
disbursements and advances of Landlord, its agent and attorneys. This Section
applies only to those items not covered in Section 16.4.
16.4 Damages. Notwithstanding termination of this Lease and re-entry by
-------
Landlord pursuant to Section 16.1 or Section 16.2, the liability of Tenant for
Rent and other charges provided for herein shall not be extinguished for the
balance of the Term, and Landlord shall be entitled to recover from Tenant:
13
<PAGE>
(i) The worth at the time of an award (including interest at the rate set
forth in Section 16.8), of any unpaid Rent which has been earned by Landlord at
the time of termination, plus
(ii) The worth at the time of an award (including interest at the rate
set forth in Section 16.8), of the amount by which the unpaid Rent which would
have been earned after termination until the time of any award exceeds the
amount of loss of Rent that Tenant proves could have been reasonably avoided;
plus
(iii) The worth at the time of an award of the amount by which the
unpaid Rent for the balance of the term of this Lease (as extended, if at all
prior to termination exceeds the amount of such loss of Rent that Tenant proves
could have been reasonably avoided (including interest at the rate set forth in
Section 16.8 from the date of the award until paid). Such worth at the time of
the award shall be computed at the discount rate of the Federal Reserve Bank of
San Francisco, or successor Federal Reserve Bank, on the date of termination.
For the purposes of this calculation only, the last Lease Years' Rent shall be
deemed to be constant for each Lease Year thereafter; plus
(iv) Any other amount necessary to compensate Landlord for all the damage
proximately caused by Tenant's failure to perform Tenant's obligations under
this Lease or which in the ordinary course of things would be likely to result
therefrom, including amounts due and payable pursuant to Section 16.3.
16.5 Non-Termination of Lease. Should Landlord re-enter the Premises pursuant
------------------------
to Section 16.1 or Section 16.2, Landlord may elect, by notice to Tenant, not to
terminate this Lease, in which case Tenant shall indemnify Landlord for the loss
of Rent by a payment at the end of each month during the remaining Term
representing the difference between the Rent which would have been paid in
accordance with this Lease and the rental actually derived from the Premises by
Landlord for such month. Without any previous notice or demand, separate actions
may be maintained by Landlord against Tenant from time to time to recover any
damages which, at the commencement of any action, have then or theretofore
become due and payable to Landlord under this Section 16 without waiting until
the end of the original term of this Lease.
16.6 Reletting. In the event that this Lease shall be terminated as
---------
hereinabove provided or by summary proceedings or otherwise, Landlord may at any
time and from time to time relet the Premises in whole or in part either in its
own name or as agent of Tenant for any period equal to or greater or less than
the remainder of the then current Term of this Lease for any rental which it
may deem reasonable to any tenant it may deem suitable and satisfactory and for
any use and purpose which it may deem appropriate, consistent with the
operation of the Building in a first-class manner. Upon each reletting all
rentals received by Landlord from such reletting shall be applied first to the
payment of any indebtedness other than Rent due hereunder from Tenant to
Landlord; second, to the payment of any costs and expenses of such reletting
and of such alterations and repairs; third, to the payment of Rent due and
unpaid hereunder; and the residue, if any, shall be held by Landlord and applied
in payment of future Rent as the same may become due and payable hereunder. Upon
a reletting of the Premises, Landlord shall not in any event be required to pay
Tenant any surplus of any sums received by the Landlord in excess of the Rent
payable in accordance with this Lease.
16.7 Right of Landlord to Cure Defaults. If Tenant shall default in the
-----------------------------------
observance or performance of any term or covenant on its part to be observed or
performed under or by virtue of any of the terms and provisions in any section
of this Lease, or if Tenant shall fail to pay any sum of money (other than Rent
or other charges) required to be paid by Tenant hereunder, Landlord may, but
shall not be obligated to, and without waiving or releasing Tenant from any
obligations to make any such payment or perform any such other act on Tenant's
part to be made or performed as provided in this Lease, remedy such default for
the account and at the expense of Tenant, immediately and without notice in case
of emergency, or in any other case only upon Tenant's failure to remedy such
default within ten (10) days after Landlord shall have notified Tenant in
writing of such default. If Landlord makes any expenditures or incurs any
obligations for the payment of money in connection with Tenant's default
including, but not limited to, attorneys' fees, in instituting, prosecuting or
defending any action or proceeding, Tenant shall pay to Landlord as Additional
Rent such sums paid or obligations incurred, with interest. Landlord shall have,
in addition to any other right or remedy, the same rights and remedies in the
event of the nonpayment of sums due under this Section as in the case of default
by Tenant in the payment of Rent or Additional Rent.
16.8 Unpaid Sums and Service Charge. Any amounts owing from Tenant to Landlord
------------------------------
under this Lease shall bear interest at the higher of (i) fifteen percent (15%)
per
14
<PAGE>
annum or (ii) three percent (3%) in excess of the rate of interest
announced on the first (1st) day of each month by Seattle First National Bank,
Washington, its successors or assigns, at its prime rate for short term
unsecured loans, calculated from the date due until the date of payment. In
addition, if any payment of Rent, Additional Rent, or other charges, is not paid
within ten (10) days of its due date, Tenant shall pay a late charge equal to
ten percent (10%) of the amount of such overdue payment per month or portion
thereof as liquidated damages for Landlord's extra expense and handling of such
past due account.
16.9 Cumulative Remedies. All remedies provided herein are intended to be
-------------------
cumulative. Landlord's exercise of any right or remedy shall not prevent it from
exercising any other right or remedy provided under this Lease or otherwise
provided by law.
16.10 Repayment of "Free Rent". If this Lease provides for a postponement
------------------------
of any monthly payments, a period of "Free Rent" or other rent concession, such
postponed rent or "Free Rent" is called the "Abated Rent". Tenant shall be
credited with having paid all of the Abated Rent on the expiration of the Lease
Term only if Tenant has fully, faithfully and punctually performed all of
Tenant's obligations hereunder, including the payment of all Rent and Additional
Rent (other than the Abated Rent) and all other monetary obligations and the
surrender of the Premises in the physical condition required by this Lease.
Tenant acknowledges that its right to receive credit for Abated Rent is
absolutely conditioned upon Tenant's full, faithful and punctual performance of
its obligations under this Lease. If Tenant defaults and does not cure within
any applicable grace period, the Abated Rent shall immediately become due and
payable in full and this Lease shall be enforced as if there were no such Rent
Abatement or other rent concession.
Section 17. Quiet Environment. Landlord covenants that upon Tenant's paying
-----------------
Rent, Additional Rent, and all other amounts and charges due hereunder and
observing and performing all the terms, covenants and conditions of this Lease
on its part to be observed and performed, Tenant may peaceably and quietly enjoy
the Premises, subject, however, to the terms and conditions of this Lease.
Section 18. Landlord's Liability.
--------------------
18.1 Notice of Default. Tenant shall give written notice of any failure by
-----------------
Landlord to perform any of its obligations under this Lease to Landlord and to
any ground lessor, mortgagee or beneficiary under any deed of trust encumbering
the Building or Land whose name and address have been furnished to Tenant in
writing. Landlord shall not be in default under this Lease unless Landlord (or
such ground Lessor, mortgagee or beneficiary) fails to cure such non-performance
within thirty (30) days after receipt of Tenant's notice. However, if such
non-performance reasonably requires more than thirty (30) days to cure, Landlord
shall not be in default if such cure is commenced within such thirty (30) day
period and thereafter is diligently pursued to completion. Tenant shall not have
the right to terminate this Lease as a result of Landlord's default or to
perform maintenance or repairs and deduct the cost from amounts payable by
Tenant to Landlord.
18.2 Limitation of Liability. The liability of Landlord to Tenant for any
-----------------------
default by Landlord under this Lease shall be limited to the interest of
Landlord in the Land and Building (and the proceeds thereof). Tenant agrees to
look solely to Landlord's interest in the Land and Building (and the proceeds
thereof) for the recovery of any judgement against Landlord, and Landlord shall
not be personally liable for any such judgement or deficiency after execution
thereon. Notwithstanding the foregoing, however, Landlord shall have personal
liability for insured claims beyond Landlord's interest in the Land and Building
(and the proceeds thereof) but only to the extent of proceeds of Landlord's
liability insurance coverage respecting such claims.
Section 19. Landlord's Interest in Premises.
--------------------------------
19.1 Priority. This Lease shall be subordinate to any first mortgage or a deed
--------
of trust or sale and leaseback used for financing purposes, now existing or
hereafter placed upon the Land, Building or the Premises, created by or at the
instance of Landlord, and to any and all advances to be made thereunder and to
interest thereon and all modifications, renewals, replacements or extensions
thereof (a "Landlord's Mortgage"); this provision shall be self-operative and no
further instrument or subordination shall be required by any Landlord's
mortgagee. Notwithstanding the foregoing, however, Tenant shall execute and
deliver any subordination agreement satisfactory in form and substance to the
holder of a Landlord's Mortgage, but only if any such subordination agreement
shall provide that so long as Tenant is not in default and has cured said
default under this Lease, Tenant shall have the continued enjoyment of the
Premises free from any disturbance or interruption by any holder of Landlord's
Mortgage or any purchaser at a foreclosure or private
15
<PAGE>
sale of the Land, Building, or the Premises as a result of Landlord's default
under a Landlord's Mortgage.
19.2 Estoppel Certificates. Tenant shall, within ten (10) days of demand,
---------------------
execute, acknowledge and deliver to Landlord or its designee a written statement
certifying: (i) the date the Lease Term commenced (the "Commencement Date") or
will commence and the date it expires; (ii) the date Tenant entered into
occupancy of and commenced business operations in the Premises; (iii) the amount
of Base Rent and the date to which Rent has been paid; (iv) that this Lease is
in full force and effect and has not been assigned, modified, supplemented or
amended in any way (or specifying the date and terms of each agreement so
affecting this Lease) and that no part of the Premises has been sublet, or to
the extent such is not the case, a copy of any sublease); (v) that, to the
extent such is the case, this Lease together with the Space Description,
represents the entire agreement between the parties as to the Premises; (vi)
that Landlord is not in default under this Lease (or if such is not the case,
the extent and nature of such default); (vii) that all required advances by
Landlord to Tenant on account of Tenant Improvements have been made (or the
extent that such is not the case); (viii) on the date of such certification
there are no existing defenses or claims which Tenant has against the
enforcement of this Lease by Landlord (or if such is not the case, the extent
and nature of such defenses or claims); (ix) the amount of the Security Deposit
paid to Landlord and (x) any other fact or representation that a mortgagee or
purchaser may reasonably request. It is intended that any such statement
delivered pursuant to this Section 19.2 shall be fully and completely binding
upon Tenant for all purposes of this Lease, may be relied upon by a prospective
purchaser or mortgagee of Landlord's interest, or any assignee of any mortgage
upon Landlord's interest in the Building or the Land. If Tenant shall fail to
respond within ten (10) days of receipt of a written request by Landlord
therefor, Tenant shall be deemed to have given a certificate as above provided
without modification and shall be conclusively deemed to have admitted the
accuracy of any information supplied by Landlord to a prospective purchaser or
mortgagee, that this Lease is in full force and effect, that there are no
uncured defaults in Landlord's performance, that the Security Deposit is as
stated in this Lease and that not more than one month's Rent has been paid in
advance.
19.3 Transfer of Landlord's Interest. In the event of any transfer,
-------------------------------
assignment, sale or foreclosure of Landlord's interest in the Premises, the
Building or the Land, other than a transfer for security purposes only, the
transferor shall automatically be relieved of any and all obligations and
liabilities on the part of Landlord accruing from and after the date of such
transfer and Tenant shall attorn to the transferee, assignee or purchaser, and
will recognize such transferee, assignee or purchaser as Tenant's Landlord under
this Lease. In the event such transferee, assignee or purchaser shall further
transfer its interest as Landlord under this Lease, Tenant covenants and agrees
to attorn to such transferee, assignee or purchaser and to recognize such
transferee, assignee or purchaser as Tenant's Landlord under this Lease. Tenant
agrees within ten (10) days of demand to execute and deliver, at any time and
from time to time, upon the request of Landlord or any mortgagee, or purchaser
of other transferee of Landlord's interest to whom Tenant has previously
attorned, any instrument which may be necessary or appropriate to evidence any
such attornment.
Section 20. Holding Over. If Tenant shall retain possession of the Premises
------------
after termination or expiration of this Lease, then (i) if such retention of the
Premises is without the express or implied consent of Landlord, for each day, or
part thereof the Tenant so retains possession of the Premises, Tenant shall pay
Landlord one hundred fifty percent (150%) the amount of the daily rate of Rent
and Additional Rent and other charges payable by Tenant hereunder during the
calendar month immediately preceding such termination or expiration together
with any damages sustained by Landlord as a result thereof, and (ii) if such
retention of the Premises is with the express or Implied consent of Landlord,
(1) such tenancy shall be from month to month (and in no event from year to year
or any period longer than month to month), and (2) Landlord may terminate any
such month to month tenancy upon thirty (30) days notice to Tenant, and (3)
Tenant shall pay Landlord rental which shall be the greater of either the then
quoted rates for similar space in the Building or one hundred fifty percent
(150%) the monthly Rent and Additional Rent and other charges payable by Tenant
hereunder during the calendar month immediately preceding such termination or
expiration.
Section 21. Miscellaneous Provisions.
------------------------
21.1 Headings. The titles to sections of this Lease and the table of contents
--------
are for convenience only and shall not be considered in construing or
interpreting the scope or intent of this Lease.
16
<PAGE>
21.2 Words. Words or any gender issued in this Lease shall be deemed to
-----
include the other gender or the neuter and words in the singular shall be deemed
to include the plural and the plural to include the singular where the sense
requires. The adverbs "herein", "hereof", "hereunder", "hereto", "hereby",
"hereinafter", and the like, wherever the same appear herein, mean and refer to
this Lease in its entirety and not to any specific section. The term "person"
includes a firm or partnership or corporation. The term "Occupant" shall mean
any person entitled to occupy a portion or portions of the Building under a
lease or other arrangement with Landlord.
21.3 Heirs and Assigns. All of the covenants, agreements, terms and
-----------------
conditions contained in this Lease shall inure to the benefit of and be binding
upon Landlord and Tenant and their respective heirs, executors, administrators,
successors and assigns. If more than one person or entity executes this Lease as
Tenant, the liability of each to pay Rent, and all other costs and charges and
to perform all other obligations hereunder shall be deemed to be joint and
several.
21.4 Non-Waiver. Failure of Landlord to insist, in any one or more
----------
instances, upon strict performance of any term, covenant or condition of this
Lease, or to exercise any option herein contained, shall not be construed as a
waiver, or a relinquishment for the future, of such term, covenant, condition or
option, but the same shall continue and remain in full force and effect. The
receipt by Landlord of Rent with knowledge of a breach of any of the terms,
covenants or conditions of this Lease to be kept or performed by Tenant shall
not be deemed to have been waived and signed by Landlord.
21.5 No Brokers. Tenant represents and warrants to Landlord that it has
----------
not engaged any broker, finder or other person entitled to any commission or fee
in respect of the negotiation, execution or delivery of this Lease, except as
disclosed in Section 1 (20). The provisions of this Section 21.5 shall not apply
to brokers with whom Landlord has a written brokerage agreement.
21.6 Entire Agreement. This Lease and the Space Description contain the
----------------
entire agreement of the parties with respect to the subject matter hereof and no
representations, promises or agreements, oral or otherwise, between the parties
not embodied herein shall be of any force or effect. No provisions of this Lease
or the Space Description may be changed, waived, discharged or terminated
orally, but only by instrument in writing executed by Landlord and Tenant
concurrently with or subsequent to the date of this Lease.
21.7 Severability. Any provision 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 the remaining provisions hereof shall nevertheless remain
in full force and effect.
21.8 Force Majeure. Time periods for Landlord's or Tenant's performance
-------------
under any provisions of this Lease (except for the payment of money) shall be
extended for periods of time during which the non-performing party's performance
is prevented due to circumstances beyond the party's control, including, without
limitation, strikes, embargoes, governmental regulations, inclement weather and
other acts of God, war or other strife.
21.9 No Accord or Satisfaction. No payment by Tenant or receipt by
---------------------------
Landlord of a lesser amount than the Rent and other charges stipulated herein
shall be deemed to be other than on account of the earliest stipulated Rent or
other charges, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment as Rent or other charges be deemed an accord
and satisfaction, and Landlord's acceptance of such check or payment shall be
without prejudice to Landlord's right to recover the balance of such rent and
other charges or pursue any other remedy to which it is entitled.
21.10 Governing Law. This Lease shall be construed and governed by the laws
-------------
of the State of Washington.
21.11 Notices. Any demand, request or notice which either party hereto
-------
desires or may be required to make or deliver to the other shall be in writing
and shall be deemed by private courier service (such as Federal Express),
facsimile, or three (3) days after being deposited in the United States mail, in
registered or certified form, return receipt requested, addressed as follows:
17
<PAGE>
To Landlord: REDMOND WHITEHALL ASSOCIATES,
----------- 2105 - 112th Avenue NE #100
Bellevue, WA 98004
Attn: Drew D. Hall
Telephone: (206) 453-4107
Facsimile: (206) 454-0135
To Tenant: CACHEFLOW, INC,
--------- 16701 NE 80th Street #100
Redmond, WA 98052
Telephone: (206) ______________________
Facsimile: (206) ______________________
or to such other address and person as either party may communicate to the other
by like written notice.
21.12 Tax on Rent. The Rent herein is exclusive of any sales, business and
-------------
occupation, gross receipts or other tax based on Rents, or tax on Tenant's
property or tax upon or measured by the number of employees of Tenant, or any
similar tax or charge. If any such tax or charge be hereinafter enacted, and
imposed upon Landlord, Tenant shall pay Landlord the amount thereof concurrently
with each monthly Rent payment. If it shall not be lawful for Tenant so to
reimburse Landlord, the monthly Rent payable to Landlord under this Lease shall
be revised to net Landlord the same net rental after imposition of any such tax
or charge upon Landlord as would have been payable to Landlord prior to the
imposition of such tax or charge. Tenant shall not be liable to reimburse
Landlord for any federal income tax or other income tax of a general nature to
Landlord's Income.
21.13 Right to Change Public Spaces and Building Directory. Landlord
----------------------------------------------------
reserves the right at any time after completion of the Building, without thereby
creating an actual or constructive eviction or incurring any liability to
Tenant, to change the arrangement or location of public areas of the Building
not contained within the Premises or any part thereof, including entrances,
passageways, doors and doorways, corridors, stairs, toilets and other public
service portions of the Building.
21.14 Mortgagee Requirements. Tenant shall within ten (10) days of request
----------------------
by Landlord deliver an executed and acknowledged instrument amending this Lease
in such respects as may be required by any present or future mortgagee, provided
that such amendment does not materially alter or impair Tenant's rights or
remedies under this Lease or increase its rental burdens.
21.15 Time is of the Essence. Tenant's and Landlord's performance of each
------------------------
of Tenant's and Landlord's obligations under this Lease is a condition as well
as a covenant. Tenant's right to continue in possession of the Premises is
conditioned upon such performance. Time is of the essence in the performance of
all covenants and conditions.
21.16 Capacity to Execute. If Tenant is a corporation, each person signing
-------------------
this Lease on behalf of Tenant represents and warrants that he has full
authority to do so and that this Lease binds the corporation. Within thirty (30)
days after this Lease is signed, Tenant shall deliver to Landlord a certified
copy of a resolution of Tenant's Board of Directors authorizing the execution of
this Lease or other evidence of such authority reasonably acceptable to
Landlord. If Tenant is a partnership, each person or entity signing this Lease
for Tenant represents and warrants that he or it is a general partner of the
Partnership, that he or it has full authority to sign for the Partnership and
that this Lease binds the Partnership and all general partners of the
Partnership. Tenant shall give written notice to Landlord of any general
partner's withdrawal or addition. Within thirty (30) days after this Lease is
signed, Tenant shall deliver to Landlord a copy of Tenant's recorded statement
of partnership or certificate of limited partnership.
21.17 Cost of Attorneys' Fees. In the event of litigation between the
-----------------------
parties hereto, declaratory or otherwise, for the enforcement of any of the
covenants, terms or conditions of this Lease, the non-prevailing party shall pay
the costs thereof and attorneys' fees reasonably incurred by the prevailing
party as determined by the court, in such suit, at trial and on appeal. The
parties covenant and agree that they intend by this Section 21.17 to compensate
for attorneys' fees actually incurred by the prevailing party to the particular
attorneys involved at such attorneys' then normal hourly rates and that this
Section shall constitute an instruction to the Court that such rate or rates
shall be deemed reasonable.
18
<PAGE>
21.18 Changes. Landlord does not guarantee the continued present status of
-------
light or air over any property adjoining or in the vicinity of the Building. Any
diminution or shutting off of light, air or view by any structure which may be
erected near or adjacent to the Building shall in no way affect this Lease or
impose any liability on Landlord.
21.19 No Reservation. The submission of this Lease for examination does
--------------
not constitute a reservation or option to Lease the Premises and this Lease
becomes effective as a Lease only upon execution and delivery thereof by
Landlord and Tenant.
21.20 Recording. This Lease shall not be recorded by either party. The
---------
parties shall record a mutually acknowledged notice of the existence of this
Lease in short form stating the identity of the parties, and the duration of the
leasehold.
21.21 Riders. The provisions of Rider 1 through Rider 3 inclusive, attached
------ - -
to this Lease are hereby incorporated by this reference as if fully here set
forth. Capitalized terms in any Rider or Exhibit have the same meaning as set
forth in this Lease. Time is particularly of the essence with respect to the
provisions of every Rider.
IN WITNESS WHEREOF this Lease has been executed as of the day and year set
forth above.
Landlord: REDMOND WHITEHALL ASSOCIATES
a Washington General Partnership
By: /s/ Drew D. Hall 2-26-97
----------------------------------------------
Drew D. Hall Date
Its: Managing Partner
Tenant: CACHEFLOW, INC.
a Delaware Corporation
By: /s/ Joseph J. Pruskowski 2-20-97
----------------------------------------------
Joseph J. Pruskowski Date
Its: President
19
<PAGE>
LANDLORD'S ACKNOWLEDGEMENT
--------------------------
State of Washington )
) ss.
County of King )
I certify that I know or have satisfactory evidence that Drew D. Hall
------------
is the person who appeared before me, and said person acknowledged that he
signed this instrument, on oath stated that he was authorized to execute the
instrument and acknowledged it as the Managing Partner of REDMOND WHITEHALL
---------------- -----------------
ASSOCIATES to be the free and voluntary act of such party for the uses and
- -----------
purposes mentioned in the instrument.
Dated: 2/26/97
-------------------------------------
/s/ Glenda K. Loveless
------------------------------
(Signature)
[NOTARY PUBLIC APPREARS HERE]
Escrow Officer, Notary Public
-------------------------------
Title
My appointment expires 12/3/97
--------
TENANT'S ACKNOWLEDGEMENT
------------------------
State of Washington )
) ss.
County of King )
I certify that I know or have satisfactory evidence that Joseph J.
---------
Pruskowski is the person who appeared before me, and said persons acknowledged
- ----------
that they signed this instrument, on oath stated that they were authorized to
execute the instrument and acknowledged it as the President and N/A,
--------- ---
respectively, of Cacheflow, Inc. to be the free and voluntary act of such party
---------------
for the uses and purposes mentioned in the instrument.
Dated: 2/20/97
-------------------------------------
/s/ Steven S. O'Dell
------------------------------
(Signature)
[NOTARY PUBLIC APPREARS HERE]
Notary Public
-------------------------------
Title
My appointment expires 1/23/00
--------
20
<PAGE>
Exhibit A to Lease
------------------
Diagram of floor(s) with approximate location of Premises Marked.
21
<PAGE>
Exhibit B To Lease
------------------
Description of Land
-------------------
LOTS 1 through 9 of 2nd amended site plan for Redmond Office Center, a binding
site plan, as per plat recorded in Volume 159 of Plats, Pages 3 through 5,
Records of King County;
SITUATE in the City of Redmond, County of King, State of Washington;
SUBJECT to those matters set forth in the public records thereof.
22
<PAGE>
Exhibit C to Lease
------------------
RULES AND REGULATIONS
Section 1. Landlord shall have the right to control and operate the Common
Areas in such manner as is reasonable for the benefit of the Occupants
generally. Tenant shall not invite to its Premises, or permit the visit of
persons in such numbers or under such conditions as to interfere with the use
and enjoyment of the Common Areas by other Occupants. No portion of the
sidewalks, doorways, entrances, passages, vestibules, halls, lobbies, corridors,
elevators or stairways in or adjacent to the Building shall be obstructed or
used for any purpose other than the ingress and egress to and from the Premises.
Tenant, its employees or invitees shall not go upon the roof of the Building.
Landlord reserves the right from time to time to reduce, increase, enclose or
otherwise change the size, number, location, layout, and nature of the Common
Areas and facilities, to construct additional buildings and storage, and to
create additional rentable areas through use or enclosure of Common Areas. When
reasonably necessary Landlord may either temporarily or permanently change the
location of, or close entrances, doors, corridors, elevators or other facilities
without liability to Tenant by reason of such closure and without such action by
Landlord being construed as an eviction of Tenant or release of Tenant from the
duty of observing and performing any of the provisions of this Lease so long as
Tenant has reasonable access to the Premises.
Section 2. During such hours as Landlord may from time to time reasonably
determine, Landlord may: (i) require all persons entering or leaving the
Building to identify themselves to a watchman by registration or otherwise and
to establish their right to enter or leave the Premises or the Building; and
(ii) limit entries into and departures from the Building to such one or more
entrances as Landlord shall from time to time designate.
Landlord reserves the right at any time to require that Tenant,
its employees or agents, desiring to take office furniture or equipment or other
similar items from the Building first obtain a pass therefor from Landlord or
such employee or agent of Landlord as Landlord shall from time to time designate
for such purpose. Tenant shall prior to moving furniture or other equipment into
or out of the Building, in all instances first obtain the prior written approval
of Landlord, both as to the time of day and entrance to the Building to be
utilized by Tenant in connection with such move.
Landlord reserves the right to exclude or eject from the
Building all solicitors, canvassers and peddlers, or any person who, in the
judgement of landlord's security officer, agent or employee in charge, is under
the influence of intoxicants or drugs, or any person who shall in any manner due
any illegal act or any act in violation of any of the Rules and Regulations.
Landlord may enact such other security measures as Landlord may
from time to time reasonably determine necessary for the safety and protection
of the Occupants and the Building. In no event shall Landlord be liable for
damages for any error with regard to the admission to or exclusion from the
Building of any person.
Section 3. Subject to the terms and conditions of the Lease, Landlord shall
provide heating and air conditioning as reasonably required for reasonable,
comfortable occupancy of the Building and the Premises under normal business
operations. Business Hours mean Monday through Friday from 7:00 a.m. to 8:00
p.m., Saturdays 8:00 a.m. to 1:00 p.m. Sundays and holidays excepted. Wherever
heat generating machines or equipment are used in the Premises which affect the
temperature otherwise maintained by the heating and air conditions systems.
Landlord reserves the right, at its option, to install supplementary air
conditioning equipment in the Premises if such machines or equipment is placing
an above building standard burden on the heating and air conditioning systems.
If supplementary air conditioning equipment is installed, the Tenant shall,
within ten (10) days of invoice, pay Landlord (i) the cost of any such
installation and (ii) the cost of operation and maintenance of such
supplementary equipment at such rates as Landlord may reasonably determine.
The Building is designed to accommodate electrical and heating
loads generated by lights and equipment typically found in a standard office
environment. Tenant shall obtain the prior written consent of Landlord before
installing lights or equipment which will result in the typical standard being
exceeded in any part of the Premises.
Tenant must obtain the written consent of Landlord prior to
using any equipment in the Premises with power requirements in excess of 220
volt single phase 30
23
<PAGE>
amperes. Regardless, of whether such consent has been obtained, Tenant shall,
within ten (10) days of invoice, pay Landlord the cost of electrical systems or
modifications necessitated by such equipment, including installation.
Tenant shall conserve energy, water, heat and air conditioning
and shall cooperate fully with Landlord to assure reasonable and efficient
operation of the heating and air conditioning systems in the Building. Tenant
shall also comply with Landlord's instruction for the use of drapes and
thermostats in the Building.
Section 4. Subject to the terms and conditions of the Lease, Landlord shall
provide routine janitorial service to the Premises and common areas of the
Building five (5) calendar days of each week, excluding holidays, consisting of
routine dusting, vacuum cleaning or dust mopping floors, removing normal trash,
and periodic cleaning of exterior windows, maintaining normal hard surface
floors and cleaning entrance doors of the Premises, according to landlord's work
schedule. Landlord shall not be required to provide janitorial services for
Tenant's Premises where the Permitted Use is for health care or specialized
laboratory uses. All janitorial service in and about the Premises shall be
performed by employees of or service companies approved by Landlord. Landlord
shall have no liability whatsoever to Tenant or any other person for any loss of
or damage to personal property on or about the Premises, however occurring,
including any damage done by a janitor or any other employee or any person.
Janitor service will not be furnished on nights when rooms are occupied after
6:00 p.m. unless, by agreement in writing, service is extended to a later hour
for a specifically designated rooms.
Section 5. All deliveries of large or bulky articles shall be delivered to
and removed from the Premises only via stairways or elevators which have been
properly padded or protected by Tenant. All deliveries of the above-mentioned
items must be scheduled with the Landlord to ensure the elevator used for the
delivery is properly padded. Objects of unusual or extraordinary size or weight
shall not be brought into or removed from the Building without the prior written
consent of Landlord and, where such consent is obtained, shall be brought into
or removed from the Building at the time and place and in the manner and shall
be placed and maintained in such location and position in the Premises as
Landlord may designate. The firm employed to move Tenant's equipment, material,
furniture or other property in or out of the Building must be a professional
mover, reasonably acceptable to landlord and insurance must be sufficient to
cover all personal liability, theft or damage to the Building. All damage to the
Building (including any stairway or elevator) or the Premises by the deliver,
installation, use or removal of freight, furniture, business equipment,
merchandise, safes or other articles shall be paid for by Tenant. Landlord shall
not be responsible for damage to any of Tenant's property delivered to or left
in any receiving area or elsewhere in the Building by any agent, employee or
representative of Landlord as an accommodation to Tenant, Landlord being under
no obligation to accept delivery of, or to move or handle, any property of
Tenant.
Section 6. Tenant shall not place a load upon any floor of the Premises
which exceeds forty-five pounds live load and twenty pounds for partitions per
square foot of floor space. Landlord reserves the right to prescribe the weight
and position of all safes, files and heavy installations which Tenant wishes to
place in the Premises in order to properly distribute the load. Business
machines and mechanical equipment belonging to Tenant which cause noise or
vibration that may be transmitted to the structure of the Building or to any
other Occupant in the Building shall be placed and maintained by Tenant at
Tenant's expense, on vibration eliminators or other devices sufficient to
eliminate noise or vibration.
Section 7. Tenant, Tenant's employees, agents or invitees shall not,
without the prior written consent of Landlord:
7.1 Attach, hang or use any curtain, blind, shade, awning or screen
in connection with any window, door or entrance in the Premises or the Building,
or attach or install any aerials or other projections from the Premises or the
Building.
7.2 Use the name of the Building for any purpose other than that of
Tenant's business address, or use any picture of the Building.
7.3 Alter any lock or install a new or additional lock or any bolt
on any door of the Premises. If Landlord shall give its consent thereto, Tenant
shall in each case furnish Landlord with a key for any such lock, and upon
termination of its tenancy, Tenant shall deliver to Landlord all keys to the
Premises and to all other rooms or offices furnished to Tenant or which Tenant
shall have made. Landlord will provide Tenant with additional keys for any lock
in the Premises upon payment therefor by Tenant.
24
<PAGE>
7.4 Install any security system without Landlord's prior
consent. If Landlord shall give its consent thereto, Tenant shall furnish
Landlord with such passwords or other security devices as are necessary to
furnish Landlord access to the Premises, and upon termination of its tenancy,
Tenant shall deliver to Landlord all security access devices which Tenant shall
have had made.
7.5 Bring or keep in or about the Premises or the Building any
animals, birds or other pals (excepts seeing-eye dogs) or bicycles or other
vehicles, except at such areas as Landlord may designate, temporarily or
otherwise.
7.6 Make or permit to emanate from the Premises or the Building any
objectionable noise or odor, nor use or keep in the Premises or the Building any
inflammable or combustible fluid or material, or in any manner annoy, disturb or
interfere with other Occupants or their employees and invitees.
7.7 Install telegraphic or telephonic connections or other wire
services, or bore or cut for such wires or Instruments incident thereto, unless
Landlord has approved the location and method of installation, introduction and
placement of such wires and instruments.
7.8 Drive spikes, hooks, screws or nails or other devices in the
walls or woodwork (except for hanging small pictures or similar items) or drill
holes in the floor of the Premises.
7.9 Place any boxes, cartons or other rubbish in the corridors or
other public areas of the Building.
7.10 No Tenant will use or keep in the Premises or the Building any
kerosene, gasoline or inflammable or combustible or explosive fluid or material
or chemical substance other than limited quantities of such materials or
substances reasonably necessary for the operation or maintenance of office
equipment or limited quantities of cleaning fluids and solvents required in
Tenant's normal operations in the Premises. Without Landlord's prior written
approval, no Tenant will use any method of heating or air conditioning other
than that supplied by Landlord.
7.11 Not paint, display, inscribe, maintain or affix any sign,
placard, picture, advertisement, name, notice, lettering or direction on any
part of the outside or inside of the Property, or on any part of the inside of
the Premises which can be seen from the outside of the Premises without the
prior consent of Landlord, and then only such name or names or matter and in
such color, size, style, character and material as may be first approved by
Landlord in writing and which complies with all recorded Restrictive Covenants
and Easement for the Building. Landlord shall prescribe the suite number and
identification sign for the Premises (which shall be prepared and installed by
Landlord at Landlord's expense). Landlord reserves the right to remove at
Tenant's expense all matter not so installed or approved without notice to
Tenant.
7.12 Not place anything or allow anything to be placed in the
Premises near the glass of any door, partition, wall or window which may be
unsightly, in Landlord's discretion, from outside the Premises, and Tenant shall
not place or permit to be placed any article of any kind on any window ledge or
on the exterior walls. Blinds, shades, awnings or other forms of inside or
outside window ventilators or similar devices, shall not be placed in or about
the outside windows in the Premises except to the extent, if any, that the
character, shape, color, material and make thereof is first approved by the
Landlord and which complies with any recorded Restrictive Covenant and Easement
for the Building.
7.13 Tenant shall not conduct, permit or advertise any auctions or
sheriffs sales or distress sales in the Premises, Building or Land.
Section 8. Tenant shall be liable for any damage to the fixtures and
systems located in the Building resulting from the abuse or misuse of any nature
or character whatever by Tenant, or Tenant's employees, agents or invitees.
Section 9. Tenant will refer all contractors, contractor's representatives
and installation technicians rendering any service to Tenant, to Landlord's
representative for approval before performance of any work. Notwithstanding such
approval, Landlord shall not be liable in any manner for the work so performed
by Tenant's contractors, contractor's representatives and installation
technicians. This Section shall apply to all work performed in the Building
including installation of telephones, telegraph equipment, electrical devices
and attachments and installations of any nature affecting floors, walls,
woodwork, trim, window, ceilings, equipment or any other part of the Building.
25
<PAGE>
Section 10. Tenant shall give prompt written notice to Landlord of any
accidents to or defects in plumbing, electrical fixtures, heating or air
conditioning systems or other systems or improvements in the Premises or the
Building, to enable Landlord to repair such damage or defects.
Section 11. Landlord shall have the right to keep a passkey and be issued
necessary security codes and devices to the Premises and the right to enter the
Premises for inspection, maintenance, cleaning or repairing and for any other
reasonable purposes.
Section 12. Landlord may change the name and the street address of the
Building, without notice and without liability to any Occupant.
Section 13. Landlord reserves the right from time to time to amend and to
make such further reasonable Rules and Regulations as, in the judgement of the
Landlord, may be necessary or desirable for the safety, care or cleanliness of
the Building or the preservation of good order herein, or the maintenance and
promotion of the high class character and reputation of the Building or for any
other reasonable or desirable purpose. Such further Rules and Regulations and
such amendments shall be binding upon Tenant, effective upon Tenant's receipt
of a copy thereof. Waiver by Landlord of any breach of any Provision of the
Rules and Regulations by any other Occupant shall not be deemed to be a waiver
of such Rules and Regulations as to Tenant or all Occupants.
Section 14. In addition to definitions set forth in these Rules and
Regulations, capitalized terms herein shall have the same meaning as set forth
in the Lease to which this is an Exhibit.
26
<PAGE>
Exhibit D to Lease
------------------
PLANS AND SPACE DESCRIPTION
The Tenant Improvements to be made to the Premises by Landlord shall be of
comparable materials and workmanship to those found in other occupied spaces
within Redmond Corporate Center. Standard interior finishes shall include
quality wall-to-wall carpeting, acoustical ceilings, recessed lighting, painted
GWB walls, oak trimmed windows, solid core doors and high quality hardware.
Landlord will build out the Premises "turnkey" to a mutually agreed upon design
substantially along the lines illustrated on the schematic outline shown on
Exhibit A, subject to Landlord's final pricing of the construction drawings.
Landlord and Tenant acknowledge and agree to Landlord's contribution towards
construction of the tenant improvements outlined in the final construction
drawings and specifications shall not exceed One Hundred Twenty Three Thousand
Five Hundred Sixty Seven and No/100's Dollars ($123,567.00) including space
planning/architectural services, governmental permits, and construction
expenses, but excluding Washington State sales tax.
Should changes occur which increase the cost of completing the mutually agreed
upon Tenant improvements, Tenant shall be responsible for any excess expenses.
Tenant shall reimburse Landlord for any Tenant improvement Expense overages
within ten (10) days from receipt of Landlord's invoice.
Furthermore, any delays in the final design, permitting or construction of the
Tenant Improvements caused by Tenant, Tenant's designers, Tenant's suppliers or
other entities selected by Tenant shall not extend the Commencement Date of the
Lease. Such delays shall include, but are not limited to, change orders incurred
during the construction process as the result of revisions to design, material
selections, equipment selections or other Tenant driven decisions.
27
<PAGE>
Rider #1
RENEWAL OPTION
To the CACHEFLOW, INC.
Redmond Corporate Center Lease
Option Period
- -------------
A. Option: Tenant is granted the right to extend the term of this Lease for
------
two (2) separate and consecutive periods of three (3) years (the "Option Term"),
on the terms and conditions set forth herein; provided, that the right to extend
for such Option Term (the "Option") may be exercised only in the event Tenant
has not been in default at any time during the entire term of this Lease and is
not in default either at the time the Option is exercised nor at the time the
Option Term is to commence.
B. Exercise of Option: To exercise the Option described in this Article,
------------------
Tenant must notify Landlord in writing no earlier than three hundred sixty (360)
days and no later than one hundred eighty (180) calendar days prior to the
expiration of the initial Term of this Lease.
C. Continuing Effect: In the event Tenant properly exercises its Option
-----------------
rights as provided herein and the Term of this Lease is extended as provided
herein, all of the terms and conditions of this lease shall apply during the
Option Term, including but not limited to Tenant's obligation to pay rent and
other charges and expenses provided for in the Lease, and provided, that (1) the
Option right exercised by the Tenant in order to extend the Term of the Lease
shall terminate and be of no further force and effect and may not be exercised
again by Tenant; (2) no concession previously granted Tenant by Landlord, if
any, shall be due or payable to Tenant during or with respect to such Option
Term; and (3) rent during the Option Term shall be determined in accordance with
the provisions of subparagraph (D) hereof.
D. Option Rent.
-----------
1. Option Term Base Rent: The Option Term base rent shall be equal to
---------------------
the base rent for the last month of the initial lease term or subsequent
Option Term subject to an adjustment commencing on the first day of the
applicable Option Term. Said adjustments shall be computed as follows: The "All
Items" Consumer Price Index for All Urban Consumers, US City Average (1982-
84=100) published by the United States Department of Labor's Bureau of Labor
Statistics ("CPI") for the thirteenth (13th) month prior to the expiration of
the initial lease term or applicable Option Term shall be referred to as the
"Base Index". The CPI for the month prior to the applicable Adjustment Date
shall be the "Adjustment Index" to compute rent adjustments to commence with
said Adjustment Date. If, as of the applicable Adjustment Date, the Adjustment
Index has increased over the Base Index, then the Rent payable under this Lease
shall, commencing with the applicable Adjustment Date and continuing thereafter
until the next Adjustment Date, be equal to the initial Base Rent or applicable
Option Rent of the Lease multiplied by a fraction, the numerator of which is the
Adjustment Index and the Denominator of which is the Base Index; provided, that
in no event shall the Rent be less than the Rent in effect on the month prior to
the Adjustment Date. If any Index is calculated from a base different from the
base period 1982-84=100, such index shall be converted to such base period by
use of a conversion factor supplied by the Bureau of Labor Statistics. If the
CPI is discontinued or replaced during the Term hereof, such governmental Cost
of Living Index or computation which replaces the CPI shall be used in order to
obtain substantially the same result as would be obtained if the CPI had not
been discontinued or replaced.
28
<PAGE>
Rider #2
CANCELLATION OPTION
CACHEFLOW, INC.
Redmond Corporate Center Lease
Provided that Tenant is not in default under any terms and conditions of this
lease Tenant shall have a one time right to terminate this lease on the last day
of the thirty-sixth (36th) month of the lease term by giving the Landlord at
least one hundred fifty (150) days prior written notice and by paying at the
time of giving such notice a termination fee equal to all unamortized tenant
improvement costs and unamortized brokerage fees. In expressing this option,
Tenant shall forfeit the Security Deposit equal to Eleven Thousand One Hundred
Nineteen and 88/100's Dollars ($11,119.88).
29
<PAGE>
Rider #3
RIGHT OF FIRST REFUSAL
To the CACHEFLOW, INC.
Redmond Corporate Center Lease
2.1 Effective as of the Lease Commencement Date, March 15, 1997, Landlord
grants Tenant a right of first refusal ("Right of First Refusal") on
approximately 2,751 rentable square feet located on the northwest corner of the
second (2nd) floor of the Building.
2.2 Exercise of Right of First Refusal. This Right of First Refusal shall
----------------------------------
be subject to the following terms and conditions:
(a) Landlord shall provide Tenant with a written notice (the "Notice")
at such time as Landlord submits a lease proposal to a third party
(other than the existing Tenant) to lease all or any portion of the RFR
Space, which Notice shall set forth the fact that a lease proposal
covering all or some portion of the RFR Space has been submitted to a
third party and stating the rentable square foot area and location of
the RFR Space subject to such proposal and the date on which lease of
the applicable RFR Space is to commence.
(b) Tenant shall have forty-eight (48) hours (the "Response Period")
from receipt of such Notice within which to elect to take all of the
RFR Space being offered to the third party, which election shall be in
writing and received by Landlord within said Response Period.
(c) Tenant shall pay to Landlord the first month's Rent and additional
Security Deposit for such RFR Space on or before the date Landlord
makes the RFR Space available for Tenant's occupancy at the then
negotiated rental rate.
(d) Failure of Tenant to elect to take all of the RFR Space being
offered to a third party within the Response Period in the manner set
forth above shall be conclusively deemed a waiver of Tenant's Right of
First Refusal with respect to that portion of the RFR Space for lease
to said third party or on the terms and conditions set forth in the
Notice. However, Tenant's Right of First Refusal hereunder shall apply
to any future lease proposal with respect to such RFR Space to any
third party or upon terms different than those stated in the Notice.
(e) Tenant is not in default under this Lease and is in occupancy of
the Premises (i) on the date Tenant elects in writing to exercise this
Right of First Refusal, and (ii) on the date Tenant occupies the RFR
Space.
2.3 If the Right of First Refusal with respect to any RFR Space is
exercised at the time and in the manner as set forth above, Tenant shall take
all of such RFR Space under all of the terms and conditions of this lease,
except Landlord provided tenant improvements and corresponding lease rates, and
such provisions shall automatically be amended to include that portion of the
RFR Space taken commencing on the date set forth in the Landlord's notice given
pursuant to subparagraph 1.2(a) above. Rent payable by Tenant shall be
increased to account for the additional square footage of the RFR Space at the
then mutually agreed upon lease rate for Right of First Refusal Space during the
Lease Term. Tenant's Percentage shall also be increased to account for the
increase in the total rentable square footage leased by Tenant.
30
<PAGE>
EXHIBIT 10.8
TECHNOLOGY BUSINESS PARK
BUILDING #2
180 COLUMBIA STREET WEST,
WATERLOO, ONTARIO.
LEASE OF SPACE
Dated: April 29, 1999
WIEBE PROPERTY CORPORATION LTD.
- AND -
CacheFlow Canada Inc.
<PAGE>
2
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
THIS INDENTURE OF LEASE....................................................4
1. DEFINITIONS.............................................................4
1.1. "Project".............................................................4
1.2. "Building"............................................................4
1.3. "Lease"...............................................................4
1.4. "Leased Premises".....................................................4
1.5. "Common Areas and Facilities".........................................4
1.6. "Leaseable Area of the Project".......................................4
1.7. "Leaseable Area of the Building"......................................4
1.8. "Substantial Completion"..............................................4
1.9. "Common Area Costs"...................................................4
1.10. "Management Fee".....................................................5
1.11. "Realty Taxes".......................................................5
1.12. "Tenant's Proportionate Share".......................................5
1.13. "Building Services"..................................................5
2. LEASED PREMISES.........................................................6
3. TERM....................................................................6
3.1. TO HAVE AND TO HOLD...................................................6
4. RENT....................................................................6
4.1. YIELDING AND PAYING THEREFORE.........................................6
4.4. Net Lease.............................................................7
4.5. Cap on Common Area and Property Tax Costs - ..........................7
5. TENANT'S COVENANTS......................................................7
5.1. Rent..................................................................7
5.2. Right to Contest......................................................7
5.3. Governmental Compliance...............................................7
5.4. Repair to the Leased Premises.........................................7
5.5. Repair on Surrender of Leased Premises................................7
5.6. No Nuisance and Caretaking............................................7
5.7. Use of Premises.......................................................7
5.8. Alterations and Changes by Tenant.....................................7
5.9. Termination...........................................................8
5.10. Locks................................................................8
5.11. Removal of Goods.....................................................8
5.12. Access by Landlord...................................................8
5.13. Signs and Directory..................................................8
5.14. Assigning or Subletting..............................................8
5.15. Tenant's Insurance...................................................8
5.16. Leasehold Improvements...............................................9
5.17. Notice of Malfunction in Equipment...................................9
5.18. Right of Entry.......................................................9
5.19. Exclusion of Landlord's Liability....................................9
5.20. Indemnification of Landlord..........................................9
5.21. Re-Entry by Landlord on Nonpayment or Nonperformance................10
5.22. Landlord's Right to Re-Let the Leased Premises......................10
5.23. Dispensing..........................................................10
5.24. Condoning...........................................................10
6. LANDLORD'S COVENANTS...................................................10
6.1. Quiet Enjoyment......................................................10
7. MUTUAL COVENANTS.......................................................10
7.1. No Exceptions of Distress............................................10
7.2. Liability for Damages to Person or Property..........................10
7.3. Right of Re-Entry and Bankruptcy of Tenant...........................10
7.4. Mechanics' Liens.....................................................11
</TABLE>
<PAGE>
3
<TABLE>
<CAPTION>
<S> <C>
7.5. Assignment of Lease as Collateral Security...........................11
7.6. Subordination and Attornment.........................................11
7.7. Landlord's Insurance.................................................11
7.8. Sales, Conveyance and Assignment.....................................11
7.9. Effect of Sale, Conveyance or Assignment.............................11
7.10. Attornment..........................................................11
7.11. Nondisturbance......................................................11
7.12. Damage or Destruction...............................................11
7.13. Rules and Regulations...............................................11
7.13.1. Purpose of Rules and Regulations..................................11
7.13.2. Observance of Rules and Regulations...............................12
7.13.3. Modification of Rules and Regulations.............................12
7.13.4. Noncompliance of Rules and Regulations............................12
7.14. Notices.............................................................12
7.15. Guarantor's Clause..................................................12
7.16. Late Payment Charge on Amounts in Default...........................12
7.17. Payments Deemed Rent................................................12
7.18. Overholding.........................................................12
7.19. Registration........................................................12
7.20. Compliance with the Planning Act....................................12
7.21. Waiver of Breach of Covenant........................................12
7.22. Obligations as Covenants............................................12
7.23. Entire Agreement....................................................12
7.24. Amendment of Modification...........................................12
7.25. Construed Covenant and Severability.................................12
7.26. Headings and Captions...............................................12
7.27. Number and Gender...................................................12
7.28. Governing Law.......................................................12
7.29. Successors and Assigns..............................................13
7.30. Relationship of Parties.............................................13
7.31. Consent Not Unreasonably Withheld...................................13
7.32. Name of Building....................................................13
7.33. No Implied Surrender or Waiver......................................13
7.34. Area Determination..................................................13
SIGNED, SEALED AND DELIVERED..............................................14
SCHEDULE "A"..............................................................15
SCHEDULE "B"..............................................................16
SCHEDULE "C"..............................................................17
RULES AND REGULATIONS.....................................................17
SCHEDULE "D"..............................................................19
JANITOR AND CLEANING SERVICE SCHEDULE.....................................19
SCHEDULE "E"..............................................................20
SUPPLEMENTAL TERMS AND CONDITIONS.........................................20
</TABLE>
<PAGE>
4
THIS INDENTURE OF LEASE made April 29, 1999,
IN PURSUANCE OF THE SHORT FORMS OF LEASES ACT:
BETWEEN:
WIEBE PROPERTY CORPORATION LTD. a Corporation incorporated under the laws of
-------------------------------
the Province of Ontario, having its head office at the City of Waterloo, in
the Regional Municipality of Waterloo,
Hereinafter called the Landlord
of the FIRST PART;
- and -
CacheFlow Canada Inc.
Hereinafter called the Tenant
of the SECOND PART;
1. DEFINITIONS
- --------------
in this Lease
1.1. "Project" - means all those certain lands located in the City of
--------------
Waterloo, in the Regional Municipality of Waterloo, more particularly described
in Schedule "A" together with the buildings now or hereafter erected on or over
the lands shown in Schedule "A", including any alterations, additions or
deletions, generally known as the Technology Business Park.
1.2. "Building" - means the building in which the Leased Premises is
---------------
located referred to as Building # 2 on Schedule "A".
1.3. "Lease" - means this lease, Schedules A, B, C, D and E to this lease,
-------------
and every properly executed instrument which by its terms amends, modifies or
supplements this lease.
1.4. "Leased Premises" - means the premises leased to the Tenant by this
-----------------------
lease and described in Article 2.
1.5. "Common Areas and Facilities" - means all that part of the Project
-----------------------------------
which is not intended to be leased to Tenants of the Project including, without
limitation, such facilities, utilities, improvements, equipment and
installations which are, from time to time, provided or designated (and which
may be changed from time to time) by the Landlord for the use by or benefit of
the Tenants, its employees, customers and other invitees in common with others
entitled to their use or benefit in the manner and for the purpose permitted by
this Lease.
1.6. "Rentable Area of the Project"- means the total rentable area
-----------------------------------
(expressed in square feet) of all the areas of the Project set aside by, the
Landlord for leasing to tenants of the Project, whether leased or not.
1.7. "Rentable Area of the Building" - means the total rentable area
-------------------------------------
(expressed in square feet) of all the areas of the Building set aside by the
Landlord for leasing to tenants of the Building, whether leased or not.
1.8. "Substantial Completion" - means reasonably fit for occupancy by the
------------------------------
Tenant.
1.9. "Common Area Costs" - means the sum of all reasonable costs of the
-------------------------
Landlord of operating and maintaining in good repair the Leased Premises and the
Building in which the Leased Premises are situated and all Common Areas within
the said building, and all costs relating to the external components of the
Project, including without limiting the generality of the foregoing, the
aggregate of all costs of:
1.9 l. - insuring the leased premises and the Building plus any form of
insurance which the Landlord or any mortgagee reasonably require from
time to time for insurable risks for any amounts against which a prudent
Landlord would insure.
1.9 2 - Common Area Costs; cleaning, snow removal, garbage and waste
collection and disposal, electric bulbs and tubes, public utilities,
including water and sewage charges, lighting, and electricity, including
that used for exterior signs, policing, supervising, traffic control,
landscaping, preventive maintenance, the costs to the Landlord of the
rental of equipment and building supplies used by the Landlord In
maintenance, and the cost of personnel and staff employed to provide
maintenance and operating services.
1.9.3. - the cost of repairs and maintenance of the Leased Premises (not
otherwise paid for by the Tenant) and the Building, excluding capital
repairs.
1.9.4 - HVAC and hydro costs for the leased premises;
1.9.5. - Janitorial Services within the leased premises as set out in
Schedule "D".
<PAGE>
5
1.9 6. - Notwithstanding the foregoing, Common Area Costs shall not
include any of the following:
(a) net recoveries that reduce the operating and maintenance expenses
of the Building and/or the Projects, received by the Landlord from
tenants as a result of any act, omission, default or negligence of
tenants or as a result of breaches by tenants of the provisions in
their respective leases;
(b) net proceeds from insurance policies taken out by the Landlord and
paid for by the Landlord and the cost of which is not include in Common
Area Costs, to the extent that the proceeds relate to the costs and
expenses incurred in the maintenance and operation of the Building
and/or the Project;
(c) all principal, interest or other charges or payments made in
respect of any mortgages or other financing instruments relating to the
Project;
(d) all corporation taxes, income taxes, profit or excess profit taxes,
capital taxes or any other taxes personal to the Landlord;
(e) any other costs and expenses incurred by the Landlord which, in
accordance with generally accepted accounting principles, are
considered to be capital expenses.
(f) any costs for services which are used by and charged to specific
tenants.
1.10. "Management Fee"- an annual property management fee equal to 6% of the
----------------------
Tenant's basic rent.
1.11. "Realty Taxes"- shall mean all taxes, rates, duties, charges,
--------------------
assessments, impositions, levies whatsoever levied in connection with the real
property comprised of the Leased Premises and the Building, and the land
comprising the project.
1.12. "Tenant's Proportionate Share"- shall be determined by the following
------------------------------------
two calculations. The Tenants Proportionate Share of the Building shall be the
ratio of the Rentable Area of the Leased Premises to the total Rentable Area in
the Building occupied, and shall apply to the Common Area Costs relating to that
Building. The Tenants Proportionate Share of the Project shall be the ratio of
the Rentable Area of the Leased Premises to the total Rentable Area then
completed in Technology. Business Park. The Tenants Proportionate Share will
include a five percent allowance for vacancy. (The total Rentable Area in any
building shall exclude any areas used for mechanical and electrical installation
and systems or any area in the Building or Project which would otherwise be
rentable but which the Landlord utilizes in connection with the operation or
maintenance of the Building or Project, and includes office space occupied by
personnel engaged in such operation and maintenance and its management, storage
rooms for building supplies, machine and maintenance shops, and parcel delivery
rooms and other like facilities for common use by or service to tenants in the
Building or Project) The parties acknowledge that the Premises form part of an
integrated office complex and accordingly certain of the costs may be more
appropriately borne by the occupants of a portion of the Building or Project
rather than of the entire Building or Project.
1.12.1. - The said areas shall be exclusively determined by the Landlord.
The Landlord intends to make changes to this building and/or construct
additional buildings on the site of Technology Business Park, 180
Columbia Street West. As each building is completed or changes made to
this building, the Tenant's proportionate share of Common Area Costs and
Taxes will be adjusted accordingly.
1.13. "Building Services"
-------------------------
1.13.1. - Heating Ventilating & Air Conditioning: to provide to the
--------------------------------------
Premises during hours to be determined by the Landlord (but to be at least
during the hours of 8.00 AM to 6.00 PM) by means of systems for heating and
cooling, filtering and circulating air, processed air in such quantities, at
such temperatures as shall maintain in the Premises conditions of reasonable
temperature and comfort in accordance with good standards of interior climate
control generally pertaining at the date of this Lease applicable to normal
occupancy of premises for office purposes, but the Landlord shall have no
responsibility for any inadequacy of performance of the said system if the
Premises depart from the design criteria for such system, i.e., that the
Tenant shall have installed partitions or other installations in locations
which interfere with the proper operation of the said system. If the use of
the Premises does not accord with the said design criteria and changes in the
systems are feasible and desirable to accommodate such use, the Landlord may
at the written request of the Tenant, make such changes and the entire
expenses of such changes will be reimbursed by the Tenant to the Landlord. At
the request of the Tenant and upon reasonable notice, the Landlord shall
provide and charge as an Additional Service air-conditioning and ventilation
to the Premises during hours wherein it is not otherwise obliged to provide
such services under this subparagraph;
1.13.2. - Elevator Services: subject to the supervision of the
-----------------
Landlord, to furnish for use by the Tenant and its employees and service to
the Premises, and to furnish for the use of the Tenant in common with others
entitled thereto at reasonable intervals upon written notice and at such hours
as the Landlord may select, freight elevator service to the Premises for the
carriage of furniture, equipment, deliveries and supplies;
1.13.3. - Access: to permit the Tenant and its employees and invitees to
------
have the use in common with others entitled thereto of the common entrances,
lobbies, stairways and corridors of the Building giving access to the Premises
(subject to the Rules and Regulations attached to this Lease as Schedule "C"
and such other reasonable limitations as the Landlord may from time to time
impose);
1.13.4. - Washrooms: to provide for the use of the Tenant and its
---------
employees and invitees, in common with others entitled thereto, washrooms,
with hot and cold water, on each floor in the Building upon which any part of
the Premises is located;
1.13.5. - Janitorial Service; to provide janitorial and cleaning services
-------------------
to the Premises consisting of the services more particularly described in Part
I of Schedule "D" attached to this Lease to be rendered substantially in
accordance with the standards of modem buildings of a similar type in
Kitchener/Waterloo, Ontario at the date of this Lease; it being agreed by the
Tenant that any janitor or cleaning service which the Landlord shall agree to
provide in excess of those above specified (including those extra services
which the Landlord shall make available by demand or special arrangement as
specified in Part 2 of Schedule "D" attached to this Lease) shall be an
Additional Service;
1.13.6. - Common Area Cleaning Service: to cause the elevators,
----------------------------
entrances, stairways, corridors, lobbies, washrooms and other parts of the
Building from time to time provided for common use and enjoyment to be swept,
cleaned or otherwise maintained;
<PAGE>
6
1.13.7. - Telephone: the Landlord shall furnish appropriate facilities
---------
for bringing telephone services to the Premises to a maximum of 5 standard
telephone lines per 1,000 square feet;
1.13.8. - Electricity: the Landlord shall furnish electricity to the
-----------
Premises for lighting and also for normal office equipment capable of
operating from the high or low voltage circuits available and standard for
the Building, and the Landlord shall replace from time to time electrical
light bulbs, tubes and ballast's required for the lighting of the Premises
either by way of group relamping on a periodic basis in accordance with
current good practice in building management having regard to the expected
service life thereof, or as the same actually burn out and when notified by
the Tenant that replacement is required;
1.13.9. - Additional Services: the Landlord, if it shall from time to
-------------------
time so elect, shall have the exclusive right, by way of Additional
Services, to provide or have its designated agents or contractors provide
any janitor or cleaning services to the Premises requested by the Tenant
which are additional to those required to be provided by the Landlord under
subparagraph 1.13.5, including the Additional Services which the Landlord
agrees to provide on demand or by arrangement referred to in Part 2 of
Schedule "D" hereto, and to supervise the moving of furniture or equipment
of the Tenant and the making of repairs or alterations conducted within the
Premises, and to supervise or make deliveries to the Premises. The cost of
Additional Services provided to the Tenant, whether those the Landlord
shall be obligated to provide hereunder or those the Landlord shall elect
to provide as Additional Services, shall be paid to the Landlord by the
Tenant from time to time promptly upon receipt of invoices (Additional
Rent) therefor from the Landlord;
2. LEASED PREMISES
- ------------------
2.1. WITNESSETH THAT in consideration of the rents, covenants, rules and
regulations and agreements hereinafter reserved and contained on the part of the
Tenant, to be respectively paid, observed and performed, the Landlord doth
demise and lease unto the Tenant for use and occupation the premises, together
with improvements thereon, being all those premises comprised of 4,664 square
feet, more or less, of the 2nd floor (Schedule B), being Unit 2210, of the
Building. The said building is located in Technology Business Park, 180 Columbia
Street West, in the City of Waterloo, in the Regional Municipality of Waterloo
and the Province of Ontario. In addition to the space leased, the Tenant shall
have access and use in common with others entitled thereto of certain common
areas from time to time.
3. TERM
- -------
3.1 TO HAVE AND TO HOLD the said leased premises for and during a term of Ten
---
(10) years, to be computed from the 1st day of June, 1999, and from thenceforth
next ensuing and fully to be completed and ended on the 31st day of May, 2009.
4. RENT
- -------
4.1. YIELDING AND PAYING THEREFORE yearly to the Landlord in every year during
----------------------------------
the said term (and proportionately for any fraction of a year) the following
sums, without any deduction, setoff or abatement whatsoever, in lawful money of
Canada, that is to say:
4.2. The sum of Fifty Six Thousand Four Hundred & Forty Six and 08/100 DOLLARS
($56,446.08) (herein called the "Basic Rent") per annum, to be paid in advance
in equal monthly installments of Four Thousand Seven Hundred & Three and 84/100
DOLLARS ($4,703.84) on the first day of each month during the term, and the last
payment to become due and be paid in advance one month before the expiration of
this lease.
4.3. In addition to the said basic rent, the Tenant shall pay to the Landlord
as Additional Rent:
4.3.1. - The Tenant's Proportionate Share of the Common Area Costs, as
hereinbefore defined for each year, calendar year or proportion thereof
during the term hereof:
4.3.2. - The Tenant's Proportionate Share of the Realty Taxes, as
hereinbefore defined for each year, calendar year or proportion thereof
during the term hereof:
4.3.3 - The Landlord may at any time and from time to time during the
term hereof (but not oftener than twice in a calendar year) compute a
bona fide estimate of the Additional Rent charges (see Article 4.3.1. and
4.3.2.) payable by the Tenant during the forthcoming year or portion
thereof. From and after the date upon which notice of such estimate is
given by the Landlord to the Tenant the Tenant will pay the amount of
such estimated costs by equal consecutive monthly instalments payable in
advance on the first day of each and every month during the year or
portion thereof for which such estimate was computed. The Tenant will, at
the request of the Landlord, provide the Landlord with post-dated cheques
to be deposited by the Landlord and applied in payment of such monthly
instalments. The parties acknowledge that the Premises form part of an
integrated office complex and accordingly, certain of the Operating Costs
and Realty Taxes may be more appropriately borne by the occupants of a
portion of the Building or Project rather than of the entire Building or
Project.
4.3.4 - On or before April 30th of each year during the term hereof or so
soon thereafter as may be practicable and on April 30th next following
the expiration of the term hereof or so soon thereafter as may be
practicable the Landlord will furnish the Tenant with a statement,
setting forth the total of the Operating Costs and Realty Taxes for the
Building during the immediately preceding calendar year or portion
thereof during which Operating Costs and Realty Taxes are payable by the
Tenant and the amount of Operating Costs and Realty Taxes payable by the
Tenant for such period. Within 15 days after delivery of such statement,
the Tenant will make an adjusting payment in the amount of the difference
between the total of the Operating Costs and Realty Taxes actually paid
by the Tenant during such period and the actual Operating Costs and
Realty Taxes that should have been paid by the Tenant on the basis set
out in such statement. In the event of disagreement between the Landlord
and the Tenant in regard to the manner of calculation or amount payable
as Additional Rent charges, the Tenant will make payment in accordance
with any notice given by the Landlord, but the disagreement shall
immediately be referred by the Landlord for determination by one or more
of the Landlord's auditors, architect, insurance broker or other
professional consultant (such as may be, in the reasonable opinion of the
Landlord, best informed and qualified to determine the difference on a
basis equitable to both parties) who shall be deemed to be acting as
experts and not arbitrators, and a determination signed by the selected
expert(s) shall be final and binding upon the Landlord and the Tenant.
Any
<PAGE>
7
adjustment required to any previous payment made by the Tenant by reason of
any such determination shall be made within 15 days thereof, including the
cost of such expert which is at the Tenants expense.
4.3.5. - All other sums required to be paid by the Tenant under this lease
within thirty days from date of invoice (i.e. work requested by the Tenant
& completed by the Landlord) said sums to be referred to as "Additional
Rent", except as in article 4.3.4.:
4.3.6. - All other taxes or duties imposed upon the Landlord which are
measured or based in whole or in part directly upon the Monthly Rent or
Additional Rent payable under this Lease, whether existing at the date
hereof or hereafter imposed by an governmental authority including, without
limitation, value added tax, business transfer tax, provincial sales tax,
federal sales tax, federal goods and services tax, excise taxes or duties
or any tax similar to any of the forgoing.
4.3.7. - If any of the foregoing amounts are not paid at the time provided
in this lease, they will nevertheless, if not paid when due, be collectible
as rent with the next installment of rent thereafter falling due, but
nothing herein contained is deemed to suspend or delay the payment of any
amount of money at the time it becomes due and payable or limit any other
remedy of the Landlord.
4.3.8. - The Tenant will make all payments from time to time due herein
without setoff, compensation or deduction whatsoever to the Landlord at the
address set forth in Article 7.14. or to such other person or persons at
such other place or places as the Landlord may from time to time designate
in writing. The Tenant will, at the request of the Landlord, provide the
Landlord with post-dated cheques to be deposited by the Landlord and
applied in payment of such monthly installments.
4.4. Net Lease - It is the intent of the parties that this Lease be absolutely
--------------
net to the Landlord and that the Tenant shall pay all costs and expenses
relating to the Building and the Leased Premises and the business carried on
therein except as expressly provided in this Lease. Any amount or obligation
herein relating to the Building or the Leased Premises which is not expressly
declared to be that of the Landlord shall be deemed to be an obligation of the
Tenant to be performed by or at the Tenant's expense.
4.5. Deposit - The Tenant shall provide a deposit to the Landlord equal to one
------------
months gross rent upon receipt of an invoice after this Lease is signed by both
parties. Deposit will be applied to the last month of the term of this Lease.
5. TENANT'S COVENANTS
- ---------------------
THE TENANT COVENANTS WITH THE LANDLORD AS FOLLOWS:
5.1. Rent - To pay rent.
---------
5.2. Right to Contest - Landlord and Tenant shall each have the right to
---------------------
contest in good faith the validity or amount of any tax, assessment, license
fee, excise fee and other charge which it is responsible to pay, provided that
no contest by Tenant may involve the possibility of forfeiture, sale or
disturbance of Landlord's interest in the Premises and that upon the final
determination of any contest by the Tenant, the Tenant shall immediately pay and
satisfy the amount found to be due, together with any costs, penalties and
interest.
5.3. Governmental Compliance - The Tenant shall, at its own cost and expense,
----------------------------
promptly comply with all laws, ordinances, by-laws, orders, regulations and
rules of any duly constituted governmental authority or any other applicable
authority having jurisdiction and/or Board of Fire Underwriters or similar
organization having jurisdiction thereof relating to the manner in which the
Tenant uses or maintains said leased premises.
5.4. Repair to the Leased Premises - And to repair, except for reasonable wear
----------------------------------
and tear and damage by fire, lightning and tempest or for matters which are
covered by insurance maintained by the Landlord and paid for by the Tenant
through Common Area Costs, provided that the Tenant's covenant to repair, except
as hereinbefore provided in this lease, shall not in any case include repairs to
the roof or outside or party walls unless the need to repair is caused by the
negligence of the Tenant, its agents, employees, invitees, or licensees; and
that the Landlord may enter and view state of repair. Where and whenever repairs
are required or desired to be made to the premises including leasehold
improvements, such work shall be carried out by the contractors or work forces
of the Landlord, at the Landlord's cost plus 20% for administration. In any and
every case the Tenant covenants with the Landlord to pay as Additional Rent to
the Landlord with the installment of rent which shall next fall due all sums
which the Landlord shall have expended in making such repairs, and shall not
have previously received from the Tenant; provided further that the making of
any repairs by the Landlord shall not relieve the Tenant from the obligation to
repair and leave the premises in good repair, reasonable wear and tear and
damage by fire, lightning and tempest only excepted.
5.5. Repair on Surrender of Leased Premises - and further, that the Tenant
-------------------------------------------
will, at the expiration or sooner determination of the said term, peaceably
surrender and yield up unto the Landlord the said premises hereby leased with
the appurtenances, erections which at any time during the said term shall be
made therein or thereon in good and substantial repair and condition.
5.6. No Nuisance and Caretaking - The Tenant covenants not to carry on or
-------------------------------
suffer or permit to be carried on any business or occupation that shall be
deemed a nuisance or which shall be offensive or an annoyance to the Landlord or
to any of its other tenants and not to commit or suffer or permit to be
committed any kind of nuisance or offensive acts and not allow any refuse,
garbage or objectionable materials to accumulate in or about the leased premises
and will at all times keep the leased premises in clean and wholesome condition,
and provide and be responsible for all janitorial services to the leased
premises.
5.7. Use of Premises - That the leased premises will not during the said term
--------------------
or any renewal thereof be at any time used for any other purpose than that of
operating a software development and service company without first obtaining the
prior written consent of the Landlord.
5.8. Alterations and Changes by Tenant - Where and whenever a Tenant requires
--------------------------------------
changes or additions to its leasehold improvements, including without limiting
the generality thereof, electrical installations, lighting, partitions, private
offices or workrooms, washroom, floor and wall coverings, etc., such work upon
first receiving the written approval of the Landlord, shall be carried out by
the contractors, or work forces of the Landlord, at his cost including the
Landlord's administration costs. All Leasehold Improvements in or upon the
Premises shall immediately upon their placement be and become the Landlord's
property without compensation therefor to the Tenant and shall become part of
the Premises.
<PAGE>
8
5.9. Termination - At the termination of this lease, all alterations,
----------------
additions and improvements, except trade fixtures, machinery and equipment used
by the Tenant in its business, which were put in at the expense of the Tenant,
shall be the property of the Landlord and shall remain upon and be surrendered
with the premises as part thereof, subject to any exceptions authorized by the
Landlord, and in such removal by the Tenant of its fixtures, machinery and
equipment the Tenant shall do no damage to the said premises or shall make good
any damage which may be occasioned thereto. The Tenant shall at the end of the
Term remove such of its Leasehold Improvements and trade fixtures as the
Landlord shall require to be removed. Where furniture, equipment and trade
fixtures or other goods are left on the premises by Tenant who has abandoned the
premises or vacated the premises upon expiration or termination of this Lease,
the Landlord may, at its option, dispose of the goods by a means and for a price
(if any) that he believes reasonable and the Landlord shall not be considered to
be a bailee, or a "warehouseman" within the meaning of The Warehousemen's Lien
-----------------------
Act of Ontario. The Tenant waives the benefit of any law, present or future,
- ---
which provides that any notice of or period of notice of, the sale or other
disposition, be given to the Tenant. The Tenant shall have the right to
terminate this lease on the 1st day of June 2004 by notifying the Landlord in
writing (to be received by the Landlord by December 1st, 2003) of it's intention
to so terminate.
5.10. Locks - The Tenant shall not place or cause to be placed any additional
-----------
locks or change or cause to be changed any lock upon any doors of the leased
premises without the approval of the Landlord.
5.11. Removal of Goods - That the Tenant will not remove any goods or chattels
----------------------
of any kind from the leased premises until all rent due or to become due under
this lease during the term herein provided for and all rates or charges which
the Tenant may incur in connection with the leased premises for electric or
other public services are fully paid, and should the Tenant remove its goods and
chattels from off the leased premises without full payment having been made, all
such rent, rates and charges shall immediately become due and payable and the
Landlord may follow the goods and chattels for thirty (30) days in the same
manner as is provided for in the Act respecting fraudulent and clandestine
removal of goods. The Tenant may remove its furniture and equipment during the
Term in the usual and normal course of its business and in addition where such
furniture or equipment has become excess for the Tenant's purposes or the Tenant
is substituting therefor new furniture and equipment. The Tenant shall, in the
case of every removal either during or at the end of the Term, make good any
damage caused to the Premises by the installation and removal.
5.12. Access by Landlord - Tenant shall permit Landlord to enter the Premises
------------------------
during normal business hours, to examine, inspect, and to show persons wishing
to lease the Premises or other premises, or to prospective purchasers of the
Building, or permit the Landlord to enter the Premises during normal business
hours, and outside normal business hours to provide services or make repairs,
replacements, changes or alterations as set out in this Lease, and to take such
steps as Landlord may deem necessary for the safety, improvement or preservation
of the Premises or the Building. Landlord shall whenever possible consult with
or give reasonable notice to Tenant prior to such entry, but no such entry shall
constitute an eviction or entitle Tenant to any abatement of Rent.
5.13. Signs and Directory - The Tenant covenants that it will not paint,
-------------------------
display, inscribe, place or affix any sign, symbol, notice or lettering of any
kind anywhere outside the Leased Premises, whether on the outside or inside of
the building, or within the Leased Premises so as to be visible from the outside
of the Leased Premises, with the exception only of an identification sign at the
entrance to the Leased Premises, containing only the name of the Tenant, and to
be subject to the approval of the Landlord as to design, size, location and
content. Such identification sign shall be installed at the expense of the
Tenant and the Landlord reserves the right to install them as an Additional
Service.
5.14. Assigning or Subletting
-----------------------------
5.14.1. - The Tenant covenants that it will not assign or sublet without
the prior written consent of the Landlord, which consent will not be
unreasonably withheld, (and which consent, if given, shall not relieve the
Tenant from any payment of the rent hereunder, nor from the payment of any
additional fire insurance premiums which may have to be paid as a result of
such assignment or subletting) as to any assignee or sub-lessee who in the
Landlord's judgement, has a satisfactory financial condition, has a good
reputation in the business community and agrees to use the Premises for
purposes satisfactory to the Landlord, but the Landlord shall be entitled
to withhold consent arbitrarily where it exercises the right of termination
arising under subparagraph 5.14.2. Without limitation, the Tenant shall for
purposes of this paragraph 5.14. be considered to assign or sublet in any
case where it permits the Premises or any portion thereof to be occupied by
persons other than the Tenant, its affiliates, its employees and others
engaged in carrying on the business of the Tenant, whether pursuant to
assignment, subletting, license or other right, and shall also include any
case where any of the foregoing occurs by operation of law.
5.14.2. - The Tenant shall not assign this Lease or sublet the whole or any
part of the Premises unless (1) it shall have received a bona fide written
offer to take an assignment or sublease which is not inconsistent with this
Lease and the acceptance of which would not breach any provision of this
Lease if this subparagraph 5.14.2. is complied with and which the Tenant
has determined to accept subject to this subparagraph 5.14.2. being
complied with, and (2) it shall have first requested and obtained the
consent in writing of the Landlord thereto. Any request for such consent
shall be in writing and accompanied by a information available to the
Tenant and requested by the Landlord as to the responsibility, reputation,
financial standing and business of the proposed assignee or subtenant.
Within ten (10) days after the receipt by the Landlord of such request for
consent and of all information which the Landlord shall have requested
hereunder (and if no such information has been requested, within ten (10)
days after receipt of such request for consent) the Landlord shall have the
right upon written notice to the Tenant, if the request is to assign this
Lease or sublet the whole of the Premises, to cancel and terminate this
Lease, or if the request is to sublet a part of the Premises only, to
cancel and terminate this Lease with respect to such part, in each case as
of a termination date to be stipulated in the notice of termination which
shall be not less than sixty (60) days or more than ninety (90) days
following the receipt by the Landlord of such request for consent, and in
such event the Tenant shall surrender the whole or part as the case may be
of the Premises in accordance with such notice and Rent shall be
apportioned and paid to the date of surrender and, if a part only of the
Premises is surrendered, Rent payable under article 4 shall thereafter
abate proportionately. If such consent shall be given, the Tenant shall
assign or sublet, as the case may be, only upon the terms set out in the
Offer submitted to the Landlord as aforesaid and not otherwise. The
foregoing shall be subject to the exception that the Tenant may, by notice
delivered to the Landlord within fourteen (14) days after receipt from the
Landlord of a notice of termination pursuant to the provisions of this
subparagraph 5.14.2., elect to continue this Lease as to all of the
Premises and not to assign or sublet, in which event the notice of
termination shall be ineffective
5.14.3. - No assignment of this Lease shall be effective unless the
assignee shall execute an appropriate instrument assuming, as to the
assigned premises, all the obligations of the Tenant hereunder. No
assignment or subletting of this Lease shall release the Tenant from its
obligations under this Lease.
5.15. Tenant's Insurance - During the Term, Tenant shall maintain at its own
------------------------
expense:
5.15.1. - Fire insurance with extended coverage and water damage insurance
in amounts sufficient to fully cover all property in the Tenants Premises
including furniture, trade fixtures and Tenant's improvements which are not
owned by the Landlord.
<PAGE>
9
5.15.2. - Tenants legal liability and comprehensive or commercial general
liability insurance covering bodily harm, death, property damage and
personal injury, with Landlord named as an additional insured, against
claims for death, personal injury and property damage in or about the
Premises, in amounts which are from time to time acceptable to a prudent
tenant in the community in which the Building is located, but not less than
$5,000,000 for death or injury, and $5,000,000 for property damage in
respect of each occurrence.
5.15.3. - The Tenant shall not carry any stock of goods or do anything in
or about the leased premises or common areas or both which will in any way
tend to increase the insurance rates on the leased all of them. The Tenant
agrees to pay as additional rent any increase in premiums for insurance
against loss by fire that may be charged during the term of this lease on
the amount of insurance to be carried by the Landlord on the leased
premises or the building of which they are a part or the common areas or
all of them resulting from the business carried on in the leased premises
by the Tenant, whether or not the Landlord has consented to the same. If
the Tenant installs any electrical equipment that overloads the lines in
the leased premises, the Tenant shall at its own expense make whatever
changes are necessary to comply with the requirements of the Insurance
Underwriters and governmental authorities having jurisdiction.
5.15.4. - Policies for such insurance shall be in a form and with an
insurer reasonably acceptable to Landlord, shall require at least sixty
(60) days' written notice to Landlord of termination or material alteration
during the Term, and shall waive, to the extent available, any right of
subrogation against Landlord. If requested by Landlord, Tenant shall from
time to time promptly deliver to Landlord certified copies or other
evidence satisfactory to Landlord that all premiums thereon have been paid
and the policies are in full force and effect.
5.15.5. - The Tenant agrees that the Landlord shall not be liable for any
loss or damage to any property belonging to, the Tenant or its employees,
invitees or licensees or any other person in, or about Technology Business
Park unless resulting from the actual fault, privity or negligence of the
Landlord, and in no event shall the Landlord be liable:
(A) - for any damage (other than Insured Damage) which is caused by
steam, water, rain or snow which may leak into, issue or flow from any
part of Technology Business Park or from the pipes or plumbing works
thereof or from any other place or quarter or for any damage caused by or
attributable to the condition or arrangement of any electric or other
wiring or for any damage caused by anything done or omitted by any other
tenant;
(B) - for any act or omission (including theft, malfeasance or
negligence) on the part of any agent, contractor or person from time to
time employed by it to perform janitor services, security services,
supervision or any other work in or about the Premises or Technology
Business Park; or
(C) - for loss or damage, however caused, to money, securities,
negotiable instruments, papers or other valuables of the Tenant.
5.15.6. - The Tenant agrees that the Landlord shall have no responsibility
or liability for the failure to supply interior climate control or elevator
service when prevented from doing so by strikes, the necessity of repairs,
any order or regulation or any body having jurisdiction, the failure of the
supply of any utility required for the operation thereof or any other cause
beyond the Landlord's reasonable control, and shall not be held responsible
for any bodily injury, death or damage to property arising from the use of,
or any happening in or about any elevator or escalator
5.15.7. - The Landlord releases the Tenant from all claims or liabilities
in respect of any damage which is Insured Damage, to the extent of the cost
of repairing such damage
5.15.8. - Except as provided in subparagraph 5.15.6. the Parties agree to
indemnify and save harmless each other in respect of all claims for bodily
injury or death, property damage or other loss or damage arising from the
conduct of any work by or any act or omission of each other or any
assignee, subtenant, agent, employee, contractor, invitee or licensee of
each other, and in respect of all costs, expenses and liabilities incurred
by each other in connection with or arising out of all such claims,
including the expenses of any action or proceeding (instituted or
threatened) or settlement thereof pertaining thereto.
5.16. Leasehold Improvements - That the Tenant shall pay the cost of all
----------------------------
leasehold improvements and the Tenant, before making any leasehold improvements
to the leased premises (subject to Article 5.8.), shall obtain the approval of
the Landlord in writing to the plans and specifications of such intended
leasehold improvements.
5.17. Notice of Malfunction in Equipment - to give to the Landlord prompt
----------------------------------------
written notice of any accident to or defect in the water pipes electrical wires,
or any defect known to the Tenant affecting the HVAC apparatus.
5.18. Right of Entry- The Tenant covenants with the Landlord to permit the
--------------------
Landlord, during the last six (6) months to show prospective tenants desirous of
leasing the said premises at the expiration of this lease, to visit and inspect
the same at all reasonable times and with proper identification of said
prospective tenants. The Landlord shall have the right during the last six (6)
months to place upon the leased premises a notice of reasonable dimensions and
reasonably placed so as not to interfere with the business of the Tenant stating
that the leased premises are for lease and further provided that the Tenant will
not remove such notice or permit the same to be removed.
5.19. Exclusion of Landlord's Liability - The Landlord shall not be liable for
---------------------------------------
any damage to any property at any time in such premises or building from water
works, steam, water, rain or snow which may leak into, issue or flow from any
part of the said building of which the premises hereby leased are a part, the
same or from any other place or quarter or for any damage caused by or
attributable to the condition or arrangement of any electric or other wiring.
5.20. Indemnification of Landlord - To indemnify each other from all
---------------------------------
liabilities, fines, suits, claims, demand and actions of any kind or nature for
which one party shall or may become liable or suffer by reason of breach,
violation or non-performance by the other party of any covenant or proviso
herein, or by reason of any injury or death occasioned to or suffered by any
person or persons or property through any act, neglect or default by one party
or any of its clerks, agents or employees and such indemnification in respect of
any such breach, violation or non-performance, damage to property, injury or
death occurring during the term of the lease shall, notwithstanding anything in
this lease to the contrary, survive any termination of this lease.
<PAGE>
10
5.21. Reentry by Landlord on Nonpayment or Nonperformance - Proviso for re-
---------------------------------------------------------
entry by Landlord on non-payment of rent or non-performance of covenants.
Notwithstanding the foregoing, the Landlord agrees not to re-enter or initiate
any remedy to terminate the Lease until:
(a) - in the case of failure by the Tenants to pay rent, the Landlord has
given written notice thereof to the Tenant and the Tenant has failed to pay
such rent within seven (7) days of receipt of such notice; and
(b) - in the case of failure by the Tenant to observe and perform any other
material covenant in the lease (apart from payment of rent), the Landlord
has given written notice thereof to the Tenant and the Tenant has failed to
rectify the same or commenced to diligently rectify the same within thirty
(30) days
5.22. Landlord's Right to Re-Let the Leased Premises - Subject to Article
----------------------------------------------------
5.21., the Landlord's covenants, seizure of forfeiture of the said term shall
become exercisable immediately upon such default being made. Provided further
that upon such re-entry by the Landlord under the terms of this paragraph or any
other provision or provisions of this lease, the Landlord may be entitled, at
its option, at any time and from time to time to re-let the leased premises or
any part thereof for the account of the Tenant or otherwise, and receive and
collect the rents therefor, applying the same first to the payments of such
expenses as the Landlord may have incurred ha recovering possession of the
leased premises, including the legal expenses and solicitor's fees, and for
putting the same into good order or condition or preparing or altering the same
for re-rental and all other expenses, commissions and charges paid, assumed or
incurred by the Landlord in or about re-letting the premises and then to the
fulfilment of the covenants of the Tenant hereunder. Any such re-letting herein
provided for may be for the remainder of the term as originally granted or for a
longer or shorter period. In any case and whether or not the leased, premises or
any part thereof be re-let, the Tenant shall pay to the Landlord the rental
hereby reserved and all other sums required to be paid by the Tenant up to the
time of the termination of this lease or of recovery of possession of the leased
premises by the Landlord, as the case may be, and thereafter the Tenant
covenants and agrees, if required by the Landlord, to pay to the Landlord until
the end of the term of this lease the equivalent of the amount of all the
rentals hereby reserved and all other sums required to be paid by the Tenant
hereunder, less the net avails of reletting, if any, and the same shall be due
and payable by the Tenant to the Landlord on the days herein provided for
rental, that is to say, upon each of the days herein provided for payment of
rental, the Tenant shall pay to the Landlord the amount of the deficiency then
existing.
5.23. Dispensing - Subject to the provisions of the Lease, the Tenant shall
----------------
not install or permit the installation or use of any machine dispensing goods
for sale in the leased premises or the building without the approval of the
Landlord or in contravention of any regulations fixed or to be fixed by the
Landlord.
5.24. Condoning - Any condoning, excusing or overlooking by the Landlord of
---------------
any default, breach or non-observance by the Tenant at any herein contained
shall not operate as a waiver of the Landlord's rights hereunder in respect of
any subsequent default, breach or non-observance, nor as to defeat or affect in
any way the rights of the Landlord herein in respect of any such subsequent
default, breach or non-observance.
6. LANDLORD'S COVENANTS
- -----------------------
THE LANDLORD COVENANTS WITH THE TENANT AS FOLLOWS:
6.1. Quiet Enjoyment - For quiet enjoyment so long as the Tenant pays the rent
--------------------
reserved under this lease and fulfils the obligations on its part to be
performed thereunder.
7. MUTUAL COVENANT'S
- --------------------
IT IS EXPRESSLY UNDERSTOOD AND AGREED BETWEEN THE LANDLORD AND TENANT AS
FOLLOWS:
7.1. No Exceptions of Distress - And the Tenant further covenants, promises
------------------------------
and agrees with the Landlord that notwithstanding any present or future Act of
the Legislature of the Province of Ontario or terms of loan agreement with the
Tenants bank, none of the goods or chattels of the Tenant on the said leased
premises at any time during the continuance of the Term hereof or any extension
thereof shall be exempt from levy by distress for rent in arrears by the Tenant
as provided for by such Act, and that upon any claims being made for such
exemption by the Tenant or on distress being made by the Landlord, this covenant
and agreement may be pleaded as an estoppel against the Tenant in any action
brought to test the right to be levying upon any such goods as are exempted in
the said Act, the Tenant waiving as it hereby does all and every benefit that
could or might have accrued to it under and by virtue of the said Act but for
this covenant, and the Landlord may seize upon and sell all the Tenant's goods
and chattels for payment of rent and costs as it might have done if such Act had
not been passed.
7.2. Liability for Damages to Person or Property - The Landlord shall not be
------------------------------------------------
responsible for any damage to the leased premises and any personality thereon or
therein, all of which shall be at the sole risk of the Tenant, and that the
Landlord shall not further in any event whatsoever be liable or responsible in
any way for any injury to any person or for any loss of or damage to any
property belonging to the Tenant or to employees, invitees or licensees of the
Tenant while such person or property is in or about the building of which the
leased premises forms a part or any truck ways, platforms or corridors in
connection therewith, including (without limiting the foregoing) any steam, gas
or electricity, water, rain or snow which may leak into, issue or flow from any
part of the said building or any adjacent or neighbouring lands or premises or
from the water, steam or drainage pipes or plumbing works of the same or leakage
or obstruction of soil pipes, conduits or from any other place or quarter or for
any loss or damage caused by or attributable to the condition or arrangement of
any electric or other wiring or for any other loss whatsoever of the Tenant with
respect to the leased premises and/or the business of the Tenant carried on
therein; provided that the same has not been caused by the Landlord's negligence
or wilful misconduct.
7.3. Right of Reentry and Bankruptcy of Tenant - That if and whenever the rent
----------------------------------------------
hereby reserved shall not be paid on the day appointed for the payment thereof;
or any part thereof shall remain unpaid for seven (7) days after any of the days
on which the rent ought to have been paid, although no formal demand shall have
been made therefor; or in case of non-payment of any other sums which the Tenant
under any provision hereof has agreed to pay; or any of the goods and chattels
of the Tenant on the premises shall be seized or taken in execution or
attachment; or in case the Tenant shall become insolvent or bankrupt or make an
assignment for the benefit of its creditors; or if a Receiver, Trustee or
similar officer shall be appointed to take charge of any part of the Tenant's
property; or give any Bill of Sale without complying with the Bulk Sales Act
(Ontario); or if an order shall be made for the winding up of the Tenant; or if
the leased premises shall, without the written consent of the Landlord, become
and remain vacant for a period of thirty (30) days; or if the leased premises
shall, without the written consent of the Landlord, be used by any other person
other than those entitled to use them under the terms of this lease; or if the
Tenant shall, without the written consent of the Landlord, abandon or attempt to
abandon the premises; or if the Tenant shall do any act within the said building
or elsewhere which shall discredit
<PAGE>
11
regulations herein contained, to be observed and performed and kept by the
Tenant, of which breach in the judgement of the Landlord in respect of the same,
shall be conclusive and binding on the Tenant; or if the Tenant attempts to move
its equipment or other belongings out of the building or buildings, the full
amount of the current month's rent and the next three months' rent shall
immediately become due and payable, and the Landlord may immediately distrain
for the same together with any arrears then unpaid, and the said term shall
immediately, at the option of the Landlord, become forfeited and determined, and
the Landlord may, without notice or any form of legal process, forthwith enter
upon and retake possession of the said lands and premises and remove the
Tenant's effects therefrom, any statute or law to the contrary notwithstanding.
7.4. Mechanics' Liens -Notice is hereby given that the Landlord shall not be
---------------------
liable for any labour or materials furnished or to be furnished to the Tenant
upon credit, and that no mechanics' liens or other liens for any such labour or
materials shall attach to or affect the reversionary or other estate or interest
of the Landlord in and to the leased premises. The Tenant shall promptly pay all
contractors and material men so as to minimize the possibility of a lien
attaching to the leased premises and should any such lien be made or filed, the
Tenant shall discharge the same within ten (10) days after written request by
the Landlord, and if the Tenant fails to do so the Landlord may pay into Court
the amount required to obtain such a discharge, in the name of the Tenant, and
the amount so paid, together with all disbursements and costs of such
proceedings on a solicitor-client basis shall be payable by the Tenant to the
Landlord and may be collected as rent in arrears, and to indemnify and save
harmless the Landlord from any claims, damages and costs whatsoever arising
therefrom.
7.5. Assignment of Lease as Collateral Security - The Landlord declares that
-----------------------------------------------
it may assign its rights under this lease to a lending institution as collateral
security for a loan to the Landlord and in the event that such an assignment is
given and executed by the Landlord and notification thereof is given to the
Tenant by or on behalf of the Landlord, it is expressly agreed between the
Landlord and Tenant that this lease shall not be cancelled or modified for any
reason whatsoever except as provided for, anticipated or permitted by the terms
of this lease or by law, without the consent in writing of such lending
institution.
7.6. Subordination and Attornment - The Tenant shall attorn to any mortgagee
---------------------------------
or chargee of the lands, Landlord, or any of them, and shall postpone and
subordinate the lease to any mortgagee or chargee of same, and shall furnish any
mortgagee or chargee with a certificate as to the status of the lease from time
to time or instrument of postponement or attornment, or other instruments which
may from time to time be requested, to give effect hereto, provided such
subordination and attornment shall not cancel or modify the terms of this Lease,
or any renewals of same, within fifteen (15) days after a written request by the
Landlord.
7.7. Landlord's Insurance - The Landlord will take out and keep in force
-------------------------
throughout the term all risks direct damage insurance on the building, but may
exclude any improvements upon which the Tenant is obliged to take out insurance,
with responsible insurance companies and in an amount such as would be carried
by a prudent owner, and the cost of the insurance will be included in the Common
Area costs. The Tenant shall be added to the policy as a named insured.
7.8. Sales, Conveyance and Assignment - Nothing in this Lease shall restrict
-------------------------------------
the right of Landlord to sell, convey, assign or otherwise deal with the
Building, subject only to the rights of Tenant under this Lease.
7.9. Effect of Sale, Conveyance or Assignment - A sale, conveyance or
---------------------------------------------
assignment of the Building shall operate to release Landlord from liability from
and after the effective date thereof upon all of the covenants, terms and
conditions of this Lease, express or implied, except as such may relate to the
period prior to such effective date, and Tenant shall thereafter look solely to
Landlord's successor in interest in and to this Lease. This Lease shall not be
affected by any such sale, conveyance or assignment, and Tenant shall attorn to
Landlord's successor in interest thereunder.
7.10. Attornment - Subject to Article 7.11., if the interest of Landlord is
----------------
transferred to any person (hereunder called "Purchaser")by reason of foreclosure
or other proceedings for enforcement of any such mortgage or deed of trust, or
by delivery of a deed in lieu of such foreclosure or other proceedings, Tenant
shall immediately and automatically attorn to Purchaser.
7.11. Nondisturbance - No attornment by Tenant under Article 7.10 shall be
--------------------
effective unless, before the date of transfer to Purchaser, Purchaser delivers
to Tenant a written undertaking, binding upon Purchaser and enforceable by and
for the benefit of Tenant under applicable law, that this Lease and Tenant's
rights hereunder shall continue undisturbed while Tenant is not in default
despite such enforcement proceedings and transfer.
7.12. Damage or Destruction - In the event that the leased premises or any
---------------------------
part thereof are totally or partially damaged or destroyed by fire or by other
perils against which the leased premises are insured, this lease shall continue
and remain in full force and effect throughout the remainder of the term,
subject to the following:
7.12.1. - That the Landlord notifies the Tenant within thirty (30) days of
the occurrence of the damage or destruction that it will repair or rebuild
the same, provided that if the Landlord notifies the Tenant within thirty
(30) days of the occurrence of the damage or this lease and any renewal
thereof shall be terminated from the happening of such damage or
destruction and the Tenant shall immediately surrender the said leased
premises and all interest therein to the Landlord, and the Landlord may re-
enter or repossess the leased premises discharged by this lease, and may
remove all parties therefrom with a reasonable time thereafter; and all
payments required to be made under the terms of this lease shall be
apportioned and in making such apportionment the Tenant shall pay rent only
to the time of the happening of such damage, but the Tenant shall have a
reasonable time after notification to remove its property from the leased
premises, provided that all rent due or to become due hereunder is fully
paid.
7.12.2. - That if the Landlord notifies the Tenant within the thirty (30)
days of the occurrence of the damage or destruction that it will repair or
rebuild the same, the Landlord shall commence repair or reconstruction of
the damage or destruction and complete the said repair or reconstruction
with reasonable promptness and diligence.
7.12.3. - That if the Landlord notifies the Tenant within the thirty (30)
days of the occurrence of the damage or destruction that it will repair and
rebuild the same, and that in the event of partial damage, the rent
reserved shall abate in part only, in the proportion that the part of the
area of the leased premises rendered unfit for occupancy bears to the whole
of the area of the leased premises, and in the event that the leased
premises are so destroyed as to be wholly unfit for occupancy, then the
rent shall not run or accrue after the injury and the rent shall recommence
immediately after the said repair shall be completed.
7.13. Rules and Regulations
---------------------------
7.13.1. - Purpose of Rules and Regulations - The Rules and Regulations in
--------------------------------
SCHEDULE "C" have been adopted by Landlord for the safety, benefit and
convenience of all tenants and other persons in the Building.
<PAGE>
12
7.13.2. - Observance of Rules and Regulations - Tenant shall at all times
-----------------------------------
comply with, and shall cause its employees, agents, licensees and
invitees to comply with, the Rules and Regulations from time to time in
effect.
7.13.3. - Modification of Rules and Regulations - Landlord may from time
-------------------------------------
to time, for the purposes set out in paragraph 1 above,
A. - shall not be repugnant to any other provision of this Lease,
B. - shall be reasonable and have general application to all tenants
in the Building, and
C. - shall be effective only upon delivery of a copy thereof to Tenant
at the Premises.
7.13.4. - Non-compliance of Rules and Regulations - Landlord shall use
---------------------------------------
its best efforts to secure compliance by all Tenants and other persons
with the Rules and Regulations from time to time in effect, but shall not
be responsible to Tenant for failure of any person to comply with such
Rules and Regulations.
7.14. Notices - Except as otherwise provided herein any notice which either
-------------
party may desire to give to the other shall be sufficiently given to the
Landlord, by personal delivery or by prepaid post, at:
180 Columbia Street West,
Waterloo, Ontario,
N2L 3L3
and to the Tenant at:
180 Columbia Sweet West,
Waterloo, Ontario,
N2L 3L3
7.15. Guarantor's Clause - This article is intentionally left blank.
------------------------
7.16. Late Payment Charge on Amounts in Default - the Tenant shall pay as
-----------------------------------------------
additional rent a late payment charge on any overdue charges or amounts owing as
provided by the terms of this lease at the rate of one and one half per centum
(1.5 %) of the amount in default, calculated on the third day of every month.
7.17. Payments Deemed Rent - That in the event of the Tenant failing to pay
--------------------------
any taxes, rates, insurance premiums, operating costs or other charges which it
has herein covenanted to pay, the Landlord may pay the same and shall be
entitled to charge the sums so paid to the Tenant, who shall pay them forthwith
on demand; and the Landlord, in addition to any other rights, shall have the
same remedies and may take the same steps for the recovery of all such sums as
it might have and take for the recovery of rent in arrears under the terms of
this lease.
7.18. Overholding - Provided that should the Tenant hold over or continue to
-----------------
occupy the premises with the consent of the Landlord after the expiration of
this lease without any further written agreement and the Landlord thereafter
accepts rent for the premises, the Tenant shall hold the premises as a monthly
tenant at a monthly rent equal to the rental payable during the last month of
the primary or renewal term plus twenty percent.
7.19. Registration - This lease shall not be registered on title, but only as
------------------
a memorial or notice thereof approved as to form by the Landlord.
7.20. Compliance with the Planning Act - This lease is subject to the
--------------------------------------
condition that it is to be effective only if the provisions of Section 50 of the
Planning Act, R.S.O. 1990, and amendments thereto, are complied with.
7.21. Waiver of Breach of Covenant - A waiver of the breach of any covenant,
----------------------------------
condition or proviso shall not be taken to be a waiver of any further breach of
the same covenant, condition or proviso.
7.22. Obligations as Covenants - Each obligation of the Landlord or the Tenant
------------------------------
expressed in this lease, even though not expressed as a covenant, is considered
to be a covenant for all purposes.
7.23. Entire Agreement - If there are any terms and conditions which at the
----------------------
date of execution of this Lease are additional or supplemental to those set out
on the preceding pages and in Schedules A, B1, B2, B3, B4, C and D, such terms
and conditions are contained in Schedule E attached hereto as part of this
Lease. This Lease contains the entire agreement between the parties hereto with
respect to the subject matter of this Lease. Tenant acknowledges and agrees that
it has not relied, upon any statement, representation, agreement or warranty. If
this Lease is made pursuant to an Offer to Lease, then the term "Lease" in the
Article 1.3. shall be deemed to include such Offer to Lease. If by the inclusion
of the Offer to Lease, a disparity should arise, then the Lease shall take
precedence over the Offer to Lease.
7.24. Amendment of Modification - Unless otherwise specifically provided in
-------------------------------
this Lease, no amendment, modification, or supplement to this Lease shall be
valid or binding unless set out in writing and executed by the parties hereto in
the same manner as the execution of this Lease.
7.25. Construed Covenant and Severability - All of the provisions of this
-----------------------------------------
Lease are to be construed as covenants and agreements as though the words
importing such covenants and agreements were used in each separate Article
hereof. Should any provision of this Lease be or become invalid, void, illegal
or not enforceable, it shall be considered separate and severable from the Lease
and the remaining provisions shall remain in force and be binding upon the
parties hereto as though such provision had not been included.
7.26. Headings and Captions - The captions appearing at the headings of the
---------------------------
sections of this lease have been inserted as a matter of convenience and for
reference only and in no way defines, limits or enlarges the scope or meaning of
this lease or any of its provisions.
7.27. Number and Gender - The necessary grammatical changes required to make
-----------------------
the provisions of this lease apply in the plural sense where the Tenant
comprises more than one entity and two corporations, associations, partners or
individuals, males or females, in all cases will be assumed as though in each
case fully expressed.
7.28. Governing Law - The lease will be interpreted and governed by the
-------------------
laws of the Province of Ontario.
<PAGE>
13
7.29. Successors and Assigns - This indenture and everything herein contained
----------------------------
shall extend to and bind and enure to the benefit of the respective heirs,
executors, administrators, successors and assigns (as the case may be) of each
and every of the parties hereto subject to the consent of the Landlord being
obtained, as hereinbefore provided, to any assignment or sublease by the Tenant,
and, where there is more than one Landlord or Tenant or where the Landlord or
Tenant is a male, female or a corporation, the provisions herein shall be read
with all grammatical changes thereby rendered necessary. All covenants being
contained shall be deemed joint and several and all rights and powers reserved
to the Landlord may be exercised by the Landlord or its agents or
representatives.
7.30. Relationship of Parties - Nothing contained in the Lease shall create
-----------------------------
any relationship between the parties hereto other than that of Landlord and
Tenant, and it is acknowledged and agreed that Landlord does not in any way or
for any purpose become a partner of Tenant in the conduct of its business, or a
joint venture or a member of a joint or common enterprise with Tenant.
7.31. Consent Not Unreasonably Withheld - Except as otherwise specifically
---------------------------------------
provided, whenever consent or approval of Landlord or Tenant is required under
the terms of this Lease, such consent or approval shall not be unreasonably
withheld or delayed. Tenant's sole remedy if Landlord unreasonably withholds or
delays consent or approval shall be an action for specific performance, and
Landlord shall not be liable for damages. If either party withholds any consent
or approval, such party shall on written request deliver to the other party a
written statement giving the reasons therefor.
7.32. Name of Building - Landlord shall have the right, after thirty (30) days
----------------------
notice to Tenant to change the name, number or designation of the Building,
during the Term without liability to the Tenant.
7.33. No Implied Surrender or Waiver - No provisions of the Lease shall be
------------------------------------
deemed to have been waived by Landlord unless such waiver is in writing signed
by Landlord. Landlord's waiver of a breach of any term or condition of this
Lease shall not prevent a subsequent act, which would have originally
constituted a breach, from having all the force and of a breach by Tenant of any
term or condition of this Lease shall not be deemed a waiver of such breach.
Landlord's failure to enforce against Tenant or any other tenant in the Building
any of the Rules and Regulations made under Article 7.13. shall not be deemed a
waiver of such Rules and Regulations. No act or thing done by Landlord, its
agents or employees during the Term shall be deemed an acceptance of a surrender
of the Premises, and no agreement to accept a surrender of the Premises shall be
valid, unless in writing signed by Landlord. The delivery of keys to any of
Landlord's agents or employees shall not operate as a termination of this Lease
or a surrender of the Premises. No payment by Tenant, or receipt by Landlord, of
a lesser amount than the Rent due hereunder shall be deemed to be other than on
account of the earliest rent to fall due of any unpaid instalment of rent, nor
shall any endorsement or statement on any cheque or any letter accompanying any
cheque, or payment as Rent, be deemed an accord and satisfaction, and Landlord
may accept such cheque or payment without prejudice to Landlord's right to
recover the balance of such Rent or pursue any other remedy available to
Landlord.
7.34. Area Determination - If any calculation or determination by the Landlord
------------------------
of the common area or rentable area of any premises is disputed or called into
question, it shall be calculated or determined by the Landlord's architect or
quantity surveyor from time to time appointed for the purpose, whose certificate
shall be conclusive,
<PAGE>
14
IN WITNESS WHEREOF the Landlord and the Tenant have hereunto affixed their hands
and seals.
SIGNED, SEALED AND DELIVERED
- ----------------------------
Dated at Waterloo this 1st Day of May ,1999.
-------- --- ---
CACHEFLOW CANADA INC.
/s/ Per: /s/ SEAL
------------------------------ ----------------------------------------
(Witness) (Tenant)
I Have Authority to bind the Corporation
Dated at Waterloo this 1st Day of May ,1999.
-------- --- -----
WIEBE PROPERTY CORPORATION LTD.
Per: /s/ SEAL
---------------------------------------
Per: /s/ SEAL
---------------------------------------
<PAGE>
15
SCHEDULE "C"
------------
RULES AND REGULATIONS
---------------------
The Tenant covenants and agrees to comply with the following rules and
regulations:
1. SECURITY: Landlord may from time to time adopt appropriate systems and
procedures for the security or safety of the Building, any persons occupying,
using or entering the same, or any equipment, finishings or contents thereof,
and Tenant shall comply with Landlord's reasonable requirements relative
thereto.
2. LOCKS: The Tenant shall not place or cause to be placed any additional
locks upon any doors of the Leased Premises without the approval of the Landlord
and subject to any conditions imposed by the Landlord. The Landlord may from
time to time install and change locking mechanisms on entrances to the Building,
common areas thereof, and the Premises, and (unless 24 hour security is provided
by the Building) shall provide to Tenant a reasonable number of keys and
replacements thereof to meet the bona fide requirements of Tenant. In these
rules "keys" include any device serving the same purpose.
If with Landlord's consent, Tenant installs locks incompatible with the
Building master locking system:
(a) Landlord, without abatement of Rent, shall be relieved of any
obligation under the Lease to provide any service to the affected areas
which require access thereto,
(b) Tenant shall indemnify Landlord against any expense as a result of
forced entry thereto which may be required in an emergency, and
(c) Tenant shall at the end of the Term and at Landlord's request remove
such lock(s) at Tenant's expense.
3. RETURN OF KEYS: At the end of the Term, Tenant shall promptly return to
Landlord all keys for the building and Premises which are in possession of
Tenant.
4. NUISANCE: The Tenant shall not perform any acts or carry on any practice
which may damage the Common Areas and Facilities or be a nuisance to any other
tenant in the Complex.
5. WINDOWS: Tenant shall observe Landlord's roles with respect to maintaining
window coverings at all windows in the Premises so that the Building presents a
uniform exterior appearance, and shall not install any window shades, screens,
drapes, covers or other materials on or at any window in the Premises without
Landlord's prior written consent.
6. SOLICITATIONS: Landlord reserves the right to restrict or prohibit
canvassing, soliciting or peddling in the Building.
7. OBSTRUCTIONS: Tenant shall not obstruct or place anything in or on the
sidewalks or driveways outside the Building or in the lobbies, corridors,
stairwells or other common areas of the building, or use such locations for any
purpose except access to and exit from the Premises without Landlord's prior
written consent. Landlord may remove at Tenant's expense any such obstruction or
thing (unauthorized by Landlord) without written notice or obligation to Tenant.
8. EMPLOYEES, AGENTS, AND INVITES: In these Rules and Regulations, Tenant
includes the employees, agents, invitees and licensees of Tenant and others
permitted by Tenant to use or occupy the Premises.
9. GARBAGE: When required by a governmental authority having jurisdiction,
the Tenant will provide within the Leased Premises facilities or accommodation
for garbage and waste and its disposal and
10. HAND TRUCKS: Any hand trucks, carryalls, or similar appliances used in
any building in the Complex shall be equipped with rubber tires, side guards and
such other safeguards as the Landlord shall require.
11. ANIMALS: No animals or birds shall be brought into the Leased Premises
12. In regard to the use and occupancy of the Leased Premises and Common
Areas and Facilities, the Tenant shall:
12.1. The Tenant shall not erect any partitions, alter or make any
changes in respect of the leased premises without the prior written consent of
the Landlord. The colour of all interior painting shall be first approved in
writing by the Landlord;
12.2. keep any garbage, trash, rubbish or refuse in containers as
approved by the Landlord within the interior of the Leased Premises until
removed as herein provided;
12.3. keep all mechanical apparatus flee of vibration and noise which may
be transmitted beyond the Lease Premises;
12.4. comply with all laws, bylaws, rules and regulations of governmental
authorities, now or hereafter in effect;
12.5. ensure that all loading and unloading of goods shall be done only
at such times, in the areas, and through the entrances, designated for such
purposes by the Landlord. The delivery or shipping of merchandise, supplies and
fixtures to and from the Leased Premises shall be subject to such controls as in
the judgement of the Landlord are necessary for the proper operation of the
Leased Premises and/or the Complex;
12.6. the Tenant shall within five days, upon written notice from the
Landlord, furnish the Landlord with the Provincial license number of any
vehicles owned or used by him or his employees. The Landlord will designate an
employee area that will be used by all Tenants and their employees and agents
and the Tenant hereby acknowledges that the employee parking area will be
strictly controlled by the Landlord.
<PAGE>
16
13. In regard to the use and occupancy of the Leased Premises and Common
areas and Facilities, the Tenant shall not:
13.1. place or maintain any merchandise or other articles in any
vestibule or entry of the Leased Premises, on the walkways adjacent thereto or
elsewhere on the exterior of the Leased Premises or Common Areas;
13.2. use or permit the use of any objectionable advertising medium such
as, without limitation, loudspeakers, phonographs, public address systems, sound
amplifiers, radio, broadcast or television apparatus within the Complex which is
in any manner audible or visible outside the Leased Premises;
13.2. permit undue accumulations of garbage, trash, rubbish or other
refuse within or without the Leased Premises. The Tenant further covenants that
the Tenant will not upon the termination of the said term leave upon the said
premises any rubbish or waste material and will leave the said premises in a
clean and tidy condition;
13.4. cause, suffer or permit odours to emanate or be dispelled from the
Leased Premises and upon direction of the Landlord shall forthwith, at the
Tenant's expense, remedy any situation resulting in a breach of this provision;
13.5. solicit business in the Common Areas and Facilities;
13.6. distribute handbills or other advertising matter to, in or upon any
automobiles parked in the Common Areas and Facilities;
13.7. permit the parking of delivery vehicles so as to interfere with the
use of any driveway, walkway, parking areas or other Common Areas and Facilities
of the Complex;
13.8. mount or place an antenna of any nature on the exterior of the
Leased Premises;
13.9. use the plumbing facilities for any other purposes than that for
which they are constructed, and no foreign substance of any kind shall be put
therein, and the expense of any breakage, stoppage or damage resulting form a
violation of the provision shall be borne by the Tenant;
13.10. use any part of the Leased Premises for lodging, sleeping or any
illegal purposes;
13.11. bring in or take out, position, construct, install or move any
safe or other heavy equipment or furniture without first obtaining the consent
in writing of the Landlord. In giving such consent, the Landlord shall have the
right in its sole discretion, to prescribe the weight permitted and the position
thereof, and the use and design of planks, skids or platforms to distribute the
weight thereof. All damage done to the building by moving or using any such
safe, heavy equipment or furniture shall be repaired at the expense of the
Tenant. The moving of all equipment and furniture shall occur only during those
hours when the Complex shall not be open for business or any other time
consented to by the Landlord and the persons employed to move the same in and
out of the Leased Premises shall be acceptable to the Landlord.
<PAGE>
17
SCHEDULE "E"
------------
SUPPLEMENTAL TERMS AND CONDITIONS
---------------------------------
Rental Rate: The Base Rent rate for the period beginning June 1st, 2004 shall be
the sum of Seventy Nine Thousand, Ten and 00/100 DOLLARS ($79,010.00) (herein
called the "Basic Rent") per annum, to be paid in advance in equal monthly
instalments of Six Thousand Five Hundred & Eighty Four and 02/100 DOLLARS
($6,584.02) on the first day of each month during the term, and the last payment
to become due and be paid in advance one month before the expiration of this
lease.
Signs: Notwithstanding Article 5.13. "Signs and Directory", the Tenant shall
have the right to install a sign on the outside of the building subject to the
usual approvals contained in Article 5.13..
<PAGE>
Exhibit 16.1
[Letterhead of Deloitte & Touche]
September 28, 1999
Securities and Exchange Commission
Mail Stop 11-3
450 5th Street NW
Washington, D.C 20549
Ladies and Gentlemen:
We have read and agree with the comments concerning the termination of our
relationship with CacheFlow Inc., which appear under the "Change in Independent
Accountants" heading of this Registration Statement on Form S-1 of CacheFlow
Inc. dated on or about September 28, 1999.
Yours truly,
/s/ DELOITTE & TOUCHE LLP
<PAGE>
EXHIBIT 16.2
September 27, 1999
[LETTERHEAD OF PRICEWATERHOUSECOOPERS]
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously the principal accountants for CacheFlow Inc. and, under the
date of July 22, 1998, we reported on the financial statements of CacheFlow Inc.
as of April 30, 1998 and for the year then ended. On August 27, 1999, our
appointment as principal accountants was terminated. We have read the statements
described herein under the caption "Change of Independent Accountants" and we
agree with such statements, except that we are not in a position to agree or
disagree with CacheFlow's statements that the decision to change auditors was
approved by the Board of Directors of CacheFlow Inc. on August 27, 1999 or that
prior to August 27, 1999, the Company had not consulted with Ernst & Young LLP
on items that involved the Company's accounting principles or the form of the
audit opinion to be issued on the Company's financial statements.
Very truly yours,
/s/ PRICEWATERHOUSECOOPERS LLP
<PAGE>
EXHIBIT 21.1
List of Subsidiaries of CacheFlow, Inc.
--------------------------------------
CacheFlow Canada Inc. Canada
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts" and
to the use of our report dated September 24, 1999 in the Registration
Statement (Form S-1) and related prospectus of CacheFlow Inc. for the
registration of shares of its common stock.
Our audits also included the consolidated financial statement schedule of
CacheFlow Inc. listed in Schedule II. The schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the consolidated financial statement schedule
referenced to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Walnut Creek, California
September 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> OTHER YEAR YEAR 3-MOS
<FISCAL-YEAR-END> APR-30-1997 APR-30-1998 APR-30-1999 APR-30-2000
<PERIOD-START> MAR-16-1996 MAY-01-1997 MAY-01-1998 MAY-01-1999
<PERIOD-END> APR-30-1997 APR-30-1998 APR-30-1999 JUL-31-1999
<CASH> 195 7,349 2,291 17,825
<SECURITIES> 3,410 0 0 0
<RECEIVABLES> 0 0 1,653 2,257
<ALLOWANCES> 0 0 (300) (300)
<INVENTORY> 38 407 932 1,721
<CURRENT-ASSETS> 3,656 7,809 4,636 21,655
<PP&E> 123 746 1,716 2,188
<DEPRECIATION> 13 104 (365) (482)
<TOTAL-ASSETS> 3,769 8,461 6,716 24,019
<CURRENT-LIABILITIES> 67 854 3,849 4,775
<BONDS> 0 0 0 0
0 0 0 0
0 1 1 1
<COMMON> 0 1 1 1
<OTHER-SE> 3,702 7,598 (346) 16,031
<TOTAL-LIABILITY-AND-EQUITY> 3,769 8,461 6,716 24,019
<SALES> 0 0 7,036 3,612
<TOTAL-REVENUES> 0 0 7,036 3,612
<CGS> 0 0 3,297 1,380
<TOTAL-COSTS> 1,469 8,461 12,968 5,761
<OTHER-EXPENSES> 4 59 3,776 2,482
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> (56) (233) 197 36
<INCOME-PRETAX> (1,443) (5,507) (13,202) (6,047)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (1,443) (5,507) (13,202) (6,047)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (1,443) (5,507) (13,202) (6,047)
<EPS-BASIC> (1.54) (1.88) (3.06) (0.97)
<EPS-DILUTED> 0 0 (0.89) (0.30)
</TABLE>
