<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 7, 1999
REGISTRATION NO. 333-88687
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
VA LINUX SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA
(PRIOR TO REINCORPORATION)
DELAWARE
(AFTER REINCORPORATION) 3571 77-0399299
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1382 BORDEAUX DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 542-8600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
LARRY M. AUGUSTIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1382 BORDEAUX DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 542-8600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JUDITH M. O'BRIEN, ESQ. WILLIAM D. SHERMAN, ESQ.
BRUCE M. MCNAMARA, ESQ. STEPHEN J. SCHRADER, ESQ.
BRET M. DIMARCO, ESQ. JUSTIN L. BASTIAN, ESQ.
WILSON SONSINI GOODRICH & ROSATI ROCHELLE A. KRAUSE, ESQ.
PROFESSIONAL CORPORATION MORRISON & FOERSTER LLP
650 PAGE MILL ROAD 755 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304 PALO ALTO, CALIFORNIA 94304
(650) 493-9300 (650) 813-5600
</TABLE>
------------------------
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, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value...... 5,060,000 shares(1) $23.00 $116,380,000 $31,705
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 660,000 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Registrant previously paid a registration fee of $19,460. Estimated pursuant
to Rule 457(a) of the Securities Act of 1933 solely for the purpose of
computing the amount of the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
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 IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 7, 1999
4,400,000 Shares
[VA LINUX SYSTEMS LOGO]
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $21.00 and $23.00 per share. We have made application to list our common
stock on The Nasdaq Stock Market's National Market under the symbol "LNUX."
The underwriters have an option to purchase a maximum of 660,000 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS VA LINUX SYSTEMS
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total......................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
HAMBRECHT & QUIST
LEHMAN BROTHERS
The date of this prospectus is , 1999.
<PAGE> 3
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 7
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 20
USE OF PROCEEDS....................... 20
DIVIDEND POLICY....................... 20
CAPITALIZATION........................ 21
DILUTION.............................. 22
SELECTED FINANCIAL DATA............... 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 25
BUSINESS.............................. 36
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
MANAGEMENT............................ 49
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................ 59
PRINCIPAL STOCKHOLDERS................ 61
DESCRIPTION OF CAPITAL STOCK.......... 63
SHARES ELIGIBLE FOR FUTURE SALE....... 65
UNDERWRITING.......................... 67
NOTICE TO CANADIAN RESIDENTS.......... 69
LEGAL MATTERS......................... 70
EXPERTS............................... 70
ADDITIONAL INFORMATION................ 70
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the common stock being sold in the offering
and our entire prospectus, including the financial statements and related notes
included elsewhere in this prospectus, before making an investment decision.
VA LINUX SYSTEMS, INC.
We are a leading provider of integrated Linux-based solutions. We offer a
single point of contact for all Linux systems, software and service needs. Since
our inception, we have exclusively focused on developing and selling Linux-based
solutions and have over five years of experience serving commercial Linux-based
customers. This experience, combined with our broad base of technical expertise
in Linux systems and software and our close ties to the open source development
community, enables us to develop Linux-based solutions that are generally more
reliable, scalable and cost effective than proprietary software solutions.
Our solutions offer the following benefits:
- Systems -- We offer a broad line of Linux systems built to customer
specifications and optimized for use in a variety of computing
environments. In particular, we have devoted significant engineering
efforts to design servers for Internet-related applications.
- Software -- We develop and pre-install on our systems customized versions
of the Linux operating system that enhance the performance and
reliability of our solutions for each customer's needs.
- Services -- We provide a full range of technical and professional
services with the sales of our systems. Professional services can consist
of planning, implementation, installation and integration, security
audits and performance analysis, while technical and support services can
include 24 hour a day, seven day a week, toll-free telephone support and
onsite services by Linux professionals.
- Internet Operations -- We communicate directly with our customers and the
open source community through our web sites, including our flagship web
site linux.com, which contains news, links and articles of interest to
open source community members. In addition, in October 1999,
substantially all sales of our systems were processed through our
valinux.com web site.
A majority of our Linux-based solutions are sold to customers implementing
or expanding their Internet infrastructures. Linux has emerged as one of the
most popular operating systems used by companies for this purpose. According to
an April 1999 survey conducted by the Internet Operating System Counter, Linux
ran on approximately 31% of the Internet servers polled, more than any other
single operating system. One of the factors contributing to the popularity of
Linux is that it is an open source operating system. This means that the source
code for Linux is available to the user via download from the Internet free of
charge. Because the Linux source code is widely available, we are able to
integrate the development capability of thousands of open source community
developers on the Internet with our own expertise to offer a broad range of
customized Linux-based solutions.
We have demonstrated technical leadership by being the first company to
introduce several Linux features for Intel-based systems, in areas such as
memory, device support and data storage. Our largest customers include Akamai
Technologies, Inc., eToys Inc., StarMedia Network, Inc. and 24/7 Media, Inc.
Sales to these four customers accounted for 14.5% of our total net revenues in
fiscal 1999 and 23.3% in the first quarter of fiscal 2000.
Our strategy is to enhance our position as a leading developer and provider
of advanced Linux and related open source solutions by:
- continuing to demonstrate technical leadership in Linux and related open
source technologies which run on the Linux operating system and provide
additional business applications for our customers. These software
applications include the Apache web server (a popular application running
on the Linux operating system which allows for the service of web pages),
the Samba file server (a
3
<PAGE> 5
popular application running on the Linux operating system which provides
file services) and the Sendmail electronic mail server (a popular
application running on the Linux operating system which allows the
exchange of e-mail messages);
- utilizing direct sales and distribution of our systems over the Internet
to reduce the cost of delivering our solutions by improving the
efficiency of order processing;
- continuing to leverage the Internet and our linux.com Internet site to
communicate with our customers and the Linux community in a cost
effective way;
- accelerating development of the open source market and community;
- continuing to apply open source practices, such as encouraging community
involvement, within our business and products; and
- increasing our brand awareness.
Cultivating close ties with the open source community has enabled us to
recruit members of this community and thereby assemble a team of software
engineers and community professionals who have significant expertise relating to
the Linux operating system and applications who collaborate on open source
development projects. We believe that involvement in these various development
projects and the close ties fostered by participation in these projects allows
us to remain abreast of technical advances, react more quickly to new
developments in Linux, and hire knowledgable software engineers to develop
products responsive to the evolving Linux market. As a Linux vendor, it is
imperative that we maintain close relationships with the open source developer
community and offer a forum where our customers and open source community
members can interact. We are firmly committed to supporting the continued growth
and success of the open source model and developer community.
We were incorporated in January 1995 in California. We intend to
reincorporate in Delaware prior to the completion of this offering. Our
principal executive offices are located at 1382 Bordeaux Drive, Sunnyvale,
California 94089, and our telephone number is (408) 542-8600. Our corporate web
site is located at valinux.com. Information contained on this web site, our
other web sites or any other web site referenced elsewhere in this prospectus
does not constitute a part of this prospectus.
------------------
CLUSTER CITY, FULLON, GOFULLON, LINUX HARDWARE SOLUTIONS, the Linux
Hardware Solutions logo, SERVICE TLC, STARTX, SUPPORT TLC, TOTAL LINUX COVERAGE,
VA TLC, VA LINUX SYSTEMS, and our logo are trademarks, trade names or service
marks that we use. We have applied for federal trademark registration only for
FULLON, GOFULLON, SERVICE TLC, STARTX, SUPPORT TLC, LINUX HARDWARE SOLUTIONS and
VA TLC. This prospectus contains other trademarks and trade names of other
companies.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.................................... 4,400,000 shares
Common stock to be outstanding after this offering...... 39,701,586 shares
Use of proceeds......................................... For general corporate purposes and working
capital, including expected operating
expenses. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.................. LNUX
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 9,
1995 QUARTER ENDED
(INCEPTION) YEAR ENDED JULY 31, -------------------
TO ----------------------------------------------------- OCT. 31, OCT. 29,
JULY 31, 1995 1996 1997 1998 1999 1998 1999
------------- ----------- ----------- ----------- ----------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues............ $ 1,135 $ 2,257 $ 2,743 $ 5,556 $ 17,710 $2,435 $ 14,848
Cost of revenues...... 747 1,991 2,562 4,494 17,766 2,053 12,887
------- ----------- ----------- ----------- ----------- ------ --------
Gross margin.......... 388 266 181 1,062 (56) 382 1,961
Income (loss) from
operations.......... 111 (169) (462) 73 (14,531) (97) (10,228)
Net income (loss)..... $ 111 $ (170) $ (474) $ 84 $ (14,512) $ (97) $(10,055)
======= =========== =========== =========== =========== ====== ========
Dividend related to
convertible
preferred stock..... $ -- $ -- $ -- $ -- $ -- $ -- $ (4,900)
======= =========== =========== =========== =========== ====== ========
Net income (loss)
attributable to
common
stockholders........ $ 111 $ (170) $ (474) $ 84 $ (14,512) $ (97) $(14,955)
======= =========== =========== =========== =========== ====== ========
Basic net income
(loss) per share.... $ 0.01 $ (0.01) $ (0.05) $ 0.02 $ (2.62) $(0.02) $ (2.00)
======= =========== =========== =========== =========== ====== ========
Diluted net income
(loss) per share.... $ 0.01 $ (0.01) $ (0.05) $ 0.01 $ (2.62) $(0.02) $ (2.00)
======= =========== =========== =========== =========== ====== ========
Shares used in
computing basic net
income (loss) per
share............... 15,000 15,000 9,467 5,100 5,530 5,100 7,483
======= =========== =========== =========== =========== ====== ========
Shares used in
computing diluted
net income (loss)
per share........... 15,000 15,000 9,467 12,249 5,530 5,100 7,483
======= =========== =========== =========== =========== ====== ========
Pro forma basic net
loss per share
(unaudited)......... $ (1.01) $ (0.56)
=========== ========
Shares used in
computing pro forma
basic net loss per
share (unaudited)... 14,317 26,646
=========== ========
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 29, 1999
----------------------
ACTUAL AS ADJUSTED
------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $14,690 $103,314
Working capital........................................... 13,877 102,501
Total assets.............................................. 27,392 116,016
Long-term obligations, less current portion............... 673 673
Total stockholders' equity................................ 16,201 104,825
</TABLE>
5
<PAGE> 7
The total number of outstanding shares of our common stock above are based on:
- 15,380,264 shares of our common stock outstanding as of October 29, 1999;
and
- automatic conversion of all outstanding shares of preferred stock upon
completion of this offering into 19,921,322 additional shares of common
stock.
See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
The as adjusted amounts above give effect to the sale of the 4,400,000
shares of common stock in this offering at an assumed public offering price of
$22.00 per share (less estimated underwriting discounts and commissions and
estimated offering expenses).
The above information excludes:
- 8,501,226 shares of common stock issuable upon exercise of options
outstanding as of October 29, 1999 at a weighted average exercise price
of $1.87 per share;
- 8,796,986 shares of common stock available for issuance at October 29,
1999 under our 1998 Stock Plan; and
- 1,500,000 additional shares of common stock available for issuance under
our 1999 Employee Stock Purchase Plan and 1999 Director Option Plan
immediately following this offering.
Unless otherwise specifically stated, information throughout this
prospectus:
- reflects the conversion of all outstanding shares of preferred stock into
19,921,322 shares of common stock automatically upon the closing of this
offering;
- assumes no exercise of the underwriters' over-allotment option;
- reflects the various stock splits since inception through the date of
this prospectus (all share and per share amounts have been retroactively
restated to reflect the stock splits), see Notes 2 and 10 of Notes to
Financial Statements regarding these stock splits; and
- assumes our reincorporation in Delaware before the effectiveness of this
offering and the filing of our amended and restated certificate of
incorporation upon completion of this offering.
6
<PAGE> 8
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and all of the information
contained in this prospectus before deciding whether to purchase our common
stock.
RISKS RELATED TO OUR FINANCIAL RESULTS
OUR LIMITED OPERATING HISTORY AND THE FACT THAT WE OPERATE IN A NEW INDUSTRY
MAKES EVALUATING OUR BUSINESS PROSPECTS AND RESULTS OF OPERATIONS DIFFICULT.
Our company was founded in January 1995. During the second quarter of
fiscal 1999, we began to expand our operations significantly. For example, we
grew from 15 employees at July 31, 1998 to 179 employees at October 29, 1999,
and only two members of our current management team were employed by us at the
end of fiscal 1998. Furthermore, we participate in the Linux industry, which has
only recently exhibited significant growth. You should consider the risks and
difficulties we may encounter as an early stage company in the new and rapidly
evolving Linux products and services market. Some of the factors that may affect
us include:
- the evolving and unpredictable nature of our business given that we
depend on open source software;
- the uncertain rate of growth in usage and acceptance of the Linux
operating system and related open source software;
- the uncertain demand for our products;
- the need to expand our sales, professional services and customer support
organizations;
- the need to expand our Internet operations;
- increased competition in the Linux industry as well as the competition we
face from the manufacturers of computer systems that run proprietary
operating systems like Microsoft Windows; and
- our ability to attract and retain qualified management personnel.
If we fail to address any of these risks or difficulties adequately, our
business strategy may not be successful and our revenues may not grow and may
decline.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE.
We incurred losses of $14.5 million in fiscal 1999 primarily due to
expansion of our operations, and we had an accumulated deficit of $29.9 million
as of October 29, 1999. We expect to continue to incur significant product
development, sales and marketing and administrative expenses, particularly as a
result of expanding our direct sales force. In addition, we are investing
considerable resources in our professional services organization and our
Internet operations. We do not expect to generate sufficient revenues to achieve
profitability and, therefore, we expect to continue to incur net losses for at
least the foreseeable future. If we do achieve profitability, we may not be able
to sustain it.
AS OUR BUSINESS MATURES, WE DO NOT EXPECT OUR NET REVENUES TO CONTINUE TO GROW
AT THE SAME RATE AS THEY HAVE IN THE PAST.
Although our net revenues have grown substantially in recent quarters, we
do not expect our net revenues to grow at such a rapid rate in the future and
they could decline. This growth rate reflects increases in customers and average
order size, as well as the introduction of a new server model in the third
quarter of fiscal 1999. As our business matures, it is unlikely that our net
revenues will continue to grow at the same pace. We believe that our future
growth rates will depend on the success of our sales and marketing efforts,
which will require significant expenditures that we may not have sufficient
resources to undertake, as well as the success of our professional services
organization. In addition, increased
7
<PAGE> 9
competition and slower than anticipated growth in our market could also affect
our revenue growth. If our net revenues do not increase at or above the rate
analysts expect, the trading price for our common stock may decline.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY AND BECAUSE THE MARKET FOR
LINUX-BASED SYSTEMS IS RAPIDLY EVOLVING, WE MAY NOT ACCURATELY FORECAST OUR
SALES AND REVENUES, WHICH WILL CAUSE QUARTERLY FLUCTUATIONS IN OUR NET REVENUES
AND RESULTS OF OPERATIONS AND MAY RESULT IN VOLATILITY IN OUR STOCK PRICE.
You should not rely on the results of any past periods as an indication of
our future net revenues or results of operations because our ability to
accurately forecast our quarterly sales and revenues is made difficult by our
limited operating history and the new and rapidly evolving market for
Linux-based systems in general, and our products in particular. In addition,
during fiscal 1999, we greatly increased our operating expenses. We do not know
whether our business will grow rapidly enough to absorb these costs. As a
result, we expect our quarterly operating results to fluctuate and they may be
below expectations of public market analysts or investors. If this occurs, the
price of our common stock may drop.
Our quarterly net revenues and results of operations may vary significantly
in the future due to a number of additional factors, many of which are outside
of our control. For more information about additional factors and our quarterly
results of operations, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results of Operations."
OUR FUTURE NET REVENUES DEPEND ON CONTINUED SALES OF OUR SERVERS, AND OUR
BUSINESS WILL SUFFER IF DEMAND FOR, OR REVENUES FROM, OUR SERVERS DECLINES.
Historically, we have derived a large percentage of our net revenues from
sales of our servers. Sales of our servers represented approximately 59% of our
net revenues in fiscal 1999 and approximately 88% of our net revenues in the
quarter ended October 29, 1999. We expect sales of these servers to continue to
account for a substantial majority of our net revenues for the foreseeable
future. Any factors adversely affecting the pricing of, or demand for, these
servers, including increased competition or decreased market acceptance of Linux
systems, could cause our net revenues to decline and our business to suffer.
OUR SUCCESS DEPENDS ON DEVELOPING NEW SYSTEMS THAT ACHIEVE MARKET ACCEPTANCE AND
ON THE SUCCESS OF OUR PROFESSIONAL SERVICES ORGANIZATION.
We develop systems that are optimized to run the Linux operating system,
particularly for use in Internet-related applications. Developing new products
that meet the needs of emerging market segments requires us to incur significant
research and development expenses and commit substantial engineering resources.
If we fail to introduce new products that address the needs of emerging market
segments, or if our new systems do not achieve market acceptance, our future
growth and profitability could suffer. Our success also depends on customers
choosing our professional consulting services and support over those of our
competitors. If customers do not select our services, our revenues may not grow
and may decline, and our business will be harmed.
IF WE ARE UNABLE TO OFFSET DECREASES IN THE SELLING PRICES OF OUR PRODUCTS OR
INCREASES IN MANUFACTURING COSTS, OUR GROSS MARGINS WILL BE HARMED.
Our gross margin may be affected by decreases in the average selling prices
of our systems or increased manufacturing costs. We have experienced
fluctuations in the average selling prices of our products to date. We
anticipate that as the market for Linux systems grows, the average unit price of
our products will continue to fluctuate and may decrease. The average unit price
of our products may also decrease in response to changes in product mix,
competitive pricing pressures, new product introductions by us or our
competitors or other factors. If we are unable to offset a decrease in the
average selling prices of our existing products by developing and introducing
products and services with higher margins or by reducing our product and
manufacturing costs, our gross margins will suffer.
8
<PAGE> 10
To maintain or increase our gross margin, we also must continue to reduce
the manufacturing cost of our products. Our products incorporate a significant
number of commodity components and our gross margin will fluctuate as a result
of changes in the cost of these components. Increases in our manufacturing
costs, whether due to increased component costs or other factors, could
seriously harm our business. For more information related to our costs
associated with manufacturing, see "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Results of Operations."
RISKS RELATED TO LINUX AND OPEN SOURCE SOFTWARE
IF THE LINUX OPERATING SYSTEM DOES NOT CONTINUE TO GAIN MARKET ACCEPTANCE, WE
WOULD NOT BE ABLE TO SUSTAIN OUR REVENUE GROWTH AND OUR BUSINESS COULD FAIL.
For the foreseeable future, we expect that substantially all of our
revenues will be derived from sales of systems that run the Linux operating
system and the provision of services and support for these systems. The Linux
operating system has only recently gained broad market acceptance. This
acceptance has been mostly limited to Internet infrastructure applications and
scientific research environments. Our success depends on the continued and
increased rate of adoption of Linux in these and other markets. If this does not
occur, our business will suffer.
Even if Linux is widely accepted, the Linux operating system is an open
source software product, which users are licensed to freely copy, use, modify
and distribute. Accordingly, anyone may download the Linux operating system and
numerous related software applications from the Internet, or otherwise copy it,
without cost, and run it on an existing Linux compatible product. Our success
depends on customers purchasing new systems which integrate and are optimized to
run the Linux operating system.
OUR ABILITY TO INTRODUCE NEW PRODUCTS OR PRODUCT ENHANCEMENTS WOULD BE IMPAIRED
IF LINUX DEVELOPERS DO NOT CONTINUE TO ENHANCE THE CORE SOURCE CODE OF THE LINUX
OPERATING SYSTEM AND DEVELOP LINUX-BASED APPLICATIONS.
We may not be able to introduce new products or product enhancements on a
timely basis unless efforts by Linux developers to expand the functionality of
the Linux operating system continue and are successful. We cannot guarantee that
these efforts will continue or be successful because the core of the Linux
operating system, or the Linux kernel, is maintained by third parties. Linus
Torvalds, the original developer of the Linux kernel, and a small group of
independent engineers are primarily responsible for the development and
evolution of the Linux kernel. Mr. Torvalds is not our employee. If Mr. Torvalds
and other third-party developers fail to further develop the Linux kernel or if
the development community does not continue to improve the functionality of the
operating system or introduce new open source software or software enhancements,
our ability to market our existing and future Linux products would suffer. In
this event, we may also be forced to rely to a greater extent on our own
development efforts or the development efforts of third-party consultants, which
would significantly increase our costs. Any failure on the part of the Linux
kernel developers to further develop and enhance the Linux kernel could stifle
the development of additional Linux-based applications for use with our
products, which would harm our product sales.
IF ADDITIONAL SOFTWARE APPLICATIONS COMPATIBLE WITH LINUX ARE NOT DEVELOPED, THE
MARKET FOR OUR PRODUCTS WILL NOT GROW, AND OUR PRODUCT SALES WILL BE HARMED.
Our products are currently purchased primarily for Internet-related
applications and by research facilities. For Linux, in general, and our
products, in particular, to gain acceptance in mainstream business and consumer
markets, more third-party software applications designed to operate on
Linux-based operating systems must be introduced and achieve market acceptance.
Many widely used applications, such as Microsoft Office, Intuit Quicken, Adobe
Photoshop and others, cannot run natively on Linux operating systems. Many
available Linux applications, such as word processors, databases, accounting
packages, spreadsheets, e-mail programs, Internet browsers, presentation and
graphics software and
9
<PAGE> 11
personal productivity applications, have not achieved mainstream market
acceptance. If third parties do not introduce more software applications
designed to operate on the Linux operating system and achieve market acceptance,
our products will not gain mainstream business and consumer acceptance, and we
may not be able to maintain our product sales growth.
IF MULTIPLE AND INCOMPATIBLE DISTRIBUTIONS OF LINUX ACHIEVE SUFFICIENT MARKET
ACCEPTANCE, OUR OPERATING EXPENSES COULD INCREASE AND DEMAND FOR OUR PRODUCTS
COULD DECLINE.
If multiple, incompatible versions of Linux are developed, customers may
become less likely to purchase Linux products, and our sales would suffer. In
addition, we may be required to offer and support more distributions of Linux,
which would increase our operating expenses.
IF THE LINUX DEVELOPER COMMUNITY FAILS TO SUPPORT US OR REACTS NEGATIVELY TO OUR
BUSINESS STRATEGY, OUR BUSINESS WILL BE HARMED.
The third parties in the Linux developer community, upon whom we rely to
develop and maintain a majority of our software, may not continue to support us,
our product promotions or our corporate or operating decisions. If we lose the
support of these third parties, we would be forced to rely to a significantly
greater extent on our own development efforts, which would require us to hire
additional developers and increase our development expenses and could adversely
impact product release schedules. In addition, negative reactions of third
parties in the Linux developer community could harm our reputation, diminish our
brand and result in lower net revenues.
RISKS RELATED TO OUR PRODUCT MANUFACTURING
WE RELY ON SYNNEX AS OUR SINGLE SOURCE CONTRACT MANUFACTURER. IF SYNNEX IS
UNABLE TO MEET OUR MANUFACTURING NEEDS OR OUR RELATIONSHIP TERMINATES, WE MAY
LOSE REVENUES AND DAMAGE OUR CUSTOMER RELATIONSHIPS.
We rely on Synnex Information Technologies, Inc. to produce substantially
all of our products at its Fremont, California facility on a purchase order
basis, and Synnex is our sole manufacturer. We currently do not have a long-term
supply contract with Synnex.
Qualifying a new contract manufacturer and commencing volume production is
expensive and time consuming. If we are required or choose to change contract
manufacturers, we may lose revenue and damage our customer relationships. For
more information about our manufacturing relationship with Synnex, see
"Business -- Manufacturing."
IF WE FAIL TO ACCURATELY PREDICT OUR MANUFACTURING REQUIREMENTS, WE COULD INCUR
ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS.
Because we currently do not have a long-term supply contract with Synnex,
it is not obligated to supply products to us for any specific period, in any
specific quantity or at any certain price, except as may be provided in a
particular purchase order. We provide forecasts of our demand to Synnex up to
five months prior to scheduled delivery of products to our customers. If we
overestimate our requirements, Synnex may have excess inventory, which would
increase our costs. If we underestimate our requirements, Synnex may have an
inadequate inventory, which could interrupt manufacturing of our products and
result in delays in shipments and revenues. In addition, lead times for
materials and components we order vary significantly and depend on factors such
as the specific supplier, contract terms and demand for each component at a
given time. We also may experience shortages of certain components from time to
time, which also could delay the manufacturing of our products. For more
information about our manufacturing relationship with Synnex, see
"Business -- Manufacturing."
10
<PAGE> 12
SYNNEX DEPENDS ON SINGLE AND LIMITED SOURCE SUPPLIERS FOR KEY COMPONENTS, WHICH
MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR PRICE FLUCTUATIONS THAT COULD
ADVERSELY AFFECT OUR OPERATING RESULTS.
Synnex, our contract manufacturer, depends on single source suppliers for a
number of key components for our products, such as industry standard processors,
power supplies, custom printed circuit boards, chassis and sheet metal parts. It
also depends on a limited number of sources to supply several other industry
standard components. For fiscal 2000, Micro Energy is our single source for
power supplies used in our FullOn model of server product. It would be difficult
for us to identify another source of supply if this supplier were unable to meet
our requirements for any reason. In addition, we do not have a long-term binding
agreement with Micro Energy. In the past, Synnex has experienced, and may in the
future experience, shortages of, or difficulties in, acquiring these components.
If Synnex is unable to buy these components in adequate quantities at the times
required, we may not be able to manufacture our products on a timely basis,
which would harm our operating results. In addition, if Synnex is required to
pay higher prices for these single or limited source components and we are
required to pay higher prices for products, our gross margin would be harmed.
Furthermore, overall market conditions affecting supply and pricing for key
commodity components are known to fluctuate significantly at times, and
increases in the costs of key components could harm our business.
IF WE EXPAND OUR MANUFACTURING OPERATIONS INTERNATIONALLY, WE WILL FACE
ADDITIONAL RISKS, WHICH COULD HARM OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
To date, substantially all of our net revenues have been derived from sales
of our products in North America. However, we intend to begin selling our
products overseas during fiscal 2000, initially in Europe. We anticipate that as
we expand our international sales, we will fulfill orders through international
facilities operated by Synnex. We could experience difficulties and disruptions
in the manufacture of our products while we transition some manufacturing
operations to these new facilities. Our inability to scale manufacturing of our
products in foreign facilities, and any manufacturing delays or disruptions that
occur, could prevent us from increasing international sales and achieving the
timely delivery of products to customers located in foreign jurisdictions. This
could result in lost revenues and slower revenue growth. Any of these factors
could significantly impair our ability to source our contract manufacturing
requirements internationally.
RISKS RELATED TO COMPETITION WITHIN OUR INDUSTRY
WE MAY NOT BE ABLE TO COMPETE WITH MORE ESTABLISHED COMPANIES.
In the market for computer systems, we face significant competition from
larger companies who market general-purpose computers and have greater financial
resources, more established direct and indirect sales channels and greater name
recognition than we do. These companies include Compaq Computer Corporation,
Dell Computer Corporation, Fujitsu International Inc., Hewlett-Packard Company,
International Business Machines Corporation and Sun Microsystems, Inc. In most
cases, these companies primarily sell systems that run proprietary operating
systems, such as Microsoft Windows and variants of UNIX, including Solaris.
These companies also have larger and more established service organizations to
support these products and operating systems. These companies may be able to
leverage their existing organizations, including their service organizations,
and provide a wider offering of products and higher levels of support on a more
cost-effective basis than we can. In addition, these companies may be able to
undertake more extensive promotional activities, adopt more aggressive pricing
policies and offer more attractive terms to their customers than we can. We also
face competition in narrow, vertical markets from limited purpose computer
vendors that offer products that are carefully tailored for specific
applications which better address the needs of these customers. Furthermore,
because Linux can be downloaded from the Internet for free or purchased at a
nominal cost and modified and re-sold with few restrictions, traditional
barriers to market entry are minimal. Accordingly, it is possible that new
competitors or alliances among existing competitors may emerge and rapidly
acquire significant market share. Any pricing pressures or loss of potential
customers resulting from our failure to compete effectively would reduce our
11
<PAGE> 13
revenues. We also may not be able to compete successfully with these current or
potential competitors. For more information about our competition, see
"Business -- Competition."
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE AGAINST OTHER PROVIDERS OF LINUX-BASED
COMPUTER PRODUCTS OR NEW MARKET ENTRANTS.
Many large, general-purpose computer vendors, such as Compaq, Dell,
Gateway, Hewlett-Packard and IBM, have recently introduced Linux-based systems.
The systems offered by these companies may have greater functionality and lower
prices than those we currently provide, making our systems less attractive to
our customers. Even if the functionality of the standard features of these
products is equivalent to ours, we face a substantial risk that a significant
number of customers will choose not to purchase products from a less well-known
vendor, regardless of the competitiveness of our solutions.
IF WE ARE UNABLE TO PROVIDE HIGH-QUALITY CUSTOMER SUPPORT AND SERVICES, WE WILL
BE UNABLE TO MEET THE NEEDS OF OUR CUSTOMERS. IN ADDITION, OUR PRODUCTS AND
SERVICES ARE DEPENDENT UPON THE EFFORTS OF MEMBERS OF THE OPEN SOURCE COMMUNITY.
For our business to succeed, we must effectively market our integrated
system and service solution. If our service organization does not meet the needs
or expectations of customers, we face an increased risk that customers will
purchase systems from other integrated solution providers or purchase systems
from one vendor and services from a Linux specialist.
The quality of our products and services is dependent on the efforts and
the expertise of members of the open source community. If we do not continue to
work productively with these members, our ability to provide product enhancement
and quality services will be harmed, which would harm our revenues and
compromise our reputation in the open source community and with customers. For
more information about our customer support and professional services, see
"Business -- Products and Services."
IF WE DO NOT INTRODUCE NEW PRODUCTS AND SERVICES IN A TIMELY MANNER, OUR
PRODUCTS AND SERVICES WILL BECOME OBSOLETE, AND OUR OPERATING RESULTS WILL
SUFFER.
The computer systems market is characterized by rapid technological change,
frequent new product enhancements, uncertain product life cycles, changes in
customer demands and evolving industry standards. Our products could be rendered
obsolete if products based on new technologies are introduced or new industry
standards emerge.
Enterprise computing environments are inherently complex. As a result, we
cannot accurately estimate the life cycles of our products. New products and
product enhancements can require long development and testing periods, which
requires us to hire and retain increasingly scarce, technically competent
personnel. Significant delays in new product releases or significant problems in
installing or implementing new products could seriously damage our business. We
have, on occasion, experienced delays in the scheduled introduction of new and
enhanced products and may experience similar delays in the future.
Our future success depends upon our ability to enhance existing products,
develop and introduce new products, satisfy customer requirements and achieve
market acceptance. This process is made more challenging by the fact that much
of the software development for our products is done by the open source
community and we must work with a large number of developers who are not our
employees in this process. We may not successfully identify new product
opportunities and develop and bring new products to market in a timely and
cost-effective manner.
12
<PAGE> 14
RISKS RELATED TO OUR PRODUCTS' DEPENDENCE ON
INTELLECTUAL PROPERTY AND OUR USE OF OUR BRAND
WE COULD BE PREVENTED FROM SELLING OR DEVELOPING OUR PRODUCTS IF THE GNU GENERAL
PUBLIC LICENSE AND SIMILAR LICENSES UNDER WHICH THE OPERATING SYSTEM
INCORPORATED INTO OUR PRODUCTS IS DEVELOPED AND LICENSED, ARE NOT ENFORCEABLE,
OR ARE NOT EFFECTIVELY ENFORCED.
The Linux kernel and the Linux operating system incorporated into our
products have been developed and licensed under the GNU General Public License,
and similar open source licenses. These licenses require that any software
program licensed under them may be copied, used, modified and distributed
freely, so long as all modifications are also freely made available and licensed
under the same conditions. We know of no instance in which a party has
challenged the validity of these licenses or in which these licenses have been
interpreted in a legal proceeding. To date, all compliance with these licenses
has been voluntary. It is possible that a court would hold one or more of these
licenses to be unenforceable in the event that someone were to file a claim
asserting proprietary rights in a program developed and distributed under them.
Any ruling by a court that these licenses are not enforceable, or that
Linux-based operating systems, or significant portions of them, may not be
copied, modified, or distributed freely, would have the effect of preventing us
from selling or developing our products, unless we are able to negotiate a
license for the use of the software or replace the affected portions. For more
information about our intellectual property, see "Business -- Intellectual
Property Rights."
IF WE ARE PROHIBITED FROM USING THE LINUX TRADEMARK, OUR BUSINESS COULD BE
ADVERSELY AFFECTED.
Like many other companies, we market Linux-based products, systems and
services. We do not own the trademark to "Linux." The owner has consented to our
use of the word Linux in our company name and in the title of our web sites. We
believe that the continued efficacy and use of the "Linux" trademark is
important to our business. If the "Linux" trademark is invalidated through a
legal action, or we are no longer permitted to use it, our business could
suffer. In addition, we cannot control the use of this trademark, and use by
others may lead to confusion about the source, quality, reputation and
dependability of Linux, which may harm our business.
OUR BUSINESS WILL BE HARMED IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL
PROPERTY RIGHTS FROM MISUSE BY THIRD PARTIES.
Our collection of trademarks is important to our business. The protective
steps we take or have taken may be inadequate to deter misappropriation of our
trademark rights. We have filed applications for registration of some of our
trademarks in the United States. Effective trademark protection may not be
available in every country in which we offer or intend to offer our products and
services. Failure to protect our trademark rights adequately could damage our
brand identity and impair our ability to compete effectively. Furthermore,
defending or enforcing our trademark rights could result in the expenditure of
significant financial and managerial resources. For more information about our
intellectual property, see "Business -- Intellectual Property Rights."
WE ARE VULNERABLE TO CLAIMS THAT OUR PRODUCTS INFRINGE THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS, ESPECIALLY BECAUSE OUR SYSTEMS INCORPORATE MANY DISTINCT
SOFTWARE COMPONENTS DEVELOPED BY THOUSANDS OF INDEPENDENT THIRD PARTIES. ANY
RESULTING CLAIMS AGAINST US COULD BE COSTLY TO DEFEND OR SUBJECT US TO
SIGNIFICANT DAMAGES.
We may be exposed to future costly litigation based on claims that our
products infringe the intellectual property rights of others. This risk is
exacerbated by the fact that most of the code in our products is developed by
independent parties over whom we exercise no supervision or control and who,
themselves, might not have the same financial resources as us to pay damages to
a successful litigant. While we are not aware that the technology employed in
our systems infringes any proprietary rights of third parties, any litigation,
with or without merit, could be time consuming to defend, result in high
litigation costs, divert our management's attention and resources, or cause
product shipment delays. We
13
<PAGE> 15
also could be required to remove or replace infringing technology, which could
be costly and delay product development and shipment.
WE MAY NOT BE ABLE TO USE INTELLECTUAL PROPERTY TO PROTECT OURSELVES FROM
COMPETITION.
Our systems consist primarily of commodity hardware components in
combination with the Linux operating system. While we have developed some
proprietary techniques and expertise, most of our activities and systems are not
protectable as proprietary intellectual property and may be used by competitors,
harming our market share and product revenues. To protect our intellectual
property, we generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners. We have also recently commenced a
patent program and to date have filed one patent application. In general,
however, we have taken only limited steps to protect our intellectual property.
Accordingly, we may be unable to use intellectual property to prevent other
companies from competing with us. In addition, we may be unable to prevent third
parties from developing techniques that are similar or superior to our
technology, or from designing around our copyrights, patents and trade secrets.
WE MAY BE SUBJECT TO CLAIMS AS A RESULT OF INFORMATION PUBLISHED ON, POSTED ON
OR ACCESSIBLE FROM OUR INTERNET SITES.
We may be subject to claims of defamation, negligence, copyright or
trademark infringement (including contributory infringement) or other claims
relating to the information contained on our Internet sites, whether written by
us or third parties. These types of claims have been brought against online
services in the past and can be costly to defend regardless of the merit of the
lawsuit. Although recent federal legislation protects online services from some
claims when the material is written by third parties, this protection is
limited. Furthermore, the law in this area remains in flux and varies from state
to state. While no claims have been made against us to date, our business could
be seriously harmed if one were asserted.
OTHER RISKS RELATED TO OUR BUSINESS
IF WE FAIL TO ADEQUATELY PROMOTE AND MAINTAIN OUR BRAND NAME OR ARE UNABLE TO
CONTINUE USING "LINUX" AS PART OF OUR BRAND NAME, OUR PRODUCT SALES WOULD
DECLINE, AND WE WOULD INCUR SIGNIFICANT COSTS TO PROMOTE A NEW BRAND NAME.
We believe that we need a strong brand to compete successfully. In order to
promote and maintain our brand identity and to attract and retain customers, we
plan to increase our spending on advertising and promotions and to implement new
marketing campaigns. These strategies may not be successful. If we are unable to
design and implement effective marketing campaigns or otherwise fail to promote
and maintain our brand, our sales could decline. Our business may also be harmed
if we incur significant expenses in an attempt to promote and maintain our brand
without a corresponding increase in revenues. Linus Torvalds owns the trademark
to "Linux." Mr. Torvalds has consented informally to our use of the word Linux
in our company name and in the title of our web sites, but has not executed a
formal agreement. This informal consent may be revoked in the future, however,
and we may no longer be able to use this trademark in our brand or in the title
of our web sites. In this event, our product sales would decline, and we would
incur significant costs to promote a new brand name, which takes time and may
not be successful.
IF WE DO NOT SUBSTANTIALLY EXPAND OUR DIRECT SALES OPERATIONS AND E-COMMERCE
INITIATIVES, OUR SALES AND MARKET SHARE WILL NOT GROW.
In order to increase market awareness and sales of our products, we will
need to substantially expand our direct sales operations, both domestically and
internationally. To date, we have relied primarily on our direct sales force to
generate demand for our products. Many of our products require a sophisticated
sales effort targeted at our prospective customers' information technology
departments. Competition for qualified
14
<PAGE> 16
sales personnel is intense, and we might not be able to hire the quality and
number of sales people we require. In addition, we have devoted significant
resources to implementing e-commerce solutions, such as our valinux.com web
site, that broaden our market reach and we intend to deploy more e-commerce
solutions. If we fail to effectively expand our direct sales operations or
strengthen our e-commerce initiatives, our growth will be limited.
OUR MANAGEMENT TEAM IS NEW AND, IF THEY ARE UNABLE TO WORK TOGETHER EFFECTIVELY,
OUR BUSINESS COULD BE SERIOUSLY HARMED.
Our business is highly dependent on the ability of our management team to
work together effectively to meet the demands of our growth. We grew from 15
employees at July 31, 1998 to 179 employees at October 29, 1999. Only two
members of our current management team were employed by us at the end of fiscal
1998. These individuals have not previously worked together as a management team
and have had only limited experience managing a rapidly growing company on
either a public or private basis. Our productivity and the quality of the
products and services we render may be adversely affected if we do not integrate
and train our new employees quickly and effectively.
EXPANDING OUR SERVICES BUSINESS WILL BE COSTLY AND MAY NOT RESULT IN ANY BENEFIT
TO US.
We believe that the expansion of both our business and the acceptance of
Linux are dependent upon the availability of high quality professional services
to assist customers in designing and implementing Linux-based systems. If we are
unable to successfully provide these services, our revenues will not grow and we
may lose customers seeking quality professional services. We have recently
expanded our strategic focus to place additional emphasis on providing
professional services, from which we have historically derived an insignificant
amount of revenue. Our customers may not engage our professional services
organization to render services such as architecture and planning, system
integration, open source product implementation and security consulting
services. We may not generate sufficient services revenues to offset the
expenses of this organization. We may not attract or retain a sufficient number
of the highly qualified service personnel we need to support the expansion of
our professional services organization. This expansion has required, and will
continue to require, significant additional expenses and resources. In addition,
this expansion will place further strain on our management and operational
resources.
IF WE ARE UNABLE TO HIRE AND RETAIN ADDITIONAL RESEARCH AND DEVELOPMENT,
SUPPORT, SALES AND MARKETING STAFF WE WILL NOT HAVE SUFFICIENT RESOURCES TO
COMPETE AND GROW OUR REVENUES.
We intend to hire a significant number of additional research and
development, support, sales and marketing and other personnel during fiscal
2000. Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain highly qualified personnel. Our future success and
ability to sustain our revenue growth also depend upon the continued service of
our executive officers and other key engineering, sales, marketing and support
personnel. Competition for qualified personnel in our industry and in the San
Francisco Bay Area, as well as the other geographic markets in which we recruit,
is extremely intense and characterized by rapidly increasing salaries, which may
increase our operating expenses or hinder our ability to recruit qualified
candidates.
ATTEMPTS TO EXPAND BY MEANS OF BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES MAY
NOT BE SUCCESSFUL AND MAY DISRUPT OUR OPERATIONS OR HARM OUR REVENUES.
While we have no current agreements or negotiations underway, we have in
the past, and may in the future, make investments in complementary companies,
products or technologies or buy businesses, products or technologies in the
future. In the event of any future purchases, we will face additional financial
and operational risks, including:
- difficulty in assimilating the operations, technology and personnel of
acquired companies;
- disruption in our business because of the allocation of resources to
consummate these transactions and the diversion of management's attention
from our core business;
15
<PAGE> 17
- difficulty in retaining key technical and managerial personnel from
acquired companies;
- dilution of our stockholders, if we issue equity to fund these
transactions;
- assumption of operating losses, increased expenses and liabilities;
- harm to our reputation, if the open source development community does not
approve of these transactions;
- our relationships with existing employees, customers and business
partners may be weakened or terminated as a result of these transactions;
and
- we may experience one-time in-process research and development charges
and ongoing expenses associated with amortization of goodwill and other
purchased intangible assets.
IF WE ARE UNABLE TO IMPLEMENT APPROPRIATE SYSTEMS, PROCEDURES AND CONTROLS TO
MANAGE OUR EXPECTED GROWTH, WE MAY NOT BE ABLE TO SUCCESSFULLY OFFER OUR
SERVICES AND GROW OUR BUSINESS.
Our ability to successfully offer our services and grow our business
requires an effective planning and management process. Since we began
operations, we have significantly increased the size of our operations. This
growth has placed, and we expect that any future growth we experience will
continue to place, a significant strain on our management, systems and
resources. Our key personnel have limited experience managing this type of
growth. In order to manage growth effectively, we will need to continue to
implement or update our operational and financial systems, procedures and
controls, including implementing an enterprise resource planning system and a
web-based ordering system.
WE WILL FACE ADDITIONAL OPERATIONAL AND FINANCIAL RISKS AS WE EXPAND OUR
INTERNATIONAL OPERATIONS, ANY ONE OF WHICH COULD HARM OUR INTERNATIONAL MARKET
SHARE AND REVENUES.
As we expand our international operations, we will face a number of
additional challenges associated with the conduct of business overseas. For
example:
- we may have difficulty managing and administering a globally-dispersed
business;
- fluctuations in exchange rates may negatively affect our operating
results;
- we may encounter greater difficulty in collecting accounts receivable
resulting in longer collection periods;
- we may not be able to repatriate the earnings of our foreign operations;
- we will have to comply with a wide variety of foreign laws and regulatory
environments with which we are not familiar;
- we may not be able to adequately protect our trademarks and other
intellectual property overseas due to the uncertainty of laws and
enforcement in certain countries relating to the protection of
intellectual property rights;
- we could face difficulty in building close relationships with
international open source developers;
- reductions in business activity during the summer months in Europe and
certain other parts of the world could negatively impact the operating
results of our foreign operations;
- export controls could prevent us from shipping our products into and from
some markets;
- multiple and possibly overlapping tax structures could significantly
reduce the financial performance of our foreign operations;
- changes in import/export duties and quotas could affect the competitive
pricing of our products and services and reduce our market share in some
countries; and
- economic or political instability in some international markets could
result in the forfeiture of some foreign assets and the loss of sums
spent developing and marketing those assets.
16
<PAGE> 18
WE MAY NOT BE ABLE TO GENERATE ENOUGH ADDITIONAL REVENUE FROM OUR PLANNED
INTERNATIONAL EXPANSION TO OFFSET THE COSTS ASSOCIATED WITH ESTABLISHING AND
MAINTAINING FOREIGN OPERATIONS.
A key component of our growth strategy is to expand our presence in foreign
markets. It will be costly to establish international facilities and operations,
promote our brand internationally and develop localized web sites and other
systems. Revenue from international activities may not offset the expense of
establishing and maintaining these foreign operations. In addition, because we
have little experience in marketing and distributing products or services for
these markets, we may not benefit from any first-to-market advantages.
OUR PRODUCTS OR INTERNAL SYSTEMS, AS WELL AS THOSE OF OUR CUSTOMERS AND
SUPPLIERS, COULD FAIL AS A RESULT OF THE YEAR 2000 PROBLEM.
We have completed our assessment of Year 2000 readiness with respect to our
products and believe that all of our products manufactured since early calendar
1997 are Year 2000 compliant in all material respects. However, our products
operate in complex system environments and directly and indirectly interact with
a number of other hardware and software systems. We are unable to predict to
what extent our products may be affected if other products in the systems in
which our products operate experience a material Year 2000 failure. Any failure
of our products or internal systems, as well as those of our customers and
suppliers, to be Year 2000 compliant could harm our business. For further
discussion about the risks we face in connection with the Year 2000 issue, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Readiness."
WE DEPEND ON THE CONTINUED SERVICES OF OUR FOUNDERS AND OTHER KEY ENGINEERING
PERSONNEL, WHOSE KNOWLEDGE OF OUR BUSINESS AND TECHNICAL EXPERTISE WOULD BE
DIFFICULT TO REPLACE.
Our products and technologies are complex, and we are substantially
dependent upon the continued services of our existing engineering personnel and
executive management, especially Larry M. Augustin, our President and Chief
Executive Officer. We do not have employment contracts with any of our key
engineering personnel, so that the employment of any key engineer may be
terminated "at will" by such individual. The loss of any, or a group of, our key
engineering personnel, particularly to a competitor, could adversely affect our
business, reduce our market share, slow our product development processes and
diminish our brand identity. Additionally, members of the open source community
are not our employees and have no obligation to perform services on our behalf.
OUR PRODUCTS MAY CONTAIN DEFECTS THAT COULD BE COSTLY TO CORRECT, DELAY MARKET
ACCEPTANCE OF OUR PRODUCTS AND EXPOSE US TO LITIGATION.
Despite testing by us and our customers, errors may be found in our
products after commencement of commercial shipments. We buy almost all of our
component hardware parts from third parties. These parts may fail, cause
unexpected electrical or mechanical problems or otherwise not function properly.
In addition, most of the software code in our products is developed by
independent parties over whom we exercise no supervision or control. If errors
are discovered, we may have to make significant expenditures of capital to
eliminate them and yet may not be able to correct them in a timely manner, if at
all. Errors and failures in our products could result in a loss of, or delay in,
market acceptance of our products and could damage our reputation and our
ability to convince commercial users of the benefits of products incorporating
Linux-based operating systems and other open source products.
Failures in our products could also cause system failures, including in
critical business systems, for our customers who may assert warranty and other
claims for substantial damages against us. Although our warranties typically
contain provisions designed to limit our exposure to potential product liability
claims, it is possible that these provisions may not be effective or enforceable
under the laws of some jurisdictions. Our insurance policies may not provide
sufficient coverage to adequately limit our exposure to this type of claim.
These claims, even if unsuccessful, could be costly and time consuming to
defend.
17
<PAGE> 19
OUR PRODUCT SALES AND REVENUE GROWTH DEPEND ON THE CONTINUED POPULARITY AND
ACCEPTANCE OF THE INTERNET, WHICH MAY DECLINE IF NEW LAWS AND GOVERNMENT
REGULATIONS SURROUNDING THE INTERNET ARE APPLIED.
If the popularity and acceptance of the Internet as an effective medium of
commerce does not continue to grow or declines, our product sales and revenue
growth will be harmed. We are significantly dependent on the Internet to process
the sale of our products. In October 1999, substantially all of our sales were
processed through our valinux.com web site. We also plan to deploy enhanced
e-commerce applications to facilitate Internet-based ordering and tracking, and
sales processing. New laws and government regulations surrounding the Internet,
such as Internet taxation and consumer privacy laws, could result in a decline
in the use or popularity of the Internet as a medium for commerce, which would
harm our sales and revenue growth.
RISKS RELATED TO THIS OFFERING
WE MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE OUR
PROFITS OR MARKET VALUE.
We have broad discretion in the use of the net proceeds of this offering
and could spend the net proceeds in ways that do not yield a favorable return or
to which stockholders object. We may also use the proceeds to acquire
complementary businesses or technologies, although no such acquisitions are
currently planned. Until we need to use the proceeds of this offering, we may
place them in investments may not produce income or that lose value. For further
discussion of our planned use of the net proceeds from this offering, see "Use
of Proceeds."
INSIDERS WILL CONTINUE TO HOLD APPROXIMATELY 59% OF THE OUTSTANDING SHARES OF
OUR COMMON STOCK AFTER THIS OFFERING, WHICH WILL LIMIT YOUR ABILITY TO INFLUENCE
CORPORATE MATTERS.
After this offering, we anticipate that our officers, directors and five
percent or greater stockholders will beneficially own or control, directly or
indirectly, approximately 25,533,312 shares of common stock, which in the
aggregate will represent approximately 59% of the outstanding shares of common
stock. These stockholders, if acting together, will have the ability to control
all matters submitted to our stockholders for approval, including the election
and removal of directors and the approval of any business combinations. For more
information regarding the voting rights of our stockholders, see "Description of
Capital Stock."
PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD
PREVENT A CHANGE IN OUR CONTROL.
Provisions of our amended and restated certificate of incorporation and
bylaws in effect after completion of this offering and Delaware law could make
it more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. For further discussion of the anti-takeover
effects of our charter documents and Delaware law, see "Description of Capital
Stock -- Delaware Anti-takeover Law and Certain Charter and Bylaw Provisions."
THE INITIAL PUBLIC OFFERING PRICE IS DETERMINED BY NEGOTIATIONS BETWEEN THE
UNDERWRITERS AND US, BUT THE MARKET PRICE MAY BE LESS OR MAY BE VOLATILE, AND
YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC
OFFERING PRICE.
Prior to this offering there was no public market for our common stock. The
initial public offering price for our common stock will be determined through
negotiations between the underwriters and us. This initial public offering price
may vary from the market price of our common stock after the offering. If you
purchase shares of common stock, you may not be able to resell those shares at
or above the initial public
18
<PAGE> 20
offering price. The market price of our common stock may fluctuate significantly
in response to factors, some of which are beyond our control, including the
following:
- actual or anticipated fluctuations in our operating results;
- changes in market valuations of other technology companies;
- announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
- additions or departures of key personnel;
- future sales of common stock;
- any deviations in net revenues or in losses from levels expected by
securities analysts; and
- volume fluctuations, which are particularly common among highly volatile
securities of Internet-related companies.
You should read the "Underwriting" section for a more complete discussion
of the factors considered in determining the initial public offering price of
our common stock.
A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK COULD BE SOLD IN THE PUBLIC
MARKET SOON AFTER THIS OFFERING, WHICH MAY DEPRESS OUR STOCK PRICE.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock after this offering could cause
our stock price to fall. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional stock. You should read
"Shares Eligible for Future Sale" for a full discussion of shares that may be
sold in the public market in the future.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
SHARES.
The initial public offering price is substantially higher than the book
value per share of our outstanding common stock immediately after the offering.
Accordingly, if you purchase common stock in the offering, you will incur
immediate dilution of approximately $19.37, assuming an initial public offering
price of $22.00 per share, in the book value per share of our common stock from
the price you pay for our common stock. For additional information on dilution
of the book value of your shares, see "Dilution."
19
<PAGE> 21
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance and
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 the forward-
looking statements. These risks and other factors include those listed under
"Risk Factors" and elsewhere in this prospectus. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," "continue" or the negative of these terms or other comparable
terminology. These statements are only predictions. In evaluating these
statements, you should specifically consider various factors, including the
risks outlined under "Risk Factors."
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 these
forward-looking statements.
USE OF PROCEEDS
We expect to receive net proceeds from the sale of the 4,400,000 shares of
common stock in this offering of approximately $88.6 million (approximately
$102.1 million if the underwriters' over-allotment option is exercised in full),
at an assumed initial public offering price of $22.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.
We intend to use the net proceeds from this offering for general corporate
purposes and working capital, including approximately $88.6 million to fund
expected operating expenses, including broadening our professional services
organization, hiring additional research and development personnel and expansion
of our sales operation into Europe. The amounts that we actually expend will
vary significantly, depending on a number of factors, including future revenue
growth, if any, and the amount of cash we generate from operations. As a result,
we will retain broad discretion in the allocation of the net proceeds of this
offering. In addition, we may use a portion of the net proceeds to acquire
complementary products, technologies or businesses. We currently have no
commitments or agreements and are not involved in any negotiations with respect
to any such transactions. Pending use of the net proceeds of this offering, we
intend to invest the net proceeds in interest bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. In addition, our existing bank line of credit prohibits the
payment of cash dividends without our bank's consent.
20
<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization as of October 29, 1999:
- on an actual basis;
- on a pro forma basis to give effect to the conversion of all outstanding
shares of preferred stock into 19,921,322 shares of common stock
automatically upon completion of this offering; and
- on an as adjusted basis to give effect to the sale of 4,400,000 shares of
common stock in this offering at an assumed initial offering price of
$22.00 per share (less estimated underwriting discounts and commissions
and estimated offering expenses) and the application of the net proceeds.
You should read this table in conjunction with our financial statements and
the related notes, "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
OCTOBER 29, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, less current portion............... $ 673 $ 673 $ 673
Stockholders' equity:
Preferred stock, $0.001 par value: 20,149,322 authorized
(actual and pro forma), 19,921,322 outstanding
(actual), no shares outstanding (pro forma),
10,000,000 authorized, no shares outstanding (pro
forma as adjusted)................................... 20 -- --
Common stock, $0.001 par value: 250,000,000 authorized
(actual, pro forma and pro forma as adjusted),
15,380,264 outstanding (actual), 35,301,586
outstanding (pro forma), 39,701,586 outstanding (pro
forma as adjusted)................................... 15 35 40
Additional paid-in capital................................ 71,219 71,219 159,838
Stockholder note receivable............................... (50) (50) (50)
Deferred stock compensation............................... (25,087) (25,087) (25,087)
Accumulated deficit....................................... (29,916) (29,916) (29,916)
--------- -------- --------
Total stockholders' equity........................... 16,201 16,201 104,825
--------- -------- --------
Total capitalization................................. $ 16,874 $ 16,874 $105,498
========= ======== ========
</TABLE>
The data in the table above excludes:
- 8,501,226 shares of common stock issuable upon exercise of options
outstanding as of October 29, 1999 at a weighted average exercise price
of $1.87 per share;
- 8,796,986 shares of common stock available for issuance at October 29,
1999 under our 1998 Stock Plan; and
- 1,500,000 additional shares of common stock available for issuance under
our 1999 Employee Stock Purchase Plan and 1999 Director Option Plan
immediately following this offering.
For additional information regarding these shares, see "Management -- Stock
Plans," "Certain Relationships and Related Transactions," "Description of
Capital Stock" and Notes 7 and 8 of Notes to Financial Statements.
21
<PAGE> 23
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
common stock after this offering. Our pro forma net tangible book value as of
October 29, 1999 was $15.6 million or $0.44 per share of common stock. Net
tangible book value per share represents the amount of our total tangible assets
less total liabilities, divided by the pro forma number of shares of common
stock outstanding. Dilution in net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of common stock
immediately after the completion of this offering. After giving effect to the
sale of the 4,400,000 shares of common stock in this offering at an assumed
public offering price of $22.00 per share (less estimated underwriting discounts
and commissions and estimated offering expenses), our pro forma as adjusted net
tangible book value as of October 29, 1999 would have been $104.2 million or
approximately $2.63 per share. This represents an immediate increase in net
tangible book value of $2.19 per share to existing stockholders and an immediate
dilution in net tangible book value of $19.37 per share to new investors, or
approximately 88.0% of the initial public offering price of $22.00 per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $22.00
Pro forma net tangible book value per share at October 29,
1999................................................... $0.44
Increase per share attributable to this offering.......... $2.19
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... $ 2.63
------
Dilution per share to new investors......................... $19.37
======
</TABLE>
The following table shows, on a pro forma basis as of October 29, 1999, and
after giving effect to this offering, the differences between the existing
holders of common stock and the new investors with respect to the number of
shares of common stock purchased from us, the total consideration paid to us and
the average price per share paid (based on an assumed initial public offering
price of $22.00 per share, before deducting estimated underwriting discounts and
commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 35,301,586 88.9% $ 35,706,000 26.9% $ 1.01
New investors............. 4,400,000 11.1 96,800,000 73.1 $22.00
---------- ----- ------------ -----
Total................ 39,701,586 100.0% $132,506,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion and table are based on actual shares outstanding
on October 29, 1999. The foregoing discussion assumes no exercise of any stock
options outstanding as of October 29, 1999. As of October 29, 1999, there were
options outstanding to purchase 8,501,226 shares of common stock at a weighted
average exercise price of $1.87 per share. To the extent any of these options
are exercised, there will be further dilution to investors. For more information
regarding the dilution of our shares following the offering, see
"Capitalization," "Management -- Stock Plans," "Description of Capital Stock"
and Notes 7 and 8 of Notes to Financial Statements.
22
<PAGE> 24
SELECTED FINANCIAL DATA
You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes included
elsewhere in this prospectus. The statement of operations data for the years
ended July 31, 1997, 1998 and 1999 and the balance sheet data as of July 31,
1998 and 1999 are derived from, and are qualified by reference to, the audited
financial statements and related notes appearing elsewhere in this prospectus.
The statements of operations data for the period from January 9, 1995, the date
of our inception, to July 31, 1995 and the year ended July 31, 1996 and the
balance sheet data as of July 31, 1995 and 1996 are derived from unaudited
financial statements not appearing in this prospectus. The statement of
operations data for the three months ended October 31, 1998 and October 29, 1999
and the balance sheet data as of October 29, 1999 are derived from the unaudited
financial statements included elsewhere in this prospectus. Historical results
are not necessarily indicative of results that may be expected for any future
period.
<TABLE>
<CAPTION>
PERIOD FROM QUARTER ENDED
JANUARY 9, 1995 YEAR ENDED JULY 31, -------------------------
(INCEPTION) TO ------------------------------------ OCTOBER 31, OCTOBER 29,
JULY 31, 1995 1996 1997 1998 1999 1998 1999
---------------- ------- ------ ------ -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues.................... $ 1,135 $ 2,257 $2,743 $5,556 $ 17,710 $2,435 $ 14,848
Cost of revenues.............. 747 1,991 2,562 4,494 17,766 2,053 12,887
------- ------- ------ ------ -------- ------ --------
Gross margin............... 388 266 181 1,062 (56) 382 1,961
Operating expenses:
Sales and marketing........ 21 27 310 382 5,183 177 5,064
Research and development... 86 144 115 180 3,189 48 2,774
General and
administrative........... 170 264 218 427 3,791 136 1,496
Amortization of deferred
stock compensation....... -- -- -- -- 2,312 118 2,855
------- ------- ------ ------ -------- ------ --------
Total operating
expenses............ 277 435 643 989 14,475 479 12,189
------- ------- ------ ------ -------- ------ --------
Income (loss) from
operations................. 111 (169) (462) 73 (14,531) (97) (10,228)
Interest and other income
(expense), net............. -- (1) (12) 11 19 -- 173
------- ------- ------ ------ -------- ------ --------
Net income (loss)............. $ 111 $ (170) $ (474) $ 84 $(14,512) $ (97) $(10,055)
======= ======= ====== ====== ======== ====== ========
Dividend related to
convertible preferred
stock...................... $ -- $ -- $ -- $ -- $ -- $ -- $ (4,900)
======= ======= ====== ====== ======== ====== ========
Net income (loss) attributable
to common stockholders..... $ 111 $ (170) $ (474) $ 84 $(14,512) $ (97) $(14,955)
======= ======= ====== ====== ======== ====== ========
Basic net income (loss)
per share.................. $ 0.01 $ (0.01) $(0.05) $ 0.02 $ (2.62) $(0.02) $ (2.00)
======= ======= ====== ====== ======== ====== ========
Diluted net income (loss) per
share...................... $ 0.01 $ (0.01) $(0.05) $ 0.01 $ (2.62) $(0.02) $ (2.00)
======= ======= ====== ====== ======== ====== ========
Shares used in computing basic
net income (loss) per
share...................... 15,000 15,000 9,467 5,100 5,530 5,100 7,483
======= ======= ====== ====== ======== ====== ========
Shares used in computing
diluted net income (loss)
per share.................. 15,000 15,000 9,467 12,249 5,530 5,100 7,483
======= ======= ====== ====== ======== ====== ========
Pro forma basic net loss per
share (unaudited).......... $ (1.01) $ (0.56)
======== ========
Shares used in computing pro
forma basic net loss per
share (unaudited).......... 14,317 26,646
======== ========
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
JULY 31, OCTOBER 29,
---------------------------------------------------- -----------
1995 1996 1997 1998 1999 1999
------------- ------- ------- ------ ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 21 $ 147 $ 20 $ 62 $18,653 $ 14,690
Working capital.................... 341 129 12 (214) 16,230 13,877
Total assets....................... 380 304 591 1,195 27,595 27,392
Long-term obligations, less current
portion......................... 50 -- -- 275 424 673
Total stockholders' (deficit)
equity.......................... 319 149 45 (420) 18,363 16,201
</TABLE>
See Note 2 of Notes to Financial Statements for an explanation of the
determination of the shares used in computing basic and diluted net income
(loss) per share and pro forma basic net loss per share.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and the related notes
included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of certain factors including the risks discussed in "Risk Factors" and elsewhere
in this prospectus.
OVERVIEW
We are a leading provider of Linux-based solutions, integrating systems,
software and services. Our broad-based technical expertise in systems and
software design, as well as our focus on the Linux operating system and related
open source solutions, enables us to provide high-quality Linux systems designed
for optimal performance, reliability and scalability. To further expand our
service offerings, we recently established a professional services organization.
We were founded in January 1995, and grew very modestly until the end of
fiscal 1998. Since July 31, 1998, however, we have experienced significant
growth and have invested in hiring engineers with Linux expertise, growing our
direct sales force to better penetrate the market for Linux products and
marketing our brand. To further implement these strategies, we expanded our
operations, customer support and administration infrastructure. As a result, our
employee base grew from 15 at July 31, 1998 to 179 on October 29, 1999, and our
operating expenses grew significantly. At October 29, 1999, we had an
accumulated deficit of $29.9 million. This rapid growth has placed significant
demands on our management and operational resources.
During fiscal 1999, our quarterly revenues increased rapidly, growing from
$2.4 million in the quarter ended October 31, 1998 to $7.8 million in the
quarter ended July 31, 1999 and to $14.8 million in the quarter ended October
29, 1999. To date, substantially all of our revenues have been derived from
sales of systems and related customer support. Sales of our servers accounted
for approximately 59% of our net revenues in fiscal 1999, approximately 85% in
the quarter ended July 31, 1999 and approximately 88% in the quarter ended
October 29, 1999. While we expect sales of our desktop and storage products to
increase, current and future generations of our server product families will
continue to represent a significant majority of our net revenues through fiscal
2000. We recognize revenues from product sales upon shipment. We do not grant
any rights to our customers to return products. We also provide allowances for
warranty costs at the time of shipment. Customer support fees are recognized
ratably over the term of the service contract.
In September 1999, we established our professional services organization to
expand our existing customer service and support offerings to better address the
demand for Linux expertise from our customers. This organization offers a number
of services, including systems architecture and planning, deployment and
installation, system integration, open source product implementation,
performance analysis and security consulting services. We believe that the
computer industry is generally characterized by significant demand for
professional services. Although revenues from our professional services
organization have been insignificant to date, we are aggressively marketing
these services and believe that these services will address this significant
demand. Accordingly, we expect these revenues to account for a more significant
portion of revenues in the future. Professional services revenues are recognized
upon completion of a project. Any payments made prior to completion are recorded
as deferred revenue.
Prior to January 1999, we sold our products to customers primarily in
response to telephone inquiries. During the third quarter of fiscal 1999, we
began implementing our direct sales strategy. The number of employees engaged in
direct sales activities grew from four at January 31, 1999, to 41 at October 29,
1999. Our direct sales organization consists of field sales, telesales and sales
support personnel. Although indirect sales have been insignificant to date, we
may pursue selective channel opportunities to supplement our direct sales
efforts. In addition, our valinux.com web site permits customers to configure
and order products online, allowing us to more efficiently sell products and
facilitate order processing. In
25
<PAGE> 27
October 1999, substantially all of our sales were processed through this web
site. We intend to continue to enhance our e-commerce solutions to foster closer
relationships with our customers and improve the efficiency of our sales
process.
To date, substantially all of our sales have been in North America. We
expect to launch sales and marketing efforts internationally during fiscal 2000,
initially focusing on Europe. However, we expect international revenues to
represent a relatively small percent of our revenues, if any, in fiscal 2000.
We outsource a significant portion of our manufacturing and supply chain
management operations, including inventory management and component procurement,
to Synnex, our contract manufacturer. We provide Synnex with five month rolling
forecasts based on anticipated product orders. Synnex uses these forecasts to
purchase components for our products. If we overestimate our component
requirements, Synnex may have excess inventory, which would increase our costs.
If we underestimate our component requirements, Synnex may have inadequate
inventory, which could interrupt their manufacturing of our products and result
in delays in system shipments. Any of these events could harm our business and
results of operations. Our agreement with Synnex may be terminated for any
reason at any time on delivery of 120 days advanced notice. A substantial
majority of our cost of revenues currently consists of payments to Synnex. Cost
of revenues also includes costs associated with our customer support and
professional services. Customer support costs include payments made to
DecisionOne, which provides call-center and onsite service functions to our
customers. We expect revenues from professional services to carry a higher gross
margin than our product revenues. We believe that future gross margin will
primarily be affected by:
- changes in components and manufacturing costs;
- the volume and mix of products and services sold;
- new product introductions both by us and our competitors;
- changes in our pricing policies and those of our competitors;
- the size of customer orders; and
- the mix of domestic and international sales.
Prior to October 1998, we operated as a small closely-held company. As
such, we did not have the types of operational and financial controls normally
implemented by growing enterprises. During the second half of fiscal 1999, we
implemented or updated our operational and financial systems, procedures and
controls, including the implementation of an enterprise resource planning system
and an Internet-based ordering system. Our systems will continue to require
additional modifications and improvements, and possibly new systems, to respond
to future changes in our business. Implementation of these modifications and
improvements or new systems could be disruptive to our business.
In connection with the grant of stock options to employees during fiscal
1999 and the first quarter of fiscal 2000, we recorded deferred stock
compensation of $14.4 million and $15.8 million, respectively, representing the
difference between the deemed fair market value of the common stock for
accounting purposes and the exercise price of these options as of the date of
grant. Deferred compensation is presented as a reduction of stockholders' equity
and is amortized on an accelerated basis over the vesting period of the
applicable options. We expensed $2.3 million and $2.9 million of deferred
compensation during fiscal 1999 and the first quarter of fiscal 2000,
respectively. Based on option grant activity through October 29, 1999, we expect
to amortize deferred stock compensation of $10.8 million during the remaining
nine months of fiscal 2000, $8.1 million in fiscal 2001, $4.3 million in fiscal
2002, $1.8 million in fiscal 2003 and approximately $147,000 in fiscal 2004. For
more information on the calculation of this charge, see Note 8 of Notes to
Financial Statements.
26
<PAGE> 28
RESULTS OF OPERATIONS
Although we have included a discussion of our results of operations for
each of the three fiscal years ended July 31, 1999, our significant growth
during the last fiscal year and the first quarter of fiscal 2000 makes
period-to-period comparisons involving periods prior to the fiscal year ended
July 31, 1998 less meaningful than an analysis of more recent annual and
quarterly operating results. Accordingly, this discussion and analysis of our
operating results is primarily focused on comparisons between fiscal 1998 and
1999 and the first quarter of fiscal 2000. The following table sets forth
financial data for the periods indicated as a percent of net revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JULY 31, -------------------------
----------------------- OCTOBER 29, OCTOBER 29,
1997 1998 1999 1998 1999
----- ----- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................................... 93.4 80.9 100.3 84.3 86.8
----- ----- ----- ----- ------
Gross margin........................................... 6.6 19.1 (0.3) 15.7 13.2
----- ----- ----- ----- ------
Operating expenses:
Sales and marketing.................................. 11.3 6.9 29.3 7.3 34.1
Research and development............................. 4.2 3.2 18.0 2.0 18.7
General and administrative........................... 7.9 7.7 21.4 5.6 10.1
Amortization of deferred stock compensation.......... -- -- 13.0 4.8 19.2
----- ----- ----- ----- ------
Total operating expenses........................ 23.4 17.8 81.7 19.7 82.1
----- ----- ----- ----- ------
Income (loss) from operations.......................... (16.8) 1.3 (82.0) (4.0) (68.9)
Interest and other income (expense), net............... (0.5) 0.2 0.1 -- 1.2
----- ----- ----- ----- ------
Net income (loss)...................................... (17.3)% 1.5% (81.9)% (4.0)% (67.7)%
===== ===== ===== ===== ======
Dividend related to convertible preferred stock........ -- -- -- -- (33.0)%
===== ===== ===== ===== ======
Net income (loss) applicable to common stockholders.... (17.3)% 1.5% (81.9)% (4.0)% (100.7)%
===== ===== ===== ===== ======
</TABLE>
YEARS ENDED JULY 31, 1998 AND 1999
Net Revenues
Net revenues increased from $2.7 million in fiscal 1997, to $5.6 million in
fiscal 1998, to $17.7 million in fiscal 1999. Net revenues for each period
increased due to an increase in our customer base from approximately 300
customers in fiscal 1997, to approximately 550 customers in fiscal 1998, to more
than 1,100 customers in fiscal 1999. Additionally, our average level of business
with each customer increased during this period from approximately $9,000 per
year in fiscal 1997, to approximately $10,000 per year in fiscal 1998, to more
than $15,000 per year in fiscal 1999. Growth of net revenues from fiscal 1998 to
fiscal 1999 benefitted from the introduction of our new server product designed
for the Internet market late in the second quarter of fiscal 1999. This new
product helped increase overall sales of our server products. In the fourth
quarter of fiscal 1999, sales of our server products accounted for approximately
85% of net revenues. We also believe this increase in sales reflected the
growing market acceptance of Linux and related open source software. A majority
of our systems are sold to customers deploying or expanding Internet
infrastructure environments. We believe that sales of our Internet
infrastructure solutions will represent an increasing portion of our revenues.
Cost of Revenues
Cost of revenues increased from $2.6 million in fiscal 1997, to $4.5
million in fiscal 1998, to $17.8 million in fiscal 1999. Gross margin increased
as a percent of net revenues from 6.6% in fiscal 1997, to 19.1% in fiscal 1998,
primarily due to increased sales volume and the introduction of new products. In
fiscal 1999, gross margin declined to negative 0.3%. This decline was due to
three factors. The largest factor was costs associated with establishing and
moving our manufacturing activities to our initial contract
27
<PAGE> 29
manufacturer. This represented approximately 50% of the decline. The second
factor was the establishment of our technical support organization and increased
headcount in our manufacturing operations, which represented approximately 30%
of the decline. The third factor was increased component costs due to our
transitioning to more dependable component suppliers. To become more
competitive, we transferred our manufacturing operations to Synnex in July 1999.
While we incurred additional expenses in connection with this move, we believe
that Synnex's position as a distributor of Intel architecture components and
other subsystems, its focus on build-to-order processes and its expertise in
material management will reduce our future product costs. In addition, we
anticipate that our gross margins will improve if unit volume increases and we
successfully market our professional services.
Sales and Marketing Expenses
Sales and marketing expenses consist of salaries, commissions and related
expenses for personnel engaged in marketing, sales and sales support functions,
as well as costs associated with trade shows, advertising and promotional
activities. Sales and marketing expenses increased from approximately $310,000
in fiscal 1997, to approximately $382,000 in fiscal 1998, to $5.2 million in
fiscal 1999. Sales and marketing expenses as a percent of net revenues were
11.3% in fiscal 1997, 6.9% in fiscal 1998 and 29.3% in fiscal 1999.
Approximately 70% of the increase in absolute dollars from fiscal 1998 to fiscal
1999 was due to an increase in sales and marketing personnel from two at the end
of fiscal 1998 to 66 at the end of fiscal 1999. Of these 66 employees, 34 were
engaged in sales and 32 were engaged in marketing. The remainder of the increase
was due to the launch and ongoing implementation of our branding and other
marketing campaigns. We intend to expand our sales and marketing activities
substantially, both domestically and internationally, in order to increase
market awareness and sales of our products. Accordingly, we expect our sales and
marketing expenses to continue to increase in absolute dollars.
Research and Development Expenses
Research and development expenses consist of payroll and related expenses
for software and hardware engineers and cost of materials for prototyping and
testing units. We expense all of our research and development costs as they are
incurred. Research and development expenses increased from approximately
$115,000 in fiscal 1997, to approximately $180,000 in fiscal 1998, to $3.2
million in fiscal 1999. Research and development expenses as a percent of net
revenues were 4.2% in fiscal 1997, 3.2% in fiscal 1998 and 18.0% in fiscal 1999.
Approximately 60% of the increase in absolute dollars from fiscal 1998 to fiscal
1999 was due to an increase in research and development personnel from two at
the end of fiscal 1998 to 29 at the end of fiscal 1999. The remainder of the
increase was due to increased spending for material for new product development.
We believe that a significant level of investment in system design, open source
software and other research and development initiatives is required to remain
competitive. Accordingly, we expect research and development expenses to
continue to increase in absolute dollars on an annual basis.
General and Administrative Expenses
General and administrative expenses consist of salaries and related
expenses for finance and administrative personnel, professional fees and costs
associated with implementing and expanding our information systems. General and
administrative expenses increased from approximately $218,000 in fiscal 1997, to
approximately $427,000 in fiscal 1998, to $3.8 million in fiscal 1999. General
and administrative expenses as a percent of net revenues were 7.9% in fiscal
1997, 7.7% in fiscal 1998 and 21.4% in fiscal 1999. Approximately 60% of the
increase in absolute dollars from fiscal 1998 to fiscal 1999 was due to an
increase in administrative personnel from six at the end of fiscal 1998 to 28 at
the end of fiscal 1999. The remainder of the increase was due to expenses
necessary to support our increased operations, including the implementation of a
new management information system. We intend to add personnel to expand our
information infrastructure and to support our operation as a public company. As
a result, we expect general and administrative expenses to increase in absolute
dollars on an annual basis.
28
<PAGE> 30
Amortization of Deferred Stock Compensation
In connection with the grant of stock options to employees during fiscal
1999, we recorded deferred stock compensation of $14.4 million. We amortized
$2.3 million of deferred stock compensation in fiscal 1999. We did not record
any deferred stock compensation or amortization in fiscal 1997 or fiscal 1998.
Interest and Other Income (Expense), Net
Interest and other income, net includes income from our cash investments
net of other expenses. We had net interest and other expense of approximately
$12,000 in fiscal 1997, and net interest and other income of approximately
$11,000 in fiscal 1998 and approximately $19,000 in fiscal 1999. The increase
from fiscal 1998 to fiscal 1999 was primarily due to an increase in interest
income earned on proceeds from issuances of convertible preferred stock.
Income Taxes
As of July 31, 1999, we had $10.8 million of federal and $5.2 million of
state net operating loss carryforwards for tax reporting purposes available to
offset future taxable income. The federal net operating loss carryforwards
expire at various dates through 2019 to the extent that they are not utilized.
We have not recognized any benefit from these net operating loss carryforwards
because of uncertainty surrounding their realization. The amount of net
operating losses that we can utilize is limited under tax regulations because we
have experienced a cumulative stock ownership change of more than 50% over the
last three years.
QUARTERS ENDED OCTOBER 31, 1998 AND OCTOBER 29, 1999
Net Revenues
Net revenues for the quarter ended October 29, 1999 were $14.8 million, an
increase of 510% over net revenues of $2.4 million for the quarter ended October
31, 1998. This growth was due to increased sales volume and benefitted from the
introduction of our next generation Internet server product. During the quarter
ended October 29, 1999, sales to Akamai Technologies, Inc. represented
approximately 17% of our net revenues. No other customer represented more than
10% of our net revenues during that quarter.
Cost of Revenues
Cost of revenues increased from $2.1 million in the quarter ended October
31, 1998 to $12.9 million in the quarter ended October 29, 1999. Gross margin
decreased from 15.7% of net revenues in the quarter ended October 31, 1998 to
13.2% of net revenues in the quarter ended October 29, 1999. The decline in
gross margin was due to the establishment of our technical support organization
which decreased our gross margin by 6.9 percentage points offset partially by
the increased efficiency of our manufacturing infrastructure resulting from
higher revenues.
Sales and Marketing Expenses
Sales and marketing expenses increased from approximately $177,000 in the
quarter ended October 31, 1998 to $5.1 million in the quarter ended October 29,
1999. As a percent of net revenues, sales and marketing expenses increased from
7.3% in the quarter ended October 31, 1998 to 34.1% in the quarter ended October
29, 1999. Approximately 64% of the increase in absolute dollars from the quarter
ended October 31, 1998 period to the quarter ended October 29, 1999 period was
due to an increase in sales and marketing personnel from four to 71. The
remainder of the increase was due to increased spending for branding activities.
Research and Development Expenses
Research and development expenses increased from approximately $48,000 in
the quarter ended October 31, 1998, to $2.8 million in the quarter ended October
29, 1999. As a percent of net revenues,
29
<PAGE> 31
research and development expenses increased from 2.0% in the quarter ended
October 31, 1998 to 18.7% in the quarter ended October 29, 1999. Approximately
50% of the increase in absolute dollars from the quarter ended October 31, 1998
period to the quarter ended October 29, 1999 was due to an increase in research
and development personnel from three to 34. The remainder of the increase was
due to increased spending for material for new product development.
General and Administrative Expenses
General and administrative expenses increased from approximately $136,000
in the quarter ended October 31, 1998, to $1.5 million in the quarter ended
October 29, 1999. As a percent of net revenues, general and administrative
expenses increased from 5.6% in the quarter ended October 31, 1998 to 10.1% in
the quarter ended October 29, 1999 period. Approximately 60% of the increase in
absolute dollars was due to an increase in administrative personnel from five to
37. The remainder of the increase was due to increased spending for consulting
and other professional services.
Amortization of Deferred Stock Compensation
We amortized approximately $118,000 of deferred stock compensation in the
quarter ended October 31, 1998. We recorded deferred stock compensation of $15.8
million and amortized $2.9 million of deferred stock compensation in the quarter
ended October 29, 1999.
Interest and Other Income (Expense), Net
We had no interest and other income, net during the quarter ended October
31, 1998. During the quarter ended October 29, 1999, we earned approximately
$173,000 of interest income from the investment of the proceeds raised from
sales of our convertible preferred stock.
Preferred Stock Dividend
During the quarter ended October 29, 1999, we recorded a preferred stock
dividend of $4.9 million representing the value of the beneficial conversion
feature on the issuance of convertible preferred stock in September 1999. The
beneficial conversion feature was calculated at the commitment date based on the
difference between the conversion price of $3.86 per share and the estimated
fair value of the common stock at that date. The amount of the beneficial
conversion feature was limited to the amount of the gross proceeds received from
the issuance of convertible preferred stock. The excess of the beneficial
conversion feature over the gross proceeds received was $4.2 million.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of the five
quarters in the period ending October 29, 1999. The information for each of
these quarters is unaudited and has been prepared on the same basis as our
audited financial statements appearing elsewhere in this prospectus. In the
opinion of management, all necessary adjustments, consisting only of normal
recurring adjustments, have been included to present fairly the unaudited
quarterly results when read in conjunction with our audited financial statements
and related notes. We have experienced, and expect to continue to experience,
fluctuations in operating results from quarter to quarter. Historical operating
results are not necessarily indicative of the results that may be expected for
any future period.
30
<PAGE> 32
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 29,
1998 1999 1999 1999 1999
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues...................... $2,435 $ 3,170 $ 4,270 $ 7,835 $ 14,848
Cost of revenues.................. 2,053 3,324 4,295 8,094 12,887
------ ------- ------- ------- --------
Gross margin.................... 382 (154) (25) (259) 1,961
------ ------- ------- ------- --------
Operating expenses:
Sales and marketing............. 177 406 1,326 3,274 5,064
Research and development........ 48 216 410 2,515 2,774
General and administrative...... 136 654 1,146 1,855 1,496
Amortization of deferred stock
compensation................. 118 371 505 1,318 2,855
------ ------- ------- ------- --------
Total operating
expenses.............. 479 1,647 3,387 8,962 12,189
------ ------- ------- ------- --------
Loss from operations.............. (97) (1,801) (3,412) (9,221) (10,228)
Interest and other income
(expense), net.................. -- (14) -- 33 173
------ ------- ------- ------- --------
Net loss.......................... $ (97) $(1,815) $(3,412) $(9,188) $(10,055)
====== ======= ======= ======= ========
Dividend related to convertible
preferred stock................. $ -- $ -- $ -- -- $ (4,900)
====== ======= ======= ======= ========
Net loss attributable to common
stockholders.................... $ (97) $(1,815) $(3,412) $(9,188) $(14,955)
====== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 29,
1998 1999 1999 1999 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
AS A PERCENT OF NET REVENUES:
Net revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................. 84.3 104.9 100.6 103.3 86.8
------ ------- ------- ------- --------
Gross margin................. 15.7 (4.9) (0.6) (3.3) 13.2
------ ------- ------- ------- --------
Operating expenses:
Sales and marketing............. 7.3 12.8 31.1 41.8 34.1
Research and development........ 2.0 6.8 9.6 32.1 18.7
General and administrative...... 5.6 20.6 26.8 23.7 10.1
Amortization of deferred stock
compensation................. 4.8 11.7 11.8 16.8 19.2
------ ------- ------- ------- --------
Total operating
expenses.............. 19.7 51.9 79.3 114.4 82.1
------ ------- ------- ------- --------
Loss from operations.............. (4.0) (56.8) (79.9) (117.7) (68.9)
Interest and other income
(expense), net.................. -- (0.4) -- 0.4 1.2
------ ------- ------- ------- --------
Net loss.......................... (4.0)% (57.2)% (79.9)% (117.3)% (67.7)%
====== ======= ======= ======= ========
Dividend related to convertible
preferred stock................. -- -- -- -- (33.0)%
====== ======= ======= ======= ========
Net loss attributable to common
stockholders.................... (4.0)% (57.2)% (79.9)% (117.3)% (100.7)%
====== ======= ======= ======= ========
</TABLE>
31
<PAGE> 33
Gross margin decreased from 15.7% in the quarter ended October 31, 1998, to
negative 3.3% in the quarter ended July 31, 1999. Approximately 70% of this
decline during fiscal 1999 was due to an increase in component costs due to our
transitioning to more dependable component suppliers. The remainder of the
decline was due to costs associated with the establishment of our technical
support organization. Gross margin increased from negative 3.3% in the quarter
ended July 31, 1999, to 13.2% in the quarter ended October 29, 1999.
Approximately 75% of the increase was due to lower material costs as a result of
transferring our manufacturing operations to Synnex. The remainder of the
increase represents improved leverage of our manufacturing infrastructure as a
result of increased volumes. We expect sales and marketing expenses to continue
to increase in absolute dollars on a quarterly basis through fiscal 2000 as we
continue to hire additional sales and marketing personnel and invest in branding
activities. We also expect our research and development expenses to increase in
absolute dollars on a quarterly basis through fiscal 2000 as we continue to hire
additional personnel. General and administrative expenses of $1.5 million in the
quarter ended October 29, 1999 decreased approximately $360,000 from the quarter
ended July 31, 1999. This decrease was due to the expenditure of approximately
$500,000 for the implementation of a new management information system during
the quarter ended July 31, 1999, partially offset by fees paid for consulting
services. We expect general and administrative expenses to stabilize during the
remainder of fiscal 2000 as reduced consulting costs are expected to be offset
by increased costs associated with being a public company and the hiring of
additional personnel. Our operating expenses are largely fixed and are based on
anticipated revenue trends. As a result, a delay in generating or recognizing
revenues could cause significant variations in our operating results from
quarter to quarter and could result in substantially greater operating losses.
In addition, we intend to broaden our professional service organization and
begin manufacturing products internationally, both of which will increase our
cost of revenues.
Our net revenues and operating results will vary significantly from quarter
to quarter due to a number of factors, many of which are outside of our control
and any of which may cause our stock price to fluctuate. The primary factors
that could affect our quarterly operating results include:
- demand for and market acceptance of Linux-based systems and our products
and services;
- increases in manufacturing costs, including the prices of components we
purchase;
- reductions in the sales price of systems offered by us or our
competitors;
- our ability to develop, introduce and market new products and product
enhancements that meet customer requirements in a timely manner;
- our contract manufacturer's ability to manufacture sufficient quantities
of systems and maintain the quality of our systems;
- our ability to obtain sufficient supplies of sole or single source
components, including power supplies and chassis;
- the introduction of competing products by larger companies which market
general or limited purpose servers and computers;
- the failure of Linux developers to enhance and develop the Linux
operating system;
- economic conditions generally and in the specific industries in which our
customers operate; and
- costs related to acquisitions of complementary technologies or
businesses.
Although we grew sequentially each quarter during fiscal 1999 and the first
quarter of fiscal 2000, we may experience some seasonality in our operating
results. It is difficult for us to evaluate the degree to which this seasonality
may affect our business because of our limited operating history and the fact
that our recent growth may have overshadowed seasonality in recent periods. In
addition, if our international sales grow, we may experience lower sales in
Europe or other international locations during the summer months. Concerns
regarding year 2000 compliance issues may also adversely affect the demand for
our products in the next few quarters.
32
<PAGE> 34
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our operations have been financed through private sales of
$35.9 million of convertible preferred stock. As of July 31, 1999 and October
29, 1999, we had cash and cash equivalents of $18.7 million and $14.7 million,
respectively, an accumulated deficit of $15.0 million and $29.9 million,
respectively, and working capital of $16.2 million and $13.9 million,
respectively.
In February 1999, we entered into a $4.0 million line of credit with a
bank. In connection with this line of credit, we also entered into a $500,000
equipment loan. At October 29, 1999, $500,000 was outstanding under the
equipment loan and no amounts were outstanding under the line of credit. Amounts
outstanding under each facility bear interest at a variable rate equal to the
bank's prime rate plus 0.75% per annum (8.75% as of October 29, 1999) and are
secured by substantially all of our assets. At July 31, 1999 and October 29,
1999, we were not in compliance with the tangible net worth covenant in our
agreement with the bank. These violations were subsequently waived by the bank.
We used approximately $325,000 of cash in operating activities in fiscal
1997 and $10.2 million in fiscal 1999. We generated approximately $86,000 in
cash from operations in fiscal 1998. Cash used in operating activities for
fiscal 1997 and 1999 was attributable to net losses of approximately $474,000
and $14.5 million, respectively. In fiscal 1998, we generated cash from an
increase in accounts payable of approximately $403,000 and net income of
approximately $84,000, offset in part by an increase in accounts receivable. In
fiscal 1999, cash used in operating activities was also attributable to
increases in accounts receivable and inventories of $3.3 million and $1.7
million, respectively, offset in part by increases in accounts payable of $5.4
million and accrued expenses of $1.4 million, as well as depreciation and
amortization of stock compensation. In the first quarter of fiscal 2000, we used
$8.1 million of cash in operating activities. Cash used in operating activities
during the first quarter ended October 29, 1999, was attributable to a net loss
of $10.1 million and an increase in accounts receivable of $3.3 million, offset
in part by increases in accounts payable of $1.3 million, accrued liabilities,
warranty and other of approximately $421,000 and depreciation and amortization
of stock compensation.
We used cash in investing activities of approximately $25,000 in fiscal
1997, approximately $44,000 in fiscal 1998 and $2.3 million in fiscal 1999.
Approximately 70% of the cash used in fiscal 1999 was used for purchases of
computer equipment. The remainder of the cash used in investing activities was
used to purchase a variety of other fixed assets. We used cash in investing
activities of approximately $701,000 in the first quarter of fiscal 2000.
Approximately 90% of the cash used during this period was used for purchases of
computer equipment and the remainder was used to purchase a variety of other
fixed assets. While we have no outstanding commitments, we expect to make
capital expenditures of approximately $2.0 million during the remaining nine
months of fiscal 2000. Our capital expenditures may increase over the next
several years as we expand our facilities and acquire equipment to support
expansion of our sales and marketing and research and development activities.
Our financing activities provided cash of approximately $370,000 in fiscal
1997, $31.0 million in fiscal 1999 and $4.8 million in the first quarter of
fiscal 2000. We had no financing activities in fiscal 1998. The increase in
fiscal 1999 and the first quarter of fiscal 2000 resulted almost entirely from
the net proceeds from the issuances of convertible preferred stock.
Our future liquidity and capital requirements will depend upon numerous
factors, including the costs associated with the expansion of our sales and
marketing activities and product development efforts, the level and timing of
product and service revenues, the amount of working capital required, the level
of fixed asset investment required, and available borrowings under line of
credit arrangements. We believe that the net proceeds from this offering,
together with our current cash and investment balances and any cash generated
from current or future debt financing, will be sufficient to meet our operating
and capital requirements for at least the next 12 months. However, it is
possible that we may require additional financing within this period,
particularly if we elect to acquire complementary businesses or technologies.
The factors described in this paragraph will affect our future capital
requirements and the adequacy of our available funds. As a result, we may be
required to raise additional funds through public or private financings,
strategic relationships or other arrangements. We cannot assure you that
additional funding, if
33
<PAGE> 35
needed, will be available on reasonable terms, or at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants. Our inability to raise capital
when needed could seriously harm our business.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," (SOP No. 98-1). SOP
No. 98-1 requires entities to capitalize certain costs related to internal-use
software once certain criteria have been met. We adopted SOP No. 98-1 in fiscal
1999. The adoption of SOP No. 98-1 did not have a material impact on our
financial position or results of operations.
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133, as recently amended, is effective for fiscal years beginning after
June 15, 2000. We do not believe the adoption of SFAS No. 133 will have a
material effect on our financial position or results of operations.
In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP No.
97-2, Software Revenue Recognition, With Respect to Certain Transactions," (SOP
No. 98-9). SOP No. 98-9 amends SOP No. 97-2 and SOP No. 98-4 by extending the
deferral of the application of certain provisions of SOP No. 97-2 amended by SOP
No. 98-4 through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP No. 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. We have not had significant software sales
to date and do not expect the adoption of SOP No. 98-9 to have a significant
effect on our financial position or results of operations.
YEAR 2000 READINESS
The Year 2000 Issue
The Year 2000 issue refers to the potential for disruption to business
activities caused by system failures or miscalculations which are triggered by
advancement of date records past the year 1999. For example, if software that
uses the calendar year in computations is not ready for the millennial calendar
change, it may interpret a 21(st) century date as a 20(th) century date, for
example, mistaking 2001 for 1901.
Readiness of Our Products
We have completed our assessment of Year 2000 readiness with respect to our
products and believe that all of our products manufactured since early calendar
1997 are Year 2000 compliant in all material respects. However, our products
operate in complex system environments and directly and indirectly interact with
a number of other hardware and software systems. We are unable to predict to
what extent our products may be affected if other products in the systems in
which our products operate experience a material Year 2000 failure.
Readiness of Our Systems and Facilities
Our business may be affected by Year 2000 issues. We are completing our
systems updates, upgrades, and replacements of non-ready systems. Systems
include internal hardware and software as well as external services provided by
other companies, including contract manufacturing, product development, customer
support, information processing, and facility services. We are not currently
aware of any unresolved Year 2000 problems relating to any of our internal
systems. We do not believe that we have any significant systems that are not
Year 2000 compliant. The majority of our software, hardware and operating
systems have been acquired as new products in the last two years. We acquired
the software as original product and it is supported by existing vendors. We do
not believe that we have any significant systems that
34
<PAGE> 36
contain embedded chips that are not Year 2000 compliant. We are not using legacy
hardware or software that would be more likely to have Year 2000 issues because
of its age.
Cost of Product and Internal Systems Preparation
Based on our assessment to date, we do not expect the total cost of Year
2000 preparation and remediation to be material to our business. To date, our
preparation and remediation costs have not been material.
Year 2000 Risk
Failures of our internal systems to be Year 2000 compliant could
temporarily prevent us from processing orders, issuing invoices and developing
products, and could require us to devote significant resources to correcting the
problems.
If our suppliers, vendors, customers or service providers fail to correct
their Year 2000 problems, these failures could result in an interruption in, or
a failure of, our normal business activities or operations. If a Year 2000
problem occurs, it may be difficult to determine which party's products have
caused the problem. These failures could interrupt our operations and damage our
relationships with our customers.
An internal or external business disruption caused by the Year 2000 issue
could interrupt our operations and damage our relationships with our customers.
An internal disruption unique to us could give a comparative advantage to our
competitors. Failure of our internal systems and critical external services to
be ready for the Year 2000 could delay order processing, issuing invoices or
development and shipment of products. The cost of recovery from failures could
be significant.
Our customers' purchasing plans could be affected by Year 2000 issues if
they need to expend significant resources to fix their existing systems. This
situation could divert funds and resources otherwise available for new product
purchases. In addition, some customers may wait to purchase our products until
after the Year 2000, which may reduce our revenues in the near future.
We are unable to determine at this time whether these or other Year 2000
failures will occur and if they will have a material impact on our business,
results of operations or financial condition. This inability is particularly
acute due to the potential scope of the Year 2000 problem and the inability to
ascertain the readiness of external service providers, including utilities,
government entities and other vendors. We have not developed, and we have no
current plans to develop in the near future, a contingency plan to deal with the
effects of this worst case scenario.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may invest
in may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds and government and non-government debt securities. In
general, money market funds are not subject to market risk because the interest
paid on such funds fluctuates with the prevailing interest rate. As of October
29, 1999, all of our cash and cash equivalents were in money market and checking
funds.
We have operated primarily in the United States, and all sales have been
made in U.S. dollars. Accordingly, we have not had any material exposure to
foreign currency rate fluctuations.
35
<PAGE> 37
BUSINESS
VA LINUX OVERVIEW
We are a leading provider of Linux-based solutions, integrating systems,
software and services. Our broad-based technical expertise in systems and
software design, as well as our focus on the Linux operating system and other
open source solutions, enables us to provide high-quality Linux systems designed
for optimal performance, reliability and scalability. Through our staff of Linux
system and software engineers, we also offer comprehensive customer service and
support. To further expand our service offerings, we recently established a
professional services organization to provide a broad range of services
including system architecture design, system integration and security
consulting.
Our products are primarily sold through a direct sales organization to
customers deploying or expanding Internet infrastructure environments. Our
largest customers include Akamai Technologies, eToys, StarMedia Network and 24/7
Media. Sales to these four customers accounted for 14.5% of our total net
revenues in fiscal 1999 and 23.3% in the first quarter of fiscal 2000. In fiscal
1999, we had over 50 customers who each purchased at least $50,000 of our Linux
systems.
INDUSTRY BACKGROUND
The Internet Build-Out
The Internet is rapidly becoming a critical resource for business.
Companies that successfully build an online presence can more efficiently
conduct business with partners and suppliers, communicate with customers and
employees and address the rapidly growing, global base of online consumers.
According to International Data Corporation, or IDC, the number of worldwide
Internet users is expected to grow from 159 million in 1998, to 510 million in
2003, and worldwide e-commerce revenues will increase from approximately $50
billion, to more than $1.3 trillion during the same period.
To remain competitive, companies are being forced to offer more
sophisticated Internet services more rapidly. As a result, their computing
environments are becoming more complex and their demand for Internet
infrastructure is growing. According to IDC, businesses will spend approximately
$56 billion on Internet infrastructure and deploy approximately six million
servers in 2003.
The Growth of the Internet is Fueling Demand for Linux and Other Open Source
Solutions
In seeking cost-effective, reliable and secure infrastructure for their
Internet services, companies are increasingly implementing open source software,
such as the Linux operating system, the Apache web server (a popular application
running on the Linux operating system which allows for the service of web
pages), the Samba file server (a popular application running on the Linux
operating system which provides file services) and the Sendmail e-mail server (a
popular application running on the Linux operating system which allows the
exchange of e-mail messages).
The term "open source" applies to software which can be copied, modified
and distributed without any associated fee and with few restrictions. As such,
the source code for Linux can be downloaded from the Internet. Popular open
source software like Linux is continuously maintained and improved by large
communities of developers who share information, code and suggestions. This
collaborative environment has been facilitated and enhanced by the growth of the
Internet and the availability of low-cost computing resources. These market
trends have fueled significant increases in the number of developers in open
source projects, the frequency of software releases and the speed of feature
development and error correction.
The nature of open source software makes it very easy for multiple groups,
commercial and non-commercial, to create "distributions," or collections, of
this software. The best known distributions of Linux, for example, include those
from Caldera, Debian, Red Hat and S.u.S.E. In most cases, there are only minor
technical variations among distributions and software applications designed for
Linux to run consistently across all of them. When variations among
distributions occur, they are generally market-
36
<PAGE> 38
based. For example, some distributions are localized for different languages or
optimized for different hardware systems.
The following points illustrate some of the benefits consumers receive by
implementing the Linux operating system and related open source solutions:
Rapid Development and High Quality. Traditional software vendors that
create proprietary software programs rely on a limited pool of software
engineers to correct software errors and develop new software or software
enhancements. In contrast, any end user can access the source code to
develop new features and applications or suggest fixes and improvements to
open source software. As a result, businesses are not dependent on a single
third party vendor and can rely on a larger pool of software engineers and
service providers. In addition, these software projects promote independent
peer review. This system of peer review is designed to ensure the quality
of all submissions and changes to the code. Furthermore, we believe that
opening source code to the public ensures that security flaws are quickly
identified and eliminated, making open source software more secure than
proprietary software.
Customer-Focused Solutions. The lack of access to the source code of
proprietary software makes it more difficult and costly to integrate into
existing systems than open source software. In addition, in an environment
where anyone can access and modify the source code, internal development
personnel in an organization can leverage the efforts of a broad community
consisting of other information technology specialists and independent
programmers to develop customized solutions more rapidly and at a
significantly lower cost. The ability to modify open source software by end
users also results in open source software implementations that are
tailored to meet customer needs.
Lower Cost of Ownership. Consumers can significantly decrease the
cost of owning and servicing their computing systems in an open source
environment. According to GartnerGroup, the sale price of the computing
system typically accounts for approximately 10% of the total cost of owning
that system. The remaining 90% is attributable to services such as
training, support and maintenance. These are largely software
support-related activities. Therefore, in addition to having the ability to
install an unlimited number of copies for free, consumers can reduce their
costs by sourcing services from more than one party, avoiding the
significant margins that proprietary software vendors can charge as a
result of their exclusive knowledge of the product. Open source software
solutions create a competitive, multi-source market for these software
support services.
The benefits of open source initiatives have accelerated the market
penetration of open source software, especially in environments such as the
Internet where highly reliable, secure, low-cost and customizable solutions are
essential. For example, in September 1999, Apache, an open source web server,
commanded a 55% market share, according to the Netcraft Web Server Survey
(netcraft.com/survey), as compared to 22% for Microsoft's Internet Information
Server.
Linux is the Leading Internet Operating System
Linux has emerged as the leading operating system for the Internet.
According to an April 1999 survey conducted by the Internet Operating System
Counter (leb.net/hzo/ioscount), which polls web sites for operating system
information, Linux ran on approximately 31% of the servers polled, more than any
other single system. According to an IDC report dated August 1999, the use of
Linux grew at an annual rate of 181% in 1998. In its report, IDC also projected
that the use of Linux will grow faster than the use of any other operating
system through 2003. We believe that this growth is largely attributable to
decisions by information technology managers to deploy Linux as a highly
cost-effective and reliable way to support web services. However, we can give no
assurances that any of the referenced projections will be achieved. According to
the IDC report, in 1998, Linux compact disc units sold represented 14.7% of all
server operating system license units sold worldwide, and, according to PC Data,
sales of Linux operating system units in retail stores grew from 6,236 in June
1998 to 46,175 in June 1999. We believe that the reliability,
37
<PAGE> 39
security and continuous improvement of open source software, complemented by its
low cost, will continue to make Linux a preferred solution for delivering
Internet services.
The Challenge in Delivering Open Source Solutions
As companies adopt software solutions that are created in an open source
environment as part of their critical business operations, they face new
challenges. To help maximize the advantages of these software solutions and
address these challenges, consumers require the assistance of vendors that have
significant open source expertise and are able to provide timely and qualified
open source professional services and customer support. The rapid evolution of
open source software requires open source vendors and support providers to:
- continuously develop knowledge of the ongoing changes in open source
software distributions;
- actively engage in research and development with the open source
development community; and
- leverage the expertise of this community to deliver customized solutions.
In addition, as open source software becomes more complex, its interactions
with a diverse range of commodity hardware platforms become more difficult to
support. Supporting too broad a set of hardware platforms and software offerings
can overwhelm many service and support organizations. As a result, vendors must
maintain a thorough understanding of the interoperability of open source
software distributions and hardware platforms and tailor their offerings to
provide the best available hardware and software products.
Traditional server, workstation and personal computer vendors depend on
highly controlled and scheduled releases of software from major proprietary
software developers. This regimented software environment enables the
disaggregation of hardware, service and support delivery among multiple
companies, while keeping systems and service offerings tied to new proprietary
software releases. Given the rapid rate of development in commodity hardware
markets, systems vendors have become reliant on this controlled software release
process to coordinate the development and create the demand for new products and
services. As open source software gains market acceptance, its rapid and
relatively unconstrained pace of development disrupts these well-defined
processes and poses significant challenges for traditional systems vendors and
service providers. To effectively deliver open source solutions to large
companies, vendors will need to simultaneously:
- capitalize on the rapid pace of open source software development;
- manage the high rate of change in commodity hardware markets; and
- integrate the best available open source software and system components
to produce the highest-quality solutions for particular customer needs.
We believe that, in order to satisfy these market requirements, open source
vendors must deliver integrated system, software and support solutions to
customers.
The Market Opportunity for Open Source Vendors
We believe that open source solutions will continue to gain market
acceptance as the limitations of more expensive and less customizable
proprietary applications become more pronounced. To date, no large Intel
processor-based systems vendors have focused their businesses on delivering
high-quality systems optimized for Linux and other open source software. These
vendors are primarily dependent on proprietary operating systems and
applications from vendors such as Microsoft. Alternatively, some systems
vendors, such as Sun Microsystems, offer their own proprietary software. In
neither case do these vendors maintain expertise in creating and implementing
open source systems, nor do they have extensive ties to the open source
community. Linux software and service vendors, on the other hand, have little
experience in developing and supporting systems that are optimized for Linux.
38
<PAGE> 40
SOLUTION
We are a leading provider of Linux-based solutions, integrating systems,
software and services. We offer high-quality Linux systems that are designed for
optimal performance, reliability and scalability in business and Internet-based
computing environments. We also offer comprehensive service and customer
support. Our products and services offer the following benefits:
Integrated Linux-Based Solution
We offer a single point of contact for all Linux product, service and
support needs. Our Linux systems are used in a variety of computing
environments, ranging from small desktops to complex, high-performance, groups
of servers and are differentiated to meet the price, performance and scalability
requirements of our customers. For example, for the Internet server markets, we
offer compact servers with high storage capabilities that we engineer for use by
companies with physical space constraints. We also offer professional services,
consisting of planning, implementation, installation and integration, security
audits and performance analysis, as well as 24-hour toll-free telephone support
and onsite services by Linux professionals.
Depth of Technical Expertise in Linux and Other Open Source Software
We focus on Linux-based solutions and have developed a comprehensive
understanding of our customers' Linux needs. In addition, by cultivating close
ties with the open source community, we have assembled a world-class team of
Linux software engineers and community professionals who collaborate on open
source development projects. As of October 29, 1999, we employed 37 Linux and
open-source hardware and software professionals. Many of our current employees
are leading contributors to open source projects. Notably, Intel has contracted
with us to port the Linux operating system to its next generation series of
processors which are used in computers. We believe that our involvement in these
projects and our investment in Linux expertise helps position us as an integral
member of the Linux development community. This also helps enable us to remain
abreast of technical advances and react quickly to new developments.
High-Quality, Cost-Effective Solutions
We offer high-quality systems that provide our customers with significantly
lower total costs of system ownership. The Linux expertise of our engineers
enables us to design servers, workstations and desktops that are tuned for
optimal performance, reliability and scalability in Linux environments. Our
engineers work with engineers of major component vendors, such as Mylex and
Matrox, to improve the performance of their subsystems and components and ensure
interoperability with Linux and other open source products. We integrate widely
available commodity hardware components, popular Linux distributions and Linux
service and support to deliver comprehensive low-cost, high-quality
industry-standard systems to our customers. By contrast, customers of other
vendors are required to purchase Linux service and support separately from their
system provider, which adds significantly to the total cost of their system.
Support for Multiple Linux Distributions
We maintain Linux distribution neutrality by offering our customers a
variety of Linux distributions. This enables us to offer customers an optimal
distribution for their system or customize a publicly available distribution to
meet their specific needs. By remaining neutral, we believe we offer the best
open source software for our customers' needs and can support specialized
distributions which meet the requirements of different geographic or vertical
markets more rapidly and effectively than vendors of single, general purpose
distributions. In addition, we believe our neutrality is well aligned with the
goals of a broad section of the open source developer community, thus improving
our ability to recruit and retain the best community talent.
39
<PAGE> 41
Extensive Internet Services
As a Linux vendor, it is imperative that we maintain close relationships
with the open source developer community and offer a forum where our customers
and open source community members can interact. We currently maintain several
web sites that serve our customers and the open source community, including
linux.com, our flagship open source portal. linux.com offers a central place for
sharing ideas and receiving information related to Linux and other open source
software, creating a conduit for customer and community exchange and providing
technical support. Our commitment to the open source community has attracted
significant support from its members which, in turn, keeps linux.com up to date
and content-rich through continuous contributions. linux.com and our other web
sites received more than nine million page views in October 1999.
STRATEGY
Our objective is to enhance our position as a leading developer and
provider of advanced Linux and related open source solutions. Key elements of
our strategy are to:
Continue to Demonstrate Technical Leadership in Linux and Related Open Source
Technologies
As an open source technology leader, we will enhance our position in the
marketplace and reinforce our ability to bring high-quality solutions and
support to our customers. We intend to continue to recruit experts who are fully
engaged in open source development projects. We intend to remain at the
forefront of high-performace Linux systems and software development, as
demonstrated by our development of high-density Linux servers and our software
to manage groups of servers. Further, we intend to leverage our business
agreements with leading technology companies to reduce the time-to-market for
Linux support for emerging hardware technologies, such as the porting of Linux
to Intel's future 64-bit processor family.
Utilize Our Direct Distribution Model
We intend to gain immediate feedback from customers on our designs and
product quality by using a direct sales and distribution model. We believe this
will enable us to improve our solutions much faster and more precisely than if
we utilized a traditional reseller-distributor model. By communicating our
users' critiques on open source software reliability, usability and scalability
to the open source community, we believe we will facilitate improvements in the
quality of open source software. Furthermore, we intend to use the direct
distribution model to expand our build-to-order fulfillment capability, minimize
inventory costs, increase margin and lower prices to our customers. We believe
the direct model is the most effective means of reaching customers and
establishing long-term customer relationships.
Continue to Leverage the Internet
As a company that specializes in Linux solutions, Internet strategies are
central to our operations. We intend to continue to strengthen our brand and our
Internet presence through expansion of our commercial web site and our
sponsorship of community-oriented sites like linux.com. We also plan to use the
Internet to enhance our relationship with our customers and suppliers by
delivering highly customized order and account information and offering creative
self-service programs. Currently, substantially all orders are placed through
our web site. In addition, we will continue to engage in Internet-based
strategies, which promote closer ties between our customers and the open source
community. We intend to build strong community relationships by providing
Internet resources to open source community members who want to lead or
contribute to open source projects. Finally, we intend to continue to use the
Internet as a research and development resource by involving the network of open
source engineers on the Internet in our engineering projects.
40
<PAGE> 42
Accelerate Development of the Open Source Market and Community
We intend to continue to invest resources for the development of open
source technologies and the open source community. We intend to increase the
variety and quality of open source applications by encouraging our customers to
join with members of the open source community in application development. By
promoting open source solutions, we believe we will raise awareness of open
source software capabilities. We intend to increase the credibility of open
source solutions and educate customers who are currently unaware of its benefits
by partnering with established technology companies such as database developers
and Internet software providers.
Continue to Apply Open Source Practices Within Our Business and Products
The popularity of Linux and other open source products demonstrates the
success of innovative, highly collaborative software development models. These
models have been made possible only in recent years through the widespread
availability of the Internet. We seek opportunities to apply similar models of
Internet community collaboration across our business, in such areas as market
research, product development and ongoing customer support. For example, we are
collaborating with more than 100 members of the open source community to help
develop a more secure version of Linux for use in university computing
environments. We will continue to embrace the open source model not only in the
creation of new products and services, but also in the overall execution of our
business model.
Increase Brand Awareness
We believe that continuing to build our brand is vital to our success in
providing Linux-based solutions and strengthening our presence in the Linux and
open source communities. We have established a reputation for providing
high-quality Linux systems and support and for promoting open source community
involvement. We intend to continue to promote our brand through a variety of
campaigns, including promotion of linux.com and related sites, public relations
activities, and tightly-focused advertising campaigns in computer-related
publications and general business media. We also intend to continue to
contribute engineering resources, leadership, systems and other services to open
source development projects and to community-wide support organizations, such as
Linux International and the Linux Standard Base.
PRODUCTS AND SERVICES
We offer an end-to-end Linux-based solution for our customers that includes
systems, software and services. Our systems are designed to meet the reliability
and scalability requirements of Internet infrastructure and other computing
intensive markets. Unlike traditional systems vendors, we design our products
exclusively around the Linux operating system. All our systems and components
are tested and configured for optimal Linux compatibility and include support
and service as a standard feature. In addition to system support, we offer
professional service capabilities that provide in-depth Linux and other open
source software expertise to our customers.
Computing Systems
We sell a broad line of Linux desktop and server systems. Our Linux systems
are built to customer specifications and can be optimized for a wide range of
applications and environments. We build our products with standard components
that adhere to the Intel processor architecture and are carefully selected and
tested for optimal performance in Linux environments. We believe our
comprehensive testing methodology, combined with our significant expertise in
solving hardware and software integration issues in Linux environments, assures
our customers that our systems will not suffer from incompatibility problems.
Our design decisions reflect the benefit of our direct channel sales strategy,
which provides us with early and frequent customer feedback on product
improvements.
All our systems come pre-installed with a version of a popular Linux
distribution, which we customize to enhance quality and performance for our
customers' particular application requirements. All
41
<PAGE> 43
improvements to popular distributions are posted to the Internet in open source
form immediately, enabling us to maintain our standing as an active open source
community participant.
We have devoted significant engineering efforts to design our servers for
Internet-related applications. For example, we have focused on reducing the
height of our server designs to facilitate high-density installation. This
reduces our customers' space requirements which can, among other things, lower
the costs of implementing our systems in co-location facilities. Our recently
introduced FullOn model server product offers one of the highest disk storage
densities of any similar server system in the industry for any operating system.
In addition, our FullOn model server product features support for a
configuration of multiple disks, which provide back-up in the event of a system
failure. Our FullOn model server product features a dual processor
configuration, which allows up to five 1.6 inch 10,000 revolution per minute
disk drives, any of which can be swapped while the system is running.
We offer a broad range of desktop configurations, from value-priced to
high-performance models. Our high-performance desktops are designed for
computing-intensive applications, such as Linux development. Most of these
products feature a configuration of multiple disks, which provide back-up in the
event of a system failure, and external storage, which positions these products
as departmental file and database servers.
Our customers benefit from a single point of contact for complete system
support. All our system sales include six software support calls for the first
12 months, along with two day return-to-depot hardware service. By contrast,
customers of other vendors are often required to purchase Linux service and
support separately from their system provider, which adds significantly to the
total cost.
We introduce new configurations frequently. The following table details our
server and desktop configurations available as of October 1999:
<TABLE>
<CAPTION>
PRODUCTS PROCESSOR MEMORY INTERNAL DISK TARGET MARKET
-------- --------- ------ ------------- -------------
<S> <C> <C> <C> <C>
StartX SP Intel Celeron 64-256MB 6.4GB Linux community developers
(500MHz) Students
StartX MP Intel Pentium III 128MB-1GB 6.4-36.4GB Software developers
(Dual 600MHz) Local serving
StartX ZP Intel Pentium III XEON 128MB-1GB 9.1-36.4GB Technical applications
(Dual 500MHz) Local serving
501 (2u) Intel Pentium III 128MB-1GB 9.1-144.0GB Internet and web serving
(Dual 600MHz) server groups
FullOn2X2 (2u) Intel Pentium III 256MB-2GB 6.4-180.0GB High-performance, high-density
(Dual 600MHz) Internet and web serving High-
performance computer groups
700 (4u) Intel Pentium III 128MB-1GB 9.1-144.0GB Internet serving
(Dual 600MHz) I/O expansion
3500 (7u) Intel Pentium III XEON 1-2GB 9.1GB-3.2TB High-performance servers
(Quad 550MHz)
</TABLE>
Service and Support
We believe that in an open source computing environment an integrated
product and service organization is essential for the delivery of effective and
low-cost solutions. Because of the variability of open source software and the
challenges associated with integrating this continuously evolving software with
standard hardware packages, we believe only a vendor that has expertise with
both can maintain a strong standing in the open source community and be in a
position to select the best available software and hardware products to provide
high-quality, low-cost solutions to customers.
Open Source Community Relationship. The quality of our services is
dependent on the efforts and the expertise of members of the open source
community. It is imperative, therefore, that we continue to work productively
with these community members. We do so by actively sponsoring, contributing to
or
42
<PAGE> 44
otherwise supporting dozens of open source projects. We established the
linux.com web site to provide a neutral forum for Linux information and links to
other members of the open source community. We have also developed other special
purpose web sites, such as themes.org. In addition, unlike some vendors of Linux
distributions which act as intermediaries between Linux users and developers, we
help establish direct communication between our customers and members of the
development community.
Professional Services. We have recently established a professional service
organization that offers a comprehensive suite of services that reduce our
customers' time to implement Linux-based infrastructure solutions and improve
the scalability and security of these solutions. These services include
planning, installation, systems integration, performance analysis and security
consulting of Linux solutions.
Technical Support. We offer a broad range of Linux technical support
products under the product family "Total Linux Coverage" or "VA TLC." For our
commercial customers, we offer 24 hours a day, seven days a week access to our
technical support specialists by telephone and the Internet. For smaller
customers or end users, we also offer per-incident technical support products
and upgrades through a toll-free telephone number and our web site. All products
include comprehensive support for our systems and Linux software.
Extended Warranties and Onsite Maintenance. As part of our Total Linux
Coverage product family, we offer customers a broad range of warranty and onsite
maintenance services. Our standard service options include next business day
onsite response for systems maintenance throughout North America and three year
warranties for systems and components. For our commercial customers, we offer
same day priority onsite response, with assigned technical support specialists
for their specific Linux configuration.
Customer Service. Our customers can access phone and onsite support across
the United States and Canada 24 hours a day, seven days a week. We have
partnered with DecisionOne, a leading provider of computer maintenance and
support services, for the provision of call center and onsite service functions
to our customers. We have trained DecisionOne employees, who are dedicated to
Linux support and who do not support any other systems vendors.
INTERNET OPERATIONS
A central component of our business strategy is to leverage the Internet to
enhance our ties with the open source development community and promote market
acceptance of Linux solutions. The Internet is the primary communication medium
for open source community vendors and developers. In addition, information about
Linux is widely dispersed on the Internet. Therefore, prominent web sites are
important mechanisms for attracting open source community members, providing a
forum to link customers with other community members, facilitating the
initiation of open source projects and promoting the growth of Linux-based
solutions.
In addition to our support of numerous open source web sites through the
donation of systems, hosting and systems administration support, we own and
manage several sites that are widely used by the open source community and our
customer base.
- linux.com is our flagship web site, which contains news, links and
articles of interest to open source community members. Its focus is on
corporate Linux usage, customization and support.
- themes.org is a repository of desktop themes. Desktop themes are
background images, icons and other graphic customizations for the window
systems used in Linux and popular Unix operating systems.
- valinux.com is our e-commerce site, which provides company and product
information and allows customers to order customized systems as well as
to access professional and customer support online.
linux.com and themes.org are continually updated and enhanced with
significant content contributions from the open source community.
43
<PAGE> 45
ENGINEERING
We offer our customers a broad range of technical expertise in Linux-based
systems and software design. As of October 29, 1999, our engineering
organization consisted of 34 employees. Our organization combines extensive
knowledge of hardware architecture with in-depth expertise on how to optimize
the performance of Linux for these architectures.
Software Engineering
As of October 29, 1999, we had 19 software engineers. These engineers
primarily work to advance Linux technology and customize popular Linux
distributions for our customers. We participate in the development of Linux and
our team includes many recognized technologists who have made significant
contributions to the Linux code base. As a result, our software engineers enjoy
an in-depth understanding of the capabilities of the Linux operating system. Our
software engineers concentrate their efforts on several Linux disciplines,
including kernel and driver development; distribution and product releases; and
advanced projects, such as desktop and graphics applications and software to
manage groups of servers.
Systems Engineering
As of October 29, 1999, we had a staff of 12 engineers dedicated to systems
engineering and mechanical design. These engineers design our printed circuit
boards, sheet metal chassis and molded plastic parts and have significant
expertise in designing high-density Intel processor-based systems, including
backplane and high-performance input/output design. We believe our designs are
industry leaders in storage density, clustering technology, thermal management
capabilities, manufacturability, reliability, serviceability and low cost.
Open Source Development Projects
We devote some of our resources to, and encourage our employees to be
actively involved in, open source development projects. By contributing to these
projects, our employees expand our relationships with open source community
members, assist in improving open source software and remain current with all
developments in the open source community. Our employees actively contribute to
a variety of significant and ongoing Linux projects. The following table
highlights some of these efforts:
<TABLE>
<CAPTION>
PROJECT DESCRIPTION PARTICIPATING EMPLOYEES
- ------- ----------- -----------------------
<S> <C> <C>
Linux Kernel The core of the Linux Ted T'so
operating system San "nettwerk" Mehat
Leonard Zubkoff
Walt Drummond
H. J. Lu
XFree86 A server for the Xwindow Mark Vojkovich
system that runs on Unix and Brad Grantham
Unix-like systems
Enlightenment Window manager for the Geoff "mandrake" Harrison
Xwindow system Carsten "rasterman" Haitzler
VACM Software to manage groups, or Michael Jennings
clusters, of servers San Mehat
Samba A file server Jeremy Allison
Perl A programming language Chip Salzenberg
Debian A Linux operating system Sean Perry
distribution Joey Hess
Linux International A Linux advocacy group Jon "maddog" Hall
</TABLE>
44
<PAGE> 46
CUSTOMERS
Our Linux products and services are targeted primarily at Internet
infrastructure and scientific computing applications that demand highly scalable
and reliable solutions. We believe that sales related to Internet infrastructure
solutions will represent an increasing portion of our revenues. In addition, as
Linux becomes more widely used, we see a significant opportunity to increase
sales of Linux desktops. The following is a representative list of our
customers, each from which we derived more than $50,000 in revenues in fiscal
1999:
Akamai Technologies, Inc.
Amteva Technologies, Inc.
Argonne National Laboratory
Brookhaven National Laboratory
Cavalier Telephone
Cisco Systems, Inc.
CNET, Inc.
Connect Innovations, Inc.
Cox Interactive Media, Inc.
Donald Danforth Plant Sciences Center
Dartmouth College
eCollege.com
El Camino Resources International, Inc.
EMC Corporation
eToys Inc.
Exodus Communications, Inc.
Forman Interactive Corp.
France Telecom
Global Proximity Corporation
GTE Corporation
Hyseq, Inc.
Inabata America Corporation
Integral Access, Inc.
IX Development Laboratories Inc.
Linuxcare, Inc.
Lucent Technologies Inc.
Massachusetts Inst. of Tech.
Music Connection Corporation
NaviSite, Inc.
NeoPlanet, Inc.
Powerize.com, Inc.
Rainmaker Digital Inc.
Rhone-Poulenc Rorer Inc.
Sandia National Laboratories
Sarnoff Corporation
Stanford University
StarMedia Network, Inc.
Telestor SARL
TIBCO Software Inc.
Tucows.Com Inc.
24/7 Media, Inc.
Universidade Estadual Paulista
ViaNet Communications
Virtual Networks, Inc.
WinStar Communications, Inc.
Customer Case Studies
Akamai Technologies, Inc. Akamai provides a global delivery service for
Internet content that improves web site speed and reliability. Akamai required
its own Linux distribution and a solution tightly integrated with networking
products. Akamai purchased a large number of servers from us to help support the
anticipated traffic load of NetAid, a live multi-media Internet based
entertainment event. Akamai purchased our 501 servers. Akamai selected us to
meet its web performance technology requirements due to our expertise in Linux
development and customization, our ability to manufacture a large number of
systems quickly and our ability to provide high-quality systems integration and
implementation service. We configured, shipped and installed over 300 servers in
less than 30 days.
Blue Mountain Arts. Blue Mountain Arts is an electronic greeting card
publisher based in San Diego, California which offers free electronic animated
and musical greeting cards that can be emailed to anyone in the world. Blue
Mountain required a system that could support its architecture for heavy
internet traffic loads in a very cost-effective implementation. Blue Mountain
selected us after deciding that Linux on Intel Architecture was significantly
better for its needs, and that our quality was superior to that provided by
other Linux solutions.
Donald Danforth Plant Sciences Center. Donald Danforth Plant Sciences
Center is a non-profit laboratory dedicated to furthering the knowledge of plant
sciences. Danforth required a large group of small form-factor systems for this
processing, and it was particularly concerned about support of Sun Microsystems'
network file system, or NFS. Danforth selected us after a review of Linux and
Linux
45
<PAGE> 47
vendors. In addition to the cost effective performance and quality of our
systems, it was also pleased to find that we employ one of the leading open
source NFS contributors, H.J. Lu.
SALES AND MARKETING
We sell our products and services primarily through our direct sales
organization in the United States and Canada. We are in the process of entering
into an agreement with a reseller who will market our products to the U.S.
government. As of October 29, 1999, we had 40 sales professionals located in
Arizona, California, Colorado, Illinois, Massachusetts, Michigan, Minnesota, New
York, Texas, Washington, Washington D.C., and Toronto, Ontario. We intend to
expand our sales operations into Europe in the future.
Our sales personnel rely on our commercial web site, valinux.com, to
expedite and process sales. valinux.com incorporates an advanced ordering system
that offers customers and the company a single point of order entry. In October
1999, substantially all our sales were processed through our web-based ordering
system. Most of these orders resulted from the efforts of our direct sales
personnel. We believe that, as we build brand name recognition and as market
acceptance of Linux solutions increases, a larger percent of sales will occur
without direct salesperson support.
We continuously strive to associate our brand with Linux and the open
source community in general. We market our products and services aggressively
through online advertising campaigns, traditional media advertising programs,
trade shows, Internet-based video seminars and through our own Internet portals.
Our marketing efforts are both broad-based and focused on specific market
segments that represent significant short-term lead-generation opportunities,
such as the Internet infrastructure and scientific computing markets. Our
Internet infrastructure marketing includes joint-marketing programs with
co-location facilities, such as Abovenet.
MANUFACTURING
With the exception of a small internal systems integration and prototyping
facility, we have relocated our internal manufacturing organization to Synnex's
manufacturing facility in Fremont, California. Synnex and its affiliated
entities will own approximately 1.60% of our common stock immediately following
this offering. While all current volume manufacturing is conducted in Fremont,
California we intend to initiate contract manufacturing and distribution
activities internationally with Synnex in the United Kingdom, Japan and Taiwan
should sales in those geographic regions grow sufficiently. We selected Synnex
for its technical expertise in build-to-order production and distribution, large
scale component purchasing and distribution capabilities and international
operations. Our relationship with Synnex has enabled us to reduce our
manufacturing and component costs significantly.
Substantially all of our functional test, quality assurance and software
loading software utilized by Synnex in the manufacturing process has been
developed and is owned by us. Testing and quality control processes are also
applied to components and parts. Synnex's build-to-order process enables us to
rapidly manufacture customized computer systems and to achieve high inventory
turnover rates and reduced inventory levels, which lessens exposure to the risk
of declining inventory values. This flexible manufacturing process also enables
us to quickly incorporate new technologies and components into our process
quickly while mitigating the risk of excess and obsolete inventories.
By maintaining rigorous quality control processes, we are able to supply
high quality products. We test components, parts and subassemblies at various
stages in the manufacturing process. We also conduct on-going production
reliability audits and defect tracking for early identification of workmanship
and component problems.
Although most of our components are standard products sold by multiple
vendors, some are available only from one source. For fiscal 2000, we have a
single source for power supplies; Micro Energy, used in our FullOn model server
product. It would be difficult for us to identify another source of supply if
this supplier were unable to meet our requirements for any reason. We do not
have a binding long-term
46
<PAGE> 48
agreement with Micro Energy. Therefore, we are susceptible to supply shortages
and interruptions that could harm our operating results. Furthermore, overall
market conditions affecting supply and pricing for key commodity components are
known to fluctuate significantly at times. Recently, the price of memory chips
has increased significantly. Increases in costs of key components could harm our
results of operations.
We continuously seek to improve our manufacturing operating efficiencies
through the use of new technologies. For example, to facilitate rapid and
accurate ordering, manufacturing and fulfillment of products, we have
implemented a complete end-to-end e-commerce solution. We intend to continue
integrating additional order fulfillment, tracking and related functionality
into our back-office systems.
COMPETITION
We compete in markets that are new, intensely competitive, highly
fragmented and rapidly changing. We face competition primarily from computer
vendors that provide solutions for distributed computing systems.
Companies offering competitive products vary in scope and breadth of
products and services offered and include:
- computer systems manufacturers such as Compaq, Dell, Hewlett-Packard, IBM
and Sun Microsystems, all of which, except Sun Microsystems, have
recently qualified their systems for Linux; and
- Linux service and software vendors.
We believe we compete favorably on the principal factors that will draw end
users to Linux systems, which include:
- product functionality;
- quality of product and product support;
- total cost of ownership;
- system performance at different price points;
- reusability for multiple applications;
- sales and distribution efficiency;
- brand name recognition; and
- quality and availability of professional services.
To be competitive, we must respond promptly and effectively to the
challenges of technological change, evolving standards and our competitors'
innovations by continuing to enhance our products and grow our sales and
professional services organizations. Any pricing pressures or loss of potential
customers resulting from our failure to compete effectively would reduce our
revenues.
We expect competition in the computer systems market to increase
significantly as new companies enter the market and current competitors expand
their product lines and services. Many of these potential competitors are likely
to have substantial competitive advantages including:
- greater resources that can be devoted to the development, promotion and
sale of their products;
- more established sales forces and channels;
- greater software development experience; and
- greater name recognition.
47
<PAGE> 49
INTELLECTUAL PROPERTY RIGHTS
Our systems consist primarily of commodity hardware components in
combination with the Linux operating system and incorporate many distinct
software components developed by thousands of independent third parties. While
we have developed some proprietary techniques and know how, most of our
activities and systems are not protectable as proprietary intellectual property.
To protect our proprietary intellectual property, we generally enter into
confidentiality or license agreements with our employees, consultants, and
corporate partners. We have also recently commenced a patent program and to date
have filed one patent application. To date, we have licensed almost all of our
software development projects under open source licenses.
EMPLOYEES
At October 29, 1999 we had a total of 179 employees, all of whom were based
in the United States and Canada. Of the total, 34 were in research and
development, 71 were engaged in sales and marketing, 13 were engaged in customer
and professional services activities and 61 were in administration, finance and
operations. None of our employees are subject to a collective bargaining
agreement and we believe that our relations with our employees are good.
FACILITIES
Our corporate headquarters facility, of approximately 29,326 square feet,
is located in Sunnyvale, California. We occupy our corporate headquarters
facility pursuant to a sublease that expires on September 30, 2000. We expect to
require additional space to meet our needs in the next 12 months. We are
currently evaluating additional space in the local area. We believe that
suitable additional facilities will be available as needed on commercially
reasonable terms.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings. We may in
the future be party to litigation arising in the course of our business. These
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources.
48
<PAGE> 50
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to our
executive officers and directors as of November 11, 1999(1).
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Larry M. Augustin......................... 37 President, Chief Executive Officer and Director
Robert Russo.............................. 54 General Manager and Executive Vice President,
Worldwide Field Operations
Brian D. Biles............................ 41 Vice President, Marketing
Gregory B. Chabrier....................... 45 Vice President, Sales
John T. Hall.............................. 27 Vice President, Support and Professional Services
Todd B. Schull............................ 41 Vice President, Finance and Chief Financial Officer
Daniel R. Shore........................... 35 Vice President, Operations
Gregg E. Zehr............................. 46 Vice President, Engineering
Leonard N. Zubkoff........................ 41 Chief Technical Officer
Jeffry R. Allen(2)........................ 48 Director
Carol A. Bartz(3)......................... 51 Director
Douglas Leone(3).......................... 42 Director
Eric S. Raymond........................... 42 Director
Carl Redfield(2).......................... 52 Director
</TABLE>
- ---------------
(1) A former director, Thomas F. Mendoza, resigned from our Board of Directors
effective November 10, 1999.
(2) Member of the audit committee.
(3) Member of the compensation committee.
Larry M. Augustin, one of our founders, has served as our President and
Chief Executive Officer and as a member of our Board of Directors since March
1995. From September 1989 through December 1995, Mr. Augustin was a Consultant
for Fintronic USA, Inc., a provider of high performance EDA tools, and was a
Research Associate at Stanford University. Mr. Augustin is a director of Linux
International, a Linux vendor and advocacy association. Mr. Augustin received a
B.S. degree in Electrical Engineering from the University of Notre Dame, and a
M.S.E.E. and a Ph.D. in Electrical Engineering from Stanford University.
Robert Russo has served as our General Manager and Executive Vice
President, Worldwide Field Operations since October 1999. He was Senior Vice
President, Worldwide Field Operations at Synopsys, Inc., a leading supplier of
EDA software tools and services, from February 1993 through October 1999. Mr.
Russo served as General Manager Entry Level Systems Division at Cray Research
Inc., a developer of mini-supercomputers, from September 1991 to January 1993.
Mr. Russo received a B.S. degree in both aeronautical and mechanical engineering
from the New York Institute of Technology.
Brian D. Biles has served as our Vice President, Marketing since March
1999. He was a consultant to various companies from June 1998 to March 1999.
Prior to that, Mr. Biles was Director of Marketing, Enterprise Network Products
Group at Sun Microsystems, where he worked from September 1987 to April 1998.
Mr. Biles received a B.A. degree in Computer Information Sciences from the
University of California at Santa Cruz.
Gregory B. Chabrier has served as our Vice President, Sales since January
1999. Mr. Chabrier was President at Vendre, a maker of web-based sales tools,
from June 1998 to December 1998. From May 1997 to May 1998, he was Vice
President of Sales at Selectica, a developer of configuration software. Mr.
Chabrier was Vice President of Sales at Calico Technology, a maker of sales
configuration software,
49
<PAGE> 51
from March 1996 through April 1997. Mr. Chabrier was Vice President of Field
Operations at HAL Computer Systems, the producer of the Fujitsu Ultra SPARC
based SMP server series, where he worked from October 1991 to March 1996. Mr.
Chabrier received a B.S. degree in Physics from the University of California at
Davis and an M.B.A. degree from the University of Santa Clara.
John T. Hall has served as our Vice President, Support and Professional
Services since August 1998. He was our Vice President, Finance from August 1997
through August 1998. Prior to that, Mr. Hall was Chief Executive Officer and a
founder of Stanford Student Enterprises, a student-managed company that provides
campus services through its subsidiaries, from August 1996 through June 1997.
From May 1995 to June 1997, Mr. Hall was the head counselor at the Bridge, a
suicide prevention and counseling center in Palo Alto, California.
Todd B. Schull has served as our Vice President, Finance and Chief
Financial Officer since June 1999. He was Vice President and Chief Financial
Officer at Repeater Technologies, Inc, a wireless infrastructure company, from
January 1997 through May 1999. Mr. Schull held various positions, most recently
Vice President of Finance, North America and Corporate Controller at Solectron
Corporation, from December 1987 through December 1996. Mr. Schull received a
B.S. degree in Accounting from the University of Utah, and is a Certified Public
Accountant.
Daniel R. Shore has served as our Vice President, Operations since November
1998. He was Director of Operations, Digital Video Group at Philips Consumer
Electronics from November 1997 through October 1998. Mr. Shore held various
positions, including Business Unit General Manager and Product Marketing Manager
for AccuTouch and TouchMonitor Business Unit, at Elo TouchSystems, a leading
supplier of touch screen computers, from June 1990 through November 1997. Mr.
Shore received a B.S. degree in Mechanical Engineering from the University of
Tennessee College of Engineering and an M.A. degree in Economics from the
University of Tennessee Graduate School of Business.
Gregg E. Zehr has served as our Vice President of Engineering since
December 1998. He was a founder and Executive Vice President, Engineering at
Ridge Technologies, a company that provides external RAID storage for NT
servers, from July 1997 to May 1998. Mr. Zehr was Director, Desktop Hardware
Engineering, then Vice President, PowerBook Engineering at Apple Computer, Inc.
from October 1988 to July 1997. Mr. Zehr received a B.S. degree in Electrical
Engineering and an M.S.E.E. from the University of Illinois.
Leonard N. Zubkoff has served as our Chief Technical Officer since July
1998. He was a member of the principal technical staff at Oracle Corporation
from December 1993 to June 1998. Prior to that, he held various technical
positions, most recently Principal Scientist, at Lucid, Incorporated, a LISP and
C/C++ software company, from February 1985 through September 1993. Mr. Zubkoff
received a B.A. degree in Mathematics and Physics from the University of
Rochester and an M.S. degree in Computer Science from Carnegie-Mellon
University.
Jeffry R. Allen has served on our Board of Directors since October 1998. He
has been with Network Appliance, Inc., a leading provider of network data access
solutions, since December 1996, where he currently serves as Senior Vice
President, Finance and Operations, Chief Financial Officer and Secretary. Prior
to December 1996, Mr. Allen served in various capacities, including Senior Vice
President of Operations and Vice President and Controller of Bay Networks, Inc.,
a networking company, from October 1994 to December 1996. Mr. Allen received a
B.S. degree from San Diego State University.
Carol A. Bartz has served on our Board of Directors since July 1999. She
has served as Chief Executive Officer and Chairman of the Board of Autodesk Inc.
since May 1992. Ms. Bartz served as President of Autodesk from May 1992 through
September 1996, and from June 1999 to the present. Ms. Bartz is a director of
Network Appliance, Inc., a leading provider of network data access solutions,
BEA Systems, Inc., a provider of software that allows cross-platform middleware
solutions from enterprise business applications, Cadence Design Systems, Inc., a
leading electronic design firm, and Cisco Systems, Inc. Ms. Bartz received a
B.S. degree in Computer Science from the University of Wisconsin.
50
<PAGE> 52
Douglas Leone has served on our Board of Directors since October 1998. He
has been at Sequoia Capital, a venture capital firm, since July 1988 and has
been a General Partner since 1993. He is a member of the board of directors of
Scient Corporation and several other private corporations. Mr. Leone received a
B.S. degree in Mechanical Engineering from Cornell University, a M.S. degree in
Industrial Engineering from Columbia University and an M.S. degree in Management
from Massachusetts Institute of Technology, Sloan School of Management.
Eric S. Raymond has served on our Board of Directors since October 1998. He
has served as Technical Director at Chester County InterLink, a nonprofit
Internet service provider, since September 1993. Prior to that, Mr. Raymond was
an independent consultant from May 1985 through October 1993.
Carl Redfield has served on our Board of Directors since October 1998. He
has served as Senior Vice President, Manufacturing and Logistics of Cisco
Systems, Inc. since February 1997. From September 1993 through February 1997,
Mr. Redfield was Vice President of Manufacturing of Cisco Systems. Mr. Redfield
serves on the boards of CTC Communications, Inc. and iBASIS Inc., both of which
are competitive local exchange carriers. Mr. Redfield received a B.S. degree in
Materials Engineering from Rensselaer Polytechnic Institute and an M.B.A. degree
from Harvard Business School.
BOARD OF DIRECTORS
Our Board of Directors has seven authorized directors and currently
consists of six members. Each director holds office until his or her term
expires or until his or her successor is duly elected and qualified. Upon
completion of this offering, our amended and restated certificate of
incorporation and bylaws will provide for a classified Board of Directors. In
accordance with the terms of our certificate, our Board of Directors will be
divided into three classes whose terms will expire at different times. The three
classes will be comprised of the following directors:
- Class I consists of Messrs. Augustin and Leone, who will serve until the
annual meeting of stockholders to be held in 2000;
- Class II consists of Messrs. Raymond and Redfield, who will serve until
the annual meeting of stockholders to be held in 2001; and
- Class III consists of Mr. Allen and Ms. Bartz, who will serve until the
annual meeting of stockholders to be held in 2002.
At each annual meeting of stockholders beginning with the 2000 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified. Any additional directorships resulting from an increase
in the number of directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of an equal number of directors.
Committees
Our Board of Directors has an audit committee and a compensation committee.
The audit committee consists of Messrs. Allen and Redfield. The audit committee
reviews our internal accounting procedures, consults with and reviews the
services provided by our independent accountants and makes recommendations to
the Board of Directors regarding the selection of independent accountants. The
compensation committee consists of Ms. Bartz and Mr. Leone. The compensation
committee reviews and recommends to the Board of Directors the salaries,
incentive compensation and benefits of our officers and employees and
administers our stock plans and employee benefit plans.
51
<PAGE> 53
Compensation Committee Interlocks and Insider Participation
Our Board of Directors established the compensation committee in October
1999. Prior to establishing the compensation committee, our Board of Directors
as a whole performed the functions delegated to the compensation committee. Ms.
Bartz, a member of our compensation committee, serves as a member of the board
of directors and compensation committee of Network Appliance, Inc. of which Mr.
Allen is an executive officer. No other member of our compensation committee has
served 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. Since the formation of our compensation
committee, none of its members has been our officer or employee.
Compensation
We reimburse our directors who are not officers or employees for expenses
incurred in attending any Board of Directors or committee meeting. Directors who
are also our officers or employees are not reimbursed for expenses incurred in
attending Board of Directors or committee meetings.
Effective upon the closing of this offering, our non-employee directors
also will be eligible to participate in our 1999 Director Option Plan. Each
non-employee director who joins our Board of Directors after this offering will
automatically receive a grant of an option to purchase 40,000 shares of our
common stock on the date on which such person becomes a director. The shares
subject to each of these options will vest over a four year period following the
date of grant with 1/4 vesting one year from the date of grant and 1/48 vesting
each month thereafter. Additionally, beginning at our annual meeting of
stockholders to be held in 2000 and at each successive annual stockholder
meeting, each non-employee director who has previously served at least six
consecutive months prior thereto (including our current non-employee directors)
will receive an option to purchase 16,000 shares of our common stock which will
also vest over four years. The vesting of these options will automatically
accelerate upon a change of control of our company. The exercise price per share
for all options automatically granted to directors under our 1999 Director
Option Plan will be equal to the market price of our common stock on the date of
grant and will have a ten year term, but will generally terminate within a
specified time, as defined in the 1999 Director Option Plan, following the date
the option holder ceases to be a director or consultant.
Employee directors, including Mr. Augustin, are eligible to participate in
our 1999 Employee Stock Purchase Plan and to receive discretionary grants under
our 1998 Stock Plan.
52
<PAGE> 54
EXECUTIVE OFFICERS
Our executive officers are appointed by our Board of Directors and serve
until their successors are elected or appointed.
Compensation
The following table sets forth all compensation paid or accrued during
fiscal 1999 to our President and Chief Executive Officer, and each of our four
other most highly compensated officers whose annual compensation exceeded
$100,000 for the period. Messrs. Shore and Zehr joined us during fiscal 1999 and
therefore their annual compensation does not reflect their full base salary.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION SECURITIES ------------
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS OPTIONS COMPENSATION
- ---------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Larry M. Augustin............................. $ 96,133 $ 6,199 1,155,000 $13,294(1)
President and Chief Executive Officer
Gregg E. Zehr................................. 116,667 31,250 665,910 --
Vice President, Engineering
Daniel R. Shore(2)............................ 94,225 45,500 499,434 37,836(2)
Vice President, Operations
John T. Hall.................................. 99,100 7,967 2,919,000 --
Vice President, Support and Professional
Services
</TABLE>
- ---------------
(1) We forgave and wrote off a loan in the principal amount of $13,294 to Mr.
Augustin.
(2) We paid $37,836 in premiums for a life insurance policy payable to Mr.
Shore's wife.
Option Grants in Fiscal 1999
The following table sets forth information concerning grants of stock
options to each of the executive officers named in the compensation table above
during fiscal year 1999. All options granted to these executive officers in the
last fiscal year were granted under the 1998 Stock Plan. One-quarter of the
shares subject to each option vests and becomes exercisable on the first
anniversary of the date of grant, and an additional 1/48 of the shares subject
to each option vests each month thereafter. In addition, options granted to each
of the individuals set forth below may be early exercised, provided that such
individual enters into a restricted stock purchase agreement. The shares thus
acquired remain subject to a right of repurchase by us. The percent of the total
options set forth below is based on an aggregate of 15,962,180 options granted
to employees during fiscal 1999. All options were granted at a fair market value
as determined by our Board of Directors on the date of grant.
Potential realizable value represents hypothetical gains that could be
achieved for the options if exercised at the end of the option term assuming
that the fair market value of the common stock on the date of grant appreciates
at 5% and 10% over the option term (ten years) and that the option is exercised
and sold on the last day of its option term for the appreciated stock price. The
assumed 5% and 10% rates of stock price appreciation are provided in accordance
with rules of the Securities and Exchange Commission and do not represent our
estimate or projection of our future common stock price. Actual gains, if any,
on stock option exercises will depend on the future performance of our common
stock.
53
<PAGE> 55
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION --------------------
NAME GRANTED DURING PERIOD PER SHARE DATE 5% 10%
- ---- ---------- ------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Larry M. Augustin(1).... 1,155,000 7.24% $0.020 09/30/08 $14,527 $36,815
Gregg E. Zehr(1)........ 665,910 4.17 0.043 02/24/09 18,008 45,635
Daniel R. Shore......... 499,434 3.13 0.043 12/08/08 13,506 34,227
John T. Hall(1)......... 2,919,000 18.29 0.020 09/30/08 36,715 93,043
</TABLE>
- ---------------
(1) These options are subject to a change of control provision. One-fourth of
the shares originally granted vest and become immediately exercisable upon
the occurrence of both a change of control and the involuntary termination
of service with us or the termination of service with us without cause.
Aggregate Option Exercises in Fiscal Year 1999 and Values at July 31, 1999
The following table sets forth information concerning option exercises in
fiscal 1999 and exercisable and unexercisable stock options held by the
executive officers named in the summary compensation table at July 31, 1999. The
value of unexercised in-the-money options is based on a value of $1.00 per
share, the fair market value of our common stock as of July 31, 1999, as
determined by our board of directors, minus the actual per share exercise
prices, multiplied by the number of shares underlying the option. All options
were granted under our 1998 Stock Plan.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT JULY 31, 1999 AT JULY 31, 1999
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Larry M. Augustin....... -- -- 1,155,000 -- $1,131,900 --
Gregg E. Zehr........... 665,910 -- -- -- -- --
Daniel R. Shore......... 249,750 -- 249,684 -- 244,274 --
John T. Hall............ 2,919,000 $4,865 -- -- -- --
</TABLE>
CHANGE OF CONTROL AND EMPLOYMENT AGREEMENTS
In March 1995, we entered into a five year employment agreement with Mr.
Augustin that provides for annual salary and benefits. This agreement has been
terminated.
In October 1998, we entered into stock option agreements under our 1998
Stock Plan with each of Messrs. Augustin, Hall, Zehr and Zubkoff that include
change of control provisions. Each of these agreements provides that if the
officer is terminated without cause or involuntarily terminated upon a change of
control, he will receive one year accelerated vesting of all of his stock
options (or an accelerated lapsing of the repurchase right applicable for the
common stock issued upon an early exercise of the option). If the officer
voluntarily resigns, is terminated for cause or is terminated for any other
reason, he is not entitled to this acceleration.
In October 1998, we entered into a Founder's Stock Repurchase Agreement
with Mr. Augustin. Pursuant to this agreement, we have the right to repurchase
shares from Mr. Augustin that have not been released from our repurchase option.
Sixty percent of Mr. Augustin's 4,950,000 shares were released from the
repurchase option upon execution of the agreement; 1/24 of the remaining shares
are released each month starting in November 1998. This agreement provides that
if Mr. Augustin is terminated without cause or involuntarily terminated, 50% of
the remaining unreleased shares will be released from our repurchase right. If
Mr. Augustin voluntarily resigns, is terminated for cause or is terminated for
any other reason, he is not entitled to this release of shares.
In October 1998, we entered into an employment agreement with Mr. Shore
that provides that if he is involuntarily terminated for any reason, he will
receive a severance package equal to the higher of either
54
<PAGE> 56
one month's salary for every year of service or three month's salary. In
December 1998, we entered into an employment agreement with Mr. Zehr that
provides that if he is involuntarily terminated for any reason, he will receive
a severance package equal to his salary for six months. These amounts will be
paid monthly following the termination of either officer's employment. We will
pay these amounts on a salary continuation basis with medical benefits coverage
during the severance period.
In October 1999, we entered into an employment agreement with Mr. Russo
that provides that if he is involuntarily terminated in the first year of his
employment he would receive six months salary and benefits and also six months
accelerated vesting of his stock options. If Mr. Russo is involuntarily
terminated after his first year of employment he would receive three months
salary and three months accelerated vesting of his stock options. In the event
the Company appoints a new Chief Executive Officer by October 2000, and Mr.
Russo's employment is terminated within the longer of six months of the new
Chief Executive Officer's appointment or twelve months from Mr. Russo's start
date, Mr. Russo's initial stock grant would be accelerated by 25%. Also, Mr.
Russo would receive twelve additional months of accelerated vesting of his stock
options in the event of a change of control followed by his involuntary
termination within six months of the change of control.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation to be filed upon
completion of this offering limits the liability of our directors to the maximum
extent permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability associated with any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemption; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of our director's liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation and bylaws also
provide that we shall indemnify our directors and executive officers and may
indemnify our other officers and employees and other agents to the fullest
extent permitted by law. We believe that indemnification under our bylaws covers
at least negligence and gross negligence on the part of indemnified parties. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether our bylaws would permit indemnification.
We are entering into indemnification agreements with each of our officers
and directors containing provisions that require us to, among other things,
indemnify our officers and directors against liabilities that may arise by
reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to cover our directors and officers under any of
our liability insurance policies applicable to our directors and officers. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
STOCK PLANS
1998 Stock Plan
Our 1998 Stock Plan was originally approved by our Board of Directors and
stockholders in October 1998. On October 7, 1999 our Board of Directors amended
the 1998 Stock Plan, to be effective upon the completion of this offering. We
expect our stockholders will approve this amended plan in November 1999. The
1998 Stock Plan, as amended, provides for the granting to our employees of
incentive stock options within the meaning of Section 422 of the United States
tax code, and for the granting to employees, including officers and directors,
non-employee directors and consultants of non-statutory stock options and
55
<PAGE> 57
stock purchase rights. We have reserved an aggregate of 27,257,144 shares of
common stock for issuance under this plan. The number of shares reserved for
issuance under this plan will be subject to an annual increase on the first day
of each fiscal year equal to the lesser of (a) 4,000,000 shares, (b) 4.9% of the
outstanding shares on that date, or (c) a lesser amount as determined by our
Board of Directors. As of October 29, 1999, options to purchase 8,471,226 shares
of common stock were outstanding under this plan; 9,988,932 shares had been
issued upon exercise of options, net of repurchases, and 8,796,986 shares were
available for future grant. Unless terminated sooner, the 1998 Stock Plan will
terminate automatically in 2008.
Our 1998 Stock Plan is administered by our Board of Directors who determine
the terms of the options or stock purchase rights granted, including the
exercise price, the number of shares subject to each option or stock purchase
right, the vesting and the form of consideration payable upon such exercise. In
addition, the Board of Directors has the authority to amend, suspend or
terminate the plan, provided that no such action may affect any share of common
stock previously issued and sold or any option previously granted and then
outstanding under the plan. The Board of Directors has the exclusive authority
to interpret and apply the provisions of the 1998 Stock Plan.
Options and stock purchase rights granted under our 1998 Stock Plan are not
generally transferable by the optionee, and each option and stock purchase right
is exercisable during the lifetime of the optionee only by the optionee. Options
granted under the 1998 Stock Plan must generally be exercised within three
months of the end of optionee's status as our employee or consultant (or such
shorter time as may be specified in the option agreement), or within twelve
months after his or her termination by death or disability, but in no event
later than the expiration of the option's ten year term. In the case of stock
purchase rights, unless the Board of Directors determines otherwise, the
agreement evidencing the grant shall provide that we have a repurchase option
exercisable upon the voluntary or involuntary termination of his or her
employment for any reason (including death or disability). In this event, the
purchase price per share will be equal to the original price and may be paid by
cancellation of his or her outstanding indebtedness to us, if any. Our
repurchase option shall lapse at a rate determined by the Board of Directors.
The exercise price of any incentive stock options granted under the 1998 Stock
Plan and any non-statutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
United States tax code, must be at least equal to the fair market value of our
common stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date and
the term of such incentive stock option must not exceed five years. The term of
all other options granted under the 1998 Stock Plan may not exceed ten years.
Options granted under our 1998 Stock Plan, as amended, will accelerate and
become fully vested in the event we are acquired, unless the successor
corporation assumes or substitutes other options in their place.
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan was adopted by our Board of Directors
in October 1999 and we expect stockholder approval in November 1999. A total of
1,000,000 shares of common stock have been reserved for issuance under our 1999
Employee Stock Purchase Plan. This plan provides for annual increases equal to
the lesser of (a) 500,000 shares, (b) 1% of the outstanding shares on the last
day of our fiscal year, or (c) a lesser amount determined by our Board of
Directors.
Our 1999 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the United States tax code, contains consecutive six month
offering and purchase periods. The offering periods generally start on the first
trading day on or after September 1 and March 1 of each year, except for the
first such offering period which commences on the first trading day on or after
the effective date of this offering and ends on the last trading day on or
before August 31, 2000.
56
<PAGE> 58
Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, any employee who immediately after
grant owns stock possessing 5% or more of the total combined voting power or
value of all classes of our capital stock, or whose rights to purchase stock
under all of our employee stock purchase plans accrues at a rate which exceeds
$25,000 worth of stock for each calendar year may not be granted an option to
purchase stock under this plan. The 1999 Employee Stock Purchase Plan permits
participants to purchase common stock through payroll deductions of up to 10% of
the participant's "compensation." Compensation is defined as the participant's
base straight time gross earnings and commissions, but is exclusive of payments
for overtime, shift premium payments, incentive compensation, incentive
payments, bonuses and other compensation.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 1999 Employee Stock Purchase Plan is generally 85% of the
lower of the fair market value of the common stock at the beginning of the
offering period, or at the end of the purchase period. Participants may end
their participation at any time during an offering period, and they will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with us.
Rights granted under the 1999 Employee Stock Purchase Plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the plan. The 1999 Employee Stock
Purchase Plan provides that, in the event of our merger with or into another
corporation or a sale of substantially all our assets, each outstanding option
may be assumed or substituted for a new option by the successor corporation. If
the successor corporation refuses to assume or substitute a new option for the
outstanding options, the offering period then in progress will be shortened and
a new exercise date will be set. The 1999 Employee Stock Purchase Plan will
terminate automatically in 2009, unless terminated earlier. The Board of
Directors has the authority to amend or terminate the purchase plan, except that
no such action may adversely affect any outstanding rights to purchase stock
under the purchase plan. The Board of Directors has the exclusive authority to
interpret and apply the provisions of the purchase plan.
1999 Director Option Plan
Our 1999 Director Option Plan was approved by our Board of Directors in
October 1999 and we expect our stockholders to approve it in November 1999. A
total of 500,000 shares of our common stock have been reserved for issuance
under our 1999 Director Option Plan. This plan provides for annual increases
equal to the lesser of (a) 250,000 shares, (b) 0.5% of the outstanding shares on
the last day of our fiscal year, or (c) a lesser amount determined by our Board
of Directors. No awards will be made under the 1999 Director Option Plan until a
new non-employee director is elected after the completion of this offering. The
purpose of the 1999 Director Option Plan is to attract and retain the best
available non-employee directors, to provide them additional incentives and,
therefore, to promote the success of our business.
The 1999 Director Option Plan establishes an automatic grant of 40,000
shares of common stock to each non-employee director who is elected after the
completion of this offering. The 1999 Director Option Plan also provides that
upon the date of each annual stockholders' meeting, each non-employee director
who has been a member of our Board of Directors for at least six months prior to
the date of the stockholders' meeting (including our current non-employee
directors) will receive automatic annual grants of options to acquire 16,000
shares of our common stock.
Each automatic grant will have an exercise price per share equal to the
fair market value of our common stock at the date of grant and will vest as to
1/4 of the shares subject to the option one year after the date of grant and
1/48 each month thereafter. Each automatic grant will have a term of ten years.
The 1999 Director Option Plan is administered by our Board of Directors or by a
committee designated by our Board of Directors constituted to permit
non-employee director awards to be exempt from Section 16(b) of the Exchange Act
in accordance with Rule 16(b)-3 thereunder. The administrator shall approve
forms
57
<PAGE> 59
of award agreements for use under the plan, determine the terms and conditions
of awards pursuant to the 1999 Director Option Plan and construe and interpret
the terms of the plan and awards granted under it.
In the event of our merger with another corporation or the sale of
substantially all of our assets, each non-employee director's outstanding option
will become fully vested and exercisable. Options granted under the 1999
Director Option Plan must be exercised within 3 months of the end of the
non-employee director's tenure as a member of our Board of Directors, or within
12 months after a non-employee director's termination by death or disability,
provided that the option does not terminate by its terms earlier.
Unless terminated sooner, our 1999 Director Option Plan terminates
automatically in 2009. Our Board of Directors has the authority to amend,
suspend or terminate the plan, subject to stockholder approval of some
amendments and provided no amendment, suspension or termination may affect
awards to non-employee directors previously granted under the plan, unless
agreed to by the affected non-employee director.
401(k) Plan
In September 1998, we adopted a 401(k) Profit Sharing Plan and Trust
covering our employees who are age 21 as of the 401(k) Profit Sharing Plan and
Trust effective date, and/or have at least 1,000 hours of service credited as of
their anniversary hire date with us and for every plan year thereafter. The
401(k) Profit Sharing Plan and Trust excludes nonresident alien employees. The
401(k) Profit Sharing Plan and Trust is intended to qualify under Section 401(k)
of the United States tax code, so that contributions to the 401(k) Profit
Sharing Plan and Trust by employees or by us and the investment earnings thereon
are not taxable to the employees until withdrawn. If our 401(k) Profit Sharing
Plan and Trust qualifies under Section 401(k) of the United States tax code, our
contributions will be deductible by us when made. Our employees may elect to
reduce their current compensation by up to the statutorily prescribed annual
limit of $10,000 in 1999 and to have those funds contributed to the 401(k)
Profit Sharing Plan and Trust. The 401(k) Profit Sharing Plan and Trust permits
us, but does not require us, to make additional matching contributions on behalf
of all participants. To date, we have not made any contributions to the 401(k)
Profit Sharing Plan and Trust.
58
<PAGE> 60
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PREFERRED STOCK
On October 30, 1998 and February 19, 1999, we sold an aggregate of
8,623,773 shares and 3,525,549 shares, respectively, of our series A preferred
stock at a purchase price of $0.4567 per share. On July 16, 1999 and September
24, 1999, we sold an aggregate of 6,502,592 shares and 1,256,454 shares,
respectively, of our series B preferred stock at a purchase price of $3.86 per
share. On August 1, 1999, we issued 12,954 shares of our series B preferred
stock in consideration for certain assets. The following officer, directors and
5% stockholders purchased shares in these financings:
<TABLE>
<CAPTION>
SHARES OF SHARES OF
PURCHASER SERIES A STOCK SERIES B STOCK
- --------- -------------- --------------
<S> <C> <C>
Sequoia Capital Entities:
Sequoia Capital VIII................................... 7,299,666 469,586
Sequoia International Technology Partners VIII(Q)...... 483,261 31,088
CMS Partners LLC....................................... 161,088 10,362
Sequoia International Technology Partners VIII......... 92,625 5,958
Sequoia 1997........................................... 17,718 1,140
Sequoia Capital Franchise Fund......................... -- 419,690
Sequoia Capital Franchise Partners..................... -- 46,632
Intel Corporation........................................ 3,284,673 259,068
Larry M. Augustin........................................ 109,488 --
</TABLE>
CMS Partners LLC, Sequoia International Technology Partners VIII(Q),
Sequoia Capital VIII, Sequoia International Technology Partners VIII, Sequoia
1997, Sequoia Capital Franchise Fund and Sequoia Capital Franchise Partners are
affiliated entities and together are considered a 5% stockholder. Mr. Leone, one
of our directors, is the managing member of the general partner of Sequoia
International Technology Partners VIII(Q), Sequoia Capital VIII, Sequoia
International Technology Partners VIII, Sequoia Capital Franchise Fund and
Sequoia Capital Franchise Partners, and has signature authority for CMS Partners
LLC and Sequoia 1997. Mr. Leone disclaims beneficial ownership of the securities
held by such entities, except for his proportional interest in the entities.
Larry M. Augustin is our President, Chief Executive Officer, one of our
directors and a 5% stockholder. Our director Ms. Bartz is the beneficial owner
of limited partnership interests of Sequoia International Technology Partners
VIII(Q) and Sequoia Franchise Partners. Our director Mr. Redfield is the
beneficial owner of limited partnership interests of Sequoia Franchise Partners.
INVESTOR RIGHTS AGREEMENT
We have entered into an agreement with the preferred stockholders described
above pursuant to which these and other preferred stockholders will have
registration rights with respect to their shares of common stock following this
offering. For a description of these registration rights, see "Description of
Capital Stock." Upon the completion of this offering, all shares of our
outstanding preferred stock will be automatically converted into an equal number
of shares of common stock.
59
<PAGE> 61
STOCK OPTION GRANTS TO OFFICERS AND DIRECTORS
During fiscal 1999, we granted the following options to purchase our common
stock to our officers, directors and stockholders who beneficially own 5% or
more of our common stock. In order to comply with the closing conditions of the
investors for the sale of the series A preferred stock, on October 1, 1998,
options previously granted to Messrs. Augustin, Hall and Zubkoff were cancelled
and exchanged for options to purchase the same number of shares of common stock
under our 1998 Stock Plan. These new options had vesting and pricing terms
consistent with the prior grants.
<TABLE>
<CAPTION>
EXERCISE PRICE
NAME DATE OF GRANT OPTIONS PER SHARE
- ---- ---------------- --------- --------------
<S> <C> <C> <C>
Larry M. Augustin............................... October 1, 1998 1,155,000 $0.02
John T. Hall.................................... October 1, 1998 2,919,000 0.02
Leonard N. Zubkoff.............................. October 1, 1998 2,376,000 0.02
Jeffry R. Allen................................. October 30, 1998 150,000 0.043
Eric S. Raymond................................. October 30, 1998 150,000 0.043
Carl Redfield................................... October 30, 1998 150,000 0.043
Daniel R. Shore................................. December 9, 1998 499,434 0.043
Gregory B. Chabrier............................. February 25, 499,434 0.043
1999
Gregg E. Zehr................................... February 25, 665,910 0.043
1999
Brian D. Biles.................................. April 13, 1999 499,434 0.50
Todd B. Schull.................................. June 1, 1999 499,434 0.50
Carol A. Bartz.................................. July 14, 1999 150,000 1.00
</TABLE>
INDEMNIFICATION, CHANGE OF CONTROL AND EMPLOYMENT AGREEMENTS.
We are entering into indemnification agreements with each of our directors
and officers. Such indemnification agreements will require us to indemnify our
directors and officers to the fullest extent permitted by Delaware law. For a
description of the limitation of our directors' liability and our
indemnification of such officers, see "Limitation on Directors' Liability and
Indemnification."
For a description of an employment agreements we entered into with Messrs.
Augustin and Russo and change of control agreements entered into with Messrs.
Augustin, Hall, Zehr and Zubkoff, see "Management -- Change of Control and
Employment Agreements."
60
<PAGE> 62
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of October 29, 1999 and as adjusted
to reflect the sale of common stock offered hereby by:
- each stockholder known by us to own beneficially more than 5% of our
common stock;
- each of our executive officers named in the compensation table above;
- each of our directors; and
- all current directors and executive officers as a group.
Except as otherwise indicated, we believe that the beneficial owners of the
common stock listed below, on the information furnished by such owners, have
sole voting power and investment power with respect to such shares. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In computing the number of shares beneficially owned by a
person and the percent ownership of that person, shares of common stock subject
to options or warrants held by that person that are currently exercisable or
will become exercisable within 60 days after October 29, 1999 are deemed
outstanding, while such shares are not deemed outstanding for purposes of
computing percent ownership of any other person. Percent of beneficial ownership
is based upon 35,301,586 shares of our common stock outstanding prior to this
offering and 39,701,586 shares of common stock outstanding after this offering.
Unless otherwise indicated in the footnotes below, the persons and entities
named in the table have sole voting and investment power with respect to all
shares beneficially owned, subject to community property laws where applicable.
The address for those individuals for which an address is not otherwise
indicated is VA Linux Systems, Inc., 1382 Bordeaux Drive, Sunnyvale, California
94089.
<TABLE>
<CAPTION>
PERCENT OF SHARES
OUTSTANDING
SHARES --------------------
BENEFICIALLY PRIOR
OWNED PRIOR TO AFTER
NAME OR GROUP OF BENEFICIAL OWNERS TO OFFERING OFFERING OFFERING
- ---------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with Sequoia Capital Funds(1)........... 9,038,814 25.6% 22.8%
3000 Sand Hill Road, Building 4, Suite 280
Menlo Park, California 94025
Douglas Leone(1)............................................ 9,038,814 25.6 22.8
Sequoia Capital
3000 Sand Hill Road, Bldg. 4, Ste. 280
Menlo Park, CA 94025
Larry M. Augustin(2)........................................ 6,598,488 18.1 16.2
Intel Corporation........................................... 3,543,741 10.0 8.9
2200 Mission College Blvd. Mail Stop RN6-46
Santa Clara, CA 95052
Attn: M&A Portfolio Manager
John T. Hall(3)............................................. 2,919,000 8.3 7.4
Gregg E. Zehr(4)............................................ 665,910 1.9 1.7
Daniel R. Shore(5).......................................... 499,434 1.4 1.3
Jeffry R. Allen(6).......................................... 311,300 * *
Carl Redfield(6)............................................ 311,300 * *
Carol A. Bartz(7)........................................... 201,812 * *
Eric S. Raymond(6).......................................... 162,952 * *
All directors and officers as a group (13 persons)(8)....... 25,533,312 65.8 59.1
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 7,769,252 shares held by Sequoia Capital VIII, 514,349 shares held
by Sequoia International Technology Partners VIII (Q), 171,450 shares held
by CMS Partners LLC, 98,583
61
<PAGE> 63
shares held by Sequoia International Technology Partners VIII, 18,858
shares held by Sequoia 1997, 419,690 shares held by Sequoia Capital
Franchise Fund, 46,632 shares held by Sequoia Capital Franchise Partners.
Mr. Leone is the managing member of Sequoia International Technology
Partners VIII, Sequoia Capital VIII, Sequoia International Technology
Partners VIII (Q), Sequoia Capital Franchise Fund and Sequoia Capital
Franchise Partners, and has signature authority for CMS Partners LLC and
Sequoia 1997. Mr. Leone disclaims beneficial ownership of shares held by
these entities except to the extent of his pecuniary interest in these
entities.
(2) Includes 990,000 shares subject to our right of repurchase, which lapses
over time, and an option exercisable for 1,155,000 shares, of which all
1,155,000 shares may be exercised by Mr. Augustin and upon exercise will
become subject to our right of repurchase, which lapses over time. Also
includes 384,000 shares owned by Alice Kitsuta Augustin, Mr. Augustin's
wife.
(3) Includes 1,398,688 shares subject to our right of repurchase, which lapses
over time.
(4) Includes 665,910 shares subject to our right of repurchase, which lapses
over time.
(5) Includes 249,750 shares subject to our right of repurchase, which lapses
over time and an option exercisable for 249,684 shares, of which all
249,684 shares may be exercised by Mr. Shore and upon exercise will become
subject to our right of repurchase, which lapses over time.
(6) Includes 150,000 shares subject to our right of repurchase, which lapses
over time.
(7) Includes an option exercisable for 150,000 shares, of which all 150,000
shares may be exercised by Ms. Bartz and upon exercise will become subject
to our right of repurchase, which lapses over time.
(8) Includes the shares beneficially owned by the persons and entities
described in footnotes (1) - (7).
62
<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
260,000,000 shares, $0.001 par value per share, to be divided into two classes
to be designated common stock and preferred stock. Of the shares authorized,
250,000,000 shares shall be designated as common stock and 10,000,000 shares
shall be designated as preferred stock. The following description of our capital
stock is only a summary. You should refer to our certificate of incorporation
and bylaws as in effect upon the closing of this offering, which are included as
exhibits to the registration statement of which this prospectus forms a part,
and by the provisions of applicable Delaware law.
COMMON STOCK
As of October 29, 1999, and assuming the conversion of all outstanding
shares of preferred stock into common stock, there were 35,301,586 shares of
common stock outstanding which were held of record by approximately 108
stockholders. There will be 39,701,586 shares of common stock outstanding
(assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options after October 29, 1999) after giving effect to the sale
of our common stock in this offering. There are outstanding options to purchase
a total of 8,501,226 shares of our common stock.
The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our amended and
restated certificate of incorporation to be filed concurrently with completion
of this offering, does not provide for cumulative voting in the election of
directors. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by our Board of
Directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, 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.
Holders of our common stock have no preemptive or other subscription or
conversion rights. There are no redemption or sinking fund provisions applicable
to our common stock.
PREFERRED STOCK
Upon the completion of this offering and filing of our amended and restated
certificate of incorporation, our Board of Directors will be authorized, without
action by the stockholders, to issue 10,000,000 shares of preferred stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof. These rights, preferences and privileges may include dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any series or the
designation of any series, all or any of which may be greater than the rights of
the common stock. It is not possible to state the actual effect of the issuance
of all shares of preferred stock upon the right of holders of our common stock
until our Board of Directors determines the specific rights of the holders of
any preferred stock that may be issued. However, the effect might include, among
other things: (a) restricting dividends on the common stock, (b) diluting the
voting power of the common stock, (c) impairing the liquidation rights of the
common stock and (d) delaying or preventing a change in our control without
further action by the stockholders. Upon the closing of this offering, no shares
of preferred stock will be outstanding and we have no present plans to issue any
shares of preferred stock.
REGISTRATION RIGHTS
Pursuant to a registration rights agreement we entered into with holders of
19,915,082 shares of our common stock (assuming conversion of all outstanding
shares of preferred stock), the holders of these shares are entitled to certain
registration rights regarding these shares. The registration rights provide that
if we propose to register any securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, they are entitled to notice of the registration and are
entitled to include shares of their common stock in the registration. This right
is subject to conditions and limitations, including the right of the
underwriters in an offering to limit the number of
63
<PAGE> 65
shares included in the registration. The holders of these shares may also
require us to file up to two registration statements under the Securities Act at
our expense with respect to their shares of common stock. We are required to use
our best efforts to effect these registrations, subject to conditions and
limitations. Furthermore, the holders of these shares may require us to file
additional registration statements on Form S-3, subject to conditions and
limitations. These rights terminate on the earlier of five years after the
effective date of this offering, the date on which all shares subject to these
registration rights have been sold to the public, or when a holder is able to
sell all its shares pursuant to Rule 144 under the Securities Action in any
90-day period.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make our acquisition more difficult by means of a tender offer, a
proxy contest or otherwise and could also make the removal of incumbent officers
and directors more difficult. These provisions, summarized below, are expected
to discourage certain types of coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of us to first
negotiate with us. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweighs the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of interested
stockholder status, did own) 15% or more of a corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by the board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
Our certificate of incorporation eliminates the right of stockholders to
act by written consent without a meeting and limits the ability of stockholders
to call a special meeting. The certificate of incorporation and bylaws do not
provide for cumulative voting in the election of directors. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of our company. These and
other provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company. The amendment of any of these
provisions would require approval by holders of at least 66 2/3% of our
outstanding common stock.
Our Board of Directors will be divided into three classes, each with
staggered three-year terms. As a result, only one class of directors will be
elected at each annual meeting of our stockholders, with the other classes
continuing for the remainder of their respective three-year terms.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Boston EquiServe,
N.A.
NASDAQ STOCK MARKET NATIONAL MARKET LISTING
We have made application to list our common stock on The Nasdaq Stock
Market's National Market under the symbol "LNUX."
64
<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of our common stock in the
public market could adversely affect the market price of our common stock.
Upon completion of this offering, based on shares outstanding as of October
29, 1999, we will have outstanding 39,701,586 shares of common stock, assuming
(1) the issuance of 4,400,000 shares of common stock in this offering, (2) no
exercise of the underwriters' over-allotment option, and (3) no exercise of
options after July 31, 1999. All of the 4,400,000 shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act. However, the sale of any of these share if purchased by
"affiliates" as that term is defined in Rule 144 are subject to certain
limitations and restrictions that are described below.
The remaining 35,301,586 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. These shares are "restricted
shares" as that term is defined in Rule 144 and therefore may not be sold
publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. In addition, our
directors and officers as well as other stockholders and optionholders have
entered into "lock-up agreements" with the underwriters. These lock-up
agreements provide that, except under limited exceptions, the stockholder may
not offer, sell, contract to sell, pledge or otherwise dispose of any of our
common stock or securities that are convertible into or exchangeable for, or
that represent the right to receive, our common stock for a period of 180 days
after the effective date. Credit Suisse First Boston, however, may in its sole
discretion, at any time without notice, release all or any portion of the shares
subject to lock-up agreements. Accordingly, of the remaining 35,301,586 shares,
22,949,202 shares will become eligible for sale on June 7, 2000, the 181(st) day
after the effective date subject to Rules 144 and 701, assuming an effective
date of December 9, 1999.
As of October 29, 1999, there were a total of 8,501,226 shares of common
stock subject to outstanding options, 956,886 of which were vested, and nearly
all of which are subject to lock-up agreements. Immediately after the completion
of the offering, we intend to file registration statements on Form S-8 under the
Securities Act to register all of the shares of common stock issued or reserved
for future issuance under our 1998 Stock Plan, our 1999 Employee Stock Purchase
Plan and our 1999 Director Option Plan. On the date 180 days after the effective
date of the offering, the date that the lock-up agreements expire, a total of
2,245,776 shares of our common stock subject to outstanding options will be
vested. After the effective dates of the registration statements on Form S-8,
shares purchased upon exercise of options granted pursuant to our 1998 Stock
Plan, our 1999 Employee Stock Purchase Plan and our 1999 Director Option Plan
generally would be available for resale in the public market.
Rule 144
In general, under Rule 144 as currently in effect beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 397,016 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq Stock
Market's National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about us.
65
<PAGE> 67
Rule 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
generally including the holding period of any prior owner other than an
"affiliate," is entitled to sell such shares without complying with the manner
of sale, notice filing, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.
The SEC 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 Securities Exchange Act of 1934, 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," as defined in Rule 144, subject only to the manner of sale
provisions of Rule 144. Securities issued in reliance on Rule 701 may be sold by
"affiliates" under Rule 144 without compliance with its one year minimum holding
period requirement.
66
<PAGE> 68
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999 we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Deutsche Banc
Alex. Brown, Hambrecht & Quist LLC and Lehman Brothers Inc. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
of Shares
Underwriter ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Deutsche Bank Securities Inc................................
Hambrecht & Quist LLC.......................................
Lehman Brothers Inc. .......................................
--------
Total.............................................
========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering price less
the underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The underwriters
and selling group members may allow a discount of $ per share on sales to other
broker/dealers. After the initial public offering, the public offering price and
concession and discount to broker/dealers may be changed by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------------------- -------------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us.... $ $ $ $
Expenses payable by us.... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our executive officers, directors and other of our security holders
have agreed that we will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Securities and Exchange
Commission a registration statement under the Securities Act relating to, any
shares of common stock or securities convertible into or exchangeable or
exercisable for any common stock, or publicly disclose the intention to make an
offer, sale, pledge, disposition or filing, without the prior written consent of
Credit Suisse First Boston Corporation for a period of 180 days after the date
of this prospectus. We can, however, issue up to 4,000,000 shares of common
stock in connection with acquisitions of businesses, provided that, the
recipients agree to the foregoing lock-up provisions. We can also issue stock
pursuant to the exercise of currently outstanding options.
67
<PAGE> 69
The underwriters have reserved for sale, at the initial public offering
price up to 352,000 shares of the common stock for employees, directors, other
persons associated with us and a number of open source developers who have
expressed an interest in purchasing common stock in this offering. The number of
shares available for sale to the general public in this offering will be reduced
to the extent these persons purchase the reserved shares. Any reserved shares
not so purchased will be offered by the underwriters to the general public on
the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have made application to list the shares of common stock on The Nasdaq
Stock Market's National Market under the symbol "LNUX."
In June 1999, we sold shares of our Series B preferred stock in a private
placement at a purchase price of $3.86 per share. In this private placement,
Lehman Brothers VC Partners, L.P. purchased 640,354 shares of Series B preferred
stock for approximately $2.5 million. Lehman Brothers Venture Partners L.P.
purchased 571,856 shares of Series B preferred stock for approximately $2.2
million. Lehman Brothers Venture Capital Partners I, L.P. purchased 342,194
shares of Series B preferred stock for approximately $1.3 million. These funds
purchased these shares of Series B preferred stock on the same terms as the
other investors in the private placement. These funds are affiliated entities of
Lehman Brothers Inc., a representative of the underwriters in this offering.
Pursuant to the regulations of the National Association of Securities Dealers,
Inc., subject to limited exceptions, these funds may not sell or otherwise
transfer any shares of our capital stock that they hold for 90 days following
the completion of this offering. This restriction is in addition to the 180-day
lock-up agreed to by these funds with the underwriters.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include:
- the information in this prospectus and otherwise available to the
underwriters;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
68
<PAGE> 70
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where required
by law, that such purchaser is purchasing as principal and not as agent, and
(iii) such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against the issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. Such report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one such report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
69
<PAGE> 71
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by Morrison &
Foerster, LLP, Palo Alto, California. As of the date of this prospectus, WS
Investment Company 98B, WS Investment Company 99A and WS Investment Company 99B,
each an investment partnership composed of certain current and former members of
and persons associated with Wilson Sonsini Goodrich & Rosati, Professional
Corporation, in addition to certain current individual members of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, beneficially own an aggregate of
102,584 of VA Linux Systems, Inc. preferred stock.
EXPERTS
The audited financial statements and schedule included in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form S-1 under the Securities Act with respect
to the shares of common stock offered hereby. This prospectus does not contain
all the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of the contract or
other document filed as an exhibit to the registration statement, each statement
being qualified in all respects by this reference. A copy of the registration
statement may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
The Commission maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
70
<PAGE> 72
VA LINUX SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' (Deficit) Equity................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 73
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders of
VA Linux Systems, Inc.:
We have audited the accompanying balance sheets of VA Linux Systems, Inc.
(a Delaware corporation) as of July 31, 1998 and 1999, and the related
statements of operations, stockholders' (deficit) equity and cash flows for each
of the three years in the period ended July 31, 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of VA Linux Systems, Inc. as of
July 31, 1998 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended July 31, 1999 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Jose, California
September 30, 1999 (except with respect to the matters referred to
in Note 10, as to which the date is November 29, 1999)
F-2
<PAGE> 74
VA LINUX SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
OCTOBER 29,
1999
PRO FORMA
JULY 31, STOCKHOLDERS'
----------------- OCTOBER 29, EQUITY
1998 1999 1999 (NOTE 7)
------ -------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 62 $ 18,653 $ 14,690
Accounts receivable, net of allowances of $39, $207
and $364, respectively........................... 746 4,033 7,287
Inventories......................................... 315 1,971 1,980
Prepaid expenses and other assets................... 3 381 438
------ -------- --------
Total current assets........................ 1,126 25,038 24,395
Property and equipment, net........................... 55 1,759 2,287
Other assets.......................................... 14 798 710
------ -------- --------
$1,195 $ 27,595 $ 27,392
====== ======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Equipment loan...................................... $ -- $ 500 $ 167
Current portion of notes payable.................... 275 259 327
Accounts payable.................................... 820 6,243 7,497
Accrued warranty.................................... 167 239 445
Accrued liabilities and other....................... 78 1,567 2,082
------ -------- --------
Total current liabilities................... 1,340 8,808 10,518
------ -------- --------
Notes payable and other, net of current portion....... 275 424 673
------ -------- --------
Commitments (Note 5)
Stockholders' (deficit) equity:
Convertible preferred stock, $0.001 par value;
aggregate liquidation preference of $30,648 as of
October 29, 1999
Authorized -- 20,149,322;
Outstanding -- 0 shares at July 31, 1998,
18,651,914 shares at July 31, 1999, 19,921,322
at October 29, 1999 and none pro forma......... -- 19 20 $ --
Common stock, $0.001 par value
Authorized -- 250,000,000;
Outstanding -- 5,100,000 shares at July 31, 1998,
15,444,860 at July 31, 1999, 15,380,264 shares
at October 29, 1999 and 35,301,586 shares pro
forma.......................................... 5 15 15 $ 35
Additional paid-in capital.......................... 24 45,461 71,219 71,219
Stockholder note receivable......................... -- (50) (50) (50)
Deferred stock compensation......................... -- (12,121) (25,087) (25,087)
Accumulated deficit................................. (449) (14,961) (29,916) (29,916)
------ -------- -------- --------
Total stockholders' (deficit) equity........ (420) 18,363 16,201 $ 16,201
------ -------- -------- ========
$1,195 $ 27,595 $ 27,392
====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 75
VA LINUX SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED JULY 31, -------------------------
--------------------------- OCTOBER 31, OCTOBER 29,
1997 1998 1999 1998 1999
------ ------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................................. $2,743 $ 5,556 $ 17,710 $2,435 $ 14,848
Cost of revenues.............................. 2,562 4,494 17,766 2,053 12,887
------ ------- -------- ------ --------
Gross margin............................. 181 1,062 (56) 382 1,961
------ ------- -------- ------ --------
Operating expenses:
Sales and marketing......................... 310 382 5,183 177 5,064
Research and development.................... 115 180 3,189 48 2,774
General and administrative.................. 218 427 3,791 136 1,496
Amortization of deferred stock 118 2,855
compensation............................. -- -- 2,312
------ ------- -------- ------ --------
Total operating expenses............ 643 989 14,475 479 12,189
------ ------- -------- ------ --------
Income (loss) from operations................. (462) 73 (14,531) (97) (10,228)
Interest and other income (expense), net...... (12) 11 19 -- 173
------ ------- -------- ------ --------
Net income (loss)............................. $ (474) $ 84 $(14,512) $ (97) $(10,055)
====== ======= ======== ====== ========
Dividend related to convertible preferred $ -- $ (4,900)
stock....................................... $ -- $ -- $ --
====== ======= ======== ====== ========
Net income (loss) attributable to common $ (97) $(14,955)
stockholders................................ $ (474) $ 84 $(14,512)
====== ======= ======== ====== ========
Basic net income (loss) per share............. $(0.05) $ 0.02 $ (2.62) $(0.02) $ (2.00)
====== ======= ======== ====== ========
Diluted net income (loss) per share........... $(0.05) $ 0.01 $ (2.62) $(0.02) $ (2.00)
====== ======= ======== ====== ========
Shares used in computing basic net income 5,100 7,483
(loss) per share............................ 9,467 5,100 5,530
====== ======= ======== ====== ========
Shares used in computing diluted net income 5,100 7,483
(loss) per share............................ 9,467 12,249 5,530
====== ======= ======== ====== ========
Pro forma basic net loss per share $ (0.56)
(unaudited)................................. $ (1.01)
======== ========
Shares used in computing pro forma basic net 26,646
loss per share (unaudited).................. 14,317
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 76
VA LINUX SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDER DEFERRED
------------------- ------------------- PAID-IN NOTE STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ------ ---------- ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1996............ -- $-- 15,000,000 $15 $ 69 $ -- $ --
Issuance of convertible preferred
stock for cash...................... 1,734,000 2 -- -- 498 -- --
Repurchase of common stock for
cash............................ -- -- (9,900,000) (10) (45) -- --
Net loss.......................... -- -- -- -- -- -- --
---------- -- ---------- --- ---------- ---- --------
BALANCE AT JULY 31, 1997............ 1,734,000 2 5,100,000 5 522 -- --
Repurchase of convertible
preferred stock in exchange for
note payable.................... (1,734,000) (2) -- -- (498) -- --
Net income........................ -- -- -- -- -- -- --
---------- -- ---------- --- ---------- ---- --------
BALANCE AT JULY 31, 1998............ -- -- 5,100,000 5 24 -- --
Issuance of Series A convertible
preferred stock for cash and
note receivable, net............ 12,149,322 12 -- -- 5,482 (50) --
Exercise of stock options and
stock purchase rights for cash
and services rendered........... -- -- 10,304,860 10 308 -- --
Issuance of Series B convertible
preferred stock for cash, net... 6,502,592 7 -- -- 25,084 -- --
Issuance of common stock for
assets acquired................. -- -- 40,000 -- 20 -- --
Fair value of options and stock
purchase rights granted for
services rendered and assets
acquired........................ -- -- -- -- 110 -- --
Deferred stock compensation....... -- -- -- -- 14,433 -- (14,433)
Amortization of deferred stock
compensation.................... -- -- -- -- -- -- 2,312
Net loss.......................... -- -- -- -- -- -- --
---------- -- ---------- --- ---------- ---- --------
BALANCE AT JULY 31, 1999............ 18,651,914 $19 15,444,860 $15 $ 45,461 $(50) $(12,121)
Issuance of Series B convertible
preferred stock for assets
acquired (unaudited)............ 12,954 -- -- -- 50 -- --
Issuance of Series B convertible
preferred stock for cash, net
(unaudited)..................... 1,256,454 1 -- -- 4,833 -- --
Dividend related to convertible
preferred stock (unaudited)..... -- -- -- -- 4,900 -- --
Exercise of stock options and
stock purchase rights
(unaudited)..................... -- -- 497,374 1 24 -- --
Issuance of common stock for
services rendered (unaudited)... -- -- 5,714 -- 71 -- --
Issuance of common stock for cash
(unaudited)..................... -- -- 13,000 -- 162 -- (149)
Repurchase of unvested common
stock for cash (unaudited)...... -- -- (580,684) (1) (24) -- --
Fair value of options issued for
services rendered (unaudited)... -- -- -- -- 70 -- --
Deferred stock compensation
(unaudited)..................... -- -- -- -- 15,672 -- (15,672)
Amortization of deferred stock
compensation (unaudited)........ -- -- -- -- -- -- 2,855
Net loss (unaudited).............. -- -- -- -- -- -- --
---------- -- ---------- --- ---------- ---- --------
BALANCE AT OCTOBER 29, 1999
(UNAUDITED)....................... 19,921,322 $20 15,380,264 $15 $ 71,219 $(50) $(25,087)
========== == ========== === ========== ==== ========
<CAPTION>
RETAINED
EARNINGS TOTAL
(ACCUMULATED STOCKHOLDERS'
DEFICIT) (DEFICIT) EQUITY
------------ ----------------
<S> <C> <C>
BALANCE AT JULY 31, 1996............ $ 66 $ 150
Issuance of convertible preferred
stock for cash...................... -- 500
Repurchase of common stock for
cash............................ (75) (130)
Net loss.......................... (474) (474)
-------- --------
BALANCE AT JULY 31, 1997............ (483) 46
Repurchase of convertible
preferred stock in exchange for
note payable.................... (50) (550)
Net income........................ 84 84
-------- --------
BALANCE AT JULY 31, 1998............ (449) (420)
Issuance of Series A convertible
preferred stock for cash and
note receivable, net............ -- 5,444
Exercise of stock options and
stock purchase rights for cash
and services rendered........... -- 318
Issuance of Series B convertible
preferred stock for cash, net... -- 25,091
Issuance of common stock for
assets acquired................. -- 20
Fair value of options and stock
purchase rights granted for
services rendered and assets
acquired........................ -- 110
Deferred stock compensation....... -- --
Amortization of deferred stock
compensation.................... -- 2,312
Net loss.......................... (14,512) (14,512)
-------- --------
BALANCE AT JULY 31, 1999............ $(14,961) $ 18,363
Issuance of Series B convertible
preferred stock for assets
acquired (unaudited)............ -- 50
Issuance of Series B convertible
preferred stock for cash, net
(unaudited)..................... -- 4,834
Dividend related to convertible
preferred stock (unaudited)..... (4,900) --
Exercise of stock options and
stock purchase rights
(unaudited)..................... -- 25
Issuance of common stock for
services rendered (unaudited)... -- 71
Issuance of common stock for cash
(unaudited)..................... -- 13
Repurchase of unvested common
stock for cash (unaudited)...... -- (25)
Fair value of options issued for
services rendered (unaudited)... -- 70
Deferred stock compensation
(unaudited)..................... -- --
Amortization of deferred stock
compensation (unaudited)........ -- 2,855
Net loss (unaudited).............. (10,055) (10,055)
-------- --------
BALANCE AT OCTOBER 29, 1999
(UNAUDITED)....................... $(29,916) $ 16,201
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 77
VA LINUX SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED JULY 31, -------------------------
------------------------ OCTOBER 31, OCTOBER 29,
1997 1998 1999 1998 1999
----- ----- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $(474) $ 84 $(14,512) $ (97) $(10,055)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization.............. 9 18 449 6 236
Loss on disposal of assets................. -- -- 75 -- --
Amortization of deferred stock
compensation............................. -- -- 2,312 118 2,855
Non-cash compensation expense.............. -- -- 64 -- 441
Changes in assets and liabilities:
Accounts receivable...................... (149) (449) (3,287) (261) (3,254)
Inventories.............................. (102) (76) (1,656) (91) (9)
Prepaid expenses and other assets........ (1) (11) (517) (8) 27
Accounts payable......................... 279 403 5,423 560 1,254
Accrued liabilities and other............ 74 (12) 1,426 80 215
Accrued warranty......................... 39 129 72 (94) 206
----- ----- -------- ------- --------
Net cash provided by (used in)
operating activities................ (325) 86 (10,151) 213 (8,084)
----- ----- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............ (25) (44) (2,139) (234) (701)
Purchase of other long-lived assets........... -- -- (154) -- --
----- ----- -------- ------- --------
Net cash used in investing
activities.......................... (25) (44) (2,293) (234) (701)
----- ----- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable..................... -- -- (275) -- (16)
Proceeds from borrowings on equipment loan and
line of credit............................. -- -- 700 -- --
Repayments of borrowings on equipment loan and
line of credit............................. -- -- (200) -- --
Proceeds from issuance of convertible
preferred stock, net....................... 500 -- 30,535 3,938 4,834
Proceeds from issuance of common stock........ -- -- 275 -- 29
Repurchase of common stock.................... (130) -- -- -- (25)
----- ----- -------- ------- --------
Net cash provided by financing
activities.......................... 370 -- 31,035 3,938 4,822
----- ----- -------- ------- --------
Net increase in cash and cash equivalents....... 20 42 18,591 3,917 (3,963)
Cash and cash equivalents, beginning of year.... -- 20 62 62 18,653
----- ----- -------- ------- --------
Cash and cash equivalents, end of year.......... $ 20 $ 62 $ 18,653 $ 3,979 $ 14,690
===== ===== ======== ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Repurchase of convertible preferred stock
pursuant to notes payable.................. $ -- $ 550 $ -- $ -- $ --
Issuance of convertible preferred stock for
note receivable............................ $ -- $ -- $ 50 $ -- $ --
Issuance of convertible preferred stock for
assets..................................... $ -- $ -- $ -- $ -- $ 50
Dividends on convertible preferred stock...... $ -- $ -- $ -- $ -- $ 4,900
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 78
VA LINUX SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF OCTOBER 31, 1998 AND OCTOBER 29, 1999 IS UNAUDITED)
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
VA Linux Systems, Inc. ("the Company"), formerly known as VA Research,
Inc., was incorporated in California in January 1995 and is a provider of
Linux-based computer systems and services. Additionally, the Company has
recently established a professional services organization to provide other
services including system architecture design, system integration and security
consulting. Effective August 1, 1999, the Company began operating on a 52-53
week year ending the Friday before July 31. Accordingly, the accompanying
statements of operations, stockholders' (deficit) equity and cash flow for the
first quarter of fiscal 2000 reflect the period ended October 29, 1999.
The Company is subject to certain risks including the emergence of the
Linux industry, dependence on a key supplier for manufacturing, competition from
larger, more established companies, short product life cycles, the Company's
ability to develop and bring to market new products on a timely basis,
dependence on key employees, the ability to attract and retain additional
qualified personnel and the ability to obtain adequate financing to support
growth.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
Unaudited Interim Financial Data
The unaudited interim financial statements for the three months ended
October 31, 1998 and October 29, 1999 have been prepared on the same basis as
the audited financial statements and, in the opinion of management, reflect all
normal recurring adjustments necessary to present fairly the financial
information set forth therein, in accordance with generally accepted accounting
principles.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments or money-market
type funds with an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents consist principally of cash deposited in
money market and checking accounts.
Inventories
Inventories are stated at the lower of cost or market and consist of the
following (in thousands):
<TABLE>
<CAPTION>
JULY 31,
-------------- OCTOBER 29,
1998 1999 1999
---- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................... $256 $1,813 $1,836
Finished goods.................................. 59 158 144
---- ------ ------
Total........................................... $315 $1,971 $1,980
==== ====== ======
</TABLE>
F-7
<PAGE> 79
VA LINUX SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1998 AND OCTOBER 29, 1999 IS UNAUDITED)
Provisions, when required, are made to reduce excess and obsolete
inventories to their estimated net realizable values. Due to competitive
pressures and technological innovation, it is possible that estimates of net
realizable value could change in the near term.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives (three to five years) of
the assets. Leasehold improvements are amortized over the corresponding lease
term.
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JULY 31,
--------------
1998 1999
---- ------
<S> <C> <C>
Computer and office equipment............................... $ 22 $1,314
Furniture and fixtures...................................... 76 110
Leasehold improvements...................................... -- 572
Software.................................................... -- 125
---- ------
Total property and equipment........................... 98 2,121
Less: Accumulated depreciation and amortization............. (43) (362)
---- ------
Property and equipment, net............................ $ 55 $1,759
==== ======
</TABLE>
The Company periodically evaluates the carrying amount of its long-lived
assets and applies the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS No. 121"). SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used or disposed of by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Revenue Recognition
Product revenues from the sale of Linux-based servers and desktop computers
are recognized upon shipment of goods. The Company does not grant to its
customers any rights to return products. The Company provides allowances for
warranty costs at the time of shipment. Revenues from customer support services,
including on-site maintenance and technical support, are recognized pro-rata
over the term of the related service agreement. Revenues from professional
service contracts, including planning, deployment and installation, systems
integration, performance analysis and security consulting of Linux-based
solutions, are recognized as revenue on a completed contract basis. For the
years ended July 31, 1997, 1998 and 1999, and for the quarters ended October 31,
1998 and October 29, 1999, revenues from customer support services and
professional service contracts have not been material.
Stock Split
Effective October 15, 1998 and March 30, 1999, the Company completed a
2-for-1 and 3-for-2 split, respectively, of its common stock. As a result of the
stock splits, outstanding and reserved common shares increased. The rights of
the holders of these securities were not otherwise modified. Subsequent to July
31, 1999, the Board of Directors approved, subject to stockholder approval,
additional stock splits (see Note 10).
F-8
<PAGE> 80
VA LINUX SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1998 AND OCTOBER 29, 1999 IS UNAUDITED)
Stock-Based Compensation and Equity Instruments Exchanged for Services and
Assets
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), in October 1995. SFAS No. 123
permits the use of either a fair value based method or the method defined in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), to account for stock-based compensation arrangements.
Companies that elect to employ the valuation method provided in APB No. 25 are
required to disclose the pro forma net income (loss) that would have resulted
from the use of the fair value based method. The Company has elected to continue
to determine the value of stock-based compensation arrangements under the
provisions of APB No. 25 and, accordingly, it has included the pro forma
disclosures required under SFAS No. 123 in the financial statements (see Note
8).
The value of options, stock purchase rights and stock exchanged for
services rendered or assets acquired are valued using the Black-Scholes option
pricing model. To calculate the expense or asset value, the Company uses either
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
Software Development Costs
In accordance with SFAS No. 86, "Accounting for the Cost of Computer
Software to be Sold, Leased, or Otherwise Marketed", development costs incurred
in the research and development of new software products are expensed as
incurred until technological feasibility in the form of a working model has been
established. To date, the Company's software development has been completed
concurrent with the establishment of technological feasibility and, accordingly,
all software development costs have been charged to research and development
expense in the accompanying statements of operations.
Computation of Per Share Amounts
Basic net income (loss) per common share and diluted net income (loss) per
common share are presented in conformity with SFAS No. 128, "Earnings Per Share"
("SFAS No. 128") for all periods presented. Pursuant to Securities and Exchange
Commission 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 income (loss) per common share as if
such stock had been outstanding for all periods presented. To date, the Company
has not had any issuances or grants for nominal consideration.
In accordance with SFAS No. 128, basic net income (loss) per common share
has been calculated using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. For the years
ended July 31, 1997 and 1999, and the quarters ended October 31, 1998 and
October 29, 1999, the Company has excluded all convertible preferred stock and
outstanding stock options from the calculation of diluted net loss per common
share because all such securities are antidilutive for those periods. The total
number of shares excluded from the calculations of diluted net loss per common
share were 3,245,000 and 25,320,000 for the years ended July 31, 1997 and 1999,
respectively, and 17,773,774 and 28,423,000 for the quarters ended October 31,
1998 and October 29, 1999, respectively. Pro forma basic net loss per common
share has been calculated assuming the conversion of the convertible preferred
stock using the if-converted method into an equivalent number of common shares
as if the shares had been converted on the dates of issuance.
F-9
<PAGE> 81
VA LINUX SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1998 AND OCTOBER 29, 1999 IS UNAUDITED)
The following table presents the calculation of basic, diluted and pro
forma basic net income (loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED JULY 31, -------------------------
--------------------------- OCTOBER 31, OCTOBER 29,
1997 1998 1999 1998 1999
------ ------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) attributable to common
stockholders................................ $ (474) $ 84 $(14,512) $ (97) $(14,955)
------ ------- -------- ------ --------
Basic:
Weighted average shares of common stock
outstanding.............................. 9,467 5,100 8,268 5,100 15,166
Less: Weighted average shares subject to
repurchase............................... -- -- (2,738) -- (7,683)
------ ------- -------- ------ --------
Shares used in computing basic net income
(loss) per share......................... 9,467 5,100 5,530 5,100 7,483
====== ======= ======== ====== ========
Basic net income (loss) per share........... $(0.05) $ 0.02 $ (2.62) $(0.02) $ (2.00)
====== ======= ======== ====== ========
Diluted:
Shares used above........................... 9,467 5,100 5,530 5,100 7,483
Add: Weighted average dilutive convertible
preferred stock and stock options........ -- 7,149 -- -- --
------ ------- -------- ------ --------
Shares used in computing diluted net income
(loss) per share......................... 9,467 12,249 5,530 5,100 7,483
====== ======= ======== ====== ========
Diluted net income (loss) per share......... $(0.05) $ 0.01 $ (2.62) $(0.02) $ (2.00)
====== ======= ======== ====== ========
Pro forma basic net loss per share:
Shares used above........................... 5,530 7,483
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock
(unaudited).............................. 8,787 19,163
-------- --------
Shares used in computing pro forma basic net
loss per share (unaudited)............... 14,317 26,646
======== ========
Pro forma basic net loss per share
(unaudited).............................. $ (1.01) $ (0.56)
======== ========
</TABLE>
Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130") which establishes standards
for reporting and presentation of comprehensive income. SFAS No. 130 was adopted
by the Company in 1998. This standard defines comprehensive income as the
changes in equity of an enterprise except those resulting from stockholder
transactions. Comprehensive income (loss) for the years ended July 31, 1997,
1998 and 1999, and for the quarters ended October 31, 1998 and October 29, 1999
equaled net income (loss).
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS No.
131"). SFAS No. 131 establishes standards for disclosures about operating
segments, products and services, geographic areas and major customers. The
Company is organized and operates as one operating segment, the provision of
Linux-based products and services. The Company markets its products in the
United States through its direct sales
F-10
<PAGE> 82
VA LINUX SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1998 AND OCTOBER 29, 1999 IS UNAUDITED)
force. Revenues for each of the years ended July 31, 1997, 1998 and 1999, and
for the quarters ended October 31, 1998 and October 29, 1999 were primarily
generated from sales to end users in the United States.
Recent Accounting Pronouncements
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP No. 98-1"). SOP
No. 98-1 requires entities to capitalize certain costs related to internal-use
software once certain criteria have been met. SOP No. 98-1 was adopted by the
Company in fiscal 1999. The adoption of SOP No. 98-1 did not have a material
impact on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133, as recently amended, is
effective for fiscal years beginning after June 15, 2000. Management believes
the adoption of SFAS No. 133 will not have a material effect on the Company's
financial position or results of operations.
In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP No.
97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP
No. 98-9"). SOP No. 98-9 amends SOP No. 97-2 and SOP No. 98-4 by extending the
deferral of the application of certain provisions of SOP No. 97-2 amended by SOP
No. 98-4 through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP No. 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. The Company has not had significant
software sales to date and management does not expect the adoption of SOP No.
98-9 to have a significant effect on the financial position or results of
operations.
Supplier Concentration
The Company is dependent on a single contract manufacturer for
substantially all of its manufacturing and supply chain management, including
component procurement and inventory management. The contract manufacturer is
also an investor in the Company. The inability of the manufacturer to fulfill
the production requirements of the Company or make distributions of the
Company's products on a timely basis could negatively impact future results.
Although there are other contract manufactures that could provide similar
services, a change in the contract manufacturer could cause delays in
manufacturing and distribution of the Company's products and possible loss of
sales.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. The
Company provides credit, in the normal course of business, to a number of
companies and performs ongoing credit evaluations of its customers. As of
October 29, 1999, approximately 39% of gross accounts receivable were
concentrated with two customers. As of July 31, 1999, approximately 37% of gross
accounts receivable was concentrated with one customer. As of July 31, 1998,
approximately 32% of gross accounts receivable was concentrated with five
customers. No single customer accounted for more than 10% of net revenues in
fiscal 1997, 1998 and 1999, and the quarter ended October 31, 1998. For the
quarter ended October 29, 1999, one customer accounted for approximately 17% of
net revenues.
F-11
<PAGE> 83
VA LINUX SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1998 AND OCTOBER 29, 1999 IS UNAUDITED)
3. NOTES PAYABLE:
UMAX Data Systems
In April 1998, the Company entered into a note payable arrangement with
UMAX Data Systems ("UMAX") for the repurchase of 1,734,000 shares of the
Company's Series A preferred stock held by UMAX. The note payable was for
$550,000, of which $275,000 was paid in November 1998. The remaining note
payable bears no interest and is to be repaid in 12 equal monthly installments
of approximately $23,000, beginning in February 2000 and ending in January 2001.
As of July 31, 1999, principal maturities under the note payable are $115,000
and $160,000 in fiscal 2000 and fiscal 2001, respectively. For the period during
fiscal 1998 when UMAX was a significant shareholder, the Company purchased
approximately $395,000 of computer components from UMAX.
Acquisition of Rights
In connection with the acquisition of certain Internet properties and
rights during fiscal 1999, the Company entered into an obligation to pay a total
of $396,000 in cash. The obligation bears no interest and is repayable in 33
equal monthly installments of $12,000 beginning in April 1999 and ending
December 2001. As of July 31, 1999, principal maturities under the obligation
are $144,000 in fiscal 2000, $144,000 in fiscal 2001 and $60,000 in fiscal 2002.
4. LINE OF CREDIT AND EQUIPMENT LOAN:
In February 1999, the Company entered into a loan and security agreement
with a bank for maximum borrowings of $4,000,000 under a revolving line of
credit ("Line of Credit") and $500,000 under an equipment loan ("Equipment
Loan"). The interest rate for both the Line of Credit and the Equipment Loan is
the bank's base rate plus 0.75% (8.75% at July 31, 1999). The amount available
for borrowing under the Line of Credit is limited to an amount equal to 80% of
the Company's eligible accounts receivable, less any outstanding letters of
credit issued under the Line of Credit. The Company can borrow $500,000 under
the Line of Credit without limitation to eligible accounts receivable. The
amount available for borrowing under the Equipment Loan can only be utilized to
acquire equipment that the bank approves. Advances under the Equipment Loan can
only be made through December 31, 1999. Borrowings under the Equipment Loan are
repayable in 36 equal monthly installments of principal and interest beginning
on a date no later than January 1, 2000. The Company has now agreed with the
bank to commence repayment of the Equipment loan in equal monthly installments
commencing October 31, 1999. Borrowings under the Line of Credit mature in
February 2000 and borrowings under the Equipment Loan mature in July 2002. As of
July 31, 1999, the Company had $0 outstanding on the Line of Credit and $500,000
outstanding on the Equipment Loan. The Equipment Loan and Line of Credit require
that the Company maintain certain financial and non-financial ratios and
covenants. As of July 31, 1999 and October 29, 1999, the Company was not in
compliance with all of the ratios and covenants. The Company obtained a waiver
from the bank to waive this non-compliance as of July 31, 1999 and October 29,
1999.
F-12
<PAGE> 84
VA LINUX SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1998 AND OCTOBER 29, 1999 IS UNAUDITED)
5. COMMITMENTS:
The Company leases its facilities under operating leases that expire at
various dates through April 30, 2004. Future minimum rental payments as of July
31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................ $ 639
2001................................................ 514
2002................................................ 496
2003................................................ 107
2004................................................ 25
------
$1,781
======
</TABLE>
Rent expense for the years ended July 31, 1997, 1998 and 1999 was
approximately $42,000, $55,000 and $344,000, respectively.
6. RETIREMENT SAVINGS PLAN:
The Company maintains an employee savings and retirement plan which is
intended to be qualified under Section 401(k) of the Internal Revenue Code and
is available to substantially all full-time employees of the Company. The plan
provides for tax deferred salary deductions and after-tax employee
contributions. Contributions include employee salary deferral contributions and
discretionary employer contributions. To date, there have been no employer
discretionary contributions.
7. CONVERTIBLE PREFERRED STOCK:
Series A convertible preferred stock ("Series A") and Series B convertible
preferred stock ("Series B") consists of the following, net of issuance costs,
(in thousands, except share information):
<TABLE>
<CAPTION>
JULY 31,
--------------- OCTOBER 29,
1998 1999 1999
---- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Series A:
Authorized -- 12,149,322;
Outstanding -- 0, 12,149,322 and 12,149,322 shares,
respectively........................................... $-- $ 5,494 $ 5,494
Series B:
Authorized -- 8,000,000;
Outstanding -- 0, 6,502,592 and 7,772,000 shares,
respectively........................................... -- 25,091 29,975
--- ------- -------
$-- $30,585 $35,469
=== ======= =======
</TABLE>
During fiscal 1999, the Company issued 12,149,322 shares of Series A at
$0.4567 per share. In June 1999, the Company issued 6,502,592 shares of Series B
at $3.86 per share and an additional 1,256,454 shares of Series B at $3.86 per
share in September 1999. Also during the three months ended October 29, 1999,
the Company issued 12,954 shares of Series B in exchange for assets acquired.
The Company has recorded a preferred stock dividend of $4.9 million representing
the value of the beneficial conversion feature on the issuance of Series B in
September 1999. The beneficial conversion feature was calculated at the
commitment date based on the difference between the conversion price of $3.86
per share and the estimated fair value of the common stock at that date. The
amount of the beneficial conversion feature was limited to the amount of the
gross proceeds received from the issuance of Series B. The excess
F-13
<PAGE> 85
VA LINUX SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1998 AND OCTOBER 29, 1999 IS UNAUDITED)
of the beneficial conversion feature over the gross proceeds received was $4.2
million. The rights, restrictions and preferences of the Series A and Series B
(collectively, "Preferred Stock") are as follows:
- The holders of Series A and Series B are entitled to receive
non-cumulative cash dividends, at the rate of $0.0228 and $0.1930,
respectively, when and as declared by the Board of Directors, prior and
in preference to any cash dividend declarations or distributions to
holders of common stock.
- In the event of any liquidation, dissolution or winding up of the
Company, the holders of Series A and Series B are entitled to receive
proceeds equal to $0.4567 per share and $3.86 per share, respectively,
plus all declared but unpaid dividends, prior and in preference to any
distribution to holders of common stock. If the assets available for
distribution are insufficient to pay the preferred stockholders in full,
the assets will be distributed ratably among the preferred stockholders.
- Each share of Preferred Stock is convertible at the option of the holder
into one share of common stock. Each share of Preferred Stock converts
automatically into common stock at the earlier of (1) the closing of an
underwritten public offering of the Company's common stock at an
aggregate offering price of greater than $15,000,000 or (2) the date
specified by affirmative vote of a majority of the holders of Preferred
Stock outstanding.
- The holder of each share of Preferred Stock is entitled to one vote for
each share of common stock into which it is convertible.
Stockholder Note Receivable
In connection with the issuance of 36,496 shares of Series A to an officer
of the Company, the Company received a non-interest bearing note receivable. The
note has no maturity date. The outstanding principal balance at July 31, 1999
and October 29, 1999 was $50,000.
Unaudited Pro Forma Stockholders' Equity
The Company's Board of Directors has authorized the filing of a
registration statement with the Securities and Exchange Commission to register
shares of its common stock in connection with a proposed initial public offering
(the "IPO"). If the IPO is consummated under the terms presently anticipated,
all of the outstanding shares of convertible preferred stock as of October 29,
1999 will be converted into 19,921,322 shares of common stock upon the closing
of the IPO. The effect of the conversion of the preferred stock outstanding at
October 29, 1999 has been reflected as unaudited pro forma stockholders' equity
in the accompanying balance sheet.
8. COMMON STOCK:
As of October 29, 1999, the Company had reserved shares of its common stock
for future issuance as follows (unaudited):
<TABLE>
<S> <C>
Conversion of Series A preferred stock...................... 12,149,322
Conversion of Series B preferred stock...................... 7,772,000
1998 Stock Option Plan...................................... 17,268,212
Non-Plan Stock Options and Stock Purchase Rights............ 30,000
----------
37,219,534
==========
</TABLE>
F-14
<PAGE> 86
VA LINUX SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1998 AND OCTOBER 29, 1999 IS UNAUDITED)
Repurchase of Stock
In January 1997, the Company repurchased 9,900,000 shares of common stock
from two of the Company's founders. The Company paid approximately $130,000 in
cash for repurchase of the common stock, which was subsequently retired.
Stock Repurchase Agreements
In October 1998, a founder of the Company holding 4,950,000 shares of
common stock entered into a Stock Repurchase Agreement ("Agreement") with the
Company. Under the terms of the Agreement, in the event of any voluntary or
involuntary termination of the founder's employment with the Company, the
Company shall have an irrevocable, exclusive option, for a period of 90 days
from termination, to repurchase any shares of common stock held by the founder,
at $0.02 per share. The founder's shares of common stock are released from the
repurchase option as follows: 2,970,000 are not subject to repurchase as of
October 30, 1998 and 1/24 of the remaining shares are released from the
repurchase option each month after October 1998 until all shares have been
released. As of July 31, 1999, 1,237,500 shares are subject to repurchase by the
Company.
In connection with the exercise of options pursuant to the Company's Stock
Option Plan, employees entered into restricted stock purchase agreements with
the Company. Under the terms of these agreements, the Company has a right to
repurchase any unvested shares at the original exercise price of the shares upon
termination of the employee. The repurchase right lapses ratably over the
vesting term of the original option grant. As of July 31, 1999, 5,011,448 shares
were subject to repurchase by the Company.
Stock Issued for Services Rendered
In October 1999, the Company issued 5,714 shares of common stock to a
non-employee in exchange for recruiting services rendered. The Company recorded
approximately $71,000 of consulting expense based on the fair value of the
Company's common stock on the date of issuance.
Stock Option Plan
In fiscal 1997, the Company adopted and the Board of Directors approved the
1996 Stock Option Plan ("1996 Plan"), under which a total of 4,650,000 shares
were reserved for issuance. The 1996 Plan permitted options to be granted to
employees, consultants and directors to purchase shares of the Company's common
stock at a price determined by the Board. The Company granted 4,650,000 options
under the 1996 Plan during fiscal 1997 and 1998. In fiscal 1998, the Company
granted options to purchase 4,026,000 shares of common stock outside of the 1996
Plan at an exercise price of $0.02 per share. In October 1998, the Company
cancelled all stock options outstanding under the 1996 Plan and the 4,026,000
options that had been issued in fiscal 1998 outside of the 1996 Plan. The
cancelled options were replaced with options under the 1998 Plan that had
vesting and exercise prices consistent with the terms of the cancelled options.
The 1996 Plan was terminated in October 1998.
In fiscal 1999, the Company adopted and the Board of Directors approved the
1998 Stock Plan (the "1998 Plan"). The number of shares reserved for issuance
under the 1998 Plan is 23,257,144. Subsequent to July 31, 1999, the Board of
Directors approved an amendment to the 1998 Plan to increase the number of
authorized shares by 4,000,000 (See Note 10). Under the 1998 Plan, the Board of
Directors may grant to employees and consultants options and/or stock purchase
rights to purchase the Company's common stock at terms and prices determined by
the Board of Directors. The Plan will terminate in 2008. Nonqualified options
granted under the 1998 Plan must be issued at a price equal to at least 85% of
the
F-15
<PAGE> 87
VA LINUX SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1998 AND OCTOBER 29, 1999 IS UNAUDITED)
fair market value of the Company's common stock at the date of grant. All
options may be exercised at any time within 10 years of the date of grant or
within three months of termination of employment, or such shorter time as may be
provided in the stock option agreement, and vest over a vesting schedule
determined by the Board of Directors.
A summary of the option activity under the 1996 and 1998 Plans and related
information for the years ended July 31 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED
OPTIONS AVERAGE
AVAILABLE SHARES EXERCISE PRICE
----------- ----------- --------------
<S> <C> <C> <C>
Balance, July 31, 1996...................... -- -- $ --
Authorized.................................. 4,650,000 -- --
Granted................................... (3,021,000) 3,021,000 0.02
Cancelled................................. 55,800 (55,800) 0.02
----------- -----------
Balance, July 31, 1997...................... 1,684,800 2,965,200 0.02
Granted................................... (2,644,800) 2,644,800 0.02
Cancelled................................. 960,000 (960,000) 0.02
----------- -----------
Balance, July 31, 1998...................... -- 4,650,000 0.02
Authorized................................ 23,257,144 -- --
Granted................................... (16,757,146) 16,757,146 0.20
Exercised................................. -- (10,221,528) 0.03
Cancelled................................. 52,642 (4,702,642) 0.31
----------- -----------
Balance, July 31, 1999...................... 6,552,640 6,482,976 0.46
Authorized (unaudited).................... 4,000,000 -- --
Granted (unaudited)....................... (2,429,838) 2,429,838 5.39
Exercised (unaudited)..................... -- (348,088) 0.12
Cancelled (unaudited)..................... 674,184 (93,500) 0.74
----------- -----------
Balance, October 29, 1999 (unaudited)....... 8,796,986 8,471,226 $1.88
=========== =========== =====
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE
EXERCISE AT JULY 31, CONTRACTUAL EXERCISE
PRICES 1999 LIFE PRICE
- ----------- ----------- ----------- ---------
<S> <C> <C> <C>
$0.02-$0.04 1,857,684 9.33 $0.02
$0.50-$1.00 4,625,292 9.81 0.64
---------
6,482,976 $0.46
========= =====
</TABLE>
As of July 31, 1999, there were 1,292,708 shares issuable upon the exercise
of fully vested options under the 1998 Plan at a weighted average exercise price
of $0.02 per share.
During fiscal 1999, the Company also granted to non-employees options and
stock purchase rights to acquire 268,332 shares of common stock outside of the
1998 Plan at a weighted average exercise price of $0.15 and a weighted average
fair value of $0.57. These equity instruments were either granted in exchange
for certain assets, including certain Internet properties and rights, or for
consulting services rendered. During fiscal 1999, and the quarter ended October
29, 1999, 83,332 and 155,000 options and
F-16
<PAGE> 88
VA LINUX SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1998 AND OCTOBER 29, 1999 IS UNAUDITED)
stock purchase rights, with weighted average exercise prices of $0.26 and $0.10,
were exercised respectively. As of July 31, 1999, 185,000 options and stock
purchase rights granted outside of the 1998 Plan were outstanding and
exercisable at exercise prices ranging from $0.04 to $0.50. The weighted average
exercise price of these outstanding options and stock purchase rights was $0.09
and the weighted average remaining contractual life was 8.53 years. As of
October 29, 1999, 30,000 options and stock purchase rights granted outside of
the 1998 Plan were outstanding and exercisable at a weighted average exercise
price of $0.043. The remaining contractual life of these outstanding options was
8.85 years.
During fiscal 1999, the Company recorded compensation expense of $64,000
and assets of $90,000 based upon the fair value of the equity instruments at the
date of grant. Pursuant to the provisions of SFAS No. 123, the fair value of
options and stock purchase rights issued was determined based on the fair value
of the consideration received, where such amount was reliably measurable, or the
fair value of the equity instruments issued, in which case, the fair value was
estimated on the grant date using the Black-Scholes model and the following
assumptions:
<TABLE>
<S> <C>
Risk free interest rate..................................... 5.75%
Average expected life of options............................ 1 year
Dividend yield.............................................. 0%
Volatility of common stock.................................. 65%
</TABLE>
The Company accounts for stock options issued to employees under APB
Opinion No. 25 whereby the difference between the exercise price and the fair
value at the date of grant is recognized as compensation expense. Had
compensation expense been determined consistent with SFAS No. 123, net income
(loss) would have decreased and losses would have increased to the following pro
forma amounts (in thousands except per share data):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------
1997 1998 1999
------ ----- --------
<S> <C> <C> <C>
Net income (loss) as reported........................... $ (474) $ 84 $(14,512)
Pro forma net income (loss)............................. (474) 84 (14,683)
Basic net income (loss) per share....................... (0.05) 0.02 (2.62)
Diluted net income (loss) per share..................... (0.05) 0.01 (2.62)
Pro forma basic and diluted net income (loss) per
share................................................. (0.05) 0.02 (2.66)
</TABLE>
The weighted average fair value of options granted during fiscal 1999 was
$0.03. The Company did not grant any options in fiscal 1997 and 1998. Pursuant
to the provisions of SFAS No. 123, the compensation cost associated with options
granted in fiscal 1999 was estimated on the grant date using the Black-Scholes
model and the following assumptions:
<TABLE>
<S> <C>
Risk free interest rate..................................... 5.75%
Average expected life of option............................. 3 years
Dividend yield.............................................. 0%
Volatility of common stock.................................. 0.01%
</TABLE>
Deferred Stock Compensation
In connection with the grant of certain stock options to employees during
fiscal 1999 and the quarter ended October 29, 1999, the Company recorded
deferred stock compensation within stockholders' equity of approximately $30.2
million, representing the difference between the estimated fair value of the
common stock for accounting purposes and the option exercise price of these
options at the date of grant. The Company recorded amortization of deferred
compensation of approximately $2.3 million during fiscal 1999
F-17
<PAGE> 89
VA LINUX SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1998 AND OCTOBER 29, 1999 IS UNAUDITED)
and approximately $2.9 million during the quarter ended October 29, 1999. The
deferred stock compensation expense is being amortized on an accelerated basis
over the vesting period of the individual award, generally four years. The
method is in accordance with Financial Accounting Standards Board Interpretation
No. 28. Accordingly, at October 29, 1999, the remaining deferred compensation of
approximately $25.1 million will be amortized as follows: $10.8 million during
the remaining nine months of fiscal 2000, $8.1 million during fiscal 2001, $4.3
million during fiscal 2002, $1.8 million during fiscal 2003 and $147,000 during
fiscal 2004. The amortization expense relates to options awarded to employees in
all operating expense categories. The amortization of deferred compensation has
not been separately allocated to these categories. The amount of deferred
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited.
9. INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Due to the Company's loss
position in fiscal 1997 and 1999, and availablity of loss carryforwards in
fiscal 1998, there was no provision for income taxes for the years ended July
31, 1997, 1998 or 1999. A valuation allowance has been recorded for the total
deferred tax assets as a result of uncertainties regarding realization of the
assets based upon the limited operating history of the Company, the lack of
consistent profitability to date and the uncertainty of future profitability.
The components of the net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
JULY 31,
----------------
1998 1999
----- -------
<S> <C> <C>
Net operating loss carryforwards.......................... $ 73 $ 3,970
Other reserves and accruals............................... 141 638
----- -------
214 4,608
Valuation allowance....................................... (214) (4,608)
----- -------
Net deferred income tax asset............................. $ -- $ --
===== =======
</TABLE>
As of July 31, 1999, the Company has net operating loss carryforwards of
approximately $10.8 million to offset future federal taxable income, which
expire at various dates through the year 2019. The Company also has California
net operating loss carryforwards of approximately $5.2 million to offset future
California taxable income, which expire in the year 2004. The operating loss
carryforwards to be used in future years is limited in accordance with the
provisions of the Tax Reform Act of 1986 as the Company has experienced a
cumulative stock ownership change of more than 50% over the last three years.
10. SUBSEQUENT EVENTS:
On October 7, 1999, the Board of Directors approved, subject to stockholder
approval, the following:
- amendment of the 1998 Stock Plan to increase the number of authorized
shares by 4,000,000 and provide for an automatic annual increase in the
number of shares authorized under the 1998 Stock Plan. Such increase is
to be added on the first day of the Company's fiscal year beginning in
2000 and will be equal to the lesser of (i) 4,000,000 shares, (ii) 4.9%
of the then outstanding common stock shares, or (iii) a lesser amount
determined by the Board.
- adoption of the 1999 Employee Stock Purchase Plan under which 1,000,000
shares of common stock have been reserved for issuance initially, subject
to an annual increase of the lesser of
F-18
<PAGE> 90
VA LINUX SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1998 AND OCTOBER 29, 1999 IS UNAUDITED)
500,000 shares or 1% of the then outstanding common stock. The plan
allows employees to purchase shares of common stock at a 15% discount.
- adoption of the 1999 Director Option Plan under which 500,000 shares of
common stock have been reserved, subject to an annual increase of the
lesser of 250,000 shares or 0.5% of the then outstanding common stock.
Under the plan, options will be granted when a non-employee director
joins the Board following the IPO and at each annual meeting where the
director continues to serve on the Board.
- reincorporation into Delaware by way of a merger with a newly-formed
Delaware subsidiary, and the associated issuance of one share of common
stock of the subsidiary for each one share of common stock of the Company
held by the stockholders of record. Additionally, stockholders of record
of Series A and Series B of the Company will be entitled to receive one
share of Series A and Series B preferred stock of the subsidiary.
- an increase in the authorized shares of common stock to 250,000,000 and
the creation of newly undesignated preferred stock totaling 10,000,000,
contingent upon the reincorporation of the Company in Delaware and the
closing of the IPO.
- a 3-for-1 split of the outstanding shares of Series A
- a 2-for-1 split of the outstanding shares of common and Series B
preferred stock.
- an amendment to the conversion ratios of the Series A and Series B to
provide that each share of preferred stock will convert into one share of
common stock.
All share and per share amounts in these financial statements have been
adjusted to give effect to the reincorporation and all stock splits.
F-19
<PAGE> 91
Inside Front Cover
The graphic reads "Complete Linux Solutions" in the upper left hand corner.
Left of the center of the page is a penguin graphic with "VA Linux Systems" and
our logo. There are four lines radiating from the logo, each ending in a
graphic. The top graphic is of two of our server products next to the word
"Systems". The next lower graphic is of a penguin next to the word "Software".
The next lower graphic is of the logos of three of our web sites, "Themes.org",
"Linux.com" and "valinux.com". Below this graphic are the words "Internet
Operations". The lowest graphic shows two hands gripped in a handshake next to
the word "Services".
Inside Back Cover
Across the top is the following text, "We communicate directly with our
customers and the open source community through our web sites. The open source
community consists of the thousands of individual software developers dedicated
to the further development of freely available software." Below the text are
three page views from the Internet showing, respectively, "VA Linux Systems"
next to our logo, "Linux.com" and the logo for themes.org.
<PAGE> 92
[VA LINUX SYSTEMS LOGO]
<PAGE> 93
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 VA Linux Systems, Inc. in
connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 19,460
NASD filing fee............................................. 7,500
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving costs................................ 200,000
Legal fees and expenses..................................... 500,000
Accounting fees and expenses................................ 550,000
Blue Sky fees and expenses.................................. 10,000
Transfer Agent and Registrar fees........................... 10,000
Miscellaneous expenses...................................... 8,040
----------
Total............................................. $1,400,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
The Eighth Article of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article VI of the Registrant's Amended and Restated Bylaws provides for the
indemnification of officers, directors and third parties acting on behalf of the
Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the Registrant, and,
with respect to any criminal action or proceeding, the indemnified party had no
reason to believe his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Amended and Restated Bylaws, and intends to enter into
indemnification agreements with any new directors and executive officers in the
future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since August 1, 1996, we have issued unregistered securities to a limited
number of persons as described below: (all share numbers and exercise prices in
this Item 15 are adjusted for our splits.)
(a) From October 1, 1998 through October 29, 1999, we sold an
aggregate of 10,569,616 shares of our common stock at exercise prices
ranging from $0.02 to $12.00 per share to employees, consultants, directors
and other service providers pursuant to our 1998 Stock Plan, as amended.
(b) On October 30, 1998 and February 19, 1999, we sold 8,623,773 and
3,525,549 shares of Series A Preferred Stock, respectively, at a price of
$0.4567 per share to a group of private investors for an aggregate purchase
price of $5,548,190.
(c) On December 9, 1998, we granted an option to purchase 30,000
shares of our common stock to an outside service provider at a purchase
price of $0.0433.
II-1
<PAGE> 94
(d) On January 19, 1999 and March 1, 1999, we sold a total of 83,332
shares of our common stock, having a value of $22,817, to an outside
service provider in consideration for past services rendered.
(e) On February 25, 1999, we granted a right to purchase 135,000
shares of our common stock at a purchase price of $0.0433 per share in
connection with an asset purchase.
(f) On May 13, 1999, we granted a right to purchase 5,000 shares of
our common stock, having a value of $2,500, to an outside service provider
in consideration for past services rendered.
(g) On May 13, 1999, we granted a right to purchase 15,000 shares of
our common stock to an outside service provider at a purchase price of
$0.50 per share.
(h) On May 25, 1999, we sold 40,000 shares of our common stock in
connection with an asset purchase for an aggregate purchase price of
$20,000.
(i) On June 16, 1999 and September 24, 1999, we sold 6,502,592 and
1,256,454 shares of our Series B Preferred Stock, respectively, for $3.86
per share to a group of private investors for an aggregate purchase price
of $29,949,918.
(j) On August 1, 1999 we sold 12,954 shares of our Series B Preferred
Stock in connection with an asset purchase for an aggregate purchase price
of $50,002.
(k) On October 6, 1999, we sold 13,000 shares of our common stock for
$1.00 per share to a group of private investors for an aggregate purchase
price of $13,000.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of prospectus included herein. The sales of the above
securities were deemed to be exempt from registration in reliance on Rule 701
promulgated under Section 3(b) under the Securities Act as transactions pursuant
to a compensatory benefit plan or a written contract relating to compensation,
or in reliance on Section 4(2) of the Securities Act or Regulation D promulgated
thereunder as transactions by an issuer not involving any public offering. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions. All
recipients either received adequate information about VA Linux or had access,
through employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
1.1 Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation of the
Registrant
3.2** Bylaws of the Registrant
4.1 Specimen Common Stock Certificate
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2** 1998 Stock Plan and forms of agreement thereunder
10.3** 1999 Employee Stock Purchase Plan
10.4** 1999 Director Option Plan
10.5+** Sublease between Registrant and Boca Global, Inc.
</TABLE>
II-2
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
10.6** First Amended and Restated Registration Rights Agreement
between Registrant and certain holders of preferred stock
10.7** Founder's Stock Repurchase Agreement
10.8+ Manufacturing Agreement between the Registrant and Synnex
Information Technologies, Inc.
10.9** Loan and Security Agreement between Registrant and Comerica
Bank-California
10.10+** Master Subcontracted Maintenance Service Provider Agreement
between Registrant and DecisionOne Corporation
10.11+** VA Research Linux IA-64 Porting License Agreement between
Registrant and Intel Corporation
10.12** GNU General Public License, version 2
10.13** Employment Letter between the Registrant and Daniel R. Shore
10.14** Employment Letter between the Registrant and Gregg E. Zehr
10.15** Employment Letter between the Registrant and Todd B. Schull
10.16+ Master Lease Agreement between Boca Global, Inc. and
Bordeaux Partners LLC
10.17** Employment Letter between the Registrant and Robert Russo
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants
23.2 Consent of Counsel (see Exhibit 5.1)
23.3** Consent of IDC
23.4** Consent of Gartner Group
23.5** Consent of PC Data
24.1** Power of Attorney (see page II-4)
27.1** Financial Data Schedules
</TABLE>
- ---------------
+ Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed
with the Commission.
* To be filed by amendment
** Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<S> <C>
II -- Valuation and Qualifying Accounts S-2
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities
II-3
<PAGE> 96
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 whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 97
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 the 7th day of December, 1999.
VA Linux Systems, Inc.
By: /s/ LARRY M. AUGUSTIN
------------------------------------
Larry M. Augustin, President and
Chief Executive Officer
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>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<C> <S> <C>
/s/ LARRY M. AUGUSTIN President and Chief Executive December 7, 1999
- --------------------------------------------------- Officer and Director
Larry M. Augustin (Principal Executive
Officer)
/s/ TODD B. SCHULL* Vice President, Finance and December 7, 1999
- --------------------------------------------------- Chief Financial Officer
Todd B. Schull (Principal Financial and
Accounting Officer)
/s/ JEFFRY R. ALLEN* Director December 7, 1999
- ---------------------------------------------------
Jeffry R. Allen
/s/ CAROL BARTZ* Director December 7, 1999
- ---------------------------------------------------
Carol Bartz
/s/ DOUGLAS LEONE* Director December 7, 1999
- ---------------------------------------------------
Douglas Leone
/s/ ERIC S. RAYMOND* Director December 7, 1999
- ---------------------------------------------------
Eric S. Raymond
/s/ CARL REDFIELD* Director December 7, 1999
- ---------------------------------------------------
Carl Redfield
*By: /s/ TODD B. SCHULL
---------------------------------------------
Todd B. Schull
Attorney-in-fact
</TABLE>
II-5
<PAGE> 98
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To VA Linux Systems, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of VA Linux Systems, Inc. included in this Registration
Statement and have issued our report thereon dated September 30, 1999. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying schedule is the responsibility of
the Company's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth herein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
San Jose, California
September 30, 1999
S-1
<PAGE> 99
VA LINUX SYSTEMS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTIONS END OF PERIOD
----------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Year Ended July 31, 1997
Allowance for doubtful accounts............. $ -- $ -- $ -- $ --
Year Ended July 31, 1998
Allowance for doubtful accounts........... $ -- $ 39 $ -- $ 39
Year Ended July 31, 1999
Allowance for doubtful accounts........... $ 39 $168 $ -- $207
Quarter Ended October 31, 1998
Allowance for doubtful accounts
(unaudited)............................ $ 39 $ 13 -- $ 52
Quarter Ended October 29, 1999
Allowance for doubtful accounts
(unaudited)............................... $207 $157 -- $364
</TABLE>
S-2
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
1.1 Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation of the
Registrant
3.2** Bylaws of the Registrant
4.1 Specimen Common Stock Certificate
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2** 1998 Stock Plan and forms of agreement thereunder
10.3** 1999 Employee Stock Purchase Plan
10.4** 1999 Director Option Plan
10.5+** Sublease between Registrant and Boca Global, Inc.
10.6** First Amended and Restated Registration Rights Agreement
between Registrant and certain holders of preferred stock
10.7** Founder's Stock Repurchase Agreement
10.8+ Manufacturing Agreement between the Registrant and Synnex
Information Technologies, Inc.
10.9** Loan and Security Agreement between Registrant and Comerica
Bank-California
10.10+** Master Subcontracted Maintenance Service Provider Agreement
between Registrant and DecisionOne Corporation
10.11+** VA Research Linux IA-64 Porting License Agreement between
Registrant and Intel Corporation
10.12** GNU General Public License, version 2
10.13** Employment Letter between the Registrant and Daniel R. Shore
10.14** Employment Letter between the Registrant and Gregg E. Zehr
10.15** Employment Letter between the Registrant and Todd B. Schull
10.16+ Master Lease Agreement between Boca Global, Inc. and
Bordeaux Partners LLC
10.17** Employment Letter between the Registrant and Robert Russo
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants
23.2 Consent of Counsel (see Exhibit 5.1)
23.3** Consent of IDC
23.4** Consent of Gartner Group
23.5** Consent of PC Data
24.1** Power of Attorney (see page II-4)
27.1** Financial Data Schedules
</TABLE>
- ---------------
+ Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed
with the Commission.
* To be filed by amendment
** Previously filed.
<PAGE> 1
EXHIBIT 1.1
4,400,000
VA LINUX SYSTEMS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
December ___, 1999
CREDIT SUISSE FIRST BOSTON CORPORATION
DEUTSCHE BANK ALEX. BROWN
HAMBRECHT & QUIST LLC
LEHMAN BROTHERS, INC.,
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue
New York, NY 10010
Dear Sirs:
1. Introductory. VA Linux Systems, Inc. a Delaware corporation
("COMPANY"), proposes to issue and sell 4,400,000 shares ("FIRM SECURITIES") of
its Common Stock, par value $0.001 per share, ("SECURITIES") and also proposes
to issue and sell to the Underwriters, at the option of the Underwriters, an
aggregate of not more than 660,000 additional shares ("OPTIONAL SECURITIES") of
its Securities as set forth below. The Firm Securities and the Optional
Securities are herein collectively called the "OFFERED SECURITIES." As part of
the offering contemplated by this Agreement, Deutsche Bank Alex. Brown (the
"DESIGNATED UNDERWRITER") has agreed to reserve out of the Firm Securities
purchased by it under this Agreement, up to 352,000 shares, for sale to the
Company's directors, officers, employees and other parties associated with the
Company and a number of open source developers who have expressed an interest in
purchasing Offered Securities (collectively, "PARTICIPANTS"), as set forth in
the Prospectus (as defined herein) under the heading "Underwriters" (the
"DIRECTED SHARE PROGRAM"). The Firm Securities to be sold by the Designated
Underwriter pursuant to the Directed Share Program (the "DIRECTED SHARES") will
be sold by the Designated Underwriter pursuant to this Agreement at the public
offering price. Any Directed Shares not orally confirmed for purchase by a
Participant by the end of the business day on which this Agreement is executed
will be offered to the public by the Underwriters as set forth in the
Prospectus. The Company hereby agrees with the several Underwriters named in
Schedule A hereto ("UNDERWRITERS") as follows:
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-88687) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("COMMISSION") and either (i) has
been declared effective under the Securities Act of 1933 ("ACT") and is
not proposed to be amended or (ii) is proposed to be amended by amendment
or post-
1
<PAGE> 2
effective amendment. If such registration statement ("INITIAL REGISTRATION
STATEMENT") has been declared effective, either (i) an additional
registration statement ("ADDITIONAL REGISTRATION STATEMENT") relating to
the Offered Securities may have been filed with the Commission pursuant to
Rule 462(b) ("RULE 462(b)") under the Act and, if so filed, has become
effective upon filing pursuant to such Rule and the Offered Securities all
have been duly registered under the Act pursuant to the initial
registration statement and, if applicable, the additional registration
statement or (ii) such an additional registration statement is proposed to
be filed with the Commission pursuant to Rule 462(b) and will become
effective upon filing pursuant to such Rule and upon such filing the
Offered Securities will all have been duly registered under the Act
pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration statement
has been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("RULE 462(c)") under the
Act or, in the case of the additional registration statement, Rule 462(b).
For purposes of this Agreement, "EFFECTIVE TIME" with respect to the
initial registration statement or, if filed prior to the execution and
delivery of this Agreement, the additional registration statement means
(i) if the Company has advised the Representatives that it does not
propose to amend such registration statement, the date and time as of
which such registration statement, or the most recent post-effective
amendment thereto (if any) filed prior to the execution and delivery of
this Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (ii) if the Company has
advised the Representatives that it proposes to file an amendment or
post-effective amendment to such registration statement, the date and time
as of which such registration statement, as amended by such amendment or
post-effective amendment, as the case may be, is declared effective by the
Commission. If an additional registration statement has not been filed
prior to the execution and delivery of this Agreement but the Company has
advised the Representatives that it proposes to file one, "EFFECTIVE TIME"
with respect to such additional registration statement means the date and
time as of which such registration statement is filed and becomes
effective pursuant to Rule 462(b). "EFFECTIVE DATE" with respect to the
initial registration statement or the additional registration statement
(if any) means the date of the Effective Time thereof. The initial
registration statement, as amended at its Effective Time, including all
information contained in the additional registration statement (if any)
and deemed to be a part of the initial registration statement as of the
Effective Time of the additional registration statement pursuant to the
General Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("RULE
430A(b)") under the Act, is hereinafter referred to as the "INITIAL
REGISTRATION STATEMENT." The additional registration statement, as amended
at its Effective Time, including the contents of the initial registration
statement incorporated by reference therein and including all information
(if any) deemed to be a part of the additional registration statement as
of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to
as the "ADDITIONAL REGISTRATION STATEMENT." The Initial Registration
Statement and the Additional Registration Statement are herein referred to
collectively as the "REGISTRATION STATEMENTS" and individually as a
"REGISTRATION STATEMENT." The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in
accordance with Rule 424(b) ("RULE 424(b)") under the Act or (if no such
filing is required) as included in a Registration Statement, is
hereinafter referred to as the "PROSPECTUS." No document has been or will
be prepared or distributed in reliance on Rule 434 under the Act.
2
<PAGE> 3
(b) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (i) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of
the Act and the rules and regulations of the Commission ("RULES AND
REGULATIONS") and did not include any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed, or will conform, in all respects to the
requirements of the Act and the Rules and Regulations and did not include,
or will not include, any untrue statement of a material fact and did not
omit, or will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and
(iii) on the date of this Agreement, the Initial Registration Statement
and, if the Effective Time of the Additional Registration Statement is
prior to the execution and delivery of this Agreement, the Additional
Registration Statement each conforms, and at the time of filing of the
Prospectus pursuant to Rule 424(b) or (if no such filing is required) at
the Effective Date of the Additional Registration Statement in which the
Prospectus is included, each Registration Statement and the Prospectus
will conform, in all respects to the requirements of the Act and the Rules
and Regulations, and neither of such documents includes, or will include,
any untrue statement of a material fact or omits, or will omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement: on the Effective Date of the Initial Registration Statement,
the Initial Registration Statement and the Prospectus will conform in all
respects to the requirements of the Act and the Rules and Regulations,
neither of such documents will include any untrue statement of a material
fact or will omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and no
Additional Registration Statement has been or will be filed. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only
such information is that described as such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus; the Company is duly
qualified to do business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification, except where the
failure to so qualify would not individually or in the aggregate have a
material adverse effect on the condition (financial or other), business,
properties or results of operations of the Company taken as a whole
("MATERIAL ADVERSE EFFECT"); and the Company has no subsidiaries.
(d) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and, when the Offered
Securities have been delivered and paid for in accordance with this
Agreement on each Closing Date (as defined below), such Offered Securities
will have been, validly issued, fully paid and nonassessable and will
conform to the description thereof contained in the Prospectus in all
material respects; none of the outstanding shares of capital stock of the
Company was issued in violation of the preemptive or other similar rights
of any securityholder of the Company; and the stockholders of the Company
have no preemptive rights with respect to the Securities.
3
<PAGE> 4
(e) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any person
that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like payment
in connection with this offering.
(f) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of the
Company owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to a
Registration Statement or in any securities being registered pursuant to
any other registration statement filed by the Company under the Act which
have not been validly satisfied or waived.
(g) The Offered Securities have been approved for listing on the
Nasdaq Stock Market's National Market subject to notice of issuance.
(h) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and such
as may be required under state securities laws.
(i) The execution, delivery and performance of this Agreement,
and the issuance and sale of the Offered Securities will not result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation or order of
any governmental agency or body or any court, domestic or foreign, having
jurisdiction over the Company or any of its properties, or any material
agreement or instrument to which the Company is a party or by which the
Company is bound or to which any of the properties of the Company is
subject, or the charter or by-laws of the Company, and the Company has
full power and authority to authorize, issue and sell the Offered
Securities as contemplated by this Agreement.
(j) This Agreement has been duly authorized, executed and
delivered by the Company.
(k) Except as disclosed in the Prospectus, the Company has good
and marketable title to all real properties and all other properties and
assets owned by it, in each case free from liens, encumbrances and defects
that would materially affect the value thereof or materially interfere
with the use made or to be made thereof by them; and except as disclosed
in the Prospectus, the Company holds any leased real or personal property
under valid and enforceable leases with no exceptions that would
materially interfere with the use made or to be made thereof by the
Company.
(l) The Company possesses adequate certificates, authorities or
permits issued by appropriate governmental agencies or bodies necessary to
conduct the business now operated by it and has not received any notice of
proceedings relating to the revocation or modification of any such
certificate, authority or permit that, if determined adversely to the
Company, would have a Material Adverse Effect.
(m) The Company is not in violation of its charter or bylaws or
in default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, deed
of trust, loan or credit agreement, note, lease or other agreement
4
<PAGE> 5
or instrument to which the Company is a party or by which it may be bound,
or to which any of the property or assets of the Company is subject except
for such defaults that would not be reasonably expected by the Company to
result in a Material Adverse Effect.
(n) No labor dispute with the employees of the Company exists or,
to the knowledge of the Company, is imminent that might have a Material
Adverse Effect.
(o) The Company owns, possesses or can acquire on reasonable
terms, adequate trademarks, trade names and other rights to inventions,
know-how, patents, copyrights, confidential information and other
intellectual property (collectively, "INTELLECTUAL PROPERTY RIGHTS")
necessary to conduct the business now operated by it, or presently
employed by it, and has not received any notice of infringement of or
conflict with asserted rights of others with respect to any intellectual
property rights that, if determined adversely to the Company, would
individually or in the aggregate have a Material Adverse Effect.
(p) Except as disclosed in the Prospectus, the Company (i) is not
in violation of any statute, any rule, regulation, decision or order of
any United States federal or state governmental agency or body or any
domestic court relating to the use, disposal or release of hazardous or
toxic substances or relating to the protection or restoration of the
environment or human exposure to hazardous or toxic substances
(collectively, "ENVIRONMENTAL LAWS"), (ii) does not own or operate any
real property contaminated with any substance that is subject to any
environmental laws, (iii) is not liable for any off-site disposal or
contamination pursuant to any environmental laws, and (iv) is not subject
to any claim relating to any environmental laws, which violation,
contamination, liability or claim would individually or in the aggregate
have a Material Adverse Effect; and the Company is not aware of any
pending investigation which might lead to such a claim.
(q) Except as disclosed in the Prospectus, there are no pending
legal or governmental actions, suits or proceedings against or affecting
the Company, or any of its properties that, if determined adversely to the
Company, would individually or in the aggregate have a Material Adverse
Effect, or would materially and adversely affect the ability of the
Company to perform its obligations under this Agreement, or which are
otherwise material in the context of the sale of the Offered Securities;
and no such actions, suits or proceedings are threatened or, to the
Company's knowledge, contemplated.
(r) The Company has filed all foreign, federal, state and local
tax returns that are required to be filed or has requested extensions
thereof (except in any case in which the failure so to file would not have
a Material Adverse Effect) and has paid all taxes required to be paid by
it and any other assessment, fine or penalty levied against it, to the
extent that any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good
faith or as described in or contemplated by the Prospectus.
(s) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which it is engaged; the
Company has not been refused any insurance coverage sought or applied for;
and the Company has no reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not materially and adversely
affect the condition (financial or otherwise), earnings, properties,
business affairs or business prospects, net worth or results of operations
of the Company, except as described in or contemplated by the Prospectus.
5
<PAGE> 6
(t) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates shown and their results of operations and cash
flows for the periods shown, and such financial statements have been
prepared in conformity with the generally accepted accounting principles
in the United States applied on a consistent basis and the schedules
included in each Registration Statement present fairly the information
required to be stated therein; and to the Company's knowledge, Arthur
Andersen LLP who certified the financial statements and supporting
schedules included in the Registration Statement are independent public
accountants as required by the 1933 Act and the 1933 Act Regulations.
(u) The Company maintains a system of internal accounting
controls sufficient to provide the Company with reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(v) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or
other), business, properties or results of operations of the Company, and,
except as disclosed in or contemplated by the Prospectus, there has been
no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(w) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(x) The Registration Statement, the Prospectus and any
preliminary prospectus complies, and any further amendments or supplements
thereto will comply, with any applicable laws or regulations of foreign
jurisdictions in which the Prospectus or any preliminary prospectus, as
amended or supplemented, if applicable, are distributed in connection with
the Directed Share Program, and that (ii) no authorization, approval,
consent, license, order, registration or qualification of or with any
government, governmental instrumentality or court, other than such as have
been obtained, is necessary under the securities law and regulations of
foreign jurisdictions in which the Directed Shares are offered outside the
United States.
(y) The Company has not offered, or caused the Underwriters to
offer, any Offered Securities to any person pursuant to the Directed Share
Program with the specific intent to unlawfully influence (i) a customer or
supplier of the Company to alter the customer's or supplier's level or
type of business with the Company or (ii) a trade journalist or
publication to write or publish favorable information about the Company or
its products.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $ per share, the respective Firm
Securities set forth opposite the names of the Underwriters in Schedule A
hereto.
6
<PAGE> 7
(a) The Company will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, against payment of
the purchase price in Federal (same day) funds by official bank check or
checks or wire transfer to an account at a bank reasonably acceptable to
Credit Suisse First Boston Corporation ("CSFBC") drawn to the order of the
Company, at the office of Wilson, Sonsini, Goodrich & Rosati, P.C.
("WSGR"), 650 Page Mill Road, Palo Alto, California 94304 at 6:30 A.M.,
local time, on , 1999, or at such other time not later than seven full
business days thereafter as CSFBC and the Company determine, such time
being herein referred to as the "FIRST CLOSING DATE." For purposes of Rule
15c6-1 under the Securities Exchange Act of 1934, the First Closing Date
(if later than the otherwise applicable settlement date) shall be the
settlement date for payment of funds and delivery of securities for all
the Offered Securities sold pursuant to the offering. The certificates for
the Firm Securities so to be delivered if requested by CSFBC will be in
definitive form, in such denominations and registered in such names as
CSFBC requests and will be made available for checking and packaging at
the above office of WSGR at least 24 hours prior to the First Closing
Date.
(b) In addition, upon written notice from CSFBC given to the
Company from time to time not more than 30 days subsequent to the date of
the Prospectus, the Underwriters may purchase all or less than all of the
Optional Securities at the purchase price per Security to be paid for the
Firm Securities. The Company agrees to sell to the Underwriters the
Optional Securities specified in such notice and the Underwriters agree,
severally and not jointly, to purchase such Optional Securities. Such
Optional Securities shall be purchased for the account of each Underwriter
in the same proportion as the Firm Securities set forth opposite such
Underwriter's name bears to the total number of shares of Firm Securities
(subject to adjustment by CSFBC to eliminate fractions) and may be
purchased by the Underwriters only for the purpose of covering
over-allotments made in connection with the sale of the Firm Securities.
No Optional Securities shall be sold or delivered unless the Firm
Securities previously have been, or simultaneously are, sold and
delivered. The right to purchase the Optional Securities or any portion
thereof may be exercised from time to time and to the extent not
previously exercised may be surrendered and terminated at any time upon
notice by CSFBC to the Company.
(c) Each time for the delivery of and payment for the Optional
Securities, being herein referred to as an "OPTIONAL CLOSING DATE", which
may be the First Closing Date (the First Closing Date and each Optional
Closing Date, if any, being sometimes referred to as a "CLOSING DATE"),
shall be determined by CSFBC but shall be not later than five full
business days after written notice of election to purchase Optional
Securities is given. The Company will deliver the Optional Securities
being purchased on each Optional Closing Date to the Representatives for
the accounts of the several Underwriters against payment of the purchase
price therefor in Federal (same day) funds by official bank check or
checks or wire transfer to an account at a bank acceptable to CSFBC drawn
to the order of the Company, at the above office of WSGR. The certificates
for the Optional Securities being purchased on each Optional Closing Date
if requested by CSFBC will be in definitive form, in such denominations
and registered in such names as CSFBC requests upon reasonable notice
prior to such Optional Closing Date and will be made available for
checking and packaging at the above office of WSGR at a reasonable time in
advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
7
<PAGE> 8
5. Certain Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this Agreement
or (B) the fifteenth business day after the Effective Date of the Initial
Registration Statement. The Company will advise CSFBC promptly of any such
filing pursuant to Rule 424(b). If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement and an additional registration statement is necessary to
register a portion of the Offered Securities under the Act but the
Effective Time thereof has not occurred as of such execution and delivery,
the Company will file the additional registration statement or, if filed,
will file a post-effective amendment thereto with the Commission pursuant
to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York
time, on the date of this Agreement or, if earlier, on or prior to the
time the Prospectus is printed and distributed to any Underwriter, or will
make such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration statement
as filed or the related prospectus or the Initial Registration Statement,
the Additional Registration Statement (if any) or the Prospectus and will
not effect such amendment or supplementation without CSFBC's consent,
which such consent will not be unreasonably withheld; and the Company will
also advise CSFBC promptly of the effectiveness of each Registration
Statement (if its Effective Time is subsequent to the execution and
delivery of this Agreement) and of any amendment or supplementation of a
Registration Statement or the Prospectus and of the institution by the
Commission of any stop order proceedings in respect of a Registration
Statement and will use its best efforts to prevent the issuance of any
such stop order and to obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will promptly
notify CSFBC of such event and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect such
compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of,
any such amendment or supplement shall constitute a waiver of any of the
conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability
Date (as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "AVAILABILITY DATE" means the
45th day after the end of the fourth fiscal quarter following the fiscal
quarter that includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter
8
<PAGE> 9
of the Company's fiscal year, "AVAILABILITY DATE" means the 90th day after
the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of
each Registration Statement (four of which will be signed and will include
all exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be delivered
under the Act in connection with sales by any Underwriter or dealer, the
Prospectus and all amendments and supplements to such documents, in each
case in such quantities as CSFBC requests. The Prospectus shall be so
furnished on or prior to 3:00 P.M., New York time, on the business day
following the later of the execution and delivery of this Agreement or the
Effective Time of the Initial Registration Statement. All other documents
shall be so furnished as soon as available. The Company will pay the
expenses of printing and distributing to the Underwriters all such
documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required for the distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company
will furnish to the Representatives (i) as soon as available, a copy of
each report and any definitive proxy statement of the Company filed with
the Commission under the Securities Exchange Act of 1934 or mailed to
stockholders, and (ii) from time to time, such other public information
concerning the Company as CSFBC may reasonably request.
(h) The Company will pay all expenses incident to the performance
of its obligations under this Agreement, for any filing fees and other
expenses (including fees and disbursements of counsel not to exceed
$10,000 incurred in connection with qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and the printing of memoranda relating thereto for the filing
fee incident to, and the reasonable fees and disbursements of counsel to
the Underwriters in connection with, the review by the National
Association of Securities Dealers, Inc. of the Offered Securities), for
any travel expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting meetings
with prospective purchasers of the Offered Securities and for expenses
incurred in distributing preliminary prospectuses and the Prospectus
(including any amendments and supplements thereto) to the Underwriters.
(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the Commission a registration statement under the Act
relating to, any additional shares of its Securities or securities
convertible into or exchangeable or exercisable for any shares of its
Securities, or publicly disclose the intention to make any such offer,
sale, pledge, disposition or filing, without the prior written consent of
CSFBC except issuances of Securities pursuant to the conversion or
exchange of convertible or exchangeable securities or the exercise of
warrants or options, in each case outstanding on the date hereof, grants
of employee stock options pursuant to the terms of a plan in effect on the
date hereof, issuances of Securities pursuant to the exercise of such
options; provided, however, with respect to issuances of securities in
connection with any business combination, CSFBC's consent will not be
unreasonably withheld,
9
<PAGE> 10
provided that the persons receiving such securities in such business
combination agree to be subject to the same lockup agreement as the
Company's other stockholders.
(j) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. The Designated Underwriter
will notify the Company as to which Participants will need to be so
restricted. The Company will direct the transfer agent to place stop
transfer restrictions upon such securities for such period of time.
(k) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Shares
Program and stamp duties, similar taxes or duties or other taxes, if any,
incurred by the Underwriters in connection with the Directed Share
Program. Furthermore, the Company covenants with the Underwriters that the
Company will comply with all applicable securities and other applicable
laws, rules and regulations in each foreign jurisdiction in which the
Directed Shares are offered in connection with the Directed Share Program.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, shall be prior to the filing of
the amendment or post-effective amendment to the registration statement to
be filed shortly prior to such Effective Time), of Arthur Andersen LLP
that they are independent public accountants within the meaning of the Act
and the applicable published Rules and Regulations thereunder and stating
to the effect that:
(i) in their opinion the financial statements and
schedules examined by them and included in the Registration
Statements comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified by the
American Institute of Certified Public Accountants for a review of
interim financial information as described in Statement of Auditing
Standards No. 71, Interim Financial Information, on the unaudited
financial statements included in the Registration Statements;
(iii) on the basis of the review referred to in clause
(ii) above, a reading of the latest available interim financial
statements of the Company, inquiries of officials of the Company who
have responsibility for financial and accounting matters and other
specified procedures, nothing came to their attention that caused
them to believe that:
10
<PAGE> 11
(A) the unaudited financial statements included in
the Registration Statements do not comply as to form in
all material respects with the applicable accounting
requirements of the Act and the related published Rules
and Regulations or any material modifications should be
made to such unaudited financial statements for them to be
in conformity with generally accepted accounting
principles;
(B) at the date of the latest available balance
sheet read by such accountants, or at a subsequent
specified date not more than three business days prior to
the date of such letter, there was any change in the
capital stock or any increase in short-term indebtedness
or long-term debt of the Company or, at the date of the
latest available balance sheet read by such accountants,
there was any decrease in net assets, as compared with
amounts shown on the latest balance sheet included in the
Prospectus; or
(C) for the period from the closing date of the
latest income statement included in the Prospectus to the
closing date of the latest available income statement read
by such accountants there were any decreases, as compared
with the corresponding period of the previous year and
with the period of corresponding length ended the date of
the latest income statement included in the Prospectus, in
net sales or net operating income (loss) or in the total
or per share amounts of net income,
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such letter;
and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each case to
the extent that such dollar amounts, percentages and other financial
information are derived from the general accounting records of the
Company subject to the internal controls of the Company's accounting
system or are derived directly from such records by analysis or
computation) with the results obtained from inquiries, a reading of
such general accounting records and other procedures specified in
such letter and have found such dollar amounts, percentages and other
financial information to be in agreement with such results, except as
otherwise specified in such letter.
For purposes of this subsection 6(a), (i) if the Effective Time
of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, "REGISTRATION
STATEMENTS" shall mean the initial registration statement as
proposed to be amended by the amendment or post-effective
amendment to be filed shortly prior to its Effective Time, (ii)
if the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement but the
Effective Time of the Additional Registration is subsequent to
such execution and delivery, "REGISTRATION STATEMENTS" shall mean
the Initial Registration Statement and the additional
registration statement as proposed to be filed or as proposed to
be amended by the post-effective amendment to be filed shortly
prior to its Effective Time, and (iii) "PROSPECTUS" shall mean
the prospectus included in the Registration Statements.
11
<PAGE> 12
(b) If the Effective Time of the Initial Registration Statement
is not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or such later date as shall have been
consented to by CSFBC. If the Effective Time of the Additional
Registration Statement (if any) is not prior to the execution and delivery
of this Agreement, such Effective Time shall have occurred not later than
10:00 P.M., New York time, on the date of this Agreement or, if earlier,
the time the Prospectus is printed and distributed to any Underwriter, or
shall have occurred at such later date as shall have been consented to by
CSFBC. If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Prospectus
shall have been filed with the Commission in accordance with the Rules and
Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration
Statement shall have been issued, and no proceedings for that purpose
shall have been instituted or, to the knowledge of the Company or the
Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company which, in the
reasonable judgment of a majority in interest of the Underwriters
including the Representatives, is material and adverse and makes it
impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities; (ii) any
material suspension or material limitation of trading in securities
generally on the New York Stock Exchange, or any setting of minimum prices
for trading on such exchange, or any suspension of trading of any
securities of the Company on any exchange or in the over-the-counter
market; (iii) any banking moratorium declared by U.S. Federal or New York
authorities; or (iv) any outbreak or escalation of major hostilities in
which the United States is involved, any declaration of war by Congress or
any other substantial national or international calamity or emergency if,
in the judgment of a majority in interest of the Underwriters including
the Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and payment
for the Offered Securities.
(d) The Representatives shall have received an opinion, dated
such Closing Date, of Wilson Sonsini Goodrich & Rosati, counsel for the
Company, to the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Prospectus; the Company
is duly qualified to do business as a foreign corporation in good
standing in all other jurisdictions in which its ownership or lease
of property or the conduct of its business requires such
qualification, except where the failure to be so qualified would not
have a material adverse effect on the financial condition of the
Company; and the Company has no subsidiaries.
(ii) The Offered Securities delivered on such Closing Date
and all other outstanding shares of the Common Stock of the Company
have been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus, and the stockholders of the Company have no preemptive
rights pursuant to the Company's Certificate of Incorporation or
bylaws, and, to such counsel's knowledge, the stockholders of the
Company do not have any contractual or other preemptive rights with
respect to the Offered Securities.
12
<PAGE> 13
(iii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings known to such counsel between
the Company and any person granting such person the right to require
the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in
any securities being registered pursuant to any other registration
statement filed by the Company under the Act;
(iv) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of
the proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of
1940.
(v) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is required
for the consummation of the transactions contemplated by this
Agreement in connection with the issuance or sale of the Offered
Securities by the Company, except such as have been obtained and made
under the Act and such as may be required under state securities
laws;
(vi) The execution, delivery and performance of this
Agreement and the issuance and sale of the Offered Securities will
not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any rule,
regulation or order of any governmental agency or body or any court
having jurisdiction over the Company or any of its properties, or any
agreement or instrument required to be filed as an exhibit to the
Registration Statement pursuant to Item 601(b)(10) of Regulation S-K
to which the Company is a party or by which the Company is bound or
to which any of the properties of the Company is subject, or the
charter or bylaws of the Company, and the Company has full power and
authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement;
(vii) To the knowledge of such counsel, there is not
pending or threatened any action, suit, proceeding, inquiry or
investigation, to which the Company is a party, or to which the
property of the Company is subject, before or brought by any court or
governmental agency or body, domestic or foreign, which might
reasonably be expected to result in a Material Adverse Effect which
is of a character required to be disclosed in the Registration
Statement or Prospectus by the Act or the rules and regulations of
the Commission thereunder other than those described in the
Registration Statement or Prospectus, or which might reasonably be
expected to materially and adversely affect the consummation of the
transactions contemplated in the Agreement or the performance by the
Company of its obligations thereunder;
(viii) The information in the Prospectus under
"Description of Capital Stock," in the fifth and sixth paragraphs of
"Shares Eligible" and in the Registration Statement under Item 14, in
each case insofar as such statements constitute summaries of the
legal matters, documents or proceedings referred to therein, fairly
present the information called for with respect to such legal
matters, documents and proceedings and fairly summarize the matters
referred to therein in all material respects;
(ix) To the knowledge of such counsel, the Company is not
in violation of its charter or bylaws;
13
<PAGE> 14
(x) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in such
opinion, the Additional Registration Statement (if any) was filed and
became effective under the Act as of the date and time (if
determinable) specified in such opinion, the Prospectus either was
filed with the Commission pursuant to the subparagraph of Rule 424(b)
specified in such opinion on the date specified therein or was
included in the Initial Registration Statement or the Additional
Registration Statement (as the case may be), and, to the knowledge of
such counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations; such counsel have no reason to believe that any part of
a Registration Statement or any amendment thereto, as of its
effective date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus or any amendment or
supplement thereto, as of its issue date or as of such Closing Date,
contained any untrue statement of a material fact or omitted to state
any material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; the descriptions in the Registration Statements and
Prospectus of statutes, legal and governmental proceedings and
contracts and other documents are accurate and fairly present the
information required to be shown (it being understood that such
counsel need express no opinion as to the descriptions under the
headings "Notice to Canadian Residents" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Recent Accounting Pronouncements"); and such counsel do not know of
any legal or governmental proceedings required to be described in a
Registration Statement or the Prospectus which are not described as
required or of any contracts or documents of a character required to
be described in a Registration Statement or the Prospectus or to be
filed as exhibits to a Registration Statement which are not described
and filed as required; it being understood that such counsel need
express no opinion as to the financial statements or other financial
data contained in the Registration Statements or the Prospectus, and,
with respect to the effectiveness of the Registration Statement and
the absence of a stop order suspending the effectiveness of a
Registration Statement, such counsel may rely solely on the oral
representation of the Commission; and
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
(e) The Representatives shall have received from Morrison &
Foerster LLP, counsel for the Underwriters, such opinion or opinions,
dated such Closing Date, with respect to the incorporation of the Company,
the validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives may require, and the Company shall have furnished to such
counsel such documents as they request for the purpose of enabling them to
pass upon such matters.
(f) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to
their knowledge after reasonable investigation, shall state that: the
representations and warranties of the Company in this Agreement are true
and correct; the Company has complied with all agreements and satisfied
all conditions on its part to be performed
14
<PAGE> 15
or satisfied hereunder at or prior to such Closing Date; no stop order
suspending the effectiveness of any Registration Statement has been issued
and no proceedings for that purpose have been instituted or are
contemplated by the Commission; the Additional Registration Statement (if
any) satisfying the requirements of subparagraphs (1) and (3) of Rule
462(b) was filed pursuant to Rule 462(b), including payment of the
applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the Prospectus was printed and distributed to any
Underwriter; and, subsequent to the date of the most recent financial
statements in the Prospectus, there has been no material adverse change,
nor any development or event involving a prospective material adverse
change, in the condition (financial or other), business, properties or
results of operations of the Company taken as a whole except as set forth
in or contemplated by the Prospectus or as described in such certificate.
(g) The Representatives shall have received a letter, dated such
Closing Date, of Arthur Andersen LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred to
in such subsection will be a date not more than three days prior to such
Closing Date for the purposes of this subsection.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
requests. CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each
Underwriter, its partners, directors and officers and each person, if any,
who controls such Underwriter within the meaning of Section 15 of the Act,
against any losses, claims, damages or liabilities, joint or several, to
which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any
Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are
based upon 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, and will reimburse each Underwriter for any legal
or other expenses reasonably incurred by such Underwriter in connection
with investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that the Company
will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission
from any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and
agreed that the only such information furnished by any Underwriter
consists of the information described as such in subsection (b) below.
The Company agrees to indemnify and hold harmless the Designated
Underwriter and each person, if any, who controls the Designated
Underwriter within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act (the "Designated Entities"), from and
against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) (i)
caused by any untrue statement or alleged untrue statement of a material
fact contained in any material prepared by or with the consent of the
Company for distribution to Participants in connection with the Directed
Share Program or caused by any omission or alleged omission to state
15
<PAGE> 16
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; (ii) caused by the failure of any
Participant to pay for and accept delivery of Directed Shares that the
Participant agreed to purchase; or (iii) related to, arising out of, or in
connection with the Directed Share Program, other than losses, claims,
damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted from the bad faith or gross
negligence of the Designated Entities.
(b) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company, its directors and officers and each person, if
any who controls the Company within the meaning of Section 15 of the Act,
against any losses, claims, damages or liabilities to which the Company
may become subject, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of
any material fact contained in any Registration Statement, the Prospectus,
or any amendment or supplement thereto, or any related preliminary
prospectus, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to
the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance upon
and in conformity with written information furnished to the Company by
such Underwriter through the Representatives specifically for use therein,
and will reimburse any legal or other expenses reasonably incurred by the
Company in connection with investigating or defending any such loss,
claim, damage, liability or action as such expenses are incurred, it being
understood and agreed that the only such information furnished by any
Underwriter consists of the following information in the Prospectus
furnished on behalf of each Underwriter: the concession and reallowance
figures appearing in the fourth paragraph under the caption "Underwriting"
and the last paragraph under the caption "Underwriting" regarding
stabilizing and passive market making.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under subsection (a) or (b) above, notify the
indemnifying party of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party otherwise than under subsection (a)
or (b) above. In case any such action is brought against any indemnified
party and it notifies the indemnifying party of the commencement thereof,
the indemnifying party will be entitled to participate therein and, to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party),
and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party under this Section for any legal
or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party unless such settlement (i) includes an unconditional
release of such indemnified party from all liability on any claims that
are the subject matter of such action and (ii) does not include a
statement as to, or an admission of, fault, culpability or a failure to
act by or on behalf of an indemnified party.
16
<PAGE> 17
Notwithstanding anything contained herein to the contrary, if indemnity
may be sought pursuant to the last paragraph in Section 7 (a) hereof in
respect of such action or proceeding, then in addition to such separate
firm for the indemnified parties, the indemnifying party shall be liable
for the reasonable fees and expenses of not more than one separate firm
(in addition to any local counsel) for the Designated Underwriter for the
defense of any losses, claims, damages and liabilities arising out of the
Directed Share Program, and all persons, if any, who control the
Designated Underwriter within the meaning of either Section 15 of the Act
or Section 20 of the Exchange Act.
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a) or
(b) above (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on
the other from the offering of the Securities or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses)
received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid by an indemnified party as a result
of the losses, claims, damages or liabilities referred to in the first
sentence of this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim which is the subject
of this subsection (d). Notwithstanding the provisions of this subsection
(d), no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the
obligations of the Underwriters under this Section shall be in addition to
any liability which the respective Underwriters may otherwise have and
shall extend, upon the same terms and conditions, to each director of the
Company, to each officer of the Company who has signed a Registration
Statement and to each person, if any, who controls the Company within the
meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed
17
<PAGE> 18
to purchase does not exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date,
CSFBC may make arrangements satisfactory to the Company for the purchase of such
Offered Securities by other persons, including any of the Underwriters, but if
no such arrangements are made by such Closing Date, the non-defaulting
Underwriters shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the Offered Securities that such defaulting
Underwriters agreed but failed to purchase on such Closing Date. If any
Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CSFBC and the Company for the purchase of such Offered Securities by other
persons are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company, except as provided in Section 9 (provided that if such default occurs
with respect to Optional Securities after the First Closing Date, this Agreement
will not terminate as to the Firm Securities or any Optional Securities
purchased prior to such termination). As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability for
its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriters is not consummated for any reason other than solely because
of the termination of this Agreement pursuant to Section 8 or the occurrence of
any event specified in clause (ii), (iii) or (iv) of Section 6(c), the Company
will reimburse the Underwriters for all out-of-pocket expenses (including fees
and disbursements of counsel) reasonably incurred by them in connection with the
offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives, at c/o Credit Suisse First Boston Corporation, 2400
Hanover Street, Palo Alto, CA 94304, Attention: Investment Banking
Department--Transactions Advisory Group, with a copy to Morrison & Foerster LLP,
755 Page Mill Road, Palo Alto, CA 94304, Attention: Justin L. Bastian or, if
sent to the Company, will be mailed, delivered or telegraphed and confirmed to
it at VA Linux Systems, 1380 Bordeaux Drive, Sunnyvale, CA 94089, Attention:
Larry Augustin, with a copy to Wilson Sonsini Goodrich & Rosati, 650 Page Mill
Road, Palo Alto, CA 94304, Attention: Bruce M. McNamara; provided, however, that
any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or
telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
18
<PAGE> 19
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives, jointly or by CSFBC will be binding
upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without regard to
principles of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
19
<PAGE> 20
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
VA LINUX SYSTEMS, INC.
By:
----------------------------------------
Larry Augustin
President and Chief Executive Officer
The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the
date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
DEUTSCHE BANK ALEX. BROWN
HAMBRECHT & QUIST LLC
LEHMAN BROTHERS, INC.
Acting on behalf of themselves and as
the Representatives of the
several Underwriters
By CREDIT SUISSE FIRST BOSTON CORPORATION
By
----------------------------------------
Title
-------------------------------------
20
<PAGE> 21
SCHEDULE A
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF
FIRM SECURITIES
---------------
<S> <C>
Credit Suisse First Boston Corporation ........................
Deutsche Bank Alex. Brown .....................................
Hambrecht & Quist LLC .........................................
Lehman Brothers, Inc. .........................................
Total ===============
</TABLE>
21
<PAGE> 1
EXHIBIT 4.1
VA
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN
BOSTON, MA OR NEW YORK, NY
CUSIP 91819B 10 5
SEE REVERSE FOR CERTAIN ABBREVIATIONS
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE PER
SHARE, OF
VA LINUX SYSTEMS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney, upon surrender of this Certificate, properly
endorsed.
This Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar. WITNESS the facsimile seal of Corporation and the
facsimile signatures of its duly authorized officers. Dated:
TREASURER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
-1-
<PAGE> 1
EXHIBIT 5.1
December 7, 1999
VA LINUX SYSTEMS, INC.
1382 Bordeaux Drive
Sunnyvale, CA 94089
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and exchange Commission on December 7, 1999 (Registration No.
333-88687), as amended (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 5,060,000
shares of your Common Stock, $0.001 par value per share (the "Shares"). The
Shares include an over-allotment option granted to the underwriters of the
offering to purchase up to 660,000 shares. We understand that the Shares are to
be sold to the underwriters of the offering for resale to the public as
described in the Registration Statement. As your legal counsel, we have examined
the proceedings taken, and are familiar with the proceedings proposed to be
taken, by you in connection with the sale and issuance of the Shares to be sold
by you.
It is our opinion that upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement, will be legally issued, fully paid and non-assessable.
We are members of the Bar of the State of California only and express no
opinion as to any matter relating to the laws of any jurisdiction other than the
laws of the State of California and the federal laws of the United States.
Without limiting the foregoing, we express no opinion as to the securities laws
of the State of Delaware.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI
------------------------------------
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
Exhibit 10.8
VA RESEARCH MANUFACTURING CONTRACT
This Manufacturing Agreement ("Agreement") is entered into this 5/27 day of
1999 by and between VA Linux Systems Inc., having its place of business at 1380
Bordeaux Drive, Sunnyvale, CA 94089. ("VA Linux Systems") and SYNNEX
Information Technologies, Inc., having its place of business at 3797 Spinnaker
Court, Fremont, CA 94538.
1.0 WORK, LICENSE
Synnex agrees to use reasonable commercial efforts to perform the work
(hereinafter "Work") pursuant to Blanket Purchase Orders or changes thereto
issued by VA Research and accepted by Synnex. Synnex acknowledges that time is
of the essence in the performance of Work".
Work shall mean to procure components, materials, equipment and other supplies
and to manufacture, assemble, and test products (hereinafter "Products")
pursuant to detailed written specifications for each such Product which are
provided by VA Research and accepted by Synnex and to deliver such Products. For
each Product or revision thereof, written specifications shall include but are
not limited to bill of materials, schematics, assembly drawings, process
documentation, test specifications, current revision number, and approved
vendor list (hereinafter "Specifications") as attached hereto.
Synnex is granted by VA Research a non-exclusive license during the term of this
Agreement to use all of VA Research's patents, trade secrets and other
intellectual property required to perform Synnex' obligations under this
Agreement.
2.0 FORECASTS, ORDERS, MATERIAL PROCUREMENT
2.1 FORECASTS
See Addendum A
2.2. ORDERS
See Addendum A
The parties agree that the terms and conditions contained in this Agreement or
Addendum A shall prevail over any terms and conditions of any Blanket Purchase
Order, acknowledgement form or other instrument.
2.3 MATERIAL PROCUREMENT. VA Research's accepted Blanket Purchase
Orders will constitute authorization for Synnex to procure, using standard
purchasing practices, the components, materials and supplies necessary for the
manufacture of Products ("Inventory") covered by such Blanket Purchase Orders.
See Addendum A
3.0 SHIPMENTS, SCHEDULE CHANGE, CANCELLATION
3.1 SHIPMENTS. All Products delivered pursuant to the terms of this
Agreement shall be suitably packed for shipment in accordance with VA
Research's Specifications, marked for shipment to VA Research's destination
specified in the applicable Daily Release Order and delivered to a carrier or
forwarding agent. Shipment will be F.O.B. Synnex' facility at which time risk
of loss and title will pass to VA Research. All freight, insurance and other
shipping expenses, as well as any special packing expenses not included in the
original price quotation for the Products will be paid by VA Research.
3.2 QUANTITY INCREASES AND SHIPMENT SCHEDULE CHANGES
See Addendum A
3.3 CANCELLATION.
VA will not cancel any Daily Release Orders. For cancellation of Blank Purchase
Orders, Synnex will use reasonable commercial efforts to return unused
inventory to its vendors and to cancel pending orders for such inventory.
Synnex will also use reasonable commercial efforts to sell any excess inventory
caused by the cancellation through its
<PAGE> 2
distribution channel to minimize the loss. *
4.0 ENGINEERING CHANGES
VA Research may request, in writing, that Synnex incorporate engineering changes
into the Product. Such request will include a description of the proposed
engineering change sufficient to permit Synnex to evaluate its feasibility and
cost. Synnex' evaluation shall be in writing and shall state the costs and time
of implementation and the impact on the delivery schedule and pricing of the
Product. *
5.0 TOOLING, NON-RECURRING EXPENSES, SOFTWARE
* All software which VA Research provides to Synnex is and shall remain
the property of VA Research. VA Research grants Synnex a limited license during
the term of the agreement to copy, modify and use such software as required to
perform Synnex' obligations under this Agreement. All modifications to such VA
Research software shall be the exclusive property of either VA Research or VA
Research's vendor, as the case may be. Synnex shall reasonably assist VA
Research to secure such proprietary rights to such modifications at VA's
expense. All software developed by Synnex to support the process tooling or
otherwise shall be and remain the property of Synnex.
6.0 PRODUCT ACCEPTANCE AND WARRANTIES
6.1 PRODUCT ACCEPTANCE. The Products delivered by Synnex will be inspected and
tested as required by VA Research within * of receipt. If Products are found to
be defective in material or workmanship, VA Research has the right to reject
such Products during said period. Products not rejected during said period will
be deemed accepted. VA Research has the right to reject such Products during
said period by notifying Synnex in writing at the address provided above,
attention President. VA Research may return defective Products, freight collect,
after obtaining a return material authorization number from Synnex to be
displayed on the shipping container and completing a failure report. Rejected
Products will be promptly repaired or replaced, at Synnex' option, and returned
freight pre-paid. If the Product is source inspected by VA Research prior to
shipment, VA Research will inspect goods within * of its request date.
6.2 EXPRESS LIMITED WARRANTY. Synnex warrants that the Products will conform to
VA Research's applicable Specifications and will be free from defects in
workmanship for a period of * from the date of shipment. Synnex shall warrant
the materials to the same extent that the manufacturer warrants the materials to
Synnex. This express limited warranty does not apply to (a) materials consigned
or supplied by VA Research or Synnex; (b) defects resulting from VA Research's
Specifications or the design of the Products; (c) any other defects not caused
by Synnex; or (d) Product that has been abused, damaged, altered or misused (not
used as in accordance to the product specification) by any person or entity
after title passes to VA Research. With respect to first articles, prototypes,
pre-production units, test units or other similar Products, Synnex makes no
representations or warranties whatsoever. Notwithstanding anything else in this
Agreement, Synnex assumes no liability for or obligation related to the
performance, accuracy, specifications, failure to meet specifications or defects
of or due to tooling, designs or instructions produced or supplied by VA
Research and VA Research shall be liable for costs or expenses incurred by
Synnex related thereto. Upon any failure of a Product to comply with the above
warranty, Synnex' sole obligation, and VA Research's sole remedy, is for Synnex,
at its option, to promptly repair or replace such unit and return it to VA
Research freight collect. VA Research shall return Products covered by the
warranty freight pre-paid after completing a failure report and obtaining a
return material authorization number from Synnex to be displayed on the shipping
container.
SEE ADDENDUM A
SYNNEX MAKES NO OTHER WARRANTIES OR CONDITIONS ON THE PRODUCTS, EXPRESS,
IMPLIED, STATUTORY, OR IN ANY OTHER PROVISION OF THIS AGREEMENT OR COMMUNICATION
WITH VA RESEARCH, AND SYNNEX SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OR
CONDITION OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed
with the Commission.
<PAGE> 3
7.0 PAYMENT TERMS, ADDITIONAL COSTS AND PRICE CHANGES
7.1 PRICE AND PAYMENT TERMS. The price for Products to be manufactured will be
set from time to time for reference purposes through Blanket Purchase
Orders issued by VA Research and accepted by Synnex. The actual sale price
of all Products shall be established through Daily Release Orders provided
by VA Research and accepted by Synnex. All prices quoted are exclusive of
federal, state and local excise, sales, use and similar taxes, and any
duties, and VA Research shall be responsible for all such items. Payment
for any Products, services or other prior agreed costs to be paid by VA
Research hereunder is due in * from the date of invoice and shall be made
in lawful U.S. currency.
SEE ADDENDUM A
8.1 TERM. The term of this Agreement shall commence on the date hereof above
and shall continue for one (1) year thereafter until terminated as provided
in Section 8.2 or 10.9. After the expiration of the initial term hereunder
(unless this Agreement has been terminated) this Agreement shall be
automatically renewed for separate but successive one-year terms.
8.2 TERMINATION. This Agreement may be terminated by either party for any
reason upon one hundred twenty (120) days written notice to the VA Research.
Termination of this Agreement for any reason shall not affect the obligations of
either party that exist as of the date of termination. Notwithstanding
termination or expiration of this Agreement, Sections 6.2, 8.0, 9.0, and 10.0
shall survive said termination or expiration.
9.0 LIABILITY LIMITATION
9.1 PATENTS, COPYRIGHTS, TRADE SECRETS, OTHER PROPRIETARY RIGHTS. VA Research
shall defend, indemnify and hold harmless Synnex from all claims, costs,
damages, judgments and attorneys' fees resulting from or arising out of any
alleged and/or actual infringement or other violation of any patents,
patent rights, trademarks, trademark rights, copyrights, trade secrets,
proprietary rights and processes or other such rights related to the
Products. Synnex shall promptly notify VA Research in writing of the
initiation of any such claims.
THE FOREGOING STATES THE ENTIRE LIABILITY OF THE PARTIES TO EACH OTHER
CONCERNING INFRINGEMENT OF PATENT, COPYRIGHT, TRADE SECRET OR OTHER INTELLECTUAL
PROPERTY RIGHTS.
9.2 PRODUCT LIABILITY. VA Research agrees that, if notified promptly in writing
and given sole control of the defense and all related settlement
negotiations, it will defend Synnex from any claim or action and will
indemnify and hold Synnex harmless from any loss, damage or injury,
including death, which arises from any alleged defect of any Products. VA
Research shall add Synnex as an additional insured under VA Research's
product liability polices for any Products.
9.3 NO OTHER LIABILITY. EXCEPT FOR THE EXPRESS WARRANTIES CREATED UNDER THIS
AGREEMENT AND EXCEPT AS SET FORTH OTHERWISE IN THIS AGREEMENT, IN NO EVENT SHALL
EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL
OR PUNITIVE DAMAGES OF ANY KIND OR NATURE ARISING OUT OF THIS AGREEMENT OR THE
SALE OF PRODUCTS, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT,
TORT (INCLUDING THE POSSIBILITY OF NEGLIGENCE OR STRICT LIABILITY), OR
OTHERWISE, EVEN IF THE PARTY HAS BEEN WARNED OF THE POSSIBILITY OF ANY SUCH LOSS
OR DAMAGE, AND EVEN IF ANY OF THE LIMITED REMEDIES IN THIS AGREEMENT FAIL IN
THEIR ESSENTIAL PURPOSE.
10.0 MISCELLANEOUS
10.1 CONFIDENTIALITY. All written information and data exchanged between the
parties for the purpose of enabling Synnex to manufacture and deliver Products
under this Agreement that is marked "Confidential" or the like, shall be subject
to the NDA agreement between VA Research and Synnex attached hereto as Addendum
B.
10.2 ENTIRE AGREEMENT. This Agreement, including all Addendums thereto,
constitutes the entire agreement between the Parties with respect to the
transactions contemplated hereby and supersedes all prior agreements and
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed
with the Commission.
<PAGE> 4
understandings between the parties relating to such transactions. VA Research
shall hold the existence and terms of this Agreement confidential, unless it
obtains Synnex' express written consent otherwise. In all respects, this
Agreement shall govern, and any other documents including, without limitation,
preprinted terms and conditions on VA Research's Blanket Purchase Orders and
Daily Release Orders shall be of no effect.
10.3 Amendments. This Agreement may be amended only by written consent of both
parties.
10.4 Independent Contractor. Neither party shall, for any purpose, be deemed to
be an agent of the other party and the relationship between the parties shall
only be that of independent contractors. Neither party shall have any right or
authority to assume or create any obligations or to make any representations or
warranties on behalf of any other party, whether express or implied, or to bind
the other party in any respect whatsoever.
10.5 Expenses. In the event a dispute between the parties hereunder with
respect to this Agreement must be resolved by litigation or other proceeding or
a party must engage an attorney to enforce its right hereunder, the prevailing
party shall be entitled to receive reimbursement for all associated reasonable
costs and expenses (including, without limitation, attorneys fees') from the
other party.
10.6 Security Interest. Until the purchase price and all other charges payable
to Synnex hereunder have been received in full. Synnex hereby retains and VA
Research hereby grants to Synnex a security interest in the Products delivered
to VA Research and any proceeds therefrom. VA Research agrees to promptly
execute any documents requested by Synnex to perfect and protect such security
interest. In the event of a default by VA Research, Synnex may exercise any or
all remedies provided under the Uniform Commercial Code or similar statutes or
laws enacted in the jurisdiction within which Synnex seeks to enforce its
rights under this Agreement.
10.7 Governing Law. This Agreement shall be governed by and construed under the
laws of the State of California, excluding its choice of law principles. The
parties consent to the exclusive jurisdiction of the state and Federal courts
in Santa Clara County, California.
10.8 Successors, Assignment. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors, assigns and
legal representatives. Neither party shall have the right to assign or
otherwise transfer its rights or obligations under this Agreement except with
the prior written consent of the other party, not to be unreasonably withheld.
10.9 Force Majeure. In the event that either party is prevented from performing
or is unable to perform any of its obligations under this Agreement (other than
a payment obligation) due to any Act of God, fire, casualty, flood, earthquake,
war, strike, lockout, epidemic, destruction of production facilities, riot,
insurrection, material unavailability, or any other cause beyond the reasonable
control of the party invoking this section, and if such party shall have used
its commercially reasonable efforts to mitigate its effects, such party shall
give prompt written notice to the other party, its performance shall be
excused, and the time for the performance shall be extended for the period of
delay or inability to perform due to such occurrences. Regardless of the excuse
of Force Majeure, if such party is not able to perform within ninety (90) days
after such event, the other party may terminate the Agreement. Termination of
this Agreement shall not affect the obligations of either party which exist as
of the date of termination.
ACCEPTED AND AGREED TO:
VA RESEARCH: SYNNEX INFORMATION TECHNOLOGIES,INC.:
/s/ Daniel R. Shore 5-27-99 /s/ Chih-Kai Cheng 5-27-99
- ----------------------------------- -------------------------------------
By: Daniel R. Shore By: Chih-Kai Cheng
------------------------------- ---------------------------------
Title: V.P. of Operations Title: V.P. System Integration
---------------------------- ------------------------------
<PAGE> 5
ADDENDUM A
TO VA RESEARCH MANUFACTURING CONTRACT BETWEEN
VA RESEARCH AND SYNNEX INFORMATION TECHNOLOGIES, INC.
THIS ADDENDUM WILL SUPERCEDE THE MANUFACTURING CONTRACT IN THOSE AREAS WHERE
SPECIFIED.
1. VA Research shall provide to Synnex the following:
A. A * Blanket Purchase Order ("Blanket Purchase Order") for Base
Configuration Units, broken down by expected monthly volume. In
addition to this Blanket Purchase Order, VA Research will supply a *
non-binding "sub-forecast" reflecting the anticipated configuration
detail by month.
B. *
C. Daily Release Orders for the specific configurations to be shipped
against the Blanket Purchase Order with all shipping information, and
detail of how it will be shipped
1. Ship to Address
2. Freight Forwarder
3. Unique Shipping Instructions
4. Configuration of Items to be shipped
* All daily shipping information will be supplied by Synnex to VA
Research for tracking purposes, this includes sales order numbers,
serial numbers shipped, and shipper tracking numbers. Tracking
information is to be maintained by the shipping companies.
D. If VA Research decides to consign any material, VA Research will
supply the same Purchase Order and Forecast information to those
suppliers which they will manage.
E. VA Research will be allowed to reschedule orders placed by Blanket
Purchase Order per the following schedule:
Maximum Allowable VA Research variance From Blanket Purchase Order
------------------------------------------------------------------
Quantities/Shipment
-------------------
<TABLE>
<CAPTION>
# of days before Allowable Maximum Maximum
Shipment Date Quantity Reschedule Reschedule
on Blanket Purchase Order Increases Quantity Period
- ------------------------- --------- ---------- ----------
<S> <C> <C> <C>
* *% *% *
* *% *% *
</TABLE>
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
<PAGE> 6
Reasonable commercial efforts by Synnex will be made to support any upside
requirements within this schedule or outside of this schedule.
II. Synnex will provide the following services:
A. Procure all material necessary to support the * Blanket Purchase Order
for Base Configuration Units, and the material needed to support the
forecasted configurations. All material shall be purchased from an
"Approved Vendor List" (AVL) which is supplied by VA Research. Should
Synnex need to purchase material from a source which is not on the AVL,
Synnex will inform VA Research and seek written approval to deviate.
1. All material is to be procured based on Blanket Purchase Orders and
Daily Release Orders received from VA Research. Any material which
Synnex deems necessary to purchase outside of Blanket Purchase Order
coverage will be identified as such to VA Research and purchased
only upon approval of VA Research in writing.
2. All returned inventory by Synnex shall be within a reasonable amount
of time after such inventory receipt and notification of a VA
Research reschedule or cancellation. Synnex shall keep accurate
records containing such necessary information so that VA Research
may either contact such vendor or manufacture.
B. Upon receipt of the Daily 850 EDI Release Orders Synnex will notify VA
Research of acceptance of the Daily Release Order via 855 EDI, or
information regarding inability to meet the Daily Release Order, as the
case may be. This notification will be given within one (1) business
day of receiving the Daily Release Orders. This information will
include any material or manufacturing constraints in meeting the
requested shipment date. At this time Synnex will inform VA Research of
the expected ship date for the specific configurations provided in the
Daily Release Order. *
C. It shall be specified by VA Research in the Daily Release Order which
Freight Forwarder will be used, and all costs for freight will be paid
by VA Research directly to the Shipper. * This avoids the need for
additional EDI transactions at the back-end of the process. VA and
Synnex will work together in the next phase to see whether an EDI or
other automated means that can suffice to meet the same requirements
specified by VA.
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
<PAGE> 7
D. Warranty:
If a Product comes back to Synnex within the * warranty period there will
be no cost to VA Research to repair and/or replace Product based on material or
workmanship failures as set forth in Section 6.2. Return freight will be paid
by Synnex. Synnex reserves the right to accept or reject such returns as under
warranty based on the condition of the system and the failure analysis of the
unit. VA Research agrees they will not take a credit until Synnex agrees that
it is a warranty repair. If the product was deemed to not be a valid warranty
return, VA Research will reimburse Synnex for the return freight.
Outside of the * warranty period, systems will be returned by the end customer
to VA Research for failure analysis. VA Research will replace the defective
component and send the defective part back to Synnex to return to the supplier.
Any replaced parts will be sent to VA Research for restocking in their Field
Return Unit (FRU) inventory. There will not be any credit taken by VA Research
for these parts unless a reciprocal credit is first given to Synnex by the
supplier.
E. Penalty Clause:
If Synnex is late because of something which is within Synnex control, (assuming
the order was within all schedule lead-times) and it results in a late shipment
(i.e., shipment outside the * cycle time provided below), Synnex will pay the
difference between the standard freight charge (for delivery to that end
customer) and air freight to ship to that end customer. This will not apply to
test fall outs, or design related causes, or any other causes beyond the control
of Synnex.
F. Cycle Time & Capacity:
The agreed to cycle time for shipment of product is * from accepted receipt of
Daily Release Order for a configured product to the date that Synnex places the
Product on its dock for shipment. Initial daily output capacity is established
for *. Should an already accepted Daily Release Order configuration change, the
cycle time will be reset to day one.
Once the process and capacity has been established, VA Research and Synnex will
set up jointly agreed to cycle time and daily capacities for various activities
and standard costs associated with same. Some of these activities may include;
Request for expedited cycle time
Partial orders or back order situation
Overtime requests
These cycle times and capacity requirements will be reviewed monthly.
G. Cost Review:
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
<PAGE> 8
VA Research and Synnex agree to review costing information * in an
open book manner as a basis for discussion on cost reduction efforts
and implementation. Synnex agrees to provide evidence of actual
invoice prices paid for materials used in the manufacture of VA
Research products. If material costs have changed since the prior cost
review, a new price list will be provided to VA Research which takes
into account the changes in material cost.*
H. Payment Terms:
Synnex shall invoice VA Research * for all order releases shipped
against the blanket purchase order since the last invoicing period.
Terms shall be *.
III. Pricing:
- Synnex agrees to extend to VA Research the * quoted price structure of:
- *
- *
- *
VA Research will contract with Synnex to purchase approximately *
during the * timeframe and will be at a run rate of *. *
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
<PAGE> 9
MUTUAL NONDISCLOSURE AGREEMENT
THIS MUTUAL NONDISCLOSURE AGREEMENT is made and entered into as of 5-14,
1999, between VA RESEARCH, INC. and Synnex Information Technologies Inc.
1. Purpose. The parties wish to explore a business opportunity of mutual
interest and in connection with this opportunity, each party may disclose to the
other certain confidential technical and business information which the
disclosing party desires the receiving party to treat as confidential.
2. "Confidential Information" means any information disclosed by either
party to the other, either directly or indirectly in writing, orally or by
inspection of tangible objects, including without limitation information
relating to any business strategies or arrangements, systems architecture,
software technology, intellectual property, proprietary information, technical
data, trade secrets or know-how, including but not limited to, research,
products, services, customer lists and customers, engineering and hardware
configuration information, or other business information. Confidential
information may also include information disclosed to a disclosing party by
third parties. Information communicated orally shall be considered Confidential
Information if such information is designated as being confidential or
proprietary within a reasonable time after the initial disclosure. Confidential
Information shall not, however, include any information which (i) was publicly
known and made generally available in the public domain prior to the time of
disclosure by the disclosing party; (ii) becomes publicly known and made
generally available after disclosure by the disclosing party to the receiving
party through no action or inaction of the receiving party; (iii) is already in
the possession of the receiving party at the time of disclosure, without
confidentiality restrictions, by the disclosing party as shown by the receiving
party's files and records immediately prior to the time of disclosure; (iv) is
obtained by the receiving party from a third party without a breach of such
third party's obligations of confidentiality; or (v) is independently developed
by the receiving party without use of or reference to the disclosing party's
Confidential Information, as shown by documents and other competent evidence in
the receiving party's possession.
3. Non-use and Non-disclosure. Each party agrees not to use any
Confidential Information of the other party for any purpose except to evaluate
and engage in discussions concerning a potential business relationship between
the parties. Each party agrees not to disclose any Confidential Information of
the other party to third parties or to such party's employees, except to those
employees of the receiving party who are required to have the information in
order to evaluate or engage in discussions concerning the contemplated business
relationship. Neither party shall reverse engineer, disassemble or decompile any
prototypes, software or other tangible objects which embody the other party's
Confidential Information and which are provided to the party hereunder. In the
event that either party or their respective directors, officers, employees,
consultants or agents are requested or required by legal process to disclose any
of the Confidential Information of the other party, the party required to make
such disclosure shall give prompt notice so that the other party may seek a
protective order or other appropriate relief. In the event that such protective
order is not obtained, the party required to make such disclosure shall disclose
only that portion of the Confidential Information which its counsel advises that
it is legally required to disclose.
4. Maintenance of Confidentiality. Each party agrees that it shall take
reasonable measures to protect the secrecy of and avoid disclosure and
unauthorized use of the Confidential Information of the other party. Without
limiting the foregoing, each party shall take at least those measures that it
takes to protect its own most highly confidential information and shall ensure
that its employees who have access to Confidential Information of the other
party have signed a non-use and non-disclosure agreement in content similar to
the provisions hereof, prior to any disclosure of Confidential Information to
such employees. Neither party shall make any copies of the Confidential
Information of the other party unless the same are previously approved in
<PAGE> 10
writing by the other party. Each party shall reproduce the other party's
proprietary rights notices on any such approved copies, in the same manner in
which such notices were set forth in or on the original.
5. No Obligation. Nothing herein shall obligate either party to proceed
with any transaction between them, and each party reserves the right, in its
sole discretion, to terminate the discussions contemplated by this Agreement
concerning the business opportunity.
6. No Warranty. ALL CONFIDENTIAL INFORMATION IS PROVIDED "AS IS". EACH
PARTY MAKES NO WARRANTIES, EXPRESS, IMPLIED OR OTHERWISE, REGARDING ITS
ACCURACY, COMPLETENESS OR PERFORMANCE.
7. Return of Materials. All documents and other tangible objects
containing or representing Confidential Information which have been disclosed
by either party to the other party, and all copies thereof which are in the
possession of the other party, shall be and remain the property of the
disclosing party and shall be promptly returned to the disclosing party upon
the disclosing party's written request.
8. No License. Nothing in this Agreement is intended to grant any rights
to either party under any patent, mask work right or copyright of the other
party, nor shall this Agreement grant any party any rights in or to the
Confidential Information of the other party except as expressly set forth
herein. Should the evaluation of the Confidential Information and the
discussions between the parties not result in a business relationship, the each
party agrees not to file or participate in the filing of, in the United States
or in any other country, patent applications that make reference to patent
applications of the other party which may be disclosed as Confidential
Information hereunder without the prior express written consent of the other
party.
9. Term. The obligations of each receiving party hereunder shall survive
until such time as all Confidential Information of the other party disclosed
hereunder becomes publicly known and made generally available through no action
or inaction of the receiving party.
10. Remedies. Each party agrees that any violation or threatened
violation of this Agreement may cause irreparable injury to the other party,
entitling the other party to seek injunctive relief in addition to all legal
remedies.
11. Miscellaneous. This Agreement shall bind and insure to the benefit of
the parties hereto and their successors and assigns. This Agreement shall be
governed by the laws of the State of California, without reference to conflict
of laws principles. This document contains the entire agreement between the
parties with respect to the subject matter hereof, and neither party shall have
any obligation, express or implied by law, with respect to trade secret or
proprietary information of the other party except as set forth herein. Any
failure to enforce any provision of this Agreement shall not constitute a
waiver thereof or of any other provision. This Agreement may not be amended,
nor any obligation waived, except by a writing signed by both parties hereto.
VA RESEARCH, INC. SYNNEX INFORMATION TECHNOLOGIES INC.
By: /s/ Daniel R. Shore By: /s/ Chih-Kai Cheng
------------------- -----------------------------
Name: Daniel R. Shore Name: Chih-Kai Cheng
----------------- ----------------------------
Title: VP of Operations Title: V.P.
---------------- --------------------------
<PAGE> 11
VA Linux Systems Manufacturing Agreement
Amendment 1
This Amendment 1 ("Amendment") to the Synnex Manufacturing Agreement and
Addendum dated May 27, 1999 ("Agreement") effective as of the date executed
below between VA Linux Systems, Inc. having its place of business at 1380
Bordeaux Drive, Sunnyvale, CA 94089 ("VA Linux") and SYNNEX Information
Technologies, Inc., having its place of business at 3797 Spinnaker Court,
Fremont, CA 94538 ("Synnex") shall amend the Agreement. All other terms to the
Agreement shall remain in effect unless expressly amended herein in this
Amendment. All terms unless defined herein shall have the same meaning as the
Agreement.
Whereas, Synnex desires to perform additional Work and Customized Work for
VA Linux;
Whereas, VA Linux desires to request and appoint Synnex to perform certain
Customized Work and Work for VA Linux;
Whereas, Synnex desires to participate and invest in the Series B Preferred
Stock issued by VA Linux for the purchase of no less than $1.8 million U.S.
Dollars payable upon and in accordance to such Series B Preferred Stock Purchase
Agreement;
In consideration of the mutual premises and for valuable consideration, the
parties make the following agreements:
1. Paragraph 1.1 shall be added: Any Work performed by Synnex shall include
certain custom systems integration services required by VA Linux from time
to time ("Custom Work"). This "Custom Work" will include custom systems
integration and manufacture of Products and components that are not listed
on the agreed upon "VA/Synnex product and pricing matrix". Such Custom Work
provided by Synnex shall include production labor, capacity, materials
procurement, management and logistics and shipping services related to
certain custom systems integration services. The parties shall agree upon
the price of such Custom Work which shall include as factors to such price:
*. Such price shall be prior agreed upon by the parties. The parties agree,
however, that the hourly labor and overhead shop rate charged by Synnex for
such Custom Work shall be * per hour.
2. Paragraph 2.3 shall be amended to add that materials procured to
manufacture Products (as defined in Section 2 here) shall be purchased and
invoiced by Synnex to VA Linux at * for such materials. VA Linux shall have
a right upon request to Synnex to audit bi-monthly such costs. Materials
shall be purchased to manufacture Products in the following manner in such
categories:
*
VA LINUX SERIES B CONTRACT AMENDMENT FINAL
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
<PAGE> 12
*
3. Paragraph 2.2.1 shall be added: The parties agree and acknowledge the
following:
*
4. Paragraph 7.1 shall be added: Synnex agrees that the labor, overhead, and
margin for profit for each Product manufactured except for "Custom Work"
and accepted in accordance to the Agreement shall be as follows:
(i) Synnex labor and overhead shall be * US per system unit, and
profit shall be * for server products; and
(ii) Synnex labor and overhead shall be * US per system unit, and
profit shall be * for desktop products with minimum order of
* or more of one configuration; provided, however, that
for custom configured desktop products, Synnex labor and
overhead shall be * per system unit, and profit shall be *;
(iii) Synnex shall use reasonable commercial efforts to purchase all
materials necessary for the manufacture of the Products at best
commercial prices. Synnex agrees that any price quote shall
reflect the best commercial prices available for the
components.
5. Paragraph 7.2 shall be added: Synnex shall be appointed as reseller for VA
Linux on the conditions and terms set forth in this Amendment:
(i) Synnex shall have the limited right to resell solely in the U.S.
VA Linux 2U Levi rackmount chassis, power supply, and backplane
components with factory installed non-Linux operating systems
("VA Linux Reseller Product"). A non-Linux operating system must
be factory installed and shipped on any server system built upon
"VA Linux Reseller Product" components and sold under the Synnex
or Mitac brand names.
(ii) Synnex shall have the right to resell VA Linux Reseller
Product under the Synnex and at Synnex's option under the Mitac
brand names. Provided, Synnex shall hold VA Linux harmless and
indemnify VA Linux for any liabilities including but not limited
to intellectual property claims, damages and attorneys fees so
long as such liability did not arise due to any material fault by
VA Linux. Synnex shall further agree to properly place VA Linux
trade mark, copyright or such other notices on the VA Linux
Reseller Product and shall not remove the same. Synnex shall be
solely responsible for customer support, warranty or claims
arising out of VA Linux Reseller Product except for claims arising
out of any material fault of VA Linux.
(iii) Synnex shall pay to VA Linux the following agreed upon payments
within * of invoice by Synnex for any VA Linux Reseller Product
sold by Synnex. Synnex shall pay to VA Linux as follows:
(a) Year 1: * of gross price of all server systems sold that
are built upon "VA Reseller Product" components.
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
2
<PAGE> 13
(b) Year 2: * of gross price of all server systems sold that are
built upon "VA Reseller Product" components.
(iv) Synnex shall, upon request by VA Linux, audit Synnex reseller records
relating to VA Linux Reseller Product. Synnex shall provide monthly
reports and no later than (15) days of the last date of the previous
month, to VA Linux stating number of such products sold, price,
purchaser and such information customarily provided by any reseller
to the seller of products. VA Linux shall have the right to audit
Synnex records relating to VA Linux Reseller Products. Any difference
of such audit finding of * or greater of the report made by Synnex
and such auditor shall require Synnex to pay such audit, Synnex to
pay VA Linux within five (5) business days the difference if Synnex
has underpaid by * of such report and penalty interest shall be *
per annum for such difference.
(v) The term of this provision, and solely this Reseller provision, shall
be for * from the date of execution of this Amendment. This provision
may be renewed upon mutual agreement; provided VA Linux may terminate
this provision at any time upon any breach by Synnex or upon thirty
(30) days notice by the parties to each other.
6. Section 11 shall be added: VA Linux shall sublease from Synnex and shall
jointly occupy a certain leasehold on the following terms:
(i) The leasehold shall be approximately 7,000-sq. ft. of custom systems
integration space located in [Bay Area] California. Synnex shall
reserve approximately 3,000 sq. ft. of such lease for the occupation
by VA Operations Management and Engineering personnel.
(ii) The parties each shall agree upon the location and the assignment of
office and cubicle space for each respective personnel.
(iii) VA Linux shall pay to Synnex or such Landlord the following gross
rental payments:
(a) First year - *
(b) * per month for second year
(c) The leasehold period for any lease executed by VA Linux in this
provision shall be no more than a 2 lease with an option on
2 additional years.
(d) Gross rental payments shall include: utilities (1,000 amps),
12-hour security, tax, access to fork lift, and such other
equipment. All VA Linux equipment used within VA Linux tenant
space including phone systems, monthly phone bill, any insurance,
office equipment shall be the sole responsibility of VA Linux.
(iv) The parties shall mutually agree upon and execute a sublease prior to
occupancy by either party.
(v) Tenant improvement: Synnex will reasonably work with VA Linux to
accommodate its needs. All tenant improvement costs of * or less will
be amortized into the leasing period and shall be payable monthly in
addition to the gross rental payments. The parties forecast that such
estimated cost shall be between * for the power, networking, tiles,
etc. Tenant improvements exceeding * shall be payable by VA Linux
upon completion of the work.
(vi) The parties have agreed that the anticipated move-in date to be no
later than the end of October 1999.
VA Linux Systems Synnex Information Technologies Inc.
By: /s/ Daniel R. Shore By: /s/ Chich-Kai Cheng
------------------------- -------------------------
Title: VP of Operations Title: Senior V.P.
---------------------- ----------------------
Date: 10-25-99 Date: Oct 22, 1999
----------------------- -----------------------
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
3
<PAGE> 1
EXHIBIT 10.16
LEASE
BY AND BETWEEN
BORDEAUX PARTNERS LLC,
A CALIFORNIA LIMITED LIABILITY COMPANY
AS LANDLORD
AND
BOCA GLOBAL INC.,
A FLORIDA CORPORATION
AS TENANT
JUNE 2, 1998
FOR PREMISES LOCATED AT:
1380 BORDEAUX DRIVE
SUNNYVALE, CALIFORNIA
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1 REFERENCES...................................................... 1
1.1 References...................................................... 1
ARTICLE 2 LEASED PREMISES, TERM AND POSSESSION............................ 2
2.1 Demise Of Leased Premises....................................... 2
2.2 Right To Use Outside Areas...................................... 2
2.3 Lease Commencement Date And Lease Term.......................... 3
2.4 Delivery Of Possession.......................................... 3
2.5 Performance Of Improvement Work; Acceptance Of Possession....... 3
2.6 Surrender Of Possession......................................... 3
ARTICLE 3 RENT, LATE CHARGES AND SECURITY DEPOSITS........................ 4
3.1 Base Monthly Rent............................................... 4
3.2 Additional Rent................................................. 4
3.3 Year-End Adjustments............................................ 4
3.4 Late Charge, And Interest On Rent In Default.................... 4
3.5 Payment Of Rent................................................. 5
3.6 Prepaid Rent.................................................... 5
3.7 Security Deposit................................................ 5
3.8 Lease Guaranty.................................................. 5
ARTICLE 4 USE OF LEASED PREMISES AND OUTSIDE AREA......................... 5
4.1 Permitted Use................................................... 5
4.2 General Limitations On Use...................................... 5
4.3 Noise And Emissions............................................. 6
4.4 Trash Disposal.................................................. 6
4.5 Parking......................................................... 6
4.6 Signs........................................................... 6
4.7 Compliance With Laws And Private Restrictions................... 6
4.8 Compliance With Insurance Requirements.......................... 6
4.9 Landlord's Rights To Enter...................................... 7
4.10 Use Of Outside Areas............................................ 7
4.11 Environmental Protection........................................ 7
4.12 Rules And Regulations........................................... 8
ARTICLE 5 REPAIRS, MAINTENANCE, SERVICES AND UTILITIES.................... 9
5.1 Repair And Maintenance.......................................... 9
(a) Tenant's Obligations........................................ 9
(b) Landlord's Obligation....................................... 9
5.2 Utilities....................................................... 9
5.3 Security........................................................ 9
5.4 Energy And Resource Consumption................................. 9
5.5 Limitation Of Landlord's Liability.............................. 10
ARTICLE 6 ALTERATIONS AND IMPROVEMENTS.................................... 10
6.1 By Tenant....................................................... 10
</TABLE>
i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
6.2 Ownership Of Improvements....................................... 10
6.3 Alterations Required By Law..................................... 11
6.4 Liens........................................................... 11
ARTICLE 7 ASSIGNMENT AND SUBLETTING BY TENANT............................. 11
7.1 By Tenant....................................................... 11
7.2 Merger Or Reorganization........................................ 12
7.3 Landlord's Election............................................. 12
7.4 Conditions To Landlord's Consent................................ 12
7.5 Assignment Consideration And Excess Rentals Defined............. 13
7.6 Payments........................................................ 13
7.7 Good Faith...................................................... 13
7.8 Effect Of Landlord's Consent.................................... 13
7.9 Permitted Transfer.............................................. 13
ARTICLE 8 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY................ 13
8.1 Limitation On Landlord's Liability And Release.................. 13
8.2 Tenant's Indemnification Of Landlord............................ 14
ARTICLE 9 INSURANCE....................................................... 14
9.1 Tenant's Insurance.............................................. 14
9.2 Landlord's Insurance............................................ 15
9.3 Mutual Waiver Of Subrogation.................................... 15
ARTICLE 10 DAMAGE TO LEASED PREMISES....................................... 15
10.1 Landlord's Duty To Restore...................................... 15
10.2 Insurance Proceeds.............................................. 16
10.3 Landlord's Right To Terminate................................... 16
10.4 Tenant's Right To Terminate..................................... 16
10.5 Tenant's Waiver................................................. 16
10.6 Abatement Of Rent............................................... 16
ARTICLE 11 CONDEMNATION.................................................... 16
11.1 Tenant's Right To Terminate..................................... 16
11.2 Landlord's Right To Terminate................................... 16
11.3 Restoration..................................................... 17
11.4 Temporary Taking................................................ 17
11.5 Division Of Condemnation Award.................................. 17
11.6 Abatement Of Rent............................................... 17
11.7 Taking Defined.................................................. 17
ARTICLE 12 DEFAULT AND REMEDIES............................................ 17
12.1 Events Of Tenant's Default...................................... 17
12.2 Landlord's Remedies............................................. 18
12.3 Landlord's Default And Tenant's Remedies........................ 19
12.4 Limitation Of Tenant's Recourse................................. 19
12.5 Tenant's Waiver................................................. 19
</TABLE>
ii.
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 13 GENERAL PROVISIONS.............................................. 19
13.1 Taxes On Tenant's Property...................................... 19
13.2 Holding Over.................................................... 20
13.3 Subordination To Mortgages...................................... 20
13.4 Tenant's Attornment Upon Foreclosure............................ 20
13.5 Mortgage Protection............................................. 20
13.6 Estoppel Certificate............................................ 20
13.7 Tenant's Financial Information.................................. 20
13.8 Transfer By Landlord............................................ 21
13.9 Force Majeure................................................... 21
13.10 Notices......................................................... 21
13.11 Attorney's Fees................................................. 21
13.12 Definitions..................................................... 22
(a) Real Property Taxes......................................... 22
(b) Landlord's Insurance Costs.................................. 22
(c) Property Maintenance Costs.................................. 22
(d) Property Operating Expenses................................. 22
(e) Law......................................................... 22
(f) Lender...................................................... 23
(g) Private Restrictions........................................ 23
(h) Rent........................................................ 23
13.13 General Waivers................................................. 23
13.14 Miscellaneous................................................... 23
ARTICLE 14 CORPORATE AUTHORITY BROKERS AND ENTIRE AGREEMENT................ 23
14.1 Corporate Authority............................................. 23
14.2 Brokerage Commissions........................................... 23
14.3 Entire Agreement................................................ 24
14.4 Landlord's Representations...................................... 24
ARTICLE 15 OPTIONS TO EXTENT............................................... 24
ARTICLE 16 TELEPHONE SERVICE............................................... 25
</TABLE>
iii.
<PAGE> 5
LEASE
THIS LEASE, dated June 2, 1998 for reference purposes only, is made by and
between BORDEAUX PARTNERS LLC, a California limited liability company
("Landlord") and BOCA GLOBAL INC., a Florida corporation ("Tenant"), to be
effective and binding upon the parties as of the date the last of the
designated signatories to this Lease shall have executed this Lease (the
"Effective Date of this Lease").
ARTICLE 1
REFERENCES
1.1 REFERENCES. All references in this Lease (subject to any further
clarifications contained in this Lease) to the following terms shall have the
following meaning or refer to the respective address, person, date, time
period, amount, percentage, calendar year or fiscal year as below set forth:
<TABLE>
<CAPTION>
<S> <C>
Tenant's Address for Notice: Boca Global Inc.
1377 Clint Moore Road
Boca Raton, Florida 33487
Attn: Marty Ritchason
(561) 997-2501
Tenant's Representative: Robert Federspiel
Landlord's Address for Notices: c/o Menlo Equities LLC
525 University Avenue
Suite 100
Palo Alto, California 94301
Landlord's Representative: Henry Bullock/Richard Holmstrom
Phone Number: (650) 326-9300
Intended Commencement Date September 1, 1998
Intended Term: Eighty four (84) months
Lease Expiration Date: Eighty four (84) months after the Lease
Commencement Date (as defined in
Section 2.3 (below), unless earlier
terminated by Landlord in accordance
with the terms of this Lease or
extended by Tenant pursuant to
Article 15.
First Month's Prepaid Rent: * [plus estimated expenses]
Tenant's Security Deposit: * subject to adjustment as set
forth in Section 3.7
Late Charge Amount: Five Percent (5%) of the Delinquent
Amount
Tenant's Required Liability
Coverage: * Combined Single Limit
Tenant's Broker: Prudential Realty, Inc.
Property: That certain real property situated in
the City of Sunnyvale, County of Santa
Clara, State of California, as
presently improved with two
building(s), which real property is
shown on the Site Plan attached hereto
as Exhibit "A" and is commonly known as
or otherwise described as follows:
1376-1380 Bordeaux Drive, Sunnyvale,
California.
Building: That certain Building within the
Property in which the Leased Premises
are located, commonly known as 1380
Bordeaux Drive, which Building is shown
outlined on Exhibit "A" hereto.
</TABLE>
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
1.
<PAGE> 6
<TABLE>
<S> <C>
Outside Areas: The "Outside Areas" shall mean all areas within the
Property which are located outside the Building, such
as pedestrian walkways, parking areas, landscaped area,
open areas and enclosed trash disposal areas.
Leased Premises: All the interior space within the Building, including
stairwells, connecting walkways, and atriums,
consisting of approximately 45,647 square feet and, for
purposes of this Lease, agreed to contain said number
of square feet. The Leased Premises are commonly known
as or otherwise described as follows: 1380 Bordeaux
Drive, Sunnyvale, California
Base Monthly Rent: The term "Base Monthly Rent" shall mean the following:
* per month from the Lease Commencement Date for
a period of 12 months. At the end of such 12 month
period, Base Monthly Rent shall be increased to reflect
the change in the Consumer Price Index for the San
Francisco Metropolitan Area, All Items (the "CPI"), for
the 12-month period ending 11 months after the Lease
Commencement Date, but in no event shall Base Monthly
Rent be increased less than 3% per annum compounded
annually nor more than 4% per annum compounded annually
for such 12 month period. Base Monthly Rent shall be so
adjusted at the end of each subsequent 12-month period
during the Lease Term.
Use: Systems development, research and administration in
compliance with all Laws.
Exhibits: The term "Exhibits" shall mean the Exhibits of this
Lease which are described as follows:
Exhibit "A" - Site Plan showing the Property and
delineating the Building in which the Leased Premises
are located.
Exhibit "B" - Floor Plan outlining the projected "as
is" floor plan of the Leased Premises
Exhibit "C" - Work Letter
Exhibit "D" - Lease Guaranty
Exhibit "E" - Permitted Hazardous Materials
Exhibit "F" - Environmental Reports and Documents
</TABLE>
ARTICLE 2
LEASED PREMISES, TERM AND POSSESSION
2.1 DEMISE OF LEASED PREMISES. Landlord hereby leases to Tenant and Tenant
hereby leases from Landlord for Tenant's own use in the conduct of Tenant's
business and not for purposes of speculating in real estate, for the Lease Term
and upon the terms and subject to the conditions of this Lease, that certain
interior space described in Article 1 as the Leased Premises, reserving and
excepting to Landlord the right to fifty percent (50%) of all assignment
consideration and excess rentals as provided in Article 7 below. Tenant's lease
of the Leased Premises, together with the appurtenant right to use the Outside
Areas as described in Paragraph 2.2 below, shall be conditioned upon and be
subject to the continuing compliance by Tenant with (i) all the terms and
conditions of this Lease, (ii) all Laws governing the use of the Leased
Premises and the Property, (iii) all Private Restrictions, easements and other
matters of public record of which Tenant has received copies respecting the use
of the Leased Premises and Property, and (iv) all reasonable rules and
regulations from time to time established by Landlord.
2.2 RIGHT TO USE OUTSIDE AREAS. As an appurtenant right to Tenant's right to
the use and occupancy of the Leased Premises, Tenant shall have the right to
use the Outside Areas in conjunction with its use of the Leased Premises solely
for the purposes for which they were designated and intended and for no other
purposes whatsoever. Tenant's right to so use the Outside Areas shall be
subject to the limitations on such use as set forth in Article 1 and shall
terminate concurrently with any termination of this Lease.
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
2.
<PAGE> 7
2.3 LEASE COMMENCEMENT DATE AND LEASE TERM. The term of this Lease shall
begin, and the Lease Commencement Date shall be deemed to have occurred upon
Substantial Completion (as defined in Exhibit C) of the Tenant Improvements (as
defined in Section 2.5 below) (such date, the "Lease Commencement Date"). The
term of this Lease shall in all events end eighty-four (84) months after the
Lease Commencement Date. The Lease Term shall be that period of time commencing
on the Lease Commencement Date and ending on the Lease Expiration Date (the
"Lease Term"). Notwithstanding the foregoing, the effectiveness of this Lease
and the rights and obligations of the parties hereto shall be conditioned upon
(i) the shareholders of Global Village Communication, Inc. ("Global Village")
approving the asset purchase agreement dated March 31, 1998, between Tenant and
Global Village (the "Purchase Agreement") no later than June 10, 1998, and (ii)
the closing of the Purchase Agreement on or before June 19, 1998. Tenant hereby
warrants to Landlord that upon Global Village's shareholder approval and the
performance of Global Village of its closing obligations, Tenant will be
obligated to close the transaction contemplated by the Purchase Agreement
except if Tenant discovers (i) a breach of a material representation or
warranty made by Global Village in the Purchase Agreement which would entitle
Tenant to terminate the Purchase Agreement, or (ii) fraud on the part of Global
Village in relation to the Purchase Agreement which would entitle Tenant to
terminate the Purchase Agreement.
2.4 DELIVERY OF POSSESSION. Landlord shall deliver to Tenant possession of the
Leased Premises at such time as the Tenant Improvements (as defined in Section
2.5 below) is substantially completed pursuant to the Work Letter. If Landlord
is unable to so deliver possession of the Leased Premises to Tenant in such
condition on or before the Intended Commencement Date, Landlord shall not be in
default under this Lease, nor shall this Lease be void, voidable or cancelable
by Tenant until the lapse of seventy-five (75) days after the Intended
Commencement Date (the "delivery grace period"). The delivery grace period
above set forth shall be extended for such number of days as Landlord may be
delayed in delivering possession of the Leased Premises to Tenant by reason of
Force Majeure or a Tenant Delay (as defined in the Work Letter attached to and
made a part of this Lease (the "Work Letter")). If Landlord is unable to
deliver possession of the Leased Premises in such condition to Tenant within
the described delivery grace period (including any extension thereof by reason
of Force Majeure or the actions or inactions of Tenant), then Tenant's sole
remedy shall be to terminate this Lease, and in no event shall Landlord be
liable in damages to Tenant for such delay and upon such termination, Landlord
shall return all sums previously paid by Tenant to Landlord, and neither party
shall have any further liability to the other. Tenant may not terminate this
Lease at any time after the date Landlord notifies Tenant that the Leased
Premises have been put into such condition and are available for delivery to
Tenant, unless Landlord's notice is not given in good faith.
2.5 PERFORMANCE OF IMPROVEMENT WORK; ACCEPTANCE OF POSSESSION. Landlord shall,
pursuant to the Work Letter, perform the work and make the installations in the
Leased Premises substantially as set forth in the Work Letter (such work and
installations hereinafter referred to as the "Tenant Improvements"). If any
dispute arises as to whether the Improvement Work is substantially completed, a
certificate furnished by the Architect (as defined in the Work Letter)
certifying the date of substantial completion shall be conclusive of that fact
and date and binding upon Landlord and Tenant. It is agreed that by occupying
the Leased Premises, Tenant formally accepts same and acknowledges that the
Leased Premises are in the condition called for hereunder, subject to normal
punchlist items specified by Tenant to Landlord in writing within ten (10) days
of such occupancy.
2.6 SURRENDER OF POSSESSION. Immediately prior to the expiration or upon the
sooner termination of this Lease, Tenant shall remove all of Tenant's signs
from the exterior of the Building and shall remove all of Tenant's equipment,
trade fixtures, furniture, supplies, wall decorations and other personal
property from within the Leased Premises, the Building and the Outside Areas,
and shall vacate and surrender the Leased Premises, the Building, the Outside
Areas and the Property to Landlord in the same condition, broom clean, as
existed at the Lease Commencement Date, reasonable wear and tear excepted.
Tenant shall repair all damage to the Leased Premises, the exterior of the
Building and the Outside Areas caused by Tenant's removal of Tenant's property.
Tenant shall patch and refinish, to Landlord's reasonable satisfaction, all
penetrations made by Tenant or its employees to the floor, walls or ceiling of
the Leased Premises, whether such penetrations were made with Landlord's
approval or not. Tenant shall repair or replace all stained or damaged ceiling
tiles, wall coverings and floor coverings to the reasonable satisfaction of
Landlord to the extent the condition of such items exceeds normal wear and
tear. Tenant shall repair all damage caused by Tenant to the exterior surface
of the Building and the paved surfaces of the Outside Areas and, where
necessary, replace or resurface same. Notwithstanding the foregoing, Landlord
reserves the right to require Tenant to remove any specialized improvements,
including raised floor computer areas, vaults, and other improvements of such a
nature as not likely to be generally usable by likely future tenants of the
Building. In the event Landlord requires such removal, Tenant shall, upon the
expiration or sooner termination of the Lease, remove any such improvements and
repair all damage caused by such removal. Additionally, to the extent that
Landlord shall have notified Tenant in writing at the time the improvements
were completed that it desired to have certain improvements removed at the
expiration or sooner termination of the Lease, Tenant shall, upon the expiration
or sooner termination of the Lease, remove any such improvements constructed or
installed by Landlord or Tenant and repair all damage caused by such removal.
If the Leased Premises, the Building, the Outside Areas and the Property are
not surrendered to Landlord in the condition required by this paragraph at the
expiration or sooner termination of this Lease, Landlord may, at Tenant's
expense, so remove Tenant's signs, property and/or improvements not so removed
and make such repairs and replacements not so made or hire, at Tenant's
expense, independent contractors to perform such work. Tenant shall be liable
to Landlord for all costs incurred by Landlord in returning the Leased
Premises, the Building and the Outside Areas to the required condition,
together with interest on all costs so incurred from the date paid by Landlord
at the then maximum rate of interest not prohibited or made usurious by law
until paid. Tenant shall pay to Landlord the amount of all costs so incurred
plus such interest thereon, within ten (10) days of Landlord's billing Tenant
for same. Tenant shall indemnify Landlord against loss or liability resulting
from delay by Tenant in surrendering the Leased Premises, including, without
limitation, any claims made by any succeeding Tenant or any losses to Landlord
with respect to lost opportunities to lease to succeeding tenants.
3.
<PAGE> 8
ARTICLE 3
RENT, LATE CHARGES AND SECURITY DEPOSITS
3.1 BASE MONTHLY RENT. Commencing on the Lease Commencement Date (as
determined pursuant to Paragraph 2.3 above) and continuing throughout the Lease
Term, Tenant shall pay to Landlord, without prior demand therefor, in advance
on the first day of each calendar month, the amount set forth as "Base Monthly
Rent" in Article 1 (the "Base Monthly Rent").
3.2 ADDITIONAL RENT. Commencing on the Lease Commencement Date (as determined
pursuant to Paragraph 2.3 above) and continuing throughout the Lease Term, in
addition to the Base Monthly Rent and to the extent not required by Landlord to
be contracted for and paid directly by Tenant, Tenant shall pay to Landlord as
additional rent (the "Additional Rent") the following amounts:
(a) An amount equal to all Property Operating Expenses (as defined in
Article 13) incurred by Landlord. Payment shall be made by the following
method: Landlord shall deliver to Tenant Landlord's reasonable estimate of the
expenses (including Landlord's Insurance Costs or Real Property Taxes), or
group of expenses, which it anticipates will be paid or incurred for the
ensuing calendar or fiscal year, as Landlord may determine, and Tenant shall
pay to Landlord an amount equal to the estimated amount of such expenses for
such year in equal monthly installments during such year with the installments
of Base Monthly Rent; provided, however, that Landlord may bill to Tenant, on a
periodic basis not more frequently than monthly, for a particular expenses
(or group of expenses) as paid or incurred by Landlord, and Tenant shall pay to
Landlord the amount of such expenses within ten days after receipt of a written
bill therefor from Landlord.
(b) Landlord's share of the consideration received by Tenant upon certain
assignments and sublettings as required by Article 7.
(c) Any legal fees and costs that Tenant is obligated to pay or reimburse
to Landlord pursuant to Article 13; and
(d) Any other charges or reimbursements due Landlord from Tenant pursuant
to the terms of this Lease.
Notwithstanding the foregoing, Landlord may elect by written notice to Tenant
to have Tenant pay Real Property Taxes or any portion thereof directly to the
applicable taxing authority, in which case Tenant shall make such payments and
deliver satisfactory evidence of payment to Landlord no later than ten (10)
days before such Real Property Taxes become delinquent.
3.3 YEAR-END ADJUSTMENTS. If Landlord shall have elected to bill Tenant for
the Property Operating Expenses (or any group of such expenses) on an estimated
basis in accordance with the provisions of Paragraph 3.2(a)(iii) above,
Landlord shall furnish to Tenant within one hundred twenty (120) days following
the end of the applicable calendar or fiscal year, as the case may be, a
statement setting forth (i) the amount of such expenses paid or incurred during
the just ended calendar or fiscal year, as appropriate, and (ii) the amount
that Tenant has paid to Landlord for credit against such expenses for such
period. If Tenant shall have paid more than its obligation for such expenses
for the stated period, Landlord shall, at its election, either (i) credit the
amount of such overpayment toward the next ensuing payment or payments of
Additional Rent that would otherwise be due or (ii) refund in cash to Tenant
the amount of such overpayment within thirty (30) days after the date of
Landlord's statement. IF such year-end statement shall show that Tenant did not
pay its obligation for such expenses in full, then Tenant shall pay to Landlord
the amount of such underpayment within thirty (30) days from Landlord's billing
of same to Tenant. The provisions of this Paragraph shall survive the
expiration or sooner termination of this Lease.
Tenant shall have the right, at such time and place as Landlord may reasonably
designate, to inspect and audit Landlord's books and records related to the
operation and maintenance of the Property, for the purpose of verifying
Landlord's adjusted year-end statement of Property Operating Expenses payable
by Tenant. Tenant may employ an independent public accounting firm to conduct
the audit. The costs of the audit shall be paid by Tenant unless the audit
shows that Landlord's adjusted statement over-charged Tenant its share of
Property Operating Expenses by more than five percent (5%), in which case,
Landlord shall pay all Tenant's reasonable costs of the audit.
3.4 LATE CHARGE, AND INTEREST ON RENT IN DEFAULT. Tenant acknowledges that the
late payment by Tenant of any monthly installment of Base Monthly Rent or any
Additional Rent will cause Landlord to incur certain costs and expenses not
contemplated under this Lease, the exact amounts of which are extremely
difficult or impractical to fix. Such costs and expenses will include without
limitation, administration and collection costs and processing and accounting
expenses. Therefore, if any installment of Base Monthly Rent is not received by
Landlord from Tenant within ten calendar days after the same becomes due, Tenant
shall immediately pay to Landlord a late charge in an amount equal to the amount
set forth in Article 1 as the "Late Charge Amount," and if any Additional Rent
is not received by Landlord within ten calendar days after same becomes due,
Tenant shall immediately pay to Landlord a late charge in an amount equal to 5%
of the Additional Rent not so paid. Landlord and Tenant agree that this late
charge represents a reasonable estimate of such costs and expenses and is fair
compensation to Landlord for the anticipated loss Landlord would suffer by
reason of Tenant's failure to make timely payment. In no event shall this
provision for a late charge be deemed to grant to Tenant a grace period or
extension of time within which to pay any rental installment or prevent Landlord
from exercising any right or remedy available to Landlord upon Tenant's failure
to pay each rental installment due under this Lease when due, including the
right to terminate this Lease. If any rent remains delinquent for a period in
excess of 10 calendar days, then, in addition to such late charge, Tenant
<PAGE> 9
shall pay to Landlord interest on any rent that is not so paid from said tenth
day at the then maximum rate of interest not prohibited or made usurious by Law
until paid. Notwithstanding the foregoing, once but only once in any twelve
(12) month period during the Lease Term, Tenant shall be entitled to written
notice of non-receipt of Base Monthly Rent from Landlord, and the Late Charge
Amount otherwise payable in connection with such delinquency shall be due only
if such installment of Base Monthly Rent is not received by Landlord within ten
(10) business days after Tenant's receipt of such notice from Landlord.
3.5 PAYMENT OF RENT. Except as specifically provided otherwise in this Lease,
all rent shall be paid in lawful money of the United States, without any
abatement, reduction or offset for any reason whatsoever, to Landlord at such
address as Landlord may designate from time to time. Tenant's obligation to pay
Base Monthly Rent and all Additional Rent shall be appropriately prorated at
the commencement and expiration of the Lease Term. The failure by Tenant to pay
any Additional Rent as required pursuant to this Lease when due shall be
treated the same as a failure by Tenant to pay Base Monthly Rent when due, and
Landlord shall have the same rights and remedies against Tenant as Landlord
would have had Tenant failed to pay the Base Monthly Rent when due.
3.6 PREPAID RENT. Tenant shall, upon execution of this Lease, pay to Landlord
the amount set forth in Article 1 as "First Month's Prepaid Rent" as prepayment
of rent for credit against the first payment of Base Monthly Rent due hereunder.
3.7 SECURITY DEPOSIT. Tenant has deposited with Landlord the amount set forth
in Article 1 as the "Security Deposit" as security for the performance by
Tenant of the terms of this Lease to be performed by Tenant, and not as
prepayment of rent. On the date twenty four months after the Lease Commencement
Date, provided no Event of Default shall have occurred, Landlord shall reduce
the amount of the Security Deposit so that such amount equals one month of the
Base Monthly Rent then payable. Landlord may apply such portion or portions of
the Security Deposit as are reasonably necessary for the following purposes:
(i) to remedy any default by Tenant in the payment of Base Monthly Rent or
Additional Rent or a late charge or interest on defaulted rent, or any other
monetary payment obligation of Tenant under this Lease; (ii) to repair damage
to the Leased Premises, the Building or the Outside Areas caused or permitted
to occur by Tenant; (iii) to clean and restore and repair the Leased Premises,
the Building or the Outside Areas following their surrender to Landlord if not
surrendered in the condition required pursuant to the provisions of Article 2,
and (iv) to remedy any other default of Tenant to the extent permitted by Law
including, without limitation, paying in full on Tenant's behalf any sums
claims by materialmen or contractors of Tenant to be owing to them by Tenant
for work done or improvements made at Tenant's request to the Leased Premises.
In this regard, Tenant hereby waives any restriction on the uses to which the
Security Deposit may be applied as contained in Section 1950.7(c) of the
California Civil Code and/or any successor statute. In the event the Security
Deposit or any portion thereof is so used, Tenant shall pay to Landlord,
promptly upon demand, an amount in cash sufficient to restore the Security
Deposit to the full original sum. If Tenant fails to promptly restore the
Security Deposit and if Tenant shall have paid to Landlord any sums as "Last
Month's Prepaid Rent," Landlord may, in addition to any other remedy Landlord
may have under this Lease, reduce the amount of Tenant's Last Month's Prepaid
Rent by transferring all or portions of such Last Month's Prepaid Rent to
Tenant's Security Deposit until such Security Deposit is restored to the amount
set forth in Article 1. Landlord shall not be deemed a trustee of the Security
Deposit. Landlord may use the Security Deposit in Landlord's ordinary business
and shall not be required to segregate it from Landlord's general accounts.
Tenant shall not be entitled to any interest on the Security Deposit. If
Landlord transfers the Building or the Property during the Lease Term, Landlord
may pay the Security Deposit to any subsequent owner in conformity with the
provisions of Section 1950.7 of the California Civil Code and/or any successor
statute, in which event the transferring landlord shall be released from all
liability for the return of the Security Deposit. Tenant specifically grants to
Landlord (and Tenant hereby waives the provisions of California Civil Code
1950.7 to the contrary) a period of ninety days following a surrender of the
Leased Premises by Tenant to Landlord within which to inspect the Leased
Premises, make required restorations and repairs, receive and verify workmen's
billings therefor, and prepare a final accounting with respect to the Security
Deposit. In no event shall the Security Deposit or any portion thereof, be
considered prepaid rent.
3.8 *
ARTICLE 4
USE OF LEASED PREMISES AND OUTSIDE AREA
4.1 PERMITTED USE. Tenant shall be entitled to use the Leased Premises solely
for the "Permitted Use" as set forth in Article 1 and for no other purpose
whatsoever. Tenant shall continuously and without interruption use the Leased
Premises for such purpose for the entire Lease Term. Any discontinuance of such
use for a period of sixty consecutive calendar days shall be, at Landlord's
election, a default by Tenant under the terms of this Lease; notwithstanding
the foregoing, such discontinuance shall not be a default by Tenant provided
that Tenant both (a) provides for security patrols of the Property at prudent
times and intervals, no less frequently than daily, and (b) continues to
maintain the Property in the manner that it was maintained prior to such
discontinuance and as required by this Lease. Tenant shall have the right to
use the Outside Areas in conjunction with its Permitted Use of the Leased
Premises solely for the purposes for which they were designed and intended and
for no other purposes whatsoever.
4.2 GENERAL LIMITATIONS ON USE. Tenant shall not do or permit anything to be
done in or about the Leased Premises, the Building, the Outside Areas or the
Property which does or could (i) jeopardize the structural integrity of the
Building or (ii) cause damage to any part of the Leased Premises, the Building,
the Outside Areas or the Property. Tenant shall not operate any equipment
within the Leased Premises which does or could (i) injure, vibrate
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
5.
<PAGE> 10
or shake the Leased Premises or the Building, (ii) damage, overload or impair
the efficient operation of any electrical, plumbing, heating, ventilating or air
conditioning systems within or servicing the Leased Premises or the Building, or
(iii) damage or impair the efficient operation of the sprinkler system (if any)
within or servicing the Leased Premises or the Building. Tenant shall not
install any equipment or antennas on or make any penetrations of the exterior
walls or roof of the Building other than a satellite dish not to exceed 24" in
diameter (subject to Tenant's obligations under Section 2.6). Tenant shall not
affix any equipment to or make any penetrations or cuts in the floor, ceiling,
walls or roof of the Leased Premises. Tenant shall not place any loads upon the
floors, walls, ceiling or roof systems which could endanger the structural
integrity of the Building or damage its floors, foundations or supporting
structural components. Tenant shall not place any explosive, flammable or
harmful fluids or other waste materials in the drainage systems of the Leased
Premises, the Building, the Outside Areas or the Property. Tenant shall not
drain or discharge any fluids in the landscaped areas or across the paved areas
of the Property. Tenant shall not use any of the Outside Areas for the storage
of its materials, supplies, inventory or equipment and all such materials,
supplies, inventory or equipment shall at all times be stored within the Leased
Premises other than a generator which Tenant may install in the Outside Area
(subject to Tenant's obligations under Section 2.6). Tenant shall not commit nor
permit to be committed any waste in or about the Leased Premises, the Building,
the Outside Areas or the Property.
4.3 NOISE AND EMISSIONS. All noise generated by Tenant in its use of the
Leased Premises shall be confined or muffled so that it does not interfere with
the businesses of or annoy the occupants and/or users of adjacent properties.
All dust, fumes, odors and other remissions generated by Tenant's use of the
Leased Premises shall be sufficiently dissipated in accordance with sound
environmental practice and exhausted from the Leased Premises in such a manner
so as not to interfere with the businesses of or annoy the occupants and/or
users of adjacent properties, or cause any damage to the Leased Premises, the
Building, the Outside Areas or the Property or any component part thereof or
the property of adjacent property owners.
4.4 TRASH DISPOSAL. Tenant shall provide trash bins or other adequate garbage
disposal facilities within the trash enclosure areas provided or permitted by
Landlord outside the Leased Premises sufficient for the interim disposal of
all of its trash, garbage and waste. All such trash, garbage and waste
temporarily stored in such areas shall be stored in such a manner so that it is
not visible from outside of such areas, and Tenant shall cause such trash,
garbage and waste to be regularly removed from the Property in a clean, safe
and neat condition free and clear of all trash, garbage, waste and/or boxes,
pallets and containers containing same at all times.
4.5 PARKING. Tenant shall not, at any time, park or permit to be parked any
motor homes, inoperative vehicles or equipment in the Outside Areas or on any
portion of the Property. Tenant agrees to assume responsibility for compliance
by its employees and invitees with the parking provisions contained herein. If
Tenant or its employees park any vehicle within the Property in violation of
these provisions, then without in any way limiting any of Landlord's remedies
under this Lease, Tenant shall cause such vehicle(s) to be removed within one
(1) day of receipt of written notice from Landlord.
4.6 SIGNS. Tenant shall not place or install on or within any portion of the
Leased Premises, the exterior of the Building, the Outside Areas or the
Property any sign, advertisement, banner, placard, or picture which is visible
from the exterior of the Leased Premises. Tenant shall not place or install on
or within any portion of the Leased Premises, the exterior of the Building, the
Outside Areas or the Property any business identification sign which is visible
from the exterior of the Leased Premises until Landlord shall have approved in
writing and in its reasonable discretion the location, size, content, design,
method of attachment and material to be used in the making of such sign;
provided, however, that so long as such signs are normal and customary business
directional or identification signs within the Building, Tenant shall not be
required to obtain Landlord's approval. Any sign, once approved by Landlord,
shall be installed at Tenant's sole cost and expense and only in strict
compliance with Landlord's approval, using a person approved by Landlord to
install same. Landlord may remove any signs (which have not been approved in
writing by Landlord), advertisements, banners, placards or pictures so placed
by Tenant on or within the Leased Premises, the exterior of the Building, the
Outside Areas or the Property and charge to Tenant the cost of such removal,
together with any costs incurred by Landlord to repair any damage caused
thereby, including any cost incurred to restore the surface (upon which such
sign was so affixed) to its original condition. Notwithstanding the foregoing,
Tenant shall have the right to place a monument sign bearing Tenant's name on
the Leased Premises and on the exterior of the Building in the maximum size
permitted by the local governing agency and the Private Restrictions governing
the Leased Premises. Tenant shall remove all of Tenant's signs, repair any
damage caused thereby, and restore the surface upon which the sign was affixed
to its original condition, all to Landlord's reasonable satisfaction, upon the
termination of this Lease.
4.7 COMPLIANCE WITH LAWS AND PRIVATE RESTRICTIONS. Tenant shall abide by and
shall promptly observe and comply with, at its sole cost and expense, all Laws
and Private Restrictions respecting the use and occupancy of the Leased
Premises, the Building, the Outside Areas or the Property including, without
limitation, all Laws governing the use and/or disposal of hazardous materials,
and shall defend with competent counsel, indemnify and hold Landlord harmless
from any claims, damages or liability resulting from Tenant's failure to so
abide, observe, or comply. The indemnity provision of this paragraph shall
survive the expiration or sooner termination of this Lease.
4.8 COMPLIANCE WITH INSURANCE REQUIREMENTS. With respect to any insurance
policies required or permitted to be carried by Landlord in accordance with the
provision of this Lease, copies of which have been or will, upon Tenant's
written request therefor, be provided to Tenant, Tenant shall not conduct nor
permit any other person to conduct any activities nor keep, store or use (or
allow any other person to keep, store or use) any item or thing within the
Leased Premises, the Building, the Outside Areas or the Property which (i) is
prohibited under the terms of any such policies, (ii) could result in the
termination of the coverage afforded under any of such policies, (iii) could
give to the insurance carrier the right to cancel any of such policies, or (iv)
could cause an increase in the rates (over standard rates) charged for the
coverage afforded under any of such policies. Tenant shall comply with all
6
<PAGE> 11
requirements of any insurance company, insurance underwriter, or Board of Fire
Underwriters which are necessary to maintain, at standard rates, the insurance
coverages carried by either Landlord or Tenant pursuant to this Lease.
4.9 LANDLORD'S RIGHT TO ENTER. Landlord and its agents shall have the right
to enter the Leased Premises during normal business hours after giving Tenant
reasonable notice and subject to Tenant's reasonable security measures for the
purpose of (i) inspecting the same; (ii) showing the Leased Premises to
prospective purchasers, mortgagees or tenants; (iii) making necessary
alterations, additions or repairs; and (iv) performing any of Tenant's
obligations when Tenant has failed to do so. Landlord shall have the right to
enter the Leased premises during normal business hours (or as otherwise
agreed), subject to Tenant's reasonable security measures, for purposes of
supplying any maintenance or services agreed to be supplied by Landlord.
Landlord shall have the right to enter the Outside Areas during normal business
hours for purposes of (i) inspecting the exterior of the Building and the
Outside Areas; (ii) posting notices of nonresponsibility (and for such purposes
Tenant shall provide Landlord at least fifteen (15) days' prior written notice
of any work to be performed on the Leased Premises); and (iii) supplying any
services to be provided by Landlord. Any entry into the Leased Premises or the
Outside Areas obtained by Landlord in accordance with this paragraph shall not
under any circumstances be construed or deemed to be a forcible or unlawful
entry into, or a detainer of, the Leased Premises, or an eviction, actual or
constructive of Tenant from the Lease Premises or any portion thereof.
4.10 USE OF OUTSIDE AREAS. Tenant, in its use of the Outside Areas, shall at
all times keep the Outside Areas in a safe condition free and clear of all
materials, equipment, debris, trash (except within existing enclosed trash
areas), inoperable vehicles, and other items which are not specifically
permitted by Landlord to be stored or located thereon by Tenant. If, in the
opinion of Landlord, unauthorized persons are using any of the Outside Areas by
reason of, or under claim of, the express or implied authority or consent of
Tenant, then Tenant, upon demand of Landlord, shall restrain, to the fullest
extent then allowed by Law, such unauthorized use, and shall initiate such
appropriate proceedings as may be required to so restrain such use.
4.11 ENVIRONMENTAL PROTECTION.
(a) As used herein, the term "Hazardous Materials" shall mean any toxic
or hazardous substance, material or waste or any pollutant or infectious or
radioactive material, including but not limited to those substances, materials
or wastes regulated now or in the future under any of the following statutes or
regulations and any and all of those substances included within the definitions
of "hazardous substances," "hazardous materials," "hazardous waste," "hazardous
chemical substance or mixture," "imminently hazardous chemical substance or
mixture," "toxic substances," "hazardous air pollutant," "toxic pollutant," or
"solid waste" in the (a) Comprehensive Environment Response, Compensation and
Liability Act of 1990 ("CERCLA" or "Superfund"), as amended by the Superfund
Amendments and Reauthorization Act of 1986 ("SARA"), 42 U.S.C. Section 9601 et
seq. (b) Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C.
Section 6901 et seq., (c) Federal Water Pollution Control Act ("FSPCA"), 33
U.S.C. Section 1251 et seq., (d) Clean Air Act ("CAA", 42 U.S.C. Section 7401
et seq., (e) Toxic Substances Control Act ("TSCA"), 14 U.S.C. Section 2601 et
seq., (f) Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., (g) Carpenter-Presley-Tanner Hazardous Substance Account Act ("California
Superfund"), Cal. Health & Safety code Section 25300 et seq., (h) California
Hazardous Waste Control Act, Cal Health Safety code Section 25100 et seq., (i)
Porter-Cologne Water Quality Control Act ("Porter-Cologne Act"), Cal. Water
Code Section 13000 et seq., (j) Hazardous Waste Disposal Land Use Law, Cal.
health & Safety codes Section 25200 et seq., (k) Safe Drinking Water and Toxic
Enforcement Act of 1986 ("Proposition 65"), Cal Health & Safety code Section
25249 et seq., (l) Hazardous Substances Underground Storage Tank Law, Cal.
Health & Safety code Section 25280 et seq., (m) Air Resources Law, Cal. Health &
Safety Code Section 39000 et seq., and (n) regulations promulgated pursuant to
said laws or any replacement thereof, or as similar terms are defined in the
federal, state and local laws, statutes, regulations, orders or rules
("Environmental Laws"). Hazardous Materials shall also mean any and all other
biohazardous wastes and substances, materials and wastes which are classified
as hazardous or toxic substances, materials or wastes, pollutants or
contaminants, as defined, listed or regulated by any federal, state or local
law, regulation or order or by common law decision, including, without
limitation, (i) trichloroethylene, tetrachloroethylene, perchloroethylene and
other chlorinated solvents, (ii) any petroleum products or fractions thereof,
(iii) asbestos, (iv) polychlorinated biphenyls, (v) flammable explosives, (vi)
urea formaldehyde, (vii) radioactive materials and waste, and (viii) materials
and wastes that are harmful to or may threaten human health, ecology or the
environment.
(b) Notwithstanding anything to the contrary in this Lease, Tenant, at
its sole cost, shall comply with all Laws relating to the storage, use and
disposal of Hazardous Materials; provided, however, that Tenant shall not be
responsible for contamination of the Leased Premises by Hazardous Materials
existing as of the date the Leased Premises are delivered to Tenant (whether
before or after the Intended Commencement Date) or contamination of the Leased
Premises by Hazardous Materials which have migrated from an offsite source
before or after the date the Leased Premises are delivered to Tenant, unless
caused by Tenant. Tenant shall not store, use or dispose of any hazardous
Materials except for small quantities of standard household or office products
and except for those Hazardous Materials listed on Exhibit E as may be updated
by Tenant (the "Permitted Materials"), which may be used, stored and disposed
of provided (i) such Permitted Materials are used, stored, transported, and
disposed of in strict compliance with applicable laws, (ii) such Permitted
Materials shall be limited to the materials listed on and may be used only in
the quantities specified in Exhibit E, and (iii) Tenant shall provide Landlord
with copies of all documentation required under applicable Laws in connection
with Tenant's use of Permitted Materials as and when such documentation is
provided to any regulatory authority having jurisdiction, in no event shall
Tenant cause or permit to be discharged into the plumbing or sewage system of
the Building or onto the land underlying or adjacent to the Building any
Hazardous Materials. Tenant shall update annually the information contained in
Exhibit E, but in no event shall Tenant's use of Hazardous Materials increase
or change such that Tenant uses more than two (2) times the threshold quantity
of Permitted Materials, which threshold quantity shall be the amount of
Hazardous Materials which would require Tenant to prepare a Hazardous Materials
Management Plan
7.
<PAGE> 12
pursuant to California Health and Safety Code Sections 25500 et seq. (the
"Permitted Level"). In the event that Tenant proposes to use more than the
Permitted Level, Tenant shall first obtain Landlord's written consent, which
consent shall not be unreasonably withheld. Tenant shall be solely responsible
for and shall defend, indemnify, and hold Landlord and its agents harmless from
and against all claims, costs and liabilities, including attorneys' fees and
costs, arising out of or in connection with Tenant's storage, use and/or
disposal of Hazardous Materials. If the presence of Hazardous Materials on the
Leased Premises caused or permitted by Tenant results in contamination or
deterioration of water or soil, then Tenant shall promptly take any and all
action necessary to clean up such contamination, but the foregoing shall in no
event be deemed to constitute permission by Landlord to allow the presence of
such Hazardous Materials. At any time prior to the expiration of the Lease Term
if Tenant has a reasonable basis to suspect that there has been any release or
the presence of Hazardous Materials in the ground or ground water on the
Leased Premises which did not exist upon commencement of the Lease Term,
Tenant shall have the right to conduct appropriate tests of water and soil and
to deliver to Landlord the results of such tests to demonstrate that no
contamination in excess of permitted levels has occurred as a result of
Tenant's use of the Leased Premises. Tenant shall further be solely responsible
for, and shall defend, indemnify, and hold Landlord and its agents harmless
from and against all claims, costs and liabilities, including attorneys' fees
and costs, arising out of or in connection with any removal, cleanup and
restoration work and materials required hereunder to return the Leased Premises
and any other property of whatever nature to their condition existing prior to
the appearance of the Hazardous Materials, except such Hazardous Materials as
exist on the Leased Premises because of migration to the Leased Premises from
an offsite source, in which case Landlord may undertake any removal, cleanup,
or restoration work, the cost of which shall not be included in Property
Operating Expenses as defined in Section 13.12. Tenant's obligation hereunder
shall survive the termination of the Lease. In no event shall this paragraph be
interpreted to impose on Tenant any liabilities for Pre-Existing Contamination
as defined below in subparagraph (f).
(c) Upon termination or expiration of the Lease, Tenant at its sole
expense shall cause all Hazardous Materials placed in or about the Leased
Premises, the Building, the Outside Areas, the Property, and/or the Project by
Tenant, its agents, contractors, or invitees, and all installations (whether
interior or exterior) made by or on behalf of Tenant relating to the storage,
use, disposal or transportation of Hazardous Materials to be removed and
transported for use, storage or disposal in accordance and compliance with all
Laws and other requirements respecting Hazardous Materials used or permitted to
be used by Tenant. Tenant shall apply for and shall obtain from all appropriate
regulatory authorities (including any applicable fire department or regional
water quality control board) all permits, approvals and clearances necessary
for the closure of the Property or the Project and shall take all other actions
as may be required to complete the closure of the Building and the Property or
the Project.
(d) At any time prior to expiration of the Lease term, subject to
reasonable prior notice (not less than forty-eight (48) hours) and Tenant's
reasonable security requirements and provided such activities do not
unreasonably interfere with the conduct of Tenant's business at the Leased
Premises, Landlord shall have the right to enter in and upon the Property,
Building, Outside Areas, Leased Premises and Project in order to conduct
appropriate tests of water and soil to determine whether levels of any
Hazardous Materials in excess of legally permissible levels has occurred as a
result of Tenant's use thereof. Landlord shall furnish copies of all such test
results and reports to Tenant and, at Tenant's option and cost, shall permit
split sampling for testing and analysis by Tenant. Such testing shall be at
Tenant's expense if Landlord has a reasonable basis for suspecting and confirms
the presence of Hazardous Materials in the soil or surface of ground water in,
on, or under, or about the Property, the Project, the Building, the Outside
Areas, or the Leased Premises, which has been caused by or resulted from the
activities of Tenant, its agents, contractors, or invitees.
(e) Landlord may voluntarily cooperate in a reasonable manner with the
efforts of all governmental agencies in reducing actual or potential
environmental damage. Tenant shall not be entitled to terminate this Lease or
to any reduction in or abatement of rent by reason of such compliance or
cooperation. Tenant agrees at all times to cooperate fully with the
requirements and recommendations of governmental agencies regulating, or
otherwise involved in, the protection of the environment, provided such
cooperation does not result in increased costs to Tenant or materially or
substantially interfere with Tenant's business.
(f) Landlord hereby represents and warrants (i) that except as disclosed
in any of the documents listed on Exhibit F, Landlord has received no actual
notice of any pending claim, action or proceeding regarding any Environmental
Law relating to the Property, and (ii) Landlord has provided to Tenant copies
of all environmental reports, studies, tests and other environmental documents
in its possession as of the date of this Lease, which reports, studies, tests
and other environmental documents are listed in Exhibit F attached hereto.
Landlord agrees to indemnify, hold harmless and defend Tenant, with counsel
reasonably acceptable to Landlord and Tenant, in any action, proceeding or
claim made against Tenant or its partners, principals, members, employees or
agents based upon the presence of Hazardous Materials at, on or under the
Property which were present prior to the Lease Commencement Date, regardless of
when such actions, conditions or events may be discovered ("Pre-Existing
Contamination").
(g) Tenant hereby represents and warrants that it has received and
reviewed each of those reports and documents listed in Exhibit F attached
hereto. Tenant acknowledges and accepts the condition of the Property as stated
in such reports.
4.12 RULES AND REGULATIONS. In the event Boca Global Inc. or its affiliates, or
their parents no longer occupy 100% of the Leased Premises in the aggregate,
Landlord shall have the right from time to time to establish reasonable rules
and regulations and/or amendments or additions thereto respecting the use of
the Leased Premises and the Outside Areas for the care and orderly management
of the Property. Upon delivery to Tenant of a copy of such rules and
regulations or any amendments or additions thereto, Tenant shall comply with
such rules and regulations. A violation by Tenant of any of such rules and
regulations shall constitute a default by Tenant under this Lease. If there is
a conflict between the rules and regulations and any of the provisions of this
Lease, the
8.
<PAGE> 13
provisions of this Lease shall prevail. Landlord shall not be responsible or
liable to Tenant for the violation of such rules and regulations by any other
tenant of the Property.
ARTICLE 5
REPAIRS, MAINTENANCE, SERVICES AND UTILITIES
5.1 REPAIR AND MAINTENANCE. Except in the case of damage to or destruction of
the Leased Premises, the Building, the Outside Areas or the Property caused by
an act of God or other peril, in which case the provisions of Article 10 shall
control, the parties shall have the following obligations and responsibilities
with respect to the repair and maintenance of the Leased Premises, the
Building, the Outside Areas, and the Property.
(a) TENANT'S OBLIGATIONS. Tenant shall, at all times during the Lease Term
and subject to the warranty of Landlord provided in this Section 5.1(a) and at
its sole cost and expense, regularly clean and continuously keep and maintain in
good order, condition and repair all interior and exterior portions of the
Leased Premises and every part thereof including, without limiting the
generality of the foregoing, (i) all interior walls, floors and ceilings, (ii)
all windows, doors and skylights, (iii) all electrical wiring, conduits,
connectors and fixtures, (iv) all plumbing, pipes, sinks, toilets, faucets and
drains, (v) all lighting fixtures, bulbs and lamps and all heating, ventilating
and air conditioning equipment, and (vi) all entranceways to the Leased
Premises, and excluding only those items described in Section 5.1(b) below.
Landlord shall warrant Tenant Improvements for one (1) year from the Lease
Commencement Date. Tenant, if requested to do so by Landlord, shall hire, at
Tenant's sole cost and expense, a licensed heating, ventilating and air
conditioning contractor to regularly and periodically (not less frequently than
every three months) inspect and perform required maintenance on the heating,
ventilating and air conditioning equipment and systems serving the Leased
Premises, or alternatively, Landlord may, at its election, contract in its own
name for such regular and periodic inspections of and maintenance on such
heating, ventilating and air conditioning equipment and systems and charge to
Tenant, as Additional Rent, the cost thereof. Tenant shall, at all times during
the Lease Term, keep in a clean and safe condition the Outside Areas. Tenant
shall regularly and periodically sweep and clean the driveways and parking
areas. Tenant shall, at its sole cost and expense, repair all damage to the
Leased Premises, the Building, the Outside Areas or the Property caused by the
activities of Tenant, its employees, invitees or contractors promptly following
written notice from Landlord to so repair such damages. If Tenant shall fail to
perform the required maintenance or fail to make repairs required of it pursuant
to this paragraph within a reasonable period of time following notice from
Landlord to do so, then Landlord may, at its election and without waiving any
other remedy it may otherwise have under this Lease or at law, perform such
maintenance or make such repairs and charge to Tenant, as Additional Rent, the
costs so incurred by Landlord for same. All glass within or a part of the Leased
Premises, both interior and exterior, is at the sole risk of Tenant and any
broken glass shall promptly be replaced by Tenant at Tenant's expense with glass
of the same kind, size and quality. Tenant shall have the right, but not the
obligation to paint (in a color approved by the Landlord) the exterior of the
Leased Premises at Tenant's cost.
(b) LANDLORD'S OBLIGATION. Landlord shall, at all times during the Lease
Term, maintain in good condition and repair the foundation, roof (including
structure, membrane, gutters and downspouts), and structural exterior walls
(excluding exterior painting) of the Building, the landscaping (including
sprinklers), the paved areas and the storm drain systems on the Property. The
provisions of this subparagraph (b) shall in no way limit the right of Landlord
to charge to Tenant, as Additional Rent pursuant to Article 3 (to the extent
permitted pursuant to Article 3), the costs incurred by Landlord in performing
such maintenance and/or making such repairs. The costs incurred by Landlord for
any capital item shall be amortized over the useful life of such improvement in
accordance with generally-accepted accounting principles and charged to Tenant
on such amortized basis in accordance with Article 3 and Section 13.12.
5.2 UTILITIES. Tenant shall arrange at its sole cost and expense and in its own
name, for the supply of gas and electricity to the Leased premises. In the event
that such services are not separately metered, Tenant shall, at its sole
expense, cause such meters to be installed. Landlord shall maintain the water
meter(s) in its own name; provided, however, that if at any time during the
Lease Term Landlord shall require Tenant to put the water service in Tenant's
name, Tenant shall do so at Tenant's sole cost. Tenant shall be responsible for
determining if the local supplier of water, gas and electricity can supply the
needs of Tenant and whether or not the existing water, gas and electrical
distribution systems within the Building and the Leased Premises are adequate
for Tenant's needs. Tenant shall be responsible for determining if the existing
sanitary and storm sewer systems now servicing the Leased Premises and the
Property are adequate for Tenant's needs. Tenant shall pay all charges for
water, gas, electricity and storm and sanitary sewer services as so supplied to
the Leased Premises, irrespective of whether or not the services are maintained
in Landlord's or Tenant's name.
5.3 SECURITY. Tenant acknowledges that Landlord has not undertaken any duty
whatsoever to provide security for the Leased Premises, the Building, the
Outside Areas or the Property and, accordingly, Landlord is not responsible for
the security of same or the protection of Tenant's property or Tenant's
employees, invitees or contractors. To the extent Tenant determines that such
security or protection services are advisable or necessary, Tenant shall
arrange for and pay the costs of providing same.
5.4 ENERGY AND RESOURCE CONSUMPTION. Landlord may voluntarily cooperate in a
reasonable manner with the efforts of governmental agencies and/or utility
suppliers in reducing energy or other resource consumption within the Property.
Tenant shall not be entitled to terminate this Lease or to any reduction in or
abatement of rent by reason of such compliance or cooperation. Tenant agrees at
all times to cooperate fully with Landlord and to abide by all reasonable rules
established by Landlord (i) in order to maximize the efficient operation of the
electrical, heating, ventilating and air conditioning systems and all other
energy or other resource consumption
9.
<PAGE> 14
systems with the Property and/or (ii) in order to comply with the requirements
and recommendations of utility suppliers and governmental agencies regulating
the consumption of energy and/or other resources; provided that if Landlord's
cooperation is voluntary and not mandatory, Tenant shall only be required to
comply with Landlord's rules if such rules do not impose upon Tenant additional
monetary obligations or materially or substantially impact Tenant's business.
5.5 LIMITATION OF LANDLORD'S LIABILITY. Except if due to the gross negligence
or willful misconduct of Landlord or its agents, contractors or employees,
Landlord shall not be liable to Tenant for injury to Tenant, its employees,
agents, invitees or contractors, damage to Tenant's property or loss of
Tenant's business or profits, nor shall Tenant be entitled to terminate this
Lease or to any reduction in or abatement of rent by reason of (i) Landlord's
failure to provide security services or systems within the Property for the
protection of the Leased Premises, the Building or the Outside Areas, or the
protection of Tenant's property or Tenant's employees, invitees, agents or
contractors, or (ii) Landlord's failure to perform any maintenance or repairs
to the Leased Premises, the Building, the Outside Areas or the Property until
Tenant shall have first notified Landlord, in writing, of the need for such
maintenance or repairs, and then only after Landlord shall have had a
reasonable period of time following its receipt of such notice within which to
perform such maintenance or repairs, or (iii) any failure, interruption,
rationing or other curtailment in the supply of water, electric current, gas or
other utility service to the Leased Premises, the Building, the Outside Areas
or the Property from whatever cause (other than Landlord's sole active
negligence or willful misconduct), or (iv) the unauthorized intrusion or entry
into the Leased Premises by third parties (other than Landlord).
ARTICLE 6
ALTERATIONS AND IMPROVEMENTS
6.1 BY TENANT. Tenant shall not make any alterations to or modifications of
the Leased Premises or construct any improvements within the Leased Premises
until Landlord shall have first approved, in writing, the plans and
specifications therefor, which approval may be withheld in Landlord's reasonable
discretion. It is agreed that it shall be reasonable for Landlord to require
Tenant to remove all or any portion of such alterations, modifications or
improvements at the end of the Lease Term and to fully restore the Leased
Premises, provided that Landlord notifies Tenant of such requirements at the
time Landlord grants its approval of the alterations, modifications, or
improvements. All such alterations, modifications or improvements, once so
approved, shall be made, constructed or installed by Tenant at Tenant's expense
(including all permit fees and governmental charges related thereto), using a
licensed contractor first approved by Landlord, in substantial compliance with
the Landlord-approved plans and specifications therefor. All work undertaken by
Tenant shall be done in accordance with all Laws and in a good and workmanlike
manner using new materials of good quality. Tenant shall not commence the making
of any such modifications or alterations or the construction of any such
improvements until (i) all required governmental approvals and permits shall
have been obtained, (ii) all requirements regarding insurance imposed by this
Lease have been satisfied, (iii) Tenant shall have given Landlord at least
fifteen (15) business days prior written notice of its intention to commence
such work so that Landlord may post and file notices of non-responsibility, and
(iv) if requested by Landlord, Tenant shall have obtained contingent liability
and broad form builder's risk insurance in an amount satisfactory to Landlord in
its reasonable discretion to cover any perils relating to the proposed work not
covered by insurance carried by Tenant pursuant to Article 9. In no event shall
Tenant make any modification, alternations or improvements whatsoever to the
Outside Areas or the exterior or structural components of the Building
including, without limitation, any cuts or penetrations in the floor, roof or
exterior walls of the Leased Premises. As used in this Article, the term
"modifications, alternations and/or improvements" shall include, without
limitation, the installation of additional electrical outlets, overhead lighting
fixtures, drains, sinks, partitions, doorways, or the like. Notwithstanding the
foregoing, Tenant, without Landlord's prior written consent, shall be permitted
to make non-structural alterations to the Building, provided that: (a) such
alterations do not exceed $10,000 individually or $100,000 in the aggregate, (b)
Tenant shall timely provide Landlord the notice required pursuant to Paragraph
4.9 above, (c) Tenant shall notify Landlord in writing within thirty (30) days
of completion of the alteration and deliver to Landlord a set of the plans and
specifications therefor, either "as built" or marked to show construction
changes made, and (d) Tenant shall, upon Landlord's request, remove the
alteration at the termination of the Lease and restore the Leased Premises to
their condition prior to such alteration.
6.2 OWNERSHIP OF IMPROVEMENTS. All modifications, alterations and improvements
made or added to the Leased Premises by Tenant (other than Tenant's inventory,
equipment, movable furniture, wall decorations and trade fixtures) shall be
deemed real property and a part of the Leased Premises, but shall remain the
property of Tenant during the Lease. Any such modifications, alternations or
improvements, once completed, shall not be altered or removed from the Leased
Premises during the Lease Term without Landlord's written approval first
obtained in accordance with the provisions of Paragraph 6.1 above unless
Landlord has notified Tenant that it will require removal of such modifications,
alterations or improvements at the end of the Lease Term. At the expiration or
sooner termination of this Lease, all such modifications, alterations and
improvements other than Tenant's inventory, equipment, movable furniture, wall
decorations and trade fixtures, shall automatically become the property of
Landlord and shall be surrendered to Landlord as part of the Leased Premises as
required pursuant to Article 2, unless Landlord shall require Tenant to remove
any of such modifications, alternations or improvements in accordance with the
provisions of Article 2, in which case Tenant shall so remove same. Landlord
shall have no obligations to reimburse Tenant for all or any portion of the
cost or value of any such modifications, alterations or improvements so
surrendered to Landlord. All modifications, alterations or improvements which
are installed or constructed on or attached to the Leased Premises by Landlord
and/or at Landlord's expense shall be deemed real property and a part of the
Leased Premises and shall be property of Landlord. All lighting, plumbing,
electrical, heating, ventilating and air conditioning fixtures, partitioning,
window coverings, wall coverings and floor coverings installed by Tenant shall
be deemed improvements to the Leased Premises and not trade fixtures of Tenant.
10.
<PAGE> 15
6.3 ALTERATIONS REQUIRED BY LAW. Tenant shall make all modifications,
alterations and improvements to the Leased Premises, as its sole cost, that are
required by any Law because of (i) Tenant's particular use or occupancy of the
Leased Premises, the Building, the Outside Areas or the Property, (ii) Tenant's
application for any permit or governmental approval, or (iii) Tenant's making of
any modifications, alterations or improvements to or within the Leased Premises.
If Landlord shall, at any time during the Lease Term, be required by any
governmental authority to make any modifications, alterations or improvements to
the Building or the Property or to make any modifications, alterations and
improvements to the Leased Premises are required by any Law because of Tenant's
general use or occupancy of the Leased Premises, the cost incurred by Landlord
in making such modifications, alterations or improvements, including interest at
a rate equal to the greater of (a) 11%, or (b) the sum of that rate quoted by
Wells Fargo Bank, N.T. & S.A. from time to time as its prime rate, plus two
percent (2%) ("Wells Prime Plus Two"), shall be amortized by Landlord over the
useful life of such modifications, alterations or improvements, as determined in
accordance with generally accepted accounting principles, and the monthly
amortized cost of such modifications, alterations and improvements as so
amortized shall be considered a Property Maintenance Cost.
6.4 LIENS. Tenant shall keep the Property and every part thereof free from any
lien, and shall pay when due all bills arising out of any work performed,
materials furnished, or obligations incurred by Tenant, its agents, employees
or contractors relating to the Property. If any such claim of lien is recorded
against Tenant's interest in this Lease, the Property or any part thereof,
Tenant shall bond against, discharge or otherwise cause such lien to be entirely
released within ten days after the same has been recorded. Tenant's failure to
do so shall be conclusively deemed a material default under the terms of this
Lease.
ARTICLE 7
ASSIGNMENT AND SUBLETTING BY TENANT
7.1 BY TENANT. Tenant shall not sublet the Leased Premises or any portion
thereof or assign its interest in this Lease or allow the Leased Premises to be
used or occupied by anyone other than Tenant, whether voluntarily or by
operation of Law, without Landlord's prior written consent which shall not be
unreasonably withheld. Any attempted subletting or assignment without
Landlord's prior written consent, at Landlord's election shall constitute a
default by Tenant under the terms of this Lease. The acceptance of rent by
Landlord from any person or entity other than Tenant, or the acceptance of rent
by Landlord from Tenant with knowledge of a violation of the provisions of this
paragraph, shall not be deemed to be a waiver by Landlord of any provision of
this Article or this Lease or to be a consent to any subletting by Tenant or
any assignment of Tenant's interest in this Lease. Without limiting the
circumstances in which it may be reasonable for Landlord to withhold its consent
to an assignment or subletting, Landlord and Tenant acknowledge that it shall
be reasonable for Landlord to withhold its consent in the following instances:
(a) the proposed assignee or sublessee is a governmental agency;
(b) in Landlord's reasonable judgment, the use of the Leased Premises by
the proposed assignee or sublessee would involve occupancy by other than
primary general office or engineering personnel, would entail any alterations
which would lessen the value of the leasehold improvements in the Leased
Premises, or would require increased services by Landlord;
(c) in Landlord's reasonable judgment, the financial worth of the
proposed assignee is less than that of Tenant or does not meet the credit
standards applied by Landlord;
(d) the proposed assignee (or any of its affiliates) has been in material
default under a lease, has been in litigation with a previous landlord, or in
the ten years prior to the assignment has filed for bankruptcy protection, has
been the subject of an involuntary bankruptcy, or has been adjudged insolvent;
(e) Landlord has experienced a previous default by or is in litigation
with the proposed assignee or sublessee;
(f) in Landlord's reasonable judgment, the Leased Premises, or the
relevant part thereof, will be used in a manner that will violate any negative
covenant as to use contained in this Lease;
(g) the use of the Premises by the proposed assignee or sublessee will
violate any applicable law, ordinance or regulation;
(h) the proposed assignee or sublessee is, as of the date of this Lease,
a tenant in the Building;
(i) the proposed assignment or sublease fails to include all of the terms
and provisions required to be included therein pursuant to this Article 7;
(j) Tenant is in default of any obligation of Tenant under this Lease
beyond the applicable cure period (provided that such default is curable), or
Tenant has defaulted under this Lease on three or more occasions during the 12
months preceding the date that Tenant shall request consent; or
(k) in the case of a subletting of less than the entire Premises, if the
subletting would result in the division of the Premises into more than two
subparcels or would require improvements to be made outside of the Premises.
<PAGE> 16
7.2 MERGER OR REORGANIZATION. If Tenant is a corporation, any dissolution,
merger, consolidation or other reorganization of Tenant, or the sale or other
transfer in the aggregate over the Lease Term of a controlling percentage of
the capital stock of Tenant or all of the assets or substantially all of the
assets of Tenant, shall be deemed a voluntary assignment of Tenant's interest in
this Lease. The phrase "controlling percentage" means the ownership of and the
right to vote stock possessing more than fifty percent of the total combined
voting power of all classes of Tenant's capital stock issued, outstanding and
entitled to vote for the election of directors. If Tenant is a partnership, a
withdrawal or change, voluntary, involuntary or by operation of Law, of any
general partner, or the dissolution of the partnership, shall be deemed a
voluntary assignment of Tenant's interest in this Lease. Notwithstanding the
foregoing, an initial or subsequent public offering of any amount of stock of
Tenant shall not be deemed a voluntary assignment.
7.3 LANDLORD'S ELECTION. If Tenant shall desire to assign its interest under
the Lease or to sublet the Leased Premises, Tenant must first notify Landlord,
in writing, of its intent to so assign or sublet, at least thirty (30) days in
advance of the date it intends to so assign its interest in this Lease or
sublet the Leased Premises but not sooner than one hundred eighty days in
advance of such date, specifying in detail the terms of such proposed
assignment or subletting, including the name of the proposed assignee or
sublessee, the property assignee's or sublessee's intended use of the Leased
Premises, current financial statements (including a balance sheet, income
statement and statement of cash flow, all prepared in accordance with generally
accepted accounting principles) of such proposed assignee or sublessee, the
form of documents to be used in effectuating such assignment or subletting and
such other information as Landlord may reasonably request. Landlord shall have
a period of ten (10) business days following receipt of such notice and the
required information within which to do one of the following: (i) consent to
such requested assignment or subletting subject to Tenant's compliance with the
conditions set forth in Paragraph 7.4 below, or (ii) refuse to so consent to
such requested assignment or subletting, provided that such consent shall not
be unreasonably refused, or (iii) terminate this Lease as to the portion
(including all) of the Leased Premises that is the subject of the proposed
assignment or subletting; provided however, if for any proposed sublease the
term of the sublease expires more than two (2) years prior to the end of the
original Lease Term, then Landlord shall not have the right to terminate this
Lease as provided herein and, notwithstanding anything to the contrary
contained herein, Landlord shall be entitled to seventy-five percent (75%) of
the excess rentals, as calculated pursuant to Section 7.5. During such ten (10)
business day period, Tenant covenants and agrees to supply to Landlord, upon
request, all necessary or relevant information which Landlord may reasonably
request respecting such proposed assignment or subletting and/or the proposed
assignee or sublessee.
7.4 CONDITIONS TO LANDLORD'S CONSENT. If Landlord elects to consent, or shall
have been ordered to so consent by a court of competent jurisdiction, to such
requested assignment or subletting, such consent shall be expressly conditioned
upon the occurrence of each of the conditions below set forth, and any
purported assignment or subletting made or ordered prior to the full and
complete satisfaction of each of the following conditions shall be void and, at
the election of Landlord, which election may be exercised at any time following
such a purported assignment or subletting but prior to the satisfaction of
each of the stated conditions, shall constitute a material default by Tenant
under this Lease until cured by satisfying in full each such condition by the
assignee or sublessee. The conditions are as follows:
(a) Landlord having approved in form and substance the assignment or
sublease agreement and any ancillary documents, which approval shall not be
unreasonably withheld by Landlord if the requirements of this Article 7 are
otherwise complied with.
(b) Each such sublessee or assignee having agreed, in writing
satisfactory to Landlord and its counsel and for the benefit of Landlord, to
assume, to be bound by, and to perform the obligations of this Lease to be
performed by Tenant which relate to space being subleased.
(c) Tenant having fully and completely performed or cured all of its
obligations under the terms of this Lease through and including the date of
such assignment or subletting.
(d) Tenant having reimbursed to Landlord all reasonable costs and
reasonable attorneys' fees incurred by Landlord in conjunction with the
processing and documentation of any such requested subletting or assignment,
not to exceed * .
(e) Tenant having delivered to Landlord a complete and fully-executed
duplicate original of such sublease agreement or assignment agreement (as
applicable) and all related agreements.
(f) Tenant having paid, or having agreed in writing to pay as to future
payments, to Landlord * of all assignment consideration or excess rentals to be
paid to Tenant or to any other on Tenant's behalf or for Tenant's benefit for
such assignment or subletting as follows:
(i) If Tenant assigns its interest under this Lease and if all or a
portion of the consideration for such assignment is to be paid by the assignee
at the time of the assignment, that Tenant shall have paid to Landlord and
Landlord shall have received an amount equal to * of the assignment
consideration so paid or to be paid (whichever is the greater) at the time of
the assignment by the assignee; or
(ii) If Tenant assigns its interest under this Lease and if Tenant is
to receive all or a portion of the consideration for such assignment in future
installments, that Tenant and Tenant's assignee shall have entered into a
written agreement with and for the benefit of Landlord satisfactory to Landlord
and its counsel whereby Tenant and Tenant's assignee jointly agree to pay to
Landlord an amount equal to * of all such future assignment consideration
installments to be paid by such assignee as and when such assignment
consideration is so paid.
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
12.
<PAGE> 17
(iii) If Tenant subleases the Leased Premises, that Tenant
and Tenant's sublessee shall have entered into a written agreement with and for
the benefit of Landlord satisfactory to Landlord and its counsel whereby Tenant
and Tenant's sublessee jointly agree to pay to Landlord * of all excess rentals
to be paid by such sublessee as and when such excess rentals are so paid.
(g) Any assignee or sublessee shall specifically comply with
Section 4.11(b) hereof regarding Tenant's use of Hazardous Materials.
7.5 ASSIGNMENT CONSIDERATION AND EXCESS RENTALS DEFINED. For purposes of
this Article, including any amendment to this Article by way of addendum or
other writing, the term "assignment consideration" shall mean all consideration
to be paid by the assignee to Tenant or to any other party on Tenant's behalf
or for Tenant's benefit as consideration for such assignment, with deduction
for only (i) reasonable and customary commissions incurred by Tenant in
connection with such assignment and (ii) any reasonable and customary tenant
improvement costs incurred by Tenant in connection with such assignment, and
the term "excess rentals" shall mean all consideration to be paid by the
sublessee to Tenant or to any other party on Tenant's behalf or for Tenant's
benefit for the sublease of the Leased Premises in excess of the rent due to
Landlord under the terms of this Lease for the same period, with deduction for
only (i) reasonable and customary commissions paid by Tenant and (ii) any
reasonable and customary tenant improvement costs incurred by Tenant in
connection with such sublease. Tenant agrees that the portion of any assignment
consideration and/or excess rentals arising from any assignment or subletting
by Tenant which is to be paid to Landlord pursuant to this Article now is and
shall then be the property of Landlord and not the property of Tenant.
7.6 PAYMENTS. All payments required by this Article to be made to Landlord
shall be made in cash in full as and when they become due. At the time Tenant,
Tenant's assignee or sublessee makes each such payment to Landlord, Tenant or
Tenant's assignee or sublessee, as the case may be, shall deliver to Landlord
an itemized statement in reasonable detail showing the method by which the
amount due Landlord was calculated and certified by the party making such
payment as true and correct.
7.7 GOOD FAITH. The rights granted to Tenant by this Article are granted in
consideration of Tenant's express covenant that all pertinent allocations which
are made by Tenant between the rental value of the Leased Premises and the
value of any of Tenant's personal property which may be conveyed or leased
generally concurrently with and which may reasonably be considered a part of
the same transaction as the permitted assignment or subletting shall be made
fairly, honestly and in good faith. If Tenant shall breach this covenant,
Landlord may immediately declare Tenant to be in default under the terms of
this Lease and terminate this Lease and/or exercise any other rights and
remedies Landlord would have under the terms of this Lease in the case of a
material default by Tenant under this Lease.
7.8 EFFECT OF LANDLORD'S CONSENT. No subletting or assignment, even with
the consent of Landlord, shall relieve Tenant of its personal and primary
obligation to pay rent and to perform all of the other obligations to be
performed by Tenant hereunder. Consent by Landlord to one or more assignments
of Tenant's interest in this Lease or to one or more sublettings of the Leased
Premises shall not be deemed to be a consent to any subsequent assignment or
subletting. If Landlord shall have been ordered by a court of competent
jurisdiction to consent to a requested assignment or subletting, or such an
assignment or subletting shall have been ordered by a court of competent
jurisdiction over the objection of Landlord, such assignment or subletting
shall not be binding between the assignee (or sublessee) and Landlord until
such time as all conditions set forth in Paragraph 7.4 above have been fully
satisfied (to the extent not then satisfied) by the assignee or sublessee,
including, without limitation, the payment to Landlord of all agreed assignment
considerations and/or excess rentals then due Landlord.
7.9 PERMITTED TRANSFER. Notwithstanding the foregoing, Tenant may assign
its interest in this Lease or sublease the Leased Premises (and Landlord shall
not have the right to terminate this Lease in connection with such assignment
or sublease), upon prior written notice to Landlord, but without Landlord's
consent, to a corporation which controls, is controlled by, or is under common
control with, Tenant or Tenant's parent corporation, provided that no
assignment or subletting under this Lease shall release Tenant or any guarantor
of any obligations under this Lease or any guaranty and provided further that
no assignment consideration or excess rentals shall be payable to Landlord in
connection with such assignment or sublease.
ARTICLE 8
LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY
8.1 LIMITATION ON LANDLORD'S LIABILITY AND RELEASE. Landlord shall not be
liable to Tenant for, and Tenant hereby releases Landlord and its partners,
principals, members, officers, agents, employees, lenders, attorneys, and
consultants from, any and all liability, whether in contract, tort or on any
other basis, for any injury to or any damage sustained by Tenant, Tenant's
agents, employees, contractors or invitees, any damage to Tenant's property, or
any loss to Tenant's business, loss of Tenant's profits or other financial loss
of Tenant resulting from or attributable to the condition of, the management
of, the repair or maintenance of, the protection of, the supply of services or
utilities to, the damage in or destruction of the Leased Premises, the
Building, the Property or the Outside Areas, including without limitation (i)
the failure, interruption, rationing or other curtailment or cessation in the
supply of electricity, water, gas or other utility service to the Property, the
Building or the Leased Premises; (ii) the vandalism or forcible entry into the
Building or the Leased Premises; (iii) the penetration of water into or onto
any portion of the Leased Premises; (iv) the failure to provide security and/or
adequate lighting in or about the Property, the Building or the Leased
Premises; (v) the existence of any design or construction defects within the
Property, the Building or the Leased Premises; (vi) the failure of any
mechanical systems to function properly (such as the HVAC
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
13.
<PAGE> 18
systems); (vii) the blockage of access to any portion of the Property, the
Building or the Leased Premises, except that Tenant does not so release
Landlord from such liability to the extent such damage was proximately caused
by the gross negligence or willful misconduct of Landlord, or its agents,
contractors or employees, or Landlord's failure to perform an obligation
expressly undertaken pursuant to this Lease after a reasonable period of time
(not to exceed 30 days, unless more than 30 days is required to complete the
cure, in which case, the 30 day period shall be extended for so long as
reasonably necessary to cure) shall have lapsed following receipt of written
notice from Tenant to so perform such obligation. In this regard, Tenant
acknowledges that it is fully apprised of the provisions of Law relating to
releases, and particularly to those provisions contained in Section 1542 of the
California Civil Code which reads 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
the debtor."
Notwithstanding such statutory provision, and for the purpose of implementing a
full and complete release and discharge, Tenant hereby (i) waives the benefit of
such statutory provision and (ii) acknowledges that, subject to the exceptions
specifically set forth herein, the release and discharge set forth in this
paragraph is a full and complete settlement and release and discharge of all
claims and is intended to include in its effect, without limitation, all claims
which Tenant, as of the date hereof, does not know of or suspect to exist in
its favor.
8.2 TENANT'S INDEMNIFICATION OF LANDLORD. Tenant shall defend with competent
counsel satisfactory to Landlord any claims made or legal actions filed or
threatened against Landlord with respect to the violation of any Law, or the
death, bodily injury, personal injury, property damage, or interference with
contractual or property rights suffered by any third party occurring within the
Leased Premises or resulting from Tenant's use or occupancy of the Leased
Premises, the Building or the Outside Areas, or resulting from Tenant's
activities in or about the Leased Premises, the Building, the Outside Areas or
the Property, and Tenant shall indemnify and hold Landlord, Landlord's partners,
principals, members, employees, agents and contractors harmless from any loss
liability, penalties, or expense whatsoever (including any loss attributable to
vacant space which otherwise would have been leased, but for such activities)
resulting therefrom, except to the extent proximately caused by the gross
negligence or willful misconduct of Landlord or its agents, contractors or
employees. This indemnity agreement shall survive until the latter to occur of
(i) the date of the expiration, or sooner termination, of this Lease, or (ii)
the date Tenant actually vacates the Leased Premises.
ARTICLE 9
INSURANCE
9.1 TENANT'S INSURANCE. Tenant shall maintain insurance complying with all of
the following:
(a) Tenant shall procure, pay for and keep in full force and effect,
at all times during the Lease Term, the following:
(i) Comprehensive general liability insurance insuring Tenant
against liability for personal injury, bodily injury, death and damage to
property occurring within the Leased Premises, or resulting from Tenant's use
or occupancy of the Leased Premises, the Building, the Outside Areas or the
Property, or resulting from Tenant's activities in or about the Leased Premises
or the Property, with coverage in an amount equal to Tenant's Required Liability
Coverage (as set forth in Article 1), which insurance shall contain a "broad
form liability" endorsement insuring Tenant's performance of Tenant's obligation
to indemnify Landlord as contained in this Lease.
(ii) Fire and property damage insurance in so-called "fire and
extended coverage" form insuring Tenant against loss from physical damage to
Tenant's personal property, inventory, trade fixtures and improvements within
the Leased Premises with coverage for the full actual replacement cost thereof;
(iii) Plate glass insurance, at actual replacement cost;
(iv) Pressure vessel insurance, if applicable;
(v) Workers' compensation insurance and any other employee
benefit insurance sufficient to comply with all laws; and
(vi) With respect to making of alterations or the construction
of improvements or the like undertaken by Tenant, contingent liability and
builder's risk insurance, in an amount and with coverage reasonably satisfactory
to Landlord.
(b) Each policy of liability insurance required to be carried by
Tenant pursuant to this paragraph or actually carried by Tenant with respect to
the Leased Premises or the Property: (i) shall, except with respect to
insurance required by subparagraph (a)(vi) above, name Landlord, and such
others as are designated by Landlord, as additional insureds; (ii) shall be
primary insurance providing that the insurer shall be liable for the full
amount of the loss, up to and including the total amount of liability set forth
in the declaration of coverage, without the right of contribution from or prior
payment by any other insurance coverage of Landlord; (iii) shall be in a form
satisfactory to Landlord; (iv) shall be carried with companies reasonably
acceptable to Landlord with Best's ratings of at least A and VII; (v) shall
provide that such policy shall not be subject to cancellation, lapse or change
except after at least
14.
<PAGE> 19
thirty (30) days prior written notice to Landlord, and (iv) shall contain a
so-called "severability" or "cross liability" endorsement. Each policy of
property insurance maintained by Tenant with respect to the Leased Premises or
the Property or any property therein (i) shall provide that such policy shall
not be subject to cancellation, lapse or change except after at least thirty
(30) days prior written notice to Landlord and (ii) shall contain a waiver
and/or a permission to waive by the insurer of any right of subrogation against
Landlord, its partners, principals, members, officers, employees, agents and
contractors, which might arise by reason of any payment under such policy or by
reason of any act or omission of Landlord, its partners, principals, members,
officers, employees, agents and contractors.
(c) Prior to the time Tenant or any of its contractors enters the Leased
Premises, Tenant shall deliver to Landlord, with respect to each policy of
insurance required to be carried by Tenant pursuant to this Article, a copy of
such policy (appropriately authenticated by the insurer as having been issued,
premium paid) or a certificate of the insurer certifying in form satisfactory to
Landlord that a policy has been issued, premium paid, providing the coverage
required by this Paragraph and containing the provisions specified herein. With
respect to each renewal or replacement of any such insurance, the requirements
of this Paragraph must be complied with not less than thirty (30) days prior to
the expiration or cancellation of the policies being renewed or replaced.
Landlord may, at any time and from time to time, inspect and/or copy any and all
insurance policies required to be carried by Tenant pursuant to this Article. If
Landlord's Lender, insurance broker, advisor or counsel reasonably determines at
any time that the amount of coverage set forth in Paragraph 9.1(a) for any
policy of insurance Tenant is required to carry pursuant to this Article is not
adequate, then Tenant shall increase the amount of coverage for such insurance
to such greater amount as Landlord's Lender, insurance broker, advisor or
counsel reasonably deems adequate.
9.2 LANDLORD'S INSURANCE. With respect to insurance maintained by Landlord:
(a) Landlord shall maintain, as the minimum coverage required of it by
this Lease, fire and property damage insurance in so-called "fire and extended
coverage" form insuring Landlord (and such others as Landlord may designate)
against loss from physical damage to the Building with coverage of not less
than one hundred percent (100%) of the full actual replacement cost thereof and
against loss of rents for a period of not less than six months. Such fire and
property damage insurance, at Landlord's election but without any requirements
on Landlord's behalf to do so, (i) may be written in so-called "all-risk" form,
excluding only those perils commonly excluded from such coverage by Landlord's
then property damage insurer; (ii) may provide coverage for physical damage to
the improvements so insured for up to the entire full actual replacement cost
thereof; (iii) may be endorsed to cover loss or damage caused by any additional
perils against which Landlord may elect to insure, including earthquake and/or
flood; and/or (iv) may provide coverage for loss of rents for a period of up to
twelve months. Landlord shall not be required to cause such insurance to cover
any of Tenant's personal property, inventory, and trade fixtures, or any
modifications, alterations or improvements made or constructed by Tenant to or
within the Leased Premises. Landlord shall use commercially reasonable efforts
to obtain such insurance at competitive rates.
(b) Landlord shall maintain comprehensive general liability insurance
insuring Landlord (and such others as are designated by Landlord) against
liability for personal injury, bodily injury, death and damage to property
occurring in, on or about, or resulting from the use or occupancy of the
Property, or any portion thereof, with combined single limit coverage of at
least Three Million Dollars ($3,000,000). Landlord may carry such greater
coverage as Landlord or Landlord's Lender, insurance broker, advisor or counsel
may from time to time determine is reasonably necessary for the adequate
protection of Landlord and the Property.
(c) Landlord may maintain any other insurance which in the opinion of its
insurance broker, advisor or legal counsel is prudent in carry under the given
circumstances, provided such insurance is commonly carried by owners of
property similarly situated and operating under similar circumstances.
9.3 MUTUAL WAIVER OF SUBROGATION. Landlord hereby releases Tenant, and Tenant
hereby releases Landlord and its respective partners, principals, members,
officers, agents, employees and servants, from any and all liability for loss,
damage or injury to the property of the other in or about the Leased Premises
or the Property which is caused by or results from a peril or event or
happening which is covered by insurance actually carried and in force at the
time of the loss by the party sustaining such loss; provided, however, that
such waiver shall be effective only to the extent permitted by the insurance
covering such loss and to the extent such insurance is not prejudiced thereby.
ARTICLE 10
DAMAGE TO LEASED PREMISES
10.1 LANDLORD'S DUTY TO RESTORE. If the Leased Premises, the Building or the
Outside Area are damaged by any peril after the Effective Date of this Lease,
Landlord shall restore the same, as and when required by this paragraph, unless
this Lease is terminated by Landlord pursuant to Paragraph 10.3 or by Tenant
pursuant to Paragraph 10.4. If this Lease is not so terminated, then upon the
issuance of all necessary governmental permits, Landlord shall commence and
diligently prosecute to completion the restoration of the Leased Premises, the
Building or the Outside Area, as the case may be, to the extent then allowed by
law, to substantially the same condition in which it existed as of the Lease
Commencement Date. Landlord's obligation to restore shall be limited to actual
receipt of insurance proceeds and to the improvements constructed by Landlord.
Landlord shall have on obligation to restore any Improvements made by Tenant to
the Leased Premises or any of the Tenant's personal property, inventory or
trade fixtures. Upon completion of the restoration by Landlord, Tenant shall
forthwith replace or fully repair all of Tenant's personal property, inventory,
trade fixtures and other improvements
15.
<PAGE> 20
constructed by Tenant to like or similar conditions as existed at the time
immediately prior to such damage or destruction.
10.2 INSURANCE PROCEEDS. All insurance proceeds available from the fire and
property damage insurance carried by Landlord shall be paid to and become the
property of Landlord. If this Lease is terminated pursuant to either Paragraph
10.3 or 10.4, all insurance proceeds available from insurance carried by Tenant
which cover loss of property that is Landlord's property or would become
Landlord's property on termination of this Lease shall be paid to and become the
property of Landlord, and the remainder of such proceeds shall be paid to and
become the property of Tenant. If this Lease is not terminated pursuant to
either Paragraph 10.3 or 10.4, all insurance proceeds available from insurance
carried by Tenant which cover loss to property that is Landlord's property shall
be paid to and become the property of Landlord, and all proceeds available from
such insurance which cover loss to property which would only become the property
of Landlord upon the termination of this Lease shall be paid to and remain the
property of Tenant. The determination of Landlord's property and Tenant's
property shall be made pursuant to Paragraph 6.2.
10.3 LANDLORD'S RIGHT TO TERMINATE. Landlord shall have the option to terminate
this Lease in the event any of the following occurs, which option may be
exercised only by delivery to Tenant of a written notice of election to
terminate within thirty (30) days after the date of such damage or destruction:
(a) The Building is damaged by any peril covered by valid and collectible
insurance actually carried by Landlord and in force at the time of such damage
or destruction (an "insured peril") to such an extent that the estimated cost to
restore the Building exceeds the lesser of (i) the insurance proceeds actually
received and within the control of Landlord from insurance actually carried by
Landlord or (ii) fifty percent (50%) of the then actual replacement cost
thereof;
(b) The Building is damaged by an uninsured peril, which peril Landlord
was not required to insure against pursuant to the provisions of Article 9 of
this Lease.
(c) The Building is damaged by any peril and, because of the laws then in
force, the Building, if restored, cannot be used for the same use being made
thereof before such damage.
10.4 TENANT'S RIGHT TO TERMINATE. If the Leased Premises, the Building or the
Outside Area are damaged by any peril and Landlord does not elect to terminate
this Lease or is not entitled to terminate this Lease pursuant to this Article,
then as soon as reasonably practicable, Landlord shall furnish Tenant with the
written opinion of Landlord's architect or construction consultant as to when
the restoration work required of Landlord may be complete. Tenant shall have the
option to terminate this Lease in the event any of the following occurs, which
option may be exercised only by delivery to Landlord of a written notice of
election to terminate within ten (10) business days after Tenant receives from
Landlord the estimate of the time needed to complete such restoration:
(a) If the time estimated to substantially complete the restoration
exceeds nine months from and after the date the architect's or construction
consultant's written opinion is delivered; or
(b) If the damage occurred within twelve months of the last day of the
Lease Term and the time estimated to substantially complete the restoration
exceeds one hundred eighty days from and after the date such restoration is
commenced.
10.5 TENANT'S WAIVER. Landlord and Tenant agree that the provisions of Paragraph
10.4 above, captioned "Tenant's Right To Terminate", are intended to supersede
and replace the provisions contained in California Civil Code, Section 1932,
Subdivision 2, and California Civil Code, Section 1934, and accordingly, Tenant
hereby waives the provisions of such Civil Code Sections and the provisions of
any successor Civil Code Sections or similar laws hereinafter enacted.
10.6 ABATEMENT OF RENT. In the event of damage to the Leased Premises which does
not result in termination of this Lease, the Base Monthly Rent (and any
Additional Rent) shall be temporarily abated during the period of restoration in
proportion in the degree to which Tenant's use of the Leased Premises is
impaired by such damage.
ARTICLE II
CONDEMNATION
11.1 TENANT'S RIGHT TO TERMINATE. Except as otherwise provided in Paragraph 11.4
below regarding temporary takings, Tenant shall have the option to terminate
this Lease if, as a result of any taking, (i) all of the Leased Premises is
taken, or (ii) twenty-five percent (25%) or more of the Leased Premises is taken
and the part of the Leased Premises that remains cannot, within a reasonable
period of time, be made reasonably suitable for the continued operation of
Tenant's business. Tenant must exercise such option within a reasonable period
of time, to be effective on the later to occur of (i) the date that possession
of that portion of the Leased Premises that is condemned is taken by the
condemnor or (ii) the date Tenant vacated the Leased Premises.
11.2 LANDLORD'S RIGHT TO TERMINATE. Except as otherwise provided in Paragraph
11.4 below regarding temporary takings, Landlord shall have the option to
terminate this Lease if, as a result of any taking, (i) all of the Leased
Premises is taken, (ii) twenty-five percent (25%) or more of the Leased Premises
is taken and the part of the Leased Premises that remains cannot, within a
reasonable period of time, be made reasonably suitable for the
16.
<PAGE> 21
continued operation of Tenant's business, or (iii) because of the laws then in
force, the Leased Premises may not be used for the same use being made before
such taking, whether or not restored as required by Paragraph 11.3 below. Any
such option to terminate by Landlord must be exercised within a reasonable
period of time, to be effective as of the date possession is taken by the
condemnor.
11.3 RESTORATION. If any part of the Leased Premises or the Building is taken
and this Lease is not terminated, then Landlord shall, to the extent not
prohibited by laws then in force, repair any damage occasioned thereby to the
remainder thereof to a condition reasonably suitable for Tenant's continued
operations and otherwise, to the extent practicable, in the manner and to the
extent provided in Paragraph 10.1.
11.4 TEMPORARY TAKING. If a portion of the Leased Premises is temporarily
taken for a period of one year or less and such period does not extend beyond
the Lease Expiration Date, this Lease shall remain in effect. If any portion of
the Leased Premises is temporarily taken for a period which exceeds one year or
which exceeds beyond the Lease Expiration Date, then the rights of Landlord and
Tenant shall be determined in accordance with Paragraphs 11.1 and 11.2 above.
11.5 DIVISION OF CONDEMNATION AWARD. Any award made for any taking of the
Property, the Building, or the Leased Premises, or any portion thereof, shall
belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of
its right, title and interest in any such award; provided, however, that Tenant
shall be entitled to receive any portion of the award that is made specifically
(i) for the taking of personal property, inventory or trade fixtures belonging
to Tenant, (ii) for the interruption of Tenant's business or its moving costs,
or (iii) for the value of any leasehold improvements installed and paid for by
Tenant. The rights of Landlord and Tenant regarding any condemnation shall be
determined as provided in this Article, and each party waives the provisions of
Section 1265.130 of the California Code of Civil Procedure, and the provisions
of any similar law hereinafter enacted, allowing either party to petition the
Supreme Court to terminate this Lease and/or otherwise allocate condemnation
awards between Landlord and Tenant in the event of a taking of the Leased
Premises.
11.6 ABATEMENT OF RENT. In the event of a taking of the Leased Premises which
does not result in a termination of this Lease (other than a temporary taking),
then, as of the date possession is taken by the condemning authority, the Base
Monthly Rent shall be reduced in the same proportion that the area of that part
of the Leased Premises so taken (less any addition to the area of the Leased
Premises by reason of any reconstruction) bears to the area of the Leased
Premises immediately prior to such taking.
11.7 TAKING DEFINED. The term "taking" or "taken" as used in this Article 11
shall mean any transfer or conveyance of all or any portion of the Property to
a public or quasi-public agency or other entity having the power of eminent
domain pursuant to or as a result of the exercise of such power by such an
agency, including any inverse condemnation and/or any sale or transfer by
Landlord of all or any portion of the Property to such an agency under threat
of condemnation or the exercise of such power.
ARTICLE 12
DEFAULT AND REMEDIES
12.1 EVENTS OF TENANT'S DEFAULT. Tenant shall be in default of its obligations
under this Lease if any of the following events occur:
(a) Tenant shall have failed to pay Base Monthly Rent or any Additional
Rent when due provided, however, that once but only once in any twelve (12)
month period during the Lease Term, Tenant shall be entitled to written notice
of non-receipt of Base Monthly Rent or Additional Rent from Landlord, and
Tenant shall not be in default for such delinquency if such installment of Base
Monthly Rent or Additional Rent is received by Landlord within ten (10)
business days after Tenant's receipt of such notice from Landlord; or
(b) Tenant shall have done or permitted to be done any act, use or
thing in its use, occupancy or possession of the Leased Premises or the
Building or the Outside Areas which is prohibited by the terms of this Lease,
which act, use or thing, shall continue more than thirty (30) days after
written notice from Landlord to Tenant specifying the nature of such act, use
or thing and requesting Tenant to cease or cause the cessation, or such period
as is reasonably required in the event such default is curable but not within
such thirty (30) day period, provided such cure is promptly commenced within
such thirty (30) day period and is thereafter diligently prosecuted to
completion; or
(c) Tenant shall have failed to perform any term, covenant or condition
of this Lease (except those requiring the payment of Base Monthly Rent or
Additional Rent, which failures shall be governed by subparagraph (a) above)
within thirty (30) days after written notice from Landlord to Tenant specifying
the nature of such failure and requesting Tenant to perform same or within such
longer period as is reasonably required in the event such default is curable
but not within such thirty (30) day period, provided such cure is promptly
commenced within such thirty (30) day period and is thereafter diligently
prosecuted to completion; or
(d) Tenant shall have sublet the Leased Premises or assigned or
encumbered its interest in this Lease in violation of the provisions contained
in Article 7, whether voluntarily or by operation of law; or
(e) Tenant shall have abandoned the Leased Premises; or
17.
<PAGE> 22
(f) Tenant or any Guarantor of this Lease shall have permitted or
suffered the sequestration or attachment of, or execution on, or the
appointment of a custodian or receiver with respect to, all or any substantial
part of the property or assets of Tenant (or such Guarantor) or any property
or asset essential to the conduct of Tenant's (or such Guarantor's) business,
and Tenant (or such Guarantor) shall have failed to obtain a return or release
of the same within thirty (30) days thereafter, or prior to sale pursuant to
such sequestration, attachment or levy, whichever is earlier; or
(g) Tenant or any Guarantor of this Lease shall have made a general
assignment of all or a substantial pat of its assets for the benefit of its
creditors; or
(h) Tenant or any Guarantor of this Lease shall have allowed (or sought)
to have entered against it a decree or order which: (i) grants or constitutes
an order for relief, appointment of a trustee, or condemnation or a
reorganization plan under the bankruptcy laws of the United States;
(ii) approves as properly filed a petition seeking liquidation or
reorganization under said bankruptcy laws or any other debtor's relief law
or similar statute of the United States or any state thereof; or (iii)
otherwise directs the winding up or liquidation of Tenant; provided, however,
if any decree or order was entered without Tenant's consent or over Tenant's
objection, Landlord may not terminate this Lease pursuant to this Subparagraph
if such decree or order is rescinded or reversed within thirty (30) days after
its original entry; or
(i) Tenant or any Guarantor of this Lease shall have availed itself of
the protection of any debtor's relief law, moratorium law or other similar law
which does not require the prior entry of a decree or order.
12.2 LANDLORD'S REMEDIES. In the event of any default by Tenant, and without
limiting Landlord's right to indemnification as provided in Article 8.2,
Landlord shall have the following remedies, in addition to all other rights and
remedies provided by law or otherwise provided in this Lease, to which Landlord
may resort cumulatively, or in the alternative:
(a) Landlord may, at Landlord's election, keep this Lease in effect and
enforce, by an action at law or in equity, all of its rights and remedies under
this Lease including, without limitation, (i) the right to recover the rent and
other sums as they become due by appropriate legal action, (ii) the right to
make payments required by Tenant, or perform Tenant's obligations and be
reimbursed by Tenant for the cost thereof with interest at the then maximum
rate of interest not prohibited by law from the date the sum is paid by
Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of
injunctive relief and specific performance to prevent Tenant from violating the
terms of this Lease and/or to compel Tenant to perform its obligations under
this Lease, as the case may be.
(b) Landlord may, at Landlord's election, terminate this Lease by giving
Tenant written notice of termination, in which event this Lease shall terminate
on the date set forth for termination in such notice. Any termination under
this subparagraph shall not relieve Tenant from its obligation to pay to
Landlord all Base Monthly Rent and Additional Rent then or thereafter due, or
any other sums due or thereafter accruing to Landlord, or from any claim
against Tenant for damages previously accrued or then or thereafter accruing.
In no event shall any one or more of the following actions by Landlord, in the
absence of a written election by Landlord to terminate this Lease constitute a
termination of this Lease:
(i) Appointment of a receiver or keeper in order to protect
Landlord's interest hereunder;
(ii) Consent to any subletting of the Leased Premises or assignment
of this Lease by Tenant, whether pursuant to the provisions hereof or
otherwise; or
(iii) Any action taken by Landlord or its partners, principals,
members, officers, agents, employees, or servants, which is intended to
mitigate the adverse effects of any breach of this Lease by Tenant, including,
without limitation, any action taken to maintain and preserve the Leased
Premises on any action taken to relet the Leased Premises or any portion
thereof for the account at Tenant and in the name of Tenant.
(c) In the event Tenant breaches this Lease and abandons the Leased
Premises, Landlord may terminate this Lease, but this Lease shall not terminate
unless Landlord gives Tenant written notice of termination. If Landlord does
not terminate this Lease by giving written notice of termination, Landlord may
enforce all its rights and remedies under this Lease, including the right and
remedies provided by California Civil Code Section 1951.4 ("lessor may
continue lease in effect after lessee's breach and abandonment and recover rent
as it become due, if lessee has right to sublet or assign, subject only to
reasonable limitations"), as in effect on the Effective Date of this Lease.
(d) In the event Landlord terminates this Lease, Landlord shall be
entitled, at Landlord's election, to the rights and remedies provided in
California Civil Code Section 1951.2, as in effect on the Effective Date of
this Lease. For purposes of computing damages pursuant to Section 1951.2, an
interest rate equal to the maximum rate of interest then not prohibited by law
shall be used where permitted. Such damages shall include, without limitation:
(i) The worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided,
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco, at the time of award plus one percent; and
18.
<PAGE> 23
(ii) Any other amount necessary to compensate Landlord for
all detriment 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 without limitation, the following: (i)
expenses for cleaning, repairing or restoring the Leased Premises, (ii) expenses
for altering, remodeling or otherwise improving the Leased Premises for the
purpose of reletting, including removal of existing leasehold improvements
and/or installation of additional leasehold improvements (regardless of how the
same is funded, including reduction of rent, a direct payment or allowance to a
new tenant, or otherwise), (iii) broker's fees allocable to the remainder of the
term of this Lease, advertising costs and other expenses of reletting the Leased
Premises, (iv) costs of carrying and maintaining the Leased Premises, such as
taxes, insurance premiums, utility charges and security precautions, (v)
expenses incurred in removing, disposing of and/or storing any of Tenant's
personal property, inventory or trade fixtures remaining therein, (vi)
reasonable attorney's fees, expert witness fees, court costs and other
reasonable expenses incurred by Landlord (but not limited to taxable costs) in
retaking possession of the Leased Premises, establishing damages hereunder, and
releasing the Leased Premises, and (vii) any other expenses, costs or damages
otherwise incurred or suffered as a result of Tenant's default.
12.3 LANDLORD'S DEFAULT AND TENANT'S REMEDIES. In the event Landlord fails to
perform its obligations under this Lease, Landlord shall nevertheless not be in
default under the terms of this Lease until such time as Tenant shall have
first given Landlord written notice specifying the nature of such failure to
perform its obligations, and then only after Landlord shall have had thirty
(30) days following its receipt of such notice within which to perform such
obligations; provided that, if longer than thirty (30) days is reasonably
required in order to perform such obligations, Landlord shall have such longer
period. In the event of Landlord's default as above set forth, then, and only
then, Tenant may then proceed in equity or at law to compel Landlord to perform
its obligations and/or to recover damages proximately caused by such failure to
perform (except as and to the extent Tenant has waived its right to damages as
provided in this Lease). In addition to the foregoing, and notwithstanding
Section 13.5, if Landlord fails to perform Landlord's maintenance obligations
pursuant to Section 5.1, Tenant shall, after thirty (30) days prior written
notice to Landlord (except in the case of emergency, in which case no notice
shall be required), have the right (but not the obligation) to perform such
obligation on Landlord's behalf and charge Landlord therefor. In no event shall
Tenant have the right to offset or deduct any amount due from Rent.
12.4 LIMITATION OF TENANT'S RECOURSE. Tenant's recourse shall be limited to
Landlord's interest in the Property. In addition, if Landlord is a corporation,
trust, partnership, joint venture, limited liability company, unincorporated
association, or other form of business entity, Tenant agrees that (i) the
obligations of Landlord under this Lease shall not constitute personal
obligations of the officers, directors, trustees, partners, joint venturers,
members, owners, stockholders, or other principals of such business entity, and
(ii) Tenant shall have no recourse to the assets of such officers, directors,
trustees, partners, joint venturers, members, owners, stockholders or
principals. Additionally, if Landlord is a partnership or limited liability
company, then Tenant covenants and agrees:
(a) No partner or member of Landlord shall be sued or named as a
party in any suit or action brought by Tenant with respect to any alleged
breach of this Lease (except to the extent necessary to secure jurisdiction
over the partnership and then only for that sole purpose);
(b) No service or process shall be made against any partner or
member of Landlord except for the sole purpose of securing jurisdiction over
the partnership; and
(c) No writ of execution will ever be levied against the assets
of any partner or member of Landlord other than to the extent of his or her
interest in the assets of the partnership or limited liability company
constituting Landlord.
Tenant further agrees that each of the foregoing covenants and agreements shall
be enforceable by Landlord and by any partner or member of Landlord and shall
be applicable to any actual or alleged misrepresentation or nondisclosure made
regarding this Lease or the Leased Premises or any actual or alleged failure,
default or breach of any covenant or agreement either expressly or implicitly
contained in this Lease or imposed by statute or at common law.
12.5 TENANT'S WAIVER. Landlord and Tenant agree that the provisions of
Paragraph 12.3 above are intended to supersede and replace the provisions of
California Civil Code Sections 1932(1), 1941 and 1942, and accordingly, Tenant
hereby waives the provisions of California Civil Sections 1932(1), 1941 and
1942 and/or any similar or successor law regarding Tenant's right to terminate
this Lease or to make repairs and deduct the expenses of such repairs from the
rent due under this Lease.
ARTICLE 13
GENERAL PROVISIONS
13.1 TAXES ON TENANT'S PROPERTY. Tenant shall pay before delinquency any and
all taxes, assessments, license fees, use fees, permit fees and public charges
of whatever nature or description levied, assessed or imposed against Tenant or
Landlord by a governmental agency arising out of, caused by reason of or based
upon Tenant's estate in this Lease, Tenant's ownership of property,
improvements made by Tenant to the Leased Premises or the Outside Areas,
improvements made by Landlord for Tenant's use within the Leased Premises or
the Outside Areas, Tenant's use (or estimated use) of public facilities or
services or Tenant's consumption (or estimated consumption) of public
utilities, energy, water or other resources (collectively, "Tenant's
Interest"). Upon demand by Landlord, Tenant shall furnish Landlord with
satisfactory evidence of these payments. If any such taxes, assessments, fees
or public charges are levied against Landlord, Landlord's property, the
Building or the Property, or if the assessed value of the
19.
<PAGE> 24
Building or the Property is increased by the inclusion therein of a value
placed upon Tenant's Interest, regardless of the validity thereof, Landlord
shall have the right to require Tenant to pay such taxes, and if not paid and
satisfactory evidence of payment delivered to Landlord at least ten days prior
to delinquency, then Landlord shall have the right to pay such taxes on
Tenant's behalf and to invoice Tenant for the same. Tenant shall, within the
earlier to occur of (a) thirty (30) days of the date it receives an invoice
from Landlord setting forth the amount of such taxes, assessments, fees, or
public charge so levied, or (b) the due date of such invoice, pay to Landlord,
as Additional Rent, the amount set forth in such invoice. Failure by Tenant to
pay the amount so invoiced within such time period shall be conclusively deemed
a default by Tenant under this Lease. Tenant shall have the right to bring suit
in any court of competent jurisdiction to recover from the taxing authority the
amount of any such taxes, assessments, fees or public charges so paid.
13.2 HOLDING OVER. This Lease shall terminate without further notice on the
Lease Expiration Date (as set forth in Article 1). Any holding over by Tenant
after expiration of the Lease Term shall neither constitute a renewal nor
extension of this Lease nor give Tenant any rights in or to the Leased Premises
except as expressly provided in this Paragraph. Any such holding over to which
Landlord has consented 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 Base Monthly Rent shall be increased to an amount equal to one hundred
fifty percent (150%) of the Base Monthly Rent payable during the last full
month immediately preceding such holding over.
13.2 SUBORDINATION TO MORTGAGES. This Lease is subject to and subordinate to
all ground leases, mortgages and deeds of trust which affect the Building or the
Property and which are of public record as of the Effective Date of this Lease,
and to all renewals, modifications, consolidations, replacements and extensions
thereof. However, if the lessor under any such ground lease or any lender
holding any such mortgage or deed of trust shall advise Landlord that it desires
or requires this Lease to be made prior and superior thereto, then, upon written
request of Landlord to Tenant, Tenant shall promptly execute, acknowledge and
deliver any and all customary or reasonable documents or instruments which
Landlord and such lessor or lender deems necessary or desirable to make this
Lease prior thereto. Tenant hereby consents to Landlord's ground leasing the
land underlying the Building or the Property and/or encumbering the Building or
the Property as security for future loans on such terms as Landlord shall
desire, all of which future ground leases, mortgages or deeds of trust shall be
subject to and subordinate to this Lease. However, if any lessor under any such
future ground lease or any lender holding such future mortgage or deed of trust
shall desire or require that this Lease be made subject to and subordinate to
such future ground lease, mortgage or deed of trust, then Tenant agrees, within
ten (10) business days after Landlord's written request therefor, to execute,
acknowledge and deliver to Landlord any and all documents or instruments
requested by Landlord or by such lessor or lender as may be necessary or proper
to assure the subordination of this Lease to such future ground lease, mortgage
or deed of trust, but only if such lessor or lender agrees in writing to Tenant
in a non-disturbance agreement, to recognize Tenant's rights under this Lease
and agrees not to disturb Tenant's quiet possession of the Leased Premises so
long as Tenant is not in default under this Lease. If Landlord assigns the Lease
as security for a loan, Tenant agrees to execute such documents as are
reasonably requested by the lender and to provide reasonable provisions in the
Lease protecting such lender's security interest which are customarily required
by institutional lenders making loans secured by a deed of trust, provided that
such documents do not increase Tenant's monetary obligations or materially
increase Tenant's non-monetary obligations.
13.4 TENANT'S ATTORNMENT UPON FORECLOSURE. Tenant shall, upon request, attorn
(i) to any purchaser of the Building or the Property at any foreclosure sale or
private sale conducted pursuant to any security instruments encumbering the
Building or the Property, (ii) to any grantee or transferee designated in any
deed given in lieu of foreclosure of any security interest encumbering the
Building or the Property, or (iii) to the lessor under an underlying ground
lease of the land underlying the Building or the Property, should such ground
lease be terminated; provided that such purchaser, grantee or lessor recognizes
Tenant's rights under this Lease.
13.5 MORTGAGEE PROTECTION. In the event of any default on the part of
Landlord, Tenant will give notice by certified mail to any Lender or lessor
under any underlying ground lease who shall have requested, in writing, to
Tenant that it be provided with such notice, and Tenant shall offer such Lender
or lessor a reasonable opportunity to cure the default, including time to
obtain possession of the Leased Premises by power of sale or judicial
foreclosure or other appropriate legal proceedings if reasonably necessary to
effect a cure (other than maintenance obligations).
13.6 ESTOPPEL CERTIFICATE. Tenant will, following any request by Landlord,
promptly execute and deliver to Landlord an estoppel certificate (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, (ii) stating the date to which the rent
and other charges are paid in advance, if any, (iii) 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, and (iv) certifying
such other information about this Lease as may be reasonably requested by
Landlord, its Lender or prospective lenders, investors or purchasers of the
Building or the Property. Tenant's failure to execute and deliver such estoppel
certificate within ten business days after Landlord's request therefor shall be
a material default by Tenant under this Lease, and Landlord shall have all of
the rights and remedies available to Landlord as Landlord would otherwise have
in the case of any other material default by Tenant, including the right to
terminate this Lease and sue for damages proximately caused thereby, it being
agreed and understood by Tenant that Tenant's failure to deliver such estoppel
certificate in a timely manner could result in Landlord being unable to perform
committed obligations to other third parties which were made by Landlord in
reliance upon this covenant of Tenant. Landlord and Tenant intend that any
statement delivered pursuant to this paragraph may be levied upon by any Lender
or purchaser or prospective Lender or purchaser of the Building, the Property,
or any interest in them.
13.7 TENANT'S FINANCIAL INFORMATION. Tenant shall, within ten business days
after Landlord's request therefor, deliver to Landlord a copy of Tenant's (and
any guarantor's) current financial statements (including a balance sheet,
20.
<PAGE> 25
income statement and statement of cash flow, all prepared in accordance with
generally-accepted accounting principles) which may be consolidated with
Tenant's parent corporation, and any such other information reasonably
requested by Landlord regarding Tenant's financial condition. Landlord shall be
entitled to disclose such financial statements or other information to its
Lender, to any present or prospective principal of or investor in Landlord, or
to any prospective Lender or purchaser of the Building, the Property, or any
portion thereof or interest therein. Any such (i) financial statement or (ii)
other information which is marked "confidential" or "company secrets" (or is
otherwise similarly marked by Tenant) shall be confidential and shall not be
disclosed by Landlord to any third party except as specifically provided in
this paragraph, unless the same becomes a part of the public domain without the
fault of Landlord.
13.8 TRANSFER BY LANDLORD. Landlord and its successors in interest shall have
the right to transfer their interest in the Building, the Property, or any
portion thereof at any time and to any person or entity. In the event of any
such transfer, the Landlord originally named herein (and in the case of any
subsequent transfer, the transferor), from the date of such transfer, (i) shall
be automatically relieved, without any further act by any person or entity, of
all liability for the performance of the obligations of the Landlord hereunder
which may accrue after the date of such transfer and (ii) shall be relieved of
all liability for the performance of the obligations of the Landlord hereunder
which have accrued before the date of transfer if its transferee agrees to
assume and perform all such prior obligations of the Landlord hereunder in
writing. Tenant shall attorn to any such transferee. After the date of any such
transfer, the term "Landlord" as used herein shall mean the transferee of such
interest in the Building or the Property.
13.9 FORCE MAJEURE. The obligations of each of the parties under this Lease
(other than the obligations to pay money) shall be temporarily excused if such
party is prevented or delayed in performing such obligations by reason of any
strikes, lockouts or labor disputes; government restrictions, regulations,
controls, action or inaction; civil commotion; or extraordinary weather, fire
or other acts of God.
13.10 NOTICES. Any notice required or desired to be given by a party regarding
this Lease shall be in writing and shall be personally served, or in lieu of
personal service may be given by reputable overnight courier service, postage
prepaid or by facsimile, with a copy sent by overnight courier, or by certified
mail, addressed to the other party as follows:
IF TO LANDLORD: Bordeaux Partners LLC
c/o Menlo Equities LLC
525 University Avenue
Suite 100
Palo Alto, California 94301
Attention: Henry Bullock/Richard Holmstrom
Facsimile No. (650) 326-9333
with a copy to: Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, California 94111
Attention; Paul Churchill
Facsimile No. (415) 951-3699
IF TO TENANT: Boca Global Inc.
1377 Clint Moore Road
Boca Raton, Florida 33487
Attention: Marty Ritchason
Facsimile No. (561) 997-2501
with a copy to: Boca Research Inc.
501 East Atlantic Avenue
Delray Beach, Florida 33483
Attention: Robert Federspiel
Facsimile No. (561) 994-5848
with a copy to: Wise & Shepard
3030 Hansen Way, #100
Palo Alto, California 94304
Attention: Lisa Barton Armando
Facsimile No. (650) 856-1344
Any notice given in accordance with the foregoing shall be deemed received upon
actual receipt or refusal to accept delivery.
13.1 ATTORNEYS' FEES. In the event any party shall bring any action,
arbitration proceeding or legal proceeding alleging a breach of any provision
of this Lease, to recover rent, to terminate this Lease, or to enforce,
protect, determine or establish any term or covenant of this Lease or rights or
duties hereunder of either party, the prevailing party shall be entitled to
recover from the non-prevailing party as a part of such action or proceeding,
or in a
<PAGE> 26
separate action for that purpose brought within one year from the determination
of such proceeding, reasonable attorneys' fees, expert witness fees, court
costs and other reasonable expenses incurred by the prevailing party.
13.12 DEFINITIONS. Any term that is given a special meaning by any provision
in this Lease shall, unless otherwise specifically stated, have such meaning
wherever used in this Lease or in any Addenda or amendment hereto. In addition
to the terms defined in Article 1, the following terms shall have the following
meanings:
(a) REAL PROPERTY TAXES. The term "Real Property Tax" or "Real
Property Taxes" shall each mean (i) all taxes, assessments, levies and other
charges of any kind or nature whatsoever, general and special, foreseen and
unforeseen (including all instruments 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 or new
construction), 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 for whatever
reason against the Property or any portion thereof, or Landlord's interest
herein, or the fixtures, equipment and other property of Landlord that is an
integral part of the Property and located thereon, or Landlord's business of
owning, leasing or managing the Property or the gross receipts, income or
rentals from the Property, (ii) all charges, levies or fees imposed by any
governmental authority against Landlord by reason of or based upon the use of
or number of parking spaces within the Property, the amount of public services
or public utilities used or consumed (e.g. water, gas, electricity, sewage or
waste water disposal) at the Property, the number of person employed by tenants
of the Property, the size (whether measured in area, volume, number of tenants
or whatever) or the value of the Property, or the type of use or uses conducted
within the Property, and all costs and fees (including attorneys' fees)
reasonably incurred by Landlord in contesting any Real Property Tax and in
negotiating with public authorities as to any Real Property Tax. If, at any
time during the Lease Term, the taxation or assessment of the Property
prevailing as of the Effective Date of this Lease shall be altered so that in
lieu of or in addition to any the Real Property Tax described above there shall
be levied, awarded 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, substitute, or additional use or charge (i) on the value, size, use
or occupancy of the Property or Landlord's interest therein or (ii) on or
measured by the gross receipts, income or rentals from the Property, or on
Landlord's business of owning, leasing or managing the Property or (iii)
computed in any manner with respect to the operation of the Property, then any
such tax or charge, however designated, shall be included within the meaning
of the terms "Real Property Tax" or "Real Property Taxes" for purposes of this
Lease. If any Real Property Tax is partly based upon property or rents
unrelated to the Leased Premises, then only that part of such Real Property
Tax that is fairly allocable to the Leased Premises (including allocable
portions of the Property) shall be included within the meaning of the terms
"Real Property Tax" or "Real Property Taxes." Notwithstanding the foregoing,
the terms "Real Property Tax" or "Real Property Taxes" shall not include
estate, inheritance, transfer, gift or franchise taxes of Landlord or the
federal or state income tax imposed on Landlord's income.
(b) LANDLORD'S INSURANCE COSTS. The term "Landlord's Insurance Costs"
shall mean the costs to Landlord to carry and maintain the policies of fire and
property damage insurance for the Building and the Property and general
liability and any other insurance required or permitted to be carried by
Landlord pursuant to Article 9, together with any deductible amounts paid by
Landlord upon the occurrence of any insured casualty or loss. If any Landlord's
Insurance Costs are partly attributable to a portion of the Property unrelated
to the Leased Premises, then only that part of such Landlord's Insurance Costs
that is fairly allocable to the Leased Premises (including allocable portions
of the Property) shall be included within the meaning of the term "Landlord's
Insurance Costs."
(c) PROPERTY MAINTENANCE COSTS. The term "Property Maintenance Costs"
shall mean all costs and expenses (except Landlord's Insurance Costs and Real
Property Taxes) paid or incurred by Landlord in protecting, operating,
maintaining, repairing and preserving the Property and all parts thereof,
including without limitation, (i) market rate professional management fees not
to exceed 3% of gross revenues (provided that gross revenues not include such
property management fees) from the Property, (ii) the amortizing portion of any
costs incurred by Landlord in the making of any modifications, alterations or
improvements required by any governmental authority as set forth in Article 6,
which are so amortized during the Lease Term, and (iii) such other costs as may
be paid or incurred with respect to operating, maintaining, and preserving the
Property, such as repairing and resurfacing the exterior surfaces of the
Building (including roofs), repairing and resurfacing paved areas, repairing
and replacing structural parts of the Building, and repairing and replacing,
when necessary, electrical, plumbing, heating, ventilating and air conditioning
systems serving the Building. If any Property Maintenance Costs are partly
attributable to a portion of the Property unrelated to the Leased Premises,
then only that part of such Property Maintenance Costs that is fairly allocable
to the Leased Premises (including allocable portions of the Property) shall be
included within the meaning of the term "Property Maintenance Costs."
Notwithstanding the foregoing, "Property Maintenance Costs" shall not include
and Tenant shall in no event have any obligation to perform or to pay directly,
or to reimburse Landlord for, all or any portion of the following: (i) costs
for which Landlord has received reimbursement from others; (ii) depreciation,
amortization or other expense reserves (except when such reserves are actually
expended for Property Maintenance Costs); (iii) mortgages, interest, charges
and fees incurred on debt, payments on mortgages and rent under ground leases;
or (iv) leasing costs (including from disputes) for the leasing of the Property
to other tenants.
(d) PROPERTY OPERATING EXPENSES. The term "Property Operating
Expenses" shall mean and include all Real Property taxes, plus all Landlord's
Insurance Costs, plus all Property Maintenance Costs.
(e) LAW. The term "Law" shall mean any judicial decisions and any
statute, constitution, ordinance, resolution, regulation, rule, administrative
order, or other requirements of any municipal, county, state, federal, or other
governmental agency or authority having jurisdiction over the parties to this
Lease, the Leased Premises, the Building or the Property, or any of them, in
effect either at the Effective Date of this Lease or at any
22.
<PAGE> 27
time during the Lease Term, including, without limitation, any regulation,
order, or policy of any quasi-official entity or body (e.g. a board of fire
examiners or a public utility or special district).
(f) LENDER. The term "Lender" shall mean the holder of any promissory
note or other evidence of indebtedness secured by the Property or any portion
thereof.
(g) PRIVATE RESTRICTIONS. The term "Private Restrictions" shall mean (as
they may exist from time to time) any and all covenants, conditions and
restrictions, private agreements, easements, and any other recorded documents
or instruments affecting the use of the Property, the Building, the Leased
Premises, or the Outside Areas.
(h) RENT. The term "Rent" shall mean collectively Base Monthly Rent and
all Additional Rent.
13.13 GENERAL WAIVERS. One party's consent to or approval of any act by the
other party requiring the first party's consent or approval shall not be deemed
to waive or render unnecessary the first party's consent to or approval of any
subsequent similar act by the other party. No waiver of any provision hereof, or
any waiver of any breach of any provision hereof, shall be effective unless in
writing and signed by the waiving party. The receipt by Landlord of any rent or
payment with or without knowledge of the breach of any other provision hereof
shall not be deemed a waiver of any such breach. No waiver of any provision of
this Lease shall be deemed a continuing waiver unless such waiver specifically
states so in writing and is signed by both Landlord and Tenant. No delay or
omission in the exercise of any right or remedy accruing to either party upon
any breach by the other party under this Lease shall impair such right or remedy
or be construed as a waiver of any such breach theretofore or thereafter
occurring. The waiver by either party of any breach of any provision of this
Lease shall not be deemed to be a waiver of any subsequent breach of the same or
any other provisions herein contained.
13.14 MISCELLANEOUS. Should any provisions of this Lease prove to be invalid
or illegal, such invalidity or illegality shall in no way affect, impair or
invalidate any other provisions hereof, and such remaining provisions shall
remain in full force and effect. Time is of the essence with respect to the
performance of every provision of this Lease in which time of performance is a
factor. Any copy of this Lease which is executed by the parties shall be deemed
an original for all purposes. This Lease shall, subject to the provisions
regarding assignment, apply to and bind the respective heirs, successors,
executors, administrators and assigns of Landlord and Tenant. The term "party"
shall mean Landlord or Tenant as the context implies. If Tenant consists of
more than one person or entity, then all members of Tenant shall be jointly and
severally liable hereunder. This Lease shall be construed and enforced in
accordance with the Laws of the State in which the Leased Premises are located.
The captions in this Lease are for convenience only and shall not be construed
in the construction or interpretation of any provision hereof. When the context
of this Lease requires, the neuter gender includes the masculine, the feminine,
a partnership, corporation, limited liability company, joint venture, or other
form of business entity, and the singular includes the plural. The terms
"must," "shall," "will," and "agree" are mandatory. The term "may" is
permissive. When a party is required to do something by this Lease, it shall do
so at its sole cost and expense without right of reimbursement from the other
party unless specific provision is made therefor. Where Landlord's consent is
required hereunder, the consent of any Lender shall also be required. Landlord
may, at its option, elect in the future to process and record a parcel map to
divide the Property into two separate legal parcels, with the Building and a
portion of the Outside Areas constituting one legal parcel (the "Tenant's
Parcel"), and the balance of the Property constituting the other legal parcel
(the "Parcelization"). In the event that Landlord accomplishes the
Parcelization, Landlord reserves the right to amend the definitions in this
Lease so as to restrict Tenant's use and occupancy rights to Tenant's Parcel;
provided that Tenant's Parcel shall conform to the Site Plan attached as
Exhibit A. Landlord and Tenant shall both be deemed to have drafted this Lease,
and the rule of construction that a document is to be construed against the
drafting party shall not be employed in the construction or interpretation of
this Lease. Where Tenant is obligated not to perform any act or is not
permitted to perform any act, Tenant is also obligated to restrain any others
reasonably within its control, including agents, invitees, contractors,
subcontractors and employees, from performing such act. Landlord shall not
become or be deemed a partner or a joint venturer with Tenant by reason of any
of the provisions of this Lease.
ARTICLE 14
CORPORATE AUTHORITY
BROKERS AND ENTIRE AGREEMENT
14.1 CORPORATE AUTHORITY. If Tenant is a corporation, each individual
executing this Lease on behalf of such corporation represents and warrants that
Tenant is validly formed and duly authorized and existing, that Tenant is
qualified to do business in the State in which the Leased Premises are located,
that Tenant has the full right and legal authority to enter into this Lease,
and that he or she is duly authorized to execute and deliver this Lease on
behalf of Tenant in accordance with its terms. Tenant shall, within thirty (30)
days after execution of this Lease, deliver to Landlord a certified copy of the
resolution of its board of directors authorizing or ratifying the execution of
this Lease and if Tenant fails to do so, Landlord at its sole election may
elect to terminate this Lease.
14.2 BROKERAGE COMMISSIONS. Tenant represents, warrants and agrees that it has
not had any dealings with any real estate broker(s), leasing agent(s),
finder(s) or salesmen, other than the Tenant's Broker (as named in Article 1)
with respect to the lease by it of the Leased Premises pursuant to this Lease,
and that it will indemnify, defend with competent counsel, and hold Landlord
harmless from any liability for the payment of any real estate brokerage
commissions, leasing commissions or finder's fees claimed by any other real
estate broker(s), leasing agent(s), finder(s), or salesmen to be earned or due
and payable by reason of Tenant's agreement or promise (implied or otherwise)
to pay (or to have Landlord pay) such a commission or finder's fee by reason of
its leasing the Leased
23.
<PAGE> 28
Premises pursuant to this Lease. Landlord shall pay all leasing commissions or
finder's fees owing to Tenant's Broker and any other brokers used by Landlord
in connection with this Lease, subject to Landlord's written agreement with
such brokers.
14.3 ENTIRE AGREEMENT. This Lease and the Exhibits (as described in Article 1),
which Exhibits are by this reference incorporated herein, constitute the entire
agreement between the parties, and there are no other agreements,
understandings or representations between the parties relating to the lease by
Landlord of the Leased Premises to Tenant, except as expressed herein. No
subsequent changes, modifications or additions to this Lease shall be binding
upon the parties unless in writing and signed by both Landlord and Tenant.
14.4 LANDLORD'S REPRESENTATIONS. Tenant acknowledges that neither Landlord nor
any of its agents made any representations or warranties respecting the
Property, the Building or the Leased Premises, upon which Tenant relied in
entering into the Lease, which are not expressly set forth in this Lease.
Tenant further acknowledges that neither Landlord nor any of its agents made
any representations as to (i) whether the Leased Premises may be used for
Tenant's intended use under existing Law, or (ii) the suitability of the Leased
Premises for the conduct of Tenant's business, or (iii) the exact square
footage of the Leased Premises, and that Tenant relied solely upon its own
investigations with respect to such matters. Tenant expressly waives any and
all claims for damage by reason of any statement, representation, warranty,
promise or other agreement of Landlord or Landlord's agent(s), if any, not
continued in this Lease or in any Exhibit attached hereto.
ARTICLE 15
OPTIONS TO EXTEND
15.1 So long as Boca Global Inc. or its parent or their affiliates occupy one
hundred percent (100%) of the Leased Premises in the aggregate and subject to
the condition set forth in clause (b) below, Tenant shall have one option to
extend the term of this Lease with respect to the entirety of the Leased
Premises for a period of three (3) years from the expiration of the eighty
fourth (84th) month of the Lease Term (the "Extension Period"), subject to the
following conditions:
(a) The option to extend shall be exercised, if at all, by notice of
exercise given to Landlord by Tenant not more than 360 days nor less than 270
days prior to the expiration of the eighty fourth (84th) month of the Lease
Term:
(b) Anything herein to the contrary notwithstanding, if Tenant is in
default under any of the terms, covenants or conditions of this Lease beyond
the applicable cure period (provided such default can be cured), either at the
time Tenant exercises either extension option or on the commencement date of
the Extension Period, Landlord shall have, in addition to all of Landlord's
other rights and remedies provided in this Lease, the right to terminate such
option to extend upon notice to Tenant.
15.2 In the event the option is exercised in a timely fashion, the Lease shall
be extended for the term of the Extension Period upon all of the terms and
conditions of this Lease, provided that the Base Monthly Rent for the Extension
Period shall be the "Fair Market Rent" for the Leased Premises. For purposes
hereof, "Fair Market Rent" shall mean the Base Monthly Rent determined pursuant
to the process described below. In no event, however, shall any adjustment of
Base Monthly Rent pursuant to this paragraph result in a decrease of the Base
Monthly Rent for the Leased Premises below the amount due from Tenant for the
preceding portion of the initial Lease Term, for which Base Monthly Rent had
been fixed.
15.3 Within 30 days after receipt of Tenant's notice of exercise, Landlord
shall notify Tenant in writing of Landlord's estimate of the Base Monthly Rent
for the applicable Extension Period, based on the provisions of Paragraph 15.2
above. Within 30 days after receipt of such notice from Landlord, Tenant shall
have the right either to (i) accept Landlord's statement of Base Monthly Rent
as the Base Monthly Rent for the Extension Period; or (ii) rescind Tenant's
exercise of the Extension Option; or (iii) elect to arbitrate Landlord's
estimate of Fair Market Rent, such arbitration to be conducted pursuant to the
provisions hereof. Failure on the part of Tenant to require arbitration of Fair
Market Rent within such 30-day period shall constitute acceptance of the Base
Monthly Rent for the Extension Period as calculated by Landlord. If Tenant
elects arbitration, the arbitration shall be concluded within 90 days after the
date of Tenant's election, subject to extension for an additional 30-day period
if a third arbitrator is required and does not act in a timely manner. To the
extent that arbitration has not been completed prior to the expiration of any
preceding period for which Base Monthly Rent has been determined, Tenant shall
pay Base Monthly Rent at the rate calculated by Landlord, with the potential
for an adjustment to be made once Fair Market Rent is ultimately determined by
arbitration.
15.4 In the event of arbitration, the judgment or the award rendered in any
such arbitration may be entered in any court having jurisdiction and shall be
final and binding between the parties. The arbitration shall be conducted and
determined in the City and County of San Francisco in accordance with the then
prevailing rules of the American Arbitration Association or its successor for
arbitration of commercial disputes except to the extent that the procedures
mandated by such rules shall be modified as follows:
(a) Tenant shall make demand for arbitration in writing within 30 days
after service of Landlord's determination of Fair Market Rent given under
Paragraph 15.3 above, specifying therein the name and address of the person to
act as the arbitrator on its behalf. The arbitrator shall be qualified as a
real estate appraiser familiar with the Fair Market Rent of similar industrial,
research and development, or office space in the Silicon Valley area who
24.
<PAGE> 29
would qualify as an expert witness over objection to give opinion testimony
addressed to the issue in a court of competent jurisdiction. Failure on the part
of Tenant to make a proper demand in a timely manner for such arbitration shall
constitute a waiver of the right thereto. Within 15 days after the service of
the demand for arbitration, Landlord shall give notice to Tenant, specifying the
name and address of the person designated by Landlord to act as arbitrator on
its behalf who shall be similarly qualified. If Landlord fails to notify Tenant
of the appointment of its arbitrator, within or by the time above specified,
then the arbitrator appointed by Tenant shall be the arbitrator to determine the
issue.
(b) In the event that two arbitrators are chosen pursuant to Paragraph
15.4(a) above, the arbitrators so chosen shall, within 15 days after the second
arbitrator is appointed determine the Fair Market Rent. If the two arbitrators
shall be unable to agree upon a determination of Fair Market Rent within such
15-day period, they, themselves, shall appoint a third arbitrator, who shall be
a competent and impartial person with qualifications similar to those required
of the first two arbitrators pursuant to Paragraph 15.4(a). In the event they
are unable to agree upon such appointment within seven days after expiration of
such 15-day period, the third arbitrator shall be selected by the parties
themselves, if they can agree thereon, within a further period of 15 days. If
the parties do not so agree, then either party, on behalf of both, may request
appointment of such a qualified person by the then Chief Judge of the United
States District Court having jurisdiction over the County of Santa Clara, acting
in his private and not in his official capacity, and the other party shall not
raise any question as to such Judge's full power and jurisdiction to entertain
the application for and make the appointment. The three arbitrators shall decide
the dispute if it has not previously been resolved by following the procedure
set forth below.
(c) Where an issue cannot be resolved by agreement between the two
arbitrators selected by Landlord and Tenant or settlement between the parties
during the course of arbitration, the issue shall be resolved by the three
arbitrators within 15 days of the appointment of the third arbitrator in
accordance with the following procedure. The arbitrator selected by each of the
parties shall state in writing his determination of the Fair Market Rent
supported by the reasons therefor with counterpart copies to each party. The
arbitrators shall arrange for a simultaneous exchange of such proposed
resolutions. The role of the third arbitrator shall be to select which of the
two proposed resolutions most closely approximates his determination of Fair
Market Rent. The third arbitrator shall have no right to propose a middle ground
or any modification of either of the two proposed resolutions. The resolution he
chooses as most closely approximating his determination shall constitute the
decision of the arbitrators and be final and binding upon the parties.
(d) In the event of a failure, refusal or inability of any arbitrator to
act, his successor shall be appointed by him, but in the case of the third
arbitrator, his successor shall be appointed in the same manner as provided for
appointment of the third arbitrator. The arbitrators shall decide the issue
within 15 days after the appointment of the third arbitrator. Any decision in
which the arbitrator appointed by Landlord and the arbitrator appointed by
Tenant concur shall be binding and conclusive upon the parties. Each party shall
pay the fee and expenses of its respective arbitrator and both shall share the
fee and expenses of the third arbitrator, if any, and the attorneys' fees and
expenses of counsel for the respective parties and of witnesses shall be paid by
the respective party engaging such counsel or calling such witnesses.
(e) The arbitrators shall have the right to consult experts and competent
authorities to obtain factual information or evidence pertaining to a
determination of Fair Market Rent, but any such consultation shall be made in
the presence of both parties with full right on their part to cross-examine. The
arbitrators shall render their decision and award in writing with counterpart
copies to each party. The arbitrators shall have no power to modify the
provisions of this Lease.
ARTICLE 16
TELEPHONE SERVICE
Notwithstanding any other provision of this Lease to the contrary:
(a) So long as the entirety of the Leased Premises is leased to Tenant:
(i) Landlord shall have no responsibility for providing to Tenant any
telephone equipment, including wiring, within the Leased Premises or for
providing telephone service or connections from the utility to the Leased
Premises; and
(ii) Landlord makes no warranty as to the quality, continuity or
availability of the telecommunications services in the Building, and Tenant
hereby waives any claim against Landlord for any actual or consequential damages
(including damages for loss of business) in the event Tenant's
telecommunications services in any way are interrupted, damaged or rendered less
effective, except to the extent caused by the grossly negligent or willful act
or omission by Landlord, its agents, contractors or employees. Tenant accepts
the telephone equipment (including, without limitation, the INC, as defined
below) in its "AS-IS" condition, and Tenant shall be solely responsible for
contracting with a reliable third party vendor to assume responsibility for the
maintenance and repair thereof (which contract shall contain provisions
requiring such vendor to inspect the INC periodically (the frequency of such
inspections to be determined by such vendor based on its experience and
professional judgment), and requiring such vendor to meet local and federal
requirements for telecommunications material and workmanship). Landlord shall
not be liable to Tenant and Tenant waives all claims against Landlord
whatsoever, whether for personal injury, property damage, loss of use of the
Leased Premises, or otherwise, due to the interruption or failure of telephone
services to the Leased Premises. Tenant hereby holds Landlord harmless and
agrees to indemnify, protect and defend Landlord from and against any liability
for any damage, loss or expense due
25.
<PAGE> 30
to any failure or interruption of telephone service to the Leased Premises for
any reason. Tenant agrees to obtain loss of rental insurance adequate to cover
any damage, loss or expense occasioned by the interruption of telephone service.
(b) At such time as the entirety of the Leased Premise is no longer
leased to Tenant, Landlord shall in its sole discretion have the right, by
written notice to Tenant, to elect to assume limited responsibility for INC, as
provided below, and upon such assumption of responsibility by Landlord, this
subparagraph (b) shall apply prospectively.
(i) Landlord shall provide Tenant access to such quantity of pairs
in the Building intra-building network cable ("INC") as is determined to be
available by Landlord in its reasonable discretion. Tenant's access to the INC
shall be solely by arrangements made by Tenant, as Tenant may elect, directly
with Pacific Bell or Landlord (or such vendor as Landlord may designate), and
Tenant shall pay all reasonable charges as may be imposed in connection
therewith. Pacific Bell's charges shall be deemed to be reasonable. Subject to
the foregoing, Landlord shall have no responsibility for providing to Tenant
any telephone equipment, including wiring, within the Leased Premises or for
providing telephone service or connections from the utility to the Leased
Premises, except as required by law.
(ii) Tenant shall not alter, modify, add to or disturb any telephone
wiring in the Leased Premises or elsewhere in the Building without the
Landlord's prior written consent. Tenant shall be liable to Landlord for any
damage to the telephone wiring in the Building due to the act, negligent or
otherwise, of Tenant for any employee, contractor or other agent of Tenant.
Tenant shall have no access to the telephone closets within the Building,
except in the manner and under procedures established by Landlord. Tenant shall
promptly notify Landlord of any actual or suspected failure of telephone
service to the Leased Premises.
(iii) All costs incurred by Landlord for the installation,
maintenance, repair and replacement of telephone wiring in the Building shall be
a Property Maintenance Cost.
(iv) Landlord makes no warranty as to the quality, continuity or
availability of the telecommunications services in the Building, and Tenant
hereby waives any claim against Landlord for any actual or consequential
damages (including damages for loss of business) in the event Tenant's
telecommunications services in any way are interrupted, damaged or rendered
less effective, except to the extent caused by the grossly negligent or willful
act or omission by Landlord, its agents or employees. Tenant acknowledges that
Landlord meets its duty of care to Tenant with respect to the Building INC by
contracting with a reliable third party vendor to assume responsibility for the
maintenance and repair thereof (which contract shall contain provisions
requiring such vendor to inspect the INC periodically (the frequency of such
inspections to be determined by such vendor based on its experience and
professional judgment), and Requiring such vendor to meet local and federal
requirements for telecommunications material and workmanship). Subject to the
foregoing, Landlord shall not be liable to Tenant and Tenant waives all claims
against Landlord whatsoever, whether for personal injury, property damage, loss
of use of the Leased Premises, or otherwise, due to the interruption or failure
of telephone services to the Leased Premises. Tenant hereby holds Landlord
harmless and agrees to indemnify, protect and defend Landlord from and against
any liability for any damage, loss or expense due to any failure or
interruption of telephone service to the Leased Premises for any reason. Tenant
agrees to obtain loss of rental insurance adequate to cover any damage, loss or
expense occasioned by the interruption of telephone service.
THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK
26
<PAGE> 31
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the
respective dates below set forth with the intent to be legally bound thereby as
of the Effective Date of this Lease first above set forth.
LANDLORD:
BORDEAUX PARTNERS LLC, a
California limited liability company
By: Menlo Equities LLC, a
California limited liability company,
its Managing Member
By: /s/ [Signature Illegible], Member
---------------------------------
Dated: 6/2/98
------------------------------
TENANT:
BOCA GLOBAL INC., a
Florida corporation
By: /s/ ANTHONY ZALENSKI
--------------------------------------
Anthony Zalenski
President and Chief Executive Officer
By: /s/ R. MICHAEL BREWAR
--------------------------------------
R. Michael Brewar
Secretary
27
<PAGE> 32
EXHIBIT A
SITE PLAN
[BLUEPRINT]
EXHIBIT FOR LEASE PLAN
<PAGE> 33
EXHIBIT B
FLOOR PLAN
[BLUEPRINT]
<PAGE> 34
EXHIBIT C
WORK LETTER
THIS WORK LETTER, dated June 2, 1998, is entered into by and between
BORDEAUX PARTNERS LLC, a California limited liability company ("Landlord"), and
BOCA GLOBAL INC., a Florida corporation ("Tenant"). On or about the date hereof,
Landlord and Tenant entered into that certain Lease (the "Lease") for certain
premises (the "Leased Premises") commonly known as 1380 Bordeaux Drive,
Sunnyvale, California. This Work Letter sets forth the agreement of Landlord and
Tenant with respect to the improvements to be constructed in the Leased
Premises. All defined terms used herein shall have the meaning set forth in the
Lease, unless otherwise defined in this Work Letter.
1. CERTAIN DEFINITIONS.
(a) "Architect" shall mean Dennis Kobza Associates.
(b) "Contractor" shall mean Applied Construction Technology Inc.
(c) "Substantial Completion" shall have the meaning given to that
term in Section 8 hereof.
(d) "Tenant Delay" shall have the meaning given to that term in
Section 8 hereof.
2. CONSTRUCTION OF TENANT IMPROVEMENTS. Landlord shall, through the
Contractor, furnish and install within the Leased Premises, substantially in
accordance with the plans and specifications to be approved by Landlord and
Tenant pursuant to paragraph 2 below, certain items of general construction (the
"Tenant Improvements"). The quantities, character and manner of installation of
all of the Tenant Improvements shall be subject to the limitations imposed by
any applicable governmental regulations relating to conservation of energy and
by applicable building codes and regulations. In addition, Tenant agrees that
except for changing the bay doors into windows, adding HVAC and installing a
fire suppression system and electrical wiring, the Tenant Improvements shall not
require Landlord to perform work which would (i) require changes to structural
components of the Building or the exterior design of the Building; (ii) require
any material modification to the Building's electrical systems; (iii) be
incompatible with the Building plans filed with the City of Sunnyvale; or (iv)
delay the completion of the Leased Premises beyond November 15, 1998.
3. SPACE PLANNING.
(a) Landlord and Tenant acknowledge and agree that Schedule 1 hereto
sets forth a basic description of the Tenant Improvements, which the parties
hereby approve. Promptly after execution of the Lease by the parties, Landlord's
Architect shall prepare comprehensive space planning documents for Landlord's
and Tenant's approval which shall be based on the basic description set forth in
Schedule 1 (the "Space Planning Documents"). Such Space Planning Documents shall
be sufficient to enable Landlord's Architect and engineers to prepare the
Working Drawings (as defined below).
(b) All planning and interior design services for the Leased
Premises, such as selection of colors, finishes, fixtures, furnishings or floor
coverings, will be included in the cost of the Tenant Improvements, shall be
subject to prior written approval of Landlord, and shall be timely delivered so
as not to impede the design and construction of the Tenant Improvements.
(c) Upon Landlord's and Tenant's approval of the Space Planning
Documents, Landlord shall be authorized to cause its architect and engineers to
prepare the Working Drawings.
4. APPROVAL OF WORKING DRAWINGS.
(a) Landlord and Tenant acknowledge that Landlord shall retain
Landlord's Architect and engineers to prepare all architectural and engineering
plans and specifications (except the Design Build Plans, as defined below)
required for the construction of the Tenant Improvements in conformance with the
base building and tenant improvement standard specifications of the Building.
Such plans and specifications, together with the Design Build Plans are
hereinafter referred to as the "Working Drawings". Landlord shall also retain
Landlord's Architect and engineers to prepare drawings and specifications for
Changes (as defined below), if any, requested or required pursuant to paragraph
6 below. As used herein, the term "Design Build Plans" means the plans for
plumbing, HVAC and electrical, which plans will be developed by subcontractors
in each of the plumbing, HVAC and electrical trade disciplines. The Contractor
will request design build proposals from no fewer than two (2) qualified
subcontractors in each of the plumbing, HVAC and electrical trade disciplines.
(b) Landlord shall submit the completed Working Drawings to Tenant
for Tenant's approval. Tenant will provide written approval of the Working
Drawings within ten (10) days after such submission. If Tenant disapproves any
part of the submission, the disapproval shall include written instructions
adequate for Landlord's Architect and engineers to revise the Working Drawings.
Such revisions shall be subject to Landlord's approval within five (5) business
days after Landlord's receipt of such Working Drawings, which approval shall not
be unreasonably withheld. Tenant will finally approve the revised Working
Drawings within six (6) business days after submission thereof to Tenant. If
Tenant's instructions necessitate (i) revisions to the Working Drawings (as
originally submitted) which do not conform with the Space Planning Documents, or
(ii) a change of scope relative to the Space Planning Documents, the costs
incurred by Landlord as a result of such instructions (including, without
limitation, the cost of revising the Working Drawings) shall be considered a
cost of the Tenant Improvements.
<PAGE> 35
(c) If Tenant fails to approve the Working Drawings or the required
Working Drawings within the applicable periods set forth in subparagraph 3(b)
above, then (A) Landlord shall not be obligated to commence construction of the
Tenant Improvements, (B) Tenant shall be responsible for any resulting delay,
and the cost of such delay, in Landlord's completion of the Tenant Improvements
and delivery of the Leased Premises, and (C) any such delay shall be deemed a
Tenant Delay (as defined below).
(d) Upon Tenant's approval of the Working Drawings, Landlord shall be
authorized to cause the Contractor to proceed with the construction of the
Tenant Improvements in accordance with the Working Drawings. Tenant may specify
that the Contractor complete the Tenant Improvements in phases, provided that at
minimum, the first phase shall include drop ceilings, carpeting, duct work and
finished perimeter walls throughout the entire Leased Premises.
5. COST OF TENANT IMPROVEMENTS.
(a) Unless specified otherwise herein, Landlord shall bear and pay the
cost of the Tenant Improvements (which cost shall include, without limitation,
the costs of construction, the cost of permits and permit expediting, and all
architectural and engineering services obtained by Landlord in connection with
the Tenant Improvements, the Contractor's fees, which shall not exceed * of
hard costs for general conditions and * of hard costs plus general conditions
for the Contractor's fee, Landlord's fee for construction administration in an
amount equal to the amount charged by any construction manager retained by
Landlord (the "Construction Manager"), which shall not exceed * of hard costs,
utilities, and Landlord's Insurance Costs (including, without limitation, course
of construction insurance), from the date of this Work Letter until the Lease
Commencement Date) up to a maximum of * (the "Tenant Improvement Allowance").
The Tenant Improvement Allowance shall be utilized only for building
improvements to the Building, and not for signage, furniture costs, any third
party consulting or contracting fees (except for Landlord's Architect and
engineering fees), any telecom/cabling costs, or any other purpose. Tenant shall
bear and pay the cost of the Tenant Improvements (including but not limited to
all of the foregoing fees and costs) in excess of the Tenant Improvement
Allowance, if any. The cost of the Tenant Improvements shall exclude the cost of
furniture, fixtures and inventory and other items of Tenant's Work (as defined
below).
(b) Tenant shall have the right to elect to increase the Tenant
Improvement Allowance by up to an additional * (the "Additional Allowance"),
subject to the following terms and conditions: (i) Tenant shall make such
election, if at all, no later than twenty (20) days prior to the commencement of
the Improvement Work; (ii) if * or less of the Additional Allowance is used,
such amount shall be amortized over the initial eighty-four (84) month Lease
Term at * and if more than * of the Additional Allowance is used, the amount of
such Additional Allowance above * shall be amortized over the initial
eighty-four (84) month Lease Term at *; and (iii) the Additional Allowance shall
constitute a part of the Tenant Improvement Allowance and shall be subject to
the restrictions and conditions on such Tenant Improvement Allowance provided in
this work Letter. Notwithstanding the foregoing, in the event Tenant specifies
that the Tenant Improvements be completed in phases pursuant to Section 4(d)
above, and the entire amount of the Tenant Improvement Allowance or Additional
Allowance is not used in the first phase, Tenant may use any remaining
unutilized Tenant Improvement Allowance or Additional Allowance for subsequent
phases of the Tenant Improvements provided that (i) such unutilized Tenant
Improvement Allowance or Additional Allowance must be used within sixty (60)
days following Substantial Completion of the Tenant Improvements or Tenant must
be contractually obligated to use such unutilized Tenant Improvement Allowance
or Additional Allowance within sixty (60) days following Substantial Completion
of the Tenant Improvements and the work pursuant to such contract(s) will be
completed within 180 days following Substantial Completion of the Tenant
Improvements and (ii) Tenant is not then in default under the Lease. Nothing
contained herein shall relieve Tenant of its obligation to complete all of the
Tenant Improvements as provided in Section 5(a).
(c) As soon as practicable after Tenant's and Landlord's approval of
the Working Drawings, Contractor shall provide Tenant and Landlord with an
estimate for the cost to complete the Tenant Improvements subject to Contractor
obtaining at least two (2) bids for each subcontract (other than the
subcontracts for the work to be done pursuant to the Design Build Plans).
Contractor shall provide the subcontractor bids to Landlord and Tenant for
review, comment and input on selection, which shall be given by Landlord and
Tenant within five (5) business days after receipt of such subcontractor bids.
Contractor shall prepare an estimate of pricing for the Tenant Improvements,
taking into consideration Landlord's and Tenant's comments and the Design Build
Plans, and shall submit such pricing to Landlord and Tenant for approval, or
disapproval, which shall be given within five (5) business days of receipt of
such pricing. After such pricing has been approved by Landlord and Tenant,
Contractor and Landlord shall enter into a fixed price construction contract for
such final price (the "Final Price"). The Final Price shall include the Tenant
Improvements to be done pursuant to the Design Build Plans and Working Drawings.
In the event the cost to actually complete the Tenant Improvements is more than
the Final Price, Tenant shall have no obligation therefor, unless such increase
is due to a Change approved by Tenant in writing pursuant to Section 6.
6. CHANGES.
(a) Any request by Tenant for a change in the Tenant Improvements
after approval of the Working Drawings (a "Change") shall be accompanied by all
information necessary to clearly identify and explain the proposed Change. As
soon as practicable after receipt of such an Estimate Request form, Landlord
shall notify Tenant of the estimated cost of such Change as well as the
estimated increase in construction time caused by the Change, if any. If Tenant
agrees to such estimates of cost and construction time, Tenant shall approve in
writing such estimates within three (3) days after receipt of Landlord's notice.
Upon receipt of such written request, Landlord shall be authorized to cause the
Contractor to proceed with the implementation of the requested Change.
(b) The increased cost and time, as determined by Landlord, of all
Changes, including the cost of architectural and engineering services required
to revise the Working Drawings to reflect such Changes, the Contractor's
overhead and fee, and Landlord's fee for construction administration services,
shall be treated as costs
* Confidential treatment has been requested by the Registrant as to certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
<PAGE> 36
of the Tenant Improvements, and shall be as determined by Landlord upon
completion of the Tenant Improvements, subject only to Landlord's furnishing to
Tenant appropriate back-up information from the Contractor concerning the
increased costs and increased construction time.
(c) Upon completion of the Working Drawings, but prior to
Contractor's commencement of work, Tenant may request that Landlord's Architect
redesign the Tenant Improvements within five (5) business days after receipt of
the Final Price to reduce the cost of the Tenant Improvements, which redesign
must be approved by Landlord and the cost of which shall be included in the cost
of Tenant Improvements.
7. TENANT'S WORK. Landlord and Tenant acknowledge and agree that certain
work required for Tenant's occupancy of the Leased Premises, including but not
limited to the procurement and installation of furniture, fixtures, equipment,
artwork and interior signage are beyond the scope of the Tenant Improvements and
shall be performed by Tenant or its contractors at Tenant's sole cost and
expense. All such work ("Tenant's Work") shall be subject to Landlord's prior
written approval which shall not be unreasonably withheld. Tenant shall adopt a
construction schedule for Tenant's Work in conformance with the Contractor's
schedule, and shall perform Tenant's Work in such a way as not to hinder or
delay the operations of Landlord or the Contractor in the Building. Any costs
incurred by Landlord as a result of any interference with Landlord's operations
by Tenant or its contractors shall be promptly paid by Tenant to Landlord upon
demand. Landlord shall notify Tenant of any such interference of which Landlord
has actual knowledge within twenty-four (24) hours. Tenant's contractors shall
be subject to Landlord's prior written approval which shall not be unreasonably
withheld, and to the administrative supervision of the Contractor. Tenant's Work
shall not constitute occupancy of the Leased Premises and shall comply with all
of the following requirements:
(a) Tenant's Work shall not proceed until Landlord has approved in
writing: (i) Tenant's contractors, (ii) proof of the amount and coverage of
public liability and property damage insurance carried by Tenant's contractors
in the form of an endorsed insurance certificate naming Landlord, the
Contractor, and the agents of Landlord and the Contractor as additional
insureds, in an amount not less than One Million Dollars ($1,000,000.00), and
(iii) complete and detailed plans and specifications for Tenant's Work.
(b) Tenant's Work shall be performed in conformity with a valid
permit when required, a copy of which shall be furnished to Landlord before such
work is commenced. In any event, all Tenant's Work shall comply with all
applicable laws, codes and ordinances of any governmental entity having
jurisdiction over the Building. Landlord shall have no responsibility for
Tenant's failure to comply with such applicable laws. Any and all delay in
obtaining a certificate of occupancy due to Tenant's vendors is the
responsibility of Tenant and shall be a Tenant Delay.
(c) In connection with Tenant's Work (e.g., delivering or installing
furniture or equipment to the second floor of the Leased Premises), Tenant or
its contractors shall arrange for any necessary hoisting or elevator service
with Landlord and shall pay such reasonable costs for such services as may be
charged by Landlord.
(d) Tenant shall promptly pay Landlord upon demand for any extra
expense incurred by Landlord by reason of faulty work done by Tenant or its
contractors, by reason of damage to existing work caused by Tenant or its
contractors, or by reason of inadequate cleanup by Tenant or its contractors.
8. COMPLETION; TENANT DELAY.
(a) "Substantial Completion" shall mean the occurrence of (i) the
date that Landlord's Architect furnishes a certificate of substantial completion
confirming that the Tenant Improvements have been substantially completed,
subject to minor details of construction, decoration or mechanical adjustment
which do not unreasonably affect Tenant's ability to do business in the Leased
Premises, and (ii) one of the following: (A) a temporary certificate of
occupancy is issued by the City of Sunnyvale or (B) a final certificate of
occupancy is issued by the City of Sunnyvale or (C) Tenant's occupancy of all or
part of the Leased Premises. Upon Substantial Completion, the Tenant
Improvements shall be deemed "Substantially Complete" and possession of the
Leased Premises shall be deemed delivered to Tenant for all purposes under the
Lease. Any punchlist items identified by Tenant and Landlord on a punchlist
pursuant to a walkthrough of the Leased Premises shall be completed by Landlord
within thirty (30) days after the date of Substantial Completion of the Leased
Premises.
(b) If Landlord shall be delayed in substantially completing the
Tenant Improvements as a result of:
(i) Tenant's failure to furnish the information,
instructions and plans required in paragraph 3 or approve or disapprove (and
give reasons for such disapproval) the Working Drawings, within the applicable
time periods specified in paragraph 4; or
(ii) Any changes in the scope of the Tenant Improvements
from that set forth in the Space Planning Documents, or any Changes to the
Working Drawings requested by Tenant after approval thereof pursuant to
paragraph 6 (including without limitation Tenant Changes which are requested but
not subsequently approved by Tenant pursuant to paragraph 6), but only if Tenant
approves in writing such Change pursuant to paragraph 6 hereof; or
(iii) Any interruption or interference in Landlord's
construction of the Tenant Improvements caused by Tenant, its contractors or its
vendors; or
(iv) Tenant's failure to timely pay any amounts which Tenant
is obligated to pay under this Work Letter; or
<PAGE> 37
(v) Any other act, neglect, failure or omission of Tenant, its
agents, employees or contractors of which Landlord has given Tenant notice,
which Tenant failed to cure within twenty-four (24) hours of receipt of the
notice (items (i) through (v) above being collectively referred to as "Tenant
Delays");
then the date upon which the payment of rental under the Lease shall commence
shall be advanced by the cumulative duration of such Tenant Delays.
9. TENANT REPRESENTATIVE. For purposes of this Work Letter and the work
to be performed hereunder, Tenant designates the following local representative
to act on behalf of Tenant:
Art Sheurpukdi
Boca Research Inc.
1377 Clint Moore Road
Boca Raton, Florida 33487
Facsimile No. (561) 997-2501
provided that if no Northern California address for Art Sheurpukdi is provided
to Landlord, or if Art Sheurpukdi is not in Northern California at any time
Tenant's approval or consent is required, Tenant's representative shall be:
Jim Nealon
Boca Global Inc.
1144 East Arques Avenue
Sunnyvale, California 94086
Facsimile No. (408) 523-2407
IN WITNESS WHEREOF, Landlord and Tenant have executed this Work Letter as
of the respective dates set forth below.
TENANT LANDLORD
BOCA GLOBAL INC., BORDEAUX PARTNERS LLC,
a Florida corporation a California limited liability company
By: /s/ ANTHONY ZALENSKI By: Menlo Equities LLC, a California
------------------------------- limited liability company,
Anthony Zalenski, President and its Managing Member
Chief Executive Officer
By: /s/ R. MICHAEL BREWAR
------------------------------- By: /s/ [Signature Illegible], Member
R. Michael Brewar, Secretary --------------------------
Date of Execution Date of Execution
by Tenant: June 1, 1998 by Landlord: 6/2/98
------------------------ ---------------------
<PAGE> 38
SCHEDULE 1
IMPROVEMENTS
PRELIMINARY
BASIC DESCRIPTION OF TENANT IMPROVEMENTS
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------
WORKOUT ROOM
- --------------------------------------------------------------------------------------------
Nautilus & Lifecycle Area 25 by 30 o 30 ft wall mirrored
o TV/VCR hung on wall
- --------------------------------------------------------------------------------------------
RESTROOM CORE NEAR WORKOUT RM
- --------------------------------------------------------------------------------------------
Women's 50 x 25 o 4 Stalls w/vanities
o 2 Showers with Dressing/Locker Area
- --------------------------------------------------------------------------------------------
Men's 50 x 25 o 4 Stalls w/vanities
o 2 Showers with Dressing/Locker Area
- --------------------------------------------------------------------------------------------
ENGINEERING
- --------------------------------------------------------------------------------------------
Think Room 20 by 20 o Whiteboard on three walls
- --------------------------------------------------------------------------------------------
Open Cube Area TBA o For 20 cubes (8 x 10)
- --------------------------------------------------------------------------------------------
Hardware Director 12 by 14 o Office
- --------------------------------------------------------------------------------------------
Software Director 12 by 14 o Office
- --------------------------------------------------------------------------------------------
Quality Manager 11 by 13 o Office
- --------------------------------------------------------------------------------------------
QA Lab 24 by 18 o Vinyl Tile
o Additional AC with Temp Control
- --------------------------------------------------------------------------------------------
Hardware/Misc. Lab 46 x 33 o 1/2 wall separation to split room in 2
o ESD Flooring on Hardware Lab Side
o Vinyl Tile on Misc. Lab side
- --------------------------------------------------------------------------------------------
Library 20 by 12 o Bookcases around perimeter with
Conference Room table in center
- --------------------------------------------------------------------------------------------
Document Storage Area TBA o Med. Area
- --------------------------------------------------------------------------------------------
Copy/Fax/Printer Area TBA o Small Area
- --------------------------------------------------------------------------------------------
Conference Rm. TBA o Conference Room
- --------------------------------------------------------------------------------------------
Kitchenette TBA o Cabinets/Counter
o Full Size Sink with Hot/Cold Water
o Full Size Refrigerator
o Microwave/Toaster
o Vending Machine
- --------------------------------------------------------------------------------------------
LOBBY AREA
- --------------------------------------------------------------------------------------------
Visitor Office 11 by 13 o Office
- --------------------------------------------------------------------------------------------
Lobby TBA o With Receptionist Desk/Counter
- --------------------------------------------------------------------------------------------
Board Room 22 by 15 o Board Room
- --------------------------------------------------------------------------------------------
Restroom Core TBA o Men's and Women's Bathrooms
- --------------------------------------------------------------------------------------------
</TABLE>
Boca-Global, Inc. 05/26/98
Page 1 of 3
<PAGE> 39
SCHEDULE 1
IMPROVEMENTS
PRELIMINARY
BASIC DESCRIPTION OF TENANT IMPROVEMENTS
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
GENERAL MGR/HUMAN RESOURCES
- -----------------------------------------------------------------------------------------------------
Exec. General Manager 14 by 16 o Window Office with room for small
conf. table
- -----------------------------------------------------------------------------------------------------
Administrative Site Mgr 11 by 13 o Office
- -----------------------------------------------------------------------------------------------------
Human Resource Area TBA o Sectioned Off with small orientations room,
Cube for one person. Confidential File Storage
- -----------------------------------------------------------------------------------------------------
Conference Room TBA o Conference Room
- -----------------------------------------------------------------------------------------------------
Copy/Fax/Printer Area TBA o Area
- -----------------------------------------------------------------------------------------------------
FINANCE/MARKETING/SALES
- -----------------------------------------------------------------------------------------------------
Finance Manager 11 by 13 o Office
- -----------------------------------------------------------------------------------------------------
Payroll Specialist 11 by 13 o Office
- -----------------------------------------------------------------------------------------------------
Finance Open Cube Area TBA o 5 occupied cubes (8x10)
o 3 vacant cubes (8x10)
- -----------------------------------------------------------------------------------------------------
Finance Lateral File Rm. TBA o Room
- -----------------------------------------------------------------------------------------------------
Copy Room/Office TBA o Room with lockable cabinets
Supply Storage
- -----------------------------------------------------------------------------------------------------
Conference Room TBA o Position closer to Finance
- -----------------------------------------------------------------------------------------------------
Finance/Marketing TBA o Area between Finance and Marketing large enough
Growth Area to expand either dept. by a total of 6 cubes
(8x10)
- -----------------------------------------------------------------------------------------------------
Marketing Manager 11 by 13 o Office (vacant presently)
- -----------------------------------------------------------------------------------------------------
Marketing Open Cube TBA o 3 Occupied Cubes (8x10)
Area o 1 Vacant Cube (8x10)
- -----------------------------------------------------------------------------------------------------
Storage/File Room TBA o To be shared by marketing and Sales
- -----------------------------------------------------------------------------------------------------
VP of Retail Sales 12 by 14 o Office
- -----------------------------------------------------------------------------------------------------
VP of Distribution Sales 12 by 14 o Office
- -----------------------------------------------------------------------------------------------------
Sales Open Cube Area TBA o 1 Occupied Cube (8x10)
o 2 Vacant Cubes (8x10)
- -----------------------------------------------------------------------------------------------------
CUSTOMER SVC/TECHNICAL SUPPORT
- -----------------------------------------------------------------------------------------------------
Training Room 25 by 20 o
- -----------------------------------------------------------------------------------------------------
Tech Support Manager 11 by 13 o Office
- -----------------------------------------------------------------------------------------------------
Tech Support Open Cube TBA o "Bull-Pen" style consisting of 21 low-wall cubes
Area (7'x6') surrounded by a high cube wall
- -----------------------------------------------------------------------------------------------------
Storage/File Room TBA o Room
- -----------------------------------------------------------------------------------------------------
</TABLE>
Boca-Global, Inc. 05/26/98
Page 2 of 3
<PAGE> 40
SCHEDULE 1
IMPROVEMENTS
PRELIMINARY
BASIC DESCRIPTION OF TENANT IMPROVEMENTS
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
OTHER AREAS
- ------------------------------------------------------------------------------------------------
Lunch Room TBA o Adjacent to "bay-door" that is glassed in.
o Vinyl Tile
- ------------------------------------------------------------------------------------------------
Electrical Room TBA o
- ------------------------------------------------------------------------------------------------
Server Room TBA o Raised Flooring (6") "used"
(Computer & Phone) o Small separate Security Room inside
server room.
- ------------------------------------------------------------------------------------------------
Shipping/Mail/Storage TBA o Large Open Room, able to hold nice cages
Room storage closets
o No Carpet
o Access to exterior door for receiving/shipping
small materials (no bay door necessary).
- ------------------------------------------------------------------------------------------------
</TABLE>
Boca-Global, Inc. 05/26/98
Page 3 of 3
<PAGE> 41
Confidential treatment has been requested by the Registrant for this page. The
omitted portions have been separately filed with the Commission.
1
<PAGE> 42
Confidential treatment has been requested by the Registrant for this page. The
omitted portions have been separately filed with the Commission.
2
<PAGE> 43
EXHIBIT E
PERMITTED HAZARDOUS MATERIALS
CHEMLIST.XLS Page 1
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
DEPT. MANUFACTURER PRODUCT NAME COMMON NAME MAIN INGREDIENT QTY
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
All Various Alcohol Alcohol Isopropyl Alcohol 10 gal
- -----------------------------------------------------------------------------------------------------
All WD-40 Corp WD-40 WD-40 Petrochemical 10 gal
- -----------------------------------------------------------------------------------------------------
R&D Tech Spray Minus 96 Freezer Cold Air Chlorodifluoromethane 3 gal
- -----------------------------------------------------------------------------------------------------
R&D Tech Spray 1676-12s Defluxer De-fluxer Dichlorofluoroethane 3 gal
- -----------------------------------------------------------------------------------------------------
R&D Kester Flux 135R Flux Alcohol Based 20 gal
- -----------------------------------------------------------------------------------------------------
R&D Microcare Corp Micro Care Genosolve Solvent Genesolve 2004 5 gal
- -----------------------------------------------------------------------------------------------------
R&D Various Solder Wire Solder Wire Lead/Rosin Core 80 lbs
- -----------------------------------------------------------------------------------------------------
R&D Various Solder Wick Solder Wick Copper 5 lbs
- -----------------------------------------------------------------------------------------------------
</TABLE>
This chemical inventory will be updated prior to occupancy and cross checked
with federal, state and local regulations to identify methods of compliance
with these agencies. All necessary documentation required by applicable
regulatory agencies will be forwarded for your review and files.
BOCA RESEARCH, INC. CONFIDENTIAL 5/26/98 Page 1
<PAGE> 44
EXHIBIT F
ENVIRONMENTAL REPORTS AND DOCUMENTS
o Phase I Report, Contact International Corporation, 1376 Bordeaux Drive,
Building No. 2 in Sunnyvale, California. Dated: January 20, 1995. By:
Seacor
o Environmental Site Assessment of 1380 Bordeaux Drive in Sunnyvale,
California. Dated: February 21, 1995. By: Seacor.
o Asbestos Survey Report at 1380 Bordeaux Drive, Sunnyvale, California.
Dated: February 21, 1995. By: Seacor.
o Cost Estimate for Above Ground Site Closure. Dated: December 7, 1995. By:
Steve Mitchell, Environmental Officer, Great Western Bank.
o Aboveground Facilities Closure Plan, Former Contact International
Corporation. 1376-1380 Bordeaux Drive in Sunnyvale, California (DRAFT).
Dated: September 20, 1996. By: Environmental Management Corporation.
o Aboveground Facility Post-Closure Report, Former Contact International
Corporation. Site 1376-1380 Bordeaux Drive in Sunnyvale, California. Letter
Dated: May 21, 1997, Report Dated: May 15, 1997. By: Environmental
Management Consultants.
o Phase II (actually Phase I Update) Update for the Former Contact
International Corporation Site Located at 1376-1380 Bordeaux Drive in
Sunnyvale, California. Dated: May 25, 1997. By: EMR.
o Hazardous Materials Facility Closure Application. Dated: June 6, 1997.
o Addendum to the Post-Closure Report: Overexcavation of Imported Soils and
Soil Evaluation, Disposal, and Site Restoration at the Former Contact
International Corporation Site 1376-1380 Bordeaux Drive, Sunnyvale,
California. Dated: June 10, 1997. By: Environmental Management Consultants.
o Assessment of Suspect Asbestos-Containing Materials at the Former Contact
International Building 1380 Bordeaux Drive, Sunnyvale, California. Dated:
June 18, 1997. By: Clayton.
o Summary of Soil and Groundwater Sampling and Analysis at 1376 and 1380
Bordeaux Drive in Sunnyvale, California. Dated: June 23, 1997. By: Clayton.
o Request for Regulatory Closure, 1376 and 1380 Bordeaux Drive in Sunnyvale,
California. Dated: August 5, 1997.
o Site Health and Safety Plan for Soil Excavation at 1380 Bordeaux Drive in
Sunnyvale, California. Dated: September 22, 1997. By: Clayton.
o Proposal to Conduct Soil Removal Activities at 1380 Bordeaux Drive in
Sunnyvale, California. Dated: November 7, 1997. Proposal No. 97SFOEMR337A.
By: Clayton.
o Soil Excavation and Removal at 1380 Bordeaux Drive in Sunnyvale,
California. Dated January 14, 1998. By: Clayton.
o Santa Clara Valley Water District Letter Dated May 6, 1998, regarding one
active monitoring well located at 1380 Bordeaux.
1.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
San Jose, California
December 6, 1999
