<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WEBSENSE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7373 51-0380839
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
10240 SORRENTO VALLEY ROAD
SAN DIEGO, CALIFORNIA 92121
(858) 320-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN B. CARRINGTON
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
WEBSENSE, INC.
10240 SORRENTO VALLEY ROAD
SAN DIEGO, CALIFORNIA 92121
(858) 320-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
RICHARD A. FINK, ESQ. MARGARET H. KAVALARIS, ESQ.
MICHAEL S. KAGNOFF, ESQ. SCOTT M. STANTON, ESQ.
JEFFREY C. THACKER, ESQ. MARTY B. LORENZO, ESQ.
BROBECK, PHLEGER & HARRISON LLP GRAY CARY WARE FREIDENRICH LLP
38 TECHNOLOGY DRIVE 4365 EXECUTIVE DRIVE, SUITE 1600
IRVINE, CALIFORNIA 92618 SAN DIEGO, CALIFORNIA 92121
(949) 790-6408 (858) 677-1400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
PROPOSED
TITLE OF EACH CLASS MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------
Common stock, $.01 par value................................ $60,000,000 $ 15,840
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION
8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
The information in this prospectus is not complete and may be changed.
Underwriters may not confirm sales of these securities until the
registration statement filed with the Securities and Exchange Commission
is effective. This prospectus is not an offer to sell these securities,
and we are not soliciting an offer to buy these securities, in any state
where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 28, 2000
PRELIMINARY PROSPECTUS
SHARES
WEBSENSE LOGO
COMMON STOCK
This is an initial public offering of common stock by Websense, Inc. The
estimated initial public offering price will be between $ and
$ per share.
------------------
Prior to this offering, there has been no public market for our common
stock. We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol WBSN.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Websense, Inc., before expenses................. $ $
</TABLE>
We have granted the underwriters an option for a period of 30 days to
purchase up to additional shares of common stock.
------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CHASE H&Q
SG COWEN
WIT CAPITAL CORPORATION
, 2000
<PAGE> 3
[COLOR ARTWORK AND GRAPHICS TO FOLLOW]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 7
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................................. 24
Business.................................................... 31
Management.................................................. 42
Principal Stockholders...................................... 53
Transactions with Related Parties........................... 55
Description of Capital Stock................................ 56
Shares Eligible for Future Sale............................. 60
Underwriting................................................ 62
Legal Matters............................................... 64
Experts..................................................... 64
Where You Can Find More Information......................... 64
Index to Financial Statements............................... F-1
</TABLE>
------------------------
We own or have rights to trademarks on tradenames that we use in
conjunction with the sale of our products and services. Websense is a registered
trademark that we own. Websense Enterprise, AfterWork and AfterWork.com are
trademarks that we own. This prospectus also contains trademarks and tradenames
of other companies.
------------------------
We use market data and industry forecasts in this prospectus, which we have
obtained from internal surveys, market research, publicly available information
and industry publications. Industry publications generally state that the
information they provide has been obtained from sources believed to be reliable,
but that the accuracy and completeness of such information is not guaranteed.
Similarly, we believe that the surveys and market research we or others have
performed are reliable, but we have not independently verified this information.
Neither we nor any of the underwriters represents that any such information is
accurate.
2
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including "Risk Factors" and the financial statements and
notes thereto, before making an investment decision.
WEBSENSE, INC.
We are the leading provider of employee Internet management solutions that
enable businesses to monitor, report and manage how their employees use the
Internet. Our Websense Enterprise solution gives business managers the ability
to implement Internet access policies for different users and groups within
their businesses, and supports their efforts to improve employee productivity,
conserve network bandwidth and mitigate potential legal liability. Our solution,
which is sold on a subscription basis, consists of a scalable, multi-platform
software application that references our proprietary database of Web site
addresses. As of January 31, 2000, our solutions were in use by more than 7,500
organizations in over 50 countries, including more than 200 of the Fortune 500
and over 25 of the Nikkei 225. Users of our solution include American Express
Company, Bell South Corporation, Coca-Cola Company, Compaq Computer Corporation,
Deloitte & Touche LLP, General Motors Corporation, International Business
Machines Corporation, JP Morgan & Co., Mobil Corporation, Pfizer Inc., Proctor &
Gamble Co., Siemens AG, Texas Instruments Incorporated and Toshiba Corporation.
The Internet has emerged as an important communications and commerce
platform for enterprises around the world. Many companies are using the Internet
to streamline business processes and enable business applications that are
accessed over the corporate network. These companies are making substantial
investments in Internet connectivity and are providing high-speed Internet
access to large numbers of their employees. The Internet has also become a
highly popular consumer medium for entertainment, information and commerce.
International Data Corporation, or IDC, a market research firm, projects that
the number of Internet users worldwide will reach 316 million by 2002. Because
Internet access in the workplace is fast, convenient and essentially free to
employees, employees tend to use their employers' Internet connections for
personal or recreational purposes during work hours. IDC estimates that between
30% and 40% of employee Internet activity in the workplace is non-work-related,
and that roughly 70% of non-business-related e-commerce is conducted through an
Internet connection at work. Employees' personal use of company Internet access
during business hours can result in lost employee productivity, increased
network bandwidth consumption and potential legal liability.
Given the Internet's increasingly important role as a business tool and its
continuing adoption as a consumer medium for entertainment, information and
commerce, management of employee Internet access is increasingly becoming a
priority for businesses worldwide. Our solution enables businesses to rapidly
implement and configure Internet access policies for specific groups, user types
and individuals within an organization. Our flexible and easy-to-use software
applications operate in conjunction with our proprietary database, which is
available for daily incremental downloads. The software component of our
solutions provides managers with policy options such as blocking Web sites
completely or partially, setting time periods for access, allowing access but
generating an exception report, or postponing access until after work hours. Our
database is organized in 54 categories and encompasses more than 800,000 Web
sites representing approximately 85 million Web page addresses. We add
approximately 2,000 newly categorized Web sites each business day using a
proprietary process of automated site collection, algorithmic classification and
manual verification. Websense Enterprise is easy to deploy and use, and has
minimal impact on an organization's information technology, or IT, department.
Our highly scalable solution requires no additional hardware and supports a
broad range of network platforms, including leading proxy servers, firewalls and
cache engines.
3
<PAGE> 6
Our primary strategic objective is to maintain and strengthen our position
as the leading provider of employee Internet management solutions. We plan to
achieve this objective by pursuing both subscription renewals and
enterprise-wide deployment of our solution within existing customers. We also
believe that by using our installed base of large, established companies as
reference accounts, we can attract new customers and deepen our market
penetration. We also intend to expand our global network of more than 450
value-added resellers, or VARs, and distributors which include AT&T Corporation,
GTE Network Services, Unipalm and UUNET Technologies, Inc. We plan to leverage
our key relationships with original equipment manufacturers, or OEMs, and
technology providers such as CacheFlow Inc., Check Point Software Technologies
Ltd., Cisco Systems, Inc., Inktomi Corporation and Nokia Corporation. We also
plan to expand the functionality of Websense Enterprise, further develop our
database-building technologies and capitalize on incremental revenue
opportunities through the introduction of new products and databases.
Our business was founded in 1994 as NetPartners Internet Solutions, a
reseller of computer network security solutions. In 1996, we released Websense
Internet Screening System, our first product as a software developer, and, in
1999, we changed our name to Websense, Inc.
We maintain a Web site at www.websense.com. Information contained on our
Web site does not constitute part of this prospectus. Our principal executive
offices are located at 10240 Sorrento Valley Road, San Diego, California 92121,
and our telephone number is (858) 320-8000.
4
<PAGE> 7
THE OFFERING
Common stock offered by us ................. shares
Common stock to be outstanding after this
offering.................................... shares
Use of proceeds............................. Selling and marketing, research
and development, operating
losses, working capital and
general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market Symbol...... WBSN
This table is based on shares outstanding as of December 31, 1999, and
excludes the following:
- 3,161,551 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price of $0.83 per share;
- 112,500 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.69 per share; and
- 336,328 shares of common stock available for future issuance under our
various stock plans.
Except as otherwise indicated, all information in this prospectus is based
on the following assumptions:
- the conversion of each outstanding share of preferred stock into one
share of common stock upon completion of this offering;
- no exercise of the underwriters' overallotment option; and
- amendments to our certificate of incorporation and bylaws to be effective
upon completion of this offering.
5
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary financial data for our company. You
should read this information together with the financial statements and the
notes to those statements appearing elsewhere in this prospectus and the
information under "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997 1998 1999
---- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Subscriptions...................................... $ -- $ 14 $ 637 $ 2,503 $ 7,141
Other products and services........................ 882 2,576 4,383 4,416 1,506
---- ------ ------- ------- -------
Total revenues................................ 882 2,590 5,020 6,919 8,647
---- ------ ------- ------- -------
Gross margin......................................... 404 1,021 1,588 2,459 6,372
Income (loss) from operations........................ 276 31 (1,427) (5,642) (9,479)
Net income (loss).................................... 276 27 (1,462) (5,609) (9,254)
Historical net income (loss) per share:
Basic and diluted(1)............................... -- $ 0.00 $ (0.21) $ (0.80) $ (1.25)
==== ====== ======= ======= =======
Weighted average shares -- basic and diluted....... -- 7,000 7,000 7,000 7,403
==== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $10,735 $
Working capital............................................. 5,222
Total assets................................................ 16,756
Deferred revenue............................................ 11,593 11,593
Long-term debt.............................................. 1,497 1,497
Total stockholders' equity.................................. 1,642
</TABLE>
The pro forma as adjusted column in the balance sheet data reflects:
- the conversion of all of our outstanding preferred stock into common
stock upon completion of this offering; and
- our sale of shares of common stock at an assumed initial public
offering price of $
per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses that we will pay.
- ---------------
(1) See Note 1 of "Notes to Financial Statements" for a description of the
computation of per share information. We have not presented share and per
share data for 1995 because we operated as a sole proprietorship during that
period.
6
<PAGE> 9
RISK FACTORS
You should carefully consider the following risk factors in addition to
other information in this prospectus before purchasing our common stock. The
risks and uncertainties described below are those that we currently deem to be
material and that we believe are specific to our company, our industry and this
offering. If any of these or other risks actually occur, the trading price of
our common stock could decline, and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND, BECAUSE WE EXPECT OUR OPERATING EXPENSES TO
INCREASE IN THE FUTURE, WE MAY NEVER BECOME PROFITABLE.
We have experienced net losses in each of the last 12 fiscal quarters, and
as of December 31, 1999, we had an accumulated deficit of $16.4 million. We
expect to continue to incur net losses for at least the next several quarters.
While we are unable to predict accurately our future operating expenses, we
currently expect these expenses to increase substantially, as we, among other
things:
- expand our domestic and international selling and marketing activities;
- increase our research and development efforts to upgrade our existing
solutions and develop new products and technologies;
- develop and expand our proprietary database and systems;
- upgrade our operational and financial systems, procedures and controls;
- hire additional personnel, including additional engineers and other
technical staff; and
- assume the responsibilities of being a public company.
We will need to significantly increase our revenues to achieve and maintain
profitability. If we fail to increase revenues from subscription fees to
Websense Enterprise, we will continue to experience losses indefinitely.
Although our revenues have grown in recent quarters, we may not be able to
continue this growth or achieve or maintain profitability. We also may fail to
accurately estimate and assess our increased operating expenses as we grow. If
our operating expenses exceed our expectations, our financial performance will
be adversely affected, which could cause the price of our common stock to
decline.
WE ARE AN EARLY-STAGE COMPANY WITH AN UNPROVEN BUSINESS MODEL, WHICH MAKES IT
DIFFICULT TO EVALUATE OUR CURRENT BUSINESS AND FUTURE PROSPECTS.
We have only a limited operating history upon which to base an evaluation
of our current business and future prospects. We began offering our employee
Internet management solutions in September 1996, but only since May 1998 have we
directed a majority of our focus on these solutions. We introduced the most
recent version of Websense Enterprise in December 1999. The revenue and income
potential of our business and our market are unproven. In addition, because of
our limited operating history and because the market for employee Internet
management solutions is relatively new and rapidly evolving, we have limited
insight into trends that may emerge and affect our business. We may make errors
in predicting and reacting to relevant business trends, which could harm our
business. Before investing, you should consider an investment in our stock in
light of the risks, uncertainties and difficulties frequently encountered by
early-stage companies in new and rapidly evolving markets such as ours. We may
not be able to successfully address any or all of these risks. Failure to
adequately do so could cause our business, results of operations and financial
condition to suffer.
7
<PAGE> 10
BECAUSE WE EXPECT TO DERIVE SUBSTANTIALLY ALL OF OUR FUTURE REVENUE FROM
SUBSCRIPTION FEES FOR WEBSENSE ENTERPRISE, ANY FAILURE OF THIS SOLUTION TO
SATISFY CUSTOMER DEMANDS OR TO ACHIEVE MORE WIDESPREAD MARKET ACCEPTANCE WILL
SERIOUSLY HARM OUR BUSINESS.
Substantially all of our revenues come from subscriptions for Websense
Enterprise, and we expect this trend will continue for the foreseeable future.
As a result, if for any reason revenues from our solutions decline or do not
grow as rapidly as we anticipate, our operating results and our business will be
significantly impaired. If Websense Enterprise fails to meet the needs of our
target customers, or if it does not compare favorably in price and performance
to competing solutions, our growth will be limited. We cannot assure you that
our solution will achieve continued market acceptance. Our future financial
performance also will depend, in part, on our ability to diversify our offerings
by successfully developing, introducing and gaining customer acceptance of new
solutions and enhanced versions of Websense Enterprise. We cannot assure you,
however, that we will be successful in achieving market acceptance of any new
solutions that we develop or of enhanced versions of Websense Enterprise. Any
failure or delay in diversifying our existing offerings could harm our business,
results of operations and financial condition.
THE MARKET FOR EMPLOYEE INTERNET MANAGEMENT SOLUTIONS IS EMERGING, AND IF WE ARE
NOT SUCCESSFUL IN PROMOTING AWARENESS OF THE NEED FOR OUR SOLUTION AND OF OUR
WEBSENSE BRAND, OUR GROWTH MAY BE LIMITED.
We believe that many corporations are unaware of the existence or scope of
problems caused by employee misuse of the Internet. In addition, there may be a
time-limited opportunity to achieve and maintain a significant share of the
market for employee Internet management solutions due in part to the emerging
nature of this market and the substantial resources available to our existing
and potential competitors. We are committing significant resources to promote
awareness of the problems caused by employee misuse of Internet access in the
workplace, but we cannot assure you that we will be successful in this effort.
If employers do not recognize or acknowledge these problems, then the market for
our solution may develop more slowly than we expect, which could adversely
affect our operating results. Developing and maintaining awareness of our
Websense brand is critical to achieving widespread acceptance of our existing
and future employee Internet management solutions. Furthermore, we believe that
the importance of brand recognition will increase as competition in our market
develops. Successful promotion of our Websense brand will depend largely on the
effectiveness of our marketing efforts and on our ability to develop reliable
and useful products at competitive prices. As a result, we plan to increase our
financial commitment to creating and maintaining brand awareness among potential
customers. If we fail to successfully promote our Websense brand, or if our
expenses to promote and maintain our Websense brand are greater than
anticipated, our results of operations and financial condition could suffer.
WE MUST DEVELOP AND EXPAND OUR INDIRECT SALES CHANNELS TO INCREASE REVENUE AND
IMPROVE OUR OPERATING RESULTS.
We currently sell our products both indirectly and directly, however, we
intend to rely increasingly on our indirect sales channels. We depend on our
indirect sales channels, including value-added resellers, or VARs, distributors,
original equipment manufacturers, or OEMs, and Internet service providers, to
offer Websense Enterprise to a larger customer base than we can reach through
our direct sales efforts. We will need to expand our existing relationships and
enter into new relationships to increase our current and future market share and
revenue. We cannot assure you that we will be able to maintain and expand our
existing relationships or enter into new relationships, or that any new
relationships will be available on commercially reasonable terms. If we are
unable to maintain and expand our existing relationships or enter into new
relationships, we would lose customer introductions and co-marketing benefits
and our operating results could suffer.
8
<PAGE> 11
OUR RELIANCE ON INDIRECT SALES CHANNELS COULD RESULT IN REDUCED REVENUE GROWTH
BECAUSE WE HAVE LITTLE CONTROL OVER OUR INDIRECT CHANNEL PARTNERS.
Our indirect sales channels accounted for approximately 70% of our total
revenues in 1999. We anticipate that sales from our various indirect channel
partners, including VARs, distributors, OEMs, Internet service providers and
other partners, will account for an increasing percentage of our total revenues
in future periods. None of our indirect channel partners is obligated to
continue selling our solutions or to make any purchases from us. Our ability to
generate increased revenue depends significantly upon the ability and
willingness of our channel partners to market and sell our solutions to
organizations worldwide. If they are unsuccessful in their efforts, our
operating results will suffer. We cannot control the level of effort these
channel partners expend or the extent to which any of them will be successful in
marketing and selling our solutions. Many of our channel partners also market
and sell products that compete with Websense Enterprise. We may not be able to
prevent these channel partners from devoting greater resources to support our
competitors' products.
WE FACE INCREASING COMPETITION FROM BETTER ESTABLISHED COMPANIES THAT MAY HAVE
SIGNIFICANTLY GREATER RESOURCES, WHICH COULD PREVENT US FROM INCREASING
REVENUE OR ACHIEVING OR SUSTAINING PROFITABILITY.
The market for our solutions is intensely competitive and is likely to
become even more so in the future. Increased competition could result in pricing
pressures, reduced sales, reduced margins or the failure of Websense Enterprise
to achieve or maintain more wide-spread market acceptance, any of which would
have a material adverse effect on our business, results of operations and
financial condition. Our current principal competitors include:
- companies offering network filtering products, such as JSB Software
Technologies plc., N2H2 Incorporated, Secure Computing Corporation and
Symantec Corporation;
- companies offering network reporting products, such as Telemate Net
Software, Inc. and WebTrends Corporation; and
- companies offering client-based software filtering products, such as The
Learning Company and Log-On Data Corporation.
We also face current and potential competition from vendors of Internet servers,
operating systems and networking hardware, many of which now, or may in the
future, develop and/or bundle employee Internet management solutions with their
products. We also compete against, and expect increased competition from,
traditional network management software developers and Web management service
providers. Many of our current and potential competitors enjoy substantial
competitive advantages, such as:
- greater name recognition and larger marketing budgets and resources;
- established marketing relationships and access to larger customer bases;
and
- substantially greater financial, technical and other resources.
As a result, they may be able to respond more quickly and effectively than we
can to new or changing opportunities, technologies, standards or customer
requirements. For all of the foregoing reasons, we may not be able to compete
successfully against our current and future competitors. See "Business --
Competition" for additional information regarding our competition.
9
<PAGE> 12
OUR FUTURE GROWTH DEPENDS ON OUR EXISTING CUSTOMERS RENEWING AND PURCHASING
ADDITIONAL SUBSCRIPTIONS TO WEBSENSE ENTERPRISE.
Our future success depends on achieving high customer renewal rates for
subscriptions to Websense Enterprise. Subscription agreements for our solutions
typically have a duration of 12, 24 or 36 months. Our customers have no
obligation to renew their subscriptions upon expiration. We cannot assure you
that we will continue to experience high renewal rates. In order to maintain our
revenues we must continue to sell renewal subscriptions to our existing
customers.
Our future success also depends on our ability to sell subscriptions to
existing customers for additional employees within their respective
organizations. Initial orders from customers often cover only a small percentage
of the total number of their employees who have Internet access. As a result, to
maintain and increase our revenues we must sell our existing customers
additional subscriptions for Websense Enterprise. This may require increasingly
sophisticated sales efforts targeting senior management and other management
personnel associated with our customers' Internet infrastructure.
OUR DATABASE CATEGORIES AND OUR PROCESS FOR CLASSIFYING WEB SITES WITHIN THOSE
CATEGORIES ARE SUBJECTIVE, AND WE MAY NOT BE ABLE TO CATEGORIZE WEB SITES IN
ACCORDANCE WITH OUR CUSTOMERS' EXPECTATIONS.
We may not succeed in accurately categorizing Internet content to meet our
customers' expectations. We rely upon a combination of automated filtering
technology and human review to categorize Web sites in our proprietary database.
Our customers may not agree with our determinations that particular Web sites
should be included or not included in specific categories of our database. In
addition, it is possible that our filtering processes may place objectionable
material in categories that are generally unrestricted by our users' Internet
access policies, which could result in employees having access to such material
in the workplace. Any miscategorization could result in customer dissatisfaction
and harm our reputation. Furthermore, we select our categories based on Web site
content we believe employers want to manage. We may not now, or in the future,
succeed in properly identifying the categories of Web site content that
employers want to manage. Any failure to effectively categorize and filter Web
sites according to our customers' expectations will impair the growth of our
business and our efforts to increase brand acceptance.
OUR DATABASE MAY FAIL TO KEEP PACE WITH THE RAPID GROWTH AND TECHNOLOGICAL
CHANGE OF THE INTERNET.
The success of Websense Enterprise depends on the breadth and accuracy of
our database. Although our database currently catalogs more than 800,000 Web
sites, it contains only a fraction of the material available on the Internet. In
addition, the total number of Web sites is growing rapidly, and we expect this
rapid growth rate to continue in the future. We cannot assure you that our
database and database technologies will be able to keep pace with the growth in
the number of Web sites, especially the growing number of Web sites containing
foreign languages. Further, the ongoing evolution of the Internet will require
us to continually improve the functionality, features and reliability of our
database. Because Websense Enterprise can only manage access to Web sites
included in our database, if our database does not contain a meaningful portion
of relevant Web sites, the effectiveness of our solution will be significantly
diminished. Any failure of our database to keep pace with the rapid growth and
technological change of the Internet will impair the market acceptance of our
Websense Enterprise products, which in turn will harm our business, results of
operations and financial condition.
10
<PAGE> 13
OUR RECENT GROWTH HAS STRAINED OUR EXISTING PERSONNEL AND INFRASTRUCTURE
RESOURCES, AND IF WE ARE UNABLE TO IMPLEMENT APPROPRIATE CONTROLS AND
PROCEDURES TO MANAGE OUR GROWTH, WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT
OUR BUSINESS PLAN.
We are currently experiencing a period of rapid growth in our operations,
which has placed, and will continue to place, a significant strain on our
resources. Our future success will depend, in part, upon the ability of our
senior management to manage growth effectively. This will require us to:
- hire and train additional personnel in the United States and
internationally;
- implement additional management information systems; and
- further develop our administrative, financial and accounting systems and
controls.
Any failure to successfully manage our growth could distract management
attention, and result in our failure to execute on our business plan.
IF WE ACQUIRE ANY COMPANIES OR TECHNOLOGIES IN THE FUTURE, THEY COULD PROVE
DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND
ADVERSELY AFFECT OUR OPERATING RESULTS.
We may acquire or make investments in complementary companies, services and
technologies in the future. We have not made any acquisitions or investments to
date, and therefore our ability as an organization to make acquisitions or
investments is unproven. If we fail to properly evaluate and execute
acquisitions and investments, our business and prospects may be seriously
harmed. To successfully complete an acquisition, we must:
- properly evaluate the technology;
- accurately forecast the financial impact of the transaction, including
accounting charges and transaction expenses;
- integrate and retain personnel;
- combine potentially different corporate cultures; and
- effectively integrate products and research and development, selling and
marketing and support operations.
If we fail to do any of these, we may suffer losses or our management may
be distracted from our day-to-day operations. In addition, if we finance
acquisitions by issuing convertible debt or equity securities, existing
stockholders may be diluted which could affect the market price of our stock.
WE ARE DEPENDENT ON OUR MANAGEMENT TEAM, AND THE LOSS OF ANY KEY MEMBER OF THIS
TEAM MAY PREVENT US FROM IMPLEMENTING OUR BUSINESS PLAN IN A TIMELY MANNER.
Our success depends largely upon the continued services of our executive
officers and other key management and development personnel. In particular, we
rely on John B. Carrington, our President, Chief Executive Officer and Chairman.
We are also substantially dependent on the continued service of our existing
engineering personnel because of the complexity of our products and
technologies. We do not have employment agreements with a majority of our
executive officers, key management or development personnel and, therefore, they
could terminate their employment with us at any time without penalty. We do not
maintain key person life insurance policies on any of our employees. The loss of
one or more of our key employees could seriously harm our business, results of
operations and financial condition. We cannot assure you that in such an event
we would be able to recruit personnel to replace these individuals in a timely
manner, or at all, on acceptable terms.
11
<PAGE> 14
OUR MANAGEMENT TEAM WAS ONLY RECENTLY FORMED, AND OUR SUCCESS DEPENDS ON ITS
ABILITY TO WORK TOGETHER EFFECTIVELY.
We hired Mr. Carrington in May 1999 and Douglas C. Wride, our Chief
Financial Officer, in June 1999. In addition, a majority of our management team
has joined us in the last 18 months. Our future success depends on the
integration of this management team and its ability to work together
effectively. If our management team fails to work together effectively, our
business could be harmed.
BECAUSE COMPETITION FOR OUR TARGET EMPLOYEES IS INTENSE, WE MAY NOT BE ABLE TO
ATTRACT AND RETAIN THE HIGHLY SKILLED EMPLOYEES WE NEED TO SUPPORT OUR PLANNED
GROWTH.
To execute our growth plan, we must attract and retain highly qualified
personnel. We need to hire additional personnel in virtually all operational
areas, including selling and marketing, research and development, operations and
technical support, customer service and administration. Competition for these
personnel is intense, especially for engineers with high levels of experience in
designing and developing software and Internet-related products. We cannot
assure you that we will be successful in attracting and retaining qualified
personnel. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. Many of the companies with
which we compete for experienced personnel have greater resources than we have.
If we fail to attract new personnel or retain and motivate our current
personnel, our business and future growth prospects could be severely harmed.
SALES TO CUSTOMERS OUTSIDE THE UNITED STATES HAVE ACCOUNTED FOR A SIGNIFICANT
PORTION OF OUR REVENUE, AND WE EXPECT THIS TREND TO CONTINUE, WHICH EXPOSES US
TO RISKS INHERENT IN INTERNATIONAL SALES.
We market and sell our products outside the United States through VARs,
distributors and other resellers. International sales represented approximately
21% of our revenue in the year ended 1999. As a key component of our business
strategy, we intend to expand our international sales. In addition to the risks
associated with our domestic sales, our international sales are subject to the
following risks:
- dependence on foreign distributors and their sales channels;
- the ability of our Websense Enterprise products to properly categorize
and filter Web sites containing foreign languages;
- laws and business practices favoring foreign competitors;
- compliance with multiple, conflicting and changing governmental laws and
regulations, including tax laws and regulations;
- longer accounts receivable payment cycles and other collection
difficulties; and
- regional economic and political conditions.
Such factors could have a material adverse effect on our future international
sales. Any reduction in international sales, or our failure to further develop
our international distribution channels, could have a material adverse effect on
our business, results of operations and financial condition. Our international
revenue is currently denominated in U.S. dollars. As a result, fluctuations in
the value of the U.S. dollar and foreign currencies may make our solutions more
expensive for international customers, which could harm our business. We do not
currently engage in currency hedging activities to limit the risk of exchange
rate fluctuation.
12
<PAGE> 15
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND THESE
FLUCTUATIONS MAY CAUSE OUR STOCK PRICE TO FALL.
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. We plan to significantly increase
our operating expenses as we, among other things, expand our selling and
marketing activities, increase our research and development efforts and hire
additional personnel. Our operating results could fluctuate during certain
periods, including those in which we experience:
- high commission expenses;
- a concentration of marketing expenses for marketing activities, such as
trade shows and advertising campaigns; and
- a concentration of general and administrative expenses, such as
recruiting expenses and professional services fees.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our results of operations are not meaningful and should not be
relied upon as indicators of our future performance. It is possible that in some
future periods, our results of operations may be below the expectations of
public-market analysts and investors. If this occurs, the price of our common
stock may decline.
ANY FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD IMPAIR OUR ABILITY
TO PROTECT OUR PROPRIETARY TECHNOLOGY AND ESTABLISH OUR WEBSENSE BRAND.
Intellectual property is critical to our success, and we rely upon
trademark, copyright and trade secret laws in the United States and other
jurisdictions as well as confidentiality procedures and contractual provisions
to protect our proprietary technology and our Websense brand. Websense is a
registered United States trademark. We also have applied to register AfterWork
and AfterWork.com as trademarks. These trademark applications may not be
granted. In addition, any of our trademarks may be challenged by others or
invalidated through administrative process or litigation. We currently have no
issued patents. We have two patent applications pending in the United States and
two international patent applications pending which relate to our proprietary
database-building and filtering technologies. These patent applications or any
new patent applications we file may not result in issued patents. In addition,
any issued patents may not provide us with any competitive advantages, or may be
challenged by third parties. Furthermore, legal standards relating to the
validity, enforceability and scope of protection of intellectual property rights
is uncertain. Effective patent, trademark, copyright and trade secret protection
may not be available to us in every country in which our solutions are
available. The laws of some foreign countries may not be as protective of
intellectual property rights as United States laws, and mechanisms for
enforcement of intellectual property rights may be inadequate. As a result, we
cannot assure you that our means of protecting our proprietary technology and
brands will be adequate. Furthermore, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating our intellectual
property. Any such infringement or misappropriation could have a material
adverse effect on our business, results of operations and financial condition.
See "Business -- Intellectual Property Rights."
WE MAY BE SUED BY THIRD PARTIES FOR ALLEGED INFRINGEMENT OF THEIR PROPRIETARY
RIGHTS.
The software and Internet industries are characterized by the existence of
a large number of patents, trademarks and copyrights and by frequent litigation
based on allegations of patent infringement or other violations of intellectual
property rights. As the number of entrants into our market increases, the
possibility of an intellectual property claim against us grows. Our technologies
and solutions may not be able to sustain any third-party claims or rights
against their use. Any intellectual property claims, with or
13
<PAGE> 16
without merit, could be time-consuming and expensive to litigate or settle, and
could divert management attention from executing our business plan.
WE MAY NOT BE ABLE TO DEVELOP ACCEPTABLE NEW SOLUTIONS OR ENHANCEMENTS TO OUR
EXISTING SOLUTIONS AT A RATE REQUIRED BY OUR RAPIDLY CHANGING MARKET.
Our future success depends on our ability to develop new solutions or
enhancements to our existing solutions that keep pace with rapid technological
developments and that address the changing needs of our customers. Although
Websense Enterprise is designed to operate with a variety of network hardware
and software platforms, we will need to continuously modify and enhance Websense
Enterprise to keep pace with changes in Internet-related hardware, software,
communication, browser and database technologies. We may not be successful in
either developing such solutions or timely introducing them to the market. In
addition, uncertainties about the timing and nature of new network platforms or
technologies, or modifications to existing platforms or technologies, could
increase our research and development expenses. The failure of our products to
operate effectively with the existing and future network platforms and
technologies will limit or reduce the market for our products, result in
customer dissatisfaction and seriously harm our business, results of operations
and financial condition.
OTHER VENDORS MAY DEVELOP PRODUCTS SIMILAR TO OURS FOR INCORPORATION INTO THEIR
HARDWARE OR SOFTWARE, AND THEREBY REDUCE DEMAND FOR OUR SOLUTIONS.
In the future, vendors of Internet-related hardware and software may
enhance their products or develop separate products that include functions that
are currently provided by Websense Enterprise. If employee Internet management
functions become standard features of Internet-related hardware or software, the
demand for Websense Enterprise will decrease. Furthermore, even if Websense
Enterprise is more robust and accurate than the products offered by vendors of
Internet-related hardware or software, potential customers might accept this
limited functionality in lieu of purchasing our solutions.
OUR SYSTEMS MAY BE VULNERABLE TO SECURITY RISKS OR SERVICE DISRUPTIONS THAT
COULD HARM OUR BUSINESS.
Our servers are vulnerable to physical or electronic break-ins and service
disruptions, which could lead to interruptions, delays, loss of data or the
inability to process customer requests. Such events could be very expensive to
remedy, could damage our reputation and could discourage existing and potential
customers from using our products. Although we have not experienced attempts at
electronic break-ins, we may experience break-ins in the future. Any such events
could substantially harm our business, results of operations and financial
condition.
BECAUSE OUR SOLUTIONS ARE COMPLEX AND ARE DEPLOYED IN A WIDE VARIETY OF COMPLEX
NETWORK ENVIRONMENTS, THEY MAY HAVE ERRORS OR DEFECTS THAT USERS IDENTIFY
AFTER DEPLOYMENT, WHICH COULD HARM OUR REPUTATION AND OUR BUSINESS.
Solutions as complex as ours frequently contain undetected errors when
first introduced or when new versions or enhancements are released. We have from
time to time found errors in versions of Websense Enterprise, and we may find
such errors in the future. The occurrence of errors could adversely affect sales
of our solutions, divert the attention of engineering personnel from our product
development efforts and cause significant customer relations problems.
14
<PAGE> 17
RISKS RELATED TO OUR INDUSTRY
EVOLVING REGULATION OF THE INTERNET MAY AFFECT US ADVERSELY.
As Internet commerce continues to evolve, increasing regulation by federal,
state or foreign agencies becomes more likely. Such regulation is likely in the
areas of user privacy, pricing, content and quality of products and services.
Taxation of Internet use or other charges imposed by government agencies or by
private organizations for accessing the Internet may also be imposed. Laws and
regulations applying to the solicitation, collection or processing of personal
or consumer information could affect our activities. Furthermore, any regulation
imposing fees for Internet use could result in a decline in the use of the
Internet and the viability of Internet commerce, which could have a material
adverse effect on our business, results of operations and financial condition.
THE SUCCESS OF OUR BUSINESS DEPENDS ON THE CONTINUED GROWTH AND ACCEPTANCE OF
THE INTERNET AS A BUSINESS TOOL.
Expansion in the sales of Websense Enterprise depends on the continued
acceptance of the Internet as a communications and commerce platform for
enterprises. This business model is not yet proven and may not be successful.
The Internet may not prove to be a viable commercial medium due to inadequate
development of the necessary infrastructure, such as a reliable network
backbone, or timely development of complementary products, such as high-speed
modems. Additionally, the Internet could lose its viability as a business tool
due to delays in the development or adoption of new standards and protocols to
handle increased demands of Internet activity, security, reliability, cost,
ease-of-use, accessibility, and quality-of-service. If the Internet does not
continue to become a widespread communications medium and commercial platform,
the demand for Websense Enterprise could be significantly reduced, which could
have a material adverse effect on our business, results of operations and
financial condition.
OUR SOLUTIONS CREATE RISKS OF POTENTIAL NEGATIVE PUBLICITY AND LEGAL LIABILITY.
Because customers rely on our solutions to provide employee Internet
management, any significant defects or errors in our products may result in
negative publicity or legal claims. Negative publicity or legal claims could
seriously harm our business, results of operations and financial condition. In
addition, our solutions' capability to report Internet data retrieval requests
and the workstations from which they originated may result in negative publicity
or legal claims based on potential privacy violations. Although our agreements
with customers typically indemnify us and contain provisions designed to limit
our exposure to potential legal liability, these limitation of liability
provisions may not be completely effective. We have not experienced any
liability claims to date, but we cannot assure you that we will not face this
type of claim in the future. We maintain errors and omissions insurance, but we
cannot assure you that this insurance coverage will be adequate to cover us for
any claims.
WE OR OUR CUSTOMERS AND VENDORS MAY HAVE BEEN ADVERSELY AFFECTED BY THE
TRANSITION TO THE YEAR 2000 IN A MANNER THAT IS NOT YET APPARENT.
Although the date is now past January 1, 2000, and we have not experienced
immediate adverse impact from the transition to the Year 2000, we cannot provide
assurances that we, our customers or our vendors have not been affected in a
manner that is not yet apparent. In addition, some computer programs that were
date-sensitive to the Year 2000 may not have been programmed to process the Year
2000 as a leap year, and any negative consequential effects may remain unknown.
As a result, we will continue to monitor our Year 2000 compliance and the Year
2000 compliance of our customers and vendors. Due to the general uncertainty
inherent in the Year 2000 problem, especially the uncertainty regarding the Year
2000 compliance of our customers and vendors, we are unable to determine at this
time whether the
15
<PAGE> 18
Year 2000 problem will have a material adverse effect on our business, results
of operations and financial condition.
RISKS RELATED TO THIS OFFERING
OUR SENIOR MANAGEMENT TEAM HAS BROAD DISCRETION OVER THE USE OF THE PROCEEDS
FROM THIS OFFERING.
Our senior management team will have broad discretion with respect to the
use of the proceeds of this offering, and may use the proceeds for corporate
purposes that do not increase our profitability or our market value, or in ways
with which our stockholders may not agree. Presently, anticipated uses of the
proceeds of this offering and our existing cash balances include:
- domestic and international selling and marketing;
- research and development;
- development and expansion of our database technologies and systems;
- infrastructure and support improvements;
- strategic alliances and potential acquisitions; and
- operating losses and general working capital purposes.
We have not yet determined how we will use the proceeds of this offering or our
existing cash balance. Pending determination of how the proceeds and our
existing cash balance will be used, the proceeds of the offering will be
invested in short term, investment grade, interest-bearing securities that may
lose value. See "Use of Proceeds" for more information regarding our use of the
proceeds of this offering.
OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS OWN A LARGE
PERCENTAGE OF OUR VOTING STOCK AND COULD DELAY OR PREVENT A CHANGE IN OUR
CORPORATE CONTROL OR OTHER MATTERS REQUIRING STOCKHOLDER APPROVAL, EVEN IF
FAVORED BY OUR OTHER STOCKHOLDERS.
Immediately after this offering, our executive officers, directors and
principal stockholders, and their respective affiliates, will own approximately
% of our outstanding common stock. These stockholders, if acting
together, would be able to control substantially all matters requiring approval
by our stockholders, including the election of all directors and approval of
significant corporate transactions.
OUR FUTURE CAPITAL NEEDS ARE UNCERTAIN AND WE MAY NEED TO RAISE ADDITIONAL FUNDS
IN THE FUTURE, AND SUCH FUNDS MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS OR AT
ALL.
We expect that the proceeds of this offering, together with our existing
cash balances, will fund our operations for at least 12 months. We expect that
our operating expenses will increase substantially over this period. In
addition, we may experience a material decrease in liquidity due to unforeseen
capital requirements or other events and uncertainties. We also may enter into
business relationships that require us to make cash payments. As a result, we
may need to raise additional funds, and such funds may not be available on
favorable terms, if at all. Furthermore, if we issue equity or debt securities
to raise additional funds, our existing stockholders may experience dilution,
and the new equity or debt securities may have rights, preferences or privileges
senior to those of our existing stockholders. If we cannot raise funds on
acceptable terms, we may not be able to develop or enhance our solutions,
execute on our business plan, take advantage of future opportunities or respond
to competitive pressures or unanticipated requirements. This may seriously harm
our business, results of operations and financial condition.
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<PAGE> 19
NEW INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE TANGIBLE NET
BOOK VALUE OF THEIR SHARES.
We expect that the initial public offering price of our common stock will
significantly exceed the net tangible book value of our common stock. The net
tangible book value of one share of our common stock purchased at the assumed
initial public offering price of $ per share will be only $ . As a
result, investors purchasing common stock in this offering will incur dilution
of $ per share. In addition, we have issued options and warrants to acquire
common stock at prices significantly below the assumed initial public offering
price, the exercise of which will likely result in additional dilution when and
if they are exercised.
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND WE EXPECT THAT
ITS PRICE WILL BE VOLATILE.
Prior to this offering, there has been no public market for our common
stock, and we cannot assure you that an active public market for our common
stock will develop or be sustained after this offering. The initial public
offering price of our common stock will be determined by negotiation among us
and the representatives of the several underwriters based upon a number of
factors. As a result, the initial public offering price of our common stock may
not be indicative of the market price of our common stock following the
offering. The market price of our common stock is likely to be highly volatile
and could be subject to wide fluctuations in response to:
- announcements of technological innovations or new products or services by
us or our competitors;
- demand for Websense Enterprise, including changes in our customer renewal
percentages;
- fluctuations in expected revenues from our indirect sales channels;
- changes in our pricing policies or the pricing policies of our
competitors;
- quarterly variations in operating results;
- our technological capabilities to accommodate any future growth in our
operations or customers;
- changes in government regulations;
- changes in financial estimates by securities analysts or our failure to
meet or exceed analyst estimates; and
- other events or factors, many of which are beyond our control.
In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market price of the stock of
many Internet-related companies, and that often have been unrelated or
disproportionate to the operating performance of these companies. A number of
publicly traded Internet-related companies have current market prices below
their initial public offering prices. Market fluctuations such as these may
seriously harm the market price of our common stock. In the past, securities
class action suits have been filed following periods of market volatility in the
price of a company's securities. If such an action was instituted, we would
incur substantial costs and a diversion of management attention and resources,
which would seriously harm our business, results of operations and financial
condition.
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<PAGE> 20
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.
Some provisions of our certificate of incorporation and bylaws, as well as
some provisions of Delaware law, may discourage, delay or prevent third parties
from acquiring us, even if doing so would be beneficial to our stockholders. See
"Description of Capital Stock -- Anti-Takeover Effects of Certain Provisions of
Delaware Law and Our Certificate of Incorporation and Bylaws" for information
regarding when and how these provisions apply.
FUTURE SALES OF SHARES BY EXISTING STOCKHOLDERS COULD AFFECT OUR STOCK PRICE.
If our existing stockholders sell substantial amounts of our common stock
in the public market following this offering, the market price of our common
stock could fall, potentially resulting in substantial losses for our
stockholders. These sales also may make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. See "Shares Eligible for Future Sale."
WE DO NOT INTEND TO PAY DIVIDENDS.
Since we terminated our election to be treated as an "S" corporation in
January 1998, we have not declared or paid any cash dividends on our common
stock. We currently intend to retain any future earnings to fund growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy" for additional information regarding our dividend policy.
18
<PAGE> 21
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements we make in this prospectus are forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "expects," "plans,"
"intends," "anticipates," "believes," "estimates," "predicts," "potential" or
"continue" or similar terminology. These statements involve known and unknown
risks and uncertainties that may cause our actual results, levels of activity,
performance or achievements to differ materially from any expected results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. These factors include, among other things, those
listed under "Risk Factors" and in other sections of this prospectus. We cannot
guarantee any future results, levels of activity, performance or achievements.
Moreover, neither we nor anyone else assumes responsibility for the accuracy and
completeness of any forward-looking statements. We undertake no obligation to
update any of the forward-looking statements after the date of this prospectus.
19
<PAGE> 22
USE OF PROCEEDS
We estimate that the net proceeds of this offering will be approximately
$ million, based on an assumed initial public offering price of
$ per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us. If the underwriters
exercise the over-allotment option in full, we estimate that our net proceeds
will be $ , after deducting the estimated discounts, commissions and
expenses.
We plan to use the net proceeds of this offering, along with our existing
cash balance, for working capital and general corporate purposes. These will
include, but may not be limited to, expenditures for domestic and international
selling and marketing, product research and development, development and
expansion of our database technologies and systems, infrastructure and support
improvements and operating losses. We may also use a portion of the net proceeds
for acquisitions of businesses, products and technologies or the establishment
of strategic alliances that are complementary to our current and future
business. Although we have not identified any specific businesses, products or
technologies that we may acquire, and there are no current agreements or
understandings with respect to any such transactions, we may from time to time
evaluate such opportunities. The amounts actually used for such working capital
purposes may vary significantly and will depend on a number of factors,
including the amount of our future revenue and the other factors described under
"Risk Factors." Accordingly, we will retain broad discretion in the allocation
of the net proceeds of this offering. Pending the above described uses, we will
invest the net proceeds of this offering in interest-bearing, investment-grade
securities.
DIVIDEND POLICY
Since we terminated our election to be treated as an "S" corporation for
federal income tax purposes in January 1998, we have not declared or paid cash
dividends on shares of our capital stock. We currently intend to retain any
earnings to develop and expand our business, and do not anticipate paying cash
dividends in the foreseeable future. Any future determination with respect to
the payment of dividends will be at the discretion of our board of directors and
will depend upon, among other things, our operating results, financial condition
and capital requirements, the terms of then-existing indebtedness, general
business conditions and other factors our board of directors deems relevant.
20
<PAGE> 23
CAPITALIZATION
The following table summarizes our capitalization as of December 31, 1999:
- on an actual basis, and
- on a pro forma as adjusted basis to reflect:
- the conversion of all of our outstanding preferred stock into common
stock upon completion of this offering;
- an amendment to our certificate of incorporation to be effective upon
completion of this offering, that will, among other things, authorize a
class of undesignated preferred stock; and
- our sale of shares of common stock at an assumed initial
public offering price of $ per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses
that we will pay.
You should read this table together with our financial statements and
related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 1,497 $ 1,497
Stockholders' equity:
Convertible preferred stock, par value $0.01: 7,038,340
shares authorized and 7,037,036 shares issued and
outstanding, actual; 5,000,000 shares authorized and no
shares issued and outstanding, pro forma as adjusted... 70 --
Common stock, $0.01 par value: 100,000,000 shares
authorized and 8,357,662 issued and outstanding,
actual; 100,000,000 shares authorized and 15,394,698
shares issued and outstanding, pro forma as adjusted... 84
Additional paid-in capital................................ 20,484
Deferred compensation..................................... (2,585) (2,585)
Accumulated deficit....................................... (16,411) (16,411)
-------- --------
Total stockholders' equity........................... 1,642
-------- --------
Total capitalization.............................. $ 3,139 $
======== ========
</TABLE>
- -------------------------
This table excludes the following shares as of December 31, 1999:
- 3,161,551 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price $0.83 per share;
- 112,500 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.69 per share; and
- a total of 336,328 shares of common stock available for future issuance
under our various stock plans.
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<PAGE> 24
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $1.6 million, or $0.11 per share of common stock. Pro forma net
tangible book value per share is determined by dividing the amount of our total
tangible assets less our total liabilities by the pro forma number of shares of
common stock outstanding, after giving effect to the conversion of our
outstanding preferred stock. After giving effect to our sale of shares of common
stock at an assumed initial public offering price of $ per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses that we will pay, our adjusted pro forma net tangible book
value as of December 31, 1999 would have been $ million, or $ per
share. This amount represents an immediate increase in pro forma net tangible
book value to our existing stockholders of $ per share and an immediate
dilution to new investors of $ per share. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of December
31, 1999.................................................... $ 0.11
Increase per share attributable to new investors..........
--------
Adjusted pro forma net tangible book value per share after
this offering.............................................
--------
Dilution per share to new investors......................... $
========
</TABLE>
If the underwriters exercise their option to purchase additional shares in
this offering in full, our adjusted pro forma net tangible book value at
December 31, 1999 would have been $ million, or $ per share,
representing an immediate increase in pro forma net tangible book value to our
existing stockholders of $ per share and an immediate dilution to new
investors of $ per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 15,394,698 % $21,092,684 % $1.37
New investors....................
---------- ----- ----------- ------
Total............................ 100.0% $ 100.0%
========== ===== =========== ======
</TABLE>
The preceding discussion and tables assume no exercise of any stock options
or warrants outstanding as of December 31, 1999. As of December 31, 1999, there
were outstanding options to purchase a total of 3,161,551 shares of common stock
at a weighted average exercise price of $0.83 per share and outstanding warrants
to purchase a total of 112,500 shares of common stock at a weighted average
exercise price of $1.69 per share. To the extent any of these options or
warrants are exercised, there will be further dilution to our stockholders.
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<PAGE> 25
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
our financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus. We derived the statement of operations data for the years
ended December 31, 1997, 1998 and 1999 and the balance sheet data as of December
31, 1998 and 1999 from our financial statements audited by Ernst & Young LLP,
which appear elsewhere in this prospectus. We derived the balance sheet data as
of December 31, 1997 from our financial statements audited by Ernst & Young LLP,
which are not included in this prospectus. We derived the statement of
operations data for the years ended December 31, 1995 and 1996 and the balance
sheet data as of December 31, 1995 and 1996 from our unaudited financial
statements that are not included in this prospectus. We have prepared our
unaudited financial statements on the same basis as our audited financial
statements. In the opinion of our management, our unaudited financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information in those statements. Our
historical results are not necessarily indicative of operating results to be
expected in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
---- ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Subscriptions.................................... $ -- $ 14 $ 637 $ 2,503 $ 7,141
Other products and services...................... 882 2,576 4,383 4,416 1,506
---- ------ ------- ------- -------
Total revenues............................ 882 2,590 5,020 6,919 8,647
Cost of revenues:
Subscriptions.................................... -- 73 218 736 1,084
Other products and services...................... 479 1,496 3,214 3,724 1,191
---- ------ ------- ------- -------
Total cost of revenues.................... 479 1,569 3,432 4,460 2,275
---- ------ ------- ------- -------
Gross margin....................................... 403 1,021 1,588 2,459 6,372
Operating expenses:
Selling and marketing............................ 64 438 1,720 4,597 6,311
Research and development......................... 14 146 528 1,789 3,913
General and administrative....................... 49 406 767 1,715 3,805
Amortization of stock-based compensation......... -- -- -- -- 1,822
---- ------ ------- ------- -------
Total operating expenses.................. 127 990 3,015 8,101 15,851
---- ------ ------- ------- -------
Income (loss) from operations...................... 276 31 (1,427) (5,642) (9,479)
Interest income (expense).......................... -- (4) (35) 33 225
---- ------ ------- ------- -------
Net income (loss).................................. $276 $ 27 $(1,462) $(5,609) $(9,254)
==== ====== ======= ======= =======
Historical net income (loss) per share:
Basic and diluted(1)............................. $ -- $ 0.00 $ (0.21) $ (0.80) $ (1.25)
==== ====== ======= ======= =======
Weighted average shares -- basic
and diluted(1)................................. -- 7,000 7,000 7,000 7,403
==== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
---- ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ -- $ 41 $ 123 $ 1,753 $10,735
Working capital (deficit).......................... 189 87 (1,350) (377) 5,222
Total assets....................................... 242 837 1,625 4,355 16,756
Deferred revenue................................... -- 77 1,132 4,236 11,593
Long-term debt..................................... -- -- -- 496 1,497
Total stockholders' equity (deficit)............... 207 242 (1,340) (1,217) 1,642
</TABLE>
- ---------------
(1) See Note 1 of "Notes to Financial Statements" for a description of the
computation of per share information. We have not presented share and per
share data for 1995 because we operated as a sole proprietorship during that
period.
23
<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 the leading provider of employee Internet management solutions that
enable businesses to monitor, report and manage how their employees use the
Internet. Our Websense Enterprise solution supports an organization's efforts to
improve employee productivity, conserve network bandwidth and mitigate potential
legal liability. Our business was founded in 1994 as NetPartners Internet
Solutions, a reseller of computer network security solutions and related
services. In 1996, we released our first software product, Websense Internet
Screening System. Since that time, we have refocused our business on developing
and selling employee Internet management solutions, and no longer focus on our
software reselling and services business. In 1999 we changed our name to
Websense, Inc. and completed our change in business strategy. In the same year,
we expanded our senior management team, raised approximately $9.8 million in a
private round of financing and further strengthened our indirect sales channels
and business relationships. In December 1999, we released an enhanced and
redesigned version of our Websense Enterprise solution. We currently derive a
substantial majority of our revenues from subscriptions to this solution and
expect this trend to continue in the future.
Our business has grown since inception, with total revenues reaching $5.0
million in 1997, $6.9 million in 1998 and $8.6 million in 1999. During that
period, subscription revenue grew from 13% of revenue in 1997, to 36% in 1998
and 83% in 1999 due to our change in strategy and investment in developing and
marketing our software solutions. We have experienced net losses for the last
three fiscal years, and as of December 31, 1999, we had an accumulated deficit
of $16.4 million.
We offer Websense Enterprise on a subscription basis. When a purchase
decision is made, customers enter into a subscription agreement, which is
generally 12, 24 or 36 months in duration and for a fixed number of users. Upon
entering into the subscription agreement, we promptly invoice customers for
their subscriptions. Generally, payment is due for the full term of the
subscription within 30 days of invoice. We recognize revenue on a straight-line
basis over the term of the subscription agreement. We record amounts billed to
customers in excess of recognizable revenue as deferred revenue on our balance
sheet. As of December 31, 1999, we had $11.6 million of deferred revenue. Upon
expiration of the subscription, customers must resubscribe at our then current
rates to continue using our solution.
We also derive revenues from professional services for the implementation
of our solution and from resale of hardware and software. We recognize revenues
for these services and products upon their completion or delivery. These
revenues declined significantly in 1999 due to our shift in business strategy.
We expect these revenues to remain relatively constant in dollar volume and to
continue to decline as a percent of total revenues for the foreseeable future.
In 1999 we derived 21% of our revenues from international sales. We plan to
expand our international operations significantly, particularly in selected
countries in the European and Asia Pacific markets, because we believe
international markets represent a significant growth opportunity. Our
international revenues are denominated in U.S. dollars. Fluctuation in the value
of the U.S. dollar and foreign currencies may make our products more expensive,
and this could harm our business. We do not currently engage in currency hedging
activities to limit the risk of exchange rate fluctuation.
We currently sell our solutions through indirect and direct channels;
however, our strategy is to increasingly rely on our indirect sales channels.
Our indirect sales channels accounted for approximately
24
<PAGE> 27
70% of our subscription revenue in 1999 and we expect that this percentage will
increase in the future. Domestically, we sell our solutions through more than
350 Value Added Resellers, or VARs, and through our direct sales force.
Internationally, we distribute Websense Enterprise through more than 100
distributors and resellers in over 50 countries who resell our solution through
VARs and other resellers. In addition, we leverage the sales and marketing
capabilities of our original equipment manufacturers, or OEMs, and other key
providers of complementary hardware and software products.
Because we derive our revenues from subscription fees, we do not recognize
the entire amount of subscription fees received in the quarter the subscription
agreements are executed. However, we recognize our operating expenses as they
are incurred. Our operating expenses have increased more rapidly than our
revenues in recent periods due to expanded selling and marketing efforts and
investments in administrative infrastructure to support subscription sales that
we will recognize as revenue in subsequent periods. We anticipate that this
trend will continue and that our operating expenses, particularly selling and
marketing and general and administrative expenses, will grow at a faster rate
than our revenues in the near term.
In connection with the grant of stock options in 1999, we recorded an
aggregate of $4.4 million in deferred stock-based compensation within
stockholders' equity. These options were considered compensatory because the
deemed fair value, as determined solely for financial reporting purposes, was
greater than the exercise prices determined by the board of directors on the
date of grant. We are amortizing the deferred compensation on an accelerated
basis in accordance with Financial Accounting Standards Board, or FASB,
Interpretation No. 28 over the vesting period of the related options, which is
generally four years. As of December 31, 1999, we had an aggregate of $2.6
million of deferred stock-based compensation remaining to be amortized. This
deferred compensation balance will be amortized as follows: $1.5 million during
2000; $741,000 during 2001; $302,000 during 2002; and $33,000 during 2003. The
amount of stock-based compensation amortization actually recognized in future
periods could decrease if options for which accrued but unvested compensation
has been recorded are forfeited.
RESULTS OF OPERATIONS
The following table summarizes our operating results as a percentage of
total revenues for each of the periods shown.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Subscriptions............................................. 13% 36% 83%
Other products and services............................... 87 64 17
--- --- ----
Total revenues.................................... 100 100 100
Cost of revenues:
Subscriptions............................................. 4 11 13
Other products and services............................... 64 53 14
--- --- ----
Total cost of revenues............................ 68 64 27
Gross margin................................................ 32 36 73
Operating expenses
Sales and marketing....................................... 34 66 73
Research and development.................................. 11 26 45
General and administrative................................ 15 25 44
Amortization of stock-based compensation.................. -- -- 21
--- --- ----
Total operating expenses.......................... 60 117 183
--- --- ----
Income (loss) from operations............................... (28) (81) (110)
Interest income (expense), net.............................. (1) -- 3
--- --- ----
Net income (loss)........................................... (29)% (81)% (107)%
=== === ====
</TABLE>
25
<PAGE> 28
COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues
Subscriptions. Subscription revenue increased $4.6 million, or 185%, to
$7.1 million in 1999 from $2.5 million in 1998. Subscription revenue increased
$1.9 million, or 293%, in 1998 from $637,000 in 1997. Subscription revenue
accounted for 83% of total revenues in 1999 compared to 36% in 1998 and 13% in
1997. The increases in our subscription revenue in 1999 and 1998 were due
primarily to subscriptions from new customers and renewals by existing
customers. In addition, we experienced increased market acceptance of our
Websense Enterprise products which contributed to the increases in subscription
revenues from new customers.
Other products and services. Other products and services revenue decreased
$2.9 million, or 66%, to $1.5 million in 1999 from $4.4 million in 1998
representing a decrease as a percentage of total revenues from 64% to 17%. Other
products and services revenue increased by $33,000, or 1%, in 1998 as compared
to 1997, but decreased as a percentage of total revenues from 87% to 64%. For
both years the decrease as a percentage of total revenues was primarily due to
our decision to transition from a services organization and reseller of software
to a provider of subscription-based employee Internet management solutions.
Cost of Revenues
Cost of subscriptions. Cost of subscriptions consists of the costs of Web
site review, technical support and infrastructure costs associated with
maintaining our database. Cost of subscriptions increased $348,000, or 47%, to
$1.1 million in 1999 from $736,000 in 1998. Cost of subscriptions increased
$519,000, or 238%, in 1998 from $218,000 in 1997 to support the growth in
subscriptions. Cost of subscriptions as a percentage of subscription revenue
decreased to 15% in 1999 from 29% in 1998 and 34% in 1997. These decreases in
costs of subscription revenue as a percentage of subscription revenue for both
years were due to increased revenue.
Cost of other products and services. Cost of other products and services
consists primarily of the software and hardware that we resell and the salaries
and benefits of our professional services personnel. Cost of other products and
services decreased $2.5 million, or 68%, to $1.2 million in 1999 from $3.7
million in 1998 due to our shift in focus away from reselling hardware and
software. Cost of other products and services increased $509,000, or 16%, in
1998 from $3.2 million in 1997 due to increased costs of the hardware and
software that we resold. Cost of other products and services as a percentage of
products and services revenue decreased to 79% in 1999 from 84% in 1998 due to
decreased sales of low-margin hardware products. Cost of other products and
services as a percentage of other products and services revenue increased to 84%
in 1998 from 73% in 1997 primarily due to higher acquisition costs and increased
pricing pressure on the hardware and software that we resold.
Operating Expenses
Selling and marketing. Selling and marketing expenses consist primarily of
salaries, commissions and benefits related to personnel engaged in selling,
marketing and customer support functions, along with costs related to public
relations, advertising, promotions and travel. Selling and marketing expenses
increased $1.7 million, or 37%, to $6.3 million in 1999 from $4.6 million in
1998. Selling and marketing expenses increased $2.9 million, or 167%, in 1998
from $1.7 million in 1997. The increase in selling and marketing expenses in
1999 was primarily due to increases in headcount and promotional expenses, and
were partially offset by a decrease in advertising expenses. The increase in
selling and marketing expenses in 1998 was primarily due to increased spending
in advertising, headcount and other promotional costs. We expect our selling and
marketing expenses to increase as we add personnel to support our expanding
selling and marketing efforts.
Research and development. Research and development expenses consist
primarily of salaries and benefits for software developers, contract
programmers, facilities costs and equipment depreciation.
26
<PAGE> 29
Research and development expenses increased $2.1 million, or 116%, to $3.9
million in 1999 from $1.8 million in 1998. Research and development expenses
increased $1.3 million, or 239%, in 1998 from $528,000 in 1997. The increase in
research and development expenses in 1999 was primarily a result of increased
development efforts and enhancements to Websense Enterprise. The increase in
research and development expenses in 1998 was due to the expansion of our
development efforts beginning in May 1998 relating to the Websense Enterprise
solution.
General and administrative. General and administrative expenses consist
primarily of salaries, benefits and related expenses for our executive, finance,
human resources, information technology and administrative personnel, third
party professional service fees and allocated facilities and depreciation
expenses. General and administrative expenses increased $2.1 million, or 122%,
to $3.8 million in 1999 from $1.7 million in 1998. General and administrative
expenses increased $948,000, or 124%, in 1998 from $767,000 in 1997. These
increases in our general and administrative expenses in 1999 and 1998 were
primarily due to significant investments in increased headcount, facilities and
information technology made in the second half of 1998 and in 1999 to support an
expansion in the scope of our business. We expect general and administrative
expenses to increase in the future, reflecting growth in our operations and
increased expenses associated with being a public company.
Amortization of stock-based compensation. We recognized $1.8 million in
stock-based compensation expense for 1999 relating to the amortization of
deferred compensation. There was no amortization of stock-based compensation in
periods prior to 1999.
Interest Income (Expense), Net
Net interest income (expense) increased $192,000 to $225,000 in 1999 from
$33,000 in 1998. Net interest income (expense) increased $68,000 in 1998 from
$(35,000) in 1997. These increases are primarily due to interest income from the
investment of proceeds from our financings in 1999 and 1998.
Income Taxes
In January 1998, we terminated our election to be treated as an "S"
corporation for federal income tax purposes, and as a result we became subject
to income tax at the corporate level to the extent we generate taxable income.
We have not recorded an income tax benefit arising from our historical losses
because we have recorded a full valuation allowance against any deferred tax
assets available to us for use in future periods. Realization of these assets is
primarily dependent on generating taxable net income in the future.
QUARTERLY FINANCIAL DATA
The following tables set forth unaudited quarterly operating information
and financial data for each of the eight quarters in the period ending December
31, 1999. This data has been prepared on the same basis as the audited financial
statements contained elsewhere in this prospectus and, in the opinion of
management, includes all adjustments necessary for the fair presentation of the
information for the periods presented. This information should be read in
conjunction with the financial statements and notes thereto. The operating
results and financial data in any quarter are not necessarily indicative of the
results that may be expected for any future period.
During the first quarter of 1999, we sharply curtailed marketing activities
as part of a management transition in that quarter. This resulted in a
significant decrease in our selling and marketing expenses. We resumed our
selling and marketing activities in the second quarter of 1999, which led to a
significant increase in these expenses. Additionally, in the first quarter of
1999, we increased our reserves for doubtful accounts, which, together with
increased state franchise taxes and expenses recognized in connection with the
issuance of a warrant, resulted in a significant increase in our general and
administrative expenses for the period. We believe that future operating results
will be subject to quarterly fluctuations, and, as a result, we believe that
results of operations for interim periods should not be relied upon as any
indication
27
<PAGE> 30
of the results to be expected in any future period. We have incurred operating
losses during 1999, 1998 and 1997, and we cannot be certain that we will achieve
profitability on a quarterly or annual basis in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Subscriptions......................... $ 471 $ 553 $ 689 $ 790 $ 1,198 $ 1,542 $ 1,987 $ 2,414
Other products and services........... 1,293 1,633 893 597 469 392 343 302
------ ------- ------- ------- ------- ------- ------- -------
Total revenues...................... 1,764 2,186 1,582 1,387 1,667 1,934 2,330 2,716
Cost of revenues:
Subscriptions......................... 126 181 182 247 172 221 309 382
Other products and services........... 1,044 1,325 775 580 351 306 258 275
------ ------- ------- ------- ------- ------- ------- -------
Total cost of revenues.............. 1,170 1,506 957 827 523 527 567 657
------ ------- ------- ------- ------- ------- ------- -------
Gross margin............................ 594 680 625 560 1,144 1,407 1,763 2,059
Operating expenses:
Selling and marketing................. 712 1,458 1,164 1,263 933 1,614 1,574 2,190
Research and development.............. 190 394 570 636 678 748 1,109 1,378
General and administrative............ 329 281 527 577 1,016 835 937 1,017
Amortization of stock-based
compensation........................ -- -- -- -- 43 523 647 609
------ ------- ------- ------- ------- ------- ------- -------
Total operating expenses............ 1,231 2,133 2,261 2,476 2,670 3,720 4,267 5,194
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations........... (637) (1,453) (1,636) (1,916) (1,526) (2,313) (2,504) (3,135)
Interest income (expense), net.......... (12) (6) 37 14 16 (82) 174 117
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)....................... $ (649) $(1,459) $(1,599) $(1,902) $(1,510) $(2,395) $(2,330) $(3,018)
====== ======= ======= ======= ======= ======= ======= =======
Financial Data:
Deferred revenue at end of period....... $1,968 $ 2,348 $ 3,092 $ 4,236 $ 6,169 $ 7,452 $ 9,157 $11,593
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Subscriptions......................... 27% 25% 44% 57% 72% 80% 85% 89%
Other products and services........... 73 75 56 43 28 20 15 11
--- --- ---- ---- --- ---- ---- ----
Total revenues...................... 100 100 100 100 100 100 100 100
Cost of revenues:
Subscriptions......................... 7 8 11 18 10 11 13 14
Other products and services........... 59 61 49 42 21 16 11 10
--- --- ---- ---- --- ---- ---- ----
Total cost of revenues.............. 66 69 60 60 31 27 24 24
--- --- ---- ---- --- ---- ---- ----
Gross margin............................ 34 31 40 40 69 73 76 76
Operating expenses:
Selling and marketing................. 40 67 74 91 56 83 68 81
Research and development.............. 11 18 36 46 41 39 47 50
General and administrative............ 19 13 33 41 61 43 40 37
Amortization of stock-based
compensation........................ 0 0 0 0 3 27 28 22
--- --- ---- ---- --- ---- ---- ----
Total operating expenses............ 70 98 143 178 161 192 183 190
--- --- ---- ---- --- ---- ---- ----
Income (loss) from operations........... (36) (67) (103) (138) (92) (119) (107) (114)
Interest income (expense), net.......... (1) 0 2 1 1 (4) 7 4
--- --- ---- ---- --- ---- ---- ----
Net income (loss)....................... (37)% (67)% (101)% (137)% (91)% (123)% (100)% (110)%
=== === ==== ==== === ==== ==== ====
</TABLE>
28
<PAGE> 31
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through private
sales of equity securities and the use of short- and long-term debt. As of
December 31, 1999, we had cash and cash equivalents of $10.7 million, an
accumulated deficit of $16.4 million and $1.5 million of long-term debt, of
which $504,000 is current.
Net cash used in operating activities was $403,000 in 1999 as compared to
$3.1 million in 1998 and $129,000 in 1997. In 1999, the cash used in operations
reflects a net loss before depreciation and amortization of $6.8 million and an
increase in accounts receivable of $2.2 million, partially offset by an increase
in deferred revenue of $7.4 million, as well as increases in accounts payable
and accrued liabilities. In 1998 and 1997, cash used in operations was primarily
the result of our net losses, partially offset by increases in deferred revenue.
Net cash used in investing activities was $1.7 million in 1999, $937,000 in
1998 and $179,000 in 1997. Net cash used in investing activities consisted
primarily of capital expenditures, related to our investments in computer
equipment and facilities, which were required to support our business expansion.
Net cash provided by financing activities was $11.1 million in 1999 as
compared to $5.6 million in 1998 and $352,000 in 1997. In 1999, cash provided by
financing activities consisted primarily of $9.8 million received from the sale
of Series B Convertible Preferred Stock, $360,000 received from the exercise of
stock options and $1.3 million in proceeds from borrowings, reduced by $297,000
of repayments of notes payable. In 1998, cash provided by financing activities
consisted primarily of $5.7 million received from the sale of Series A
Convertible Preferred Stock and $467,000 in proceeds from borrowings, reduced by
$558,000 of repayments of notes payable. For 1997, cash provided by financing
activities consisted primarily of $590,000 in proceeds from borrowings, reduced
by $114,000 of repayments of notes payable.
We have term notes to Silicon Valley Bank which accrue interest at the
bank's floating prime rate plus 0.25% (8.75% at December 31, 1999) and which had
$553,000 outstanding at December 31, 1999. We are required to make monthly
payments of principal and interest through February 2002.
In May 1999, we established a line of credit with Silicon Valley Bank for
working capital advances, or borrowings, and stand-by letters of credit for up
to $1.0 million. Borrowings accrue interest at the bank's floating prime rate
plus 0.25% (8.75% at December 31, 1999). As of December 31, 1999, we had open
letters of credit under the line of $496,000. Any outstanding borrowings on the
line mature in May 2000. As of December 31, 1999, we had no borrowings
outstanding against the line.
In October 1999, we modified our May 1999 agreement to provide an
additional $1.0 million line of credit from Silicon Valley Bank to be used for
equipment and furniture purchases through April 2000. In October 1999, we drew
down $925,000 of the available line, which will be converted to a term note in
April 2000. There are no compensating cash requirements on the line, and
advances accrue interest at the bank's floating prime rate plus 1.0% (9.5% at
December 31, 1999). Beginning in April 2000, we are required to make monthly
payments of principal and interest through April 2003.
All borrowings under our agreements with Silicon Valley Bank are
collateralized by substantially all our assets, and are subject to certain
financial and restrictive covenants.
We believe that the net proceeds from this offering, together with our
existing cash and cash equivalents, will be sufficient to meet our anticipated
cash needs at least through the next 12 months. If cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek to
sell additional equity or debt securities or to obtain a larger credit facility.
The sale of additional equity or convertible debt securities would result in
additional dilution to our shareholders. Additional debt would result in
increased expenses and could result in covenants that would restrict our
operations. We have not made arrangements to obtain additional financing and
there is no assurance that financing, if required, will be available in amounts
or on terms acceptable to us, if at all.
29
<PAGE> 32
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs that are incurred
during the application development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. In the future, accounting for transactions under SOP 98-1
could result in significant amounts of computer software costs and Web site
development costs being capitalized.
In June 1998, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for derivative instruments
and hedging activities. The Statement will require the recognition of all
derivatives on our balance sheet at fair value. The FASB has subsequently
delayed implementation of the standard for the financial years beginning after
June 15, 2000. We expect to adopt the new Statement effective January 1, 2001.
The impact on our financial statements is not expected to be material.
INTEREST RATE RISK
We are exposed to changes in interest rates primarily from our long-term
debt arrangements and, secondarily, our investments in cash equivalents. Under
our current policies, we do not use interest rate derivative instruments to
manage exposure to interest rate changes. A hypothetical 100 basis point adverse
move in interest rates along the entire interest rate yield curve would not
materially affect the fair value of our interest sensitive financial instruments
at December 31, 1999.
YEAR 2000 IMPACT
The Year 2000 Issue
The year 2000 issue refers to the potential for disruption for business
activities caused by system failures or miscalculations which are triggered by
advancement of data records past the year 1999. Our business has not been
affected by year 2000 issues. However, we cannot assure you that we will not
experience any disruption related to year 2000 issues in the future. We are not
currently aware of any unresolved year 2000 problems relating to any of our
internal systems, nor do we believe that we have any significant systems that
are not year 2000 compliant. Based on our assessment to date, we do not expect
the total cost of year 2000 remediation to be material to our business. To date,
our preparation and remediation costs have been less than $100,000 and future
expenditures will not be significant.
30
<PAGE> 33
BUSINESS
COMPANY OVERVIEW
Websense is the leading provider of employee Internet management solutions
that enable businesses to monitor, report and manage how their employees use the
Internet. Our Websense Enterprise solution gives businesses the ability to
rapidly implement and configure Internet access policies in support of their
efforts to improve employee productivity, conserve network bandwidth and
mitigate potential legal liability. Our flexible and easy-to-use software
applications operate in conjunction with our proprietary database, which is
available for daily incremental downloads. This database is organized into 54
categories and encompasses more than 800,000 Web sites representing
approximately 85 million Web page addresses. Our database is updated with
approximately 2,000 newly categorized Web sites each business day using a
proprietary process of automated site collection, algorithmic classification and
manual verification. Websense Enterprise is easy to deploy and use, and has
minimal impact on an organization's information technology, or IT, department.
Our highly scalable solution requires no additional hardware and supports a
broad range of network platforms, including leading proxy servers, firewalls and
cache engines.
We sell our solution primarily through indirect sales channels, including
450 value-added resellers, or VARs, distributors and original equipment
manufacturers, or OEMs. Our customers include American Express, Bell South,
Coca-Cola, Compaq, Deloitte & Touche, General Motors, IBM, JP Morgan, Mobil,
Pfizer, Proctor & Gamble, Siemens, Texas Instruments and Toshiba, many of which
are Fortune 500 or Nikkei 225 companies.
INDUSTRY BACKGROUND
The Internet has emerged as a critical business tool and an important
communications and commerce platform for enterprises worldwide. As part of their
overall business strategies, many organizations are using the Internet to enable
business applications that are accessed over their corporate networks. Companies
utilize the Internet to optimize their extended supply chains, automate their
sales forces, track shipments and communicate with employees, customers,
partners and suppliers. Due to the efficiencies, cost-savings and competitive
advantages that can be gained by leveraging the Internet, many businesses are
spending aggressively to build out their computer networks and IT
infrastructure. According to International Data Corporation, or IDC, a market
research firm, business spending on basic Internet access alone is expected to
reach $12.2 billion by 2002. In order to accommodate a significant number of
simultaneous users and the increasing volume of data transfer associated with
enterprise Internet use, many organizations are making substantial investments
in high bandwidth connections such as dedicated T-1 lines, enabling high speed
Internet access.
The Internet has also become a highly popular consumer medium for
entertainment, information and commerce. IDC has projected that the number of
Internet users worldwide will grow from 103 million in 1998 to 316 million in
2002. This rapid adoption of the Internet has been accompanied by remarkable
growth in the number of consumer-oriented content and commerce Web sites and by
an ever-expanding assortment of Web-based consumer services. The typical
Internet user communicates regularly through e-mail, retrieves news and
information from numerous Internet sources, makes online purchases of goods and
services ranging from books to airline tickets to groceries, and otherwise
accesses a broad range of non-business-related content and commerce Web sites.
As the rapid evolution of Web content and technology continues, the amount of
data, types of data and size of files traveling across the Internet have also
grown. Consumers now access and download large, complex files such as streaming
audio and video, MP3 music files, multi-player games and a variety of other rich
media, all of which consume large amounts of network bandwidth. Similarly,
online banner advertising and marketing campaigns targeting consumer Internet
users continue to evolve, consuming more bandwidth, particularly as Web-based
advertising increasingly incorporates multimedia and streaming technologies.
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Internet access at work is fast, convenient and essentially free to
employees. In general, employees enjoy unsupervised and unrestricted Internet
access from their desktop PCs. As a result, employees tend to use their
employers' Internet connections for recreational "surfing" or personal matters
during business hours. Non-business use of company Internet access by employees
can result in lost employee productivity, increased network bandwidth
consumption and potential legal liability. These factors in turn contribute to
higher costs for companies that use the Internet.
Recent research and news reports regularly document the hidden costs of
open Internet access in the workplace. According to IDC, between 30% and 40% of
employee Internet activity in the workplace is non-business-related, and roughly
70% of non-business-related e-commerce is conducted through an Internet
connection at work. This non-business use of the Internet can consume large
portions of expensive network bandwidth. According to a Saratoga Institute study
that we commissioned, more than 60% of mid- to large-sized companies surveyed
had disciplined employees for Internet misuse, and more than 30% of those
companies had terminated employees for inappropriate Internet activity. For
example, in October 1999, Xerox Corporation fired 40 employees for inappropriate
use of the Internet in the workplace. In addition, a company may be exposed to
legal liability if online content accessed at the workplace is deemed to have
created a hostile work environment for other employees.
Businesses are increasingly recognizing the problem of personal Internet
use in the workplace, and traditionally have attempted to manage or modify
employee behavior through written policies. These policies are easily ignored
and difficult to enforce. In order to monitor compliance with policy, managers
may require their IT professionals to renew the log files generated by company
servers of Web pages visited. This method of employee Internet management is
generally cumbersome and time consuming, and often does not provide the company
with useful information regarding the actual content or category of Web sites
visited. Because this method does not proactively curtail undesirable Internet
activity, employers are forced to discipline employee violations after the fact.
As a result, some managers have lost a significant level of control over both
their employees' productivity and the use of their IT infrastructures.
To address the problems associated with improper Internet use in the
workplace, many businesses have sought solutions that enable them to proactively
manage their employees' Internet access. Early Internet filtering software for
the enterprise was largely derived from products that were originally developed
to help parents prevent their children from accessing adult content at home, and
used keyword matching to block content. These, and other more recent solutions,
lack the scalability required by growing organizations, cannot operate on
multiple network platforms, do not provide the flexibility required by
management and can be labor-intensive to deploy, consuming valuable IT
resources. In addition, these applications generally do not operate in
conjunction with a comprehensive database that is consistently refreshed.
Moreover, many of these products' databases have typically focused on only a few
categories such as sex, violence and inappropriate language, and do not have
sufficiently broad coverage to address the wider range of non-business-related
content accessible through the Internet.
Workplace management of non-business-related Internet access is an
increasingly important priority because of its impact on employee productivity,
network bandwidth consumption and potential legal liability. Given the necessity
of corporate Internet access and consumers' continuing adoption of the Web as a
mass entertainment, information and commerce medium, we believe there is a
significant opportunity for an employee Internet management solution that
effectively addresses the needs of businesses.
SOLUTION
We are the leading provider of employee Internet management solutions that
enable businesses to monitor, report and manage how their employees use the
Internet. Our Websense Enterprise solution gives business managers the ability
to implement customized Internet access policies for different users and groups
within the business, and supports an organization's efforts to improve employee
productivity, conserve network bandwidth and mitigate potential legal liability.
Our solution, which is sold on a subscription
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basis, consists of a scalable, multi-platform software application that
references our proprietary database of continuously updated Web site addresses.
The principal benefits of our solution include:
Increased Employee Productivity. Our solution gives businesses the ability
to more effectively monitor, report and manage employee Internet access, thereby
reducing non-productive Internet use. Our software enables organizations to
identify the pattern and scope of Internet use and to manage access to
non-business related content or particular categories of Internet content chosen
by an organization. In addition, our software allows managers to permit or deny
Internet access based on the employee, type of user, time of day and type of
content being accessed. Our solution may also be configured to defer access
until after work hours, limiting workplace distractions but allowing appropriate
use of the organization's high-speed Internet connection.
Reduced Bandwidth Consumption. We believe our solution allows organizations
to reduce bandwidth consumption by managing personal Internet use and access to
Web sites, in particular those which may contain bandwidth-intensive content,
such as streaming audio and video, MP3 music files, multi-player games and other
rich media. Reducing the bandwidth consumed by non-business-related Internet
traffic allows an organization to use its network more efficiently and
effectively in performing important business tasks, and to avoid costs arising
from the need to buy additional telecommunications services and networking
equipment.
Reduced Exposure to Potential Legal Liabilities. Our solution supports
organizations' efforts to reduce exposure to legal liability resulting from the
improper use of the Internet in the workplace. By implementing our solution in
conjunction with an overall corporate Internet usage policy, organizations can
proactively curtail access to objectionable Internet content such as adult
entertainment, illegal activities and racism.
In addition to the benefits above, our solution provides these key
features:
Access to the Most Comprehensive Database. We provide access to a
proprietary database of over 800,000 Web sites, representing approximately 85
million unique Web pages. Our database is cataloged into 54 different categories
to enable organizations to determine the types of Internet content that are
appropriate for their workplace culture. We add approximately 2,000 newly
categorized Web sites each business day to our database and make these updates
available to our customers for daily incremental downloads.
Ability to Customize Employee Internet Access. Our solution allows
organizations to configure specific Internet access policies for various groups,
user types or individuals. Through our easy-to-use browser interface, we enable
managers to implement Internet access policy with limited impact on IT resources
and personnel. Organizations may choose Internet access options which include
blocking Web sites completely or partially, setting time periods for access,
allowing access but generating an exception report, or deferring access until
after work hours.
Ability to Scale and Operate on a Variety of Network Platforms. Our
software is designed to have minimal impact on network performance and can be
implemented without the purchase of additional hardware. Our solution is
available on a broad range of network platforms, and existing implementations
currently support up to 50,000 users on a single server. Our software works with
popular proxy servers, firewalls and cache engines offered by leading Internet
infrastructure providers such as CacheFlow, Check Point, Cisco, Inktomi,
Microsoft Corp., Nokia, and others.
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STRATEGY
Our objective is to maintain and strengthen our position as the leading
provider of employee Internet management solutions. Key components of our
strategy include:
Increase Sales to Existing Customers. Many of our customers are large
businesses that have thousands of Internet-enabled employees. In most cases,
these customers initially deploy the Websense Enterprise application in one or
two internal departments and pay subscription fees based only on the number of
Internet users in those departments. We believe that there is a large
opportunity to sell our existing customers subscriptions for additional Internet
users within their organizations. We intend to aggressively pursue renewals of
existing subscription agreements and enterprise-wide deployment of our solution
within our existing customer base.
Aggressively Leverage Indirect Sales Channels. We currently have 350 VARs
that focus on the U.S. market and over 100 international distributors and
resellers primarily in Europe and Asia Pacific. Our indirect sales channels
accounted for approximately 70% of our subscription revenue in 1999 and we
expect that this percentage will increase in the future. In addition, we plan to
improve the productivity of our existing VARs through lead development,
marketing support, sales assistance and training. We intend to aggressively
leverage and expand our indirect sales channels in both the domestic and
international markets through recruiting programs and an ongoing sharing of
subscription renewal fees.
Expand our Customer Base. Our products have been deployed in more than
7,500 organizations worldwide, including 4,600 businesses, of which more than
200 are Fortune 500 companies. We intend to leverage our large installed base of
customers to further our market penetration. We currently have over 100
international distributors and resellers covering more than 50 countries. To
address this growing opportunity, we will continue to increase the number of
international resellers and expand our database coverage beyond the English,
French, German, Japanese and Spanish Web sites currently categorized. We believe
that given the higher costs of Internet access in many foreign markets, the need
to manage employee Internet use will be cost-driven. We also currently have
2,900 educational institutions with 590,000 workstations using Websense
Enterprise to manage student Internet access.
Expand the Websense Product Offering. We intend to continuously develop and
update our software and database in order to keep current with the evolution of
Internet content and technology. We plan to offer our customers enhanced
reporting and management applications for Websense Enterprise as an incremental
revenue opportunity. We also believe that our granular filtering and
categorization of Internet content will enable us to sell subscriptions to
subsets of our database on an incremental per-user basis. We also intend to
provide additional solutions which address worker productivity and enterprise
bandwidth consumption. For example, we plan to offer our customers the ability
to block all banner ads from entering the network by dynamically stripping them
from visited Web sites. In addition, we recognize the need of many small
businesses to manage employee Internet access, and we are currently developing
Websense for Small Businesses to target this market.
Leverage and Expand Key Relationships. We intend to continue to capitalize
on our relationships with leading Internet infrastructure providers such as
CacheFlow, Check Point, Cisco, Inktomi and Nokia. We have modified our software
for each of these companies' products and regularly sponsor co-marketing
programs that leverage their brand recognition and resources. We work closely
with these vendors as an integral and embedded element of their network
infrastructure solutions. We intend to continue leveraging these key
relationships to migrate deeper into the network infrastructure, from proxy
servers, firewalls and cache engines, to network routers.
Develop and Maintain Leading Processes and Technologies. We intend to
continue developing proprietary processes and technologies that, we believe,
give us a distinct competitive advantage. In the development and maintenance of
our databases, we utilize automated site collection, algorithmic classification
and manual verification processes that we believe maximize coverage and
accuracy. In
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addition, we intend to continue to develop software and technology that will
facilitate the integration of our solutions with the systems of our customers
and business partners.
Develop and Market AfterWork.com. We intend to leverage the large and
growing user base of Websense Enterprise to develop additional revenue
opportunities through AfterWork.com. Working in conjunction with our Websense
Enterprise Solution, this portal site provides employers with the option to
defer employee's non-business related Internet activities to specified
non-working hours. AfterWork.com features a repository for bookmarked Web sites
which employees can access after work through a personalized AfterWork.com Web
page. This allows employees to pursue personal activities such as e-commerce,
research and chat, and to access news and information using their employers'
high-speed Internet connections. Personalized AfterWork.com Web pages can also
be accessed from remote locations, such as the employee's home, to provide a
gateway to useful and often-visited Web sites. We believe that AfterWork.com may
provide us with additional revenue opportunities through Internet advertising,
sponsorships and e-commerce.
PRODUCTS AND SERVICES
We develop and market a comprehensive and flexible enterprise solution for
managing employee access to the Internet. Our solution consists of customizable
software that references our proprietary database. Our database of Web page
addresses is organized into 54 categories which are regularly updated and
available for incremental daily downloads. In addition to our current offerings,
we plan to introduce and market new products and services, such as our new
AfterWork.com offering, that will provide enterprises with additional
flexibility in managing employee Internet access.
[GRAPHIC SHOWING THE ARCHITECTURE OF THE WEBSENSE ENTERPRISE SOLUTION.]
Websense Enterprise. Websense Enterprise is the foundation of our software
offerings. Websense Enterprise integrates with an organization's network server,
proxy server or firewall and is designed to provide a high level of performance
and flexibility in networks of virtually any size and configuration without
compromising security. The table below describes the platforms for which we
currently offer our Websense Enterprise solution.
<TABLE>
<CAPTION>
PROXY SERVERS FIREWALLS CACHE ENGINES APPLIANCE/OTHER
------------- --------- ------------- ---------------
<S> <C> <C> <C>
- Microsoft Proxy - Check Point - Inktomi - Team Internet
- Netscape Proxy - Cisco - CacheFlow - Nokia
- Websense Proxy - Novell - OpenServer Partners
- MimeSweeper - SecurIT
- Netscreen-Conclave
- Netopia-Conclave
- GnatBox
</TABLE>
We sell Websense Enterprise as a subscription based on the number of
Internet users to be managed. Additional users, additional features and enhanced
technical support are priced separately.
Content Management. Websense Enterprise enables employers to proactively
manage employee Internet access based on the content of the requested Web site.
Our solution gives corporate managers the ability to customize, implement and
modify Internet access policies for various groups, user types and individuals.
An easy-to-use graphical interface enables business managers to define the
categories of Web sites to which access will be managed during particular time
periods of the day. The filtering software examines
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each Internet access request, determines the category of the requested Web site
and applies the policies that have been defined by the company. There are
several possible results for each request:
- Allow. The request is allowed to proceed, because the organization has
chosen not to restrict access to the category applicable to the Web site
or because the requested Web site does not fall into any of our
categories.
- Block. The requested Web site is in a category that is not allowed to be
accessed according to the policy in effect.
- Defer and Save. The user can bookmark the requested Web site to a
personalized AfterWork.com Web page for access at a later time when the
organization's access policy is less restrictive. This Web page can also
be accessed from alternative locations, such as from the employee's home.
- Continue with Exception Report. The user is reminded about the
organization's Internet usage policy, but can choose to access the
requested Web site. Alternatively, the user can save the Web site as
described above.
The Websense Database. We offer an extensive and regularly updated database
of Web sites. Our database currently catalogs more than 800,000 Web sites, which
we estimate represent approximately 85 million Web page addresses cataloged into
54 categories. We add approximately 2,000 newly categorized Web sites per
business day to our database and make these updates available for incremental
daily downloads.
The breadth and specificity of Web site categories we have defined provide
the enterprise flexibility in selecting which types of material should be
allowed, blocked, deferred or reported. We define the categories, based on input
we have received from our customers, to identify the types of materials that we
believe employers would deem to be unacceptable, inappropriate or undesirable in
a work environment. Categories in our database include the following:
<TABLE>
<S> <C> <C>
- Abortion Advocacy - Health - Sex
- Abused Medications - Illegal & Questionable - Shopping
- Activist Groups - Information Technology - Society & Lifestyles
- Adult Content - Job Search - Special Events
- Adult Entertainment - Militancy & Extremist - Sports
- Alcohol & Tobacco - Military - Streaming Media &
- Alternative Journals - MP3 Broadcasting Channels
- Arts & Humanities - News & Media - Supplements
- Business & Economy - Nudity - Tasteless
- Cult & New Age - Online Games - Traditional Religions
- Drugs - Personals & Dating - Travel
- Education - Political Groups - URL Translation Sites
- Entertainment - Prescribed Medications - Vehicles
- Financial Data & - Proxy Avoidance - Violence
Services - Racism & Hate - Weapons
- Gambling - Religion - Web Chat
- Games - Restaurants and Dining - Web Hosting
- Gay and Lesbian Issues - Search Engines & Portals - Web-Based Email
- Government
- Hacking
</TABLE>
Reporter. Websense Reporter is a software application that is offered with
Websense Enterprise. This application assists managers in analyzing Internet use
within their organizations. Websense Reporter generates a wide variety of
tabular and graphical reports on an organization's Internet usage. It analyzes
information from Internet monitoring logs and builds visual charts in a variety
of formats for easy distribution to and interpretation by managers. Websense
Reporter enables managers to identify useful
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information, including summaries of categories of Web sites visited, requests to
all destinations and details regarding individual destination requests.
Professional Services. Our professional services group provides technical
support, training and consulting services. This group provides pre-sales and
technical support for Websense Enterprise and sells services and third-party
products. This group also allows us to offer more complete solutions to our
customers.
Websense for Schools. Websense for Schools is tailored for use in the K-12
educational setting and is offered at no charge to qualifying schools. This
solution uses a customized database and offers school administrators the ability
to manage, monitor and report on Internet usage in their school. Websense for
Schools is compatible with the Microsoft Proxy Platform with features specific
to school implementation requirements.
AfterWork.com. AfterWork.com is our hosted Web site that allows employees
to bookmark and later access Web sites where management policies do not allow
access during work hours. After work hours, when the organization's Internet
access policies may be less restrictive, employees can return to AfterWork.com
to access Web sites which they previously bookmarked. Because AfterWork.com
resides on the Internet, outside the employer's network, employees can access
the site from locations outside of work, including home.
CUSTOMERS
We currently have over 4,600 subscription agreements covering approximately
3.8 million Internet-enabled employees and 2,900 subscription agreements with
schools covering 590,000 workstations. Our customers range from Fortune 500
companies to government and educational organizations. No customer accounted for
more than 5% of our total revenues in 1998 or 1999. The following is a partial
list of users who have paid subscription fees for Websense Enterprise in excess
of $10,000 since January 1, 1999:
BUSINESS -- NORTH AMERICA
Alcan Aluminum Limited
Alliance Data Systems Corporation
American Express Company
Bank of America, N.A.
Bell Atlantic Corporation
Bowater Incorporated
Bristol-Myers Squibb Company
Center for Disease Control (CDC)
Chubb Corporation
Cigna Corporation
Compaq Computer Corporation
Conoco Inc.
Gateway, Inc.
Goodyear Tire & Rubber Company
International Business Machines Corporation
J.C. Penney Company, Inc.
JP Morgan & Co.
Maritime Telegraph & Telephone (Canada)
Marriot International, Inc.
McDonalds Corporation
Merrill Lynch & Co., Inc.
Metropolitan Life Insurance Company
Morgan Stanley Dean Witter & Co.
Paramount Pictures
Pepsi-Cola Company
Procter & Gamble Co.
Ralston Purina Company
REXEL Group
Robert Half International
Royal Bank of Canada
Staples, Inc.
Tellabs Operations, Inc.
Travellers Indemnity Company
Underwriter's Labs (UL)
Unilever
Unocal Corporation
Western Digital Corporation
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BUSINESS -- INTERNATIONAL
Amdahl Ireland
BP Amoco p.l.c.
Daiwa Securities
Lloyds of London
Marconi p.l.c.
Mitsubishi Electric Corporation
Royal Bank of Scotland
Saudi Aramco
Toshiba Corporation
ISPS
AT&T Corporation
Internet Initiative Japan (IIJ)
UUNET Technologies Ltd.
Sprint Communications Company, L.P.
EDUCATIONAL
Atlanta Public Schools
Ball State University
Dallas Public Schools
Ministry of Education (Austria)
Ministry of Education (Japan)
Portland Public Schools
GOVERNMENT
Norsk Hydro (Norway)
Norwegian State Railway
Ohio Department of Transportation
Ontario Power Generation (Canada)
Quebec Ministry of Revenue
U.S. Army Reserve
U.S. Department of Veterans Affairs
Washington State Department of Transportation
SALES, MARKETING AND DISTRIBUTION
Sales. We sell our products and services through both indirect and direct
channels. For 1999, indirect channel sales comprised approximately 70% of total
revenues, while direct sales to end-users accounted for the remainder of our
revenues. We expect that indirect sales will account for an increased percentage
of our revenues over the next several years.
Our indirect channels include:
Value-Added Resellers. We currently have more than 350 domestic VARs,
or VARs, selling our products in the United States. Our VARs include AT&T,
UUNET, GTE Network Services, Unipalm and GE Capital Information Technology
Services, among others.
Distributors. Internationally, we sell our products through a network
of more than 100 distributors and resellers in over 50 countries.
Original Equipment Manufacturers. Our solution integrates into
products manufactured by original equipment manufactures, or OEMs. A number
of our OEM partners, including CacheFlow, eSoft, Inc. and Nokia, have
provided us worldwide access to customers through their existing sales
channels.
Our direct sales efforts are coordinated through a worldwide sales
organization of approximately 20 individuals. The typical end-users buying
directly from us are larger, Fortune 500 companies looking to obtain a closer
relationship with the provider of their enterprise-wide solution.
In 1999 we generated approximately 21% of our total revenue from customers
outside of North America. We expect international markets to provide increased
opportunities for our products in the future. Our current international efforts
are focused on expanding our indirect sales channels in France and Germany,
entering China, strengthening the Asia/Pacific channels and establishing a
presence in Latin America.
Marketing. To generate qualified sales leads, build our brand and raise
corporate awareness of Websense as a leading provider of employee Internet
management solutions, we have devoted significant resources to developing and
implementing our marketing strategy. Our marketing efforts are targeted toward
operational executives and decision makers within businesses, including IT
professionals, chief executives, upper level management and human resource
personnel. We actively manage our public
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relations, communicating directly with technology analysts and the media, in an
effort to promote greater awareness of the growing problem caused by employee
misuse of the Internet at work. Our additional marketing initiatives include:
- advertising in high-technology trade magazines, management journals and
other business oriented periodicals;
- participation in and sponsorship of trade shows and industry events;
- direct mail campaigns;
- cooperative marketing efforts with Internet infrastructure vendors,
including Web link exchanges, joint press announcements, joint trade show
activities, channel marketing campaigns, road shows and seminars; and
- use of our Web site to communicate with our channel partners, allow free
trials and purchases of our products and provide product and company
information to interested parties.
CUSTOMER SERVICE, TRAINING AND SUPPORT
We believe that superior customer support is critical to retaining and
expanding our customer base. Our technical support group provides dependable and
timely resolution of customer technical inquiries and is available to customers
by telephone, e-mail and over the Web. Our training services group delivers
education, training and pre-sales support to our customers. We also offer online
training to our customers and resellers to provide them with the knowledge and
skills to successfully deploy, use and maintain our products. Our customer
service team is responsible for handling general customer inquiries, answering
questions about the ordering process, investigating the status of orders and
payments, as well as processing customer orders. In addition, our customer
service team uses our e-mail system to proactively update customers on a variety
of topics, including release dates of new products and updates to existing
products.
RESEARCH AND DEVELOPMENT
We have invested significant time and resources in creating a structured
process for undertaking product and database development projects. The research
and development department is divided into several groups which include database
production, software development, quality assurance and documentation.
Individuals are grouped along product lines and work as part of
cross-disciplined teams designed to provide a framework for defining and
addressing the activities required to bring product concepts and development
projects to market successfully. Our research and development expenses totaled
approximately $3.9 million for the year ended December 31, 1999, $1.8 million
for the year ended December 31, 1998 and $528,000 for the year ended December
31, 1997. We expect that we will continue to commit significant resources to
research and development in the future.
TECHNOLOGY
Software Architecture. Websense Enterprise is a server-based system
designed to provide a high level of performance and flexibility without
compromising security in networks of virtually any size and configuration.
Websense Enterprise is composed of an integrated system of monitoring, reporting
and management applications. It is designed to accommodate network growth
without impairing performance or requiring major overhauls and can scale to
support networks of up to 50,000 users on a single server. Websense integrates
with major firewalls, proxy servers and caching engines. We provide
cross-platform support, which is a critical feature for organizations running
networks at multiple locations and/or in heterogeneous environments.
Database Content Analysis and Updating. We use automated site collection,
algorithmic classification and manual verification processes to gather and
classify new Web sites into our database. Our automated search technology uses
Java-based tools and proprietary pattern recognition systems to automatically
search the Internet to identify and catalog Web sites into one of our 54
database categories.
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COMPETITION
The market for Internet-filtering software and related services is
immature, fragmented, highly competitive, quickly evolving and subject to rapid
technological change. We expect that competition will intensify. Increased
competition may result in reduced market acceptance of our products, price
reductions and reduced gross margins, any of which could seriously harm our
business. Competitors vary in size and in the scope and breadth of the products
and services they offer. Our current principal competitors include:
- companies offering network filtering products, such as JSB, N2H2, Secure
Computing and Symantec;
- companies offering network reporting products, such as WebTrends and
Telemate.
- companies offering client-based software filtering products, such as The
Learning Company and Log-On Data.
We also face current and potential competition from vendors of Internet
servers, operating systems and networking hardware, many of which now, or may in
the future, develop and/or bundle employee Internet management solutions with
their products. We also compete against and expect increased competition from
traditional network management software developers and Web management service
providers. Many of our current and potential competitors have longer operating
histories and significantly greater financial, technical, marketing or other
resources than we do. They may have significantly greater name recognition,
established marketing relationship and access to a larger installed base of
customers. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the functionality of their products to address customer needs.
Accordingly, new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
We believe that the principal competitive factors in the market for our
products include:
- a product's ability to scale and support the requirements of complex
networks;
- use of a large and professionally maintained category database;
- breadth of product line, giving customers a number of implementation
choices;
- depth of monitoring, reporting and analysis capabilities;
- capacity to integrate with key network providers;
- quality of customer support; and
- price and payment methods.
INTELLECTUAL PROPERTY RIGHTS
Our intellectual property rights are important to our business. We rely on
a combination of trademark, copyright and trade secret laws in the United States
and other jurisdictions as well as confidentiality procedures and contractual
provisions to protect our proprietary technology and Websense brand. We have
registered our Websense trademark in the United States. We also have applied for
United States trademark registrations for AfterWork and AfterWork.com. Effective
trademark protection may not be available in every country where our products
are available.
We currently have two patent applications pending in the United States and
two pending international patent applications that seek to protect our
proprietary database and filtering technologies. We do not have any issued
patents and our pending patent applications may not result in issued patents.
Our policy is to enter into confidentiality and invention assignment
agreements with all employees and consultants, and nondisclosure agreements with
all potential business partners. These protections, however, may not be adequate
to protect our intellectual property rights. See "Risk Factors -- Any failure to
protect
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our intellectual property rights could impair our ability to protect our
proprietary technology and establish the Websense brand" and "Risk Factors -- We
may be sued by third parties for infringement of their proprietary rights."
EMPLOYEES
As of December 31, 1999, we had 119 employees, including 51 in research and
development, 31 in selling and marketing and 37 in general and administrative.
None of our employees is represented by a labor union, and we have never
experienced a work stoppage. We believe that our relations with our employees
are good.
FACILITIES
Our corporate headquarters and principal offices are located in San Diego,
California, where we lease approximately 47,000 square feet. This lease expires
in 2002, with an option to extend the lease for an additional three years. We
also have a right of first refusal to lease an additional 13,000 square feet at
our current location. We believe that our current space along with the
additional space we have a right to lease are adequate for our current and
identified future needs.
LEGAL PROCEEDINGS
We have no pending legal proceedings. We may, however, become subject to
lawsuits from time to time in the course of our business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of December 31, 1999
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
John B. Carrington........................ 55 Chairman of the Board, President and Chief
Executive Officer
Douglas C. Wride.......................... 46 Chief Financial Officer
Harold M. Kester.......................... 52 Chief Technology Officer
Ronald B. Hegli........................... 39 Vice President of Engineering
Carrie E. Carlander....................... 29 Vice President of Finance and
Administration
J. Cleve Adams............................ 44 Vice President of Sales
Andrew Meyer.............................. 41 Vice President of Marketing
Robert J. Loarie.......................... 57 Director
Bruce T. Coleman.......................... 59 Director
John C. Stiska............................ 57 Director
Donald B. Milder.......................... 47 Director
Gary E. Sutton............................ 57 Director
</TABLE>
John B. Carrington has served as our President and Chief Executive Officer
since May 1999 and has served as our Chairman since June 1999. Prior to joining
Websense, Mr. Carrington was Chairman, President and Chief Executive Officer of
Artios, Inc., a provider of hardware and software design solutions to companies
in the packaging industry, from August 1996 until it was acquired by BARCO n.a.
in December 1998. From September 1991 to October 1995, Mr. Carrington was
President and Chief Executive Officer of Digitalk, Inc., a software development
tools company, which has since merged to form ParcPlace-Digitalk, Inc. Mr.
Carrington currently serves on the boards of directors for SalesLogix Corp, a
sales automation and e-commerce provider, and Digital Lava, Inc., a provider of
video publishing and management tools. He received his B.S. in Business
Administration from the University of Texas.
Douglas C. Wride has served as our Chief Financial Officer since June 1999.
From March 1997 to December 1998, Mr. Wride served as Chief Financial Officer of
Artios, Inc. Mr. Wride also served as Chief Operating Officer of Artios from
July 1997 to December 1998. From April 1996 to March 1997, Mr. Wride served as
Chief Operating Officer and Chief Financial Officer of NetCount, LLC, a provider
of Internet measurement and research services. From February 1992 to January
1996, Mr. Wride was Chief Financial Officer at Digitalk, Inc. Mr. Wride has also
held senior-level positions with SSD Management, Inc. and Accountants Overload
Group, and spent 11 years in the entrepreneurial technology group at Price
Waterhouse & Co. Mr. Wride received his B.S. in Business/Accounting from the
University of Southern California.
Harold M. Kester has served as our Chief Technology Officer since June
1999. Prior to joining us, from August 1993 to June 1999, Mr. Kester served as
Vice President of Encyclopedia Britannica and General Manager and Chief
Scientist of its La Jolla Research Laboratory. Prior to his employment with
Encyclopedia Britannica, Mr. Kester founded The Del Mar Group, a provider of
information retrieval software products. Mr. Kester received his B.A. in
Mathematics from California State University, Long Beach.
Ronald B. Hegli has served as our Vice President of Engineering since March
1999. Prior to joining us, from August 1998 to March 1999, Mr. Hegli served as
Director of Product Development for Nuera Communications, an Internet protocol
telephony vendor. From March 1994 to April 1998, Mr. Hegli served as Vice
President of Engineering with TriTeal Corp., a graphical user interface software
developer. Mr. Hegli received his B.S. in Nuclear Engineering from Oregon State
University and an M.S. in Mechanical Engineering from the University of
California, Berkeley.
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<PAGE> 45
Carrie E. Carlander has served as our Vice President of Finance and
Administration since January 1999. Ms. Carlander previously served as our
Director of Finance and Human Resources from December 1996 to January 1999.
Previously, from November 1995 to November 1996, Ms. Carlander served as a
financial analyst at QUALCOMM Incorporated. From October 1993 to October 1995,
she served as an analyst at the San Diego Unified Port District. Ms. Carlander
received her B.A. in Political Science from the University of California, San
Diego, and an M.B.A. from San Diego State University.
J. Cleve Adams has served as our Vice President of Sales since September
1998. From January 1996 to August 1997, Mr. Adams served as Executive Vice
President of Sequel Technology, Inc., an Internet applications company. From
June 1994 to October 1996, Mr. Adams served as Vice President of Sales for
Acusoft, a client-server start-up. Mr. Adams has also held sales positions with
Novell and Texas Instruments. He received his B.S. in Education from the
University of LaVerne.
Andrew Meyer has served as our Vice President of Marketing since August
1999. From November 1997 to August 1999, Mr. Meyer served as Vice President of
Marketing for Epicor Software (formerly Platinum Software), a provider of
enterprise resource planning software. From September 1993 to November 1997, Mr.
Meyer was Director of Marketing for Scientific-Atlanta, a cable television and
telecommunications manufacturer. Mr. Meyer received his bachelor's degree in
Mechanical Engineering from Georgia Tech and an M.B.A. from the University of
New Orleans.
Robert J. Loarie has served as a Director since May 1998. Since August
1992, Mr. Loarie has been a Principal of, and since December 1997, a Managing
Director of Morgan Stanley Dean Witter & Co., an investment banking company.
Since August 1992, Mr. Loarie has also served as a managing member of several
venture capital investment partnerships affiliated with Morgan Stanley Dean
Witter. Mr. Loarie also serves as a director of Realnames Corporation, an
Internet addressing system developer; Adaptec, a computer peripherals company;
and Evolving Systems, a telecommunications software and services company. Mr.
Loarie received a B.S. in Electrical Engineering from the Illinois Institute of
Technology and an M.B.A. from Harvard Business School.
Bruce T. Coleman served as our interim Chief Executive Officer from
November 1998 to May 1999, and continues to be a Director. Mr. Coleman has
served as the Chief Executive Officer of El Salto Advisors, an executive
consulting firm, since November 1991. He is currently the interim Chief
Executive Officer of Rogue Wave Software, an enterprise systems software
provider. From July 1997 to June 1998, Mr. Coleman served as Chief Executive
Officer of Open Horizon, Inc., a provider of Java-based software, and from
December 1995 to July 1996, he served as Chief Executive Officer of Computer
Network Technology, Inc., a provider of networking hardware and software. From
September 1994 to May 1995, Mr. Coleman also served as Chief Executive officer
of Fischer International, a provider of e-mail and security software. He
received a B.A. in Economics from Trinity College and an M.B.A. from Harvard
Business School.
John C. Stiska has served as a Director since March 1999. Mr. Stiska
currently is Chairman of Commercial Bridge Capital, LLC., a venture capital
firm. From February 1996 to February 1998, he served as Corporate Senior Vice
President and General Manager of the Technology Applications Division of
QUALCOMM Incorporated. From 1990 to 1996, Mr. Stiska was President and then
Chairman and Chief Executive Officer of Triton Group Ltd., now known as
Alarmguard Holdings, Inc., a seller and installer of burglar and fire alarms.
During that time, he also served on the board of directors of Triton's
subsidiaries, two of which were publicly traded: Mission West Properties and
Ridgewood Properties, Inc. In July 1998, Mr. Stiska joined the law firm of
Latham & Watkins, LLC as of-counsel. Mr. Stiska serves on the boards of
directors of several private companies. In addition, he is a Director of Laser
Power Corporation, a producer of microlasers, and FirstWorld Communications,
Inc., a provider of Internet data and communications services. Mr. Stiska
received a B.B.A. and J.D. from the University of Wisconsin.
Donald B. Milder has served as a Director since June 1999. Since 1989, Mr.
Milder has been a general partner with Crosspoint Venture Partners, a venture
capital investor in early-stage technology companies.
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<PAGE> 46
Mr. Milder serves on the boards of 10 privately held companies. Mr. Milder
received a B.A. from Union College and an M.B.A. from Harvard Business School.
Gary E. Sutton has served as a Director since June 1999. Since January
1996, Mr. Sutton has served as the President, Chief Executive Officer and
Chairman of @Backup, Inc., an online data protection service. From 1990 to 1995,
Mr. Sutton was chairman of Knight Protective Industries, a security systems
provider. Mr. Sutton is also a co-founder of Teledesic, Inc., a low-earth orbit
telecommunications service. Mr. Sutton has authored the book "Profit Secrets of
a No-Nonsense CEO" and several other titles. He received his B.S. from Iowa
State University.
Our executive officers are appointed by the board of directors and serve
until their successors are elected or appointed.
There are no family relationships among any of our directors or executive
officers.
CLASSIFIED BOARD
Our board currently has six members. Under our bylaws, beginning at our
next annual meeting of stockholders, our board will be divided into three
classes of directors serving staggered three-year terms, with one class of
directors to be elected at each annual meeting of stockholders. The term of the
first class of directors will expire in 2002. The term of the second class of
directors will expire in 2003. The term of the third class of directors will
expire in 2004.
BOARD COMMITTEES
Audit Committee. The audit committee of the board of directors reviews,
acts on and reports to the board of directors with respect to various auditing
and accounting matters, including the recommendation of our auditors, the scope
of the annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. The members of the audit
committee are Mr. Loarie, Mr. Sutton and Mr. Milder.
Compensation Committee. The compensation committee of the board of
directors recommends, reviews and oversees the salaries, benefits and stock
option plans for our employees, consultants, directors and other individuals
compensated by us. The compensation committee also administers our compensation
plans. The members of the compensation committee are Mr. Loarie, Mr. Coleman,
Mr. Sutton and Mr. Stiska.
DIRECTOR COMPENSATION
Directors do not receive cash compensation for their service on our board
of directors. Non-employee directors are reimbursed for reasonable expenses
incurred in connection with serving as a director. Since November 1998, we have
granted non-qualified stock options to purchase an aggregate of 130,000 shares
of common stock to Bruce Coleman, a non-employee director, in part for his
services as interim Chief Executive Officer. In June 1999, we granted a
non-qualified stock option to purchase 50,000 shares of common stock to Mr.
Sutton, a non-employee director. Each individual who first becomes a
non-employee member of the board of directors at any time after the offering
will receive an option to purchase 50,000 shares of common stock on the date
such individual joins the board of directors, provided such individual has not
previously been employed by us or any parent or subsidiary corporation. In
addition, on the date of each annual stockholders meeting beginning in 2001,
each non-employee member of the board of directors will automatically be granted
an option to purchase 2,500 shares of common stock, provided such individual has
served as a non-employee member.
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<PAGE> 47
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee currently consists of Mr. Loarie, Mr. Coleman,
Mr. Stiska and Mr. Sutton. Except for Mr. Coleman, who served as our interim
Chief Executive Officer from November 1998 to May 1999, no member of the
compensation committee has been an officer or employee of us at any time. None
of our executive officers serves as a member of the board of directors or
compensation committee of any other company that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
EXECUTIVE COMPENSATION
The following table sets forth all compensation received during fiscal 1999
by our Chief Executive Officer, our former Chief Executive Officer, and three of
our other most highly compensated executive officers whose salary and bonus
exceeded $100,000 in such fiscal year. Perquisites and other personal benefits
paid to officers are less than the minimum reporting thresholds.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- -------- -------- ------------
<S> <C> <C> <C>
John G. Carrington,...................................... $130,771 $ 94,212 1,300,000
Chief Executive Officer, President and Director
Bruce Coleman(1)......................................... 67,500 -- 130,000
Former Chief Executive Officer and Director
J. Cleve Adams........................................... 120,000 166,671 80,000
Vice President of Sales
Ronald B. Hegli.......................................... 109,038 22,327 150,000
Vice President of Engineering
Carrie Carlander......................................... 92,308 20,000 40,000
Vice President of Finance
</TABLE>
- -------------------------
(1) Mr. Coleman served as our interim Chief Executive Officer from November 1998
to May 1999.
STOCK OPTION INFORMATION
The following table sets forth information regarding options granted to the
executive officers listed in the Summary Compensation Table during fiscal 1999.
We have not granted any stock appreciation rights.
Each option represents the right to purchase one share of common stock.
Except as set forth in the footnotes below, the options vest on the following
schedule: 25% of the options vest after the completion of one year of service
from the grant date and the remainder of the options vest in equal monthly
installments over the next 36 months of service. To the extent not already
exercisable, these options may also accelerate and become exercisable, in the
event of a merger in which we are not the surviving corporation or upon the sale
of substantially all of our assets. Please see "-- Employment Agreements" and
"-- Benefit Plans" for more details regarding these options. In the year ended
December 31, 1999, we granted options to purchase an aggregate of 3,060,500
shares of common stock.
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<PAGE> 48
The potential realizable value at assumed annual rates of stock price
appreciation for the option term represents hypothetical gains that could be
achieved for the respective options if exercised at the end of the option term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
mandated by rules of the SEC and do not represent our estimate or projection of
our future common stock prices. These amounts represent assumed rates of
appreciation in the value of our common stock from the fair market value on the
date of grant. Actual gains, if any, on stock option exercises are dependent on
the future performance of the common stock and overall stock market conditions.
The amounts in the table may not necessarily be achieved.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATE OF
-------------------------------------------- STOCK PRICE APPRECIATION
NUMBER % OF TOTAL FOR
OF SECURITIES OPTIONS GRANTED OPTION TERM
UNDERLYING TO EMPLOYEES EXERCISE EXPIRATION -------------------------
NAME OPTIONS GRANTED IN 1999 PRICE DATE 5% 10%
---- --------------- --------------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
John B. Carrington..... 975,000 31.8% $0.50 5/11/09 $306,586 $776,949
John B.
Carrington(1).......... 325,000 10.6 0.50 5/11/09 102,195 258,983
Bruce T. Coleman(2).... 15,000 0.5 0.20 11/30/08 1,887 4,781
Bruce T. Coleman(2).... 15,000 0.5 0.20 12/31/08 1,887 4,781
Bruce T. Coleman(2).... 15,000 0.5 0.20 1/29/09 1,887 4,781
Bruce T. Coleman(2).... 15,000 0.5 0.20 2/26/09 1,887 4,781
Bruce T. Coleman....... 40,000 1.3 0.50 3/30/09 12,578 31,875
Bruce T. Coleman(2).... 15,000 0.5 0.20 3/31/09 1,887 4,781
Bruce T. Coleman(2).... 15,000 0.5 0.20 4/30/09 1,887 4,781
J. Cleve Adams......... 80,000 2.6 0.75 3/30/09 37,734 95,625
Ronald B. Hegli........ 150,000 4.9 0.50 3/08/09 47,167 119,531
Carrie E. Carlander.... 40,000 1.3 0.20 1/22/09 5,031 12,750
</TABLE>
- -------------------------
(1) Such option vests in equal monthly installments over Mr. Carrington's first
12 months of service.
(2) Such options vested immediately upon grant.
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1999 AND YEAR-END
OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options held by each of the executive officers listed in the
Summary Compensation Table at December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FISCAL 1999 OPTIONS AT FISCAL 1999(2)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John B. Carrington........... 325,000 -- -- 975,000 -- $6,337,500
Bruce T. Coleman............. 90,000 $27,000 -- 40,000 -- 260,000
J. Cleve Adams............... -- -- 95,625 154,375 $650,250 1,049,750
Ronald B. Hegli.............. -- -- -- 150,000 -- 975,000
Carrie E. Carlander.......... 41,250 55,505 -- 58,750 -- 399,500
</TABLE>
(1) Amount based on the difference between the fair market value of our common
stock on the date of exercise, as determined by our board of directors, and
the exercise price of the option.
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<PAGE> 49
(2) Amount based on the fair market value of our common stock on December 31,
1999, as determined by our board of directors, less the exercise price of
the option.
EMPLOYMENT AGREEMENTS
Employment Agreement of John B. Carrington. In May 1999, we entered into an
employment agreement with Mr. Carrington to serve as our President and Chief
Executive Officer. This agreement provides for an initial term of two years
which term shall be automatically extended for successive one-year periods
unless terminated by us prior to April 30 of any year. Under this agreement, Mr.
Carrington will be paid an annual base salary of $200,004 and a bonus of up to
$100,000 in 1999. After 1999, the amount of his salary and bonus will be
determined by our Board of Directors; however, his annual base salary will not
be decreased. Under his employment agreement, Mr. Carrington was granted an
option to purchase 975,000 shares of our common stock, which will vest over a
four-year period, with 25% vesting upon the completion of one year of service
and the remainder vesting in equal monthly installments over the next 36 months
of service. Mr. Carrington was also granted an option to purchase 325,000 shares
of our common stock which will vest in equal monthly installments over a
one-year period. If Mr. Carrington's employment is terminated before all of his
options vest, we will have the right to repurchase any unvested shares for which
he may have exercised such options at cost. Upon a change in control, all of Mr.
Carrington's option shares that remain unvested will vest in full.
If Mr. Carrington's employment is terminated by us other than for cause, or
is terminated by Mr. Carrington upon our breach of his employment agreement, he
is entitled to receive, as severance, a lump sum payment equal to 50% of his
base salary and 50% of his average annual bonus earned under this agreement.
Notwithstanding the foregoing, if within two years following a change of
control, Mr. Carrington's employment is terminated by us other than for cause,
is terminated by Mr. Carrington upon our breach of his employment agreement, or
is constructively terminated, he is entitled to receive, as severance, a lump
sum payment equal to 150% of his base salary and 150% of his average annual
bonus earned under this agreement.
Employment Agreement of Douglas C. Wride. In June 1999, we entered into an
employment agreement with Mr. Wride to serve as our Chief Financial Officer.
This agreement provides that Mr. Wride will be employed "at will" and paid an
annual base salary of at least $150,000. In addition, Mr. Wride will be eligible
to receive a bonus of up to 20% of his annual base salary. Under his employment
agreement, Mr. Wride was granted an option to purchase 300,000 shares of our
common stock, which will vest in equal monthly installments over a four-year
period. If Mr. Wride's employment is terminated before all of his options vest,
we will have the right to repurchase any unvested shares for which he may have
exercised such options at cost.
If Mr. Wride's employment is terminated by us other than for cause he is
entitled to receive, as severance, six months of continuation of his base salary
and he will also be entitled to vest in the number of shares of our common stock
that would have become vested under his options if his employment had continued
for an additional six months. Notwithstanding the foregoing, if within one year
following a change of control, Mr. Wride is terminated other than for cause, he
is entitled to receive, as severance, one year of continuation of his base
salary and he will also be immediately vested in all of his option shares.
BENEFIT PLANS
2000 STOCK INCENTIVE PLAN
Introduction. Our 2000 Stock Incentive Plan is intended to serve as the
successor equity incentive program to our 1998 Equity Incentive Plan. Our 2000
plan was adopted by our board on , 2000 and approved by the
stockholders in 2000. Our 2000 plan will become effective on the
date the underwriting agreement for this offering stock is signed. At that time,
all outstanding options under the
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<PAGE> 50
predecessor 1998 plan will be transferred to our 2000 plan, and no further
option grants will be made under that predecessor plan. The transferred options
will continue to be governed by their existing terms, unless our compensation
committee elects to extend one or more features of our 2000 plan to those
options. Except as otherwise noted below, the transferred options will have
substantially the same terms as in effect for grants made under the
discretionary option grant program of our 2000 plan.
Share Reserve. 4,500,000 shares of common stock has been authorized for
issuance under our 2000 plan. Such share reserve consists of the number of
shares we estimate will be carried over from our 1998 plan, including the shares
subject to outstanding options thereunder, plus an additional increase of
approximately 1,000,000 shares. The number of shares of common stock reserved
for issuance under our 2000 plan will automatically increase on the first
trading day in January each calendar year, beginning in calendar year 2001, by
an amount equal to 4% of the total number of shares of common stock outstanding
on the last trading day in December of the preceding calendar year, but in no
event will any such annual increase exceed 1,500,000 shares. In addition, no
participant in our 2000 plan may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances for more than
750,000 shares of common stock per calendar year.
Equity Incentive Programs. Our 2000 plan is divided into five separate
components:
- the discretionary option grant program, under which eligible individuals
in our employ or service may be granted options to purchase shares of
common stock at an exercise price not less than 100% of the fair market
value of those shares on the grant date;
- the stock issuance program, under which such individuals may be issued
shares of common stock directly, through the purchase of such shares at a
price not less than 100% of their fair market value at the time of
issuance or as a bonus tied to the attainment of performance milestones
or the completion of a specified period of service;
- the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary to the acquisition of
special below-market stock option grants;
- the automatic option grant program, under which option grants will
automatically be made at periodic intervals to our non-employee board
members to purchase shares of common stock at an exercise price equal to
100% of the fair market value of those shares on the grant date; and
- the director fee option grant program, under which our non-employee board
members may be given the opportunity to apply a portion of the annual
retainer fee otherwise payable to them in cash each year to the
acquisition of special below-market option grants.
Eligibility. The individuals eligible to participate in our 2000 plan
include our officers and other employees, our non-employee board members and any
consultants we hire.
Administration. The discretionary option grant program and the stock
issuance program will be administered by the compensation committee. This
committee will determine which eligible individuals are to receive option grants
or stock issuances under those programs, the time or times when such option
grants or stock issuances are to be made, the number of shares subject to each
such grant or issuance, the status of any granted option as either an incentive
stock option or a non-statutory stock option under the federal tax laws, the
vesting schedule to be in effect for the option grant or stock issuance and the
maximum term for which any granted option is to remain outstanding. The
compensation committee will also have the exclusive authority to select the
executive officers and other highly compensated employees who may participate in
the salary investment option grant program in the event that program is
activated for one or more calendar years.
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<PAGE> 51
Plan Features. Our 2000 plan will include the following features:
- The exercise price for the shares of common stock subject to option
grants made under our 2000 plan may be paid in cash or in shares of
common stock valued at fair market value on the exercise date. The option
may also be exercised through a same-day sale program without any cash
outlay by the optionee. In addition, the plan administrator may provide
financial assistance to one or more optionees in the exercise of their
outstanding options or the purchase of their unvested shares by allowing
such individuals to deliver a full-recourse, interest-bearing promissory
note in payment of the exercise price and any associated withholding
taxes incurred in connection with such exercise or purchase.
- The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including options
transferred from the 1998 plan, in return for the grant of new options
for the same or a different number of option shares with an exercise
price per share based upon the fair market value of our common stock on
the new grant date.
- Stock appreciation rights are authorized for issuance under the
discretionary option grant program. Such rights will provide the holders
with the election to surrender their outstanding options for an
appreciation distribution from us equal to the fair market value of the
vested shares of common stock subject to the surrendered option, less the
aggregate exercise price payable for those shares. Such appreciation
distribution may be made in cash or in shares of common stock. None of
the outstanding options under our 1998 plan contain any stock
appreciation rights.
- In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation will automatically
accelerate in full, and all unvested shares under the discretionary
option grant and stock issuance programs will immediately vest, except to
the extent our repurchase rights with respect to those shares are to be
assigned to the successor corporation. The compensation committee will
have complete discretion to structure one or more options under the
discretionary option grant program so those options will vest as to all
the option shares in the event those options are assumed in the
acquisition but the optionee's service with us or the acquiring entity is
subsequently terminated. The vesting of outstanding shares under the
stock issuance program may be accelerated upon similar terms and
conditions. The compensation committee will also have the authority to
grant options which will immediately vest in the event we are acquired,
whether or not those options are assumed by the successor corporation.
- The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than 50% of our outstanding voting stock or a change in the majority
of our board through one or more contested elections for board
membership. Such accelerated vesting may occur either at the time of such
transaction or upon the subsequent termination of the individual's
service.
- The options currently outstanding under our 1998 plan will immediately
vest in the event we are acquired by merger or sale of substantially all
our assets or more than 50% of our outstanding voting stock, unless those
options are assumed or continued in effect by the acquiring entity or our
repurchase rights with respect to any unvested shares subject to those
options are assigned to such entity. However, those options also contain
a special acceleration provision pursuant to which those options will
immediately vest upon an involuntary termination of the optionee's
employment within 24 months following an acquisition in which those
options are assumed, provided the optionee has been employed by us for at
least one year prior to the acquisition.
Salary Investment Option Grant Program. In the event the compensation
committee elects to activate the salary investment option grant program for one
or more calendar years, each of our executive officers and other highly
compensated employees selected for participation may elect, prior to the start
of
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<PAGE> 52
the calendar year, to reduce his or her base salary for that calendar year by a
specified dollar amount not less than $10,000 nor more than $50,000. Each
selected individual who files such a timely election will automatically be
granted, on the first trading day in January of the calendar year for which his
or her salary reduction is to be in effect, an option to purchase that number of
shares of common stock determined by dividing the salary reduction amount by
two-thirds of the fair market value per share of our common stock on the grant
date. The option will be exercisable at a price per share equal to one-third of
the fair market value of the option shares on the grant date. As a result, the
option will be structured so that the fair market value of the option shares on
the grant date less the exercise price payable for those shares will be equal to
the amount by which the optionee's salary is reduced under the program. The
option will become exercisable in a series of 12 equal monthly installments over
the calendar year for which the salary reduction is to be in effect.
Automatic Option Grant Program. Under the automatic option grant program,
each individual who first becomes a non-employee board member at any time after
the completion of this offering will automatically receive an option grant for
50,000 shares on the date such individual joins the board, provided such
individual has not been in our prior employment. In addition, on the date of
each annual stockholders meeting held after the completion of this offering,
each non-employee board member who is to continue to serve as a non-employee
board member, including each of our current non-employee board members, will
automatically be granted an option to purchase 2,500 shares of common stock,
provided such individual has served on our board for at least six months.
Each automatic grant will have an exercise price per share equal to the
fair market value per share of our common stock on the grant date and will have
a term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid per
share, any shares purchased under the option which are not vested at the time of
the optionee's cessation of board service. The shares subject to each initial
50,000-share automatic option grant will vest in a series of 4 successive annual
installments upon the optionee's completion of each year of board service over
the 4-year period measured from the grant date. The shares subject to each
annual 2,500-share automatic option grant will vest upon the optionee's
completion of one year of board service measured from the grant date. However,
the shares will immediately vest in full upon certain changes in control or
ownership or upon the optionee's death or disability of a board member.
Director Fee Option Grant Program. Should the director fee option grant
program be activated in the future, each non-employee board member will have the
opportunity to apply all or a portion of any cash retainer fee for the year to
the acquisition of a below-market option grant. The option grant will
automatically be made on the first trading day in January in the year for which
the retainer fee would otherwise be payable in cash. The option will have an
exercise price per share equal to one-third of the fair market value of the
option shares on the grant date, and the number of shares subject to the option
will be determined by dividing the amount of the retainer fee applied to the
program by two-thirds of the fair market value per share of our common stock on
the grant date. As a result, the option will be structured so that the fair
market value of the option shares on the grant date less the exercise price
payable for those shares will be equal to the portion of the retainer fee
applied to that option. The option will become exercisable in a series of 12
equal monthly installments over the calendar year for which the election is to
be in effect. However, the option will become immediately exercisable for all
the option shares upon the optionee's death or disability while serving as a
board member.
Our 2000 plan will also have the following features:
- Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our board
through one or more contested elections.
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- Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share based
upon the highest price per share of our common stock paid in that tender
offer.
- The board may amend or modify the 2000 plan at any time, subject to any
required stockholder approval. The 2000 plan will terminate no later than
January 31, 2010.
2000 EMPLOYEE STOCK PURCHASE PLAN.
Introduction. Our 2000 Employee Stock Purchase Plan was adopted by the
board on , 2000 and approved by the stockholders in
2000. The plan will become effective immediately upon the signing
of the underwriting agreement for this offering. The plan is designed to allow
our eligible employees and the eligible employees our participating subsidiaries
to purchase shares of common stock, at semi-annual intervals, with their
accumulated payroll deductions.
Share Reserve. 250,000 shares of our common stock will initially be
reserved for issuance. The reserve will automatically increase on the first
trading day in January each calendar year, beginning in calendar year 2001, by
an amount equal to 1% of the total number of outstanding shares of our common
stock on the last trading day in December in the prior calendar year. In no
event will any such annual increase exceed 375,000 shares.
Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period may have a duration in excess of 24 months and will start on the
date the underwriting agreement for the offering is signed, and will end on the
last business day in April 2002. The next offering period will start on the
first business day in May 2002, and subsequent offering periods will be set by
our compensation committee.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than 5 calendar months per year may join an offering period on the
start date or any semi-annual entry date within that period. Semi-annual entry
dates will occur on the first business day of May and November each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will be
applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per share
on the participant's entry date into the offering period or, if lower, 85% of
the fair market value per share on the semi-annual purchase date. Semi-annual
purchase dates will occur on the last business day of April and October each
year. However, a participant may not purchase more than 1,250 shares on any
purchase date, and not more than 150,000 shares may be purchased in total by all
participants on any purchase date. Our compensation committee will have the
authority to change these limitations for any subsequent offering period.
Reset Feature. If the fair market value per share of our common stock on
any purchase date is less than the fair market value per share on the start date
of the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day. All participants in the terminated offering will be transferred to the new
offering period.
Change in Control. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be
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<PAGE> 54
exercised immediately prior to the effective date of the acquisition. The
purchase price will be equal to 85% of the market value per share on the
participant's entry date into the offering period in which an acquisition occurs
or, if lower, 85% of the fair market value per share immediately prior to the
acquisition.
Plan Provisions. The following provisions will also be in effect under the
plan:
- The plan will terminate no later than the last business day of April
2010.
- The board may at any time amend, suspend or discontinue the plan.
However, certain amendments may require stockholder approval.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of 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 for:
- 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
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
Such limitation of 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 certificate of
incorporation and bylaws 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
the 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 the bylaws would
permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses specified in the agreements, including
attorneys' fees, judgments, fines and settlement amounts incurred by any such
person in any action or proceeding arising out of such person's services as a
director or executive officer of Websense, any subsidiary of Websense or any
other entity to which the person provides services at our request. In addition,
we maintain directors' and officers' insurance. We believe that these provisions
and agreements are necessary to attract and retain qualified persons as
directors and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
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<PAGE> 55
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of December 31, 1999, as adjusted to
reflect the sale of common stock offered in this offering, by:
- each person, or group of affiliated persons, known by us to own
beneficially more than 5% of our outstanding common stock;
- each director;
- each of our directors and our executive officers named in the Summary
Compensation Table; and
- all of our directors and executive officers as a group.
Except as otherwise noted, the address of each person listed in the table
is c/o Websense, Inc., 10240 Sorrento Valley Road, San Diego, California 92121.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to shares. To our knowledge, except under applicable community property
laws or as otherwise indicated, the persons named in the table have sole voting
and sole investment control with respect to all shares shown as beneficially
owned. The applicable percentage of ownership for each stockholder is based on
15,394,698 shares of common stock outstanding as of December 31, 1999 and
shares outstanding after the completion of this offering, in each
case together with applicable options for that stockholder. Shares of common
stock issuable upon exercise of options and other rights beneficially owned that
are exercisable on or before February 29, 2000 are deemed outstanding for the
purpose of computing the percentage ownership of the person holding those
options and other rights but are not deemed outstanding for computing the
percentage ownership of any other person. A portion of the shares issued to
officers or issuable upon exercise of options by officers is subject to
repurchase by us at the original exercise price in the event of termination of
that officers' employment, which repurchase right lapses over time.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
--------------------
TOTAL NUMBER BEFORE AFTER
NAME AND ADDRESS OF SHARES OFFERING OFFERING
---------------- ------------ -------- --------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS:
John B. Carrington(1)....................................... 315,000 2.0% %
Bruce T. Coleman............................................ 90,000 .6
J. Cleve Adams(2)........................................... 102,708 .7
Ronald B. Hegli............................................. -- * *
Carrie E. Carlander(3)...................................... 54,583 .3
Robert J. Loarie(4)......................................... 3,753,088 24.4
c/o Morgan Stanley Dean Witter Venture Partners
3000 Sand Hill Road
Building Four, Suite 250
Menlo Park, California 94025
John C. Stiska.............................................. 240,000 1.6
Donald B. Milder(5)......................................... 2,287,398 14.9
18552 MacArthur Blvd., Suite 400
Irvine, California 92612
Gary E. Sutton.............................................. -- * *
OTHER 5% STOCKHOLDERS:
Entities affiliated with Morgan Stanley Dean Witter Venture
Partners(6)............................................... 3,753,088 24.4
3000 Sand Hill Road
Building Four, Suite 250
Menlo Park, California 94025
Crosspoint Venture Partners 1999, L.P....................... 2,287,398 14.9
18552 MacArthur Blvd., Suite 400
Irvine, California 92612
</TABLE>
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<PAGE> 56
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
--------------------
TOTAL NUMBER BEFORE AFTER
NAME AND ADDRESS OF SHARES OFFERING OFFERING
---------------- ------------ -------- --------
<S> <C> <C> <C>
Persons and entities affiliated with Edelson Technology
Partners(7)................................................. 1,053,950 6.8
Persons and entities affiliated with Nippon Investment &
Finance Co., Ltd.(8)...................................... 806,377 5.2
Philip G. Trubey............................................ 5,760,000 37.4
3272 Lahitte Court
San Diego, California 92122(9)
Janet A. McVeigh............................................ 5,760,000 37.4
3272 Lahitte Court
San Diego, California 92122(10)
All of our officers and directors as a group (12
persons)(11).............................................. 887,291 5.8
</TABLE>
- -------------------------
* Represents beneficial ownership of less than one percent of the outstanding
shares of our common stock.
(1) Upon exercise of stock options, Mr. Carrington acquired 325,000 shares of
common stock, 10,000 shares of which he subsequently transferred. Mr.
Carrington disclaims beneficial ownership of these 10,000 shares.
(2) Consists of 102,708 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of December 31, 1999.
(3) Includes 13,333 shares issuable upon exercise of stock options exercisable
within 60 days of December 31, 1999.
(4) Includes 3,293,356 shares held by Morgan Stanley Venture Partners III,
L.P.; 316,209 shares held by Morgan Stanley Venture Investors III, L.P. and
143,523 shares held by The Morgan Stanley Venture Partners Entrepreneur
Fund, L.P. Mr. Loarie, as a general partner of each of these limited
partnerships, may be deemed to have voting and investment power over these
shares. Mr. Loarie disclaims beneficial ownership in such shares, except to
the extent of his pecuniary interest in each of the limited partnerships.
(5) Consists of 2,287,398 shares held by Crosspoint Venture Partners 1999, L.P.
Mr. Milder, as a general partner of this limited partnership, may be deemed
to have voting and investment power over these shares. Mr. Milder disclaims
beneficial ownership in such shares, except to the extent of his pecuniary
interest in the limited partnership.
(6) Includes 3,293,356 shares held by Morgan Stanley Venture Partners III,
L.P.; 316,209 shares held by Morgan Stanley Venture Investors III, L.P. and
143,523 shares held by The Morgan Stanley Venture Partners Entrepreneur
Fund, L.P.
(7) Includes 803,950 shares held by Edelson IV, L.P. and 250,000 shares held by
Harry Edelson, a general partner of Edelson IV, L.P.
(8) Includes 392,500 shares held by Investment Enterprise Partnership "New
Technology Fund 98;" 140,500 shares held by Investment Enterprises
Partnership "NIF II;" 174,239 shares held by Nippon Investment & Finance
Co., Ltd.; 45,577 shares held by Nippon Investment & Finance New Technology
Fund 99-A; 45,577 shares held by Nippon Investment & Finance New Technology
Fund 99-B; and 7,984 shares held by Jim Timmins, a partner of NIF Ventures
USA, Inc.
(9) Includes 2,880,000 shares held by Mr. Trubey and 2,880,000 shares held by
Janet A. McVeigh, Mr. Trubey's spouse.
(10) Includes 2,880,000 shares held by Ms. McVeigh and 2,880,000 shares held by
Philip G. Trubey, Ms. McVeigh's spouse.
(11) Includes 116,041 shares issuable upon exercise of stock options exercisable
within 60 days of December 31, 1999.
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<PAGE> 57
TRANSACTIONS WITH RELATED PARTIES
Since inception we have issued shares of our convertible preferred stock to
investors in private placement transactions as follows: a total of 3,703,704
shares of Series A preferred stock at a price of $1.62 per share in May 1998,
and a total of 3,333,332 shares of Series B preferred stock at a price of $3.00
per share between June and September 1999. The following table summarizes the
shares of preferred stock purchased by our executive officers, directors, and 5%
stockholders and persons and entities associated with them in these private
placement transactions. All shares of our preferred stock will convert into
common stock on a 1-for-1 basis upon completion of this offering. Shares held by
affiliated persons and entities have been aggregated. See "Principal
Stockholders." In connection with the above transactions, we entered into an
agreement with the investors providing for registration rights with respect to
these shares. See "Description of Capital Stock -- Registration Rights."
<TABLE>
<CAPTION>
SERIES A SERIES B TOTAL
PREFERRED STOCK PREFERRED STOCK CONSIDERATION
--------------- --------------- -------------
<S> <C> <C> <C>
Entities affiliated with Morgan Stanley
Ventures........................................ 3,086,420 333,334 $6,000,000
Entities affiliated with Crosspoint Venture
Partners.......................................... -- 1,910,000 5,730,000
A person and entity affiliated with Edelson
Technology...................................... 617,284 66,667 1,201,001
A person and entities affiliated with Nippon
Finance & Investment Co., Ltd................... -- 673,333 2,019,999
</TABLE>
In May 1999, John B. Carrington acquired 325,000 shares upon exercise of an
option at an exercise price of $0.50 per share and Bruce T. Coleman acquired
90,000 shares upon exercise of options at an exercise price of $0.20 per share.
In September 1999, Douglas C. Wride acquired 75,000 shares upon exercise of an
option at an exercise price of $0.75 per share. In July and December 1999,
Carrie E. Carlander acquired a total of 41,250 shares upon exercise of options
at $0.20 per share.
Stock option grants to our directors are described under the caption
"Management -- Board Compensation."
On March 29, 1999, Philip G. Trubey and Janet A. McVeigh, our founders, and
each a greater than 5% stockholder, entered into an agreement with John Stiska
pursuant to which Mr. Stiska agreed to serve as a member of our Board of
Directors on behalf of Mr. Trubey and Ms. McVeigh. Under this agreement, Mr.
Stiska agreed to represent the interests of Mr. Trubey and Ms. McVeigh as they
relate to us. In exchange, Mr. Trubey and Ms. McVeigh each transferred to Mr.
Stiska 140,000 shares of our common stock held by them. On August 25, 1999, we
entered into a Transfer Agreement with Mr. Trubey, Ms. McVeigh and Mr. Stiska in
order to effect the transfer of our shares described above.
We believe that all of our transactions with affiliates were entered into
on terms and conditions no less favorable to us than those that could have been
obtained from unaffiliated third parties. In addition, transactions with our
affiliates are approved by a majority of our board of directors, including a
majority of our independent and disinterested directors.
We have entered into indemnification agreements with all of our officers
and directors. See "Management -- Limitation of Liability and Indemnification
Matters." Some of our stockholders are entitled to have their shares registered
by us for resale. See "Description of Capital Stock -- Registration Rights."
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<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
The following information describes our common stock and preferred stock
and certain provisions of our certificate of incorporation and our bylaws as in
effect upon the closing of this offering. This description is only a summary.
You should also refer to the certificate of incorporation and bylaws which have
been filed with the SEC as exhibits to our registration statement, of which this
prospectus forms a part. The descriptions of the common stock and preferred
stock reflect changes to our capital structure that will occur upon the receipt
of the requisite board and stockholder approvals and upon the closing of this
offering in accordance with the terms of the certificate of incorporation.
Upon the completion of the offering our authorized capital stock will
consist of 100 million shares of common stock, par value $0.01 per share, and 5
million shares of preferred stock, par value $0.01 per share.
COMMON STOCK
Assuming conversion of the convertible preferred stock as described below,
as of December 31, 1999, there were 15,394,698 shares of common stock
outstanding and held of record by 54 stockholders. Based upon the number of
shares outstanding and giving effect to (1) the automatic conversion of each
share of our preferred stock into one share of our common stock upon the closing
of this offering and (2) the issuance of the shares of common
stock offered hereby, there will be shares of common stock
outstanding upon the closing of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available for that purpose, subject to any preferential dividend
rights of any outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of common stock are, and the shares offered by us in this offering will
be, when issued in consideration for payment thereof, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which we may designate and issue in the
future. Upon the closing of this offering, there will be no shares of preferred
stock outstanding.
PREFERRED STOCK
As of December 31, 1999, there were 7,037,036 shares of convertible
preferred stock outstanding. All outstanding shares of convertible preferred
stock will be converted into an aggregate of 7,037,036 shares of common stock
upon the closing of this offering and such shares of convertible preferred stock
will no longer be authorized, issued or outstanding.
Upon the closing of this offering, the board of directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of 5 million shares of preferred stock in one or more series and
to fix or alter the designations, powers, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. We have no present plans
to issue any shares of preferred stock. Please see "-- Anti-Takeover Effects of
Certain Provisions of Delaware Law and our Certificate of Incorporation and
Bylaws."
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<PAGE> 59
OPTIONS
As of December 31, 1999, options to purchase a total of 3,161,551 shares of
common stock were outstanding, all of which are subject to lock-up agreements
under the terms of the option agreements governing such options. Options to
purchase a total of 1,588,449 shares of common stock remain available for grant
under the 2000 Stock Incentive Plan. Please see "Management -- Benefit Plans"
and "Shares Eligible for Future Sale."
COMMON STOCK WARRANTS
We have an outstanding warrant to purchase 50,000 shares of common stock,
at an exercise price of $0.05 per share, which will expire upon the closing of
this offering. We also have outstanding warrants to purchase an aggregate of
62,500 shares of common stock, at an exercise price of $3.00 per share. These
warrants expire on July 30, 2004.
REGISTRATION RIGHTS
We have provided purchasers of our Series A and Series B preferred
securities with rights to require us to register their securities under the
Securities Act of 1933, as amended. The holders of 50% of the aggregate number
of shares issued on conversion of the Series A and Series B preferred stock have
the right to demand that we register their shares under the Securities Act of
1933 subject to certain limitations. We are not required to effect more than 2
registrations pursuant to such demand registration rights. In addition, after
the closing of this offering these holders will be entitled to certain piggyback
registration rights with respect to the registration of such shares of common
stock under the Securities Act of 1933. In the event that we propose to register
any shares of common stock under the Securities Act of 1933 either for our
account or for the account of other security holders, the holders of shares
having piggyback registration rights are entitled to receive notice of such
registration and to include their shares in any such registration, subject to
certain limitations. Further, at any time after we become eligible to file a
registration statement on Form S-3, the holders of registration rights may
require us to file registration statements under the Securities Act on Form S-3
with respect to their shares of common stock having an aggregate offering price
of at least $500,000. These registration rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares of common stock held by such security
holders to be included in such registration. We are generally required to bear
all of the expenses of all such registrations, including the reasonable fees of
a single counsel acting on behalf of all selling holders, except underwriting
discounts and selling commissions. Registration of any of the shares of common
stock held by security holders with registration rights would result in such
shares becoming freely tradable without restriction under the Securities Act
immediately upon effectiveness of such registration.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE
OF INCORPORATION AND BYLAWS
General. Certain provisions of Delaware law and our certificate of
incorporation and bylaws could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, control
of us. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of our common stock. These provisions of
Delaware law and the certificate of incorporation and bylaws may also have the
effect of discouraging or preventing certain types of transactions involving an
actual or threatened change of control of us, including unsolicited takeover
attempts, even though such a transaction may offer our stockholders the
opportunity to sell their stock at a price above the prevailing market price.
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<PAGE> 60
Delaware Takeover Statute. We are subject to the "business combination"
provisions of Section 203 of the Delaware General Corporation Law. Subject to
certain exceptions, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless:
- the transaction is approved by the board of directors prior to the date
the interested stockholder obtained interested stockholder status;
- upon consummation of the transaction that resulted in the stockholders
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by (a) persons who are directors and also
officers and(b) employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer; or
- on or subsequent to the date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the interested stockholder.
A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years did own,
15% or more of the corporation's voting stock. This statute could prohibit or
delay the accomplishment of mergers or other takeover or change in control
attempts with respect to us and, accordingly, may discourage attempts to acquire
us.
Charter and Bylaw Provisions. In addition, certain provisions of our
certificate of incorporation and bylaws summarized in the following paragraphs
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
Classified Board of Directors; Removal; Filling Vacancies and
Amendment. The certificate of incorporation and bylaws provide that the board
shall be divided into three classes of directors serving staggered, three-year
terms. The classification of the board has the effect of requiring at least two
annual stockholder meetings, instead of one, to replace a majority of members of
the board. Subject to the rights of the holders of any outstanding series of
preferred stock, the certificate of incorporation authorizes only the board to
fill vacancies, including newly created directorships. Accordingly, this
provision could prevent a stockholder from obtaining majority representation on
the board by enlarging the board of directors and filling the new directorships
with its own nominees. The certificate of incorporation also provides that
directors may be removed by stockholders only for cause and only by the
affirmative vote of holders of two-thirds of the outstanding shares of voting
stock.
Stockholder Action; Special Meeting of Stockholders. The certificate of
incorporation provides that stockholders may not take action by written consent,
but may only take action at duly called annual or special meetings of
stockholders. The certificate of incorporation further provides that special
meetings of our stockholders may be called only by the chairman of the board of
directors or a majority of the board of directors. This limitation on the right
of stockholders to call a special meeting could make it more difficult for
stockholders to initiate actions that are opposed by the board of directors.
These actions could include the removal of an incumbent director or the election
of a stockholder nominee as a director. They could also include the
implementation of a rule requiring stockholder ratification of specific
defensive strategies that have been adopted by the board of directors with
respect to unsolicited takeover bids. In addition, the limited ability of the
stockholders to call a special meeting of stockholders may make it more
difficult to change the existing board and management.
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<PAGE> 61
Advance Notice Requirements for Stockholder Proposals and Director
Nomination. The bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at our principal executive offices not less than 120 days
prior to the date of our annual meeting. The bylaws also specify certain
requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual
meeting of stockholders or from making nominations for directors at an annual
meeting of stockholders.
Authorized but Unissued Shares. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock and preferred stock could render
more difficult or discourage an attempt to obtain control of us by means of a
proxy contest, tender offer, merger or otherwise.
Supermajority Vote to Amend Charter and Bylaws. The Delaware General
Corporation Law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage.
Following the completion of this offering, our present directors, and executive
officers and principal stockholders will beneficially own approximately
of our common stock. This gives them veto power with respect to
any stockholder action or approval requiring either a two-thirds vote or a
simple majority.
NASDAQ NATIONAL MARKET
We have applied to list our common stock on the Nasdaq National Market
under the trading symbol "WBSN."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is U.S. Stock
Transfer Corporation, Glendale, California.
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<PAGE> 62
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to us.
After the offering, shares of our common stock will be
outstanding, assuming that the underwriters do not exercise the over-allotment
option. Of these shares, all of the shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act. The remaining shares of common
stock held by existing stockholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act, which rules are
summarized below.
The following table shows approximately when the shares of our common stock
that are not being sold in this offering but which will be outstanding when this
offering is complete will be eligible for sale in the public market:
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET
<TABLE>
<CAPTION>
NUMBER OF
SHARES ELIGIBLE
FOR FUTURE
RELEVANT DATES SALE COMMENT
-------------- --------------- --------------------------------------
<S> <C> <C>
On effective date..................... -- Shares eligible for sale under Rule
144(k)
90 days after effective date.......... -- Additional shares eligible for sale
under Rules 144 and 701
180 days after effective date......... 14,154,698 All shares subject to lock-up
agreements released; additional shares
eligible for sale under Rules 144 and
701.
More than 181 days after effective 1,240,000 Additional shares becoming eligible
date................................ for sale under Rule 144 more than 180
days after the effective date
</TABLE>
Resale of most of the restricted shares that will become available for sale
in the public market starting 180 days after the effective date will be limited
by volume and other resale restrictions under Rule 144 because the holders are
our affiliates.
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 is entitled to sell, within any three-month
period, a number of shares that is not more than the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the
sale on Form 144 is filed.
Sales under Rule 144 must also comply with manner of sale provisions and
notice requirements and are subject to the availability of current public
information about us.
60
<PAGE> 63
RULE 144(K)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us under
a stock option plan or other written agreement can resell those shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
complying with some of the restrictions, including the holding period, contained
in Rule 144.
LOCK-UP AGREEMENTS
Executive officers, directors and certain security holders will sign
lock-up agreements under which they will agree not to transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for shares of common stock, for a period of
180 days after the date of this prospectus. Hambrecht & Quist LLC may, however,
in its sole discretion, at any time, without notice, release all or any portion
of the shares subject to lock-up agreements. In addition, employees who acquired
common stock upon exercise of stock options issued under our 1998 Equity
Incentive Plan have accepted substantially identical lock-up terms with us.
STOCK PLANS
As soon as practicable after the completion of this offering, we intend to
file a registration statement under the Securities Act covering shares of our
common stock reserved for issuance under our 2000 Stock Incentive Plan and the
2000 Employee Stock Purchase Plan.
61
<PAGE> 64
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Hambrecht & Quist LLC,
SG Cowen Securities Corporation and Wit Capital Corporation, have severally
agreed to purchase from us the following numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Hambrecht & Quist LLC.......................................
SG Cowen Securities Corporation.............................
Wit Capital Corporation.....................................
--------
Total.............................................
========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are conditioned on the absence of any material adverse change in
our business and the receipt of certificates, opinions and letters from us, our
counsel and our independent auditors. The underwriters are committed to purchase
all shares of common stock offered in this prospectus if any shares are
purchased.
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and to dealers at the public offering price less a concession not in
excess of $ per share. The underwriters may allow and the dealers may
reallow a concession not in excess of $ per share to other dealers. After
the public offering of the shares, the underwriters may change the offering
price and other selling terms. The representatives of the underwriters have
informed us that the underwriters do not intend to confirm discretionary sales
in excess of 5% of the shares of common stock offered by this prospectus.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to additional
shares of common stock at the public offering price, less the underwriting
discount set forth on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase a number of shares that approximately reflects the same percentage
of total shares the underwriter purchased in the above table. We will be
obligated to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of common stock offered in this
prospectus.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us. The underwriting discount
was determined based on an arms' length negotiation between the representatives
of the underwriters and Websense. These amounts are shown assuming both no
exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares.
<TABLE>
<CAPTION>
PAID BY WEBSENSE
----------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total....................................................... $ $
</TABLE>
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ . The
offering of the shares is made for delivery when, as and if accepted by the
underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, and to contribute to payments the
underwriters may be required to make in respect of those liabilities.
62
<PAGE> 65
All of our stockholders, including all of our executive officers and
directors, have agreed that they will not, without the prior written consent of
Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of common
stock, options or warrants to acquire shares of common stock or securities
exchangeable for or convertible into shares of common stock owned by them during
the 180-day period following the date of this prospectus. We have agreed that we
will not, without the prior written consent of Hambrecht & Quist LLC, offer,
sell or otherwise dispose of any shares of common stock, options or warrants to
acquire shares of common stock or securities exchangeable for or convertible
into shares of common stock during the 180-day period following the date of this
prospectus, except that we may issue shares upon the exercise of options granted
prior to the date of this prospectus and may grant additional options under our
stock plans, provided that, without the prior written consent of Hambrecht &
Quist LLC, any additional options shall not be exercisable during the 180-day
period.
At our request, the underwriters have reserved up to shares of
common stock to be sold in the offering and offered for sale, at the public
offering price, to our customers and persons with whom we have key business
relationships. The number of shares available for sale to the general public in
the offering will be reduced to the extent these persons purchase the reserved
shares. Any reserved shares not so purchased will be offered to the general
public on the same basis as other shares offered by this prospectus.
Persons participating in this offering may over-allot or effect
transactions that stabilize, maintain or otherwise affect the market price of
the common stock at levels above those that might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or the effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
Stabilizing, if commenced, may be discontinued at any time.
Before this offering, there was no public market for the common stock. The
initial public offering price for the common stock will be determined by
negotiations between ourselves and the representatives. Among the factors to be
considered in determining the initial public offering price will be prevailing
market and economic conditions, our revenues and earnings, market valuations of
other companies engaged in activities similar to ours, estimates of our business
potential and prospects, the present state of our business operations, our
management and other factors deemed relevant.
Wit Capital, a member of the National Association of Securities Dealers,
Inc. will participate in the offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter,
co-manager or selected dealer in over 170 public offerings. Except for its
participation as a manager in this offering, Wit Capital has no relationship
with us or any of our founders or significant shareholders.
A prospectus in electronic format is being made available on an Internet
Web site maintained by Wit Capital. In addition, pursuant to an e-Dealer
Agreement, all dealers purchasing shares from Wit Capital in the offering
similarly have agreed to make a prospectus in electronic format available on Web
sites maintained by each of the e-Dealers. Other information on any of these Web
sites does not constitute part of this prospectus.
63
<PAGE> 66
LEGAL MATTERS
The validity of the common stock offered in this offering will be passed
upon for us by Brobeck, Phleger & Harrison LLP, San Diego, California. As of the
date of this prospectus, members of that firm own 19,959 shares of our common
stock. Legal matters will be passed upon for the underwriters by Gray Cary Ware
& Freidenrich LLP, San Diego, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1999 and 1998, and for each of the three years in the
period ended December 31, 1999, as set forth in their report. We have included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for our
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement. You should refer to the
registration statement and its exhibits for additional information. Whenever we
make reference in this prospectus to any of our contracts, agreements or other
documents, the references are not necessarily complete and you should refer to
the exhibits attached to the registration statement for the copies of the actual
contract, agreement or other document. When we complete this offering, we will
also be required to file annual, quarterly and special reports, proxy statements
and other information with the SEC.
You can read our SEC filings, including the registration statement, over
the Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference facilities at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade
Center, Thirteenth Floor, New York, New York 10048. You may also obtain copies
of the documents at prescribed rates by writing to the Public Reference Section
of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference facilities.
64
<PAGE> 67
WEBSENSE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets as of December 31, 1998 and 1999............. F-3
Statements of Operations for the years ended December 31,
1997, 1998 and 1999....................................... F-4
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1997, 1998 and 1999.................... F-5
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 68
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Websense, Inc.
We have audited the accompanying balance sheets of Websense, Inc. (the
"Company") as of December 31, 1998 and 1999 and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 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 auditing standards generally
accepted in the United States. 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 Websense, Inc. at December
31, 1998 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
San Diego, California
January 14, 2000
F-2
<PAGE> 69
WEBSENSE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
--------------------------- EQUITY AT DECEMBER 31,
1998 1999 1999
----------- ------------ ----------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 1,753,405 $ 10,734,601
Accounts receivable, net of allowance for
doubtful accounts of $27,154 at December 31,
1998 and $252,880 at December 31, 1999................. 1,551,235 3,448,878
Accounts receivable from a related party................. 39,158 126,772
Other current assets..................................... 57,461 328,990
----------- ------------
Total current assets.............................. 3,401,259 14,639,241
Property and equipment, net................................ 781,269 1,947,032
Deposits and other assets.................................. 172,400 87,256
Accrued offering costs..................................... -- 82,574
----------- ------------
Total Assets............................................... $ 4,354,928 $ 16,756,103
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 328,406 $ 566,972
Accounts payable to a related party...................... 8,575 6,327
Accrued payroll and related benefits..................... 308,728 894,457
Other accrued expenses................................... 194,015 556,767
Current portion of deferred revenue...................... 2,755,964 6,888,562
Long-term debt, current portion.......................... 182,359 503,795
----------- ------------
Total current liabilities......................... 3,778,047 9,416,880
Long-term debt, less current portion....................... 313,963 993,103
Deferred revenue, less current portion..................... 1,480,378 4,703,960
Commitments
Stockholders' equity (deficit):
Convertible preferred Series A -- par value $0.01;
3,705,000 shares authorized at December 31, 1998 and
1999, 3,703,704 shares issued and outstanding at
December 31, 1998 and 1999, liquidation preference of
$6,000,000 at December 31, 1998 and 1999. None
outstanding pro forma.................................. 37,037 37,037 $ --
Convertible preferred Series B -- par value $0.01; none
and 3,333,340 shares authorized at December 31, 1998
and 1999, respectively, none and 3,333,332 issued and
outstanding at December 31, 1998 and 1999,
respectively, liquidation preference of $0 and
$9,999,996 at December 31, 1998 and 1999, respectively.
None outstanding pro forma............................. -- 33,333 --
Common stock -- par value of $0.01; 92,961,660 shares
authorized, 7,000,000 and 8,357,662 shares issued and
outstanding at December 31, 1998 and 1999,
respectively, 15,394,698 shares outstanding pro
forma.................................................. 70,000 83,577 153,947
Additional paid in capital............................... 5,832,816 20,484,600 20,484,600
Deferred compensation.................................... -- (2,585,372) (2,585,372)
Accumulated deficit...................................... (7,157,313) (16,411,015) (16,411,015)
----------- ------------ ------------
Total stockholders' equity (deficit)....................... (1,217,460) 1,642,160 $ 1,642,160
----------- ------------ ============
Total liabilities and stockholders' equity (deficit)....... $ 4,354,928 $ 16,756,103
=========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 70
WEBSENSE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Subscriptions..................................... $ 637,292 $ 2,503,057 $ 7,140,645
Other products and services....................... 4,382,571 4,415,979 1,506,056
----------- ----------- -----------
Total revenues................................. 5,019,863 6,919,036 8,646,701
Cost of revenues:
Subscriptions..................................... 217,697 736,471 1,083,932
Other products and services....................... 3,213,667 3,723,098 1,190,346
----------- ----------- -----------
Total cost of revenues......................... 3,431,364 4,459,569 2,274,278
----------- ----------- -----------
Gross margin........................................ 1,588,499 2,459,467 6,372,423
Operating expenses:
Selling and marketing............................. 1,720,564 4,597,274 6,311,131
Research and development.......................... 527,666 1,789,499 3,912,712
General and administrative........................ 767,385 1,714,572 3,805,344
Amortization of stock-based compensation.......... -- -- 1,821,638
----------- ----------- -----------
Total operating expenses....................... 3,015,615 8,101,345 15,850,825
----------- ----------- -----------
Loss from operations................................ (1,427,116) (5,641,878) (9,478,402)
Interest income (expense), net...................... (35,165) 33,000 224,700
----------- ----------- -----------
Net loss.......................................... $(1,462,281) $(5,608,878) $(9,253,702)
=========== =========== ===========
Historical net loss per share:
Basic and diluted................................. $ (0.21) $ (0.80) $ (1.25)
=========== =========== ===========
Weighted average shares -- basic and diluted...... 7,000,000 7,000,000 7,403,000
=========== =========== ===========
Pro forma net loss per share:
Basic and diluted................................. $ (0.71)
===========
Weighted average shares -- basic and diluted...... 12,979,000
===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 71
WEBSENSE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED
SERIES A SERIES B COMMON STOCK
------------------- ------------------- ------------------- DEFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT COMPENSATION
--------- ------- --------- ------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996................ -- $ -- -- $ -- 7,000,000 $70,000 $ --
Distribution paid to shareholders......... -- -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- -----------
Balance at December 31, 1997................ -- -- -- -- 7,000,000 70,000 --
Preferred stock issued for cash, net of
offering costs of $269,072.............. 3,703,704 37,037 -- -- -- -- --
Net loss.................................. -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- -----------
Balance at December 31, 1998................ 3,703,704 37,037 -- -- 7,000,000 70,000 --
Preferred stock issued for cash, net of
offering costs of $185,065.............. -- -- 3,333,332 33,333 --
Issuance of common stock upon exercise of
options................................. -- -- -- -- 1,090,455 10,905 --
Issuance of common stock upon exercise of
warrant................................. -- -- -- -- 250,000 2,500 --
Issuance of warrant in connection with the
termination of an exclusive distributor
agreement............................... -- -- -- -- -- -- --
Issuance of common stock for services..... -- -- -- -- 17,207 172 --
Issuance of common stock options for
services................................ -- -- -- -- -- -- --
Deferred compensation..................... -- -- -- -- -- (4,407,010)
Amortization of deferred compensation..... -- -- -- -- -- -- 1,821,638
Net loss.................................. -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- -----------
Balance at December 31, 1999................ 3,703,704 $37,037 3,333,332 $33,333 8,357,662 $83,577 $(2,585,372)
========= ======= ========= ======= ========= ======= ===========
<CAPTION>
RETAINED
EARNINGS TOTAL
ADDITIONAL (ACCUMULATED STOCKHOLDERS'
PAID-IN CAPITAL DEFICIT) EQUITY (DEFICIT)
--------------- ------------ ----------------
<S> <C> <C> <C>
Balance at December 31, 1996................ $ 138,925 $ 38,160 $ 247,085
Distribution paid to shareholders......... -- (124,314) (124,314)
Net loss.................................. -- (1,462,281) (1,462,281)
----------- ------------ -----------
Balance at December 31, 1997................ 138,925 (1,548,435) (1,339,510)
Preferred stock issued for cash, net of
offering costs of $269,072.............. 5,693,891 -- 5,730,928
Net loss.................................. -- (5,608,878) (5,608,878)
----------- ------------ -----------
Balance at December 31, 1998................ 5,832,816 (7,157,313) (1,217,460)
Preferred stock issued for cash, net of
offering costs of $185,065.............. 9,781,598 -- 9,814,931
Issuance of common stock upon exercise of
options................................. 349,223 -- 360,128
Issuance of common stock upon exercise of
warrant................................. -- -- 2,500
Issuance of warrant in connection with the
termination of an exclusive distributor
agreement............................... 37,500 -- 37,500
Issuance of common stock for services..... 27,703 -- 27,875
Issuance of common stock options for
services................................ 48,750 -- 48,750
Deferred compensation..................... 4,407,010 -- --
Amortization of deferred compensation..... -- -- 1,821,638
Net loss.................................. -- (9,253,702) (9,253,702)
----------- ------------ -----------
Balance at December 31, 1999................ $20,484,600 $(16,411,015) $ 1,642,160
=========== ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 72
WEBSENSE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................ $(1,462,281) $(5,608,878) $(9,253,702)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation...................................... 77,154 350,835 601,030
Issuance of common stock options and warrant for
services....................................... -- -- 114,125
Loss on disposal of fixed assets.................. 29,979 -- 21,330
Deferred revenue.................................. 1,053,985 3,105,109 7,356,180
Provision for doubtful accounts................... 25,000 72,274 235,924
Amortization of deferred compensation............. -- -- 1,821,638
Changes in operating assets and liabilities:
Accounts receivable............................ (697,329) (570,481) (2,213,137)
Other current assets........................... 4,365 32,652 (271,529)
Accounts payable............................... 371,749 (446,648) 236,318
Accrued payroll and related benefits........... 225,305 41,767 585,729
Other accrued expenses......................... 242,580 (49,899) 362,752
----------- ----------- -----------
Cash used in operating activities................... (129,493) (3,073,269) (403,342)
INVESTING ACTIVITIES:
Purchase of equipment............................... (178,611) (801,860) (1,779,349)
Proceeds from sale of equipment..................... -- -- 16,050
Deposits............................................ -- (134,833) 85,144
----------- ----------- -----------
Cash used in investing activities................... (178,611) (936,693) (1,678,155)
FINANCING ACTIVITIES:
Repayments on notes payable......................... (113,694) (557,546) (296,526)
Proceeds from issuance of note payable.............. 589,592 467,111 1,264,234
Proceeds from issuance of Series B preferred
stock............................................. -- -- 9,814,931
Proceeds from issuance of Series A preferred
stock............................................. -- 5,730,928 --
Proceeds from exercise of stock options............. -- -- 360,128
Proceeds from exercise of warrant................... -- -- 2,500
Accrued offering costs.............................. -- -- (82,574)
Distributions paid to shareholders.................. (124,314) -- --
----------- ----------- -----------
Net cash provided by financing activities........... 351,584 5,640,493 11,062,693
----------- ----------- -----------
Increase in cash and cash equivalents............... 43,480 1,630,531 8,981,196
Cash and cash equivalents at beginning of year...... 79,394 122,874 1,753,405
----------- ----------- -----------
Cash and cash equivalents at end of year............ $ 122,874 $ 1,753,405 $10,734,601
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid....................................... $ 31,109 $ 30,126 $ 66,839
=========== =========== ===========
Income taxes paid................................... $ 800 $ 800 $ 29,446
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 73
WEBSENSE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Websense, Inc. ("Websense" or the "Company") was founded in 1994 as
NetPartners Internet Solutions, a reseller of computer network security
solutions and related services. Today the Company provides employee Internet
management solutions that enable businesses to monitor, report and manage how
their employees use the Internet. The Company's Websense Enterprise solution
supports an organization's efforts to improve employee productivity, conserve
network bandwidth and mitigate potential legal liability.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRO FORMA STOCKHOLDERS' EQUITY
If an initial public offering contemplated by this Prospectus is
consummated under the terms presently anticipated, all outstanding shares of
convertible preferred stock at December 31, 1999 will automatically convert into
7,037,036 common shares. Unaudited pro forma stockholders' equity at December
31, 1999, adjusted for the conversion of the convertible preferred stock is
disclosed in the accompanying balance sheet.
REVENUE RECOGNITION
In January 1998, the Company adopted American Institute of Certified Public
Accountants Statement of Position No. 97-2, Software Revenue Recognition (SOP
97-2). This statement provides guidance for recognizing revenue related to sales
by software vendors. The adoption of SOP 97-2 did not have a significant impact
on the Company's revenue recognition policies or practices.
The Company sells Websense Enterprise on a subscription basis. A
subscription agreement is generally 12, 24 or 36 months in duration and for a
fixed number of users. Upon entering into the subscription agreement, the
Company invoices customers. Generally, payment is due for the full term of the
subscription within 30 days of invoicing. The Company recognizes revenue on a
straight-line basis over the term of the subscription agreement. The Company
records amounts billed to customers in excess of recognizable revenue as
deferred revenue in the accompanying balance sheets.
The Company also derives revenue from professional services for the
implementation of its solution and from resale of software and hardware. The
Company recognizes revenue for these services and products upon their completion
or delivery.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
F-7
<PAGE> 74
WEBSENSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company sells its products to customers primarily in the United States,
Canada, Europe and Asia. The Company maintains a reserve for potential credit
losses and historically such losses have been within management's estimates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives, which range from three
to five years.
COMPUTER SOFTWARE COSTS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, when significant the Company capitalizes costs incurred in
the development of specific computer software products after establishment of
technological feasibility and marketability. There have been no such costs
capitalized to date as the costs incurred during the period between
technological feasibility to general release have not been significant.
In 1999, the Company adopted the American Institute of Certified Public
Accountants Statement of Position 98-1 "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). This standard
requires companies to capitalize qualifying computer software costs, which are
incurred during the application development stage and amortize them over the
software's estimated useful life.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred. Total advertising costs for the
years ended December 31, 1997, 1998 and 1999 were $359,610, $1,796,245 and
$998,320, respectively.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-Based Compensation requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25, when
the exercise price of the Company's employee stock options, is not less than the
fair value for the underlying stock on the date of grant, no compensation
expense is recognized. With respect to certain options granted during 1999, the
Company has recorded deferred compensation of $4,407,010 for the difference at
the grant date between the exercise price per share determined by the board of
directors on the date of grant and the deemed fair value per share determined
solely for financial reporting purposes. Deferred stock compensation is
recognized and amortized on an accelerated basis in accordance with Financial
Accounting Standards Board Interpretation No. 28 over the vesting period of the
related options, generally four years.
F-8
<PAGE> 75
WEBSENSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which
requires that all components of comprehensive income, including net income, be
reported in the financial statements in the period in which they are recognized.
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. Net
income (loss) and other comprehensive income, including foreign currency
translation adjustments, and unrealized gains and losses on investments, shall
be reported, net of their related tax effect, to arrive at comprehensive income
(loss). Comprehensive income (loss) for the years ended December 31, 1997, 1998
and 1999 did not differ from reported net income (loss).
NET LOSS PER SHARE
Websense computes net loss per share in accordance with SFAS No. 128,
Earnings Per Share, and SEC Staff Accounting Bulletin (or SAB) No. 98. Under the
provisions of SFAS No. 128, basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per share
is computed by dividing the net income (loss) for the period by the weighted
average number of common and common equivalent shares outstanding during the
period.
Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares arising from preferred stock that will
automatically convert upon the closing of the initial public offering
contemplated by this prospectus (using the as-if converted method from the
original date of issuance).
A reconciliation of shares used in the calculation of historical and pro
forma basic and diluted net loss per share attributable to common stockholders
is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Weighted average shares outstanding...................... 7,000,000 7,000,000 7,403,000
Adjustment to reflect the assumed conversion of
outstanding preferred stock............................ -- 2,344,000 5,576,000
--------- --------- ----------
Shares used in computing pro forma basic and diluted net
loss per common share.................................. 7,000,000 9,344,000 12,979,000
========= ========= ==========
</TABLE>
Dilutive securities include options, warrants, preferred stock as if
converted and restricted stock subject to vesting. Potentially dilutive
securities totaling 864,000, 3,392,000 and 4,908,000 for the years ended
December 31, 1997, 1998 and 1999, respectively, were excluded from historical
basic and diluted earnings per share because of their anti-dilutive effect.
F-9
<PAGE> 76
WEBSENSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement will
require the recognition of all derivatives on the Company's balance sheet at
fair value. The Financing Accounting Standards Board has subsequently delayed
implementation of the standard for the financial years beginning after June 15,
2000. The Company expects to adopt the new Statement effective January 1, 2001.
The impact on the Company's financial statements is not expected to be material.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
Computer hardware and software............................. $ 964,110 $ 2,147,308
Office furniture and equipment............................. 255,934 781,257
Vehicles and other equipment............................... 45,506 60,036
---------- -----------
1,265,550 2,988,601
Accumulated depreciation................................... (484,281) (1,041,569)
---------- -----------
$ 781,269 $ 1,947,032
========== ===========
</TABLE>
3. DEBT
In June 1998, the Company entered into a loan and security agreement with
Silicon Valley Bank for a $1,000,000 line of credit. Borrowings under the line
accrue interest at the bank's floating prime rate plus 0.25% (8.75% at December
31, 1999). At December 31, 1999, $552,758 is outstanding, and the Company is
required to make monthly payments of principal and interest through February
2002.
In May 1999, the Company established a line of credit with the same bank
for working capital advances ("borrowings") and stand-by letters of credit up to
$1,000,000. As of December 31, 1999, the Company had open letters of credit
under the line of $496,465 leaving available $503,535 for additional letters of
credit or borrowings. Borrowings accrue interest at the bank's floating prime
rate plus .25% (8.75% at December 31, 1999). Any outstanding balances on the
line mature in May 2000 and, at December 31, 1999, the Company had no borrowings
outstanding against the line.
In October 1999, the Company modified its May 1999 agreement to provide an
additional $1,000,000 line of credit from the same bank to be used for equipment
and furniture purchases through April 2000. In October 1999, the Company drew
down $924,967 of the available line, which will be converted to a term note in
April 2000. There are no compensating cash requirements and advances accrue
interest at the bank's floating prime rate plus 1.0% (9.5% at December 31,
1999). Through December 31, 1999, the Company has made interest-only payments
related to this note. Beginning in April 2000, the Company will
F-10
<PAGE> 77
WEBSENSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. DEBT (CONTINUED)
be required to make monthly payments of principal and interest through April
2000. Principal maturities on the above notes are as follows for the years ended
December 31.
<TABLE>
<S> <C>
2000..................................................... $ 503,795
2001..................................................... 561,445
2002..................................................... 328,884
2003..................................................... 102,774
----------
$1,496,898
==========
</TABLE>
All borrowings under the agreements with Silicon Valley Bank are
cross-collateralized by substantially all of the Company's assets, and are
subject to certain financial and restrictive covenants.
4. GEOGRAPHIC INFORMATION
The following illustrates revenues attributed to customers located in the
Company's country of domicile (the United States) and those attributed to
foreign customers:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
United States............................................... $6,398,581 $6,833,521
Europe...................................................... 275,722 1,155,942
Asia/Pacific................................................ 200,278 493,502
Latin America............................................... 44,455 163,736
---------- ----------
$6,919,036 $8,646,701
========== ==========
</TABLE>
Revenues attributed to foreign customers were not significant for the year
ended December 31, 1997.
5. DEFERRED REVENUE
The Company records deferred revenue for contracts with terms greater than
one year. The Company will recognize revenues related to contracts in existence
as of December 31, 1999 as follows:
<TABLE>
<S> <C>
2000........................................................ $ 6,888,562
2001........................................................ 2,993,561
2002........................................................ 1,471,546
2003........................................................ 175,090
2004........................................................ 63,763
-----------
$11,592,522
===========
</TABLE>
6. LEASE COMMITMENTS
The Company leases its facilities and certain equipment under
non-cancellable operating leases, expiring at various dates through March 2002.
F-11
<PAGE> 78
WEBSENSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. LEASE COMMITMENTS (CONTINUED)
Future minimum annual lease payments under non-cancellable operating leases
at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 662,256
2001........................................................ 688,744
2002........................................................ 471,248
2003........................................................ --
2004........................................................ --
----------
$1,822,248
==========
</TABLE>
Rent expense totaled $132,524, $516,265 and $689,750 for the years ended
December 31, 1997, 1998 and 1999, respectively.
7. STOCKHOLDERS' EQUITY (DEFICIT)
In May 1998, the Company reincorporated in Delaware which was accomplished
through a merger of the existing California corporation into a new Delaware
corporation. The ratio of exchange was one share of the California corporation
to one share of the Delaware corporation. In October 1999, the Company increased
the number of authorized shares to 100,000,000 consisting of 92,961,660 shares
of common stock and 7,038,340 shares of preferred stock.
CONVERTIBLE PREFERRED STOCK
In May 1998, the Company issued 3,703,704 shares of Series A convertible
preferred stock at $1.62 per share for total consideration of $5,730,928, net of
offering costs. In August 1999, the Company completed a Series B convertible
preferred stock offering. A total of 3,333,332 shares were issued at $3.00 per
share, for net proceeds of $9,814,931.
Holders of Series A and Series B convertible preferred shares are entitled
to noncumulative cash dividends at a rate to be determined by the board of
directors, if and when such dividends are declared by the board of directors. No
dividends have been declared to date. The liquidation preference for the Series
A and Series B convertible preferred shares is $1.62 and $3.00 per share,
respectively.
At the option of the holder, the Series A and Series B preferred shares are
convertible into common stock on a one-for-one basis, subject to adjustment for
antidilution, and will automatically convert into common stock concurrent with
the closing of an underwritten public offering of common stock under the
Securities Act of 1933 in which the Company receives at least $20,000,000 in
gross proceeds and the price per share is at least $6.00 (subject to adjustment
for antidilution).
The preferred stockholders have voting rights equal to the number of common
shares they would own upon conversion.
The Company reserved 7,037,036 shares of common stock for issuance upon
conversion of Series A and Series B convertible preferred stock.
F-12
<PAGE> 79
WEBSENSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
WARRANTS
The Company issued a warrant to purchase 250,000 shares of common stock at
$0.01 per share in conjunction with bridge note financing consummated in March
1998. The warrant was exercised in June 1999.
In connection with the termination of an exclusive distributor agreement,
the Company issued a warrant to a distributor to purchase up to 50,000 shares of
common stock for $.05 per share. The warrants are exercisable in whole or in
part at any time prior to the earlier of the consummation of a public offering
by the Company or March 2009. The Company has reserved 50,000 shares of common
stock for issuance upon exercise of the warrant. The Company recorded expense of
$37,500 related to this issuance based on the estimated fair value of the
warrant. This distributor accounted for $170,914 and $417,870 of the Company's
revenues for the years ended December 31, 1998 and 1999, respectively.
In connection with the Series B convertible preferred stock offering, the
Company issued a warrant to purchase 62,500 of common stock for $3.00 per share.
The warrants are exercisable in whole or in part at any time and from time to
time until their expiration in June 2004. The Company has reserved 62,500 shares
of common stock for issuance upon exercise of the warrant.
STOCK OPTION PLAN
In May 1998, the Board of Directors elected to replace the 1997 Stock
Option/Stock Issuance plan with the 1998 Stock Option/Stock Issuance Plan (the
"1998 Stock Plan") under which 4,600,000 shares of the Company's common stock
are authorized for future issuance, and reserved for purchase upon exercise of
options granted. The 1998 Stock Plan provides for the grant of incentive and
non-statutory options and issuances of common stock to employees, directors and
consultants.
The exercise price of incentive stock options must equal at least the fair
value on the date of grant and the exercise price of non-statutory stock options
and the issuance price of common stock under the stock issuance program may be
no less than 85% of the fair value on the date of grant or issuance. The options
are exercisable for a period of up to ten years after the date of grant and
generally vest over four years. Unvested common shares obtained through early
exercise of options are subject to repurchase by the Company at the original
issue price.
F-13
<PAGE> 80
WEBSENSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The following table summarizes stock option activity under the 1998 Stock
Plan and related information through December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Granted and outstanding January 1, 1996................. -- --
Granted............................................... 1,381,000 $.20
Exercised............................................. (11,666) $.20
Repurchased........................................... (11,666) $.20
Cancelled............................................. (518,334) $.20
---------- ----
Balance at December 31, 1997............................ 839,334 $.20
Granted............................................... 976,435 $.20
Cancelled............................................. (124,334) $.20
---------- ----
Balance at December 31, 1998............................ 1,691,435 $.20
Granted............................................... 3,060,500 $.91
Exercised............................................. (1,090,455) $.33
Cancelled............................................. (499,929) $.25
---------- ----
Balance at December 31, 1999............................ 3,161,551 $.83
========== ====
</TABLE>
As of December 31, 1997, 1998 and 1999 there were 87,205, 561,473, and
331,326 options exercisable, respectively, at weighted average prices of $.20
per share. As of December 31, 1999 there were 172,919 shares subject to
repurchase.
The following table summarizes all options outstanding and exercisable by
price range as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
--------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .20 - $ .50........................ 2,143,551 8.84 $ .40 331,326 $.20
$ .75................................ 468,000 9.46 $ .75 -- --
$1.50 - $3.00........................ 496,000 9.75 $2.22 -- --
$6.00 - $7.00........................ 54,000 9.97 $6.09 -- --
--------- -------
3,161,551 331,326 --
========= =======
</TABLE>
The Company has repurchased 11,666 shares exercised under the 1998 Stock
Plan through December 31, 1999 and recognized $1,750 of related expense for the
difference between the fair value and the exercise price on the date of exercise
for the year then ended.
Pro forma information regarding net loss is required by SFAS 123 and has
been determined as if the Company has accounted for its employee stock options
and stock purchase plan under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using the "Minimum Value"
option pricing model with the following weighted-average assumptions for 1997,
1998 and 1999: risk-free interest rate of 6.0%; dividend yield of 0%; and a
weighted average expected life of the
F-14
<PAGE> 81
WEBSENSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
options of five years. For purposes of pro forma disclosures, the estimated fair
value of the options are amortized to expense over the vesting period. The
Company's adjusted pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net loss.................................. $(1,466,399) $(5,633,842) $(9,467,044)
Pro forma basic and diluted net loss per share...... $ (.21) $ (.80) $ (1.28)
</TABLE>
The weighted average fair value of options granted during 1997, 1998 and
1999 was $.04, $.04 and $.11 per share, respectively
The pro forma effect on net loss for 1997, 1998 and 1999 is not likely to
be representative of the pro forma effect on reported net income or loss in
future years because these amounts reflect less than four years of vesting.
SHARES RESERVED FOR FUTURE ISSUANCE
The following shares of common stock are reserved for future issuance:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Stock options:
Granted and outstanding................................... 1,691,435 3,161,551
Reserved for future grants................................ 308,565 336,328
--------- ---------
2,000,000 3,497,879
Warrants.................................................. 250,000 112,500
--------- ---------
2,250,000 3,610,379
========= =========
</TABLE>
8. INCOME TAXES
The Company changed its previous "S" corporation status to a "C"
corporation as of January 1, 1998. With the change in status, the Company became
responsible for income tax liabilities, if any. Previously, income taxes were
the responsibility of the shareholders.
At December 31, 1999, the Company has federal and California net operating
loss carryforwards of approximately $5,183,000 and $2,368,000, respectively. The
federal and California net operating loss carryforwards will begin to expire in
2018 and 2003, respectively, unless previously utilized. At December 31, 1999,
the Company had federal and California research and development credit
carryforwards of approximately $397,000 and $225,000, respectively, which will
begin to expire in 2013 unless previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use
of the Company's net operating loss and credit carryforwards may be limited in
the event of a cumulative change in ownership of more than 50% occurs within a
three year testing period.
The components of the Company's deferred tax assets as of December 31, 1998
and 1999 are shown below. A valuation allowance has been recognized to offset
the deferred tax assets as realization of such assets is uncertain.
F-15
<PAGE> 82
WEBSENSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 887,000 $ 1,976,000
Research tax credit carryforwards......................... 156,000 543,000
Capitalized research and development...................... 368,000 1,818,000
Deferred revenue.......................................... 640,000 2,786,000
Deferred compensation..................................... -- 352,000
Other..................................................... 758,000 272,000
----------- -----------
Total deferred tax assets............................... 2,809,000 7,747,000
Valuation allowance for deferred tax assets............... (2,809,000) (7,747,000)
----------- -----------
Net deferred tax assets................................. $ -- $ --
=========== ===========
</TABLE>
9. EMPLOYEE RETIREMENT PLAN
Effective May 1, 1997, the Company established a 401(k) defined
contribution retirement plan (the "401(k) Plan") covering substantially all
employees. The 401(k) Plan provides for voluntary employee contributions from 1%
to 20% of annual compensation, as defined, and does not currently provide for
matching contributions from the Company.
F-16
<PAGE> 83
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
WEBSENSE LOGO
COMMON STOCK
----------------------
PROSPECTUS
----------------------
CHASE H&Q
SG COWEN
WIT CAPITAL CORPORATION
----------------------
, 2000
----------------------
YOU SHOULD RELY ONLY UPON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF OUR COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts, payable by the Registrant in connection with the offer
and sale of the common stock being registered. All amounts are estimates except
the registration fee, the NASD filing fee and the Nasdaq National Market entry
fee.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 15,840
NASD filing fee............................................. 6,500
*Blue Sky fees and expenses (including legal fees)..........
Nasdaq National Market entry fee............................ 95,000
*Accounting fees and expenses...............................
*Other legal fees and expenses..............................
*Transfer agent and registrar fee...........................
*Printing and engraving.....................................
*Miscellaneous..............................................
--------
*Total............................................
========
</TABLE>
- -------------------------
* to be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). As permitted by the Delaware General Corporation Law, the Registrant's
Amended and Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Registrant or its stockholders, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) under section 174 of the Delaware General
Corporation Law (regarding unlawful dividends and stock purchases) or (iv) for
any transaction from which the director derived an improper personal benefit. As
permitted by the Delaware General Corporation Law, the Bylaws of the Registrant
provide that (i) the Registrant is required to indemnify its directors and
officers to the fullest extent permitted by the Delaware General Corporation
Law, subject to certain very limited exceptions, (ii) the Registrant may
indemnify its other employees and agents as set forth in the Delaware General
Corporation Law, (iii) the Registrant is required to advance expenses, as
incurred, to its directors and executive officers in connection with a legal
proceeding to the fullest extent permitted by the Delaware General Corporation
Law, subject to certain very limited exceptions and (iv) the rights conferred in
the Bylaws are not exclusive. At present, there is no pending litigation or
proceeding involving a director, officer or employee of the Registrant regarding
which indemnification is sought, nor is the Registrant aware of any threatened
litigation that may result in claims for indemnification. Reference is also made
to Section 7 of the Underwriting Agreement, which provides for the
indemnification of officers, directors and controlling persons of the Registrant
against certain liabilities. In addition, certain of the intercompany agreements
provide for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provisions in
the Registrant's Restated Certificate of Incorporation and in its Bylaws may be
sufficiently broad to permit indemnification of the Registrant's directors and
executive officers for liabilities arising under the Securities Act. The
Registrant, with approval by the Registrant's Board of Directors, expects to
obtain directors' and officers' liability insurance.
II-1
<PAGE> 85
Reference is made to the following documents filed as exhibits to this
registration statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Form of Underwriting Agreement.............................. 1.1
Form of Restated Certificate of Incorporation of
Registrant................................................ 3.4
Form of Bylaws of Registrant................................ 3.3
Form of Indemnification Agreement........................... 10.9
</TABLE>
The Company has entered into indemnification agreements with each of the
Company's directors, a form of which is attached as an exhibit hereto and is
incorporated herein by reference.
The Registrant may obtain insurance for the protection of its directors and
officers against any liability asserted against them in their official
capacities. The rights of indemnification described above are not exclusive of
any other rights of indemnification to which the persons indemnified may be
entitled under any bylaw, agreement, vote of stockholders or directors or
otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since December 31, 1996, we have issued unregistered securities to a
limited number of persons as described below:
(a) From December 23, 1997 through December 31, 1999, we sold an
aggregate of 1,102,121 shares of our common stock at exercise prices
ranging from $0.20 to $0.75 per share to employees, consultants, directors
and other service providers pursuant to our 1998 Equity Incentive Plan.
(b) On May 20, 1998, we sold 3,703,704 shares of Series A preferred
stock at a price of $1.62 per share, to a group of private investors for an
aggregate purchase price of $6,000,000.
(c) On June 11, June 14, July 26 and September 20, 1999, we sold an
aggregate of 3,333,332 shares of Series B preferred stock at a price of
$3.00 per share to a group of private investors for an aggregate purchase
price of $9,999,996.
(d) On July 30, 1999 we issued warrants to purchase 62,500 shares of
common stock to entities affiliated with Global Alliance, Ltd. Also on July
30, 1999 we issued a warrant to purchase 50,000 shares of common stock to
Alps System Integration Co., Ltd.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Transactions
with Related Parties" in the form of prospectus included herein. The sales of
securities described in subsection (a) above 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. The sales of securities described in
subsections (b), (c) and (d) above were deemed to be exempt from registration 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 Websense or had access,
through employment or other relationships, to such information.
II-2
<PAGE> 86
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. EXHIBITS
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation, as
amended.
*3.2 Form of Amended and Restated Certificate of Incorporation to
be filed and become effective upon the closing of this
offering.
3.3 Bylaws.
*3.4 Form of Bylaws to become effective prior to effectiveness of
this Registration Statement.
*4.1 Specimen Stock Certificate of Websense, Inc.
*5.1 Opinion of Brobeck Phleger & Harrison, LLP.
10.1 Amended and Restated Registration Rights Agreement dated
June 9, 1999.
10.2 Form of Subscription Agreement regarding Series B Preferred
Stock.
*10.3 Form of Warrant to Purchase Common Stock between Websense,
Inc. and entities listed on Schedule A attached thereto,
dated July 30, 1999.
10.4 Employment Agreement by and between Websense, Inc. and John
B. Carrington, dated May 10, 1999.
10.5 Employment Agreement by and between Websense, Inc. and
Douglas C. Wride, dated June 11, 1999.
10.6 Lease Agreement between Websense, Inc. and Legacy-RECP
Sorrento OPCO, LLC, dated June 21, 1999, as amended.
10.7 1998 Equity Incentive Plan.
10.8 Standard Terms and Conditions Relating to Incentive Stock
Option Under the 1998 Equity Incentive Plan.
*10.9 2000 Stock Incentive Plan.
*10.10 2000 Stock Incentive Plan, Notice of Grant of Stock Option.
*10.11 2000 Stock Incentive Plan, Form of Incentive Stock Option
Agreement.
*10.12 2000 Employee Stock Purchase Plan.
*10.13 Form of Indemnification Agreement between Websense, Inc. and
its directors.
*10.14 Form of Indemnification Agreement between Websense, Inc. and
its officers.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Brobeck Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
b. FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
II-3
<PAGE> 87
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(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> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on January 28, 2000.
WEBSENSE, INC.
By: /s/ JOHN B. CARRINGTON
------------------------------------
John B. Carrington
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints John B. Carrington, President and
Chief Financial Officer, and Douglas Wride, Chief Financial Officer, and each of
them individually, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him in his name, place and
stead, in any and all capacities, in connection with this Registration
Statement, including to sign and file in the name and on behalf of the
undersigned as director or officer of the Registrant (i) any and all amendments
or supplements (including any and all stickers and post-effective amendments) to
this Registration Statement, with all exhibits thereto, and other documents in
connection therewith, and (ii) any and all additional registration statements,
and any and all amendments thereto, relating to the same offering of securities
as those that are covered by this Registration Statement that are filed pursuant
to Rule 462(b) promulgated under the Securities Act of 1933, as amended, with
the Securities and Exchange Commission and any applicable securities exchange or
securities self-regulatory body, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN B. CARRINGTON Chairman of the Board, President January 28, 2000
- --------------------------------------------- and Chief Executive Officer
John B. Carrington (principal executive officer)
/s/ DOUGLAS C. WRIDE Chief Financial Officer (principal January 28, 2000
- --------------------------------------------- financial and accounting officer)
Douglas Wride
/s/ ROBERT J. LOARIE Director January 28, 2000
- ---------------------------------------------
Robert J. Loarie
/s/ BRUCE T. COLEMAN Director January 28, 2000
- ---------------------------------------------
Bruce Coleman
/s/ JOHN C. STISKA Director January 28, 2000
- ---------------------------------------------
John C. Stiska
/s/ DONALD B. MILDER Director January 28, 2000
- ---------------------------------------------
Donald B. Milder
/s/ GARY E. SUTTON Director January 28, 2000
- ---------------------------------------------
Gary Sutton
</TABLE>
II-5
<PAGE> 89
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
WEBSENSE, INC.
<TABLE>
<CAPTION>
A B C D E
BALANCE AT CHARGED TO COSTS CHARGED TO OTHER DEDUCTION -- BALANCE AT END
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES ACCOUNTS DESCRIBE OF PERIOD
----------- ------------------- ---------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful
accounts...................... $ -- $ 25,000 $ -- $ -- $ 25,000
YEAR ENDED DECEMBER 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful
accounts...................... $25,000 $ 72,274 $ -- $70,120(1) $ 27,154
YEAR ENDED DECEMBER 31, 1999
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful
accounts...................... $27,154 $235,924 $ -- $10,198(1) $252,880
</TABLE>
- -------------------------
(1) Uncollectible accounts written off, net of recoveries.
S-1
<PAGE> 90
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation, as
amended.
*3.2 Form of Amended and Restated Certificate of Incorporation to
be filed and become effective upon the closing of this
offering.
3.3 Bylaws.
*3.4 Form of Bylaws to become effective prior to effectiveness of
this Registration Statement.
*4.1 Specimen Stock Certificate of Websense, Inc.
*5.1 Opinion of Brobeck Phleger & Harrison, LLP.
10.1 Amended and Restated Registration Rights Agreement dated
June 9, 1999.
10.2 Form of Subscription Agreement regarding Series B Preferred
Stock.
*10.3 Form of Warrant to Purchase Common Stock between Websense,
Inc. and entities listed on Schedule A attached thereto,
dated July 30, 1999.
10.4 Employment Agreement by and between Websense, Inc. and John
B. Carrington, dated May 10, 1999.
10.5 Employment Agreement by and between Websense, Inc. and
Douglas C. Wride, dated June 11, 1999.
10.6 Lease Agreement between Websense, Inc. and Legacy-RECP
Sorrento OPCO, LLC, dated June 21, 1999, as amended.
10.7 1998 Equity Incentive Plan.
10.8 Standard Terms and Conditions Relating to Incentive Stock
Option Under the 1998 Equity Incentive Plan.
*10.9 2000 Stock Incentive Plan.
*10.10 2000 Stock Incentive Plan, Notice of Grant of Stock Option.
*10.11 2000 Stock Incentive Plan, Form of Incentive Stock Option
Agreement.
*10.12 2000 Employee Stock Purchase Plan.
*10.13 Form of Indemnification Agreement between Websense, Inc. and
its directors.
*10.14 Form of Indemnification Agreement between Websense, Inc. and
its officers.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Brobeck Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
NETPARTNERS INTERNET SOLUTIONS, INC.
Pursuant to Sections 242 and 245 of the Delaware General Corporation Law
NETPARTNERS INTERNET SOLUTIONS, INC., a Delaware corporation (the "Corporation")
does hereby certify that;
FIRST: The present name of the Corporation is "NETPARTNERS INTERNET
SOLUTIONS, INC.", which is the name under which the Corporation was
originally incorporated. The date of filing of the original
Certificate of Incorporation of the Corporation with the Secretary
of State of the State of Delaware was April 16, 1998,
SECOND: The Amended and Restated Certificate of Incorporation (the
"Certificate") attached hereto as Exhibit A amends and restates in
its entirety the present Certificate of Incorporation of the
Corporation. This Certificate has been duly adopted and approved by
the Board of Directors of the Corporation and the stockholders of
the Corporation in each case by unanimous written consent in lieu
of a meeting thereof in accordance with the provisions of Sections
141 and 228 of the General Corporation Law of the State of
Delaware.
THIRD: This Certificate shall become effective immediately upon its filing
with the Secretary of State of Delaware.
FOURTH: Upon the filing with the Secretary of State of the State of
Delaware of this Certificate, the Certificate of Incorporation of
the Corporation shall be amended and restated in its entirety to
read as set forth on Exhibit A attached hereto.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be executed
by a duly authorized officer this June 9, 1999.
NETPARTNERS INTERNET SOLUTIONS, INC.
By: /s/ John B. Carrington
---------------------------------
Name: John Carrington
Title: President and Chief Executive
Officer
<PAGE> 2
EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NETPARTNERS INTERNET SOLUTIONS, INC.
ARTICLE I
NAME
The name of the corporation is NetPartners Internet Solutions, Inc. (the
"Corporation").
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the registered office of the Corporation in the State of
Delaware is 9 East Loockerman Street, City of Dover, County of Kent, Delaware
19901. The name of the registered agent of the Corporation at such address is
National Registered Agents, Inc.
ARTICLE III
OBJECT AND PURPOSES
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "General Corporation Law").
ARTICLE IV
CAPITAL STOCK
The Corporation shall be authorized to issue 25,739,340 shares of all
classes, consisting of (a) 18,700,000 shares of Common Stock, $.01 par value
(the "Common Stock"), (b) 7,038,340 shares of Preferred Stock, $.01 par value
(the "Preferred Stock"), of which 3,705,000 shares shall
1.
<PAGE> 3
be designated as Series A Preferred Stock (the "Series A Preferred") and of
which 3,333,340 shares shall be designated as Series B Preferred Stock (the
"Series B Preferred"). The Series A Preferred and the Series B Preferred are
hereinafter collectively referred to as the "Series Preferred."
The Series Preferred shall have the following designations, preferences,
and other rights:
1. DIVIDENDS.
(a) Holders of Series Preferred, in preference to the holders of any
other stock of the Corporation ("Junior Stock"), shall receive dividends when,
as and if declared by the Board of Directors of the Corporation, out of funds
legally available for that purpose, at the rate of 10% of the Original Issue
Price, for each 12-month period (or portion thereof) commencing with the date
such share was first issued by the Corporation (each such date, an "Original
Issuance Date"). The "Original Issue Price" of the Series A Preferred shall be
$1.62 and the "Original Issue Price" of the Series B Preferred shall be $3.00.
Upon a Liquidation (as defined below) or a conversion pursuant to Section 2, 5
or 6 hereof, all declared and unpaid dividends shall be paid in accordance with
Section 3 hereof. If the assets of the Corporation shall be insufficient to pay
the holders of Series Preferred the full declared and paid dividends to which
they shall be entitled, holders of Series Preferred shall share on a pro rata
basis in accordance with the total dividends that each such holder would have
received had there been such sufficient assets. After payment of all declared
and unpaid dividends owing to holders of Series Preferred, such holders shall
not participate in dividends thereafter paid on the Common Stock.
(b) So long as any shares of Series Preferred shall be outstanding,
no dividend, whether in cash or property, shall be paid or declared, nor shall
any other distribution be made, on any Junior Stock, nor shall any shares of any
Junior Stock of the Corporation be
2.
<PAGE> 4
purchased, redeemed, or otherwise acquired for value by the Corporation (except
for acquisitions of Common Stock by the Corporation pursuant to agreements which
permit the Corporation to repurchase such shares upon termination of services to
the Corporation or in exercise of the Corporation's right of first refusal upon
a proposed transfer) until a dividend (including the amount of any dividends
paid pursuant to the Section 1(a) above) is paid with respect to all outstanding
shares of Series Preferred in an amount for each such share of Series Preferred
equal to or greater than the greater of: (x) the aggregate amount of such
dividends for all shares of Common Stock into which each such share of Series
Preferred Stock could then be converted; or (y) the aggregate amount of such
dividends for each share of Junior Stock receiving dividends. The provisions of
this Section 1(b) shall not, however, apply to (i) a dividend payable in Common
Stock, (ii) the acquisition of shares of any Junior Stock in exchange for shares
of any other Junior Stock, or (iii) any repurchase of any outstanding securities
of the Corporation that is unanimously approved by the Corporation's Board of
Directors.
2. LIQUIDATION.
(a) Upon a Liquidation (as defined below), after payment or provision
for payment of the debts and other liabilities of the Corporation, the holders
of Series Preferred shall be entitled to receive the applicable Preference
Amount (as defined below) with respect to each share of Series Preferred, out of
the remaining assets of the Corporation available for distribution to its
stockholders, before any distribution shall be made to the holders of the Junior
Stock.
(b) After the payment of the full Preference Amount of the Series
Preferred as set forth in Section 2(a) above, the remaining assets of the
Corporation legally available for distribution, if any, shall be distributed to
the holders of Junior Stock.
3.
<PAGE> 5
(c) If, upon any Liquidation, the assets of the Corporation shall be
insufficient to make payment in full to all holders of Series Preferred of the
Preference Amount set forth in Section 2(a), then such assets shall be
distributed among the holders of Series Preferred at the time outstanding,
ratably in proportion to the full amounts to which they would otherwise be
respectively entitled.
(d) If, upon any Liquidation, the Corporation distributes property
other than cash, such property's fair market value will be determined in good
faith by the Board of Directors of the Corporation. Any securities shall be
valued as follows:
(i) Securities not subject to investment letter or other similar
restrictions on free marketability are covered by (ii) below:
(A) If traded on a securities exchange or through the Nasdaq
National Market, the value shall be deemed to be the average of the closing
prices of the securities on such quotation system over the thirty (30) day
period ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty (30) day period ending three (3) days prior to the
closing; and
(C) If there is no active public market, the value shall be
the fair market value thereof, as determined in good faith by the Board of
Directors.
(ii) The method of valuation of securities subject to investment
letter or other restrictions on free marketability (other than restrictions
arising solely by virtue of a shareholder's status as an affiliate or former
affiliate) shall be to make an appropriate discount
4.
<PAGE> 6
from the market value determined as above in (i) (A), (8) or (C) to reflect the
approximate fair market value thereof, as determined in good faith by the Board
of Directors.
3. CERTAIN DEFINITIONS.
(a) "Liquidation" means any Corporate Transaction (as defined in
Section 3(b)), any Qualified Corporate Transaction (as defined in Section 3(c)),
or any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation, other than any dissolution, liquidation or winding
up in connection with any reincorporation of the Corporation in another
jurisdiction.
(b) "Corporate Transaction" means:
(i) any consolidation or merger of the Corporation with or into
any other corporation or other entity or person, or any other corporate
reorganization, in which the stockholders of the Corporation immediately prior
to such consolidation, merger or reorganization, own less than fifty percent
(50%) of the Corporation's voting power immediately after such consolidation,
merger or reorganization, or any transaction or series of related transactions
to which the Corporation is a party in which in excess of fifty percent (50%) of
the Corporation's voting power is transferred; or
(ii) a sale, lease or other disposition of all or substantially
all of the assets of the Corporation.
(c) "Qualified Corporate Transaction" means:
(i) any consolidation or merger of the Corporation with or into
any other corporation or other entity or person, or any other corporate
reorganization, in which the stockholders of the Corporation immediately prior
to such consolidation, merger or reorganization, own less than thirty percent
(30%) of the Corporation's voting power
5.
<PAGE> 7
immediately after such consolidation, merger or reorganization, or any
transaction or series of related transactions to which the Corporation is a
party in which in excess of seventy percent (70%) of the Corporation's voting
power is transferred, that would produce a distribution to the Series B
Preferred under Section 2 hereof, having a value of less than the Preference
Amount of the Series 9 Preferred; or
(ii) a sale, lease or other disposition of all or substantially
all of the assets of the Corporation that would produce a distribution to the
Series B Preferred under Section 2 hereof, having a value of less than the
Preference Amount of the Series 3 Preferred.
(d) "Preference Amount" means:
(i) with respect to any share of Series A Preferred, an amount
equal to the sum of (x) the Original Issue Price of the Series A Preferred (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares) and (y) all declared and unpaid dividends
payable with respect to each share of Series A Preferred (as adjusted for any
stock dividends, combinations, splits, recapitalizations and the like with
respect to such shares) under Section 1 hereof, and (z) such share's pro rata
portion of the remaining assets or proceeds calculated based upon the number of
shares of Common Stock into which such shares are then convertible pursuant to
Section 5 hereof; provided, however, that to the extent that the sum of (x), (y)
and (z) would exceed $6.00 per share, then, the Preference Amount of a share of
Series A Preferred will be equal to $6.00; and
(ii) with respect to any share of Series B Preferred, an amount
equal to the sum of (x) the Original Issue Price of the Series B Preferred (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares) and (y) all declared and unpaid dividends
payable with respect to each share of Series B Preferred (as
6.
<PAGE> 8
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares) under Section 1 hereof.
4. VOTING RIGHTS.
(a) In addition to the rights provided by law. or in paragraph (b)
below, the holders of Series Preferred shall be entitled to vote on all matters
as to which holders of Common Stock shall be entitled to vote, in the same
manner and with the same effect as such holders of Common Stock, voting together
with the holders of Common Stock as one class. Each share of Series Preferred
shall entitle the holder thereof to such number of votes as shall equal the
number of whole and fractional shares of Common Stock into which such share of
Series Preferred is then convertible pursuant to Sections 5 and 6.
(b) The Corporation shall not, without the affirmative consent or
approval of the holders of a majority of the shares of Series Preferred then
outstanding, voting separately as a class:
(i) authorize any class or series of capital stock ranking senior
to or pari passu with the Series Preferred;
(ii) in any other manner alter or change the powers, preferences,
or rights, or qualifications, limitations or restrictions thereof, of the shares
of Series Preferred so as to affect them adversely;
(iii) enter into any Corporate Transaction;
(iv) enter into a Qualified Corporate Transaction; provided,
however, that the majority consent or approval of the Series Preferred required
under this Section 4(b) must include the affirmative consent or approval of the
holders of at least 25% of the Series B
7.
<PAGE> 9
Preferred then outstanding who do not also beneficially own any shares of Series
A Preferred at the time of such consent or approval;
(v) increase above 4,000,000 the number of shares of Common Stock
available for grant pursuant to any stock option plan;
(vi) consummate any financings resulting in the issuance of
equity securities; or
(vii) effect any redemption, repurchase, payment of dividends or
other distributions with respect to Junior Stock (except for acquisitions of
Common Stock by the Corporation pursuant to agreements which permit the
Corporation to repurchase such shares upon termination of services to the
Corporation or in exercise of the Corporation's right of first refusal).
(c) No person entitled to vote at an election for directors may
cumulate votes to which such person is entitled, unless, at the time of such
election, the Corporation is subject to Section 2115 of the California General
Corporation Law "CGCL"). During such time or times that the Corporation is
subject to Section 2115(b) of the CGCL, every stockholder entitled to vote at an
election for directors may cumulate such stockholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which such stockholder's shares are
otherwise entitled, or distribute the stockholder's votes on the same principle
among as many candidates as such stockholder desires. No stockholder, however,
shall be entitled to so cumulate such stockholder's votes unless (i) the names
of such candidate or candidates have been placed in nomination prior to the
voting and (ii) the stockholder has given notice at the meeting, prior to the
voting, of such stockholder's intention to cumulate such stockholder's votes. If
any stockholder has given proper notice to cumulate votes,
8.
<PAGE> 10
all stockholders may cumulate their votes for any candidates who have been
properly placed in nomination. Under cumulative voting, the candidates receiving
the highest number of votes, up to the number of directors to be elected, are
elected.
5. OPTIONAL CONVERSION.
(a) Upon the terms set forth in this Section, each holder of shares
of each series of Series Preferred shall have the right, at such holder's
option, at any time and from time to time, to convert any of such shares into
the number of fully paid and nonassessable shares of Common Stock equal to the
quotient obtained by dividing (i) the product of the "Original Issue Price" and
the number of shares of the applicable series of Series Preferred being
converted, by (ii) the Conversion Price (as defined below), as last adjusted and
then in effect, by surrender of the certificates representing the shares of such
series of Series Preferred to be converted. The conversion price per share at
which shares of Common Stock shall be issuable upon conversion of shares of
Series Preferred (the "Conversion Price") shall initially be the "Original Issue
Price" of the applicable series of Series Preferred, in each case subject to
adjustment as set forth in paragraph (d) below.
(b) The holder of any shares of Series Preferred may exercise the
conversion right pursuant to paragraph (a) above by delivering to the
Corporation the certificate or certificates for the shares to be converted, duly
endorsed or assigned in blank or to the Corporation (if required by it),
accompanied by written notice stating that the holder elects to convert such
shares and stating the name or names (with address) in which the certificate or
certificates for the shares of Common Stock are to be issued. Conversion shall
be deemed to have been effected on the date when such delivery is made (the
"Conversion Date"). As promptly as practicable thereafter, the Corporation shall
issue and deliver to or upon the written
9.
<PAGE> 11
order of such holder, to the place designated by such holder, a certificate or
certificates for the number of full shares of Common Stock to which such holder
is entitled, and a cash amount in respect of any fractional interest in a share
of Common Stock as provided in paragraph (c) below. The person in whose name the
certificate or certificates for Common Stock are to be issued shall be deemed to
have become a stockholder of record on the applicable Conversion Date unless the
transfer books of the Corporation are closed on that date, in which event such
person shall be deemed to have become a stockholder of record on the next
succeeding date on which the transfer books are open, but the applicable
Conversion Price shall be that in effect on the Conversion Date, Upon conversion
of only a portion of the number of shares covered by a certificate representing
shares of Series Preferred surrendered for conversion, the Corporation shall
issue and deliver to or upon the written order of the holder of the certificate
so surrendered for conversion, at the expense of the Corporation, a new
certificate covering the number of shares of Series Preferred representing the
unconverted portion of the certificate so surrendered.
(c) No fractional shares of Common Stock or scrip shall be issued
upon conversion of shares of Series Preferred. The number of full shares of
Common Stork issuable upon conversion of Series Preferred shall be computed on
the basis of the aggregate number of shares of Series Preferred to be converted.
Instead of any fractional shares of Common Stock which would otherwise be
issuable upon conversion of any shares of Series Preferred, the Corporation
shall pay a cash adjustment in respect of such fractional interest in an amount
equal to the product of (i) the price of one share of Common Stock as determined
in good faith by the Board of Directors of the Corporation and (ii) such
fractional interest. The holders of fractional interests shall not be entitled
to any rights as stockholders of the Corporation in respect of such fractional
interests.
10.
<PAGE> 12
(d) The Conversion Price of each series of Series Preferred shrill be
subject to adjustment from time to time as follows:
(i) If the Corporation shall at any time or from time to time
after the Original Issuance Date issue, or be deemed to issue, any shares of
Common Stock other than Excluded Stock (as defined below) without consideration
or for a consideration per share less than the applicable Conversion Price in
effect immediately prior to the issuance of such Common Stock, then the
applicable Conversion Price in effect immediately prior to each such issuance
shall forthwith be lowered to a price equal to the quotient obtained by
dividing:
(A) an amount equal to the sum of (x) the total number of
shares of Common Stock outstanding immediately prior to such issuance,
multiplied by the applicable Conversion Price in effort immediately prior to
such issuance, and (y) the consideration received by the Corporation upon such
issuance; by
(B) the total number of shares of Common Stock outstanding
immediately after the issuance of such Common Stock.
(ii) For the purposes of any adjustment of the applicable Conversion
Price pursuant to clause (i) above, the following provisions shall be
applicable:
(A) In the case of the issuance of Common Stock for cash in a
public offering or private placement, the consideration shall be deemed to be
the amount of cash paid therefor after deducting therefrom any discounts,
commissions or placement fees payable by the Corporation to any underwriter or
placement agent in connection with the issuance and sale hereof.
(B) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be
11.
<PAGE> 13
deemed to be the fair market value thereof as determined in good faith by the
Board of Directors of the Corporation, irrespective of any accounting treatment.
(C) In the case of the issuance of Options to purchase or
rights to subscribe for Common Stock, securities by their terms convertible into
or exchangeable for Common Stock, or options to purchase or rights to subscribe
for such convertible or exchangeable securities:
(1) the aggregate maximum number of shares of Common
Stock deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the time such
options or rights were issued and for a consideration equal to the consideration
(determined in the manner provided in subdivisions (A), and (B) above), if any,
received by the Corporation upon the issuance of such options or rights plus the
minimum purchase price provided in such options or rights for the Common Stock
covered thereby;
(2) the aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities, options, or rights were issued and for a consideration equal to
the consideration received by the Corporation for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the additional consideration, if any, to be
received by the Corporation upon the conversion or exchange of such securities
or the exercise of any related options or rights (the
12.
<PAGE> 14
consideration in each case to bc determined in the manner provided in
subdivision 3(A) and (B) above).
(3) on any change in the number of shares or exercise
price of Common Stock deliverable upon exercise of any such options or rights or
conversion of or exchange for such securities. other than a change resulting
from the antidilution provisions thereof, the applicable Conversion Price shall
forthwith be readjusted to such Conversion Price as would have obtained had the
adjustment made upon the issuance of such options, rights or securities not
converted prior to such change or options or rights related to such securities
not converted prior to such change been made upon the basis of such change; and
(4) on the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
applicable Conversion Price shall forthwith be readjusted to such Conversion
Price as would have obtained had the adjustment made upon the issuance of such
options, rights, securities or options or rights related to such securities been
made upon the basis of the issuance of only the number of shares of Common Stock
actually issued upon the exercise of such options or rights, upon the conversion
or exchange of such securities, or upon the exercise of the options or rights
related to such securities and subsequent conversion or exchange thereof.
(iii) "Excluded Stock" means (1) 4,000,000 shares of Common
Stock, and options therefor, reserved for issuance or grant under the 1998
Equity Incentive Plan of the Corporation; (2) shares of Common Stock issued upon
conversion of shares of Series Preferred; (3) 250,000 shares of Common Stock
reserved for issuance under the Common Stock Purchase
13.
<PAGE> 15
Warrant issued to Edelson IV, L.P.; and (4) shares of capital stock of the
Corporation declared "Excluded Stock" by a majority of the holders of the Series
Preferred.
(iv) If, at any time after the applicable Original Issuance Date,
the number of shares of Common Stock outstanding is increased by a stock
dividend payable in shares, of Common Stock or by a subdivision or split-up of
shares of Common Stock, then, following the record date for the determination of
holders of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the applicable Conversion Price shall be appropriately decreased so
that the number of shares of Common Stock issuable on conversion of each share
of Series Preferred shall be increased in proportion to such increase in
outstanding shares.
(v) If, at any time after the applicable Original Issuance Date,
the number of shares of Common Stock outstanding is decreased by a combination
of the outstanding shares of Common Stock, then, following the record date for
such combination, the applicable Conversion Price shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
each share of Series Preferred shall be decreased in proportion to such decrease
in outstanding shares.
(vi) In the event of any capital reorganization of the
Corporation, any reclassification of the stock of the Corporation (other than as
a result of a stock dividend or subdivision, split-up or combination of shares),
or any consolidation or merger of the Corporation, each share of Series
Preferred shall after such reorganization, reclassification, consolidation, or
merger be convertible into the kind and number of shares of stock or other
securities or property of the Corporation or of the corporation resulting from
such consolidation or surviving such merger to which the holder of the number of
shares of Common Stock
14.
<PAGE> 16
deliverable (immediately prior to the time of such reorganization,
reclassification, consolidation or merger) upon conversion of such share of
Series Preferred would have been entitled upon such reorganization,
reclassification, consolidation or merger. The provisions of this clause shall
similarly apply to successive reorganizations, reclassifications, consolidations
or mergers.
(vii) All calculations under this paragraph shall be made to the
nearest one hundredth (1/100) of a cent or the nearest one tenth (1/10) of a
share, as the case may be.
(viii) In any case in which the provisions of this paragraph (d)
shall require that an adjustment shall become effective immediately after a
record date of an event, the Corporation may defer until the occurrence of such
event (i) issuing to the holder of any share of Series Preferred converted after
such record date and before the occurrence of such event the shares of Capital
stock issuable upon such conversion by reason of the adjustment required by such
event in addition to the shares of capital stock issuable upon such conversion
before giving effect to such adjustments, and (ii) paying to such holder any
amount in cash in lieu of a fractional share of capital stock pursuant to
paragraph (c) above; provided, however, that the Corporation shall deliver to
such holder an appropriate instrument evidencing such holder's right to receive
such additional shares and such cash.
(e) When the Conversion Prices shall be adjusted as provided in
paragraph (d), the Corporation shall make available for inspection during
regular business hours, at its principal executive offices or at such other
place as may be designated by the Corporation, a statement, signed by its
president, showing in detail the facts requiring such adjustment and the
applicable Conversion Price that shall be in effect after such adjustment. The
Corporation shall also cause a copy of such statement to be sent by first class
certified mail, return receipt requested and postage prepaid, to each holder of
Series Preferred at such holder's address
15.
<PAGE> 17
appearing on the Corporation's records. Where appropriate, such copy may be
given in advance and may be included as part of any notice required to be mailed
under the provisions of paragraph (f) below.
(f) If the Corporation shall propose to take any action of the types
described in clauses (iv), (v) or (vi) of paragraph (d) above, the Corporation
shall give notice to each holder of shares of Series Preferred, in the manner
set forth in paragraph (c) above, which notice shall specify the record date, if
any, with respect to any such action and the date on which such action is to
take plate. Such notice shall also set forth such facts with respect thereto as
shall be reasonably necessary to indicate the effect of such action (to the
extent such effect may be known at the date of such notice) on the applicable
Conversion Price and the number, kind or class of shares or other securities or
property which shall be deliverable or purchasable upon the occurrence of such
action or deliverable upon conversion of shares of Series Preferred. In the case
of any action which would require the fixing of a record date, such notice shall
be given at least 20 days prior to the date so fixed, and in case of all other
action, such notice shall be given at least 30 days prior to the taking of such
proposed action. Failure to give such notice, or any defect therein, shall not
affect the legality or validity of any such action.
(g) The Corporation shall reserve, and at all times from and after
the date of the applicable Original Issuance Date keep reserved, free from
preemptive rights, out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the conversion of the shares of Series
Preferred, sufficient shares of Common Stock to provide for the conversion of
all outstanding shares of Series Preferred.
(h) At any time the Corporation makes or fixes a record date for the
determination of holders of Common Stock entitled to receive a dividend or other
distribution
16.
<PAGE> 18
payable in securities of the Corporation other than shares of Common Stock,
provision shall be made so that each holder of shares of Series Preferred shall
receive upon conversion thereof, in addition to the shares of Common Stock
receivable thereupon, the number of securities of the Corporation which it would
have received had its shares of Series Preferred been converted into shares of
Common Stock on the date of such event and had such holder thereafter, during
the period from the date of such event to and including the date of conversion,
retained such securities receivable by it pursuant to this paragraph during such
period, subject to the sum of all other adjustments called for during such
period under this Section with respect to the rights of such holder of shares of
Series Preferred.
6. MANDATORY CONVERSION.
(a) Upon (i) the affirmative election of the holders of at least a
majority in interest of the outstanding shares of the Series Preferred or (ii)
the consummation of the first underwritten public offering of Common Stock
pursuant to a registration statement filed under the Securities Act of 1933, as
amended, with (x) a price per share of not less than $6.00 (as adjusted for
stock splits, dividends, recapitalizations and the like), and (y) aggregate
gross proceeds of not less than $20,000,000 (a "Qualified Public Offering"),
each share of Series Preferred then outstanding shall, by virtue of and
simultaneously with such Qualified Public Offering, be deemed automatically
converted into the number of fully paid and nonassessable shares of Common Stock
equal to the quotient obtained by dividing (i) the product of the applicable
Original Issuance Price and the number of shares being converted, by (ii) the
applicable Conversion Price, as last adjusted and then in effect.
(b) As promptly as practicable after the date of consummation of any
Qualified Public Offering and the delivery to the Corporation of the
certificate, or certificates for
17.
<PAGE> 19
the shares of Series Preferred which have been converted, duly endorsed or
assigned in blank to the Corporation (if required by it), the Corporation shall
issue and deliver to or upon the written order of each holder of Series
Preferred, to the place designated by such holder, a certificate or certificates
for the number of full shares of Common Stock to which such holder is entitled,
and a cash amount in respect of any fractional interest in a share of Common
Stock as provided in paragraph (c) below. The person in whose name the
certificate or certificates for Common Stock are to be issued shall be deemed to
have become a stockholder of record on the date of such Qualified Public
Offering and on such date the shares of Series Preferred shall cease to be
outstanding, whether or not the certificates representing such shares have been
received by the Corporation.
(c) The provisions set forth In Section 5(c) shall apply to the
conversion of Series Preferred pursuant to this Section 6 in the same manner as
they apply to the conversion of Series Preferred pursuant to Section 5.
ARTICLE V
DIRECTORS
1. NUMBER.
The number of directors of the Corporation shall be as is set forth
in the by-laws of the Corporation.
2. INDEMNIFICATION.
(a) The liability of the directors of this Corporation for monetary
damages shall be eliminated to the fullest extent permissible under the General
Corporation Law.
(b) The Corporation is authorized to provide indemnification of
agents (as provided in Section 145 of the General Corporation Law) for breach of
duty to the Corporation
18.
<PAGE> 20
and its stockholders through bylaw provisions or through agreements with agents,
or both, in excess of the indemnification otherwise permitted by Section 145 of
the General Corporation Law, subject to the limits on such excess
indemnification set forth in Section 145 of the General Corporation Law. If,
after the effective date of this Article, Delaware law is amended in a manner
which permits a corporation to limit the monetary or other liability of its
directors or to authorize indemnification of, or advancement of such defense
expenses to, its directors or other persons, in any such case to a greater
extent than is permitted on such effective date, the references in this Article
to "Delaware law" shall to that extent be deemed to refer to Delaware law as go
amended.
(c) This Corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the CGCL) for breach of duty to the
Corporation and its shareholders through bylaw provisions or through agreements
with the agents, or through shareholder resolutions, or otherwise, in excess of
the indemnification otherwise permitted by Section 317 of the CGCL, subject, at
any time or times that the Corporation is subject to Section 2115(b) of the
CGCL, to the limits on such excess indemnification set forth in Section 204 of
the CGCL.
(d) The holders of the Series Preferred expressly waive their rights,
if any, as described in California Code Sections 502, 503 and 506 as they relate
to repurchases of shares upon termination of employment or service as a
consultant or director.
(e) Any repeal or modification of the foregoing provisions of this
Article V by the stockholders of this Corporation shall not adversely affect any
right or protection of an agent of this Corporation existing at the time of such
repeal or modification.
19.
<PAGE> 21
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
NetPartners Internet Solutions, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
FIRST, that the Board of Directors of NetPartners Internet Solutions,
Inc., by the unanimous written consent of its members, adopted the following
resolution:
RESOLVED: That the Amended and Restated Certificate of
Incorporation of the Corporation be amended by changing Article I so
that, as amended, said Article shall be and read as follows.
"ARTICLE I
NAME
The name of the Corporation is WebSENSE, Inc. (the "Corporation")."
SECOND, that the said amendment has been consented to and authorized by
the holders of a majority of the issued and outstanding stock entitled to vote
by a written consent given in accordance with the provisions of Section 228 of
the General Corporation Law of the State of Delaware.
THIRD, that the aforesaid amendment was duly adopted in accordance with
the provisions of Section 228 and 242 of the General Corporation Law of the
State of Delaware.
FOURTH, the original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on April 16, 1998,
amended and restated on May 20, 1998, and again amended and restated on June 10,
1999.
IN WITNESS WHEREOF, NetPartners Internet Solutions, Inc. has caused this
Certificate to be signed by Carrie Carlander its Secretary, a duly authorized
officer, effective as of June 18, 1999.
NETPARTNERS INTERNET SOLUTIONS,
INC., a Delaware corporation
By: /s/ Carrie Carlander
---------------------------------
Carrie Carlander, Secretary
<PAGE> 1
EXHIBIT 3.3
================================================================================
NETPARTNERS INTERNET SOLUTIONS, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
------------------------------
BY-LAWS
------------------------------
AS ADOPTED ON APRIL 16, 1998
================================================================================
<PAGE> 2
BY-LAWS OF
NETPARTNERS INTERNET SOLUTIONS, INC.
ARTICLE I
OFFICES
1.1 REGISTERED OFFICE.
The registered office of NETPARTNERS INTERNET SOLUTIONS, INC. (the
"Corporation") in the State of Delaware shall be at 30 Old Rudnick Lane, Suite
100, City of Dover, County of Kent 19901, and the registered agent in charge
thereof shall be Lexis Document Services Inc.
1.2 OTHER OFFICES.
The Corporation may also have an office or offices at any other place or places
within or outside the State of Delaware.
ARTICLE II
MEETING OF STOCKHOLDERS; STOCKHOLDERS'
CONSENT IN LIEU OF MEETING
2.1 ANNUAL MEETINGS.
The annual meeting of the stockholders for the election of directors, and for
the transaction of such other business as may properly come before the meeting,
shall be held at such place, date and hour as shall he fixed by the Board of
Directors (the "Board") and designated in the notice or waiver of notice
thereof, except that no annual meeting need be held if all actions, including
the election of directors, required by the General Corporation Law of the State
of Delaware (the "Delaware Statute") to be taken at a stockholders' annual
meeting are taken by written consent in lieu of meeting pursuant to Section 2.10
of this Article II.
2.2 SPECIAL MEETINGS.
A special meeting of the stockholders for any purpose or purposes may be called
by the Board, the Chairman, the President or the record holders of at least a
majority of the issued and outstanding shares of Common Stock of the
Corporation, to be held at such place, date and hour as shall be designated in
the notice or waiver of notice thereof.
2.3 NOTICE OF MEETINGS.
Except as otherwise required by statute, the Certificate of Incorporation of the
Corporation (the "Certificate") or these By-laws, notice of each annual or
special meeting of the stockholders shall be given to each stockholder of record
entitled to vote at such meeting not less than 10 nor
<PAGE> 3
more than 60 days before the day on which the meeting is to be held, by
delivering written notice thereof to him personally, or by mailing a copy of
such notice, postage prepaid, directly to him at his address as it appears in
the records of the Corporation, or by transmitting such notice thereof to him at
such address by telegraph, cable or other telephonic transmission. Every such
notice shall state the place, the date and hour of the meeting, and, in case of
a special meeting, the purpose or purposes for which the meeting is called.
Notice of any meeting of stockholders shall not be required to be given to any
stockholder who shall attend such meeting in person or by proxy, or who shall,
in person or by attorney thereunto authorized, waive such notice in writing,
either before or after such meeting. Except as otherwise provided in these
By-laws, neither the business to be transacted at, nor the purpose of, any
meeting of the stockholders need be specified in any such notice or waiver of
notice. Notice of any adjourned meeting of stockholders shall not be required to
be given, except when expressly required by law.
2.4 QUORUM.
At each meeting of the stockholders, except where otherwise provided by the
Certificate or these By-laws, the holders of a majority of the issued and
outstanding shares of Common Stock of the Corporation entitled to vote at such
meeting, present in person or represented by proxy, shall constitute a quorum
for the transaction of business. In the absence of a quorum, a majority in
interest of the stockholders present in person or represented by proxy and
entitled to vote, or, in the absence of all the stockholders entitled to vote,
any officer entitled to preside at, or act as secretary of, such meeting, shall
have the power to adjourn the meeting from time to time, until stockholders
holding the requisite amount of stock to constitute a quorum shall be present or
represented. At any such adjourned meeting at which a quorum shall be present,
any business may be transacted which might have been transacted at the meeting
as originally called.
2.5 ORGANIZATION.
Unless otherwise determined by the Board, at each meeting of the stockholders,
one of the following shall act as chairman of the meeting and preside thereat,
in the following order of precedence:
the Chairman;
the President;
any director, officer or stockholder of the Corporation designated by the Board
to act as chairman of such meeting and to preside thereat if the Chairman or the
President shall be absent from such meeting; or
a stockholder of record who shall be chosen chairman of such meeting by a
majority in voting interest of the stockholders present in person or by proxy
and entitled to vote thereat.
The Secretary or, if he shall be presiding over such meeting in accordance with
the provisions of this Section 2.5 or if he shall be absent from such meeting,
the person (who shall be an Assistant
<PAGE> 4
Secretary, if an Assistant Secretary has been appointed and is present) whom the
chairman of such meeting shall appoint, shall act as secretary of such meeting
and keep the minutes thereof.
2.6 ORDER OF BUSINESS.
The order of business at each meeting of the stockholders shall be determined by
the chairman of such meeting, but such order of business may be changed by a
majority in voting interest of those present in person or by proxy at such
meeting and entitled to vote thereat.
2.7 VOTING.
Except as otherwise provided by law, the Certificate or these By-laws, at each
meeting of the stockholders, every stockholder of the Corporation shall be
entitled to one vote in person or by proxy for each share of Common Stock of the
Corporation held by him and registered in his name on the books of the
Corporation on the date fixed pursuant to Section 6.7 of Article VI as the
record date for the determination of stockholders entitled to vote at such
meeting. Persons holding stock in a fiduciary capacity shall be entitled to vote
the shares so held. A person whose stock is pledged shall be entitled to vote,
unless, in the transfer by the pledgor on the books of the Corporation, he has
expressly empowered the pledgee to vote thereon, in which case only the pledgee
or his proxy may represent such stock and vote thereon. If shares or other
securities having voting power stand in the record of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety or otherwise, or if two or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary shall be
given written notice to the contrary and furnished with a copy of the instrument
or order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect:
if only one votes, his act binds all;
if more than one votes, the act of the majority so voting binds all; and
if more than one votes, but the vote is evenly split on any particular matter,
such shares shall be voted in the manner provided by law.
If the instrument so filed shows that any such tenancy is held in unequal
interests, a majority or even-split for the purposes of this Section 2.7 shall
be a majority or even-split in interest. The Corporation shall not vote directly
or indirectly any share of its own capital stock. Any vote of stock may be given
by the stockholder entitled thereto in person or by his proxy appointed by an
instrument in writing, subscribed by such stockholder or by his attorney
thereunto authorized, delivered to the secretary of the meeting; provided,
however, that no proxy shall be voted after three years from its date, unless
said proxy provides for a longer period. At all meetings of the stockholders,
all matters (except where other provision is made by law, the Certificate or
these By-laws) shall be decided by the vote of a majority in interest of the
stockholders present in person or by proxy at such meeting and entitled to vote
thereon, a quorum being present. Unless demanded by a stockholder present in
person or by proxy at any meeting and entitled to vote thereon, the vote on any
question need not be by ballot. Upon a demand by any such stockholder
<PAGE> 5
for a vote by ballot upon any question, such vote by ballot shall be taken. On a
vote by ballot, each ballot shall be signed by the stockholder voting, or by his
proxy, if there be such proxy, and shall state the number of shares voted.
2.8 INSPECTION.
The chairman of the meeting may at any time appoint one or more inspectors to
serve at any meeting of the stockholders. Any inspector may be removed, and a
new inspector or inspectors appointed, by the Board at any time. Such inspectors
shall decide upon the qualifications of voters, accept and count votes, declare
the results of such vote, and subscribe and deliver to the secretary of the
meeting a certificate stating the number of shares of stock issued and
outstanding and entitled to vote thereon and the number of shares voted for and
against the question, respectively. The inspectors need not be stockholders of
the Corporation, and any director or officer of the Corporation may be an
inspector on any question other than a vote for or against his election to any
position with the Corporation or on any other matter in which he may be directly
interested. Before acting as herein provided, each inspector shall subscribe an
oath faithfully to execute the duties of an inspector with strict impartiality
and according to the best of his ability.
2.9 LIST OF STOCKHOLDERS.
It shall be the duty of the Secretary or other officer of the Corporation who
shall have charge of its stock ledger to prepare and make, at least 10 days
before every meeting of the stockholders, a complete list of the stockholders
entitled to vote thereat, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to any such meeting, during ordinary business hours, for
a period of at least 10 days prior to such meeting, either at a place within the
city where such meeting is to be held, which place shall be specified in the
notice of the meeting or, if not so specified, at the place where the meeting is
to be held. Such list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
2.10 STOCKHOLDERS' CONSENT IN LIEU OF MEETING.
Any action required by the Delaware Statute to be taken at any annual or special
meeting of the stockholders of the Corporation, or any action which may be taken
at any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, by a consent in writing, as
permitted by the Delaware Statute.
<PAGE> 6
ARTICLE III
BOARD OF DIRECTORS
3.1 GENERAL POWERS.
The business, property and affairs of the Corporation shall be managed by or
under the direction of the Board, which may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by law or by the
Certificate directed or required to be exercised or done by the stockholders.
3.2 NUMBER AND TERM OF OFFICE.
The number of directors shall initially be five (5). Any subsequent change in
the number of directors shall be determined by the vote or written consent of
the holders of at least 51% of the Common Stock of the Corporation outstanding
at the time such action is taken. Directors need not be stockholders. Each
director shall hold office until his successor is elected and qualified, or
until his earlier death or resignation or removal in the manner hereinafter
provided.
3.3 ELECTION OF DIRECTORS.
At each meeting of the stockholders for the election of directors at which a
quorum is present, the persons receiving the greatest number of votes, up to the
number of directors to be elected, of the stockholders present in person or by
proxy and entitled to vote thereon shall be the directors; provided, however,
that for purposes of such vote no stockholder shall be allowed to cumulate his
votes. Unless an election by ballot shall be demanded as provided in Section 2.7
of Article II, election of directors may be conducted in any manner approved at
such meeting.
3.4 RESIGNATION, REMOVAL AND VACANCIES.
Any director may resign at any time by giving written notice to the Board, the
Chairman, the President or the Secretary. Such resignation shall take effect at
the time specified therein or, if the time be not specified, upon receipt
thereof; unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Any director or the entire Board may be removed, with or without cause, at any
time by vote of the holders of a majority of the shares then entitled to vote at
an election of directors or by written consent of the stockholders pursuant to
Section 2.10 of Article II.
Vacancies occurring on the Board for any reason may be filled by vote of the
stockholders or by the stockholders' written consent pursuant to Section 2.10 of
Article II, or by vote of the Board or by the directors' written consent
pursuant to Section 3.6 of this Article III. If the number of directors then in
office is less than a quorum, such vacancies may be filled by a vote of a
majority of the directors then in office.
<PAGE> 7
3.5 MEETINGS.
Annual Meetings. As soon as practicable after each annual election of directors,
the Board shall meet for the purpose of organization and the transaction of
other business, unless it shall have transacted all such business by written
consent pursuant to Section 3.6 of this Article III.
Other Meetings. Other meetings of the Board shall be held at such times and
places as the Board, the Chairman, the President or any director shall from time
to time determine.
Notice of Meetings. Notice shall be given to each director of each meeting,
including the time, place and purpose of such meeting. Notice of each such
meeting shall be mailed to each director, addressed to him at his residence or
usual place of business, at least two days before the date on which such meeting
is to be held, or shall be sent to him at such place by telegraph, cable,
wireless or other form of recorded communication, or be delivered personally or
by telephone not later than the day before the day on which such meeting is to
be held, but notice need not be given to any director who shall attend such
meeting. A written waiver of notice, signed by the person entitled thereto,
whether before or after the time of the meeting stated therein, shall be deemed
equivalent to notice.
Place of Meetings. The Board may hold its meetings at such place or places
within or outside the State of Delaware as the Board may from time to time
determine, or as shall be designated in the respective notices or waivers of
notice thereof.
Quorum and Manner of Acting. A majority of the total number of directors then in
office shall be present in person at any meeting of the Board in order to
constitute a quorum for the transaction of business at such meeting, and the
vote of a majority of those directors present at any such meeting at which a
quorum is present shall be necessary for the passage of any resolution or act of
the Board, except as otherwise expressly required by law or these By-laws. In
the absence of a quorum for any such meeting, a majority of the directors
present thereat may adjourn such meeting from time to time until a quorum shall
be present.
Organization. At each meeting of the Board, one of the following shall act as
chairman of the meeting and preside thereat, in the following order of
precedence:
the Chairman;
the President (if a director); or
any director designated by a majority of the directors present.
The Secretary or, in the case of his absence, an Assistant Secretary, if an
Assistant Secretary has been appointed and is present, or any person whom the
chairman of the meeting shall appoint shall act as secretary of such meeting and
keep the minutes thereof.
<PAGE> 8
3.6 DIRECTORS' CONSENT IN LIEU OF MEETING.
Any action required or permitted to be taken at any meeting of the Board may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by all the
directors then in office and such consent is filed with the minutes of the
proceedings of the Board.
3.7 ACTION BY MEANS OF CONFERENCE TELEPHONE OR SIMILAR COMMUNICATIONS EQUIPMENT.
Any one or more members of the Board may participate in a meeting of the Board
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other, and participation
in a meeting by such means shall constitute presence in person at such meeting.
3.8 COMMITTEES.
The Board may, by resolution or resolutions passed by a majority of the whole
Board, designate one or more committees, each such committee to consist of one
or more directors of the Corporation (of which at least one (1) director shall
be a Class II Director), which to the extent provided in said resolution or
resolutions shall have and may exercise the powers of the Board in the
management of the business and affairs of the Corporation and may authorize the
seal of the Corporation to be affixed to all papers which may require it, such
committee or committees to have such name or names as may be determined from
time to time by resolution adopted by the Board. A majority of all the members
of any such committee may determine its action and fix the time and place of its
meetings, unless the Board shall otherwise provide. The Board shall have power
to change the members of any such committee at any time, to fill vacancies and
to discharge any such committee, either with or without cause, at any time.
ARTICLE IV
OFFICERS
4.1 EXECUTIVE OFFICERS.
The principal officers of the Corporation shall be a Chief Executive Officer, if
one is appointed (and any references to the Chief Executive Officer shall not
apply if a Chief Executive Officer has not been appointed), a President, a
Secretary and a Treasurer, and may include such other officers as the Board may
appoint pursuant to Section 4.3 of this Article IV. Any two or more offices may
be held by the same person.
4.2 AUTHORITY AND DUTIES.
All officers, as between themselves and the Corporation, shall have such
authority and perform such duties in the management of the Corporation as may be
provided in these By-laws or, to the extent so provided, by the Board.
<PAGE> 9
4.3 OTHER OFFICERS.
The corporation may have such other officers, agents and employees as the Board
may deem necessary, including one or more Assistant Secretaries, one or more
Assistant Treasurers and one or more Vice Presidents, each of whom shall hold
office for such period, have such authority and perform such duties as the
Board, the Chairman or the President may from time to time determine. The Board
may delegate to any principal officer the power to appoint and define the
authority and duties of, or remove, any such officers, agents or employees.
4.4 TERM OF OFFICE, RESIGNATION AND REMOVAL.
All officers shall be elected or appointed by the Board and shall hold office
for such term as may be prescribed by the Board. Each officer shall hold office
until his successor has been elected or appointed and qualified or until his
earlier death or resignation or removal in the manner hereinafter provided. The
Board may require any officer to give security for the faithful performance of
his duties.
Any officer may resign at any time by giving written notice to the Board, the
Chairman, the President or the Secretary. Such resignation shall take effect at
the time specified therein or, if the time be not specified, at the time it is
accepted by action of the Board. Except as aforesaid, the acceptance of such
resignation shall not be necessary to make it effective.
All officers and agents elected or appointed by the Board shall be subject to
removal at any time by the Board or by the stockholders of the Corporation with
or without cause.
4.5 VACANCIES.
If the office of Chairman, President, Secretary or Treasurer becomes vacant for
any reason, the Board shall fill such vacancy, and if any other office becomes
vacant, the Board may fill such vacancy. Any officer so appointed or elected by
the Board shall serve only until such time as the unexpired term of his
predecessor shall have expired, unless reelected or reappointed by the Board.
4.6 THE CHIEF EXECUTIVE OFFICER.
The Chief Executive Officer shall give counsel and advice to the Board and the
officers of the Corporation on all subjects concerning the welfare of the
Corporation and the conduct of its business and shall perform such other duties
as the Board may from time to time determine. Unless otherwise determined by the
Board, he shall preside at meetings of the Board and of the Stockholders at
which he is present.
4.7 THE PRESIDENT.
Unless otherwise determined by the Board, the President shall be the chief
executive officer of the Corporation. The President shall have general and
active management and control of the business and affairs of the Corporation
subject to the control of the Board and shall see that all
<PAGE> 10
orders and resolutions of the Board are carried into effect. The President shall
from time to time make such reports of the affairs of the Corporation as the
Board of Directors may require and shall perform such other duties as the Board
may from time to time determine.
4.8 THE SECRETARY.
The Secretary shall, to the extent practicable, attend all meetings of the Board
and all meetings of the stockholders and shall record all votes and the minutes
of all proceedings in a book to be kept for that purpose. He may give, or cause
to be given, notice of all meetings of the stockholders and of the Board, and
shall perform such other duties as may be prescribed by the Board, the Chairman
or the President, under whose supervision he shall act. He shall keep in safe
custody the seal of the Corporation and affix the same to any duly authorized
instrument requiring it and, when so affixed, it shall be attested by his
signature or by the signature of the Treasurer or, if appointed, an Assistant
Secretary or an Assistant Treasurer. He shall keep in safe custody the
certificate books and stockholder records and such other books and records as
the Board may direct, and shall perform all other duties incident to the office
of Secretary and such other duties as from time to time may be assigned to him
by the Board, the Chairman or the President.
4.9 THE TREASURER.
The Treasurer shall have the care and custody of the corporate funds and other
valuable effects, including securities, shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board. The
Treasurer shall disburse the funds of the Corporation as may be ordered by the
Board, taking proper vouchers for such disbursements, shall render to the
Chairman, President and directors, at the regular meetings of the Board, or
whenever they may require it, an account of all his transactions as Treasurer
and of the financial condition of the Corporation and shall perform all other
duties incident to the office of Treasurer and such other duties as from time to
time may be assigned to him by the Board, the Chairman or the President.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
5.1 EXECUTION OF DOCUMENTS.
The Board shall designate, by either specific or general resolution, the
officers, employees and agents of the Corporation who shall have the power to
execute and deliver deeds, contracts, mortgages, bonds, debentures, checks,
drafts and other orders for the payment of money and other documents for and in
the name of the Corporation, and may authorize such officers, employees and
agents to delegate such power (including authority to redelegate) by written
instrument to other officers, employees or agents of the Corporation; unless so
designated or expressly authorized by these By-laws, no officer, employee or
agent shall have any power or authority to bind the Corporation by any contract
or engagement, to pledge its credit or to render it liable pecuniarily for any
purpose or amount.
<PAGE> 11
5.2 DEPOSITS.
All funds of the Corporation not otherwise employed shall be deposited from time
to time to the credit of the Corporation or otherwise as the Board or Treasurer,
or any other officer of the Corporation to whom power in this respect shall have
been given by the Board, shall select.
5.3 PROXIES WITH RESPECT TO STOCK OR OTHER SECURITIES OF OTHER CORPORATIONS.
The Board shall designate the officers of the Corporation who shall have
authority from time to time to appoint an agent or agents of the Corporation to
exercise in the name and on behalf of the Corporation the powers and rights
which the Corporation may have as the holder of stock or other securities in any
other corporation, and to vote or consent with respect to such stock or
securities. Such designated officers may instruct the person or persons so
appointed as to the manner of exercising such powers and rights, and such
designated officers may execute or cause to be executed in the name and on
behalf of the Corporation and under its corporate seal or otherwise, such
written proxies, powers of attorney or other instruments as they may deem
necessary or proper in order that the Corporation may exercise its powers and
rights.
ARTICLE VI
SHARES AND THEIR TRANSFER; FIXING RECORD DATE
6.1 CERTIFICATES FOR SHARES.
Every owner of stock of the Corporation shall be entitled to have a certificate
certifying the number and class of shares owned by him in the Corporation, which
shall be in such form as shall be prescribed by the Board. Certificates shall be
numbered and issued in consecutive order and shall be signed by, or in the name
of, the Corporation by the Chairman, the President or any vice President, and by
the Treasurer (or an Assistant Treasurer, if appointed) or the Secretary (or an
Assistant Secretary, if appointed). In case any officer or officers who shall
have signed any such certificate or certificates shall cease to be such officer
or officers of the Corporation, whether because of death, resignation or
otherwise, before such certificate or certificates shall have been delivered by
the Corporation, such certificate or certificates may nevertheless be adopted by
the Corporation and be issued and delivered as though the person or persons who
signed such certificate had not ceased to be such officer or officers of the
Corporation.
6.2 RECORD.
A record in one or more counterparts shall be kept of the name of the person,
firm or corporation owning the shares represented by each certificate for stock
of the Corporation issued, the number of shares represented by each such
certificate, the date thereof and, in the case of cancellation, the date of
cancellation. Except as otherwise expressly required by law, the person in whose
name shares of stock stand on the stock record of the Corporation shall be
deemed the owner thereof for all purposes regarding the Corporation.
<PAGE> 12
6.3 TRANSFER AND REGISTRATION OF STOCK.
The transfer of stock and certificates which represent the stock of the
Corporation shall be governed by Article 8 of Subtitle 1 of Title 6 of the
Delaware Code (the Uniform Commercial Code), as amended from time to time.
Registration of transfers of shares of the Corporation shall be made only on the
books of the Corporation upon request of the registered holder thereof, or of
his attorney thereunto authorized by power of attorney duly executed and filed
with the Secretary of the Corporation, and upon the surrender of the certificate
or certificates for such shares properly endorsed or accompanied by a stock
power duly executed.
6.4 ADDRESSES OF STOCKHOLDERS.
Each stockholder shall designate to the Secretary an address at which notices of
meetings and all other corporate notices may be served or mailed to him, and, if
any stockholder shall fail to designate such address, corporate notices may be
served upon him by mail directed to him at his post-office address, if any, as
the same appears on the share record books of the Corporation or at his last
known post-office address.
6.5 LOST, DESTROYED AND MUTILATED CERTIFICATES.
The holder of any shares of the Corporation shall immediately notify the
Corporation of any loss, destruction or mutilation of the certificate therefor,
and the Board may, in its discretion, cause to be issued to him a new
certificate or certificates for such shares, upon the surrender of the mutilated
certificates or, in the case of loss or destruction of the certificate, upon
satisfactory proof of such loss or destruction, and the Board may, in its
discretion, require the owner of the lost or destroyed certificate or his legal
representative to give the Corporation a bond in such sum and with such surety
or sureties as it may direct to indemnify the Corporation against any claim that
may be made against it on account of the alleged loss or destruction of any such
certificate.
6.6 REGULATIONS.
The Board may make such rules and regulations as it may deem expedient, not
inconsistent with these By-laws, concerning the issue, transfer and registration
of certificates for stock of the Corporation.
6.7 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD.
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, the
Board may fix a record date, which record date shall not precede the date upon
which the resolution fixing the record date is adopted by the Board, and which
record date shall be not more than 60 nor less than 10 days before the date of
such meeting. If no record date is fixed by the Board, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at
<PAGE> 13
the close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
In order that the Corporation may determine the stockholders entitled to consent
to corporate action in writing without a meeting, the Board may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board, and which date shall be not more
than 10 days after the date upon which the resolution fixing the record date is
adopted by the Board. If no record date has been fixed by the Board, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting, when no prior action by the Board is required by the
Delaware Statute, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in this State, its principal
place of business or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board and prior action by the Board is required by the Delaware Statute, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting shall be at the close of business on the day on
which the Board adopts the resolution taking such prior action.
In order that the Corporation may determine the stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted, and which record
date shall be not more than 60 days prior to such action. If no record date is
fixed, the record date for determining stockholders for any such purpose shall
be at the close of business on the day on which the Board adopts the resolution
relating thereto.
6.8 SEAL
The Board may provide a corporate seal, which shall be in the form of a circle
and shall bear the full name of the Corporation, the year of incorporation of
the Corporation and the words and figures "Corporate Seal - Delaware."
6.9 FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year unless otherwise
determined by the Board.
<PAGE> 14
ARTICLE VII
INDEMNIFICATION AND INSURANCE
7.1 INDEMNIFICATION.
As provided in the Certificate, to the fullest extent permitted by the Delaware
Statute as the same exists or may hereafter be amended, a director of the
Corporation shall not be liable to the Corporation or its stockholders for
breach of fiduciary duty as a director.
Without limitation of any right conferred by paragraph (a) of this Section 7.1,
each person who was or is made a party or is threatened to be made a party to or
is otherwise involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
director, officer or employee of the Corporation or is or was serving at the
request of the Corporation as a director, officer or employee of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity while serving as a director, officer or employee or in any
other capacity while serving as a director, officer or employee, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware Statute, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
permitted prior thereto), against all expense, liability and loss (including
attorneys' fees, judgments, fines, excise taxes or amounts paid in settlement)
reasonably incurred or suffered by such indemnitee in connection therewith and
such indemnification shall continue as to an indemnitee who has ceased to be a
director, officer or employee and shall inure to the benefit of the indemnitee's
heirs, testators, intestates, executors and administrators; provided, however,
that such person acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation, and with
respect to a criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful; provided further, however, that no indemnification
shall be made in the case of an action, suit or proceeding by or in the right of
the Corporation in relation to matters as to which it shall be adjudged in such
action, suit or proceeding that such director, officer, employee or agent is
liable to the Corporation, unless a court having jurisdiction shall determine
that, despite such adjudication, such person is fairly and reasonably entitled
to indemnification; provided further, however, that, except as provided in
Section 7.1 of this Article VII with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) initiated by such indemnitee was authorized
by the Board of Directors of the Corporation. The right to indemnification
conferred in this Article VII shall be a contract right and shall include the
right to be paid by the Corporation the expenses incurred in defending any such
proceeding in advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, that, if the Delaware Statute requires, an
advancement of expenses incurred by an indemnitee in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such indemnitee, including, without limitation, service to an
employee benefit plan)
<PAGE> 15
shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under this Section or otherwise.
If a claim under Section 7.1 of this Article VII is not paid in full by the
Corporation with 60 days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of any undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met the applicable standard of conduct set forth in the
Delaware Statute. Neither the failure of the Corporation (including the Board,
independent legal counsel, or the stockholders) to have made a determination
prior to the commencement of such suit that indemnification of the indemnitee is
proper in the circumstances because the indemnitee has met the applicable
standard of conduct set forth in the Delaware Statute, nor an actual
determination by the Corporation (including the Board, independent legal counsel
or the stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Section or otherwise shall be on the Corporation.
The rights to indemnification and to the advancement of expenses conferred in
this Article VII shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, the Charter, agreement, vote of
stockholders or disinterested directors or otherwise.
7.2 INSURANCE.
The Corporation may purchase and maintain insurance, at its expense, to protect
itself and any person who is or was a director, officer, employee or agent of
the Corporation or any person who is or was serving at the request of the
Corporation as a director, officer, employer or agent of another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the Delaware
Statute.
<PAGE> 16
7.3 AMENDMENT
Any by-law (including these By-laws) may be adopted, amended or repealed by the
vote of the holders of a majority of the shares then entitled to vote or by the
stockholders' written consent pursuant to Section 2.10 of Article II, or by the
vote of the Board or by the directors' written consent pursuant to Section 3.6
of Article III.
<PAGE> 1
EXHIBIT 10.1
EXECUTION COPY
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT dated June 9,1999,
among NETPARTNERS INTERNET SOLUTIONS, INC., a Delaware corporation (the
"Company"), and the holders of the Company's Series A Preferred Stock, $.01 par
value (the "Series A Preferred Stock"), listed on Schedule I (the "Series A
Investors") and the investors listed on Schedule II (the "Series B Investors").
The Series A Investors and the Series B Investors are hereinafter collectively
referred to as the "Investors."
The Company has granted the Series A Investors registration and other
rights under that certain Registration Rights Agreement dated May 20, 1998 among
the Company and the Series A Investors (the "Prior Agreement"). Pursuant to that
certain Subscription Agreement of even date herewith, among the Company and the
Series B Investors (the "Subscription Agreement"), the Company issued and sold
to each Series B Investor the number of shares of Series B Preferred Stock, $.01
par value (the "Series B Preferred Stock"), set forth opposite the name of such
Series B Investor on Schedule II. The Series A Preferred Stock and the Series B
Preferred Stock are convertible into shares of Common Stock, $.01 par value (the
"Common Stock"), of the Company. The Company and the Investors deem it to be in
their respective best interests to set forth the rights of the Investors in
connection with public offerings and sales of the Common Stock. Accordingly, the
Company and the Investors agree as follows:
SECTION 1. AMENDMENT OF PRIOR AGREEMENT. Certain of the undersigned
parties, who constitute the requisite parties necessary to amend the Prior
Agreement, hereby agree that effective upon the date hereof, the Prior Agreement
is null and void and superseded in its entirety by the rights and obligations
set forth in this Amended and Restated Registration Rights Agreement, and any
application of the rights contained in the Prior Agreement, including, but not
limited to subsequent registration rights, conflicting rights, modifications,
amendments or waivers (including any notice requirements) set forth in Sections
7, 13 and 19 of the Prior Agreement as to the issuance of the Company's Series B
Preferred Stock under that certain subscription Agreement dated of even date
herewith between the Company and the holders of the Series B Preferred Stock are
hereby waived.
SECTION 2. DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings:
"COMMISSION" means the Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any successor Federal statute, and the rules and regulations of the Commission
promulgated thereunder, all as the same shall be in effect from time to time.
"OTHER SHARES" means at any time those shares of Common Stock which do
not constitute Primary Shares or Registrable Shares.
1.
<PAGE> 2
"PRIMARY SHARES" means at any time the authorized but unissued shares of
Common Stock or shares of Common Stock held by the Company in its treasury.
"REGISTRABLE SHARES" shall mean (i) shares of Common Stock issued or
issuable pursuant to the conversion of the Restricted Shares and (ii) any Common
Stock issued as a dividend or other distribution with respect to or in exchange
for or in replacement of the shares referenced in (1) above, provided, however,
that Registrable Securities shall not include any shares of Common Stock which
have previously been registered or which have been sold to the public either
pursuant to a registration statement or Rule 144, or which have been sold in a
private transaction in which the transferor's rights under this Agreement are
not assigned.
"REGISTRATION DATE" means the date on which any registration statement
pursuant, to which the Company shall have initially registered shares of Common
Stock under the Securities Act for sale to the public shall have been declared
effective.
"REGISTRATION EXPENSES" shall mean all expenses incurred in effecting
any registration pursuant to this Agreement, including, without limitation, all
registration, qualification, and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
and expenses of any regular or special audits incident to or required by any
such registration, but shall not include Selling Expenses, and the compensation
of regular employees of the Company, which shall be paid in any event by the
Company.
"RESTRICTED SHARES" means the Company's Series A Preferred Stock and
Series B Preferred Stock.
"RULE 144" means Rule 144 promulgated under the Securities Act or any
successor rule thereto.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
successor Federal statute, and the rules and regulations of the Commission
promulgated thereunder, all as the same shall be in effect from time to time.
"SELLING EXPENSES" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the sale of Registrable
Shares and fees and disbursements of counsel for any holder (other than the fees
and disbursements of counsel included in Registration Expenses).
"TRANSFER" means any disposition of any Restricted Shares or of any
interest therein which would constitute a sale thereof within the meaning of the
Securities Act, other than any such disposition pursuant to an effective
registration statement under the Securities Act and complying with all
applicable state securities and "blue sky" laws.
SECTION 3. REQUIRED REGISTRATION.
(a) If the Company shall be requested by any Investor or group of
Investors holding at least a majority of all Registrable Shares, (i) at any time
after December 31, 1999, or (ii) at any time after the 180th day after the
Registration Date, to effect the registration under the Securities Act of
Registrable Shares, the Company shall promptly give written notice of such
2.
<PAGE> 3
proposed registration to all holders of Registrable Shares and shall offer to
include in such proposed registration any Registrable Shares requested to be
included in such proposed registration by the holders of Registrable Shares who
shall respond in writing to the Company's notice within 30 days after delivery
of such notice (which response shall specify the number of Registrable Shares
proposed to be included in such registration). The Company shall promptly use
its best efforts to effect such registration under the Securities Act of the
Registrable Shares which the Company has been so requested to register;
provided, however, that the Company shall not be obligated to effect any
registration under the Securities Act except in accordance with the following
provisions:
(b) the Company shall not be obligated to use its best efforts to
file and cause to become effective (i) more than two registration statements
initiated pursuant to clause (a)(i) above, (ii) more than three registration
statements initiated pursuant to this Section 3 and Section 5, or (iii) any
registration statement during any period in which any other registration
statement (other than on Form S-4 or Form S-8 promulgated under the Securities
Act or any successor forms thereto) pursuant to which Primary Shares are to be
or were sold has been filed and not withdrawn or has been declared effective
within the prior 90 days;
(c) the Company may delay the filing or effectiveness of any
registration statement for a period of up to 90 days after the date of a request
for registration pursuant to this Section if at the time of such request the
Company is engaged, or has fixed plans to engage within 60 days of the time of
such request, in a firm commitment underwritten public offering of Primary
Shares in which the holders of Registrable Shares may include Registrable Shares
pursuant to Section 4;
(d) with respect to any registration pursuant to this Section, the
Company may include in such registration any Primary Shares or Other Shares;
provided, however, that if any managing underwriter for the public offering
contemplated by such registration advises the Company in writing that, in such
firm's good faith opinion, the inclusion of all Registrable Shares, Primary
Shares and Other Shares proposed to be included in such registration would
adversely affect the offering and sale (including pricing) of all such
securities, then the number of Registrable Shares, Primary Shares and Other
Shares proposed to be included in such registration shall be included in the
following order:
(i) FIRST, the Registrable Shares held by the Investors, pro rata
based upon the number of Registrable Shares owned by each Investor at the time
of such registration; and
(ii) SECOND, the Primary Shares and the Other Shares;
(e) if, while a registration request is pending pursuant to this
Section 3, the Company has determined in good faith that (i) the filing of a
registration statement would require the disclosure of material information that
the Company has a bona fide business purpose for preserving as confidential or
(ii) the Company then is unable to comply with Commission requirements
applicable to the requested registration, the Company shall not be required to
effect a registration pursuant to this Section 3 until the earlier of (A) the
date upon which such material information is otherwise disclosed to the public
or ceases to be material or the Company is able
3.
<PAGE> 4
to so comply with applicable Commission requirements, as the case may be, and
(B) 180 days after the Company makes such good-faith determination, provided
that the Company shall not be permitted to delay a requested registration in
reliance on this paragraph (e) more than once in any 12-month period; and
(f) A requested registration under this Section may be rescinded by
written notice to the Company by the Investors initiating such request. Such
rescinded registration shall not count as a registration statement initiated
pursuant to this Section for purposes of paragraph (b) above if (1) such request
is rescinded by such Investors not later than five business days prior to the
proposed filing of a registration statement with the Commission and (2) such
Investors reimburse the Company for all Registration Expenses incurred in
connection with such withdrawn request. A registration rescinded later than five
business days prior to the proposed filing of a registration statement with the
Commission shall count as a registration statement initiated pursuant to
paragraph (b) of this Section and the Investors shall bear the Registration
Expenses. Furthermore, in the event that a withdrawal by the Investors is prior
to 15 days in advance of the proposed filing with the Commission of any
registration on Form S-1, or prior to 5 days in advance of the proposed filing
with the Commission of any registration on Form S-3, such registration shall not
be treated as a counted registration for purposes of Section 3 hereof, and the
Investors will not bear the Registration Expenses for such rescinded
registration.
SECTION 4. PIGGYBACK REGISTRATION. If the Company at any time proposes
for any reason to register Primary Shares or Other Shares under the Securities
Act (other than on Form S-4 or Form S-8 promulgated under the Securities Act or
any successor forms thereto), it shall promptly give written notice to each
Investor of its intention so to register the Primary Shares or Other Shares at
least 20 business days prior to the anticipated filing date of the registration
statement relating thereto. Upon the written request, given within 10 business
days after delivery of any such notice by the Company, of any Investor to
include in such registration Registrable Shares (which request shall specify the
number of Registrable Shares proposed to be included in such registration), the
Company shall use its best efforts to cause all such Registrable Shares to be
included in such registration on the same terms and conditions as the securities
otherwise being sold in such registration; provided, however, that:
(a) if any managing underwriter for the initial public offering of
Primary Shares contemplated by such registration advises the Company in writing
that, in such firm's good faith opinion, the inclusion of any or all Registrable
Shares or Other Shares proposed to be included in such registration would
adversely affect the offering and sale (including pricing) of the Primary Shares
proposed to be registered by the Company, then the number of Primary Shares,
Registrable Shares and Other Shares proposed to be included in such registration
shall be included in the following order:
(i) FIRST, the Primary Shares;
(ii) SECOND, the Registrable Shares held by the Investors, pro
rata based upon the number of Registrable Shares owned by each Investor at the
time of such registration; and
(iii) THIRD, the Other Shares; and
4.
<PAGE> 5
(b) if at any time after giving written notice of its intention to
register any Primary Shares or Other Shares and prior to the effective date of
such registration, the Company shall determine for any reason not to register or
to delay registration of such securities, the Company may, at its election, give
written notice of such determination to the Investors and, thereupon, (A) in the
case of a determination not to register, the Company shall be relieved of its
obligation to register any Registrable Shares in connection with such
registration and (B) in the case of a determination to delay such registration,
the Company shall be permitted to delay registration of any Registrable Shares
requested to be included in such registration for the same period as the delay
in registering such other securities.
SECTION 5. REGISTRATIONS ON FORM S-3. At such time as the Corporation
shall have qualified for the use of Form S-3 promulgated under the Securities
Act or any successor form thereto, the holders of the Registrable Shares then
outstanding shall have the right to request in writing registration on Form S-3,
or such successor form, of Registrable Shares, which request shall (i) specify
the number of Registrable Shares intended to be sold or disposed of and the
holders thereof, (ii) state the intended method of disposition of such
Registrable Shares, and (iii) relate to Registrable Shares having an aggregate
offering price of at least $500,000. A requested registration on Form S-3 or any
successor form in compliance with this Section 5 shall be subject to Sections 3
and 4, including without limitation Section 4(b).
SECTION 6. HOLDBACK AGREEMENT. If the Company at any time shall register
shares of Common Stock under the Securities Act (including any registrations
pursuant to Section 3, 4 or 5) for sale to the public, the Investors shall not
sell, make any short sale of, grant any option for the purchase of, or otherwise
dispose of any Restricted Shares (other than those shares of Common Stock
included in such registration pursuant to Section 3, 4 or 5) without the prior
written consent of the Company for a period designated by the Company in writing
to the Investors, which period shall not last more than 180 days after the
effective date of such registration statement or such longer period as any
managing underwriter for such public offering shall request, provided all
officers, directors and greater than 1% shareholders of the Company have entered
into similar agreements. The Company may legend and impose stop transfer
instructions on any certificate evidencing Registrable Shares relating to the
restrictions provided in this Section 6.
SECTION 7. PREPARATION AND FILING. If and whenever the Company is under
an obligation pursuant to the provisions of this Agreement to use its best
efforts to effect the registration of any Registrable Shares under the
Securities Act, the Company shall, as expeditiously as practicable:
(a) use its best efforts to cause a registration statement that
registers such Registrable Shares to become and remain effective for a period of
90 days or until all of such Registrable Shares have been disposed of (if
earlier);
(b) furnish, at least five business days before filing a
registration statement that registers such Registrable Shares, a prospectus
relating thereto or any amendments or supplements relating to such a
registration statement or prospectus, to one counsel selected by the holders of
a majority of such Registrable Shares (the "Selling Investors' Counsel"), copies
of all such documents proposed to be filed (it being understood that such
five-business-day period
5.
<PAGE> 6
need not apply to successive drafts of the same document proposed to be filed so
long as such successive drafts are supplied to such counsel in advance of the
proposed filing by a period of time that is customary and reasonable under the
circumstances);
(c) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
at least a period of 90 days or until all of such Registrable Shares have been
disposed of (if earlier) and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of such Registrable Shares;
(d) notify in writing the Selling Investors' Counsel promptly (i) of
the receipt by the Company of any notification with respect to any comments by
the Commission with respect to such registration statement or prospectus or any
amendment or supplement thereto or any request by the Commission for the
amending or supplementing thereof or for additional information with respect
thereto, (ii) of the receipt by the Company of any notification with respect to
the issuance by the Commission of any stop order suspending the effectiveness of
such registration statement or prospectus or any amendment or supplement thereto
or the initiation or threatening of any proceeding for that purpose and (iii) of
the receipt by the Company of any notification with respect to the suspension of
the qualification of such Registrable Shares for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purposes;
(e) use its efforts to register or qualify such Registrable Shares
under such other securities or blue sky laws of such jurisdictions as any seller
of Registrable Shares reasonably requests and do any and all other acts and
things which may be reasonably necessary or advisable to enable such seller of
Registrable Shares to consummate the disposition in such jurisdictions of the
Registrable Shares owned by such seller; provided, however, that the Company
will not be required to register or qualify generally to do business, subject
itself to general taxation or consent to general service of process in any
jurisdiction where it would not otherwise be required so to do but for this
paragraph (e);
(f) furnish to each seller of such Registrable Shares such
reasonable number of copies of a summary prospectus or other prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents prepared by the Company in connection
with such registration as such seller of Registrable Shares may reasonably
request in order to facilitate the public sale or other disposition of such
Registrable Shares;
(g) use its best efforts to cause such Registrable Shares to be
registered with or approved by such other governmental agencies or authorities
as may be necessary by virtue of the business and operations of the Company to
enable the seller or sellers thereof to consummate the disposition of such
Registrable Shares;
(h) notify on a timely basis each seller of such Registrable Shares
at any time when a prospectus relating to such Registrable Shares is required to
be delivered under the Securities Act within the appropriate period mentioned in
paragraph (a) of this Section, of the happening of any event as a result of
which the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a
6.
<PAGE> 7
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing and, at the
request of such seller, prepare and furnish to such seller a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the offerees of such shares, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing;
(i) make available for inspection by any seller of such Registrable
Shares, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter (collectively, the "Inspectors"), all pertinent
financial and other records, pertinent corporate documents and properties of the
Company (collectively, the "Records"), as shall be reasonably necessary to
enable them to exercise their due diligence responsibility under the Securities
Act, and cause the Company's officers, directors and employees to supply all
information (together with the Records, the "Information") reasonably requested
by any such Inspector in connection with the preparation and filing of such
registration statement. Any of the Information which the Company determines in
good faith to be confidential, and of which determination the Inspectors are so
notified, shall not be disclosed by the Inspectors unless (i) the disclosure of
such Information is necessary to avoid or correct a misstatement or omission in
the registration statement, (ii) the release of such Information is ordered
pursuant to a subpoena or other order from a court of competent jurisdiction or
(iii) such Information has been made generally available to the public. The
seller of Registrable Shares agrees that it will, upon learning that disclosure
of such Information is sought in a court of competent jurisdiction, give notice
to the Company and allow the Company, at the Company's expense, to undertake
appropriate action to prevent disclosure of the Information deemed confidential;
(j) use its best efforts to obtain from its independent certified
public accountants "cold comfort" letters in customary form and at customary
times and covering matters of the type customarily covered by cold comfort
letters;
(k) use its best efforts to obtain from its counsel an opinion or
opinions in customary form;
(1) provide a transfer agent and registrar (which may be the same
entity and which may be the Company) for such Registrable Shares to the extent
not already provided;
(m) issue to any underwriter to which any seller of Registrable
Shares may sell shares in such offering certificates evidencing such Registrable
Shares;
(n) list such Registrable Shares on any national securities exchange
or national automated quotation system on which any shares of the Common Stock
are listed or, if the Common Stock is not so listed, use its best efforts to
qualify such Registrable Shares for inclusion on the automated quotation system
of the National Association of Securities Dealers, Inc. (the "NASD") or such
national securities exchange as the Company shall reasonably determine;
7.
<PAGE> 8
(o) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission and make available to its
securityholders, as soon as reasonably practicable, earnings statements (which
need not be audited) covering a period of 12 months beginning within three
months after the effective date of the registration statement, which earnings
statements shall satisfy the provisions of Section 11(a) of the Securities Act;
and
(p) use its best efforts to take all other steps necessary to effect
the registration of such Registrable Shares contemplated hereby.
SECTION 8.
(a) EXPENSES OF REGISTRATION. All Registration Expenses incurred
(including the reasonable fees (not to exceed $15,000) of one counsel to
Investors) in connection with any registration, qualification or compliance
pursuant to Sections 3, 4 and 5 hereof (except as specifically provided
therein), shall be borne by the Company. All Selling Expenses relating To
securities so registered shall be borne by the holders of such Registrable
Shares pro rata on the basis of the number of shares of securities so registered
on their behalf, as shall any other expenses in connection with the registration
required to be borne by the holders of such Registrable Shares.
(b) LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after
the date of this Agreement, the Company shall not, without the prior written
consent of a majority in interest of the Investors, enter into any agreement
with any holder or prospective holder of any securities of the Company giving
such holder or prospective holder any registration rights.
SECTION 9. INDEMNIFICATION.
(a) In connection with any registration of any Registrable Shares
under the Securities Act pursuant to this Agreement, the Company shall indemnify
and hold harmless the seller of such Registrable Shares, each underwriter,
broker or any other person acting on behalf of such seller and each other
person, if any, who controls any of the foregoing persons within the meaning of
the Securities Act against any losses, claims, damages or liabilities, joint or
several, (or actions in respect thereof) to which any of the foregoing persons
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in the registration statement under which such
Registrable Shares were registered under the Securities Act, any preliminary
prospectus or final prospectus contained therein or otherwise filed with the
Commission, any amendment or supplement thereto or any document incident to
registration or qualification of any Registrable Shares, 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 or, with respect to any prospectus, necessary to make the statements
therein in light of the circumstances under which they were made not misleading,
or any violation by the Company of the Securities Act or state securities or
blue sky laws applicable to the Company and relating to action or inaction
required of the Company in connection with such registration or qualification
under such state securities or blue sky laws; and shall reimburse such seller,
such underwriter, such broker or such other person acting on behalf of such
seller and each such controlling person for any legal or other
8.
<PAGE> 9
expenses reasonably incurred by any of them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in said registration statement, preliminary prospectus, final prospectus,
amendment, supplement or document incident to registration or qualification of
any Registrable Shares in reliance upon and in conformity with written
information furnished to the Company through an instrument duly executed by or
on behalf of such seller or underwriter specifically for use in the preparation
thereof and provided, further, however, that, as to any underwriter or any
person controlling any underwriter, this indemnity does not apply to any losses,
claims, damages or liabilities arising out of or based upon any untrue statement
or alleged untrue statement or omission or alleged omission in any preliminary
prospectus if a copy of a prospectus was not sent or given by or on behalf of an
underwriter to such person asserting such loss, claim damage, liability or
action at or prior to the written confirmation of the sale of the Registrable
Shares as required by the Securities Act and such untrue statement or omission
had been corrected in such prospectus.
(b) In connection with any registration of Registrable Shares under
the Securities Act pursuant to this Agreement, each seller of Registrable Shares
shall indemnify and hold harmless (in the same manner and to the same extent as
set forth in the preceding paragraph of this Section) the Company, each director
of the Company, each officer of the Company who shall sign such registration
statement, each underwriter, broker or other person acting on behalf of the
Company, each person who controls any of the foregoing persons within the
meaning of the Securities Act and each other seller of Registrable Shares under
such registration statement with respect to any statement or omission from such
registration statement, any preliminary prospectus or final prospectus contained
therein or otherwise filed with the Commission, any amendment or supplement
thereto or any document incident to registration or qualification of any
Registrable Shares, if (other than with respect to such seller's indemnification
of an underwriter) such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company or such underwriter
through an instrument duly executed by or on behalf of such seller specifically
for use in connection with the preparation of such registration statement,
preliminary prospectus, final prospectus, amendment, supplement or document;
provided, however, that the maximum amount of liability in respect of such
indemnification shall be limited, in the case of each seller of Registrable
Shares, to an amount equal to the net proceeds actually received by such seller
from the sale of Registrable Shares effected pursuant to such registration; and
provided, further, however, that, as to any underwriter or any person
controlling any underwriter, this indemnity does not apply to any losses,
claims, damages or liabilities arising out of or based upon any untrue statement
or alleged untrue statement or omission or alleged omission in any preliminary
prospectus if a copy of a prospectus was not sent or given by or on behalf of an
underwriter to such person asserting such loss, claim, damage, liability or
action at or prior to the written confirmation of the sale of the Registrable
Shares as required by the Securities Act and such untrue statement or omission
had been corrected in such prospectus.
(c) Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the preceding
paragraphs of this Section, such indemnified party will, if a claim in respect
thereof is made against an
9.
<PAGE> 10
indemnifying party, give written notice to the latter of the commencement of
such action. In case any such action is brought against an indemnified party,
the indemnifying party will be entitled to participate in and to assume the
defense thereof, jointly with any other indemnifying party similarly notified to
the extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be responsible for any legal or other expenses
subsequently incurred by the latter in connection with the defense thereof,
provided, however, that if any indemnified party shall have reasonably concluded
that there may be one or more legal or equitable defenses available to such
indemnified party which are additional to or conflict with those available to
the indemnifying party, or that such claim or litigation involves or could have
an effect upon matters beyond the scope of the indemnity agreement provided in
this Section, the indemnifying party shall not have the right to assume the
defense of such action on behalf of such indemnified party and such indemnifying
party shall reimburse such indemnified party and any person controlling such
indemnified party for that portion of the fees and expenses of any counsel
retained by the indemnified party which is reasonably related to the matters
covered by the indemnity agreement provided in this Section.
(d) If the indemnification provided for in this Section is held by a
court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, claim, damage, liability or action referred to herein, then
the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amounts paid or payable by such indemnified
party as a result of such loss, claim, damage, liability or action in such
proportions as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions which resulted in such loss, claim, damage or
liability as well as any other relevant equitable considerations. The relative
fault of the indemnifying party and of the indemnified party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the indemnifying party or by
the indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
SECTION 10. UNDERWRITING AGREEMENT. Notwithstanding the provisions of
Sections 6, 7, 8, and 9 to the extent that the Investors selling Registrable
Shares in a proposed registration shall enter into an underwriting or similar
agreement, which agreement contains provisions covering one or more issues
addressed in such Sections, the provisions contained in such Sections addressing
such issue or issues shall be of no force or effect with respect to such
registration. Each Investor that requested the registration of Registrable
Shares in an underwritten public offering pursuant to this Agreement shall
execute (i) an underwriting agreement containing (A) customary representations
and warranties and opinion requirements of such Investor, and (B) other terms
reasonably satisfactory to such Investor, and (ii) customary ancillary
documents, including a power of attorney and a custody agreement.
SECTION 11. SELECTION OF UNDERWRITERS. The Investors acknowledge and
agree that the Company shall select the underwriter for any public offering of
Registrable Shares made pursuant to this Agreement.
10.
<PAGE> 11
SECTION 12. INFORMATION BY HOLDER. Each holder of Registrable Shares to
be included in any registration shall furnish to the Company such written
information regarding such holder and the distribution proposed by such holder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Agreement.
SECTION 13. EXCHANGE ACT COMPLIANCE. From and after the Registration
Date or such earlier date as a registration statement filed by the Company
pursuant to the Exchange Act relating to any class of the Company's securities
shall have become effective, the Company shall comply with all of the reporting
requirements of the Exchange Act and shall comply with all other public
information reporting requirements of the Commission which are conditions to the
availability of Rule 144 for the sale of shares of Common Stock. The Company
shall cooperate with each Investor in supplying such information as may be
necessary for such Investor to complete and file any information reporting forms
presently or hereafter required by the Commission as a condition to the
availability of Rule 144.
SECTION 14. NO CONFLICT OF RIGHTS. The Company represents and warrants
to the Investors that the registration rights granted to the Investors hereby do
not conflict with any other registration rights granted by the Company. The
Company shall not, after the date hereof, grant any registration rights which
conflict with or impair the registration rights granted hereby.
SECTION 15. TERMINATION. This Agreement shall terminate and be of no
further force or effect when the Investors cease to hold any Registrable Shares.
SECTION 16. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure
to the benefit of the Company and the Investors and their respective successors
and assigns.
SECTION 17. ASSIGNMENT. Each investor may assign its rights hereunder to
any other person or entity to whom Restricted Shares of such Investor have been
sold or otherwise transferred.
SECTION 18. ENTIRE AGREEMENT. This Agreement contains the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior arrangements or understandings with respect hereto.
SECTION 19. NOTICES. All notices, claims, certificates, requests,
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given if personally delivered or if sent by
nationally-recognized overnight courier, by telecopy, or by registered or
certified mail, return receipt requested and postage prepaid, addressed as
follows:
if to the Company:
NetPartners Internet Solutions, Inc.
9210 Sky Park Court
San Diego, CA 92123
Attention: Chief Executive Officer
Telecopier: (619) 495-1950
Telephone: (619) 505-3020
11.
<PAGE> 12
with a copy to:
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Attention: Frederick T. Muto, Esq.
Telecopier: (619) 453-3555
Telephone: (619) 550-6000
if to any Investor, to its address set forth on Schedules I or 11;
or to such other address as the party to whom notice is to be given may
have furnished to the other parties in writing in accordance herewith. Any such
notice or communication shall be deemed to have been received:
(i) in the case of personal delivery, on the date of such
delivery,
(ii) in the case of nationally-recognized overnight courier, on
the next business day after the date when sent,
(iii) in the case of telecopy transmission, when received, and
(iv) in the case of mailing, on the third business day following
that on which the piece of mail containing such communication is posted.
SECTION 20. MODIFICATIONS, AMENDMENTS, WAIVERS. The terms and provisions
of this Agreement may not be modified or amended, except (i) pursuant to a
writing signed by the Company and the Investors holding at least a majority of
the Registrable Shares held by all Investors.
SECTION 21. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, and each such counterpart hereof shall be deemed to be an
original instrument, but all such counterparts together shall constitute but one
agreement.
SECTION 22. HEADINGS. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be a part of this Agreement.
SECTION 23. SEVERABILITY. It is the desire and intent of the parties
that the provisions of this Agreement be enforced to the fullest extent
permissible under the law and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any provision of this Agreement
would be held in any jurisdiction to be invalid, prohibited or unenforceable for
any reason, such provision, as to such jurisdiction, shall be ineffective,
without invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly drawn so
as not to be invalid, prohibited or unenforceable in such jurisdiction, it
shall, as to such jurisdiction, be so narrowly drawn, without invalidating the
remaining
12.
<PAGE> 13
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction.
SECTION 24. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without giving
effect to the principles governing conflicts of laws.
13.
<PAGE> 14
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Registration Rights Agreement on the date first written above.
NETPARTNERS INTERNET SOLUTIONS, INC.
By: /s/ John B. Carrington
------------------------------------------
John Carrington
President and Chief Executive Officer
THE MORGAN STANLEY VENTURE
PARTNERS ENTREPRENEUR FUND, L.P.
By: Morgan Stanley Venture Partners III,
L.L.C. its General Partner
By: Morgan Stanley Venture Capital III,
Inc. its Institutional Managing Member
/s/ Robert J. Loarie
----------------------------------------------
Name: Robert J. Loarie
Title: Vice President
MORGAN STANLEY VENTURE INVESTORS III, L.P.
By: Morgan Stanley Venture Partners III,
L.L.C. its General Partner
By: Morgan Stanley Venture Capital III,
Inc. its Institutional Managing Member
/s/ Robert J. Loarie
----------------------------------------------
Name: Robert J. Loarie
Title: Vice President
14.
<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Registration Rights Agreement on the date first written above.
MORGAN STANLEY VENTURE PARTNERS III, L.P.
By: Morgan Stanley Venture Partners III,
L.L.C. its General Partner
By: Morgan Stanley Venture Capital III, Inc.
its Institutional Managing Member
/s/ Robert J. Loarie
----------------------------------------------
Name: Robert J. Loarie
Title: Vice President
15.
<PAGE> 16
MORGAN STANLEY VENTURE PARTNERS III, L.P.
By: Morgan Stanley Venture Partners III,
L.L.C. its General Partner
By: Morgan Stanley Venture Capital III, Inc.
its Institutional Managing Member
----------------------------------------------
Name:
Title:
EDELSON IV, L.P.
----------------------------------------------
Name: Harry Edelson
Title: Partner
SERIES B INVESTORS
ALPS SYSTEM INTEGRATION CO., LTD
/s/ Akira Okita
----------------------------------------------
Name: Akira Okita
Title: President
16.
<PAGE> 17
MORGAN STANLEY VENTURE PARTNERS III, L.P.
By: Morgan Stanley Venture Partners III,
L.L.C. its General Partner
By: Morgan Stanley Venture Capital III, Inc.
its Institutional Managing Member
----------------------------------------------
Name:
Title:
EDELSON IV, L.P.
/s/ Harry Edelson
----------------------------------------------
Name: Harry Edelson
Title: Partner
SERIES B INVESTORS
16.
<PAGE> 18
EDELSON IV, L.P.
----------------------------------------------
Name: Harry Edelson
Title: Partner
CROSSPOINT VENTURE PARTNERS
By: /s/ Donald B. Milder
------------------------------------------
Donald Milder
General Partner
16.
<PAGE> 19
EDELSON IV, L.P.
----------------------------------------------
Name: Harry Edelson
Title: Partner
CROSSPOINT VENTURE PARTNERS
By:
------------------------------------------
Donald Milder
General Partner
BROBECK PHLEGER & HARRISON, LLP
By: /s/ Richard A. Fink
------------------------------------------
Richard A. Fink
Partner
16.
<PAGE> 20
MORGAN STANLEY VENTURE PARTNERS III, L.P.
By: Morgan Stanley Venture Partners III,
L.L.C. its General Partner
By: Morgan Stanley Venture Capital III, Inc.
its Institutional Managing Member
----------------------------------------------
Name: Debra Abramovitz
Title: Principal
EDELSON IV, L.P.
----------------------------------------------
Name: Harry Edelson
Title: Partner
SERIES B INVESTORS
/s/ Kiyoshi Hayamizu
----------------------------------------------
Company: Forval Creative Inc.
Name: Kiyoshi Hayamizu
Title: President & CEO
16.
<PAGE> 21
MORGAN STANLEY VENTURE PARTNERS III, L.P.
By: Morgan Stanley Venture Partners III,
L.L.C. its General Partner
By: Morgan Stanley Venture Capital III, Inc.
its Institutional Managing Member
----------------------------------------------
Name:
Title:
EDELSON IV, L.P.
Name: Harry Edelson
Title: Partner
SERIES B INVESTORS
NIPPON INVESTMENT & FINANCE CO., LTD.
/s/ Isao Oku
----------------------------------------------
Company: Nippon Investment & Finance Co., Ltd.
Name: Isao Oku
Title: Director
c/o Nippon Investment & Finance Co., Ltd.
Daiwa Securities Kabutocho Building
1-9 Kayabacho, 1-chome, Nihonbashi
Chuo-Ku, Tokyo 103 Japan
With copy to:
Jim Timmins, Partner
NIF Ventures USA, Inc.
525 Market Street, Suite 3420
San Francisco, CA 94105
Phone: (415) 908-1888
16.
<PAGE> 22
INVESTMENT ENTERPRISE PARTNERSHIP "NIF 11"
/s/ Isao Oku
----------------------------------------------
Company: Nippon Investment & Finance Co., Ltd.
Name: Isao Oku
Title: Director
c/o Nippon Investment & Finance Co., Ltd.
Daiwa Securities Kabutocho Building
1-9 Kayabacho, 1-chome, Nihonbashi
Chuo-Ku, Tokyo 103 Japan
With copy to:
Jim Timmins, Partner
NIF Ventures USA, Inc.
525 Market Street, Suite 3420
San Francisco, CA 94105
Phone: (415) 908-1888
INVESTMENT ENTERPRISE PARTNERSHIP "NIF NEW
TECHNOLOGY FUND `98"
/s/ Isao Oku
----------------------------------------------
Company: Nippon Investment & Finance Co., Ltd.
Name: Isao Oku
Title: Director
c/o Nippon Investment & Finance Co., Ltd.
Daiwa Securities Kabutocho Building
1-9 Kayabacho, 1-chome, Nihonbashi
Chuo-Ku, Tokyo 103 Japan
With copy to:
Jim Timmins, Partner
NIF Ventures USA, Inc.
525 Market Street, Suite 3420
San Francisco, CA 94105
Phone: (415) 908-1888
17.
<PAGE> 23
INVESTMENT ENTERPRISE PARTNERSHIP "NIF 11"
----------------------------------------------
Company: Nippon Investment & Finance Co., Ltd.
Name: Isao Oku
Title: Director
c/o Nippon Investment & Finance Co., Ltd.
Daiwa Securities Kabutocho Building
1-9 Kayabacho, 1-chome, Nihonbashi
Chuo-Ku, Tokyo 103 Japan
With copy to:
Jim Timmins, Partner
NIF Ventures USA, Inc.
525 Market Street, Suite 3420
San Francisco, CA 94105
Phone: (415) 908-1888
INVESTMENT ENTERPRISE PARTNERSHIP "NIF NEW
TECHNOLOGY FUND `98"
----------------------------------------------
Company: Nippon Investment & Finance Co., Ltd.
Name: Isao Oku
Title: Director
c/o Nippon Investment & Finance Co., Ltd.
Daiwa Securities Kabutocho Building
1-9 Kayabacho, 1-chome, Nihonbashi
Chuo-Ku, Tokyo 103 Japan
With copy to:
Jim Timmins, Partner
NIF Ventures USA, Inc.
525 Market Street, Suite 3420
San Francisco, CA 94105
Phone: (415) 908-1888
/s/ Jim Timmins
----------------------------------------------
JIM TIMMINS
17.
<PAGE> 24
SCHEDULE I
SERIES A INVESTORS
<TABLE>
<CAPTION>
SHARES OF SERIES A
NAME PREFERRED STOCK
- ----------------------------------------------------------- ------------------
<S> <C>
Morgan Stanley Venture Partners III, L.P. 2,708,484
Morgan Stanley Venture Investors III, L.P. 260,051
The Morgan Stanley Venture Partners Entrepreneur Fund, L.P. 117,885
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, CA 94025
Attn: Robert J. Loarie
Edelson IV, L.P. 617,284
300 Tice Boulevard
Woodcliff Lake, NJ 07675
</TABLE>
<PAGE> 25
SCHEDULE II
SERIES B INVESTORS
<TABLE>
<CAPTION>
SHARES OF SERIES B
NAME PREFERRED STOCK
- ------------------------------------------------------- ------------------
<S> <C>
Nippon Investment and Finance Company 133,666
Investment Enterprise Partnership 140,500
Investment Enterprise Partnership - New Technology Fund 392,500
Jim Timmins 6,667
Edelson IV, L.P. 66,666
Morgan Stanley Venture Partners 333,333
CrossPoint Venture Partners 1,910,000
Forval Creative, Inc. 166,666
ALPS Electric, Inc. 166,666
Brobeck Phleger & Harrison/Rick Fink 16,667
---------
TOTAL 3,333,331
</TABLE>
<PAGE> 1
EXHIBIT 10.2
NETPARTNERS INTERNET SOLUTIONS, INC.
SUBSCRIPTION AGREEMENT
IMPORTANT: PLEASE READ CAREFULLY BEFORE SIGNING. SIGNIFICANT
REPRESENTATIONS ARE CALLED FOR HEREIN.
PERSONAL & CONFIDENTIAL
NetPartners Internet Solutions, Inc.
9210 Sky Park Court
San Diego, CA 92123
Attention: John Carrington, Chief Executive Officer
Ladies and Gentlemen:
The undersigned subscriber ("Subscriber") hereby makes application to purchase
_____________ shares of the Series B Preferred Stock (the "Securities") of
NetPartners Internet Solutions, Inc., a Delaware corporation (the "Company") for
an aggregate purchase price of $___________ pursuant to the terms of an offering
(the "Offering") described in the Company's Private Offering Memorandum, dated
February 5, 1999 (the "Memorandum"). The Subscriber hereby acknowledges receipt
of a copy of the Memorandum.
The Subscriber understand that the Securities will not be registered under the
Securities Act of 1933, as amended (the "Act"), or under the securities laws of
any U.S. state or foreign country. The Subscriber also understands that, in
order to assure that the sale of the Securities to the Subscriber will be exempt
from registration under the Act and applicable U.S. state and foreign securities
laws, that the Subscriber must meet certain financial prerequisites and must
have such knowledge and experience in financial and business matters so as to be
able to evaluate the risks and merits of an investment in the Securities.
The Subscriber acknowledges that no minimum investment is required in order to
complete and close the Offering pursuant to the Memorandum.
The Subscriber understands that the information supplied in this letter
(sometimes referred to herein as the "Subscription Agreement" or the
"Agreement") including but not limited to, the financial data set forth herein
will be disclosed to no one other than the officers and directors of the Company
and/or its counsel or other professionals associated with the Offering without
the Subscriber's consent, or unless it is necessary for the Company to use such
information to support the exemption from registration under the Act or
applicable U.S. state and foreign securities laws.
Concurrently with the execution of this Agreement, the Company and the
Subscriber agree to enter into the Amended and Restated Stockholders' Agreement
in substantially the form attached hereto as EXHIBIT A (the "Stockholders'
Agreement"), and the Amended and Restated Registration Rights Agreement in
substantially the form attached hereto as EXHIBIT B (the "Registration Rights
Agreement").
1
<PAGE> 2
1. SUBSCRIBER REPRESENTATIONS. As an inducement to the Company to sell
Securities to the Subscriber, and with the knowledge that the Company is relying
upon the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings set forth herein in order to determine the
suitability of the undersigned to acquire the Securities, the Subscriber hereby
agrees, represents and warrants, as of the date of acceptance of the
Subscriber's subscription as follows:
(a) By reason of the Subscriber's knowledge and experience in financial and
business matters in general, and investments in particular, the Subscriber is
able to evaluate the merits and risks of an investment in the Securities.
(b) The Subscriber's income and net worth are such that the Subscriber is
not now required, and does not contemplate in the future being required, to
dispose of any portion of any investment in the Securities to satisfy any
existing or contemplated undertaking.
(c) In evaluating the merits and risks of an investment in the Securities,
the Subscriber has relied solely upon the Memorandum and the advice of his, her,
or its legal counsel, tax advisors, and/or investment advisors.
(d) The Subscriber is able to bear the economic risks of an investment in
the Securities, including, without limiting the generality of the foregoing, the
risk of losing part or all of the Subscriber's investment in the Securities, and
the inability to sell or transfer the Securities for an indefinite period of
time or at a price which would enable the Subscriber to recoup his, her, or its
investment in the Securities.
(e) The Subscriber's purchase of the Securities is as principal, solely for
the Subscriber's own account, for investment, and not with an intent to sell, or
for sale in connection with any distribution of the Securities, and no other
person has any interest in or right with respect to the Securities, nor has the
Subscriber agreed to give any person any such interest or right in the future.
(f) The Subscriber, unless specified otherwise in an addendum hereto, is an
"accredited investor" as that term is defined in Section 501 of Regulation D of
the Act. An "accredited investor" includes, among other persons and entities,
(1) a natural person whose net worth, or joint net worth with that person's
spouse, exceeds $1,000,000; (2) a natural person who has had income in excess of
$200,000 in each of the two most recent years, or, with that person's spouse, in
excess of $300,000 in those years, and who expects to have at least that level
of income in the current year; (3) a corporation, partnership or similar
business entity, not formed for the specific purpose of acquiring the
Securities, with total assets in excess of $5,000,000; and (4) any entity in
which all of the equity owners are accredited investors.
(g) If the Subscriber is a corporation, partnership or trust, the person
executing this Subscription Agreement on behalf of such entity has all right,
power and authority to so execute and deliver this Subscription Agreement on
behalf of such entity and that the above representations, warranties,
agreements, acknowledgments and understandings shall be deemed
2
<PAGE> 3
to have been made on behalf of the person or persons for whose benefit such
securities are being acquired.
(h) The Company has afforded the Subscriber and his, her, or its advisors
full and complete access to all information with respect to the Company and its
business and financial condition (to the extent that such information was
possessed by the Company or could be acquired by the Company without
unreasonable effort or expense) that the Subscriber and his, her, or its
advisors deemed necessary in order to evaluate the merits and risks of an
investment in the Securities. The Subscriber further represents and warrants
that, to his, her or its knowledge his, her, or its advisors have received
satisfactory and complete information concerning the business and financial
condition of the Company in response to all inquiries made by them in respect
thereof.
(i) The offer to sell Securities was directly communicated to the
Subscriber, in such a manner that the Subscriber was able to ask questions and
receive answers concerning the terms of this transaction and that at no time was
the Subscriber presented with or solicited by any leaflet, newspaper or magazine
article, radio or television advertisement or any other form of general
advertising, or invited to any promotional meeting, otherwise than in connection
and concurrently with such communicated offer. No oral representations have been
made or oral information furnished to the Subscriber in connection with the
placement of Securities which were in any way inconsistent with the Memorandum
or its exhibits.
The Subscriber represents and warrants that the information supplied herein is
true and correct as of a date immediately prior to the Subscriber's purchase of
the Securities. If the Subscriber's circumstances should change, the Subscriber
shall immediately notify the Company. The representations and warranties of the
Subscriber set forth herein shall survive the sale of the Securities pursuant to
this Subscription Agreement.
2. COMPANY REPRESENTATIONS. Except as set forth on a Schedule of Exceptions
delivered by the Company to the Subscriber and the other purchasers hereunder
(the "Investors") at the Closing specifically identifying the relevant Section
hereof, the Company hereby represents and warrants to each Investor as of the
date of this Agreement as follows:
(a) ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has all requisite corporate power and
authority to own and operate its properties and assets, to execute and deliver
this Agreement, the Registration Rights Agreement, and the Stockholders'
Agreement (collectively with the Registration Rights Agreement, the "Related
Agreements"), to issue and sell the Securities and to issue the Common Stock
issuable upon conversion thereof (the "Conversion Shares"), and to carry and
perform its obligations under the terms of this Agreement, the Related
Agreements and the Amended and Restated Certificate of Incorporation, in
substantially the form attached hereto as EXHIBIT C (the "Restated Certificate")
and to carry on its business as presently conducted and as presently proposed to
be conducted. The Company is qualified to do business as a foreign corporation
in each jurisdiction in which the failure to so qualify would have a material
adverse effect on the Company or its business.
3
<PAGE> 4
(b) AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on the part of
the Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement and the Related
Agreements, the performance of all obligations of the Company hereunder and
thereunder at the Closing and the authorization, sale, issuance (or reserved for
issuance) and delivery of the Securities being sold hereunder and the Conversion
Shares has been taken or will be taken prior to the Closing. The Agreement and
the Related Agreements, when executed and delivered, will constitute valid and
binding obligations of the Company enforceable in accordance with their terms,
except (a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights, (b) general principles of equity that restrict the
availability of equitable remedies, and (c) to the extent that the
enforceability of the indemnification provisions in this Agreement and the
Registration Rights Agreement may be limited by applicable laws.
(c) VALID ISSUANCE OF PREFERRED AND COMMON STOCK. The Series B Preferred
that is being purchased by the Investors, when issued, sold, and delivered in
accordance with the terms of this Agreement for the consideration expressed
herein, will be duly and validly issued, fully paid, and nonassessable, and will
be free of restrictions on transfer under this Agreement and under applicable
state and federal securities laws. The Conversion Shares being purchased under
this Agreement have been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Restated Certificate, will be duly
and validly issued, fully paid, and nonassessable and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement, the Related Agreements and under applicable state and federal
securities laws.
(d) COMPLIANCE WITH LAWS; PERMITS. To its knowledge, the Company is not in
violation of any applicable statute, rule, regulation, order or restriction of
any domestic or foreign government or any instrumentality or agency thereof in
respect of the conduct of its business or the ownership of its properties which
violation would materially and adversely affect the business, assets,
liabilities, financial condition or operations of the Company. No governmental
orders, permissions, consents, approvals or authorizations are required to be
obtained and no registrations or declarations are required to be filed in
connection with the execution and delivery of this Agreement and the issuance of
the Securities or the Conversion Shares, except such as has been duly and
validly obtained or filed, or with respect to any filings that must be made
after the Closing, as will be filed in a timely manner. The Company has all
franchises, permits, licenses and any similar authority necessary for the
conduct of its business as now being conducted by it, the lack of which could
materially and adversely affect the business, properties, prospects or financial
condition of the Company and believes it can obtain, without undue burden or
expense, any similar authority for the conduct of its business as planned to be
conducted.
(e) CAPITALIZATION; VOTING RIGHTS. The authorized capital stock of the
Company, immediately prior to the Closing, will consist of 18,700,000 shares of
Common Stock, (par value $0.01) per share, 7,154,948 shares of which are issued
and outstanding and 3,952,259 shares of which are reserved for future issuance
to employees pursuant to the Company's 1998 Equity
4
<PAGE> 5
Incentive Plan, 7,038,340 shares of Preferred Stock, (par value $0.01) per
share, 3,705,000 of which are designated Series A Preferred Stock, 3,703,704 of
which are issued and outstanding and 3,333,340 of which are designated Series B
Preferred, none of which are issued and outstanding. Other than (i) as set forth
on the Schedule of Exceptions, (ii) reserved under the Company's 1998 Equity
Incentive Plan, (iii) the conversion privileges of the Preferred Stock, and (iv)
except as may be granted pursuant to the Related Agreements, there are no
outstanding options, warrants, rights (including conversion or preemptive rights
and rights of first refusal), proxy or stockholder agreements, or agreements of
any kind for the purchase or acquisition from the Company of any of its
securities. The Company has reserved 4,000,000 shares of Common Stock under its
1998 Equity Incentive Plan. Except as set forth in the Restated Certificate, the
Company is not a party or subject to any agreement or understanding, and, to the
best of the Company's knowledge, there is no agreement or understanding between
any persons that affects or relates to the voting or giving of written consents
with respect to any security or the voting by a director of the Company.
(f) SUBSIDIARIES. The Company does not own or control any equity security
or other interest of any other corporation, limited partnership or other
business entity. The Company is not a participant in any joint venture,
partnership or similar arrangement.
(g) REGISTRATION RIGHTS AND VOTING RIGHTS.
(i) Except as provided in the Registration Rights Agreement, the
Company is presently not under any obligation and has not granted any rights to
register under the Securities Act of 1933, as amended, (the "Securities Act")
any of the Company's presently outstanding securities or any of its securities
that may hereafter be issued.
(ii) To the Company's knowledge, except as provided in the
Stockholders' Agreement, no stockholder of the Company has entered into any
agreement with respect to the voting of equity securities of the Company.
(h) COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation or
default in any material respect of any provision of its Restated Certificate or
Bylaws, or in any material respect of any provision of any mortgage, agreement,
instrument or contract to which it is party or by which it is bound or, to the
best of its knowledge, of any federal or state judgment, order, writ, decree,
statute, rule or regulation applicable to the Company. The execution, delivery,
and performance of and compliance with this Agreement, and the Related
Agreements, and the consummation of the transactions contemplated hereby and
thereby, will not result in any such violation or be in material conflict with
or constitute, with or without the passage of time or giving of notice, either a
material default under any such provision or any event that results in the
creation of any material lien, charge, or encumbrance upon any assets of the
Company or any suspension, revocation, impairment, forfeiture or nonrenewal of
any material permit, license, authorization or approval applicable to the
Company, its business or operations or any of its assets or properties.
(i) LITIGATION. There is no action, suit, proceeding or investigation
pending or to the Company's knowledge currently threatened against the Company
that questions the validity of
5
<PAGE> 6
this Agreement, or the Related Agreements or the right of the Company to enter
into any of such agreements, or to consummate the transactions contemplated
hereby or thereby, or that might result, either individually or in the
aggregate, in any material adverse change in the assets, business, properties,
or financial condition of the Company, or in any material change in the current
equity ownership of the Company.
(i) OFFERING. Subject in part to the trust and accuracy of each Investor's
representations set forth in this Agreement, the offer, sale and issuance of the
Securities as contemplated by this Agreement are exempt from the registration
requirements of the Securities Act, and neither the Company nor any agent on its
behalf has solicited or will solicit any offers to sell or has offered to sell
or will offer to sell all or any part of the Securities to any person or persons
so as to bring the sale of such Securities by the Company within the
registration provisions of the Securities Act or any state securities laws.
(k) TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. Except (i) as reflected in
the Financial Statements, (ii) for liens for current taxes not yet delinquent,
(iii) for liens imposed by law and incurred in the ordinary course of business
for obligations not past due to carriers, warehousemen, laborers, materialmen
and the like, (iv) for liens in respect of pledges or deposits under workers'
compensation laws or similar legislation or (v) for minor defects in title, none
of which, individually or in the aggregate, materially interferes with the use
of such property, the Company has good and marketable title to its property and
assets free and clear of all mortgages, liens, claims and encumbrances. With
respect to the property and assets it leases, the Company is in compliance with
such leases and, to the best of the knowledge of the Company, holds a valid
leasehold interest free of any liens, claims or encumbrances, subject to clauses
(i) - (v) above.
(1) TAX RETURNS AND PAYMENTS. The Company has filed all tax returns
(federal, state and local) as required by law, except where failure to do so
would not have a material adverse effect upon the Company, taken as a whole. The
Company has made adequate provisions on its books of account of all taxes,
assessments, and governmental charges with respect to its business, properties
and operations for such period. There is no pending dispute with any taxing
authority relating to any of such returns, and the Company has no knowledge of
any proposed liability for any tax to be imposed upon the properties or assets
of the Company.
(m) FINANCIAL STATEMENTS. The Company has made available to each Investor
(a) its audited balance sheet at December 31, 1998 and audited statement of
income and cash flows for the twelve months ending December 31, 1998 and (b) its
unaudited balance sheet as of March 31, 1999 (the "Statement Date") and
unaudited consolidated statement of income and cash flows for the three month
period ending on the Statement Date (collectively, the "Financial Statements").
The Financial Statements, together with the notes thereto, have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated, except as disclosed therein, and present
fairly the financial condition and position of the Company as of December 31,
1998 and the Statement Date; provided, however, that the unaudited financial
statements are subject to normal recurring year-end audit adjustments (which are
not expected to be material), and do not contain all footnotes required under
generally accepted accounting principles.
6
<PAGE> 7
3. NO REGISTRATION. The Subscriber represents and warrants that the Subscriber
has been advised that:
(a) The Securities have not been registered under the Act, or under the
securities laws of any U.S. state or foreign country and that the Securities
must be held until the Securities are registered under the Act and applicable
U.S. state securities laws or an exemption from such registration is available.
(b) No federal or U.S. state agency, including the Securities and Exchange
Commission, the Department of Corporations, or the securities commission or
authorities of any other U.S. state or foreign jurisdiction has approved or
disapproved the Securities, passed upon or endorsed the merits of the Offering
or the accuracy or adequacy of the Memorandum, or made any finding or
determination as to the fairness of the Securities or investment.
4. INDEMNIFICATION. The undersigned agrees to indemnify and hold harmless the
Company and its officers, directors and affiliates and each other person, if
any, who controls any thereof, within the meaning of Section 15 of the Act,
against any and all loss, liability, claim, damage and expense whatsoever
(including, but not limited to, any and all expenses reasonably incurred in
investigating, preparing or defending against any litigation commenced or
threatened or any claim whatsoever) arising out of or based upon any false
representation or warranty or breach or failure by the undersigned to comply
with any covenant or agreement made by the undersigned herein or in any other
document furnished by the undersigned to any of the foregoing in connection with
this transaction.
5. REJECTION OF SUBSCRIPTION. The Subscriber understands that the Company may,
in its sole discretion, reject this subscription and, in the event that the
Offering to which the Memorandum relates is oversubscribed, reduce this
subscription in any amount and to any extent whether or not pro rata reductions
are made of any other investor's subscription.
6. TERMINATION OF OFFERING. The Subscriber acknowledges and agrees that the
Company may for any reason, at any time before the closing of the Offering and
whether or not before or after acceptance of the Agreement, terminate the
Offering and cause the escrow agent to refund to the Subscriber the purchase
price of the Securities paid by the Subscriber without interest. The Subscriber
also acknowledges and agrees that, if for any reason the Offering is terminated
or does not close or if the Subscriber's subscription is rejected for any
reason, the Subscriber shall have no claims against the Company, its directors
and officers, stockholders, agents and affiliates and shall have no interest in
the Company or in any property or assets of the Company.
7. ARBITRATION. The Subscriber agrees that any controversy between or among the
Subscriber, the Company arising out of this Agreement, shall be submitted to
arbitration in San Diego, California before the American Arbitration Association
in accordance with its rules. Arbitration must be commenced by service upon the
other party of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the
Subscriber does not make such election within five (5) days of such demand or
notice, the Subscriber authorizes the Company to do so on behalf of the
Subscriber. The
7
<PAGE> 8
Subscriber acknowledges that arbitration is final and binding on the parties and
that the Subscriber is waiving his right to seek remedies in court, including
the right to jury trial. The Subscriber also acknowledges that pre-arbitration
discovery is generally more limited than and different from court proceedings
and that the arbitrators' award is not required to include factual findings or
legal reasoning and any party's right to appeal or to seek modification of
rulings by the arbitrators is strictly limited.
8. NO REVOCATION. The Subscriber agrees that the Subscriber may not cancel,
terminate or revoke this Subscription Agreement or any agreement of the
Subscriber made hereunder (except as otherwise specifically provided herein).
This Subscription Agreement is not transferable or assignable by the undersigned
except as may be provided herein; provided, however, that this Subscription
Agreement shall survive the death or disability of the Subscriber and shall be
binding upon the Subscriber's heirs, executors, administrators, successors and
permitted assigns.
9. MARKET STAND-OFF. If requested by the Company or the representative of the
underwriters of Common Stock (or other securities) of the Company, the
undersigned agrees not to sell or otherwise transfer or dispose of any
Securities or other securities of the Company held by the undersigned for a
period not to exceed 180 days following the effective date of a registration
statement of the Company or a successor to the Company filed under the Act.
10. GOVERNING LAW. This Subscription Agreement shall be enforced, governed and
construed in all respects in accordance with the laws of the State of
California.
11. ADDITIONAL INFORMATION. Within five days after receipt of a written request
from the Company the Subscriber agrees to provide such information and to
execute and deliver such documents as reasonably may be necessary to comply with
any and all laws, regulations and ordinances to which the Company is subject.
12. COUNTERPARTS. This Subscription Agreement may be executed through the use of
separate signature pages or in any number of counterparts, and each of such
counterparts shall, for all purposes, constitute one agreement binding on all
parties, notwithstanding that all parties are not signatories to the same
counterpart.
13. ENTIRE AGREEMENT. This Subscription Agreement constitutes the entire
agreement among the parties hereto with respect to the subject matter hereof and
may be amended only by a writing executed by all parties. Each provision of this
Subscription Agreement is intended to be severable from every other provision,
and the invalidity or illegality of any portion hereof shall not affect the
validity or legality of the remainder hereof.
8
<PAGE> 9
The Subscriber hereby subscribes for tile following number of
Securities:_____________ shares of Series Preferred B Stock.
Enclosed herewith is the Subscriber's check or proof of wire transfer in the sum
of $_____________, payable to NETPARTNERS INTERNET SOLUTIONS, INC. as payment
for the subscribed Securities.
IN WITNESS WHEREOF, I hereby represent and warrant that I have read the
Memorandum and this entire Subscription Agreement, and have executed this
Subscription Agreement effective as of this __ day of _____________ 1999.
CORPORATE OR OTHER ENTITY:
- -----------------------------------
(Printed Name of Entity)
By:
--------------------------------
(Signature)
- -----------------------------------
(Name Printed)
Title:
-----------------------------
- -----------------------------------
(Street Address)
- -----------------------------------
(City, State, Zip)
- -----------------------------------
(Telephone Number)
ACCEPTED:
NetPartners Internet Solutions, Inc.
A Delaware corporation
By:
--------------------------------
Name:
------------------------
Title:
-----------------------
9
<PAGE> 10
EXHIBIT A
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
<PAGE> 11
NETPARTNERS INTERNET SOLUTIONS, INC.
AMENDED AND RESTATED STOCKHOLDERS'AGREEMENT
DATED JUNE 11, 1999
<PAGE> 12
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT dated June 9, 1999, among (i)
NETPARTNERS INTERNET SOLUTIONS, INC., a Delaware corporation (the "Corporation"
or the "Company"), (ii) the holders of shares of Series A Preferred Stock, $.0l
par value, of the Corporation (the "Series A Preferred Stock") listed on Annex I
and the holders of shares of Series B Preferred Stock, $.0l par value, of the
Corporation (the "Series B Preferred Stock") listed on Annex II (collectively
the holders of the Series A Preferred Stock and the Series B Stock, the
"Investors"), and (iii) the holders of shares of Common Stock, $.0l par value
(the "Common Stock"), of the Corporation listed on Annex III (the "Founders").
Each Investor owns the number of shares of Series A Preferred Stock or
Series B Preferred Stock set forth opposite the name of such Investor on Annex I
or Annex II, respectively. Each Founder owns the number of shares of Common
Stock set forth opposite the name of such Founder on Annex III. The parties wish
to provide for the terms with respect to certain matters regarding the
relationship between the Corporation and its stockholders and among such
stockholders. Accordingly, the parties agree as follows:
Certain of the undersigned parties, who constitute the requisite parties
necessary to amend that certain Stockholders' Agreement dated May 20, 1998 by
and among the Company and the purchasers of the Series A Preferred Stock (the
"Prior Agreement"), hereby agree that effective upon the date hereof, the Prior
Agreement is null and void and superseded in its entirety by the rights and
obligations set forth in this Amended and Restated Stockholders' Agreement, and
any application of the rights contained in the Prior Agreement, including, but
not limited to first offer, second offer, co-sale, preemption and amendment
(including any notice requirements) set forth in Sections 3.2, 3.3, 4.1, and 5.4
of the Prior Agreement as to the issuance of the Company's Series B Preferred
Stock under that certain Subscription Agreement dated of even date herewith
between the Company and the holders of the Series B Preferred Stock are hereby
waived.
ARTICLE 1
DEFINITIONS
The following terms shall have the following meanings:
"BOARD" means the Board of Directors of the Corporation.
"EQUITY SECURITIES" means all shares of capital stock of the Corporation,
all securities convertible into or exchangeable for shares of capital stock of
the Corporation, and all options, warrants, and other rights to purchase or
otherwise acquire from the Corporation shares of such capital stock, or
securities convertible into or exchangeable for shares of such capital stock.
"FOUNDER SHARES" shall mean shares of the Company's capital stock now owned
or subsequently acquired by any Founder whether or not such securities are only
registered in a Founder's name or beneficially or otherwise legally owned by
such Founder, including any interest of a spouse in any of the Founder Shares,
whether that interest is asserted pursuant to marital property laws or
otherwise. The number of Founder Shares owned by each Founder as of
1.
<PAGE> 13
the date hereof is set forth on Annex III which Annex may be amended from time
to time by the Company to reflect changes in the number of shares owned by the
Founders, but the failure to so amend shall have no effect on such Founder
Shares being subject to this Agreement.
"INDEPENDENT INDIVIDUAL" means any individual who, at the time of
consideration for nomination to the Board, (i) is not an officer, director,
partner, employee, consultant, or stockholder of the Corporation or an Investor,
(ii) is not the spouse or a parent or lineal descendant of any such officer,
director, partner, employee, consultant, or stockholder and (iii) has relevant
experience in the industry in which the Corporation operates.
"INVESTOR SHARES" means the shares of Series A Preferred Stock or Series B
Preferred Stock now owned or subsequently acquired by the Investors or any
Affiliate thereof, any shares of capital stock directly or indirectly issued
upon conversion thereof, and any shares of capital stock issued on any of the
foregoing as a stock dividend or upon any stock split or other subdivision of
shares of capital stock. The number of shares of Series A Preferred Stock or
Series B Preferred Stock owned by the Investors as of the date hereof is set
forth on Annex I or Annex II, which Annexes may be amended from time to time to
reflect changes in the number of shares owned by the Investors, but the failure
to so amend shall have no effect on such Investor Shares being subject to this
Agreement.
"NEW SECURITIES" means all Equity Securities other than (i) up to 4,000,000
shares of Common Stock, and options therefor, reserved for issuance or grant
under the 1998 Equity Incentive Plan of the Corporation; (ii) 250,000 shares of
Common Stock issuable upon exercise of Common Stock Purchase Warrants issued to
Edelson IV, L.P., (iii) the shares of Common Stock issuable upon conversion of
any shares of Series A Preferred Stock or Series B Preferred Stock; (iv) shares
of any class of capital stock issued on a pro rata basis to all holders of such
class as a stock dividend or upon any stock split or other subdivision of shares
of capital stock; (v) any shares of Common Stock issued in connection with any
Qualified Public Offering; and (vi) any shares of Common Stock issued in
connection with any acquisition or similar corporate transaction.
"PRO RATA AMOUNT" means, with respect to any Stockholder, the quotient
obtained by dividing (i) the number of shares of Common Stock held by such
Stockholder by (ii) the aggregate number of shares of Common Stock held by all
Stockholders, assuming in each case the conversion, exchange, or exercise of all
Equity Securities that are not Common Stock.
"QUALIFIED PUBLIC OFFERING" means any underwritten public offering for the
account of the Corporation of Common Stock pursuant to a registration statement
filed under the Securities Act of 1933 with aggregate proceeds (net of
underwriting discounts and commissions) to the Corporation of not less than
$20,000,000.
"SHARES" means the Investor Shares and the Founder Shares.
"STOCKHOLDERS" means the Investors and the Founders.
"TERMINATION DATE" means the date of consummation of any Qualified Public
Offering.
2.
<PAGE> 14
"THIRD PARTY" means, with respect to any Founder, any person or entity that
is not (i) a Founder, (ii) a spouse or lineal descendant or ancestor of a
Founder, (iii) any trust or other entity for the benefit of any of the
foregoing, or (iv) any trust or other entity created by any of the foregoing for
the purpose of estate planning.
"TRANSFER" means to sell, transfer, assign, or otherwise dispose of, either
voluntarily or involuntarily and with or without consideration.
"VOTING SHARES" means the shares of capital stock of the Corporation
entitled to vote for the election of directors.
ARTICLE 2
MATTERS RELATING TO THE BOARD
2.1 Board Representation.
(a) The Corporation and each Stockholder shall take such corporate
actions as may be reasonably required to ensure that the number of directors
constituting the Board is at all times six.
(b) Subject to the terms of this Agreement:
(i) The holders of a majority of all the Series A Preferred Stock
shall be entitled to (A) nominate one individual for election to the Board to
serve as director until his or her successor is elected and qualified, (B)
propose the removal from the Board of any director nominated under the foregoing
clause, and (C) nominate each successor to any director removed in accordance
herewith;
(ii) The holders of a majority of all the Series B Preferred
Stock shall be entitled to (A) nominate one individual for election to the Board
to serve as director until his or her successor is elected and qualified, (B)
propose the removal from the Board of any director nominated under the foregoing
clause, and (C) nominate each successor to any director removed in accordance
herewith;
(iii) the holders of a majority of all Common Stock shall be
entitled (A) to nominate two individuals for election to the Board to serve as
directors until their successors are elected and qualify; provided, however,
that one such nominee shall at all times be the Chief Executive Officer of the
Company, (B) to propose the removal from the Board of any director nominated
under the foregoing clause, and (C) to nominate each successor to any director
removed in accordance herewith;
(iv) Two nominees shall be Independent Individuals, who shall be
mutually acceptable to both (i) a majority in interest of the holders of the
Common Stock, voting separately, and (ii) a majority in interest to the holders
of the Investor Shares, voting separately;
(v) If at any time there is no Independent Individual currently
serving on the Board, then until as at least one Independent Individual is
elected to the Board pursuant to
3.
<PAGE> 15
Section 2. 1 (b)(iv) herein, the holders of a majority of the Investor Shares
shall be entitled to (A) nominate an individual, in addition to the right of
such holders to nominate directors under Section 2.1(b)(i) and 2.1(b)(ii)
herein, for election to the Board to serve as a director, (B) to propose the
removal from the Board of any director nominated under the foregoing clause, and
(C) to nominate each successor to any director removed in accordance herewith;
(c) Each nomination or any proposal to remove from the Board any
director pursuant to paragraph (b) above shall be made by delivering to the
Corporation a notice signed by the party or parties entitled to such nomination
or proposal. As promptly as practicable after delivery of such notice, the
Corporation shall take or cause to be taken such corporate actions as may be
reasonably required to cause the election or removal proposed in such notice.
Such corporate actions may include calling a meeting or soliciting a written
consent of the Board, or calling a meeting or soliciting a written consent of
the stockholders of the Corporation.
2.2 VOTING AGREEMENT.
Each Stockholder shall vote all Voting Shares held by such Stockholder in a
manner that results in the election to the Board of all individuals nominated in
accordance with Section 2.1(b) and for the removal from the Board of all
directors proposed to be removed in accordance with Section 2.1(b). Each
Stockholder shall use all reasonable efforts to cause each director nominated by
such Stockholder to vote for the election to the Board of all individuals
nominated in accordance with Section 2.1(b).
2.3 BOARD MEETINGS, EXPENSES.
The Company shall convene meetings of its Board not less frequently than
quarterly. The Company shall reimburse the reasonable out-of-pocket expenses of
directors incurred in connection with attending Board meetings.
ARTICLE 3
TRANSFER OF SHARES
3.1 LIMITATIONS ON TRANSFERS.
(a) No Founder shall Transfer any Founder Shares, except that each
Founder may Transfer Founder Shares (i) in accordance with Sections 3.2 and 3.3,
(ii) to any person who is not a Third Party, and (iii) each such transferee
under this Section 3.1 may Transfer such Shares to any other person or entity
that is not a Third Party with respect to such initial Founder. Upon such
Transfer, the transferee shall be bound by the obligations, and entitled to the
benefits of, this Agreement with respect to the transferred Shares in the same
manner as the transferring Founder.
(b) Any Transfer of Shares by any Founder not in accordance with
paragraph (a) above shall be void.
3.2 RIGHT OF FIRST OFFER AND SECOND OFFER.
4.
<PAGE> 16
(a) If at any time any Founder (the "Offeror") proposes to Transfer
any Shares to any Third Party, the Offeror shall, before such Transfer, deliver
to the Corporation an offer (the "First Offer") to Transfer such Shares upon the
terms set forth in this Section. The First Offer shall state that the Offeror
proposes to Transfer Shares and specify the number of Shares (the "Offered
Shares") and the terms (including purchase price) of the proposed Transfer. The
First Offer shall remain open and irrevocable for a period of 15 days (the
"First Offer Acceptance Period") from the date of its delivery. The Company may
accept the First Offer by delivering to the Offeror a notice within the First
Offer Acceptance Period, which notice shall state the number of Offered Shares
the Company desires to purchase. If the number of Offered Shares exceeds the sum
of those Offered Shares with respect to which the Company has exercised its
rights under this Section, the Offeror shall deliver to the Investors an offer
(the "Second Offer") to Transfer such excess number of Offered Shares upon the
terms set forth in this Section. The Second Offer shall contain the same
information as the First Offer, except that the Second Offer shall reduce the
number of Offered Shares by the number of Offered Shares with respect to which
the Company has exercised its rights under this Section. The Second Offer shall
remain open and irrevocable for a period of 15 days (the "Second Offer
Acceptance Period", and together with the First Offer Acceptance Period, the
"Acceptance Period").
(b) Each Investor may accept the Second Offer by delivering to the
Offeror a notice within the Second Offer Acceptance Period, which notice shall
state the number (the "Accepted Number") of Offered Shares such Investor desires
to purchase. If the sum of all Accepted Numbers exceeds the number of Offered
Shares available pursuant to the Second Offer, such Offered Shares shall be
allocated among the Investors that delivered such notice pro rata such that each
Investor shall have the right to purchase up to the number of shares of Common
Stock equal to the product obtained by multiplying (i) the aggregate number of
shares of Founder Shares covered by the Second Offer by (ii) a fraction of the
numerator of which is the number of Investor Shares owned by such Investor at
the time of the Transfer and the denominator of which is the total number of
Investor Shares owned by Investors who have accepted the Second Offer at the
time of the Transfer; provided, however, that each Investor shall not be
required to purchase more than his or its Accepted Number of Offered Shares.
(c) The Transfer of Offered Shares to the Company or the Investors, to
the extent it or they exercised their rights under this Section, shall be made
on a business day, as designated by the Offeror, not less than 10 and not more
than 30 days after expiration of the Acceptance Period on those terms and
conditions of the First Offer and the Second Offer not inconsistent with this
Section.
(d) If the number of Offered Shares exceeds the sum of those Offered
Shares with respect to which the Company and the Investors exercised their
rights under this Section, the Offeror may Transfer such excess or any portion
thereof on the terms and conditions of the First Offer and the Second Offer to
any Third Party within 90 days after expiration of the Acceptance Period. If
such Transfer is not made within such 90-day period, the restrictions provided
for in this Section shall again become effective.
3.3 CO-SALE.
5.
<PAGE> 17
If at any time any Founder (the "Seller") proposes to Transfer any Shares
to any Third Party, the Seller shall, at least 30 days before such Transfer,
deliver a notice (the "Sale Notice") to the Investors specifying the identity of
the Third Party and disclosing in reasonable detail the terms and conditions of
the proposed Transfer. Within 30 days after delivery of the Sale Notice, each
Investor may elect to participate in the proposed Transfer by delivering to the
Seller a notice specifying the Shares with respect to which such Investor
exercises his or its right under this Section. Each such Investor shall be
entitled to Transfer, at the price and on the terms applicable to the Transfer
by the Seller, up to a number of shares of Common Stock equal to the product
obtained by multiplying (i) the aggregate number of shares of Founder Shares
covered by the Sale Notice (the "Co-Sale Shares") by (ii) a fraction the
numerator of which is the number of Investor Shares owned by each such Investor
at the time of the Transfer and the denominator of which is the total number of
Founder Shares and Investor Shares at the time of the Transfer. If not all of
the Investors elect to sell their pro rata share of the Founder Shares within
said thirty (30) day period, then the Founder shall promptly notify in writing
the Investors who do so elect and shall offer such Investors the additional
right to participate pro rata in such sale. The Investors shall have five (5)
days after receipt of such notice to notify the Founder of its election to sell
all or a portion thereof of the unsubscribed shares.
3.4 PROHIBITED TRANSFERS.
(a) In the event that a Founder should Transfer any Founder Shares in
contravention of the co-sale rights of each Investor under this Agreement (a
"Prohibited Transfer"), each Investor, in addition to such other remedies as may
be available at law, in equity or hereunder, shall have the put option provided
below, and such Founder shall be bound by the applicable provisions of such
option.
(b) In the event of a Prohibited Transfer, each Investor shall have
the right to sell to such Founder the type and number of shares of capital stock
equal to the number of shares each Investor would have been entitled to transfer
to the purchaser under Section 3.3 hereof had the Prohibited Transfer been
effected pursuant to and in compliance with the terms hereof. Such sale shall be
made on the following terms and conditions:
(i) The price per share at which the shares are to be sold to the
Founder shall be equal to the price per share paid by the purchaser to such
Founder in such Prohibited Transfer. The Founder shall also reimburse each
Investor for any and all fees and expenses, including legal fees and expenses,
incurred pursuant to the exercise or the attempted exercise of the Investor's
rights under this Section 3.4.
(ii) Within ninety (90) days after the date on which an Investor
received notice of the Prohibited Transfer or otherwise became aware of the
Prohibited Transfer, such Investor shall, if exercising the option created
hereby, deliver to the Founder the certificate or certificates representing
shares to be sold, each certificate to be properly endorsed for transfer.
(iii) Such Founder shall, upon receipt of the certificate or
certificates for the shares to be sold by an Investor, pursuant to this Section
3.4, pay the aggregate purchase price therefor and the amount of reimbursable
fees and expenses, as specified in Section 3.4(b)(i), in cash or by other means
acceptable to the Investor.
6.
<PAGE> 18
(iv) Notwithstanding the foregoing, any attempt by a Founder to
transfer Founder Shares in violation of Article 3 hereof shall be voidable at
the option of a majority in interest of the Investors if the Investors do not
elect to exercise the put option set forth in this Section 3.4, and the Company
agrees it will not effect such a transfer nor will it treat any alleged
transferee as the holder of such shares without the written consent of a
majority in interest of the Investors.
3.5 INVESTOR RESTRICTION.
No Investor shall Transfer any Shares to any entity or affiliate thereof
that materially participates in a business that is competitive with the business
of the Corporation. A business that is competitive with the business of the
Corporation shall be any business that is primarily in the business of providing
computer hardware or software that enables Internet screening and is designed
for Internet blocking and monitoring on networked systems; provided, however
that nothing in this Section 3.5 shall be interpreted to restrict the Investors'
rights to Transfer Shares in connection with Article 3 or Article 4 hereof,
provided further that nothing in this Section 3.5 shall be interpreted to
restrict an Investor's ability to Transfer Shares in connection with any
consolidation or merger of the Company.
ARTICLE 4
PREEMPTIVE RIGHT
4.1 PREEMPTIVE RIGHT.
(a) If the Corporation proposes to offer New Securities to any person
or entity at any time, the Corporation shall, before such offer, deliver to the
Investors an offer (the "Offer') to issue the New Securities to them upon the
terms set forth in this Section. The Offer shall state that the Corporation
proposes to issue New Securities and specify their number and terms (including
purchase price). The Offer shall remain open and irrevocable for a period of 20
days (the "Preemptive Period") from the date of its delivery.
(b) Each Investor may accept the Offer by delivering to the
Corporation a notice (the "Purchase Notice") within the Preemptive Period. The
Purchase Notice shall state the number (the "Preemptive Number") of New
Securities such Investor desires to purchase. If the sum of all Preemptive
Numbers exceeds the number of New Securities, the New Securities shall be
allocated among the Investors that delivered a Purchase Notice pro rata in
accordance with their Pro rata Amounts; provided, however, that each Investor
shall not be required to purchase the Preemptive Number of New Securities.
(c) The issuance of New Securities to the Investors who delivered a
Purchase Notice shall be made on a business day, as designated by the
Corporation, not less than 10 and not more than 30 days after expiration of the
Preemptive Period on those terms and conditions of the Offer not inconsistent
with this Section.
(d) If the number of New Securities exceeds the sum of all Preemptive
Numbers, the Corporation may issue such excess or any portion thereof on the
terms and conditions of the Offer to any person or entity within 90 days after
expiration of the Preemptive
7.
<PAGE> 19
Period. If such issuance is not made within such 90-day period, the restrictions
provided for in this Section shall again become effective.
ARTICLE 5
MISCELLANEOUS
5.1 LEGEND ON STOCK CERTIFICATES.
Each certificate representing Shares that are subject to this Agreement
shall bear a legend substantially in the following form:
"THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, OR ENCUMBRANCE OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE RIGHTS OF THE
HOLDER OF SUCH SECURITIES IN RESPECT OF THE ELECTION OF DIRECTORS ARE
SUBJECT TO AN AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT DATED June
___, 1999, BETWEEN NETPARTNERS INTERNET SOLUTIONS, INC. AND ITS
STOCKHOLDERS. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY
WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO
THE SECRETARY OF NETPARTNERS INTERNET SOLUTIONS, INC."
5.2 SEVERABILITY; GOVERNING LAW.
If any provision of this Agreement shall be determined to be illegal and
unenforceable by any court of law, the remaining provisions shall be severable
and enforceable in accordance with their terms. This Agreement shall be governed
by and construed and enforced in accordance with the laws of the State of
Delaware.
5.3 ASSIGNMENTS, SUCCESSORS AND ASSIGNS.
The rights of each party under this Agreement may not be assigned, except
in connection with any Transfer of Shares by any Stockholder. This Agreement
shall bind and inure to the benefit of the parties and their respective
successors, permitted assigns, legal representatives and heirs.
5.4 AMENDMENTS.
This Agreement may only be modified or amended by an instrument in writing
signed by the Corporation, the holders of at least 66-2/3% of all Founder
Shares, and the holders of a majority of all Investor Shares, assuming the
conversion, exchange, or exercise of all Equity Securities that are not Common
Stock, provided, however, that no modification or amendment shall discriminate
against any Stockholder without the consent of such Stockholder. This Section
may only be amended with the consent of all parties to this Agreement.
5.5 NOTICES.
8.
<PAGE> 20
All notices, claims, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if personally
delivered or if sent by nationally-recognized overnight courier, by telecopy, or
by registered or certified mail, return receipt requested and postage prepaid,
addressed as follows:
if to the Corporation:
NetPartners Internet Solutions, Inc.
9210 Sky Park Court
San Diego, CA 92123
Fax: (619) 495-1950
Telephone: (619) 505-3020
Attention: Chief Executive Officer
if to any Stockholder, to its or his address set forth on Annex 1, II or
III, as the case may be,
or to such other address as the party to whom notice is to be given may have
furnished to the other parties in writing in accordance herewith. Any such
notice or communication shall be deemed to have been received (a) in the case of
personal delivery, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent, (c) in the case of telecopy transmission, when received, and (d) in
the case of mailing, on the third business day following that on which the piece
of mail containing such communication is posted.
5.6 HEADINGS.
The headings of the sections of this Agreement have been inserted for
convenience of reference only and shall not be deemed to be a part of this
Agreement.
5.7 NOUNS AND PRONOUNS.
Whenever the context may require, any pronouns used herein shall include
the corresponding masculine, feminine or neuter forms, and the singular form of
names and pronouns shall include the plural and vice versa.
5.8 ENTIRE AGREEMENT.
This Agreement contains the entire agreement among the parties with respect
to the subject matter hereof and supersedes all prior agreements and
understandings with respect to such subject matter.
5.9 COUNTERPARTS.
This Agreement may be executed in any number of counterparts, and each such
counterpart hereof shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
9.
<PAGE> 21
5.10 TERMINATION.
This Agreement shall terminate on the Termination Date.
10.
<PAGE> 22
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Registration Rights Agreement on the date first written above.
NETPARTNERS INTERNET SOLUTIONS, INC.
By:
-------------------------------------
John Carrington
President and Chief Executive Officer
FOUNDERS:
----------------------------------------
Philip G. Trubey
----------------------------------------
Janet A. McVeigh
THE MORGAN STANLEY VENTURE
PARTNERS ENTREPRENEUR FUND, L.P.
By: Morgan Stanley Venture Partners III,
L.L.C. its General Partner
By: Morgan Stanley Venture Capital III,
Inc. its Institutional Managing
Member
----------------------------------------
Name: Robert J. Loarie
Title: Vice President
17.
<PAGE> 23
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Registration Rights Agreement on the date first written above.
NETPARTNERS INTERNET SOLUTIONS, INC.
By:
-------------------------------------
John Carrington
President and Chief Executive Officer
FOUNDERS:
----------------------------------------
Philip G. Trubey
----------------------------------------
Janet A. McVeigh
THE MORGAN STANLEY VENTURE
PARTNERS ENTREPRENEUR FUND, L.P.
By: Morgan Stanley Venture Partners III,
L.L.C. its General Partner
By: Morgan Stanley Venture Capital III,
Inc. its Institutional Managing
Member
----------------------------------------
Name: Robert J. Loarie
Title: Vice President
[SERIES B INVESTORS]
BY: ALPS SYSTEM INTEGRATION CO., LTD
----------------------------------------
Name: Akira Okita
Title: President
17.
<PAGE> 24
MORGAN STANLEY VENTURE INVESTORS
III, L.P.
By: Morgan Stanley Venture Partners III,
L.L.C. its General Partner
By: Morgan Stanley Venture Capital III,
Inc. its Institutional Managing
Member
----------------------------------------
Name: Robert J. Loarie
Title: Vice President
MORGAN STANLEY VENTURE PARTNERS
III, L.P.
By: Morgan Stanley Venture Partners
III, L.L.C. its General Partner
By: Morgan Stanley Venture Capital
III, Inc. its Institutional Managing
Member
----------------------------------------
Name: Robert J. Loarie
Title: Vice President
EDELSON IV, L.P.
----------------------------------------
Name: Harry Edelson
Title: Partner
17.
<PAGE> 25
CROSSPOINT VENTURE PARTNERS
By:
-------------------------------------
Donald Milder
General Partner
17.
<PAGE> 26
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Registration Rights Agreement on the date first written above.
NETPARTNERS INTERNET SOLUTIONS, INC.
By:
-------------------------------------
John Carrington
President and Chief Executive Officer
FOUNDERS:
----------------------------------------
Philip G. Trubey
----------------------------------------
Janet A. McVeigh
THE MORGAN STANLEY VENTURE
PARTNERS ENTREPRENEUR FUND, L.P.
By: Morgan Stanley Venture Partners III,
L.L.C. its General Partner
By: Morgan Stanley Venture Capital III,
Inc. its Institutional Managing
Member
----------------------------------------
Name: Robert J. Loarie
Title: Vice President
[SERIES B INVESTORS]
----------------------------------------
Company: Forval Creative Inc.
Name: Kiyoshi Hayamizu
Title: President and CEO
17.
<PAGE> 27
INVESTMENT ENTERPRISE PARTNERSHIP "NIF
NEW TECHNOLOGY FUND `98"
----------------------------------------
Company: Nippon Investment & Finance
Co., Ltd.
Name: Isao Oku
Title: Director
c/o Nippon Investment & Finance Co., Ltd.
Daiwa Securities Kabutocho Building
1-9 Kayabacho, 1-chome, Nihonbashi
Chuo-Ku, Tokyo 103 Japan
With copy to:
Jim Timmins, Partner
NIF Ventures USA, Inc.
525 Market Street, Suite 3420
San Francisco, CA 94105
Phone: (415) 908-1888
----------------------------------------
JIM TIMMINS
17.
<PAGE> 28
CROSSPOINT VENTURE PARTNERS
By:
-------------------------------------
Donald Milder
General Partner
BROBECK PHLEGER & HARRISON, LLP
By:
-------------------------------------
Richard A. Fink
Partner
17.
<PAGE> 29
ANNEX I
INVESTORS
<TABLE>
<CAPTION>
SHARES OF SERIES A
NAME PREFERRED STOCK
- ---- ------------------
<S> <C>
Morgan Stanley Venture Partners III, L.P. 2,708,484
Morgan Stanley Venture Investors III, L.P. 260,051
The Morgan Stanley Venture Partners Entrepreneur Fund, L.P. 117,885
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, CA 94025
Attn: Robert J. Loarie
Edelson IV, L.P. 617,284
300 Tice Boulevard
Woodcliff Lake, NJ 07675
</TABLE>
<PAGE> 30
ANNEX II
INVESTORS
<TABLE>
<CAPTION>
SHARES OF SERIES B
NAME PREFERRED STOCK
- ---- ------------------
<S> <C>
Nippon Investment and Finance Company 133,666
Investment Enterprise Partnership 140,500
Investment Enterprise Partnership - New Technology Fund 392,500
Jim Timmins 6,667
Edelson IV, L.P. 66,666
Morgan Stanley Venture Partners 333,333
CrossPoint Venture Partners 1,910,000
Forval Creative, Inc. 166,666
ALPS Electric, Inc. 166,666
Brobeck Phleger & Harrison/Rick Fink 16,667
---------
TOTAL 3,333,331
</TABLE>
<PAGE> 31
ANNEX III
FOUNDERS
<TABLE>
<CAPTION>
NAME SHARES OF COMMON STOCK
- ---- ----------------------
<S> <C>
Philip G. Trubey 3,500,000
Janet A. McVeigh 3,500,000
</TABLE>
<PAGE> 32
EXHIBIT B
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
Filed as Exhibit 10.1 to the Registration Statement.
<PAGE> 33
EXHIBIT C
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
Filed as Exhibit 3.1 to the Registration Statement.
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
BY AND BETWEEN
NETPARTNER, INC.
AND
JOHN B. CARRINGTON
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. EMPLOYMENT...........................................................................1
2. LOYAL AND CONSCIENTIOUS PERFORMANCE; NONCOMPETITION..................................2
3. COMPENSATION OF EXECUTIVE............................................................2
4. TERM.................................................................................4
5. CHOICE OF LAW........................................................................7
6. AMENDMENT AND WAIVER.................................................................8
7. CONFIDENTIAL AND PROPRIETARY INFORMATION;
NONSOLICITATION......................................................................8
8. ASSIGNMENT AND BINDING EFFECT........................................................9
9. NOTICES..............................................................................9
10. CHOICE OF LAW........................................................................9
11. INTEGRATION..........................................................................9
12. AMENDMENT...........................................................................10
13. WAIVER..............................................................................10
14. SEVERABILITY........................................................................10
15. INTERPRETATION; CONSTRUCTION........................................................10
16. REPRESENTATIONS AND WARRANTIES......................................................10
17. LITIGATION COSTS....................................................................10
18. TRADE SECRETS OF OTHERS..............................................................1
</TABLE>
i.
<PAGE> 3
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of May 10, 1999 (the "Hire Date") by and between NETPARTNERS, INC. (the
"Company"), a Delaware corporation, and JOHN B. CARRINGTON ("Executive"). The
Company and Executive are hereinafter collectively referred to as the "Parties,"
and individually referred to as a "Party."
RECITALS
A. The Company desires assurance of the association and services of
Executive in order to retain Executive's experience, skills, abilities,
background and knowledge, and is willing to engage Executive's services on the
terms and conditions set forth in this Agreement.
B. Executive desires to be in the employ of the Company, and is willing
to accept such employment on the terms and conditions set forth in this
Agreement.
AGREEMENT
In consideration of the foregoing Recitals and the mutual promises and
covenants herein contained, and for other good and valuable consideration, the
Parties, intending to be legally bound, agree as follows:
1. EMPLOYMENT.
1.1 The Company hereby employs Executive, and Executive hereby accepts
employment by the Company, upon the terms and conditions set forth in this
Agreement, for the period commencing on the Hire Date and ending as provided in
paragraph 4 hereof (the "Employment Period").
1.2 Executive shall serve as President, Chief Executive Officer ("CEO")
and a director on the Company's Board of Directors (the "Board") Executive shall
report to the Board.
1.3 Executive shall do and perform all services, acts or things
necessary or advisable to manage and conduct the business of the Company and
which are normally associated with the position of President and CEO consistent
with the bylaws of the Company and as required by the Company's Board.
1.4 Unless the Parties otherwise agree in writing, during the term of
this Agreement, Executive shall perform the services he is required to perform
pursuant to this Agreement at the Company's offices, located in San Diego,
California, or at any other place at which the Company maintains an office;
provided, however, that the Company may from time to time require Executive to
travel temporarily to other locations in connection with the Company's business.
1.
<PAGE> 4
2. LOYAL AND CONSCIENTIOUS PERFORMANCE; NONCOMPETITION.
2.1 During the Employment Period, Executive shall devote his full
business energies, interest, abilities and productive time to the proper and
efficient performance of his duties under this Agreement. The foregoing shall
not preclude Executive from engaging in civic, charitable or religious
activities, or from serving on boards of directors of companies or organizations
which will not present any direct conflict with the interest of the Company or
affect the performance of Executive's duties hereunder. The Company acknowledges
that, at this time the Executive is on the Board of Directors of SalesLogix in
Phoenix, Arizona and Digital Lava in Los Angeles, California.
2.2 Except with the prior written consent of the Company's Board,
Executive will not, during the Employment Period, or any period during which
Executive is receiving compensation or any other consideration from the Company,
including severance pay pursuant to Section 4 herein, engage in competition with
the Company, either directly or indirectly, in any manner or capacity, as
adviser, principal, agent, partner, officer, director, employee, member of any
association or otherwise, in any phase of the business of developing,
manufacturing and marketing of products which are in the same field of use or
which otherwise compete with the products or products actively under development
by the Company.
2.3 Except as permitted herein, Executive agrees not to acquire, assume
or participate in, directly or indirectly, any position, investment or interest
known by him to be adverse or antagonistic to the Company, its business or
prospects, financial or otherwise. Ownership by Executive, as a passive
investment, of less than five percent (5%) of the outstanding shares of capital
stock of any corporation with one or more classes of its capital stock listed on
a national securities exchange or publicly traded in the over-the-counter market
shall not constitute a breach of this paragraph.
3. COMPENSATION OF EXECUTIVE.
3.1 The Company shall pay Executive an initial base salary of Two
Hundred Thousand and Four Dollars ($200,004.00) per year (the "Base Salary"),
payable in regular periodic payments in accordance with Company policy. Such
salary shall be prorated for any partial year of employment on the basis of a
365 day fiscal year.
3.2 Executive's compensation may be changed from time to time by mutual
agreement of Executive and the Board. Executive's Base Salary shall be reviewed
annually by the Board and increased (but not decreased) based upon Executive's
performance in the sole discretion of the Board.
3.3 All of Executive's compensation shall be subject to customary
withholding taxes and any other employment taxes as are commonly required to be
collected or withheld by the Company.
2.
<PAGE> 5
3.4 During the Employment Period, the Company agrees to reimburse
Executive for all reasonable and necessary business expenses subject to the
Company's standard requirements with respect to reporting and documentation of
such expenses.
3.5 Executive shall, in accordance with Company policy and the terms of
the applicable plan documents, be eligible to participate in benefits under any
Executive benefit plan or arrangement which may be in effect from time to time
and made available to its executive or key management employees. The Company may
modify or cancel its benefit plan(s) as it deems necessary.
3.6 Executive shall be eligible for a performance bonus in 1999 to be
awarded by the Board based upon Executive's attainment of certain sales goals.
If the Company's sales for the period of May through December, 1999, are between
Eight Million Six Hundred Thousand Dollars ($8,600,000.00) and Ten Million Seven
Hundred Thousand Dollars ($10,700,000.00), Executive shall earn a bonus equal to
the formula of Actual $ Sales / $10,700,000. x $50,000.00. As a stretch bonus,
if the Company's sales for the period of May through December, 1999, are between
Ten Million Seven Hundred Thousand Dollars ($10,700,000.00) and Thirteen Million
Dollars ($13,000,000.00), Executive will earn an additional bonus equal to the
formula of Actual $ Sales / $13,000,000.00 x $50,000.00 In the event Executive
attains sales goals in excess of Thirteen Million Dollars ($13,000,000.00), his
total bonus paid shall be limited to One Hundred Thousand Dollars ($100,000.00)
in 1999. If Executive earns a bonus, hereunder, it shall be paid within sixty
(60) days of December 31, 1999. For each year following 1999, Executive shall be
eligible for an annual bonus which shall be awarded at the sole discretion of
the Board pursuant to the terms of any bonus formula or plan which the Board may
approve in the future.
3.7 (a) Subject to the Board's approval, Executive will be granted a
non-statutory stock option to purchase nine hundred seventy-five thousand
(975,000) shares of the common stock of the Company, contingent on Executive
accepting employment with the Company and effective upon Executive's Hire Date
and subject to the terms and conditions of the 1998 Equity Incentive Plan
("Option 1"). One-fourth (1/4) of the shares subject to Option 1 shall vest and
be immediately exercisable on the flat anniversary of the Hire Date following
twelve (12) continuous months of service with the Company, with an additional
one forty-eighth (1/48th) of the shares subject to Option 1 vesting monthly
thereafter, provided that Executive remains employed with the Company through
each vesting installment date. The exercise price of Option 1 shall be fifty
(.50) cents per share. Notwithstanding the foregoing, Option 1 shall be fully
exercisable and shall vest in full upon a Change in Control (as defined below).
(b) Subject to the Board's approval, Executive will also be
granted a non-statutory stock option to purchase 325,000 shares of the Company's
common stock, contingent upon Executive accepting employment with the Company
and effective upon Executive's Hire Date, and subject to the terms and
conditions of the 1998 Equity Incentive Plan ("Option 2"). Option 2 will be
immediately exercisable; provided, however, that the Company shall have the
right to repurchase all unvested shares at the original purchase price of the
shares. The right of repurchase in favor of the Company shall lapse monthly
(27,083 shares per month) so that on the first anniversary of the date of grant
the right of repurchase in favor of the Company shall have
3.
<PAGE> 6
lapsed in fall. Such right of repurchase shall be subject to the terms and
conditions of subsection 6(i) of the 1998 Equity Incentive Plan. The exercise
price of Option 2 shall be fifty (.50) cents per share. Notwithstanding the
foregoing, Option 2 shall be fully exercisable and shall vest in full upon a
Change in Control (as defined below).
(c) If the outstanding shares of the Company's common stock are
increased, decreased, changed into or exchanged for a different number or kind
of shares for the Company through a reorganization or recapitalization, stock
dividend, stock split or reverse stock split, or other similar transaction, then
appropriate and proportional adjustment shall be made in the number and kind of
securities receivable upon the exercise of the Options and the exercise price
per share to prevent the dilution or enlargement of Executive's rights under the
Options; provided, however, the aggregate exercise price applicable to the
Options shall remain the same.
(d) Upon any acquisition of the Company (through acquisition of
shares, merger, sale of assets or otherwise) in which shares of the Company's
common stock are converted into or exchanged for shares of another corporation,
provision shall be made by the Company for the assumption of the Options by such
other corporation and the Options shall be appropriately adjusted to apply and
pertain to the number and class of securities which would have been issued to
Executive upon consummation of such acquisition had the Options been exercised
immediately prior thereto. Appropriate adjustments shall also be made to the
exercise price applicable to the Options shall remain the same; provided, that
in the event any surviving corporation or acquiring corporation refuses to
assume such Options or to substitute similar stock awards for such Options, the
vesting of such Options (and, if applicable, the time during which such Options
may be exercised) shall be accelerated prior to such event and the Options
terminated if not exercised after such acceleration and at or prior to such
event.
4. TERM.
(a) The Employment Period shall end on the second anniversary of the
Hire Date; provided, that the Employment Period terminate earlier as provided in
this Section 4. The two (2) year Employment Period shall be extended at the end
of each year during the Employment Period for an additional one (1) year period
unless the Company notifies Executive in writing by April 30 of any year of the
Company's election not to extend the Employment Period. Notwithstanding the
foregoing, (i) the Employment Period shall terminate upon Executive's
resignation, death or permanent Disability (as defined in Section 4(k)); (ii)
the Employment Period may be terminated by Executive at any time if the Company
fails to comply with any material provision of this Agreement, which failure has
not been cured within ten (10) business days after notice of such noncompliance
has been given by the Executive to the Company; (iii) the Employment Period may
be terminated for Good Reason by Executive at any time during the period two (2)
years after the date of a Change in Control (as defined below); (iv) the
Employment Period may be terminated without Cause by the Company upon thirty
(30) days prior written notice to Executive; and (v) the Employment Period may
be terminated by the Company at any time for Cause.
4.
<PAGE> 7
(b) If the Employment Period is terminated by the Company for Cause
or by Executive's resignation, Executive shall be entitled to receive all
amounts due to him through the date of termination, including any Bonus earned.
(c) If the Employment Period is terminated as a result of
Executive's death or permanent Disability, the Company shall pay any amounts due
to Executive through the date of termination and a pro-rated Bonus in an amount
equal to the Bonus which would have otherwise been payable to Executive pursuant
to paragraph 3.6, if any, with respect to the fiscal year in which such
termination occurs.
(d) If the Employment Period is terminated by the Company pursuant
to paragraph 4(a)(iv) or by Executive pursuant to paragraphs 4(a)(ii) above
then, upon Executive's furnishing to the Company an executed waiver and release
of claims (a form of which is attached hereto as Exhibit A), Executive shall be
entitled to receive (i) a lump sum payment equal to 50% of his current Base
Salary in effect as of the date of termination, subject to standard deductions
and withholdings payable within ten (10) days after the date of termination,
(ii) a Bonus equal to 50% of the average of the annual Bonuses earned by
Executive during the Employment Period subject to standard deductions and
withholdings. Executive shall also be eligible to receive continued medical
benefits to the extent permitted under COBRA for a period of six (6) months from
the date of termination.
(e) If, within two (2) years after a Change in Control, the
Employment Period is terminated by the Company other than for Cause, or if
Executive terminates the Employment Period for Good Reason (as hereinafter
defined), then upon Executive's furnishing to the Company an executed waiver and
release of claims (a form of which is attached hereto as Exhibit A), Executive
shall be entitled to the following: (i) Executive's Base Salary and accrued and
unused vacation earned through the date of termination; (ii) a lump sum payment
equal to one and one-half times the sum of Executive's current Base Salary in
effect as of the date of termination, subject to standard deductions and
withholdings, to be paid within (10) days after the date of termination; (iii) a
lump sum payment equal to one and one-half times the average of the Bonuses
earned by Executive during the Employment Period, subject to standard deductions
and withholdings, to be paid within ten (10) days after the date of termination;
(iv) continued medical benefits, to the extent permitted under COBRA, for a
period of eighteen (18) months.
(f) If the Employment Period is terminated prior to December 1,
1999, there shall be no Bonus earned by Executive for the fiscal year ending
December 31, 1999. If the Employment Period is terminated between December 1 and
December 31, 1999, the Bonus earned by Executive for the fiscal year ending
December 31, 1999 shall be 50% of Executive's Base Salary in effect as of such
termination for purposes of calculating average Bonuses in paragraphs 4(d) and
(e) above; provided, however, that Executive is not terminated for Cause.
(g) For purposes of this Agreement, a "Change in Control" of the
Company shall be deemed to have occurred if (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the Exchange Act")), other than a trustee or other fiduciary holding
securities of the Company under an employee benefit plan of
5.
<PAGE> 8
the Company, becomes the "beneficial owner" (as defined in Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of securities of
the Company representing 50% or more of (A) the outstanding shares of Common
Stock of the Company or (B) the combined voting power of the Company's
then-outstanding securities entitled to vote generally in the election of
directors; (ii) during any period of not more than two consecutive years, not
including any period prior to the date of this Agreement, individuals who at the
beginning of such period constitute the Board, and any new director (other than
a director designed by a person who has entered into an agreement with the
Company to effect a transaction described in clause (i) or (iii) of this
paragraph (g)) whose election by the Board or nomination by the Company's
shareholders was approved by a vote by at least a majority of the directors
still in office who either were in office at the beginning of such period or
whose election or nomination for election was previously so approved, ceases for
any reason to constitute a majority of the Board; (iii) the Company is party to
a merger or consolidation which results in the holders of voting securities of
the Company outstanding immediately prior thereto failing to continue to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 50% of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the Company sells or disposes
of all or substantially all of the Company's assets or any transaction having a
similar effect is consummated.
(h) "Good Reason" as used in this Agreement shall mean (i) without
Executive's express written consent, any failure by the Company to comply with
any material provision of this Agreement, which failure has not been cured
within ten (10) business days after notice of such noncompliance has been given
by Executive to the Company, or (ii) the occurrence (without Executive's express
written consent), within two (2) years after a Change in Control, of any one of
the following acts by the Company, or failures by the Company to act, unless, in
the case of any act or failure to act described below, such act or failure to
act is corrected prior to the date of termination specified in any notice of
termination given by Executive to the Company in respect thereof:
(a) Any change in Executive's title, authorities,
responsibilities (including reporting responsibilities) which represents an
adverse change from his status, title, position or responsibilities (including
reporting responsibilities) which were in effect immediately prior to the Change
in Control; the assignment to Executive of any material duties or work
responsibilities which are inconsistent with such status, title, position or
work responsibilities; or any removal of Executive from, or failure to appoint
or reelect him to, any such positions, except if such changes are because of
Disability, retirement, death or for Cause;
(b) The relocation of Executive's office to a location outside of
San Diego or Orange County, California;
(c) The failure by the Company to continue in effect any annual
or long-term incentive compensation plan in which Executive participated
immediately prior to the Change in Control, unless Executive participates after
the Change in Control in another
6.
<PAGE> 9
comparable plan generally available to senior executives of the Company and
senior executives of any person in control of the Company; or
(d) The failure by the Company to continue to provide the
Executive with benefits substantially similar in value in the aggregate to those
enjoyed by Executive immediately prior to the Change in Control.
(i) Except as otherwise set forth above, all of Executive's rights
to fringe benefits and bonuses hereunder (if any) accruing after the termination
of the Employment Period shall cease upon such termination.
(j) For purposes of this Agreement, "Cause" shall mean (i) the
willful failure or refusal by Executive to perform his duties hereunder (other
than any such failure resulting from Executive's incapacity due to physical or
mental illness), which has not ceased within ten (10) business days after
written demand for substantial performance is delivered to Executive by the
Company, which demand identifies the manner in which Company believes that the
Executive has not performed such duties and the steps required to cure such
failure to perform; (ii) Executive shall intentionally and willfully engage in
misconduct which is materially injurious to the Company, monetarily or
otherwise; or (iii) the conviction of Executive of or the entering of a plea of
nolo contenders by Executive with respect to, a felony.
Notwithstanding the foregoing, Executive's Employment hereunder shall not be
deemed to be terminated for Cause and no other action shall be taken by the
Company which is adverse to Executive unless and until there shall have been
delivered to Executive a copy of a resolution duly adopted by a unanimous vote
of the Board (excluding Executive) at a meeting of the Board (after written
notice to Executive and a reasonable opportunity for Executive to be heard
before the Board) authorizing and approving such termination or other action.
(k) For purposes of this Agreement, permanent "Disability" shall
mean the expiration of a continuous period of one hundred and eighty (180) days
during which Executive is unable to perform his assigned duties due to physical
or mental incapacity. In the event of any dispute regarding the existence of
Executive's Disability hereunder, the matter will be resolved by the
determination of a majority of three physicians qualified to practice medicine
in California, one to be selected by each of Executive and the Board and the
third to be selected by the two designated physicians. For this purpose,
Executive will submit to appropriate medical examinations.
(l) Executive shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or otherwise,
and the amount of any payment or benefit provided for in this Section 4 shall
not be reduced by any compensation earned by Executive as a result of employment
by another employer or by any other benefits.
5. CHOICE OF LAW.
5.1 This Agreement will be governed by the internal law, and not the
laws of conflicts, of the State of California.
7.
<PAGE> 10
6. AMENDMENT AND WAIVER.
6.1 The provisions of this Agreement may be amended or waived only with
the prior written consent of the Company and Executive, and no course of conduct
or failure or delay in enforcing the provisions of this Agreement shall affect
the validity, binding effect or enforceability of this Agreement.
7. CONFIDENTIAL AND PROPRIETARY INFORMATION; NONSOLICITATION.
7.1 Executive agrees to execute and abide by the Proprietary Information
and Inventions Agreement attached and amended hereto as Exhibit B.
7.2 Executive recognizes that his employment with the Company will
involve contact with information of substantial value to the Company, which is
not old and generally known in the trade, and which gives the Company an
advantage over its competitors who do not know or use it, including but not
limited to, techniques, designs, drawings, processes, inventions, developments,
equipment, prototypes, sales and customer information, and business and
financial information relating to the business, products, practices and
techniques of the Company, (hereinafter referred to as "Confidential and
Proprietary Information"). Executive will at all times regard and preserve as
confidential such Confidential and Proprietary Information obtained by Executive
from whatever source and will not, either during his employment with the Company
or thereafter, publish or disclose any part of such Confidential and Proprietary
Information in any manner at any time, or use the same except on behalf of the
Company, without the prior written consent of the Company.
7.3 While employed by the Company and for one (1) year thereafter, the
Executive agrees that in order to protect the Company's Confidential and
Proprietary Information from unauthorized use, that Executive will not, either
directly or through others, solicit or attempt to solicit any employee,
consultant or independent contractor of the Company to terminate his or her
relationship with the Company in order to become an employee, consultant or
independent contractor to or for any other person or business entity; or the
business of any customer, vendor or distributor of the Company which, at the
time of termination or one (1) year immediately prior thereto, was doing
business with the Company or listed on Company's customer, vendor or distributor
list.
8.
<PAGE> 11
8. ASSIGNMENT AND BINDING EFFECT.
8.1 This Agreement shall be binding upon and inure to the benefit of
Executive and Executive's heirs, executors, personal representatives, assigns,
administrators and legal representatives. Due to the unique and personal nature
of Executive's duties under this Agreement, neither this Agreement nor any
rights or obligations under this Agreement shall be assignable by Executive.
This Agreement shall be binding upon and inure to the benefit of the Company and
its successors, assigns and legal representatives. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place.
9. NOTICES.
9.1 All notices or demands of any kind required or permitted to be given
by the Company or Executive under this Agreement shall be given in writing and
shall be personally delivered (and receipted for) or mailed by certified mail,
return receipt requested, postage prepaid, addressed as follows:
9.1.1 If to the Company:
NetPartners, Inc.
9210 Sky Park Court
San Diego, California 92123
Attn: Chairman of the Board of Directors
9.1.2 If to Executive:
John B. Carrington
25 Pelican Hill Circle
Newport Coast, California 92657
Any such written notice shall be deemed received when personally delivered or
three (3) days after its deposit in the United States mail as specified above.
Either Party may change its address for notices by giving notice to the other
Party in the manner specified in this section.
10. CHOICE OF LAW.
10.1 This Agreement is made in San Diego, California. This Agreement
shall be construed and interpreted in accordance with the laws of the State of
California.
11. INTEGRATION.
11.1 This Agreement contains the complete, final and exclusive agreement
of the Parties relating to the subject matter of this Agreement, and supersedes
all prior oral and written employment agreements or arrangements between the
Parties.
9.
<PAGE> 12
12. AMENDMENT.
12.1 This Agreement cannot be amended or modified except by a written
agreement signed by Executive and the Company.
13. WAIVER.
13.1 No term, covenant or condition of this Agreement or any breach
thereof shall be deemed waived, except with the written consent of the Party
against whom the wavier in claimed, and any waiver or any such term, covenant,
condition or breach shall not be deemed to be a waiver of any preceding or
succeeding breach of the same or any other term, covenant, condition or breach.
14. SEVERABILITY.
14.1 The finding by a court of competent jurisdiction of the
unenforceability, invalidity or illegality of any provision of this Agreement
shall not render any other provision of this Agreement unenforceable, invalid or
illegal. Such court shall have the authority to modify or replace the invalid or
unenforceable term or provision with a valid and enforceable term or provision
which most accurately represents the parties' intention with respect to the
invalid or unenforceable term or provision.
15. INTERPRETATION; CONSTRUCTION.
15.1 The headings set forth in this Agreement are for convenience of
reference only and shall not be used in interpreting this Agreement. This
Agreement has been drafted by legal counsel representing the Company, but
Executive has been encouraged, and has consulted with, his own independent
counsel and tax advisors with respect to the terms of this Agreement. The
Parties acknowledge that each Party and its counsel has reviewed and revised, or
had an opportunity to review and revise, this Agreement, and the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement.
16. REPRESENTATIONS AND WARRANTIES.
16.1 Executive represents and warrants that he is not restricted or
prohibited, contractually or otherwise, from entering into and performing each
of the terms and covenants contained in this Agreement, and that his execution
and performance of this Agreement will not violate or breach any other
agreements between Executive and any other person or entity.
17. LITIGATION COSTS.
17.1 Should any litigation, arbitration, or administrative action be
commenced between the parties or their personal representatives concerning any
provision of this agreement or the rights and duties of any person in relation
to this agreement, the party or parties prevailing such action shall be
entitled, in addition to such other relief as may be granted to a reasonable
10.
<PAGE> 13
sum as and for that party's attorney's fees in such litigation which shall be
determined by the court, arbitrator, or administrative agency, in such action or
in a separate action brought for that purpose.
18. TRADE SECRETS OF OTHERS.
18.1 It is the understanding of both the Company and Executive that
Executive shall not divulge to the Company and/or its subsidiaries any
confidential information or trade secrets belonging to others, including
Executive's former employers, nor shall the Company and/or its affiliates seek
to elicit from Executive any such information. Consistent with the foregoing,
Executive shall not provide to the Company and/or its affiliates, and the
Company and/or its affiliates shall not request, any documents or copies of
documents containing such information.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
NETPARTNERS, INC.
By: /s/ Bruce Coleman
------------------------------
Its: CEO
------------------------------
Dated: 5/7/99
----------------------------
EXECUTIVE:
/s/ John B. Carrington
- ----------------------------------
JOHN B. CARRINGTON
Dated: May 7, 1999
---------------------------
11.
<PAGE> 14
EXHIBIT A
RELEASE AND WAIVER OF CLAIMS
In consideration of the payments and other benefits set forth in Section
4 of the Employment Agreement dated May ____, 1999 to which this form is
attached, I, JOHN B. CARRINGTON, hereby furnish NETPARTNERS, INC. (the
"Company"), with the following release and waiver ("Release and Waiver").
I hereby release, and forever discharge the Company, its officers,
directors, agents, employees, stockholders, successors, assigns affiliates and
Benefit Plans, of and from any and all claims, liabilities, demands, causes of
action, costs, expenses, attorneys' fees, damages, indemnities and obligations
of every kind and nature, in law, equity, or otherwise, known and unknown,
suspected and unsuspected, disclosed and undisclosed, arising at any time prior
to and including my employment termination date with respect to any claims
relating to my employment and the termination of my employment, including but
not limited to, claims pursuant to any federal, state or local law relating to
employment, including, but not limited to, discrimination claims, claims under
the California Fair Employment and Housing Act, and the Federal Age
Discrimination in Employment Act of 1967, as amended ("ADEA"), or claims for
wrongful termination, breach of the covenant of good faith, contract claims,
tort claims, and wage or benefit claims, including but not limited to, claims
for salary, bonuses, commissions, stock, stock options, vacation pay, fringe
benefits, severance pay or any form of compensation.
In releasing claims unknown to me at present, I am waiving all rights
and benefits under Section 1542 of the California Civil Code, and any law or
legal principle of similar effect in any jurisdiction: "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."
I acknowledge that, among other rights, I am waiving and releasing any
rights I may have under ADEA, that this release and waiver is knowing and
voluntary, and that the consideration given for this release and waiver is in
addition to anything of value to which I was already entitled as an Executive of
the Company. I further acknowledge that I have been advised, as required by the
Older Workers Benefit Protection Act, that: (a) the release and waiver granted
herein does not relate to claims which may arise after this release and waiver
is executed; (b) I have the right to consult with an attorney prior to executing
this release and waiver (although I may choose voluntarily not to do so); and if
I am over 40 years old upon execution of this (c) I have twenty-one (21) days
from the date of termination of my employment with the Company in which to
consider this release and waiver (although I may choose voluntarily to execute
this release and waiver earlier); (d) I have seven (7) days following the
execution of this release and waiver to revoke my consent to this release and
waiver; and (e) this release and waiver shall not be effective until the seven
(7) day revocation period has expired.
Date: /s/ John B. Carrington
---------------------- ------------------------------
JOHN B. CARRINGTON
<PAGE> 15
EXHIBIT B
NETPARTNERS, INC.
EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
In consideration of my employment or continued employment by
NETPARTNERS, INC. (the "COMPANY"), and the compensation now and hereafter paid
to me, I, JOHN B. CARRINGTON, hereby agree as follows:
1. NONDISCLOSURE
1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during
my employment and thereafter, I will hold in strictest confidence and will not
disclose, use, lecture upon or publish any of the Company's Proprietary
Information (defined below), except as such disclosure, use or publication may
be required in connection with my work for the Company, or unless an officer of
the Company expressly authority such in writing. I will obtain Company's written
approval before publishing or submitting for publication any material (written,
verbal, or otherwise) that relates to my work at Company and/or incorporates any
Proprietary Information. I hereby assign to the Company any rights I may have or
acquire in such Proprietary information and recognize that all Proprietary
Information shall be the sole property of the Company and its assigns.
1.2 PROPRIETARY INFORMATION. The term "PROPRIETARY INFORMATION" shall
mean any and all confidential and/or proprietary knowledge, data or information
of the Company. By way of illustration but not limitation, "PROPRIETARY
INFORMATION" includes (a) trade secrets, inventions, mask works, ideas,
processes, formulas, source and object codes, data, programs, other works of
authorship, know-how, improvements, discoveries developments, designs and
techniques (hereinafter collectively referred to as "INVENTIONS"); and (b)
information regarding plans for research, development, new products, marketing
and selling, business plans, budgets and unpublished financial statements,
licenses, prices and costs, suppliers and customers; and (c) information
regarding the skills and compensation of other employees of the Company.
Notwithstanding the foregoing, it is understood that, at all such times, I am
free to use information which is generally known in the trade or industry, which
is not gained as result of a breach of this Agreement, and my own, skill,
knowledge, know-how and experience to whatever extent and in whichever way I
wish.
1.3 THIRD PARTY INFORMATION. I understand, in addition, that the Company
has received and in the future will receive from third parties confidential or
proprietary information ("THIRD PARTY INFORMATION") subject to a duty on the
Company's part to maintain the confidentiality of such information and to use it
only for certain limited purposes. During the term of my employment and
thereafter, I will hold Third Party Information in the strictest confidence and
will not disclose to anyone (other than Company personnel who need to know such
information in connection with their work for the Company) or use, except in
connection with my work for the Company, Third Party Information unless
expressly authorized by an officer of the Company in writing.
1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS. During
my employment by the Company I will not improperly use or disclose any
confidential information or trade secrets, if any, of any former employer or any
other person to whom I have an obligation of confidentiality, and I will not
bring onto the promises of the Company any unpublished documents or any property
belonging to any former employer or any other person to whom I have an
obligation of confidentiality unless consented to in writing by that former
employer or person. I will use in the performance of my duties only information
which is generally known and used by persons with training and experience
comparable to my own, which is common knowledge in the industry or otherwise
legally in the public domain, or which is otherwise provided or developed by the
Company.
2. ASSIGNMENT OF INVENTIONS
2.1 PROPRIETARY RIGHTS. The term "PROPRIETARY RIGHTS" shall mean all
trade secret, patent, copyright, mask work and other intellectual property
rights throughout the world.
2.2 PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which
I made prior to the commencement of my employment with the
2.
<PAGE> 16
Company are excluded from the scope of this Agreement. To preclude any possible
uncertainty, I have set forth on Exhibit B (Previous Inventions) attached hereto
a complete list of all Inventions that I have, alone or jointly with others,
conceived, developed or reduced to practice or caused to be conceived, developed
or reduced to practice prior to the commencement of my employment with the
Company, that I consider to be my property or the property of third parties and
that I wish to have excluded from the scope of this Agreement (collectively
referred to as "PRIOR INVENTIONS"). If disclosure of any such Prior Invention
would cause me to violate any prior confidentiality agreement, I understand that
I am not to list such Prior Inventions in Exhibit B but am only to disclose a
cursory name for each such invention, a listing of the party(ies) to whom it
belongs and the fact that full disclosure as to such inventions has not been
made for that reason. A space is provided on Exhibit B for such purpose. If no
such disclosure is attached, I represent that there are no Prior Inventions. If,
in the course of my employment with the Company, I incorporate a Prior Invention
into a Company product, process or machine, the Company is hereby granted and
shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide
license (with rights to sublicense through multiple tiers of sublicensees) to
make, have made, modify, use and sell such Prior Invention. Notwithstanding the
foregoing, I agree that I will not incorporate, or permit to be incorporated,
Prior Inventions in any Company Inventions without the Company's prior written
consent.
2.3 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.4, and 2.6, I hereby
assign and agree to assign in the future (when any such Inventions or
Proprietary Rights are first reduced to practice or first fixed in a tangible
medium, as applicable) to the Company all my right, title and interest in and to
any and all Inventions (and all Proprietary Rights with respect thereto) whether
or not patentable or registrable under copyright or similar statutes, made or
conceived or reduced to practice or learned by me, either alone or jointly with
others, during the period of my employment with the Company. Inventions assigned
to the Company, or to a third party as directed by the Company pursuant to this
Section 2, are hereinafter referred to as "COMPANY INVENTIONS."
2.4 NONASSIGNABLE INVENTIONS. This Agreement does not apply to an
Invention which qualifies fully as a nonassignable Invention under Section 2870
of the California Labor Code (hereinafter "SECTION 2870"). I have reviewed the
Notification on Exhibit A (Limited Exclusion Notification) and agree that my
signature acknowledges receipt of the notification.
2.5 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my
employment I will promptly disclose to the Company fully and in writing all
Inventions authored, conceived or reduced to practice by me, either alone or
jointly with others. In addition, I will promptly disclose to the Company all
patent applications filed by me or on my behalf within six (6) months after
termination of employment. At the time of each such disclosure, I will advise
the Company in writing of any Inventions that I believe fully qualify for
protection under Section 2870; and I will at that time provide to the Company in
writing all evidence necessary to substantiate that belief. The Company will
keep in confidence and will not use for any purpose or disclose to third parties
without my consent any confidential information disclosed in writing to the
Company pursuant to this Agreement relating to Inventions that qualify fully for
protection under the provisions of Section 2870. I will preserve the
confidentiality of any Invention that does not fully qualify for protection
under Section 2870.
2.6 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right,
title and interest in and to any particular Company Invention to a third party,
including without limitation the United States, as directed by the Company.
2.7 WORKS FOR HIRE. I acknowledge that all original works of authorship
which am made by me (solely or jointly with others) within the scope of my
employment and which are protectable by copyright are "works made for hire,"
pursuant to United States Copyright Act (17 U.S.C., Section 101).
2.8 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in
every proper way to obtain, and from time to time enforce, United States and
foreign Proprietary Rights relating to Company Inventions in any and all
countries. To that end I will execute, verify and deliver such documents and
perform such other acts (including appearances as a witness) as the Company may
reasonably request for use in applying for, obtaining, perfecting, evidencing,
sustaining and enforcing such Proprietary Rights and the assignment thereof. In
addition, I will execute, verify and deliver assignments of such Proprietary
Rights to the Company or its designee.
3.
<PAGE> 17
My obligation to assist the Company with respect to Proprietary Rights relating
to such Company Inventions in any and all countries shall continue beyond the
termination of my employment, but the Company shall compensate me at a
reasonable rate after my termination for the time actually spent by me at the
Company's request on such assistance.
In the event the Company is unable for any reason, after reasonable effort, to
secure my signature on any document needed in connection with the actions
specified in this Section 2.8, I hereby irrevocably designate and appoint the
Company and its duly authorized officers and agents as my agent and attorney in
fact, which appointment is coupled with an interest, to act for and in my behalf
to execute, verify and file any such documents and to do all other lawfully
permitted acts to further the purposes of the preceding paragraph with the same
legal force and effect as if executed by me. I hereby waive and quitclaim to the
Company any and all claims, of any nature whatsoever, which I now or may
hereafter have for infringement of any Proprietary Rights assigned hereunder to
the Company.
3. RECORDS. I agree to keep and maintain adequate and current records (in the
form of notes, sketches, drawings and in any other form that may be required by
the Company) of all Proprietary information developed by me and all Inventions
made by me during the period of my employment at the Company, which records
shall be available to and remain the sole property of the Company at all times.
4. ADDITIONAL ACTIVITIES. I agree that during the period of my employment by the
Company I will not without the Company's express written consent, engage in any
employment or business activity which is competitive with, or would otherwise
conflict with, my employment by the Company. I agree further that for the period
of my employment by the Company and for six (6) months after the date of
termination of my employment by the Company I will not induce any employee of
the Company to leave the employ of the Company.
5. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms
of this Agreement and as an employee of the Company does not and will not breech
any agreement to keep in confidence information acquired by me in confidence or
in trust prior to my employment by the Company. I have not entered into, and I
agree I will not enter into, any agreement either written or oral in conflict
herewith.
6. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will
deliver to the Company any and all drawings, notes, memoranda, specifications,
devices, formulas, and documents, together with all copies thereof, and any
other material containing or disclosing any Company Inventions, Third Party
Information or Proprietary Information of the Company. I further agree that any
property situated on the Company's premises and owned by the Company, including
disks and other storage media, filing cabinets or other work areas, is subject
to inspection by Company personnel at any time with or without notice. Prior to
leaving, I will cooperate with the Company in completing and signing a mutually
agreed termination statement.
7. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and
because I may have access to and become acquainted with the Proprietary
Information of the Company, the Company shall have the right to enforce this
Agreement and any of its provisions by injunction, specific performance or other
equitable relief, without bond and without prejudice to any other rights and
remedies that the Company may have for a breach of this Agreement
8. NOTICES. Any notices required or permitted hereunder shall be given to the
appropriate party at the address specified below or at such other address as the
party shall specify in writing. Such notice shall be deemed given upon personal
delivery to the appropriate address or if sent by certified or registered mail,
three (3) days after the date of mailing.
9. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the
Company, I hereby consent to the notification of my new employer of my rights
and obligations under this Agreement.
10. GENERAL PROVISIONS
10.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement
will be governed by and construed according to the laws of the State of
California, as such laws are applied to agreements entered into and to be
performed entirely within California between California residents. I hereby
expressly consent to the personal jurisdiction of the state and federal courts
located in San Diego County, California for any lawsuit filed there against me
by Company arising from or related to this Agreement
4.
<PAGE> 18
10.2 SEVERABILITY. In case any one or more of the provisions contained
in this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect such invalidity, illegality or unenforceability
shall not affect the other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
10.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my
heirs, executors, administrators and other legal representatives and will be for
the benefit of the Company, its successors, and its assigns.
10.4 SURVIVAL. The provisions of this Agreement shall survive the
termination of my employment and the assignment of this Agreement by the Company
to any successor in interest or other assignee.
10.5 EMPLOYMENT. I agree and understand that nothing in this Agreement
shall confer any right with respect to continuation of employment by the
Company, nor shall it interfere in any way with my right or the Company's right
to terminate my employment at any time, with or without cause.
10.6 WAIVER. No waiver by the Company of any breach of this Agreement
shall be a waiver of any preceding or succeeding breach. No waiver by the
Company of any right under this Agreement shall be construed as a waiver of any
other right. The Company shall not be required to give notice to enforce strict
adherence to all terms of this Agreement.
10.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 and 2 of
this Agreement shall apply to any time during which I was previously employed,
or am in the future employed, by the Company as a consultant if no other
agreement governs nondisclosure and assignment of inventions during such period.
Except for my Employment Agreement dated May 10th, 1999, this Agreement is the
final, complete and exclusive agreement of the parties with respect to the
subject matter hereof. In the event of any conflict between the terms of this
Agreement and my Employment Agreement, my Employment Agreement shall prevail. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, will be effective unless in writing and signed by the
party to be charged.
This Agreement shall be effective as of the first day of my employment
with the Company, namely: May 10, 1999.
I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY
FILLED OUT EXHIBIT B TO THIS AGREEMENT.
Dated: 5-7-99
----------------------------
/s/ John B. Carrington
- ----------------------------------
(SIGNATURE)
JOHN B. CARRINGTON
- ----------------------------------
(PRINTED NAME)
ACCEPTED AND AGREED TO:
NETPARTNERS, INC.
By: /s/ Bruce Coleman
------------------------------
Title: CEO
----------------------------
- ----------------------------------
(Address)
- ----------------------------------
Dated: 5/7/99
---------------------------
5.
<PAGE> 19
EXHIBIT A
LIMITED EXCLUSION NOTIFICATION
THIS IS TO NOTIFY you in accordance with Section 2872 of the California
Labor Code that the foregoing Agreement between you and the Company does not
require you to assign or offer to assign to the Company any invention that you
developed entirely on your own time without using the Company's equipment,
supplies, facilities or trade secret information except for those inventions
that either:
1. Relate at the time of conception or reduction to practice of the
invention to the Company's business, or actual or demonstrably anticipated
research or development of the Company;
2. Result from any work performed by you for the Company.
To the extent a provision in the foregoing Agreement purports to require
you to assign an invention otherwise excluded from the preceding paragraph, the
provision is against the public policy of this state and is unenforceable.
This limited exclusion does not apply to any patent or invention covered
by a contract between the Company and the United States or any of its agencies
requiring full title to such patent or invention to be in the United States.
I ACKNOWLEDGE RECEIPT of a copy of this notification.
By: /s/ John B. Carrington
----------------------------------
JOHN B. CARRINGTON
Date: 5-7-99
--------------------------------
WITNESSED BY:
/s/ Bruce Coleman
- ----------------------------------
(PRINTED NAME OF REPRESENTATIVE)
<PAGE> 20
EXHIBIT B
TO: NETPARTNERS, INC.
FROM: JOHN B. CARRINGTON
DATE: May 7, 1999
SUBJECT: PREVIOUS INVENTIONS
1. Except as listed in Section 2 below, the following is a complete list of all
inventions or improvements relevant to the subject matter of my employment by
NETPARTNERS, INC. (the "COMPANY") that have been made or conceived or first
reduced to practice by me alone or jointly with others prior to my engagement by
the Company:
[X] No inventions or improvements.
[ ] See below:
----------------------------------
----------------------------------
----------------------------------
[ ] Additional sheets attached.
2. Due to a prior confidentiality agreement, I cannot complete the
disclosure under Section 1 above with respect to inventions or improvements
generally listed below, the proprietary rights and duty of confidentiality with
respect to which I owe to the following party(ies):
INVENTION OR IMPROVEMENT PARTY(IES) RELATIONSHIP
------------------------ ---------- ------------
1.
------------------------ ---------- ------------
2.
------------------------ ---------- ------------
3.
------------------------ ---------- ------------
[ ] Additional sheets attached.
<PAGE> 1
EXHIBIT 10.5
[COMPANY LOGO AND LETTERHEAD]
June 11, 1999
Douglas C. Wride
2052 Burnt Mill Road
Tustin, CA 92680
RE: EMPLOYMENT AGREEMENT
Dear Doug:
Pursuant to our discussions, this letter sets forth the terms of your
employment with NetPartners Internet Solutions, Inc. (the "Company") as well as
our understanding with respect to any termination of that employment
relationship.
1. POSITION AND DUTIES: You will be employed by the Company as its Chief
Financial Officer, reporting to the Chief Executive Officer ("CEO") and, as
needed, the Company's Board of Directors (the "Board") and audit committee. You
accept employment with the Company on the terms and conditions set forth in this
Agreement, and you agree to devote your full business time, energy and skill to
your duties at the Company. Your duties shall include, but not be limited to,
any duties that are consistent with your position, as well as any other duties
that may be assigned to you from time to time by the CEO or the Board. Those
duties will include responsibility for the Company's control, treasury,
strategic planning, human resources, legal and MIS functions.
2. TERM OF -EMPLOYMENT: Your employment with the Company will start on
June 11, 1999, will be for no specified term, and may be terminated by you or
the Company at any time, with or without cause, subject to the provisions of
Paragraphs 4 and 5 below.
3. COMPENSATION: You will be compensated by the Company for your
services as follows:
(a) Salary: You will be paid a monthly salary of $12,500.00, less
applicable withholding, in accordance with the Company's normal payroll
procedures. Your salary will be reviewed by the CEO on an annual basis, and may
be subject to adjustment based upon various factors including, but not limited
to, your performance and the Company's profitability. Any adjustment to your
salary shall occur only by the mutual agreement of you and the CEO.
(b) Bonus: You will be eligible to earn an annual bonus of up to 20%
of your annual base salary. The bonus plan will be based upon the Company's
achievement of various financial and/or other goals established in a written
bonus plan that will be communicated to you each year. Your 1999 bonus plan will
be established as soon as possible.
1
<PAGE> 2
(c) Benefits: You will have the right, on the same basis as other
executive employees of the Company, to participate in and to receive benefits
under any Company medical, vision, life, disability or other group insurance
plans, as well as under the Company's 401 (k) and business expense reimbursement
policy. NetPartners pays all but $5.00 per month of your health and dental
premiums for yourself and 50% of the premiums for your dependents.
(d) Vacation: You will accrue three weeks paid vacation each year of
employment and receive ten holidays each year. You shall schedule all of your
vacations at times that are mutually convenient and reasonable for both you and
the Company.
(e) Stock Options. On June 11, 1999 the Board of Directors approved
that you be granted an option to purchase 300,000 shares of the Company's common
stock, with a strike price of $0.75 per share, and which option will vest over a
four year period, except that the first years options (75,000 shares), are
immediately exercisable. You may purchase these 75,000 shares any time during
your first year of employment, provided, however, that the Company shall have
the right to repurchase all unvested shares at the original purchase price of
$0.75 per share. The right of repurchase in favor of the Company shall lapse
monthly (6,250 shares per month) so that on June 11, 2000 the right of
repurchase in favor of the Company shall have lapsed in full. In addition, from
June 11, 1999 your options will be treated as if you had achieved the one-year
employment requirement making you eligible for any acceleration of options due
to Change of Control. Except as noted here, your option will be governed by the
terms and conditions of the Company's stock option plan.
4. VOLUNTARY TERMINATION: In the event that you voluntarily resign from
your employment with the Company, or in the event that your employment
terminates as a result of your death or disability (meaning that you are unable
to perform your duties for any 90 days in any one year period as a result of a
physical and/or mental impairment), you will be entitled to no compensation or
benefits from the Company other than those earned under Paragraph 3 through the
date of your termination. In particular, you will not be entitled to any pro
rated portion of the bonus that you would have earned under subparagraph 3(b)
had you been employed for the entire year in which your termination occurs. You
agree that in the event you resign from your employment with the Company for any
reason, you will provide the Company with one month's written notice of your
resignation. The Company may, in its sole discretion, elect to waive all or any
part of such notice period and accept your resignation at an earlier date so
long as it pays you any compensation and benefits that you would have earned
through the end of such notice period.
5. OTHER TERMINATION: Your employment may be terminated by the Company
under the circumstances set forth below.
(a) Termination for Cause. If your employment is terminated by the
Company for cause as defined below, you shall be entitled to no compensation or
benefits from the Company other than those earned under Paragraph 3 through the
date of your termination. In particular, you will not be entitled to any pro
rated portion of the bonus that you would have earned under subparagraph 3(b)
had you been employed for the entire year in which your termination occurs.
For purposes of this Agreement, a termination "for cause" occurs if you
are terminated for any of the following reasons: (i) theft dishonesty,
misconduct or falsification of any employment or Company
2
<PAGE> 3
records; (ii) improper disclosure of the Company's confidential or proprietary
information; (iii) any action by you which has a material detrimental effect on
the Company's reputation or business; (iv) your failure or inability to perform
any assigned duties reasonably expected of a chief financial officer after
written notice from the Company to you of, and a reasonable opportunity to cure,
such failure or inability; (v) any material breach of this Agreement by you,
which breach is not cured within 10 days following written notice to you of such
breach; or (vi) your conviction (including any plea of guilty or nolo contendre)
for any criminal act that impairs your ability to perform your duties under this
Agreement.
(b) Termination Without Cause: If your employment is terminated by
the Company without cause (and not as a result of your death or disability), you
shall receive severance payments at your final base salary rate, less applicable
withholding, for a period of six months. Severance payments will be made in
accordance with the Company's normal payroll procedures. The Company will also
accelerate the vesting of any unvested stock options previously granted to you
that would have vested during the six-month period following the termination of
your employment. You will also be entitled to receive any compensation and
benefits that you earn under Paragraph 3 through the date of your termination
without cause. You will not be entitled to any pro rated portion of the bonus
that you would have earned under subparagraph 3(b) had you been employed for the
entire year in which your termination occurs. Your right to receive the
severance pay and other benefits described in this subparagraph is conditioned
upon your execution and delivery to the Company of a general release of claims,
in form reasonably satisfactory to the Company and you, that does not impair
your right to receive any compensation or benefits that you have earned under
this Agreement.
(c) Termination Without Cause Following Change in Control: If your
employment is terminated by the Company without cause and within one year
following any Change in Control (as defined below), you shall receive severance
payments at your final base salary rate, less applicable withholding, for a
period of 12 months. Severance payments will be made on your final day of
employment. The Company will also accelerate the vesting of any unvested stock
options previously granted to you as outlined in the Company option plan. You
will also be entitled to receive any compensation and benefits that you earn
under Paragraph 3 through the date of your termination without cause. You will
not be entitled to any pro rated portion of the bonus that you would have earned
under subparagraph 3(b) had you been employed for the entire year in which your
termination occurs. Your right to receive the severance pay and other benefits
described in this subparagraph is conditioned upon your execution and delivery
to the Company of a general release of claims, in form reasonably satisfactory
to the Company and you, that does not impair your right to receive any
compensation or benefits that you have earned under this Agreement. If your
employment is terminated by the Company without cause either within four months
prior to, or more than one year after, any Change in Control, you shall receive
only the compensation and benefits described in subparagraph 5(b).
For purposes of this Agreement, a "Change in Control" of the Company
shall be deemed to have occurred if:
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
other than a trustee or other fiduciary holding securities of the Company under
an employee benefit plan of the Company, becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
3
<PAGE> 4
indirectly, of securities of the Company representing 50% or more of (A) the
outstanding shares of common stock of the Company or (B) the combined voting
power of the Company's then-outstanding securities entitled to vote generally in
the election of directors; or
(ii) the Company (A) is party to a merger or consolidation which
results in the holders of voting securities of the Company outstanding
immediately prior thereto failing to continue to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation, or (B) sells or disposes of all or substantially all of the
Company's assets (or any transaction having similar effect is consummated), or
(C) the individuals constituting the Board immediately prior to such merger,
consolidation, sale or disposition shall cease to constitute at least 50% of the
Board, unless the election of each director who was not a director prior to such
merger, consolidation, sale or disposition was approved by a vote of at least
two-thirds of the directors then in office who were directors prior to such
merger, consolidation, sale or disposition.
6. CONFIDENTIAL AND PROPRIETARY INFORMATION: As a condition of your
employment, you agree to sign the Company's standard form of employee
proprietary information and assignment of inventions agreement.
7. DISPUTE RESOLUTION: In the event of any dispute or claim relating to
or arising out of your employment relationship with the Company, this Agreement,
or the termination of your employment with the Company for any reason
(including, but not limited to, any claims of breach of contract, wrongful
termination or age, disability or other discrimination), you and the Company
agree that all such disputes shall be fully, finally and exclusively resolved by
binding arbitration conducted by the American Arbitration Association ("AAA") in
Orange County, California, pursuant to the AAA's National Rules for the
Resolution of Employment Disputes. You and the Company hereby knowingly and
willingly waive your respective rights to have any such disputes or claims tried
to a judge or jury. Provided, however, that this arbitration provision shall not
apply to any disputes or claims relating to or arising out of the actual or
alleged misuse or misappropriation of the Company's property, including, but not
limited to, its trade secrets or proprietary information. In any arbitration (or
other legal proceeding) commenced to enforce any right arising out of this
Agreement, the prevailing party shall be entitled to recover from the losing
party its attorneys' fees and costs incurred in connection with such proceeding.
8. INTERPRETATION: This Agreement shall be interpreted in accordance
with and governed by the laws of the State of California.
9. ASSIGNMENT. In view of the personal nature of the services to be
performed under this Agreement by you, you cannot assign or transfer any of your
obligations under this Agreement.
10. ENTIRE AGREEMENT: This Agreement and the agreements referred to
above constitute the entire agreement between you and the Company regarding the
terms and conditions of your employment, and they supersede all prior
negotiations, representations or agreements between you and the Company
regarding your employment whether written or oral.
11. MODIFICATION: This Agreement may only be modified or amended by a
supplemental written agreement signed by you and the CEO.
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Doug, we look forward to working with you at NetPartners Internet
Solutions, Inc. Please sign and date this letter on the spaces provided below to
acknowledge your acceptance of the terms of this Agreement.
Sincerely,
NetPartners Internet Solutions, Inc.
By: /s/ John B. Carrington 6/11/99
----------------------------------
John B. Carrington
Chief Executive Officer
I agree to and accept employment with NetPartners Internet Solutions,
Inc. on the terms and conditions set forth in this Agreement
Date: June 11, 1999 /s/ Douglas C. Wride
----------------------------------
Douglas C. Wride
5
<PAGE> 1
EXHIBIT 10.6
LEASE AGREEMENT
(NNN R&D)
BASIC LEASE INFORMATION
<TABLE>
<S> <C>
Lease Date: June 21, 1999
Landlord: Legacy-RECP Sorrento OPCO, LLC,
a Delaware limited liability company
Landlord's Address: c/o Legacy Partners Commercial, Inc.
6480 Weathers Place, Suite 245
San Diego, CA 92121
Tenant: NETPARTNERS INTERNET SOLUTIONS, Inc.,
a Delaware corporation
Tenant's Address: 10240 Sorrento Valley Road, Suite 200
San Diego, CA 92121
Premises: Approximately 41,259 rentable square feet as shown on Exhibit A
Premises Address: 10240 Sorrento Valley road, 1st (Storage Room), 2nd (All) and
3rd (All) Floors,
San Diego, CA 92121
Building [10240]: Approximately 65,217 rentable square feet
Lot (Building's tax parcel): APN 343-130-17
Park [Legacy Creekside]: Approximately 122,172 rentable
square feet
Term: September 1, 1999 ("Commencement Date"), through
August 31, 2002 ("Expiration Date")
Base Rent (P. 3): Fifty-four Thousand Four Hundred Sixty-two Dollars ($54,462.00)
per month
Adjustments to Base Rent: September 1, 2000 to August 31, 2001: $56,640.00 per month
September 1, 2001 to August 31 2002: $58,906.00 per month
Security Deposit (P. 41): Fifty-four thousand Four Hundred Sixty-two Dollars ($54,462.00)
Letter of Credit (P. 4): Two Hundred Seventy-one Thousand Four Hundred Sixty-five Dollars
($271,465.00) as further described in Section 4 of the Lease.
*Tenant's Share of Operating
Expenses (P. 6.1): 63.3% of Building 10240 and 33.8% of the Park
*Tenant's Share of Tax
Expenses (P. 6.2): 33.8% of the Park
*Tenant's Share of Common Area
Utility Costs (P. 7): 33.8% of the Park
*Tenant's Share of Utility
Expenses (P. 7): 63.3% of Building 10240 and 33.8% of the Park
</TABLE>
*The amount of Tenant's Share of the expenses as referenced above shall be
subject to modification as set forth in this Lease.
<TABLE>
<S> <C>
Permitted Uses P. 9: General office, software development and customer support,
but only to the extent permitted by the City of San Diego
and all agencies and governmental authorities having
jurisdiction thereof.
Unreserved One hundred sixty (160) spaces, consisting of one (1) reserved
Parking Spaces: space designated for Tenant's Employee of the Month, and one
hundred fifty-nine (159) non-exclusive and non-designated
spaces.
</TABLE>
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<TABLE>
<S> <C>
Broker (P. 38): CB Richard Ellis for Tenant Colliers International for Landlord
Exhibits: Exhibit A - Premises, Building, Lot and/or Park
Exhibit B - Tenant Improvements
Exhibit C - Rules and Regulations
Exhibit D - Intentionally Omitted
Exhibit E - Hazardous Materials Disclosure Certificate - Example
Exhibit F - Change of Commencement Date - Example
Exhibit G - Tenant's Initial Hazardous Materials Disclosure Certificate
Exhibit H - Sign Criteria
Addenda: Addendum 1: Option to Extend the Lease
Addendum 2: Right of First Refusal
</TABLE>
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
1. Premises......................................................................5
2. Adjustment of Commencement Date; Condition of the Premises....................5
3. Rent..........................................................................5
4. Collateral for Performance of Lease Obligations...............................6
5. Tenant Improvements...........................................................7
6. Additional Rent...............................................................7
7. Utilities....................................................................10
8. Late Charges.................................................................11
9. Use of Premises..............................................................12
10. Alterations and Additions; and Surrender of Premises.........................12
11. Repairs and Maintenance......................................................13
12. Insurance....................................................................14
13. Waiver of Subrogation........................................................15
14. Limitation of Liability and Indemnity........................................15
15. Assignment and Subleasing....................................................16
16. Ad Valorem Taxes.............................................................17
17. Subordination................................................................18
18. Right of Entry...............................................................18
19. Estoppel Certificate.........................................................18
20. Tenant's Default.............................................................19
21. Remedies for Tenant's Default................................................19
22. Holding Over.................................................................21
23. Landlord's Default...........................................................21
24. Parking......................................................................21
25. Sale of Premises.............................................................21
26. Waiver.......................................................................21
27. Casualty Damage..............................................................22
28. Condemnation.................................................................22
29. Environmental Matters/Hazardous Materials....................................22
30. Financial Statements.........................................................25
31. General Provisions...........................................................25
32. Signs........................................................................26
33. Mortgage Protection..........................................................27
34. Quitclaim....................................................................27
35. Modifications of Tenant......................................................27
36. Warranties of Tenant.........................................................27
37. Compliance with Americans with Disabilities Act..............................27
38. Brokerage Commission.........................................................28
39. Quiet Enjoyment..............................................................28
40. Landlord's Ability to Perform Tenant's Unperformed Obligations...............28
41. Security Deposit.............................................................28
42. Satellite Dish...............................................................29
43. Attendant on First Floor of Building.........................................30
</TABLE>
3
<PAGE> 4
LEASE AGREEMENT
Date: This Lease is made and entered into as of the Lease Date set forth on
Page 1. The Basic Lease Information set forth on Page 1 and this Lease
are and shall be construed as a single instrument.
1. PREMISES
Landlord hereby leases the Premises to Tenant upon the terms and
conditions contained herein. Landlord hereby grants to Tenant a license for the
right to use, on a non-exclusive basis, parking areas and ancillary facilities
located within the Common Areas of the Park, subject to the terms of this Lease.
Landlord and Tenant hereby agree that for purposes of this Lease, as of the
Lease Date, the rentable square footage area of the Premises, the Building, the
Lot and the Park shall be deemed to be the number of rentable square feet as set
forth in the Basic Lease Information on Page 1. Tenant hereby acknowledges that
the rentable square footage of the Premises may include a proportionate share of
certain areas used in common by all occupants of the Building and/or the Park
(for example an electrical room or telephone room). Tenant further agrees that
the number of rentable square feet of the Building, the Lot and the Park may
subsequently change after the Lease Date commensurate with any physical
modifications to any of the foregoing by Landlord resulting from condemnation,
casualty, or rehabilitation of the Building, the Lot, or the Park, and Tenant's
Share shall accordingly change.
2. ADJUSTMENT OF COMMENCEMENT DATE; CONDITION OF THE PREMISES
2.1 If Landlord cannot deliver possession of the Premises on the
Commencement Date, Landlord shall not be subject to any liability nor shall the
validity of the Lease be affected; provided, the Lease Term and the obligation
to pay Rent shall commence on the date possession is tendered and the Expiration
Date and the dates for the adjustments to Base Rent shall be extended
commensurately. In the event the commencement date and/or the expiration date of
this Lease is other than the Commencement Date and/or Expiration Date specified
in the Base Lease Information, as the case may be, Landlord and Tenant shall
execute a written amendment to this Lease, substantially in the form of Exhibit
F hereto, wherein the parties shall specify the actual commencement date,
expiration date, the date on which Tenant is to commence paying Rent, and the
dates for the adjustments to Base Rent. The work "Term" whenever used herein
refers to the initial term of this Lease and any extension thereof. By taking
possession of the Premises, Tenant shall be deemed to have accepted the Premises
in good condition and state of repair; however Landlord shall deliver the
Premises with the existing building operating systems including electrical,
mechanical and plumbing systems in good working condition as of the Commencement
Date of the Lease and Tenant shall have a review period of thirty (30) days to
confirm such condition. Tenant hereby acknowledges and agrees that neither
Landlord nor Landlord's agents or representatives has made any representations
or warranties as to the suitability, safety or fitness of the Premises for the
conduct of Tenant's business, Tenant's intended use of the Premises or for any
other purpose.
2.2 Landlord shall permit Tenant to access the Premises for the sole
purposes of installing telephone and computer wiring and systems, and installing
cubicles on August 1, 1999 (prior to the Commencement Date) and such access
shall be at Tenant's sole risk and subject to all provisions of this Lease,
including, but not limited to, the requirement to pay the Security Deposit and
deliver to Landlord the Letter of Credit, and to obtain the insurance required
pursuant to this Lease and to delivery insurance certificates as required
herein. In addition to the foregoing, Landlord shall have the right to impose
such additional reasonable conditions on Tenant's early entry as Landlord shall
deem appropriate. Tenant shall not be reasonable for paying Base Rent or
Tenant's Share of Operating Expenses, Tax Expenses, Common Area Utility Costs,
or Utility Expenses during such early access period. However, if, at any time,
Tenant is in default of any term, condition or provision of this Lease, any such
waiver by Landlord of Tenant's requirement to pay rental payments shall be null
and void and Tenant shall immediately pay to Landlord all rental payments so
waived by Landlord.
3. RENT
On the date that Tenant executes this Lease, Tenant shall deliver to
Landlord the original executed Lease, the Base Rent (which shall be applied
against the Rent payable for the first month Tenant is required to pay Base
4
<PAGE> 5
Rent), the Security Deposit, and all insurance certificates evidencing the
insurance required to be obtained by Tenant under Section 12 of this Lease.
Tenant agrees to pay Landlord, without prior notice or demand, or abatement,
offset, deduction or claim, the Base Rent specified in the Basic Lease
Information, payable in advance at Landlord's address specified in the Basic
Lease Information on the Commencement Date and thereafter on the first (1st) day
of each month throughout the balance of the Term of the Lease. In addition to
the Base Rent set forth in the Basic Lease Information, Tenant shall pay
Landlord in advance on the Commencement Date and thereafter on the first (1st)
day of each month throughout the balance of the Term of this Lease, as
Additional Rent, Tenant's Share of Operating Expenses, Tax Expenses, Common Area
Utility Costs, and Utility Expenses. Tenant shall also pay to Landlord as
Additional Rent hereunder, within ten (10) days after receipt of Landlord's
written demand therefor, any and all costs and expenses incurred by Landlord to
enforce the provisions of this Lease, including, but not limited to, costs
associated with the delivery of notices, delivery and recordation of notice(s)
of default, attorneys' fees, expert fees, court costs and filing fees
(collectively, the "Enforcement Expenses"). The term "Rent" whenever used herein
refers to the aggregate of all these amounts. If Landlord permits Tenant to
occupy the Premises without requiring Tenant to pay rental payments for a period
of time, the waiver of the requirement to pay rental payments shall only apply
to waiver of the Base Rent and Tenant shall otherwise perform all other
obligations of Tenant required hereunder, except Tenant shall not be responsible
for paying Tenant's Share of Operating Expenses, Tax Expenses, Common Area
Utility Costs, or Utility Expenses during the early access period described in
Section 2.2 above. The Rent for any fractional part of a calendar month at the
commencement or termination of the Lease term shall be a prorated amount of the
Rent for a full calendar month based upon a thirty (30) day month. The prorated
Rent shall be paid on the Commencement Date and the first day of the calendar
month in which the date of termination occurs, as the case may be.
4. COLLATERAL FOR PERFORMANCE OF LEASE OBLIGATIONS
Prior to Tenant's early access under Section 2.2, Tenant shall deliver
to Landlord, as collateral for the full and faithful performance by Tenant of
all of its obligations under this Lease and for all losses and damages Landlord
may suffer as a result of any default by Tenant under this Lease, an irrevocable
and unconditional negotiable letter of credit, in the form and containing the
terms required herein, payable in the City of San Diego, California running in
favor of Landlord issued by a solvent bank under the supervision of the
Superintendent of Banks of the State of California, or a National Banking
Association, in the original amount of Two Hundred Seventy-one Thousand Four
Hundred Sixty-five Dollars ($271,465,000) (the "Letter of Credit"). The Letter
of Credit shall be (a) at sight and irrevocable, (b) except as set forth in this
Section 4, maintained in effect, whether through replacement, renewal or
extension, for the entire Lease Term (the "Letter of Credit Expiration Date")
and Tenant shall delivery a new Letter of Credit or certificate of renewal or
extension to Landlord at least thirty (30) days prior to the expiration of the
Letter of Credit, without any action whatsoever on the part of Landlord, (c)
subject to the Uniform Customs and Practices for Documentary Credits (1993-Rev)
International Chamber of Commence Publication #500, (d) acceptable to Landlord
in its sole discretion, (e) fully assignable by Landlord by amendment thereto in
accordance with customary letter of credit practice, and (f) permit partial
draws. In addition to the foregoing, the form and terms of the Letter of Credit
(and the bank issuing the same) shall be acceptable to Landlord, in Landlord's
reasonable discretion, and shall provide, among other things, in effect that:
(1) Landlord, or its then managing agent, shall have the right to draw down an
amount up to the face amount of the Letter of Credit upon the presentation to
the issuing bank of Landlord's (or Landlord's then managing agent's) statement
that such (A) amount is due to Landlord under the terms and conditions of this
Lease, it being understood that if Landlord or its managing agent by a
corporation, partnership or other entity, then such statement shall be signed by
an officer (if a corporation), a general partner (if a partnership), or any
authorized party (if another entity), and (B) an event of default has occurred
under this Lease and all applicable notice and care periods have elapsed; (2)
the Letter of Credit will be honored by the issuing bank without inquiry as to
the accuracy thereof and regardless of whether the Tenant disputes the content
of such statement; and (3) in the event of a transfer of Landlord's interest in
the Building, Landlord shall transfer the Letter of Credit, in whole or in part
(or cause a substitute letter of credit to be delivered, as applicable), to the
transferee and thereupon the Landlord shall, without any further agreement
between the parties, be released by Tenant from all liability therefor, and it
is agreed that the provisions hereof shall apply to every transfer or assignment
of the whole or any portion of said Letter of Credit to a new Landlord. If, as a
result of any such application of all or any part of the Letter of Credit, the
amount of the Letter of Credit shall be less than Two Hundred Seventy-one
Thousand Four Hundred Sixty-five Dollars ($271,465.00), Tenant shall within five
(5) days thereafter provide Landlord with additional letter(s) of credit in an
amount equal to the deficiency (or a replacement letter of credit in the total
amount of Two Hundred Seventy-one Thousand Four Hundred Sixty-five Dollars
5
<PAGE> 6
($271,465.00) and each such additional (or replacement) letter of credit shall
comply with all of the provisions of this Section 4, and if Tenant fails to do
so, the same shall constitute an incurable default by Tenant. Tenant further
covenants and warrants that it will neither assign nor encumber the Letter of
Credit or any part thereof and that neither Landlord nor its successors or
assigns will be bound by any such assignment, encumbrance, attempted assignment
or attempted encumbrance. Without limiting the generality of the foregoing, if
the Letter of Credit expires earlier than the Letter of Credit Expiration Date,
Landlord will accept a renewal thereof or substitute letter of credit (such
renewal or substitute letter of credit to be in effect not later than twenty
(20) days prior to the expiration thereof), which shall be irrevocable and
automatically renewable as above provided through the Letter of Credit
Expiration Date upon the same terms as the expiring letter of credit or such
other terms as may be acceptable to Landlord in its reasonable discretion.
However, if the Letter of Credit is not timely renewed or a substitute letter of
credit is not timely received, or if Tenant fails to maintain the Letter of
Credit in the amount and terms set forth in this Section 4, Landlord shall have
the right to present such Letter of Credit to the bank in accordance with terms
of this Section 4, and the entire sum evidenced thereby shall be paid to and
held by Landlord as collateral for performance of all Tenant's obligations under
this Lease and for all losses and damages Landlord may suffer as a result of any
default by Tenant under this Lease. If there shall occur a default under this
Lease as set forth in Section 20 of this Lease, Landlord may, but without
obligation to do so, draw upon the Letter of Credit, in part or in whole, to
cure any default of Tenant and/or to compensate Landlord for any all damages of
any kind or nature sustained or which may be sustained by Landlord resulting
from Tenant's default. Tenant agrees not to interfere in any way with payment to
Landlord of the proceeds of the Letter of Credit, either prior to or following a
"draw" by Landlord of any portion of the Letter of Credit, regardless of whether
any dispute exists between Tenant and Landlord as to Landlord's right to draw
from the Letter of Credit. No condition or term of this Lease shall be deemed to
render the Letter of Credit conditional to justify the issuer of the Letter of
Credit in failing to honor a drawing upon such Letter of Credit in a timely
manner. Landlord and Tenant acknowledge and agree that in no event or
circumstance shall the Letter of Credit or any renewal thereof or substitute
therefor be (i) deemed to be or treated as a "security deposit" within the
meaning of California Civil Code Section 1950.7, (ii) subject to the terms of
such Section 1950.7, or (iii) intended to serve as a "security deposit" within
the meaning of such Section 1950.7. The parties hereto (x) recite that the
Letter of Credit is not intended to serve as a security deposit and such Section
1950.7 and any and all other laws, rules and regulations applicable to security
deposits in the commercial context ("Security Deposit Laws") shall have no
applicability or relevancy to the Letter of Credit and (y) waive any and all
rights, duties and obligations either party may now or, in the future, will have
relating to or arising from the expiration of each six (6) month period
thereafter, provided Tenant is not then in default under this Lease, Tenant
shall have the right to reduce the amount of the Letter of Credit by an amount
equal to Fifty-Four Thousand Two Hundred Ninety-Three Dollars ($54,293.00), if
and when Tenant provides to Landlord financial statements in the form required
by Section 30 of this Lease which demonstrate, over the previous three (3)
calendar quarters, that the quotient of the following, on a percentage basis,
equals or exceeds eight percent (8%): Tenant's EBITDA (Earnings Before Interest,
Taxes and Depreciation), divided by Tenant's gross revenues.
5. TENANT IMPROVEMENTS
Tenant hereby accepts the Premises as suitable for Tenant's intended use
and as being in good operating order, condition and repair, "AS IS", except as
specified in Exhibit B attached hereto. Landlord or Tenant, as the case may be,
shall install and construct the Tenant Improvements (as such term is defined in
Exhibit B hereto) in accordance with the terms, conditions, criteria and
provisions set forth in Exhibit B. Landlord and Tenant hereby agree to and shall
be bound by the terms, conditions and provisions of Exhibit B. Tenant
acknowledges and agrees that neither Landlord nor any of Landlord's agents,
representatives or employees has may any representations as to the suitability,
fitness or condition of the Premises for the conduct of Tenant's business or for
any other purpose, including without limitation, any storage incidental thereto.
Any exception to the foregoing provisions must be made by express written
agreement by both parties.
6. ADDITIONAL RENT
It is intended by Landlord and Tenant that this Lease be a "triple net
lease." The costs and expenses described in this Section 6 and all other sums,
charges, costs and expenses specified in this Lease other than Base Rent are to
be paid by Tenant to Landlord as additional rent (collectively, "Additional
Rent").
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6.1 OPERATING EXPENSES: In addition to the Base Rent set forth in
Section 3, Tenant shall pay Tenant's Share, which is specified in the Base Lease
Information, of all Operating Expenses as Additional Rent. The term "Operating
Expenses" as used herein shall mean the total amounts paid or payable by
Landlord in connection with the ownership, maintenance, repair and operation of
the Premises, the Building and the Lot, and where applicable, of the Park
referred to in the Basic Lease Information. The amount of Tenant's Share of
Operating Expenses shall be reviewed from time to time by Landlord and shall be
subject to modification by Landlord if there is a change in the rentable square
footage of the Premises, the Building and/or the Park. These Operating Expenses
may include, but are not limited to:
6.1.1 Landlord's cost of repairs to, and maintenance of, the roof,
the roof membrane and the exterior walls of the Building;
6.1.2 Landlord's cost of maintaining the outside paved area,
landscaping and other common areas for the Park. The term "Common Area" shall
mean all areas and facilities within the Park exclusive of the Promises and the
other portions of the Park leasable exclusively to other tenants. The Common
Areas include, but are not limited to, interior lobbies, mezzanines, parking
areas, access and perimeter roads, sidewalks, landscaped areas and similar areas
and facilities;
6.1.3 Landlord's annual cost of insurance insuring against fire and
extended coverage (including, if Landlord elects, "all risk" or "special
purpose" coverage) and all other insurance, including, but not limited to,
earthquake, flood and/or surface water endorsements for the Building, the Lot
and the Park (including the Common Areas), rental value insurance against loss
of Rent in an amount equal to the amount of Rent for a period of at least six
(6) months commencing on the date of loss, and subject to the provisions of
Section 27 below, any deductible;
6.1.4 Landlord's cost of: (i) modifications and/or new improvements
to the Building, the Common Areas and/or the Park occasioned by any rules, laws
or regulations effective subsequent to the date on which the Building was
originally constructed, but excluding Landlord's cost of modifications and/or
new improvements to the Building, the Common Areas and/or the Park required by
the Americans with Disabilities Act as in effect as of the date of the Lease;
(ii) reasonable necessary replacement improvements to the Building, the Common
Areas and the Park after the Commencement Date; and (iii) new improvements to
the Building, the Common Areas and/or the Park that reduce operating costs or
improve life/safety conditions, all as reasonably determined by Landlord, in its
sole discretion; provided, however, if any of the foregoing are in the nature of
capital improvements, then the cost of such capital improvements shall be
amortized on a straight-line basis over a reasonable period, which shall not be
less than the lesser of fifteen (15) years or the reasonable estimated useful
life of such modifications, new improvements or replacement improvements in
question (at an interest rate as reasonable determined by Landlord), and Tenant
shall pay Tenant's Share of the monthly amortized portion of such costs
(including interest charges) as part of the Operating Expenses herein;
6.1.5 If Landlord reasonably elects to so procure, Landlord's cost
of preventative maintenance, and repair contracts including, but not limited to,
contracts for elevator systems and heating, ventilation and air conditioning
systems, lifts for disabled persons as required by law, and trash or refuse
collection;
6.1.6 Landlord's cost of security and fire protection services for
the Building and/or the Park, as the case may be, if in Landlord's sole
discretion such services are provided;
6.1.7 Intentionally Omitted;
6.1.8 Intentionally Omitted;
6.1.9 Landlord's cost of supplies, equipment, rental equipment and
other similar items used in the operation and/or maintenance of the Park;
6.1.10 Landlord's cost for the repairs and maintenance items set
forth in Section 11.2 below;
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6.1.11 Landlord's cost for the management and administration of the
Premises, the Building and/or Park or any part thereof, including, without
limitation, a property management fee, accounting, auditing, billing, postage,
salaries and benefits for clerical and supervisory employees, whether located on
the Park or off-site, payroll taxes and legal and accounting costs and all fees,
licenses and permits related to the ownership, operation and management of the
Park. Landlord covenants that said costs shall be allocated uniformly throughout
the Park, and shall not be in excess of those costs charged by unaffiliated
third-party management companies in the San Diego area;
6.1.12 In the event Landlord elects, at Landlord's sole discretion,
to employ (or contract with a vendor for) a concierge for the Building (which
concierge shall perform such services for the Building as Landlord shall
reasonably request of such concierge), Landlord's cost of providing such
concierge, including without limitation, vendor charges, salary costs,
employment taxes, health insurance costs and other costs typically incurred in
the employment of personnel; and
6.1.13 Despite anything to the contrary in this Lease, the following
items shall be excluded from the calculation of Operating Expenses, and Tenant
shall not have a responsibility for any portion of the cost thereof:
(a) Cost of repairs or other work occasioned by the exercise of
right of eminent domain;
(b) Leasing considerations, attorneys' fees, costs and
disbursements and other expenses which are incurred in connection with
negotiations or disputes with tenants, other occupants or prospective tenants;
(c) Cost of renovating or otherwise improving or decorating,
painting or redecorating leased space for tenants or other occupants or vacant
tenant space, other than ordinary maintenance provided to all tenants, except in
all Common Areas;
(d) If applicable, Landlord's costs of electricity and other
services sold separately to tenants for which Landlord is entitled to be
reimbursed by such tenants as an additional charge over and above the Base Rent
and Operating Expenses or other rental adjustments payable under the Lease with
such tenant, and domestic water submetered and separately billed to tenants;
(e) Depreciation;
(f) Costs incurred due to violation by Landlord or any tenant of
the terms and conditions of any lease;
(g) Overhead and profit paid to subsidiaries or affiliates of
Landlord for services on or to the Building and/or Premises, to the extent only
that the costs of such services exceed competitive costs for such services were
they not so rendered by a subsidiary or affiliate;
(h) Ground rents, principal payments, or any interest expense on
any loans secured by mortgages placed upon the Building and Lot (or a leasehold
interest therein);
(i) Any compensation paid to clerks, attendants or other persons
in commercial concessions operated by Landlord, except to the extent that such
compensation exceeds the revenue earned from such commercial concession. In such
event, the revenue earned from such commercial concession shall first be applied
to the cost of such compensation;
(j) Any particular items and services for which Tenant otherwise
reimburses Landlord by direct payment over and above Base Rent and Operating
Expenses;
(k) Advertising and promotional expenditures;
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(l) Any fines or penalties incurred due to violations by Landlord
of any governmental law, ordinance, rule or authority;
(m) Any expense for which Landlord is compensated through
proceeds of insurance; and
(n) Expenses in connection with services or other benefits of a
type which Tenant is not entitled to receive under the Lease but which are
provided to another tenant or occupant.
6.2 TAX EXPENSES: In addition to the Base rent set forth in Section 3,
Tenant shall pay its share, which is specified in the Basic Lease Information,
of all real property taxes applicable to the land and improvements included
within the Lot on which the Premises are situated and one hundred percent (100%)
of all personal property taxes now or hereafter assessed or levied against the
Premises or Tenant's personal property. The amount of Tenant's Share of Tax
Expenses shall be reviewed from time to time by Landlord and shall be subject to
modification by Landlord if there is a change in the rentable square footage of
the Premises, the Building and/or the Park. Tenant shall also pay one hundred
percent (100%) of any increase in real property taxes attributable, in
Landlord's reasonable discretion, to any and all alterations, Tenant
Improvements or other improvements of any kind, which are above standard
improvements customarily installed for similar buildings located within the
Building or the Park (as applicable), whatsoever placed in, on or about the
Premises for the benefit of, at the request of, or by assessment (general,
special, supplemental, ordinary or extraordinary), commercial rental tax,
payment under any improvement bond or bonds, license fees, license tax, business
license fee, rental tax, transaction tax, levy, or penalty imposed by authority
having the direct or indirect power of tax (including any city, county, state or
federal government, or any school, agricultural, lighting, drainage or other
improvement district thereof) as against any legal or equitable interest of
Landlord in the Premises, the Building, the Lot or the Park, as against
Landlord's right to rent, or as against Landlord's business of leasing the
Premises or the occupancy of Tenant or any other tax, fee, or excise, however
described, including, but not limited to, any value added tax, or any tax
imposed in substitution (partially or totally) of any tax previously included
within the definition of real property taxes, or any additional tax the nature
of which was previously included within the definition of real property taxes.
The term "Tax Expenses" shall not include any franchise, estate, inheritance,
net income, or excess profits tax imposed upon Landlord.
6.3 PAYMENT OF EXPENSES: Landlord shall reasonably estimate Tenant's
Share of the Operating Expenses and Tax Expenses for the calendar year in which
the Lease commences. Commencing on the Commencement Date, one-twelfth (1/12th)
of this estimated amount shall be paid by Tenant to Landlord, as Additional
Rent, and thereafter on the first (1st) day of each month throughout the
remaining months of such calendar year. Thereafter, Landlord may estimate such
expenses as of the beginning of each calendar year during the Term of this Lease
and Tenant shall pay one-twelfth (1/12th) of such estimated amount as Additional
Rent hereunder on the first (1st) day of each month during such calendar year
and for each ensuing calendar year throughout the Term of this Lease. Tenant's
obligation to pay Tenant's Share of Operating Expenses and Tax Expenses shall
survive the expiration or earlier termination of this Lease.
6.4 ANNUAL RECONCILIATION: By June 30th of each calendar year, or as
soon thereafter as reasonably possible, Landlord shall furnish Tenant with an
accounting of actual Operating Expenses and Tax Expenses. Within thirty (30)
days of Landlord's delivery of such accounting, Tenant shall pay to Landlord the
amount of any underpayment. Notwithstanding the foregoing, failure by Landlord
to give such accounting by such date shall not constitute a waiver by Landlord
of its right to collect any of Tenant's underpayment at any time. Landlord shall
credit the amount of any overpayment by Tenant toward the next estimated monthly
installment(s) falling due, or where the Term of the Lease has expired, refund
the amount of overpayment to Tenant together with such accounting. If the Term
of the Lease expires prior to the annual reconciliation of expenses Landlord
shall have the right to reasonably estimate Tenant's Share of such expenses, and
if Landlord determines that an underpayment is due, Tenant hereby agrees that
Landlord shall be entitled to deduct such underpayment from Tenant's Security
Deposit, provided Landlord delivers such accounting described herein. If
Landlord reasonably determines that an overpayment has been made by Tenant,
Landlord shall refund said overpayment to Tenant as soon a practicable
thereunder. Notwithstanding the foregoing, failure of Landlord to accurately
estimate Tenant's Share of such expenses or to otherwise perform such
reconciliation of expenses, including without limitation, Landlord's failure to
deduct any portion of any underpayment from Tenant's Security Deposit, shall not
constitute a waiver of Landlord's
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right to collect any of Tenant's underpayment at any time during the Term of the
Lease or at any time after the expiration or earlier termination of this Lease.
6.5 AUDIT: After delivery to Landlord of at least twenty (20) days prior
written notice Tenant, at its sole cost and expense through any accountant
designated by it, shall have the right to examine and/or audit the books and
records evidencing such costs and expenses for the previous one (1) calendar
year, during Landlord's reasonable business hours but not more frequently than
once during any calendar year. Any such accounting firm designated by Tenant may
not be compensated on a contingency fee basis. The results of any such audit
(and any negotiations between the parties related thereto) shall be maintained
strictly confidential by Tenant and its accounting firm and shall not be
disclosed, published or otherwise disseminated to any other party other than to
Landlord and its authorized agents. Landlord and Tenant shall use their best
efforts to cooperate in such negotiations and to promptly resolve any
discrepancies between Landlord and Tenant in the accounting of such costs and
expenses.
6.6 AFTER-HOURS HVAC: Landlord shall install at its expense equipment to
enable Tenant to activate and control heating, air conditioning and/or
ventilation to the Premises during all hours which are non-building standard
hours for operation ("After-Hours HVAC"). Heating, air conditioning and/or
ventilation utilized at anytime outside of the hours of 7:00 a.m. to 6:00 p.m.
on Monday through Friday and 8:00 a.m. to 1:00 p.m. on Saturday (including legal
holidays) shall be considered After-Hours HVAC use. Tenant shall pay to Landlord
within ten (10) days of Landlord's written demand therefor, as additional rent
(i) Landlord's actual cost of supplying such After-Hours HVAC, plus (ii) an
amount reasonably determined by Landlord to be the depreciation and ordinary
wear-and-tear of the HVAC system attributable to Tenant's additional usage of
such system, plus an amount equal to fifteen percent (15%) of (i) and (ii) above
as Landlord's administrative fee. As of the date of this Lease, the cost for
After-Hours HVAC use is estimated to be $15.18 per hour, but is subject to
change as reasonably determined by Landlord.
7. UTILITIES
Utility Expenses, Common Area Utility Costs and all other sums or
charges set forth in this Section 7 are considered part of Additional Rent. In
addition to the Base Rent set forth in Section 3 hereof, Tenant shall pay the
cost of all water, sewer use, sewer discharge fees and sewer connection fees,
gas, heat, electricity, refuse pickup, janitorial service, telephone and other
utilities billed or metered separately to the Premises and/or Tenant. Tenant
shall also pay Tenant's Share (as set forth in the Basic Lease Information) of
any assessments or charges for utility or similar purposes included within any
tax bill for the Lot on which the Premises are situated, including, without
limitation, entitlement fees, allocation unit fees, and/or similar fees or
charges, and any penalties related thereto. For any such utility fees or use
charges that are not billed or metered separately to Tenant, including without
limitation, electricity serving the Premises and water and refuse pick up
charges. Tenant shall pay to Landlord, as Additional Rent, without prior notice
or demand, on the Commencement Date and thereafter on the first (1st) day of
each month throughout the balance of the Term of this Lease the amount which is
attributable to Tenant's use of the utilities or similar services, as reasonably
estimated and determined by Landlord based upon factors such as size of the
Premises in relation to the size of the Building and/or Park and intensity of
use of such utilities by Tenant such that Tenant shall pay the portion of such
charges reasonably consistent with Tenant's use of such utilities and similar
services ("Utility Expenses"). If Tenant disputes any such estimate or
determination, then Tenant shall either pay the estimated amount or cause the
Premises to be separately metered at Tenant's sole expense. In addition, Tenant
shall pay to Landlord Tenant's Share of any Common Area utility costs, fees,
charges or expenses ("Common Area Utility Costs"). Tenant shall pay to Landlord
one-twelfth (1/12th) of the estimated amount of Tenant's Share of the Common
Area Utility Costs on the Commencement Date and thereafter on the first (1st)
day of each month throughout the balance of the Term of this Lease and any
reconciliation thereof shall be substantially in the same manner as specified
Section 6.4 above. The amount of Tenant's Share of Common Area Utility Costs
shall be reviewed from time to time by Landlord and shall be subject to
modification by Landlord if there is a change in the rentable square footage of
the Premises, the Building and/or the Park. Tenant acknowledges that the
Premises may become subject to the rationing of utility services or restrictions
on utility use as required by a public utility company, governmental agency or
other similar entity having jurisdiction thereof. Notwithstanding any such
rationing or restrictions on use of any such utility services, Tenant
acknowledges and agrees that its tenancy and occupancy hereunder shall be
subject to such rationing restrictions as may be imposed upon Landlord, Tenant,
the Premises, the Building or the Park, and Tenant shall in no event be excused
or relieved from any covenant or
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obligation to be kept or performed by Tenant by reason of any such rationing or
restrictions. Tenant further agrees to timely and faithfully pay, prior to
delinquency, any amount, tax, charge, surcharge, assessment or imposition
levied, assessed or imposed upon the Premises, or Tenant's use and occupancy
thereof. Notwithstanding anything to the contrary contained herein, if permitted
by applicable Laws, Landlord shall have the right at any time and from time to
time during the Term of this Lease to either contract for service from a
different company or companies (each such company shall be referred to herein as
an "Alternate Service Provider") other than the company or companies presently
providing electricity service for the Building or the Park (the "Electric
Service Provider") or continue to contract for service from the Electric Service
Provider, at Landlord's sole discretion. Tenant hereby agrees to cooperate with
Landlord, the Electric Service Provider, and any Alternate Service Provider at
all times and, as reasonably necessary, shall allow Landlord, the Electric
Service Provider, and any Alternate Service Provider reasonable access to the
Building's electric lines, feeders, risers, wiring, and any other machinery
within the Premises. In the event any of the utility services essential to the
use and occupancy of the Premises shall be interrupted (such that any of such
services shall not be available for Tenant's use and occupancy of the Premises)
for a period in excess of thirty (30) days, such interruption shall not have
been caused in whole or in part by the acts or omissions of Tenant or Tenant's
Representatives, such interruption shall not have been the result of or arise
out of a Casualty or Condemnation contained within the terms of Sections 27 or
28, such interruption shall have had a material and adverse effect on Tenant's
use and occupancy of the Premises and the business interruption insurance
required to be carried by Tenant hereunder shall have been exhausted by such
interruption or such business interruption insurance shall not cover such
utility interruption, Tenant shall receive an abatement of one (1) day of Base
Rent for each day subsequent to the expiration of such thirty (30) day period
that such utility interruption continues and the Term of this Lease shall be
extended by one (1) day for each day of such abatement. Tenant shall not be
entitled to any abatement or to exercise any termination rights based on such
interruption in the event Tenant is in default of this Lease.
8. LATE CHARGES
Any and all sums or charges set forth in this Section 8 are considered
part of Additional Rent. Tenant acknowledges that late payment (the fifth day of
each month or any time thereafter) by Tenant to Landlord of Base Rent, Tenant's
Share of Operating Expenses, Tax Expenses, Common Area Utility Costs, and
Utility Expenses or other sums due hereunder, will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of such costs being extremely
difficult and impracticable to fix. Such costs include, without limitation,
processing and accounting charges, and late charges that may be imposed on
Landlord by the terms of any note secured by any encumbrance against the
Premises, and late charges and penalties due to the late payment of real
property taxes on the Premises. Therefore, if any installment of Rent or any
other sum due from Tenant is not received by Landlord within five (5) days of
when due, Tenant shall promptly pay to Landlord all of the following, as
applicable: (a) an additional sum equal to five percent (5%) of such delinquent
amount plus interest on such delinquent amount at the rate equal to the prime
rate plus three percent (3%) for the time period such payments are delinquent as
a late charge for every month or portion thereof that such sums remain unpaid,
(b) the amount of seventy-five dollars ($75) for each three-day notice prepared
for, or served on, Tenant, (c) the amount of fifty dollars ($50) relating to
checks for which there are not sufficient funds. If Tenant delivers to Landlord
a check for which there are not sufficient funds, Landlord may, at its sole
option, require Tenant to replace such check with a cashier's check for the
amount of such check and all other charges payable hereunder. The parties agree
that this late charge and other charges referenced above represent a fair and
reasonable estimate of the costs that Landlord will incur by reason of late
payment by Tenant. Acceptance of any late charge or other charges shall not
constitute a waiver by Landlord of Tenant's default with respect to the
delinquent amount, nor prevent Landlord from exercising any of the other rights
and remedies available to Landlord for any other breach of Tenant under this
Lease. If a late charge or other charge becomes payable for any three (3)
installments of Rent within any twelve (12) month period, then Landlord, at
Landlord's sole option, can either require the Rent be paid quarterly in
advance, or be paid monthly in advance by cashier's check or by electronic funds
transfer.
9. USE OF PREMISES
9.1 COMPLIANCE WITH LAWS, RECORDED MATTERS, AND RULES AND REGULATIONS:
The Premises are to be used solely for the purposes and uses specified in the
Basic Lease Information and for no other uses or purposes without Landlord's
prior written consent, which consent shall not be unreasonably withheld,
conditioned or delayed so long as the proposed use (i) does not involve the use
of Hazardous Materials other than as expressly permitted
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under the provisions of Section 29 below, (ii) does not require any additional
parking in excess of the parking spaces already licensed to Tenant pursuant to
the provisions of Section 24 of this Lease, and (iii) is compatible and
consistent with the other uses then being made in the Park and in other similar
types of buildings in the vicinity of the Park, as reasonably determined by
Landlord. The use of the Premises by Tenant and its employees, representatives,
agents, invitees, licensees, subtenants, customers or contractors (collectively,
"Tenant's Representatives") shall be subject to, and at all times in compliance
with, (a) any and all applicable laws, ordinances, statutes, orders and
regulations as same exist from time to time (collectively the "Laws"), (b) any
and all documents, matters or instruments, including without limitation, any
declarations of covenants, conditions and restrictions, and any supplements
thereto, each of which has been or hereafter is recorded in any official or
public records with respect to the Premises, the Building, the Lot and/or the
Park, or any portion thereof (collectively, the "Recorded Matters") and (c) any
and all rules and regulations set forth in Exhibit C, attached to and made a
part of this Lease, and any other reasonable rules and regulations promulgated
by Landlord now or hereafter enacted relating to parking and the operation of
the Premises, the Building and the Park (collectively, the "Rules and
Regulations"). Tenant agrees to, and does hereby, assume full and complete
responsibility to ensure that the Premises are adequate to fully meet the needs
and requirements of Tenant's intended operations of its business within the
Premises, and Tenant's use of the Premises and that same are in compliance with
all applicable Laws throughout the Term of this Lease. Additionally, Tenant
shall be solely responsible for the payment of all costs, fees and expenses
associated with any modifications, improvements or alterations to the Premises,
Building, the Common Areas and/or the Park occasioned by the enactment of, or
changes to, any Laws arising from Tenant's particular use of the Premises or
alterations, improvements or additions made to the Premises regardless of when
such Laws became effective.
9.2 PROHIBITION ON USE: Tenant shall not use the Premises or permit
anything to be done in or about the Premises nor keep or bring anything therein
which will in any way conflict with any of the requirements of the Board of Fire
Underwriters or similar body now or hereafter constituted or in any way increase
the existing rate of or affect any policy of fire or other insurance upon the
Building or any of its contents, or cause a cancellation of any insurance
policy. No auctions may be held or otherwise conducted in, on or about the
Premises, the Building, the Lot or the Park without Landlord's written consent
thereto, which consent may be given or withheld in Landlord's sole discretion.
Tenant shall not do or permit anything to be done in or about the Premises which
will in any way obstruct or interfere with the rights of Landlord, other tenants
or occupants of the Building, other buildings in the Park, or other persons or
businesses in the area or injure or annoy or use or allow the Premises to be
used for any unlawful or objectionable purpose, as determined by Landlord, in
its reasonable discretion, for the benefit, quiet enjoyment and use by Landlord
and all other tenants or occupants of the Building or other buildings in the
Park; nor shall Tenant cause, maintain or permit any private or public nuisance
in, on or about the Premises, Building, Park and/or the Common Area including
but not limited to, any offensive odors noises, fumes or vibrations. Tenant
shall not damage or deface or otherwise commit or suffer to be committed any
waste in, upon or about the Premises. Tenant shall not place or store, nor
permit any other person or entity to place or store, any property, equipment,
materials, supplies personal property or other items or goods outside of the
Premises for any period of time. Tenant shall not permit any non-service
animals, including, but not limited to, any household pets, to be brought or
kept in or about the Premises. Tenant shall place no loads upon the floors,
walls, or ceilings in excess of the maximum designed load permitted by the
applicable Uniform Building Code or which may damage the Building or outside
areas; nor place any harmful liquids in the drainage systems; nor dump or store
waste materials, refuse or other such materials, or allow such to remain outside
the Building area, expect for any non-refuse or other such materials, or allow
such to remain outside the Building area, except for any non-hazardous or
non-harmful materials which may be stored in refuse dumpsters or in any enclosed
trash areas provided. Tenant shall honor the terms of all Recorded Matters
relating to the Premises, the Building, the Lot and/or the Park Tenant shall
honor the Rules and Regulations. If Tenant fails to comply with such Laws,
Recorded Matters, Rules and Regulations or the provisions of this Lease,
Landlord shall have the right to collect from Tenant a reasonable sum as a
penalty, in addition to all rights and remedies of Landlord hereunder including,
but not limited to, the payment by Tenant to Landlord of all Enforcement
Expenses and Landlord's costs and expenses, if any, to cure any of such failures
of Tenant, if Landlord, at its sole option, to undertake such cure.
10. ALTERATIONS AND ADDITIONS; AND SURRENDER OF PREMISES
10.1 ALTERATIONS AND ADDITIONS: Tenant shall not install any signs,
fixtures, improvements, nor make or permit any other alterations or additions to
the Premises without the prior written consent of Landlord, which
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consent shall not be unreasonably withheld, conditioned, or delayed. If any such
alteration or addition is expressly permitted by Landlord, Tenant shall deliver
at least fifteen (15) days prior notice to Landlord, from the date Tenant
intends to commence construction, sufficient to enable Landlord to post a Notice
of Non-Responsibility. In all events, Tenant shall obtain all permits or other
governmental approvals prior to commencing any of such work and delivery a copy
of same to Landlord. All alterations and additions shall be installed by a
licensed contractor approved by Landlord, at Tenant's sole expense in compliance
with applicable Laws (including, but not limited to, the ADA as defined herein),
Recorded Matters, and Rules and Regulations. Tenant shall keep the Premises and
the property on which the Premises are situated free from any liens arising out
of any work performed, materials furnished or obligations incurred by or on
behalf of Tenant.
10.2 SURRENDER OF PREMISES: Upon the termination of this Lease, whether
by forfeiture, lapse of time or otherwise, or upon the termination of Tenant's
right to possession of the Premises, Tenant will at once surrender and deliver
up the Premises, together with the fixtures (other than trade fixtures),
additions and improvements which Landlord has notified Tenant, in writing, that
Landlord will require Tenant not to remove, to Landlord in good condition and
repair (including, but not limited to, replacing all light bulbs and ballasts
not in good working condition) and in the condition in which the Premises
existed as of Commencement Date, except for casualty under Section 27 or
reasonable wear and tear. Reasonable wear and tear shall not include any damage
or deterioration to the floors of the Premises arising from the use of forklifts
in, on or about the Premises (including, without limitation, any marks or stains
of any portion of the floors), and any damage or deterioration that would have
been prevented by proper maintenance by Tenant or Tenant otherwise performing
all of its obligations under this Lease. Upon such termination of this Lease,
Tenant shall remove all tenant signage, trade fixtures, furniture, furnishings,
personal property, additions, and other improvements unless Landlord requests,
in writing, that Tenant not remove some or all of such fixtures (other than
trade fixtures), additions or improvements installed by, or on behalf of Tenant
or situated in or about the Premises. By the date which is twenty (20) days
prior to such termination of this Lease, Landlord shall notify Tenant in writing
of those fixtures (other than trade fixtures), alterations, additions and other
improvements which Landlord shall require Tenant not to remove from the
Premises. Tenant shall repair any damage caused by the installation or removal
of such signs, trade fixtures, furniture, furnishings, fixtures, additions and
improvements which are to be removed from the Premises by Tenant hereunder. If
Landlord fails to so notify Tenant at least twenty (20) days prior to such
termination of this Lease, then Tenant shall remove all tenant signage,
alterations, furniture, furnishings, trade fixtures, additions and other
improvements (other than the Tenant Improvements) installed in or about the
Premises by, or on behalf of Tenant. Tenant shall ensure that the removal of
such items and the repair of the Premises will be completed prior to such
termination of this Lease.
11. REPAIRS AND MAINTENANCE
11.1 TENANT'S REPAIRS AND MAINTENANCE OBLIGATIONS: Except for those
portions of the Building to be maintained by Landlord, as provided in Sections
11.2 and 11.3 below, Tenant shall, at Tenant's sole cost and expense, keep and
maintain the Premises in good, clean and safe condition and repair to the
reasonable satisfaction of Landlord including, but not limited to, repairing any
damage caused by Tenant or Tenant's Representatives and replacing any property
so damaged by Tenant or Tenant's Representatives. Without limiting the
generality of the foregoing, Tenant shall be solely responsible for maintaining,
repairing, and replacing (a) all plumbing, electrical wiring and equipment
exclusively serving the Premises, (b) all interior lighting (including, without
limitation, light bulbs and/or ballasts) serving the Premises, (c) all glass,
windows, window frames, window casements, skylights, interior and exterior
doors, door frames and door closers, (d) all tenant signage, (e) security
systems, (f) all partitions, fixtures, equipment, interior painting, and
interior walls contiguous to any portion of the Premises). Tenant shall be
responsible for providing janitorial service for the Premises at its sole cost.
11.2 REIMBURSABLE REPAIRS AND MAINTENANCE OBLIGATIONS: Subject to the
provisions of Sections 6 and 9 of this Lease and except for (i) the obligations
of Tenant set forth in Section 11.1 above, (ii) the obligations of Landlord set
forth in Section 11.3 below, and (iii) the repairs rendered necessary by the
intentional or negligent acts or omissions of Tenant or any of Tenant's
Representatives, Landlord agrees, at Landlord's expense, subject to
reimbursement pursuant to Section 6 above, to keep in good repair all mechanical
systems, heating, ventilation and air conditioning systems exclusively serving
the Premises, sprinkler systems and fire protection systems, the plumbing and
mechanical systems exterior to the Premises, the roof, roof membranes, exterior
walls of the Building, signage (exclusive of tenant signage), and exterior
electrical wiring and equipment, exterior lighting, exterior glass, exterior
doors/entrances and door closers, exterior window casements, exterior painting
of the Building (exclusive of
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the Premises), and underground utility and sewer pipes outside the exterior
walls of the Building. For purposes of this Section 11.2, the term "exterior"
shall mean outside of and not exclusively serving the Premises. Landlord shall
procure and maintain (a) the heating, ventilation and air conditioning systems
preventative maintenance and repair contract(s), and (b) the fire and sprinkler
protection services and preventative maintenance and repair contract(s)
(including, without limitation, monitoring services). Tenant will reimburse
Landlord for the cost thereof in accordance with the provisions of Section 6
above.
11.3 LANDLORD'S REPAIRS AND MAINTENANCE OBLIGATIONS: Except for repairs
rendered necessary by the intentional or negligent acts or omissions of Tenant
or any of Tenant's Representatives, Landlord agrees, at Landlord's sole cost and
expense, to (a) keep in good repair the structural portions of the floors,
foundations and exterior perimeter walls of the Building (exclusive of glass and
exterior doors), and (b) replace the structural portions of the roof of the
Building (excluding the roof membrane) as, and when, Landlord determines such
replacement to be necessary in Landlord's reasonable discretion.
11.4 TENANT'S FAILURE TO PERFORM REPAIRS AND MAINTENANCE OBLIGATIONS:
Except for normal maintenance and repair of the items described above and
subject to Section 42 below, Tenant shall have no right of access to or right to
install any device on the roof of the Building nor make any penetrations of the
roof of the Building without the express prior written consent of Landlord. If
Tenant refuses or neglects to repair and maintain the Premises and the adjacent
areas properly as required herein and to the reasonable satisfaction of
Landlord, Landlord may, but without obligation to do so, at any time after
providing ten (10) days prior written notice of its intent to do so (except in
the event of an emergency, in which case such notice is not required), make such
repairs and/or maintenance without Landlord having any liability to Tenant for
any loss or damage that may accrue to Tenant's merchandise, fixtures or other
property, or to Tenant's business by reason thereof, except to the extent any
damage is caused by the willful misconduct or gross negligence of Landlord or
its authorized agents and representatives. In the event Landlord makes such
repairs and/or maintenance, upon completion thereof Tenant shall pay to
Landlord, as additional rent, the Landlord's costs for making such repairs
and/or maintenance, plus twenty percent (20%) for overhead, upon presentation of
a bill therefor, plus any Enforcement Expenses. The obligations of Tenant
hereunder shall survive the expiration of the Term of this Lease or the earlier
termination thereof. Tenant hereby waives any right to repair at the expense of
Landlord under any applicable Laws now or hereafter in effect respecting the
Premises.
12. INSURANCE
12.1 TYPES OF INSURANCE: Tenant shall maintain in full force and effect
at all times during the Term of this Lease, at Tenant's sole cost and expense,
for the protection of Tenant and Landlord, as their interests may appear,
policies of insurance which afford the following coverages (i) worker's
compensation: statutory limits; (ii) employer's liability, as required by law,
with a minimum limit of $100,000 per employee and $500,000 per occurrence; (iii)
commercial general liability insurance (occurrence form) providing coverage
against any and all claims for bodily injury and property damage occurring in,
or about the Premises arising out of Tenant's and Tenant's Representatives' use
and/or occupancy of the Premises. Such insurance shall include coverage for
blanket contractual liability, fire damage, premises, personal injury, completed
operations, products liability, personal and advertising, and a plate-glass
rider to provide coverage for all glass in, on or about the Premises including,
without limitation, skylights. Such insurance shall have a combined single limit
of not less than One Million Dollars ($1,000,000) per occurrence with a Two
Million Dollar ($2,000,000) aggregate limit and excess/umbrella insurance in the
amount of Two Million Dollars ($2,000,000). If Tenant has other locations which
it owns or leases, the policy shall include an aggregate limit per location
endorsement. If necessary, as reasonably determined by Landlord, Tenant shall
provide for restoration of the aggregate limit; (iv) comprehensive automobile
liability insurance: a combined single limit of not less than $2,000,000 per
occurrence and insuring Tenant against liability for claims arising out of the
ownership, maintenance, or use of any owned, hired or non-owned automobiles; (v)
"all risk" or "special purpose" property insurance, including without
limitation, sprinkler leakage, boiler and machinery comprehensive form, if
applicable, covering damages to or loss of any personal property, trade
fixtures, inventory, fixtures and equipment located in, or about the Premises
and in addition, business interruption of Tenant. Such insurance shall be
written on a replacement cost basis (without deduction for depreciation) in an
amount equal to one hundred percent (100%) of the full replacement value of the
aggregate of the items referred to in this subparagraph (v); and (vi) such other
insurance as Landlord deems necessary and prudent or as may otherwise be
reasonably required by any of Landlord's lenders or joint venture partners.
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12.2 INSURANCE POLICIES: Insurance required to be maintained by Tenant
shall be written by companies (i) licensed to do business in the State o
California, (ii) domiciled in the United States of America, and (iii) having a
"General Policyholders Rating" of at least A:X (or such higher rating as may be
require by a lender having a lien on the Premises) as set forth in the most
current issues of A.M. Best's Rating Guides." Any deductible amounts under any
of the insurance policies required hereunder shall not exceed Five Thousand
Dollars ($5,000). Tenant shall deliver to Landlord certificates of insurance and
true and complete copies of any and all endorsements required herein for all
insurance required to be maintained by Tenant hereunder prior to Tenant's early
access in accordance with Section 2.2. Tenant shall, at least thirty (30) days
prior to expiration of each policy, furnish Landlord with certificates of
renewal or "binders" thereof. Each certificate shall expressly provide that such
policies shall not be cancelable or otherwise subject to modification except
after thirty (30) days prior written notice to the parties named as additional
insureds as required in this Lease (except for cancellation for nonpayment of
premium, in which event cancellation shall not take effect until at least ten
(10) days' notice has been given to Landlord). Tenant shall have the right to
provide insurance coverage which it is obligated to carry pursuant to the terms
of this Lease under a blanket insurance policy, provided such blanket policy
expressly affords coverage for the Premises and for Landlord as required by this
Lease.
12.3 ADDITIONAL INSUREDS AND COVERAGE: Landlord, any property management
company and/or agent of Landlord for the Premises, the Building, the Lot or the
Park, and any lender(s) of Landlord having a lien against the Premises, the
Building, the Lot or the Park shall be named as additional insureds under all of
the policies required in Section 12.1 (iii) above, but only if Landlord provides
notice expressly requesting such entities to be named as additional insureds.
Additionally, such policies shall provide for severability of interest. All
insurance to be maintained by Tenant shall, except for workers' compensation and
employer's liability insurance, be primary, without right of contribution from
insurance maintained by Landlord. Any umbrella/excess liability policy (which
shall be in "following form") shall provide that if the underlying aggregate is
exhausted, the excess coverage will drop down as primary insurance. The limits
of insurance maintained by Tenant shall not limit Tenant's liability under this
Lease. It is the parties' intention that the insurance be procured and
maintained by Tenant as required herein shall provide coverage for any and all
damage or injury arising from or related to Tenant's operations of its business
and/or Tenant's or Tenant's Representatives' use of the Premises and/or any of
the areas within the Park, whether such events occur within the Premises (as
described in Exhibit A hereto) or in any other part of the Park. It is not
contemplated or anticipated by the parties that the aforementioned risks of loss
be borne by Landlord's insurance carriers, rather it is contemplated and
anticipated by Landlord and Tenant that such risks of loss be borne by Tenant's
insurance carriers pursuant to the insurance policies procured and maintained by
Tenant as required herein.
13. WAIVER OF SUBROGATION
Landlord and Tenant hereby mutually waive their respective rights of
recovery against each other for any loss of, or damage to, either parties'
property to the extent that such loss or damage is insured by an insurance
policy required to be in effect at the time of such loss or damage. Each party
shall obtain any special endorsements, if required by its insurer whereby the
insurer waives its rights of subrogation against the other party. This provision
is intended to waive fully, and for the benefit of the parties hereto, any
rights and/or claims which might give rise to a right of subrogation in favor of
any insurance carrier. The coverage obtained by Tenant pursuant to Section 12 of
this Lease shall include, without limitation, a waiver of subrogation
endorsement attached to the certificate of insurance. The provisions of this
Section 13 shall not apply in those instances in which such waiver of
subrogation would invalidate such insurance coverage or would cause either
party's insurance coverage to be voided or otherwise uncollectable.
14. LIMITATION OF LIABILITY AND INDEMNITY
Except to the extent of damage resulting from the gross negligence or
willful misconduct of Landlord or its authorized representatives, Tenant agrees
to protect, defend (with counsel acceptable to Landlord) and hold Landlord and
Landlord's lenders, partners, members, property management company (if other
than Landlord), agents, directors, officers, employees, representatives,
contractors, shareholders, successors and assigns, and each of their respective
partners, members, directors, employees, representatives, agents, contractors,
shareholders, successors and assigns (collectively, the "Indemnitees") harmless
and indemnify the Indemnitees from and against
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all liabilities, damages, claims, losses, judgments, charges and expenses
(including reasonable attorneys' fees, costs of court and expenses necessary in
the prosecution or defense of any litigation including the enforcement of this
provision) arising from or in any way related to, directly or indirectly, (i)
Tenant's or Tenant's Representatives' use of the Premises, Building and/or Park,
(ii) the conduct of Tenant's business, (iii) from any activity, work or thing
done, permitted or suffered by Tenant in or about the Premises, (iv) in any way
connected with the Premises or with the improvements or personal property
therein, including, but not limited to, any liability for injury to person or
property of Tenant, Tenant's Representatives, or third party persons, and/or (v)
Tenant's failure to perform any covenant or obligation of Tenant under this
Lease. Tenant agrees that the obligations of Tenant herein shall survive the
expiration or earlier termination of this Lease.
Except to the extent of damage resulting from the gross negligence or
willful misconduct of Landlord or its authorized representatives, to the fullest
extent permitted by law, Tenant agrees that neither Landlord nor any of
Landlord's lender(s), partners, members, employees, representatives, legal
representatives, successors or assigns shall at any time or to any extent
whatsoever be liable, responsible or in any way accountable for any loss,
liability, injury, death or damage to persons or property which at time may be
suffered or sustained by Tenant or by any person(s) whomsoever who may at any
time be using, occupying or visiting the Premises, the Building or the Park,
including, but not limited to, any acts, errors or omissions by or on behalf of
any other tenants or occupants of the Building and/or Park. Tenant shall not, in
any event or circumstance, be permitted to offset or otherwise credit against
any payments of Rent required herein for matters which Landlord may be liable
hereunder. Landlord and its authorized representatives shall not be liable for
any interference with light or air, or for any latent defect in the Premises or
the Building.
15. ASSIGNMENT AND SUBLEASING
15.1 PROHIBITION: Tenant shall not assign, mortgage, hypothecate,
encumber, grant any license or concession, pledge or otherwise transfer this
Lease (collectively, "assignment"), in whole or in part whether voluntarily or
involuntarily or by operation of law, nor sublet or permit occupancy by any
person other than Tenant of all or any portion of the Premises without first
obtaining the prior written consent of Landlord, which constant shall not
reasonably be withheld, conditioned or delayed. Tenant hereby agrees that
Landlord may withhold its consent to any proposed sublease or assignment if the
proposed sublessee or assignee or its business is subject to compliance with
additional requirements of the ADA (defined below) and/or Environmental Laws
(defined below) beyond those requirements which are applicable to Tenant, unless
the proposed sublessee or assignee shall (a) first delivery plans and
specifications for complying with such additional requirements and obtain
Landlord's written consent thereto, and (b) comply with all Landlord's
conditions for or contained in such consent, including without limitation,
requirements for security to assure the lien-free completion of such
improvements. If Tenant seeks to sublet or assign all or any portion of the
Premises, Tenant shall deliver to Landlord at least thirty (30) days prior to
the proposed commencement of the sublease or assignment (the "Proposed Effective
Date") the following (i) the name of the proposed assignee or sublessee; (ii)
such information as to such assignee's or sublessee's financial responsibility
and standing as Landlord may reasonably require; and (iii) the aforementioned
plans and specifications, if any. Within ten (10) days after Landlord's receipt
of a written request from Tenant that Tenant seeks to sublet or assign all or
any portion of the Premises, Landlord shall deliver to Tenant a copy of
Landlord's standard form of sublease or assignment agreement (as applicable),
which instrument shall be utilized for each proposed sublease or assignment (as
applicable), and such instrument shall include a provision whereby the assignee
or sublessee assumes all of Tenant's obligations hereunder and agrees to be
bound by the terms hereof. As Additional Rent hereunder, Tenant shall pay to
Landlord a fee in the amount of five hundred dollars ($500) plus Tenant shall
reimburse Landlord for actual reasonable legal and other expenses incurred by
Landlord in connection with any actual or proposed assignment or subletting. In
the event the sublease or assignment (1) by itself or taken together with prior
sublease(s) or partial assignment(s) covers or totals, as the case may be, more
than twenty-five percent (25%) of the rentable square feet of the Premises or
(2) is for a term which by itself or taken together with prior or other
subleases or partial assignments is greater than fifty percent (50%) of the
period remaining in the Term of this Lease as of the time of the Proposed
Effective Date, then Landlord shall have the right to be exercised by giving
written notice to Tenant within thirty (30) days following receipt of Tenant's
notice of proposed assignment or sublease, to recapture the space described in
the sublease or assignment. If such recapture notice is given, it shall serve to
terminate this Lease with respect to the proposed sublease so long as Tenant
delivers such recission notice to Landlord within ten (10) days of Tenant's
receipt of Landlord's recapture notice. However, no termination of this Lease
with respect to part or all of the Premises shall become effective without the
prior written consent, where
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necessary, of the holder of each deed of trust encumbering the Premises or any
party thereof. If this Lease is terminated pursuant to the foregoing with
respect to less then the entire Premises, the Rent shall be adjusted on the
basis of proportion of square feet retained by Tenant to the square feet
originally demised and this Lease as so amended shall continue thereafter in
full force and effect Each permitted assignee or sublessee shall assume and be
deemed to assume this Lease and shall be and remain liable jointly and severally
with Tenant for payment of Rent and for the due performance of, and compliance
with all terms, covenants, conditions and agreements herein contained on
Tenant's part to be performed or complied with for the term of this Lease. No
assignment or subletting shall affect the continuing primary liability of Tenant
(which, following assignment, shall be joint and several with the assignee), and
Tenant shall not be released from performing any of the terms, covenants and
conditions of this Lease. Tenant hereby acknowledges and agrees that it
understands that Landlord's accounting department may process and accept Rent
payments without verifying that such payments are being made by Tenant, a
permitted sublessee or a permitted assignee in accordance with the provisions of
this Lease. Although such payments may be processed and accepted by such
accounting department personnel, any and all actions or omissions by the
personnel of Landlord's accounting department shall not be considered as
acceptance by Landlord of any proposed assignee or sublessee nor shall such
actions or omissions to be deemed to be a substitute for the requirement that
Tenant obtain Landlord's prior written consent to any such subletting or
assignment, and any such actions or omissions by the personnel of Landlord's
accounting department shall not be considered as a voluntary relinquishment by
Landlord of any its rights hereunder nor shall any voluntary relinquishment of
such rights be inferred therefrom. For purposes hereof, in the event Tenant is a
corporation, partnership, joint venture, trust or other entity other than a
natural person, any change in the direct or indirect ownership of Tenant
(whether pursuant to one or more transfers) which results in a change of more
than fifty percent (50%) in the direct or indirect ownership of Tenant shall be
deemed to be an assignment within the meaning of this Section 15 and shall be
subject to all the provisions hereof. Except with respect to any Related Entity
(as defined below), any and all opinions (except for the Option to Extend the
Lease described in Addendum One of this Lease), first rights of refusal, tenant
improvement allowances and other similar rights granted to Tenant in this Lease,
if any, shall not be assignable by Tenant unless expressly authorized in writing
by Landlord.
15.2 EXCESS SUBLEASE RENTAL OR ASSIGNMENT CONSIDERATION: In the vent of
any sublease or assignment of all or any portion of the Premises where the rent
or other consideration provided for in the sublease or assignment either
initially or over the term of the sublease or assignment exceeds the Rent or pro
rata portion of the Rent, as the case may be, for such space reserved in the
Lease, Tenant shall pay the Landlord monthly, as Additional Rent, at the same
time as the monthly installments of Rent are payable hereunder, after deduction
for reasonable attorneys' fees (in an amount not to exceed $2,500) and brokerage
commissions (but without deduction for any Tenant Improvement Costs incurred by
Tenant) fifty percent (50%) of the excess of each such payment of rent or other
consideration in excess of the Rent called for hereunder.
15.3 WAIVER: Notwithstanding any assignment or sublease, or any
indulgences, waivers or extensions of time granted by Landlord to any assignee
or sublessee, or failure by Landlord to take action against any assignee or
sublessee, Tenant waives notice of any default of any assignee or sublessee and
agrees that Landlord may, at its option, proceed against Tenant without having
taken action against or joined such assignee or sublessee, except that Tenant
shall have the benefit of any indulgences, waivers and extensions of time
granted to any such assignee or sublessee.
15.4 RELATED ENTITIES: Notwithstanding anything to the contrary
contained in this Section 15, so long as Tenant delivers to Landlord (1) at
least fifteen (15) business days prior written notice of its intention to assign
or sublease the Premises to any Related Entity, which notice shall set forth the
name of the Related Entity, (2) a copy of the proposed agreement pursuant to
which such assignment or sublease shall be effectuated, and (3) such other
information concerning the Related Entity as Landlord may reasonably require,
including without limitation, information regarding any change in the proposed
use of any portion of the Premises and any financial information with respect to
such Related Entity, and so long as any change in the proposed use of the
subject portion of the Premises is in conformance with the uses permitted to be
made under this Lease and do not involve the use or storage of any Hazardous
Materials (other than nominal amounts of ordinary household cleaners, office
supplies and janitorial supplies which are not regulated by any Environmental
Laws), then Tenant may assign this Lease or sublease any portion of the Premises
to any Related Entity, or in connection with any merger, consolidation or sale
of substantially all of the assets of Tenant, without having to obtain the prior
written consent of Landlord thereto. For purposes of this Lease the term
"Related Entity" shall mean and refer to any corporation or entity which
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controls, is controlled by or is under common control with Tenant, as all of
such terms are customarily used in the industry.
16. AD VALOREM TAXES
Prior to delinquency, Tenant shall pay all taxes and assessments levied
upon trade fixtures, alterations, additions, improvement, inventories and
personal property located and/or installed on or in the Premises by, or on
behalf of, Tenant; and if requested by Landlord, Tenant shall promptly deliver
to Landlord copies of receipts for payment of all such taxes and assessments. To
the extent any such taxes are not separately assessed or billed to Tenant,
Tenant shall pay the amount thereof as invoiced by Landlord.
17. SUBORDINATION
Without the necessity of any additional document being executed by
Tenant for the purpose of effecting a subordination, and at the election of
Landlord or any bona fide mortgagee or deed of trust beneficiary with a lien on
all or any portion of the Premises or any ground lessor with respect to the land
of which the Premises are a part, the rights of Tenant under this Lease and this
Lease shall be subject and subordinate at all times to (i) all ground leases or
underlying leases which may now exist or hereafter be executed affecting the
Building or the land upon which the Building is situated or both, and (ii) the
lien of any mortgage or deed of trust which my now exist or hereafter be
executed in any amount of which the Building, the Lot, ground leases or
underlying leases, or Landlord's interest or estate in any of said items is
specified as security. Notwithstanding the foregoing, Landlord or any such
ground lessor, mortgagee, or any beneficiary shall have the right to subordinate
or cause to be subordinated any such ground leases or underlying leases or any
such liens to this Lease. If any ground lease or underlying lease terminates for
any reason or any mortgage or deed of trust is foreclosed or a conveyance in
lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any
subordination and upon the request of such successor to Landlord, attain to and
become the Tenant of the successor in interest to Landlord, provided such
successor in interest will not disturb Tenant's use, occupancy or quiet
enjoyment of the Premises so long as Tenant is not in default of the terms and
provisions of this Lease. The successor in interest to Landlord following
foreclosure, sale or deed in lieu thereof shall not be (a) liable for any act or
omission of any prior lessor or with respect to events occurring prior to
acquisition of ownership; (b) subject to any offsets or defenses which Tenant
might have against any prior lessor (c) bound by prepayment of more than one (1)
month's Rent, except in those instances when Tenant pays Rent quarterly in
advance pursuant to Section 8 hereof, then not more than three months' Rent; or
(d) liable to Tenant for any Security Deposit not actually received by such
successor in interest to the extent any portion of all of such Security Deposit
has not already been forfeited by, or refunded to, Tenant. Landlord shall be
liable to Tenant for all or any portion of the Security Deposit not forfeited
by, or refunded to Tenant, until and unless Landlord transfers such Security
Deposit to the successor in interest. Tenant covenants and agrees to execute
(and acknowledge if required by Landlord, any lender or ground lessor) and
deliver, within ten (10) days of a demand or request by Landlord and in the
commercially reasonable form requested by Landlord, ground lessor, mortgagee or
beneficiary, any additional documents evidencing the priority or subordination
of this Lease with respect to any such ground leases or underlying leases or the
lien of any such mortgage or deed of trust. Tenant's failure to timely execute
and deliver such additional documents shall, at Landlord's option, constitute a
material default hereunder. It is further agreed that Tenant shall be liable to
Landlord, and shall indemnify Landlord from and against any loss, cost, damage
or expense, incidental, consequential, or otherwise, arising or accruing
directly or indirectly, from any failure of Tenant to execute or deliver to
Landlord any such additional documents, together with any and all Enforcement
Expenses.
Tenant's agreement to subordinate this Lease to any future ground or
underlying lease or any future deed of trust or mortgage pursuant to the
foregoing provisions of this Section 17 is conditioned upon Landlord delivering
to Tenant from the Lessor under such future ground or underlying lease or the
holder of any such deed of trust, a non-disturbance agreement in a commercially
reasonable form agreeing, among other things, that Tenant's right to possession
of the Premises pursuant to the terms and conditions of this Lease shall not be
disturbed provided Tenant is not in default under this Lease beyond the
applicable notice and cure periods hereunder.
18. RIGHT OF ENTRY
Tenant grants Landlord or its agents the right to enter the Premises at
all reasonable times upon one (1) business day notice (except in the event of an
emergency, in which case such notice is not required) for purposes of
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inspection, exhibition, posting or notices, repair or alteration. At Landlord's
option, Landlord shall at all times have and retain a key with which to unlock
all the doors in, upon and about the Premises, excluding Tenant's vaults and
safes. It is further agreed that Landlord shall have the right to use any and
all means Landlord deems necessary to enter the Premises in an emergency.
Landlord shall have the right to place "for rent" or "for lease" signs on the
outside of the Premises, the Building and in the Common Areas. Landlord shall
also have the right to place " for sale" signs on the outside of the Building
and in the Common Areas. Tenant hereby waives any claim from, damages or for any
injury or inconvenience to or interference with Tenant's business, or any other
loss occasioned thereby except for any claim for any of the foregoing arising
out of the sole active gross negligence or willful misconduct of Landlord or its
authorized representatives.
19. ESTOPPEL CERTIFICATE
Tenant shall execute (and acknowledge if required by any lender or
ground lessor) and deliver to Landlord, within ten (10) days after Landlord
provides such to Tenant, a statement in writing certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification), the date to which the Rent and other charges are paid in
advance, if any, acknowledging that there are not, to Tenant's knowledge, any
uncured defaults on the part of Landlord hereunder or specifying such defaults
as are claimed, and such other matters as Landlord may reasonably require. Any
such statement may be conclusively relied upon by Landlord and any prospective
purchaser or encumbrance of the Premises. Tenant's failure to deliver such
statement within such time shall be conclusive upon the Tenant that (a) this
Lease is in full force and effect, without modification except as may be
represented by Landlord; (b) there are no uncured defaults in Landlord's
performance; and (c) not more than one month's Rent has been paid in advance,
except in those instances when Tenant pays Rent quarterly in advance pursuant to
Section 8 hereof, then not more than three month's Rent has been paid in
advance. Failure by Tenant to so deliver such certified estoppel certificate
shall be a material default of the provisions of this Lease. Tenant shall be
liable to Landlord, and shall indemnify Landlord from and against any loss,
cost, damage or expense, incidental, consequential, or otherwise, arising or
accruing directly or indirectly, from any failure of Tenant to execute or
deliver to Landlord any such certified estoppel certificate, together with any
and all Enforcement Expenses.
20. TENANT'S DEFAULT
The occurrence of any one or more of the following events shall, at
Landlord's option, constitute a material default by Tenant of the provisions of
this Lease:
20.1 The abandonment of the Premises by Tenant or, after five (5)
business days written notice to Tenant, the vacation of the Premises by Tenant
which would cause any insurance policy to be invalidated or otherwise lapse.
Tenant agrees to notice and service of notice as provided for in this Lease and
waives any right to any other or further notice or service of notice which
Tenant may have under any statute of law now or hereafter in effect;
20.2 The failure by Tenant to make any payment of Rent, Additional Rent
or any other payment required hereunder with three (3) business days after
Landlord's delivery of written notice to Tenant that said payment is past due.
Tenant agrees that any such written notice delivered by Landlord shall, to the
fullest extent permitted by law, serve as the statutorily required notice under
applicable law. In addition to the foregoing, Tenant agrees to notice and
service of notice as provided for in this Lease;
20.3 The failure by Tenant to observe, perform or comply with any of the
conditions, covenants or provisions of this Lease (except failure to make any
payment of Rent and/or Additional Rent) and such failure is not cured within
fifteen (15) days after notice from Landlord. If such failure is susceptible of
cure but cannot reasonably be cured within the aforementioned time period (if
any), as reasonably determined by Landlord, Tenant shall promptly commence the
cure of such failure and thereafter diligently prosecute such cure to completion
within the time period specified by Landlord in any written notice regarding
such failure as may be delivered to Tenant by Landlord. In no event or
circumstance shall Tenant have more than thirty (30) days to complete any such
cure, unless otherwise expressly agreed to in writing by Landlord (in Landlord's
sole discretion); notwithstanding the foregoing, the failure of Tenant to
deliver the Letter of Credit to Landlord as and when set forth in Section 4 of
this Lease shall constitute a material default hereunder;
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20.4 The making of a general assignment by Tenant for the benefit of
creditors, the filing of a voluntary petition by Tenant or the filing of an
involuntary petition of any of Tenant's creditors seeking the rehabilitation,
liquidation, or reorganization of Tenant under any law relating to bankruptcy,
insolvency or other relief of debtors and, in the case of an involuntary action,
the failure to remove or discharge the same within sixty (60) days of such
filing, the appointment of a receiver or other custodian to take possession of
substantially all of Tenant's assets or this leasehold, Tenant's insolvency or
inability to pay Tenant's debts or failure generally to pay Tenant's debts when
due, any court entering a decree or order directing the winding up or
liquidation of Tenant or of substantially all of Tenant's assets, Tenant taking
any action toward the dissolution or winding up of Tenant's affairs, the
cessation or suspension of Tenant's use of the Premises, or the attachment,
execution or other judicial seizure of substantially all of Tenant's assets or
this leasehold;
20.5 Tenant's use or storage of Hazardous Materials in, on or about the
Premises, the Building, the Lot and/or the Park other than as expressly
permitted by the provisions of Section 29 below which is not cured with five (5)
business days' notice from Landlord; or
20.6 The making of any material misrepresentation or omission by Tenant
in any materials delivered by or on behalf of Tenant to Landlord pursuant to
this Lease.
21. REMEDIES FOR TENANT'S DEFAULT
21.1 LANDLORD'S RIGHTS: In the event of Tenant's material default under
this Lease, Landlord may terminate Tenant's right to possession of the Premises
by any lawful means in which case upon delivery of written notice by Landlord
this Lease shall terminate on the date specified by Landlord in such notice and
Tenant shall immediately surrender possession of the Premises to Landlord. In
addition, the Landlord shall have the immediate right of re-entry whether or not
this Lease is terminated, and if this right of re-entry is exercised following
abandonment of the Premises by Tenant, Landlord may consider any personal
property belonging to Tenant and left on the Premises to also have been
abandoned. No re-entry or taking possession of the Premises by Landlord pursuant
to this Section 21 shall be construed as an election to terminate this Lease
unless a written notice of such intention is given to Tenant. If Landlord relets
the Premises or any portion thereof, (i) Tenant shall be liable immediately to
Landlord for all reasonable costs Landlord incurs in reletting the Premises or
any part thereof, including, without limitation, broker's commissions, expenses
of cleaning, redecorating, and further improving the Premises and other similar
costs (collectively, the "Reletting Costs"), and (ii) the rent received by
Landlord from such reletting shall be applied to the payment of, first, any
indebtedness from Tenant to Landlord other than Base Rent, Operating Expenses,
Tax Expenses, Common Area Utility Costs and Utility Expenses; second, all costs
including maintenance, incurred by Landlord in reletting; and, third, Base Rent,
Operating Expenses, Tax Expenses, Common Area Utility Costs, Utility Expenses,
and all other sums due under this Lease. Any and all of the Reletting Costs
shall be fully chargeable to Tenant and shall not be prorated or otherwise
amortized in relation to any new lease for the Premises or any portion thereof.
After deducting the payments referred to above, any sum remaining from the
rental Landlord received from reletting shall be held by Landlord and applied in
payment of future Rent as Rent becomes due under this Lease. In no event shall
Tenant be entitled to any excess rent received by Landlord. Reletting may be for
a period shorter or longer than the remaining term of this Lease. No act by
Landlord other than giving written notice to Tenant shall terminate this Lease.
Act of maintenance, efforts to relet the Premises or the appointment of a
receiver on Landlord's initiative to protect Landlord's interest under this
Lease shall not constitute a termination of Tenant's right to possession. So
long as this Lease is not terminated, Landlord shall have the right to remedy
any default of Tenant, to maintain or improve the Premises, to cause a receiver
to be appointed to administer the Premises and new or existing subleases and to
add to the Rent payable hereunder all of Landlord's reasonable costs in so
doing, with interest at the maximum rate permitted by law from the date of such
expenditure.
21.2 DAMAGES RECOVERABLE: If Tenant breaches this Lease and abandons the
Premises before the end of the Term, or if Tenant's right to possession is
terminated by Landlord because of a breach or default under this Lease, then in
either such case, Landlord may recover from Tenant all damages suffered by
Landlord as a result of Tenant's failure to perform its obligations hereunder,
including, but not limited to, the cost of any Tenant Improvements constructed
by or on behalf of Tenant pursuant to Exhibit B hereto, the portion of any
broker's or leasing agent's commission incurred with respect to the leasing of
the Premises to Tenant for the balance of the Term of the Lease remaining after
the date on which Tenant is in default of its obligations hereunder, and all
Reletting Costs, and the worth at the time of the award (computed in accordance
with paragraph (3) of Subdivision
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(a) of Section 1951.2 of the California Civil Code) of the amount by which the
Rent then unpaid hereunder for the balance of the Lease Term exceeds the amount
of such loss of Rent for the same period which Tenant proves could be reasonably
avoided by Landlord and in such case, Landlord prior to the award, may relet the
Premises for the purpose of mitigating damages suffered by Landlord because of
Tenant's failure to perform its obligations hereunder; provided, however, that
even though Tenant has abandoned the Premises following such breach, this Lease
shall nevertheless continue in full force and effect for as long as Landlord
does not terminate Tenant's right of possession, and until such termination,
Landlord shall have the remedy described in Section 1951.4 of the California
Civil Code (Landlord may continue this Lease in effect after Tenant's breach and
abandonment and recover Rent as it becomes due, if Tenant has the right to
sublet or assign, subject only to reasonable limitations) and may enforce all
its rights and remedies under this Lease, including the right to recover the
Rent from Tenant as it becomes due hereunder. The "worth at the time of the
award" within the meaning of Subparagraphs (a)(1) and (a)(2) of Section 1951.2
of the California Civil Code shall be computed by allowing interest at the rate
of ten percent (10%) per annum. Tenant waives redemption or relief from
forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or
under any other present or future law, in the event Tenant is evicted or
Landlord takes possession of the Premises by reason of any default of Tenant
hereunder.
21.3 RIGHTS AND REMEDIES CUMULATIVE: The foregoing rights and remedies
of Landlord are not exclusive; they are cumulative in addition to any rights and
remedies now or hereafter existing at law, in equity by statute or otherwise, or
to any equitable remedies Landlord may have, and to any remedies Landlord may
have under bankruptcy laws or laws affecting creditor's rights generally. In
addition to all remedies set forth above, if Tenant materially defaults under
this Lease, any and all Base Rent waived by Landlord under Section 3 above shall
be immediately due and payable to Landlord and all options granted to Tenant
hereunder shall automatically terminate, unless otherwise expressly agreed to in
writing by Landlord.
21.4 WAIVER OF A DEFAULT: The waiver by Landlord of any default of any
provision of this Lease shall not be deemed or construed a waiver of any other
default by Tenant hereunder or of any subsequent default of this Lease, except
for the default specified in the waiver.
22. HOLDING OVER
If Tenant holds possession of the Premises after the expiration of the
Term of this Lease with Landlord's consent, Tenant shall become a tenant from
month-to-month upon the terms and provision of this Lease, provided the monthly
Base Rent during such hold over period shall be 125% of the Base Rent due on the
last month of the Lease Term, payable in advance on or before the first day of
each month. Acceptance by Landlord of the monthly Base Rent without the
additional twenty-five percent (25%) increase of Base Rent shall not be deemed
or construed as a waiver by Landlord of any of its rights to collect the
increased amount of the Base Rent as provided herein at any time. Such
month-to-month tenancy shall not constitute a renewal or extension for any
further term. All options, if any, granted under the terms of this Lease shall
be deemed automatically terminated and be of no force or effect during said
month-to-month tenancy. Tenant shall continue in possession until such tenancy
shall be terminated by either Landlord or Tenant giving written notice of
termination to the other party at least thirty (30) days prior to the effective
date of termination. This paragraph shall not be construed as Landlord's
permission for Tenant to hold over. Acceptance of Base Rent by Landlord
following expiration or termination of this Lease shall not constitute a renewal
of this Lease.
23. LANDLORD'S DEFAULT
Landlord shall not be deemed in breach or default of this Lease unless
Landlord fails within a reasonable time to perform an obligation required to be
performed by Landlord hereunder. For purposes of this provision, a reasonable
time shall not be less than thirty (30) days after receipt by Landlord of
written notice specifying the nature of this obligation Landlord has not
performed; provided, however, that if the nature of Landlord's obligation is
such that more than thirty (30) days, after receipt of written notice, is
reasonably necessary for its performance, then Landlord shall not be in breach
or default of this Lease if performance of such obligation is commenced within
such thirty (30) day period and thereafter diligently pursued to completion. In
providing notice to Landlord hereunder, Tenant shall also comply with any notice
requirements under Section 33 below.
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24. PARKING
Tenant shall have a license to use the number of parking spaces
specified in the Basic Lease Information. Landlord shall exercise reasonable
efforts to insure that such spaces are available to Tenant for its use, but
Landlord shall not be required to enforce Tenant's right to use the same.
25. SALE OF PREMISES
In the event of any sale of Premises by Landlord or the cessation
otherwise of Landlord's interest therein, Landlord shall be and is hereby
released from any and all of its obligations to perform or further perform under
this Lease and from all liability hereunder accruing from or after the date of
such sale; and the purchaser, at such sale or any subsequent sale of the
Premises shall be deemed, without any further agreement between the parties or
their successors in interest or between the parties and any such purchaser, to
have assumed and agreed to carry out any and all of the covenants and
obligations of the Landlord under this Lease. For purposes of this Section 25,
the term "Landlord" means only the owner and/or agent of the owner as such
parties exist as of the date on which Tenant executes this Lease. A ground lease
or similar long term lease by Landlord of the entire Building, of which Premises
are a part, shall be deemed a sale within the meaning of this Section 25. Tenant
agrees to attorn to such new owner provided such new order does not disturb
Tenant's use, occupancy or quiet enjoyment of the Premises so long as Tenant is
not in default of any of the provisions of this Lease.
26. WAIVER
No delay or omission in the exercise of any right or remedy of Landlord
on any default by Tenant shall impair such a right or remedy or be construed as
a waiver. No delay or omission in the exercise of any right or remedy of Tenant
on any default by Landlord shall impair such a right or remedy or be construed
as a waiver. The subsequent acceptance of Rent by Landlord after default by
Tenant of any covenant or term of this Lease shall not be deemed a waiver of
such default, other than a waiver of timely payment for the particular Rent
payment involved, and shall not prevent Landlord from maintaining an unlawful
detainer or other action based on such breach. No payment by Tenant or receipt
by Landlord of a lesser amount than the monthly Rent and other sums due
hereunder shall be deemed to be other than on account of the earliest Rent or
other sums due, nor shall any endorsement or statement on any check or
accompanying any check or payment be deemed an accord and satisfaction; and
Landlord may accept such check or payment without prejudice to Landlord's right
to recover the balance of such Rent or other sum or pursue any other remedy
provided in this Lease. No failure, partial exercise or delay on the part of the
Landlord in exercising any right, power or privilege hereunder shall operate as
a waiver thereof.
27. CASUALTY DAMAGE
If the Premises or any part thereof shall be damaged by fire or other
casualty, Tenant shall give prompt written notice thereof to Landlord. In case
the Building shall be so damaged by fire or other casualty that substantial
alteration or reconstruction of the Building shall, in Landlord's reasonable
opinion, be required (whether or not the Premises shall have been damaged by
such fire or other casualty), Landlord may, at its option, terminate this Lease
by notifying Tenant in writing of such termination within ninety (90) days after
the date of such damage, in which event the Rent shall be abated as of the date
of such damage. If Landlord does not elect to terminate this Lease, and provided
insurance proceeds and any contributions from Tenant, if necessary, are
available to fully repair the damage, Landlord shall within one hundred twenty
(120) days after the date of such damage commence to repair and restore the
Building and shall proceed with reasonable diligence to restore the Building
(except that Landlord shall not be responsible for delays outside its control)
to substantially the same condition in which it was immediately prior to the
happening of the casualty; provided, Landlord shall not be required to rebuild,
repair, or replace any part of Tenant's furniture, furnishings, fixtures and/or
equipment removable by Tenant or any improvements, alterations or additions
installed by or for the benefit of Tenant under the provisions of this Lease.
Landlord shall not in any event be required to spend for such work an amount in
excess of the insurance proceeds (excluding any deductible) and any
contributions from Tenant, if necessary, actually received by Landlord as a
result of the fire or other casualty. Landlord shall not be liable for any
inconvenience or annoyance to Tenant, injury to the business of Tenant, loss of
use of any part of the Premises by the Tenant or loss of Tenant's personal
property resulting in any way from such damage or the repair thereof, except to
the extent caused by Landlord's gross negligence or willful misconduct, and
except that, subject to the provision of the next sentence, Landlord shall allow
Tenant a fair diminution of Rent during the time and to the extent the Premises
are unfit for occupancy. Notwithstanding
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anything to the contrary contained herein, if the Premises or any other portion
of the Building be damaged by fire or other casualty resulting from the
intentional or negligent acts or omissions of Tenant or any of Tenant's
Representatives; (i) the Rent shall not be diminished during the repair of such
damage, (ii) Tenant shall not have any right to terminate this Lease due to the
occurrence of such casualty or damage, and (iii) Tenant shall be liable to
Landlord for the cost and expense of the repair and restoration of all or any
portion of the Building caused thereby (including, without limitation, any
deductible) to the extent such cost and expenses is not covered by insurance
proceeds. In the event the holder of any indebtedness secured by the Premises
requires that the insurance proceeds he applied to such indebtedness, then
Landlord shall have the right to terminate this Lease by delivering written
notice of termination to Tenant within thirty (30) days after the date of notice
to Tenant of any such event, whereupon all rights and obligations shall cease
and terminate hereunder except for those obligations expressly intended to
survive any such termination of this Lease. Except as otherwise provided in this
Section 27, Tenant hereby waives the provisions of Sections 1932(2), 1933(4),
1941 and 1942 of the California Civil Code.
28. CONDEMNATION
If twenty-five percent (25%) or more of the Premises is condemned by
eminent domain, inversely condemned or sold in lieu of condemnation for any
public or quasi-public use or purpose ("Condemned"), then Tenant or Landlord may
terminate this Lease as of the date when physical possession of the Premises is
taken and title vests in such condemning authority, and Rent shall be adjusted
to the date of termination. Tenant shall not because of such condemnation assert
any claim against Landlord or the condemning authority for any compensation
because of such condemnation, and Landlord shall be entitled to receive the
entire amount of any award without deduction for any estate of interest or other
interest of Tenant; provided, however, the foregoing provisions shall not
preclude Tenant, at Tenant's sole cost and expense, from obtaining any separate
award to Tenant for loss of or damage to Tenant's trade fixtures and removable
personal property or for damages for cessation of interruption of Tenant's
business provided such award is separate from Landlord's award and provided
further such separate award neither diminishes nor impairs the award otherwise
payable to Landlord. In addition to the foregoing, Tenant shall be entitled to
seek compensation for the relocation costs recoverable by Tenant pursuant to the
provisions of California Government Code Section 7262. If neither party elects
to terminate this Lease, Landlord shall, if necessary, promptly proceed to
restore the Premises or the Building to substantially its same condition prior
to such partial condemnation, allowing for the reasonable effects of such
partial condemnation, and a proportionate allowance shall be made to Tenant, as
reasonably determined by Landlord, for the Rent corresponding to the time during
which, and to the part of the Premises of which, Tenant is deprived on account
of such partial condemnation and restoration. Landlord shall not be required to
spend funds for restoration in excess of the amount received by Landlord as
compensation awarded.
29. ENVIRONMENTAL MATTERS/HAZARDOUS MATERIALS
29.1 HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE: Prior to executing this
Lease, Tenant has completed, executed and delivered to Landlord Tenant's Initial
Hazardous Materials Disclosure Certificate (the "Initial HazMat Certificate"), a
copy of which is attached hereto as Exhibit G and incorporated herein by this
reference. Tenant covenants, represents and warrants to Landlord that the
information on the Initial HazMat Certificate is true and correct and accurately
describes the use(s) of Hazardous Materials which will be made and/or used on
the Premises by Tenant. Tenant shall commencing with the date which is one year
from the Commencement Date and continuing every year thereafter, complete,
execute, and deliver to Landlord, a Hazardous Materials Disclosure Certificate
("the HazMat Certificate") describing Tenant's present use of Hazardous
Materials on the Premises, and any other reasonably necessary documents as
requested by Landlord. The HazMat Certificate required hereunder shall be in
substantially the form as that which is attached hereto as Exhibit E.
29.2 DEFINITION OF HAZARDOUS MATERIALS: As used in this Lease, the term
Hazardous Materials shall mean and include (a) any hazardous or toxic wastes,
materials or substances, and other pollutants or contaminants, which are or
become regulated by any Environmental Laws; (b) petroleum, petroleum by
products, gasoline, diesel fuel, crude oil or any fraction thereof; (c) asbestos
and asbestos containing material, in any form, whether friable or non-friable;
(d) polychlorinated biphenyls; (e) radioactive materials; (f) lead and
lead-containing materials; (g) any other material, waste or substance displaying
toxic, reactive, ignitable or corrosive characteristics, as all such terms are
used in their broadest sense, and are defined or become defined by any
Environmental Law (defined below); or (h) any materials which cause or threatens
to cause a nuisance upon or waste to any portion of the Premises, the
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Building, the Lot, the Park or any surrounding property; or poses or threatens
to pose a hazard to the health and safety of persons on the Premises or any
surrounding property.
29.3 PROHIBITION; ENVIRONMENTAL LAWS: Tenant shall not be entitled to
use nor store any Hazardous Materials on, in, or about the Premises, the
Building, the Lot and the Park, or any portion of the foregoing, without, in
each instance, obtaining Landlord's prior written consent thereto. If Landlord
consents to any such usage or storage, then Tenant shall be permitted to use
and/or store only those Hazardous Materials that are necessary for Tenant's
business and to the extent disclosed in the HazMat Certificate (and any updates
thereof) and as expressly approved by Landlord in writing, provided that such
usage and storage is only to the extent of the quantities of Hazardous Materials
as specified in the then applicable HazMat Certificate as expressly approved by
Landlord and provided further that such usage and storage is in full compliance
with any and all local, state and federal environmental, health and/or
safety-related laws, statutes, orders, standards, courts' decisions, ordinances,
rules and regulations (as interpreted by judicial and administrative decisions),
decrees, directives, guidelines, permits or permit conditions, currently
existing and as amended, enacted, issued or adopted in the future which are or
become applicable to Tenant or all or any portion of the Premises (collectively,
the "Environmental Laws"). Tenant agrees that any changes to the type and/or
quantities of Hazardous Materials specified in the most recent HazMat
Certificate may be implemented only with the prior written consent of Landlord,
which consent may be given or withheld in Landlord's sole discretion. Tenant
shall not be entitled nor permitted to install any tanks under, on or about the
Premises for the storage of Hazardous Materials without the express written
consent of Landlord, which may be given or withheld in Landlord's sole
discretion. Landlord shall have the right during ordinary business hours during
the Term of this Lease, upon one business day's advance written notice to (I)
inspect the Premises, (ii) conduct tests and investigations to determine whether
Tenant is in compliance with the provisions of this Section 29, and (iii)
request lists of all Hazardous Materials used, stored or otherwise located on,
under or about any portion of the Premises and/or the Common Areas. The cost of
all such inspections, tests and investigations shall be borne solely by Tenant,
if Landlord reasonably determines that Tenant or any Tenant's Representatives
are directly or indirectly responsible in any manner for any contamination
revealed by such inspections, costs and investigations. The aforementioned
rights granted herein to Landlord and its representatives shall not create (a) a
duty on Landlord's part to inspect, test, investigate, monitor or otherwise
observe the Premises or the activities of Tenant and Tenant's Representatives
with respect to Hazardous Materials, including without limitation, Tenant's
operation, use and any remediation related thereto, or (b) liability on the part
of Landlord and its representatives for Tenant's use, storage, disposal or
remediation of Hazardous Materials, it being understood that Tenant shall be
solely responsible for all liability in connection therewith.
29.4 TENANT'S ENVIRONMENTAL OBLIGATIONS: Tenant shall give to Landlord
immediate verbal and follow-up written notice of any spills, releases,
discharges, disposals, emissions, migrations, removals or transportation of
Hazardous Materials on, under or about any portion of the Premises or in any
Common Areas. Tenant, at its sole cost and expense, covenants and warrants to
promptly investigate, clean up, remove, restore and otherwise remediate
(including, without limitation, preparation of any feasibility studies or
reports and the performance of any and all closures) any spill, release,
discharge, disposal, emission, migration or transportation of Hazardous
Materials arising from or related to the intentional or negligent acts or
omissions of Tenant or Tenant's Representatives such that the affected portions
of the Park and any adjacent property are returned to the condition existing
prior to the appearance of such Hazardous Materials. Any such investigation,
clean up, removal, restoration and other remediation shall only be performed
after Tenant has obtained Landlord's prior written consent, which consent shall
not be unreasonably withheld, conditioned or delayed so long as such actions
would not potentially have a material advance long-term or short-term effect on
any portion of the Premises, the Building, the Lot or the Park. Notwithstanding
the foregoing, Tenant shall be entitled to respond immediately to an emergency
without first obtaining Landlord's prior written consent. Tenant, at its sole
cost and expense, shall conduct and perform, or cause to be conducted and
performed, all closures as required by any Environmental Laws or any agencies or
other governmental authorities having jurisdiction thereof. If Tenant fails to
so promptly investigate, clean up, remove, restore, provide closure or otherwise
so remediate, Landlord may, but without obligation to do so, take any and all
steps necessary to rectify the same and Tenant shall promptly reimburse Landlord
upon demand, for all costs and expenses to Landlord of performing investigation,
clean up, removal, restoration, closure and remediation work. All such work
undertaken by Tenant, as required herein, shall be performed in such a manner as
to enable Landlord to make full economic use of the Premises, the Building, the
Lot and the Park after the satisfactory completion of such work.
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29.5 ENVIRONMENTAL INDEMNITY: In addition to Tenant's obligations as set
forth hereinabove, Tenant and Tenant's officers and directors agree to, and
shall, protect, indemnify, defend (with counsel acceptable to Landlord) and hold
Landlord and the other Indemnitees harmless from and against any and all claims,
judgments, damages, penalties, fines, liabilities, losses (including, without
limitation, diminution in value of any portion of the Premises, the Building,
the Lot or the Park, damages for the loss of or restriction on the use of
rentable or usable space, and from any adverse impact of Landlord's marketing of
any space within the Building and/or Park), suits, administrative proceedings
and costs (including, but not limited to, attorneys' and consultant fees and
court costs) arising at any time during or after the Term of this Lease in
connection with or related to, directly or indirectly, the use, presence,
transportation, storage, disposal, migration, removal, spill, release or
discharge of Hazardous Materials on, in or about any portion of the Premises,
the Common Areas, the Building, the Lot or the Park as a result (directly or
indirectly) of the intentional or negligent acts or omissions of Tenant or any
Tenant's Representatives. Neither the written consent of Landlord to the
presence, use or storage of Hazardous Materials in, on, under or about any
portion of the Premises, the Building, the Lot and/or the Park, nor the strict
compliance by Tenant with all Environmental Laws shall excuse Tenant and
Tenant's officers and directors from its obligations of indemnification pursuant
hereto. Tenant shall not be relieved of its indemnification obligations under
the provisions of this Section 29.5 due to Landlord's status as either an
"owner" or "operator" under any Environmental Laws.
29.6 SURVIVAL: Tenant's obligations and liabilities pursuant to the
provisions of this Section 29 shall survive the expiration or earlier
termination of this Lease. If it is determined by Landlord that the condition of
all or any portion of the Premises, the Building, the Lot and/or the Park is not
in compliance with the provision of this Lease with respect to Hazardous
Materials, including without limitation all Environmental Laws at the expiration
or earlier termination of this Lease, then in Landlord's reasonable discretion,
Landlord may require Tenant to hold over possession of the Premises until Tenant
can surrender the Premises to Landlord in the condition in which the Premises
existed as of the Commencement Date and prior to the appearance of such
Hazardous Materials except for reasonable wear and tear, including without
limitation, the conduct or performance of any closures as required by any
Environmental Laws. The burden of proof hereunder shall be upon Tenant. For
purposes hereof, the term "reasonable wear and tear" shall not include any
deterioration in the condition or diminution of the value of any portion of the
Premises, the Building, the Lot and/or the Park in any manner whatsoever related
to directly, or indirectly, Hazardous Materials. Any such holdover by Tenant
will be with Landlord's consent, will not be terminable by Tenant in any event
or circumstances and will otherwise be subject to the provisions of Section 22
of this Lease.
29.7 EXCULPATION OF TENANT: Tenant shall not be liable to Landlord
(either directly or as an Operating Expense) for nor otherwise obligated to
Landlord under any provision of the Lease with respect to the following: (i) any
claim, remediation, obligation, investigation, obligation, liability, cause of
action, attorney's fees, consultants' costs, expense or damage resulting from
any Hazardous Materials present in, on or about the Premises or the Buildings to
the extent not caused or otherwise permitted, directly or indirectly, by Tenant
or Tenant's Representatives; or (ii) the removal, investigations, monitoring or
remediation of any Hazardous Materials present in, or about the Premises or the
Building caused by any source, including third parties, other than Tenant or
Tenant's Representatives; provided, however, Tenant shall be fully liable for
and otherwise obligated to Landlord under the provisions of this Lease for all
liabilities, costs, damages, penalties, claims, judgments, expenses (including
without limitation, attorneys' and experts' fees and costs) and losses to the
extent (a) Tenant or any of Tenant's Representatives contributes to the presence
of such Hazardous Materials, or Tenant and/or any of Tenant's Representatives
exacerbates the conditions caused by such Hazardous Materials, or (b) Tenant
and/or Tenant's Representatives allows or permits persons over which Tenant or
any of Tenant's Representatives had control, and/or for which Tenant or any of
Tenant's Representatives are legally responsible for, to cause such Hazardous
Materials to be present in, on, under, through or about any portion of the
Premises, the Common Areas, the Building or the Park, or (c) Tenant and/or any
of Tenant's Representatives does not take all reasonably appropriate actions to
prevent such persons over which Tenant of any of Tenant's Representatives has
control and/or for which Tenant or any of Tenant's Representatives are legally
responsible from causing the presence of Hazardous Materials in, on, under,
through or about any portion of the Premises, the Common Areas, the Building or
the Park.
30. FINANCIAL STATEMENTS
Tenant, for the reliance of Landlord, any lender holding or anticipated
to acquire a lien upon the Premises, the Building or the Park or any
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portion thereof, or any prospective purchaser of the Building or the Park or any
portion thereof, within ten (10) days after Landlord's request therefor, but not
more often than once annually so long as Tenant is not in default of this Lease,
shall deliver to Landlord the then current audited financial statements of
Tenant (including interim periods following the end of the last fiscal year for
which annual statements are available) which statements shall be prepared or
compiled by a certified public accountant and shall present fairly the financial
condition of Tenant at such dates and thus result of its operations and changes
in its financial positions for the periods ended on such dates. If an audited
financial statement has not been prepared, Tenant shall provide Landlord with an
unaudited financial statement and/or such other information, the type and form
of which are acceptable to Landlord in Landlord's reasonable discretion, which
reflects the financial condition of Tenant. If Landlord so requests, Tenant
shall deliver to Landlord an opinion of a certified public accountant, including
a balance sheet and profit and loss statement for the most recent prior year,
all prepared in accordance with generally accepted accounting principles
consistently applied. Any and all options granted to Tenant hereunder shall be
subject to and conditioned upon Landlord's reasonable approval of Tenant's
financial condition at the time of Tenant's exercise of any such option. In the
event Tenant shall remain a privately held company, Landlord shall not disclose
any of Tenant's financial statements without Tenant's consent, which consent
shall not be unreasonably withheld, conditioned or delayed, except Landlord may
disclose such financial statements to its joint venture partners, lenders,
attorneys, accountants, prospective buyers and lenders, agents, employees, and
property manager without Tenant's consent.
31. GENERAL PROVISIONS
31.1 TIME. Time is of the essence in this Lease and with respect to each
and all of its provisions in which performance is a factor.
31.2 SUCCESSORS AND ASSIGNS. The covenants and conditions herein
contained, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
31.3 RECORDATION. Tenant shall not record this Lease or a short form
memorandum hereof with the prior written consent of the Landlord.
31.4 LANDLORD'S PERSONAL LIABILITY. The liability of Landlord (which,
for purposes of this Lease, shall include Landlord and the owner of the Building
if other than Landlord) to Tenant for any default by Landlord under the terms of
this Lease shall be limited to the actual interest of Landlord and its present
or future partners or members in the Premises or the Building and the proceeds
therefrom, and Tenant agrees to look solely to the Premises for satisfaction of
any liability and shall not look to other assets of Landlord nor seek any
recourse against the assets of the individual partners, members, directors,
officers, shareholders, agents or employees of Landlord (including without
limitation, any property management company of Landlord); it being intended that
Landlord and the individual partners, members, directors, officers,
shareholders, agents and employees of Landlord (including without limitation,
any property management company of Landlord) shall not be personally liable in
any manner whatsoever for any judgment or deficiency. The liability of Landlord
under this Lease is limited to its actual period of ownership of title to the
Building, and Landlord shall be automatically released from further performance
under this Lease upon transfer of Landlord's interest in the Premises or the
Building.
31.5 SEPARABILITY. Any provisions of this Lease which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate any other
provisions hereof and such other provision shall remain in full force and
effect.
31.6 CHOICE OF LAW. This Lease shall be governed by, and construed in
accordance with, the laws of the State of California.
31.7 ATTORNEYS' FEES. In the event any dispute between the parties
results in litigation or other proceeding, the prevailing party shall be
reimbursed by the party not prevailing for all reasonable costs and expenses,
including, without limitation, reasonable attorneys' and experts' fees and costs
incurred by the prevailing party in connection with such litigation or other
proceeding, and any appeal thereof. Such costs, expenses and fees shall be
included in and made a part of the judgment recovered by the prevailing party,
if any.
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31.8 ENTIRE AGREEMENT. This Lease supercedes any prior agreements,
representations, negotiations or correspondence between the parties, and
contains the entire agreement of the parties on matters covered. No other
agreement, statement or promise made by any party, that is not in writing and
signed by all parties to this Lease, shall be binding.
31.9 WARRANTY OF AUTHORITY. On the date that each party executes this
Lease, each party shall deliver to the other an original certificate of status
for itself issued by the California Secretary of State or statement of
partnership for itself recorded in the county in which the Premises are located,
as applicable. Each person executing this Lease on behalf of the party
represents and warrants that (1) such person is duly and validly authorized to
do so on behalf of the entity it purports to so bind, and (2) if such party is a
partnership, corporation or trustee, that such partnership, corporation or
trustee has full right and authority to enter into this Lease and perform all of
its obligations hereunder. Tenant hereby warrants that this Lease is valid and
binding upon Tenant and enforceable against Tenant in accordance with its terms.
31.10 NOTICES. Any and all notices and demands required or permitted to
be given hereunder to Landlord shall be in writing and shall be sent: (a) by
United States mail, certified and postage prepaid; or (b) by personal delivery;
or (c) by overnight courier, addressed to Landlord at 101 Lincoln Centre Drive,
Fourth Floor, Foster City, California 94404-1167. Any and all notices and
demands required or permitted to be given hereunder to Tenant shall be in
writing and shall be sent: (i) by United Stated mail, certified and postage
prepaid; or (ii) by personal delivery to any employee or agent of Tenant over
the age of eighteen (18) years; or (ii) by overnight courier, all of which shall
be addressed to Tenant at the Premises. Notice and/or demand shall be deemed
given upon the earlier of actual receipt or the third day following deposit in
the United States mail. Any notice or requirement of service required by any
statute or law now or hereafter in effect, including, but not limited to,
California Code of Civil Procedure Sections 1161, 1161.1, and 1162 (including
any amendments, supplements or substitutions thereof), is hereby waived by
Tenant.
31.11 JOINT AND SEVERAL. If Tenant consists of more than one person or
entity, the obligations of all such persons or entities shall be joint and
several.
31.12 COVENANTS AND CONDITIONS. Each provisions to be performed by
Tenant hereunder shall be deemed to be both a covenant and a condition.
31.13 WAIVER OF JURY TRIAL. The parties hereto shall and they hereby do
waive trial by jury in any action, proceeding or counterclaim brought by either
of the parties hereto against the other on any matters whatsoever arising out of
or in any way related to this Lease, the relationship of Landlord and Tenant,
Tenant's use or occupancy of the Premises, the Building or the Part, and/or any
claim of injury, loss or damage.
31.14 INTENTIONALLY OMITTED.
31.15 UNDERLINING. The use of underlining within the Lease is for
Landlord's reference purposes only and no other meaning or emphasis is intended
by this use, nor should any be inferred.
31.16 MERGER. The voluntary or other surrender of this Lease by Tenant,
the mutual termination or cancellation hereof by Landlord and Tenant, or a
termination of this Lease by Landlord for a material default by Tenant
hereunder, shall not work a merger, and, at the sole option of Landlord, (i)
shall terminate all or any existing subleases or subtenancies, or (ii) may
operate as an assignment to Landlord of any or all of such subleases or
subtenancies. Landlord's election of either or both of the foregoing options
shall be exercised by delivery by Landlord of written notice thereof to Tenant
and all known subtenants under any sublease.
32. SIGNS
All signs and graphics of every kind visible in or from public view of
corridors or the exterior of the Premises shall be subject to Landlord's prior
written approval and shall be subject to any applicable governmental laws,
ordinances, and regulations and in compliance with Landlord's sign criteria as
same may exist from time to time or as set forth in Exhibit H hereto and made a
part hereof. Tenant shall remove all such signs and graphics prior to the
termination of this Lease. Such installations and removals shall be made in a
manner as to avoid damage
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or defacement of the Premises; and Tenant shall repair any damage or defacement,
including without limitation, discoloration caused by such installation or
removal. Landlord shall have the right, at its option, to deduct from the
Security Deposit such sums as are reasonably necessary to remove such signs,
including, but not limited to, the costs and expenses associated with any
repairs necessitated by such removal. Notwithstanding the foregoing, in no event
shall any: (a) neon, flashing or moving sign(s) or (b) signs which shall
interfere with the visibility of any sign, awning, canopy, advertising matter,
or decoration of any kind of any other business or occupant of the Building or
the Park be permitted hereunder. Tenant further agrees to maintain any such
sign, awning, canopy, advertising matter, lettering, decoration or other thing
as may be approved in good condition and repair at all times.
33. MORTGAGEE PROTECTION
Upon any default on the part of Landlord, Tenant will give written
notice by registered or certified mail to any beneficiary of a deed of trust or
mortgagee of a mortgage covering the Premises who has requested such notice and
provided Tenant with notice of their interest together with an address for
receiving notice, and shall offer such beneficiary or mortgagee a reasonable
opportunity to cure the default (which, in no event shall be less than ninety
(90) days nor more than one hundred twenty (120) days), including time to obtain
possession of the Premises by power of sale or a judicial foreclosure, if such
should prove necessary to effect a cure. If such default cannot be cured within
such time period, then such additional time as may be necessary will be given to
such beneficiary or mortgagee to effect such cure so long as such beneficiary or
mortgagee has commenced the cure within the original time period and thereafter
diligently pursues such cure to completion, in which event this Lease shall not
be terminated while such cure is being diligently pursued. Tenant agrees that
each lender to whom this Lease has been assigned by Landlord is an express third
party beneficiary hereof. Tenant shall not make any prepayment of Rent more than
one (1) month in advance without the prior written consent of each such lender,
except if Tenant is required to make quarterly payments of Rent in advance
pursuant to the provisions of Section 8 above. Tenant waives the collection of
any deposit from such lender(s) or any purchaser at a foreclosure sale of such
lender(s)' deed of trust unless the lender(s) or such purchaser shall not
actually received and not refunded the deposit. Tenant agrees to make all
payments under this Lease to the lender with the most senior encumbrance upon
receiving a direction, in writing, to pay said amounts to such lender. Tenant
shall comply with such written direction to pay without determining whether an
event of default exists under such lender's loan to Landlord.
34. QUITCLAIM
Upon any termination of this Lease, Tenant shall, at Landlord's request,
execute, have acknowledged and deliver to Landlord a quitclaim deed of Tenant's
interest in and to the Premises. If Tenant fails to so deliver to Landlord such
a quitclaim deed, Tenant hereby agrees that Landlord shall have the full
authority and right to record such a quitclaim deed signed only by Landlord and
such quitclaim deed shall be deemed conclusive and binding upon Tenant.
35. MODIFICATIONS FOR LENDER
If, in connection with obtaining financing for the Premises or any
portion thereof, Landlord's lender shall request reasonable modification(s) to
this Lease as a condition to such financing, Tenant shall not unreasonably
withhold, delay or defer to consent thereto, provided such modifications do not
materially adversely affect Tenant's rights hereunder or the use, occupancy or
quiet enjoyment of Tenant hereunder.
36. WARRANTIES OF TENANT
Tenant hereby warrants and represents to Landlord, for the express
benefit of Landlord, that Tenant has undertaken a complete and independent
evaluation of the risks inherent in the execution of this Lease and the
operation of the Premises for the use permitted hereby, and that, based upon
said independent evaluation, Tenant has elected to enter into this Lease and
hereby assumes all risks with respect thereto. Tenant hereby further warrants
and represents to Landlord, for the express benefit of Landlord, that in
entering into this Lease, Tenant has not relied upon any statement, fact,
promise or representation (whether express or implied, written or oral) not
specifically set forth herein in writing and that any statement, fact, promise
or representation (whether express or implied, written or oral) made at any time
to Tenant, which is not expressly incorporated herein in writing, is hereby
waived by Tenant.
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37. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Landlord and Tenant hereby agree and acknowledge that the Premises, the
Building and/or the Park may be subject to the requirements of the Americans
with Disabilities Act, a federal law codified at 42 U.S.C. 12101 et seq,
including, but not limited to Title III thereof, all regulations and guidelines
related thereto, together with any and all laws, rules, regulations, ordinances,
codes and statutes now or hereafter enacted by local or state agencies having
jurisdiction thereof, including all requirements of Title 24 of the State of
California, as the same may be in effect on the date of this Lease and may be
hereafter modified, amended or supplemented (collectively, the "ADA"). Any
Tenant Improvements to be constructed hereunder shall be in compliance with the
requirements of the ADA, and all costs incurred for purposes of compliance
therewith shall be a part of and included in the costs of the Tenant
Improvements. Tenant shall be solely responsible for conducting its own
independent investigation of this matter and for ensuring that the design of all
Tenant Improvements strictly comply with all requirement of the ADA. Subject to
reimbursement pursuant to Section 6 of the Lease, if any barrier removal work or
other work is required to the Building, the Common Areas or the Park under the
ADA, then such work shall be the responsibility of Landlord; provided, if such
work is required under the ADA as a result of Tenant's use of the Premises or
any work or alteration made to the Premises by or on behalf Tenant, then such
work shall be performed by Landlord at the sole cost and expense of Tenant.
Except as otherwise expressly provided in this provision, Tenant shall be
responsible at its sole cost and expense for fully and faithfully complying with
all applicable requirements of the ADA, including without limitation, not
discriminating against any disabled persons in the operation of Tenant's
business in or about the Premises, and offering or otherwise providing auxiliary
aids and services as, and when, required by the ADA. Within ten (10) days after
receipt, Landlord and Tenant shall advise the other party in writing, and
provide the other copies of (as applicable), any notices alleging violation of
the ADA relating to any portion of the Premises or the Building; any claims made
or threatened in writing regarding noncompliance with the ADA and relating to
any portion of the Premises or the Building; or any governmental or regulatory
actions or investigations instituted or threatened regarding noncompliance with
the ADA and relating to any portion of the Premises or the Building. Tenant
shall and hereby agrees to protect, defend (with counsel acceptable to Landlord)
and hold Landlord and the other Indemnitees harmless and indemnify the
Indemnitees from and against all liabilities, damages, claims, loses, penalties,
judgments, charges and expenses (including reasonable attorneys' fees, costs of
court and expenses necessary in the prosecution or defense of any litigation
including the enforcement of this provision) arising from or in any way related
to, directly or indirectly, Tenant's or Tenant's Representatives' violation or
alleged violation of the ADA. Tenant agrees that the obligations of Tenant
herein shall survive the expiration or earlier termination of this Lease.
38. BROKERAGE COMMISSION
Landlord and Tenant each represents and warrants for the benefit of the
other that it has had no dealings with any real estate broker, agent or finder
in connection with the Premises and/or the negotiation of this Lease, except for
the Broker(s) (as set forth on Page 1), and that it knows of no other real
estate broker, agent or finder who is or might be entitled to a real estate
broker, agent or finder who is or might be entitled to a real estate brokerage
commission or finder's fee in connection with this Lease or otherwise based upon
contacts between the claimant and Tenant. Each party shall indemnify and hold
harmless the other from and against any and all liabilities or expenses arising
out of claims made for a fee or commission by any real estate broker, agent or
finder in connection with the Premises and this Lease other than Broker(s), if
any, resulting from the actions of the indemnifying party. Any real estate
brokerage commission or finder's fee payable to the Broker(s) in connection with
this Lease shall be paid by Landlord and only be payable and applicable to the
extent of the initial Term of the Lease and to the extent of the Premises as
same exist as of the date on which Tenant executes this Lease. Unless expressly
agreed to in writing by Landlord and Broker(s) no real estate brokerage
commission or finder's fee shall be owed to, or otherwise payable to, the
Broker(s) for any renewals or other extensions of the initial Term of this Lease
or for any additional space leased by Tenant other than the Premises as same
exists as of the date on which Tenant executes this Lease. Tenant further
represents and warrants to Landlord that Tenant will not receive (i) any portion
of any brokerage commission or finder's fee payable to the Broker(s) in
connection with this Lease or (ii) any other form of compensation or incentive
from the Broker(s) with respect to this Lease.
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39. QUIET ENJOYMENT
Landlord covenants with Tenant, upon the paying of Rent and observing
and keeping the covenants, agreements and conditions of this Lease on its part
to be kept, and during the period that Tenant is not otherwise in default of any
of the terms or provisions of this Lease, and subject to the rights of any of
Landlord's lenders, (i) that Tenant shall and may peaceably and quietly hold,
occupy and enjoy the Premises and the Common Areas during the Term of this
Lease; and (ii) neither Landlord, nor any successor or assign of Landlord, shall
disturb Tenant's occupancy or enjoyment of the Premises and the Common Areas.
40. LANDLORD'S ABILITY TO PERFORM TENANT'S UNPERFORMED OBLIGATIONS
Notwithstanding anything to the contrary contained in this Lease, if
Tenant shall fail to perform any of the terms, provision, covenants or
conditions to be performed or complied with by Tenant pursuant to this Lease,
and/or if the failure of Tenant relates to a matter which in Landlord's judgment
reasonably exercised is of an emergency nature and such failure shall remain
uncured for a period of time commensurate with such emergency, then Landlord
may, at Landlord's option without any obligation to do so, and in its sole
discretion as to the necessity therefor, perform any such term, provision,
covenant, or condition, or make any such payment and Landlord by reason of so
doing shall not be liable or responsible for any loss or damage thereby
sustained by Tenant or anyone holding under or through Tenant. If Landlord so
performs any of Tenant's obligations hereunder, the full amount of the cost and
expense entailed or the payment so made or the amount of the loss so sustained
shall immediately be owing by Tenant to Landlord, and Tenant shall promptly pay
to Landlord upon demand, as Additional Rent, the full amount thereof with
interest thereon from the date of payment at the greater of (i) ten percent
(10%) per annum, or (ii) the highest rate permitted by applicable law and
Enforcement Expenses.
41. SECURITY DEPOSIT
Upon Tenant's execution of this Lease, Tenant shall deliver to Landlord,
as a Security Deposit for the performance by Tenant of its obligations under
this Lease, the amount specified in the Basic Lease Information. If Tenant is in
default, Landlord may, but without obligation to do so, use the Security
Deposit, or any portion thereof, to cure the default or to compensate Landlord
for all damages sustained by Landlord resulting from Tenant's default,
including, but not limited to the Enforcement Expenses. Tenant shall,
immediately on demand, pay to Landlord a sum equal to the portion of the
Security Deposit so applied or used so as to replenish the amount of the
Security Deposit held to increase such deposit to the amount initially deposited
with Landlord. As soon as practicable but no later than (30) days after the
termination of this Lease, Landlord shall return the Security Deposit to Tenant,
less such amounts as are reasonably necessary, as determined solely by Landlord,
to remedy Tenant's default(s) hereunder or to otherwise restore the Premises to
a clean and safe condition, reasonable wear and tear excepted. If the cost to
restore the Premises exceeds the amount of the Security Deposit, Tenant shall
promptly deliver to Landlord any and all of such excess sums as reasonably
determined by Landlord. Landlord shall not be required to keep the Security
Deposit separate from other funds, and, unless otherwise required by law, Tenant
shall not be entitled to interest on the Security Deposit. In no event or
circumstance shall Tenant have the right to any use of the Security Deposit and,
specifically, Tenant may not use the Security Deposit as a credit or to
otherwise offset any payments required hereunder, including, but not limited to,
Rent or any portion thereof.
42. SATELLITE DISH
Tenant shall have the right (but only to the extent permitted by the
City of San Diego and all agencies and governmental authorities having
jurisdiction thereof), at Tenant's sole cost and expense, to install and operate
a satellite or microwave dish or dishes and related equipment ("Satellite
Dishes") along with any necessary cables ("Cables") on a portion of the roof of
the Building to be designated by Landlord ("Roof Space") for the Term of the
Lease (the Satellite Dishes and Cables are hereinafter collectively referred to
as the "Equipment"). The location and size of the Equipment shall be subject to
Landlord's approval, not to be unreasonably withheld and which best promotes the
safety, aesthetics and efficiency of the Equipment; provided, all of the
Equipment and any modifications thereto or placement thereof shall (i) be at
Tenant's sole cost and expense, (ii) be contained visually within a roof screen
to be at Tenant's sole cost and expense, (iii) be installed and operated to
Landlord's reasonable specifications, (iv) installed, maintained, operated and
removed in accordance with all Recorded Matters, applicable Laws, and the
provisions of Section 10 of this Lease, and (v) not affect any of the structural
components or any of the systems of the Building. For purposes hereof, the
Equipment shall be construed as part of the Tenant's Property and shall be
removed by the Tenant at the expiration or earlier termination of this Lease.
Landlord shall cooperate
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reasonably with Tenant to modify the roof screen placement (subject to all
applicable Laws and Recorded Matters) if required for signal quality,
reconfiguration due to the installation of any HVAC systems and other reasonable
considerations; provided, the cost of all such modifications shall be solely the
responsibility of the Tenant. All modifications to the Building, including the
Roof Space, if any, shall be approved by the Landlord prior to commencement of
any work with respect to the Equipment. No additional rent shall be paid by
Tenant for use of the Roof Space and operation of the Equipment. The Equipment
shall remain the property of the Tenant and Tenant shall remove the Equipment
upon the expiration or earlier termination of the Lease in accordance with the
provisions of Section 10 of this Lease. Tenant shall restore the Roof Space and
any other portion of the Building affected by the Equipment to its original
condition, excepting ordinary wear and tear and/or damage or destruction due to
fire or other casualty not caused directly or indirectly by Tenant, its agents,
employees, contractors or the Equipment or any part thereof. Notwithstanding
anything to the contrary contained herein, Tenant may not assign, lease, rent,
sublet or otherwise transfer any of its interest in the Roof Space or the
Equipment. Each of the other provisions of this Lease shall be applicable to the
Equipment and the use of the Roof Space by Tenant, including without limitation,
Sections 12 and 14 of this Lease. The Equipment shall comply with all rules and
regulations of the Federal Communications Commission and all other agencies
having jurisdiction thereof. If applicable, Tenant shall provide to the Landlord
a copy of (i) the Federal Communications Commission (or other agency) grant
which has awarded frequencies to Tenant and (ii) a list of Tenant's frequencies.
Anything to the contrary contained herein notwithstanding, if, during the Lease
Term, as such Term may be extended, Landlord, in its reasonable judgment,
believes that the Equipment poses a threat to human health or otherwise may be
an environmental hazard that cannot be remediated or has not been remediated
within ten (10) days after Tenant has been notified thereof, the Tenant shall
immediately cease all operations of the Equipment and Tenant shall remove all of
the Equipment within thirty (30) days thereafter. To the best of Tenant's
knowledge, Tenant represents to Landlord that the Equipment shall not emit or
project any electromagnetic fields which pose a threat to human health or
otherwise may be an environmental hazard. In addition, Tenant shall be solely
responsible for insuring the Equipment and Landlord shall have not
responsibility therefor. Tenant shall indemnify, defend (by counsel reasonably
acceptable to Landlord) and hold harmless Landlord and the other Indemnitees
from and against any and all claims, demands, liabilities, damages, judgments,
losses, penalties, costs and expenses (including reasonable attorneys' fees)
Landlord may suffer or incur arising out of or related to the installation, use,
operation, maintenance, replacement and/or removal of the Equipment or any
portion thereof, including without limitation the cost of repairs and
replacements to the roof of the Building occasioned by the installation,
maintenance, repairs and removal of the Equipment.
43. ATTENDANT ON FIRST FLOOR OF BUILDING
Tenant shall have a non-exclusive license, which license shall be
revocable by Landlord in the event Tenant, or Tenant's Representatives, or the
attendant described below, shall not comply with any of the Provisions set forth
below within ten (10) days after written notice to Tenant, to employ, at
Tenant's sole cost and expense, an attendance for Tenant's operations to be
located on the first (1st) floor of the Building in area designated by Landlord;
provided, (i) any furniture (other than the existing reception desk, which will
be provided and owned by Landlord but maintained by Tenant), fixtures and/or
equipment for such attendant shall be at Tenant's sole cost and expense and
shall not be permanently attached to the Building or floor, (ii) upon revocation
o this license, Tenant shall have the obligation to restore the first (1st)
floor of the Building to its original condition, (iii) such attendant shall not
interfere with Landlord's operation, management, maintenance, marketing and
repair of any portion of the Building and shall work in harmony with any and all
representatives, contractors, subcontractors, employees and agents of Landlord,
(iv) all of the provisions of this Lease shall be applicable to such attendant,
including without limitation, Sections 12 and 14 of this Lease, (v) such
attendant shall (a) not interfere with other tenants' use and occupancy of their
respective premises and (b) use their commercially reasonable efforts to
minimize any disruption and inconvenience to such other tenants occupying the
first floor of the Building, and (vi) Tenant shall be fully and wholly
responsible and liable for any action, omission and/or failure to act of such
attendant and any and all damage, liability, claim, judgment, cost and expense
(collectively, "Claims") incurred as a result of or arising out of the presence,
action, omission and/or failure to act of such attendant and Tenant shall
indemnify, defend and hold Indemnitees harmless from and against all of such
Claims. Landlord and Landlord's agents, representatives, employees, and
contractors shall use their commercially reasonable efforts to work in harmony
with the attendant.
IN WITNESS WHEREOF, this Lease is executed by the parties as of the
Lease Date referenced on Page 1 of this Lease.
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TENANT:
NETPARTNERS INTERNET SOLUTIONS, INC.
A DELAWARE CORPORATION
By: /s/ illegible
--------------------------------
Its: Chairman & CEO
--------------------------------
Date: June 23, 1999
--------------------------------
By: /s/ illegible
--------------------------------
Its: VP Finance
--------------------------------
Date: June 23, 1999
--------------------------------
LANDLORD:
LEGACY-RECP SORRENTO OPCO, LLC
A DELAWARE LIMITED LIABILITY COMPANY
By: Legacy Partners Commercial, Inc.
as Manager and Agent of Landlord
By: /s/ illegible
--------------------------------
Date:
--------------------------------
<PAGE> 33
EXHIBIT A - PREMISES
This exhibit, entitled "Premises", is and shall constitute EXHIBIT A to that
certain Lease Agreement dated June 21, 1999 (the "Lease"), by and between
Legacy-RECP Sorrento OPCO, LLC, a Delaware limited liability company
("Landlord") and NETPARTNERS INTERNET SOLUTIONS, Inc. a Delaware corporation
("Tenant") for the leasing of certain premises at 10240 Sorrento Valley Road,
1st (Storage Room), 2nd (All) and 3rd (All) Floors, San Diego, California (the
"Premises").
The Premises consist of the rentable square footage of space specified in the
Base Lease Information and has the address specified in the Base Lease
Information. The Premises are a part of and are contained in the Building
specified in the Base Lease Information. The cross-hatched area depicts the
Premises within the Building.
[PICTURE]
[PICTURE]
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EXHIBIT A TO ADDENDUM TWO
[PICTURE]
<PAGE> 35
EXHIBIT A
(CONTINUED)
[PICTURE]
[PICTURE]
<PAGE> 36
EXHIBIT B TO LEASE AGREEMENT
TENANT IMPROVEMENTS
This exhibit, entitled "Tenant Improvements", is and shall constitute EXHIBIT B
to that certain Lease Agreement dated June 21, 1999 (the "Lease"), by and
between Legacy-RECP Sorrento OPCO, LLC, a Delaware limited liability company
("Landlord") and NETPARTNERS INTERNET SOLUTIONS, Inc., a Delaware corporation
("Tenant") for the leasing of certain premises located at 10240 Sorrento Valley
Road, 1st (Storage Room), 2nd (All) and 3rd (All) Floors, San Diego, California
(the "Premises"). The terms, conditions and provisions of this EXHIBIT B are
hereby incorporated into and are made a part of the Lease. Any capitalized terms
used herein and not otherwise defined herein shall have the meaning ascribed to
such terms as set forth in the Lease.
1. Tenant Improvements. Subject to the conditions set forth below, Landlord
agrees to construct and install certain improvements ("Tenant Improvements") in
the Building of which the Premises are a part in accordance with the Final
Drawings (defined below) and pursuant to the terms of this EXHIBIT B, in a good
and workman-like manner, using good quality materials.
2. Definition. "Tenant Improvements" as used in this Lease shall include only
those interior portions of the Building which are described below. "Tenant
Improvements" shall specifically not include any alterations, additions or
improvements installed or constructed by Tenant, and any of Tenant's trade
fixtures, equipment, furniture, furnishings, telephone equipment or other
personal property (collectively, "Personal Property"). The Tenant Improvements
shall include any and all interior improvements to be made to the Premises as
specified in the Final Drawings (defined below), as specified and agreed to by
Tenant and Landlord. Tenant identification signage (in accordance with Exhibit
H) shall be considered part of the Tenant Improvements.
3. Tenant's Initial Plans; the Work. Tenant desires Landlord to perform certain
Tenant Improvements in the Premises in substantial accordance with the plan(s)
or scope of work (collectively, the "Initial Plans") prepared by Legacy Partners
C.D.S., Inc., last revised June 23, 1999, a copy of which is attached hereto as
Schedule 1, and made a part hereof. Such work, as shown in the Initial Plans and
as more fully detailed in the Final Drawings (as defined and described in
Section 4 below), shall be hereinafter referred to as the "Work". Not later than
two (2) business days following Landlord's request specifying the needed
information, Tenant and/or Tenant's Representatives shall furnish to Landlord
such additional plans, drawings, specifications and finish details as Landlord
may reasonably request to enable Landlord's architects and engineers, as
applicable, to prepare mechanical, electrical and plumbing plans and to prepare
the Final Drawings, including but not limited to, a final telephone layout and
special electrical connections, if any. All plans, drawings, specifications and
other details describing the Work which have been, or are hereafter, furnished
by or on behalf of Tenant shall be subject to Landlord's approval, which
approval shall not be unreasonably withheld. Landlord shall not be deemed to
have acted unreasonably if it withholds its approval of any plans,
specifications, drawings or other details or of any Change Request (hereafter
defined in Section 11 below) because, in Landlord's reasonable opinion, the work
as described in any such item, or any Change Request, as the case may be: (a) is
likely to adversely affect Building systems, the structure of the Building or
the safety of the Building and/or its occupants; (b) might impair Landlord's
ability to furnish services to Tenant or other tenants in the Building; (c)
would increase the cost of operating the Building or the Park; (d) would violate
any applicable governmental, administrative body's or agencies' laws, rules,
regulations, ordinances, codes or similar requirements (or interpretations
thereof); (e) contains or uses Hazardous Materials; (f) would adversely affect
the appearance of the Building or the Park; (g) might adversely affect another
tenant's premises or such other tenant's use and enjoyment of such premises; (h)
is prohibited by any ground lease affecting the Building, the Lot and/or the
Park, any Recorded Matters or any mortgage, trust deed or other instrument
encumbering the building, the Lot and/or the Park; (i) is likely to be
substantially delayed because of unavailability or shortage of labor or
materials necessary to perform such work or the difficulties or unusual nature
of such work; (j) is not, at a minimum, in accordance with Landlord's Building
Standards (defined below), or (k) would increase the Tenant Improvement Costs
(defined in Section 9 below) by more than ten percent (10%) from the cost
originally estimated and anticipated by the parties. The foregoing reasons,
however, shall not be the only reasons for which Landlord may withhold its
approval, whether or not such other reasons are similar or dissimilar to the
foregoing. Neither the approval by Landlord of the Work or the Initial Plans or
any other plans, specifications, drawings or other items associated with the
Work nor Landlord's performance, supervision or monitoring of the Work shall
constitute any warranty or covenant by Landlord to Tenant of the adequacy of the
design for Tenant's intended use of the Premises. Tenant agrees to, and
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does hereby, assume full and complete responsibility to ensure that the Work and
the Final Drawings are adequate to fully meet the needs and requirements of
Tenant's intended operations of its business within the Premises and Tenant's
use of the Premises.
4. Final Drawings. If necessary for the performance of the Work and to the
extent not already included as part of the Initial Plans attached hereto,
Landlord shall promptly prepare or cause to be prepared final working drawings
and specifications for the Work (the "Final Drawings") based on and consistent
with the Initial Plans and the other plans, specifications, drawings, finish
details or other information furnished by Tenant or Tenant's Representatives to
Landlord and approved by Landlord pursuant to Section 3 above. Tenant shall
cooperate diligently with Landlord and Landlord's architect, engineer and other
representatives and Tenant shall furnish within two (2) days after any request
therefor, all information required by Landlord or Landlord's architect, engineer
or other representatives for completion of the Final Drawings. So long as the
Final Drawings are substantially consistent with the Initial Plans, Tenant shall
approve the Final Drawings within two (2) business days after receipt of same
from Landlord. Landlord and Tenant shall indicate their approval of the Final
Drawings by initialing each sheet of the Final Drawings and delivering to one
another a true and complete copy of such initialed Final Drawings. A true and
complete copy of the approved and initialed Final Drawings shall be attached to
the Lease as EXHIBIT B-1 and shall be made a part thereof. Tenant's failure to
approve or disapprove such Final Drawings within the foregoing three (3)
business day time period, shall be conclusively deemed to be approval of same by
Tenant. If Tenant reasonably disapproves of any matters included in the Final
Drawings because such items are not substantially consistent with the Initial
Plans, Tenant shall, within the aforementioned two (2) business day period,
deliver to Landlord written notice of its disapproval and Tenants shall specify
in such written notice, in sufficient details as Landlord may reasonably
require, the matters disapproved, the reasons for such disapproval, and the
specific changes or revisions necessary to be made to the Final Drawings to
cause such drawings to substantially conform to the Initial Plans. Any
additional costs associated with such requested changes or revisions shall be
paid for solely by Tenant, as the Excess Tenant Improvement Costs (defined in
Section 10 below), in cash upon written demand therefor by Landlord. Any changes
or revisions requested by Tenant must first be approved by Landlord, which
approval shall not be unreasonably withheld, subject to the provisions of
Section 3 above. If Landlord approves such requested changes or revisions,
Landlord shall cause the Final Drawings to be revised accordingly and Landlord
and Tenant shall initial each sheet of the Final Drawings as revised and attach
a true and complete copy thereof to the Lease as EXHIBIT B-1. Landlord and
Tenant hereby covenant to each other to cooperate with each other and to act
reasonably in the preparation and approval of the Final Drawings.
5. Performance of Work. As soon as practicable after Tenant and Landlord initial
and attach to the Lease as EXHIBIT B-1 a true and complete copy of the Final
Drawings, Landlord shall submit the Final Drawings to the governmental
authorities having rights of approval over the Work and shall apply for the
necessary approvals and building permits. Subject to the satisfaction of all
conditions precedent and subsequent to its obligations under this EXHIBIT B, and
further subject to the provisions of Section 10 hereof, as soon as practicable
after Landlord or its representatives have received all necessary approvals and
building permits, Bearing Construction (or other general contractor selected by
Landlord), ("Bearing") will put the Final Drawings out for bid to its licensed,
bonded and insured sub-contractors. If the Tenant Improvement Costs (which
include the bid to be received from Bearing) exceed the Tenant Improvement
Allowance, then, within three (3) business days of Landlord informing Tenant in
writing that the Tenants Improvement Costs exceed the Tenant Improvement
Allowance, Tenant, at its sole option, which must be exercised within such three
(3) business day period, shall have the right to instruct Landlord in writing to
put the Final Drawings out for bid to at least two (2) other licensed, bonded
and insured general contractors chosen by Landlord. The Tenants Improvements
shall be constructed by Bearing or such other general contractor selected by
Landlord (the general contractor which shall construct the Tenant Improvements,
whether Bearing or such other general contractor is hereinafter referred to as
the "General Contractor"), provided, however, Landlord and Tenant acknowledge
and agree that, in the event Landlord bids the Final Drawings to a General
Contractor other than Bearing, it is each party's intention that the lowest
bidder be given substantial (although not determinative) consideration in the
selection of the General Contractor. Landlord shall commence construction, or
cause the commencement of construction by the General Contractor, of the Tenant
Improvements, as soon as practicable after selection of the General Contractor.
Except as hereinafter expressly provided to the contrary, Landlord shall cause
the performance of the Work using (except as may be stated or otherwise shown in
the Final Drawings) building standard materials, quantities and procedures then
in use by Landlord ("Building Standards"). Landlord shall use commercially
reasonable efforts not to unreasonably interfere with Tenant's business
operations at the Premises during any construction undertaken by Landlord on the
first floor of the Building.
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6. Substantial Completion. Landlord and Tenant shall cause the General
Contractor to Substantially Complete (defined below) the Tenant Improvements in
accordance with the Final Drawings by the Commencement Date of the Lease as set
forth in Section 2 of the Lease (the "Completion Date"), subject to delays due
to (a) acts or events beyond its control including, but not limited to, acts of
God, earthquakes, strikes, lockouts, boycotts, casualties, discontinuance of any
utility or other service required for performance of the Work, moratoriums,
governmental agencies and weather, (b) the lack of availability or shortage of
specialized materials used in the construction of the Tenant Improvements, (c)
any matters beyond the control of Landlord, the General Contractor or any
subcontractors, (d) any changes required by the fire department, building and/or
planning department, building inspectors or any other agency having jurisdiction
over the Building, the Work and/or the Tenant Improvements (except to the extent
such changes are directly attributable to Tenant's use or Tenant's specialized
tenant improvements, in which event such delays are considered Tenant Delays)
(the events and matters set forth in Subsections (a), (b), (c) and (d) are
collectively referred to as "Force Majeure Delays"), or (c) any Tenant Delays
(defined in Section 7 below). The Tenant Improvements shall be deemed
substantially complete on the date that the building officials of the applicable
governmental agency(s) issues its temporary or final approval of the
construction of the Tenant Improvements whether in the form of the issuance of a
temporary or final permit, temporary or final certificate of occupancy or the
written approval evidencing its temporary or final inspection on the building
permit(s), or the date on which Tenant first takes occupancy of the Premises,
whichever first occurs ("Substantial Completion", or "Substantially Completed,
or "Substantially Complete"). Both Landlord and Tenant agree that any delay in
the installation of any folding door within the Premises or the door proposed to
be installed at the First Floor lobby stairway shall not be a condition of the
occurrence of Substantial Completion. If the Work is not deemed to be
Substantially Completed on or before the scheduled Completion Date, (i) Landlord
agrees to use reasonable efforts to Substantially Complete the Work as soon as
practicable thereafter, (ii) the Lease shall remain in full force and effect,
(iii) Landlord shall not be deemed to be in breach or default of the Lease or
this EXHIBIT B as a result thereof and Landlord shall have no liability to
Tenant as a result of any delay in occupancy (whether for damages, abatement of
all or any portion of the Rent, or otherwise), and (iv) except in the event of
any Tenant Delays, which will not affect the Commencement Date but will extend
the Completion Date without any penalty or liability to Landlord, and
notwithstanding anything to the contrary contained in the Lease, the
Commencement Date and the Expiration Date of the term of the Lease (as defined
in Section 2 of the Lease) shall be extended commensurately by the amount of
time attributable to such Force Majeure Delays, and Landlord and Tenant shall
execute a written amendment to the Lease evidencing such extensions of time,
substantially in the form of Exhibit F to the Lease. Subject to the provisions
of Section 10.2 of the Lease, the Tenant Improvements shall belong to Landlord
and shall be deemed to be incorporated into the Premises for all purposes of the
Lease, unless Landlord, in writing, indicates otherwise to Tenant.
In the event Landlord is unable to deliver the Premises to Tenant on or
before September 1, 1999 due solely to a Landlord Delay (defined below), then
Tenant shall be entitled to one (1) day's free Base rent for each day after
September 1, 1999 until the Premises are delivered to Tenant; provided, however,
in no event shall Tenant be entitled to receive in excess of forty-five (45)
days of free Base Rent. For example, if Landlord delivers the Premises to Tenant
on October 1, 1999, then Tenant shall not be obligated to pay Base Rent for the
period commencing October 1, 1999 through October 30, 1999. As used herein,
"Landlord Delay" means any delay in the Substantial Completion of the Tenant
Improvements which is due to any act or omission of the Landlord (wrongful,
negligent or otherwise), its agents or contractors (including acts or omissions
while acting as agent or contractor for Tenant). The term Landlord Delay shall
include, but shall not be limited to any: (1) delay in the giving of
authorizations or approvals by Landlord beyond the time periods allowed for such
approvals in this Exhibit B; (2) delay attributable to the acts or failures to
act of Landlord or Landlord's agents or contractors, where such acts or failures
to act actually delay the Substantial Completion of Tenant Improvements; and (3)
delay attributable to the interference of Landlord, its agents or contractors
with the Substantial Completion of Tenant Improvements. No Landlord Delay shall
be deemed to have occurred unless Tenant has given Landlord written notice that
an act or omission by Landlord is about to occur or has occurred which will
cause a delay in construction of the Tenant Improvements, and Landlord has
failed to cure such delay within two (2) business days after Landlord's receipt
of such notice, in which case, the number of days of delay after such notice
shall constitute a Landlord Delay. Landlord shall pay all of the costs and
expenses incurred by Landlord which result from a Landlord Delay.
7. Tenant Delays. There shall be no extension of the scheduled Commencement Date
or Expiration Date of the term of the Lease (as otherwise permissibly extended
in accordance with the provisions of Section 6 above) if
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the Work has not been Substantially Completed by the scheduled Commencement Date
due to any delay attributable to Tenant and/or Tenant's Representatives or
Tenant's intended use of the Premises (collectively, "Tenant Delays"),
including, but not limited to, any of the following described events or
occurrences: (a) delays related to changes made or requested by Tenant to the
Work and/or the Final Drawings; (b) the failure of Tenant to furnish all or any
plans, drawings, specifications, finish details or other information required
under Section 3 and 4 above; (c) the failure of Tenant to comply with the
requirements of Section 10 below; (d) Tenant's requirements for special work or
materials, finishes, or installations other than the building Standards or
Tenant's requirements for special construction or phasing (including, but not
limited to, the door proposed to be installed at the First floor lobby stairway,
and the folding wall proposed for the training room); (e) any changes required
by the fire department, building or planning department, building inspectors or
any other agency having jurisdiction over the Building, the Work and/or the
Tenant Improvements if such changes are directly attributable to Tenant's use or
Tenant's specialized tenant improvements; (f) the performance of any additional
work pursuant to a Change Request (defined below in Section 11) which is
requested by Tenant; (g) the performance of work in or about the Premises by any
person, firm or corporation employed by or on behalf of Tenant, including,
without limitation, any failure to complete or any delay in the completion of
such work; or (h) any and all delays caused by or arising from acts or omissions
of Tenant and/or Tenant's Representatives, in any manner whatsoever, including,
but not limited to, any and all revisions to the Final Drawings. Any delays in
the construction of the Tenant Improvements due to any of the events described
above, shall in no way extend or affect the date on which Tenant is required to
commence paying Rent under the terms of the Lease. It is the intention of the
parties that all of such delays will be considered Tenant Delays for which
Tenant shall be wholly and completely responsible for any and all consequences
related to such delays, including, without limitation, any costs and expenses
attributable to increases in labor or materials.
8. Tenant Improvement Allowance. Landlord and Tenant hereby acknowledge and
agree that the Tenant Improvement Costs (defined in Section 9 below) for the
Tenant Improvements, based upon the Initial Plans approved by Landlord and
Tenant in accordance with the provisions of Section 4 above, are estimated to be
approximately Three Hundred Twenty-nine Thousand Forty-eight Dollars
($329,048.00) (the "Estimated TI Costs"). If the actual Tenant Improvement Costs
varies from this estimate by more than twenty-five percent (25%), then Landlord
may required any of the following, in its sole discretion: (a) changes be made
to the Final Drawings to reduce the cost of the Tenant Improvements and Landlord
may refuse to sign any construction contract or Change Orders to the
construction contract, as the case may be, until such changes are made to the
sole satisfaction of Landlord; (b) Tenant to deposit into a separate escrow
account cash in an amount equal to the Excess Tenant Improvement Costs (defined
in Section 10 below); (c) Tenant to provide Landlord evidence satisfactory to
Landlord, in its sole discretion, that Tenant has adequate financial resources
to pay for the Excess Tenant Improvement Costs, as solely determined by
Landlord; and/or (a) Tenants to pay all of the Excess Tenant Improvement Costs
before Landlord's contribution of the Tenant Improvement Allowance (defined in
Section 10 below); provided, however, in no event or circumstance shall the
Tenant Improvement Costs exceed the maximum amount of Four Hundred Eleven
Thousand Three Hundred Ten Dollars ($411,310.00), which amount is based on the
amount of Ten Dollars ($10.00) per rentable square foot for 41,131 square feet
of the Premises which is to be improved, as described in the Initial Plans.
Subject to the foregoing, Landlord shall provide an allowance for the planning
and construction of the Tenant Improvements for the Work to be performed in the
Premises, as described in the Initial Plans and the Final Drawings, in the
amount of Three Hundred Twenty-nine Thousand Forty-eight Dollars ($329,048.00)
(the "Tenant Improvement Allowance") based upon an allowance of Eight Dollars
($8.00) per rentable square foot for 41,131 square feet of the Premises which is
to be improved, as described in the Initial Plans and the Final Drawings. Tenant
shall not be entitled to any credit, abatement or payment from Landlord in the
event that the amount of the Tenant Improvement Allowance specified above
exceeds the actual Tenant Improvement Costs. The Tenant Improvement Allowance
shall only be used for tenant improvements typically installed by Landlord in
office/R&D buildings. The Tenant Improvement Allowance shall be the maximum
contribution by Landlord for the Tenant Improvement Costs and shall be subject
to the provisions of Section 10 below.
9. Tenant Improvement Costs. The Tenant Improvements' cost ("Tenant Improvement
Costs") shall mean and include any and all costs and expenses of the Work,
including without limitation, all of the following:
(a) All costs of preliminary space planning and final architectural and
engineering plans and specifications (including, without limitation, the scope
of work, all plans and specifications, the Initial Plans and the Final Drawings)
for the Tenant Improvements, and architectural fees, engineering costs and fees,
and other costs associated with completion of said plans;
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(b) All costs of obtaining building permits and other necessary
authorizations and approvals from the City of San Diego and other applicable
jurisdictions;
(c) All costs of interior design and finish schedule plans and
specifications including as-built drawings;
(d) All direct and indirect costs of procuring, constructing and
installing the Tenant Improvements in the Premises, including, but not limited
to, the construction fee for overhead and profit, the cost of all on-site
supervisory and administrative staff, office, equipment and temporary services
rendered by Landlord's consultants and the General Contractor in connection with
construction of the Tenant Improvements, and all labor (including overtime) and
materials constituting the Work;
(e) All fees payable to the General Contractor, architect and
Landlord's engineering firm if they are required by Tenant to redesign any
portion of the Tenant Improvements following Tenant's approval of the Final
Drawings; and
(f) A construction management fee payable to Landlord in the amount of
the following percentages of all direct and indirect costs of procuring,
constructing and installing the Tenant Improvements in the Premises and the
Building; five percent (5%) of the first $200,000; four percent (4%) of the next
$100,000; and three percent (3%) of the remainder;
(g) All costs of design, fabrication, installation, and permitting of
Tenant identification signage, in accordance with Exhibit H.
10. Excess Tenant Improvement Costs. Prior to commencing the Work, Landlord
shall submit to Tenant a written statement of the actual Tenant Improvement
Costs (the "Actual TI Costs") (which shall include the amount of any overtime
projected as necessary to Substantially Complete the Work by the Completion
Date) as then known by Landlord, and such statement shall indicate the amount,
if any, by which the Actual TI Costs exceeds the Tenant Improvement Allowance
(the "Excess Tenant Improvement Costs"). The term "Excess Tenant Improvement
Costs" shall also include the costs related to any and all Change Orders. Tenant
agrees, within three (3) days after submission to it of such statement, to
execute and deliver to Landlord, in the form then in use by Landlord, an
authorization to proceed with the Work Tenant shall faithfully pay all of the
Excess Tenant Improvement Costs to Landlord in cash, concurrently with Tenant's
delivery to Landlord of the aforementioned signed written authorization to
proceed. No Work shall be commenced until Tenant has fully complied with the
preceding provisions of this Section 10. If Tenant fails to remit the sums so
demanded by Landlord pursuant to Section 8 above and this Section 10 within the
time periods required, Landlord may, at its option, declare Tenant in default
under the Lease.
11. Change Requests. No changes or revisions to the approved Final Drawings
shall be made by either Landlord or Tenant unless approved in writing by both
parties. Upon Tenant's request and submission by Tenant (at Tenant's sole cost
and expense) of the necessary information and/or plans and specifications for
any changes or revisions to the approved Final Drawings and/or for any work
other than the Work described in the approved Final Drawings ("Change Requests")
and the approval by Landlord of such Change Request(s), which approval Landlord
agrees shall not be unreasonably withheld, conditioned or delayed Landlord shall
perform the additional work associated with the approved Change Request(s), at
Tenant's sole cost and expense, subject, however, to the following provisions of
the Section 11. Prior to commencing any additional work related to the approved
Change Request(s), Landlord shall submit to Tenant a written statement of the
cost of such additional work and a proposed tenant change order therefor
("Change Order") in the standard form then in use by Landlord. Tenant shall
execute and deliver to Landlord such Change Order and shall pay the entire cost
of such additional work in the following described manner. Any costs related to
such approved Change Request(s), Change Order and any delays associated
therewith, shall be added to the Tenant Improvement Costs and shall be paid for
by Tenant as and with any Excess Tenant Improvement Costs as set forth in
Section 10 above. The billing for such additional costs to Tenant shall be
accompanied by evidence of the amounts billed as is customarily used in the
business. Costs related to approved Change Requests and Change Orders shall
include, without limitation, any architectural or design fees, Landlord's
construction fee for overhead and profit, the cost of all on-site supervisory
and administrative staff, office,
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equipment and temporary services rendered by Landlord and/or Landlord's
consultants, and the General Contractor's price for offering the change. If
Tenant fails to execute or deliver such Change Order, or to pay the costs
related thereto, then Landlord shall not be obligated to do any additional work
related to such approved Change Request(s) and/or Change Orders, and Landlord
may proceed to perform only the Work, as specified in the Final Drawings.
12. Termination. If the Lease in terminated prior to Completion Date, for any
reason due to the default of Tenant hereunder, in addition to any other remedies
available to Landlord under the Lease, Tenant shall pay to Landlord as
Additional Rent under the Lease, within five (5) days of receipt of a statement
therefor, any and all costs incurred by Landlord and not reimbursed or otherwise
paid by Tenant through the date of termination in connection with the Tenant
Improvements to the extent planned, installed and/or constructed as of such date
of termination include, but not limited to, any costs related to the removal of
all or any portion of the Tenant Improvements and restorations costs related
thereto. Subject to the provisions of Section 10.2 of the Lease, upon the
expiration or earlier termination of the Lease, Tenant shall not be required to
remove the Tenant Improvements it being the intention of the parties that the
Tenant Improvements are to be considered incorporated into the Building.
Notwithstanding anything to the contrary contained herein, Landlord shall have
the right to terminate the Lease, upon written notice to Tenant, if Landlord is
unable to obtain a building permit for the Tenant Improvements with Sixty (60)
days from the date the Lease is signed by Tenant.
13. Tenant Access. Landlord shall grant Tenant a license to have access to the
Premises on August 1, 1999 (prior to the Completion Date) to allow Tenant to do
other work required by Tenant to make the Premises ready for Tenant's use,
consisting of installing telephone and computer wiring and systems, and
installing cubicles (the "Tenant's Pre-Occupancy Work"). It shall be a condition
to the grant by Landlord and continued effectiveness of such license that:
(a) Tenant shall give to Landlord a written request to have such access
not less than two (2) business days prior to the date on which such proposed
access will commence (the "Access Notice"). The Access Notice shall contain or
be accompanied by each of the following items, all in form and substance
reasonably acceptable to Landlord: (i) a detailed description of and schedule
for Tenant's Pre-Occupancy Work; (ii) the names and addresses of all
contractors, subcontractors and material suppliers and all other representatives
of Tenant who or which will be entering the Premises on behalf of Tenant to
perform Tenant's Pre-Occupancy Work or will be supplying materials for such
work, and the approximate number of individuals, itemized by trade, who will be
present in the Premises; (iii) copies of all contracts, subcontracts, material
purchase orders, plans and specifications pertaining to Tenant's Pre-Occupancy
Work; (iv) copies of all licenses and permits required in connection with the
performance of Tenant's Pre-Occupancy Work; (v) certificates of insurance (in
amounts satisfactory to Landlord and with the parties identified in, or required
by, the Lease named as additional insureds) and instruments of indemnification
against all claims, costs, expenses, penalties, fines, and damages which may
arise in connection with Tenant's Pre-Occupancy Work; and (vi) assurances of the
ability of Tenant to pay for all of Tenant's Pre-Occupancy Work and/or a letter
of credit or other security deemed appropriate by Landlord securing Tenant's
lien-free completion of Tenant's Pre-Occupancy Work.
(b) Such pre-term access by Tenant and Tenant's employees, agents,
contractors, consultants, workmen, mechanics, suppliers and invites shall be
subject to scheduling by Landlord.
(c) Tenant's employees, agents, contractors, consultants, workmen,
mechanics, suppliers and invitees shall fully cooperate, work in harmony and
not, in any manner, interfere with Landlord or Landlord's agents or
representatives in performing the Work and any additional work pursuant to
approved Change Orders, Landlord's work in other areas of the Building or the
Park, or the general operation of the Building. If at any time any such person
representing Tenant shall not be cooperative or shall otherwise cause or
threaten to cause any such disharmony or interference, include, without
limitation, labor disharmony, and Tenant fails to immediately institute and
maintain corrective actions as directed by Landlord, then Landlord may revoke
such license upon twenty-four (24) hours' prior written notice to Tenant.
Landlord shall use commercially reasonable efforts (i) not to interfere with
Tenant's Pre-Occupancy Work and (ii) shall work in harmony with Tenant's agents
and representatives.
(d) Any such entry into and occupancy of the Premises or any portion
thereof by Tenant or any person or entity working for or on behalf of Tenant
shall be deemed to be subject to all of the terms, covenants, conditions
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and provisions of the Lease, excluding only the covenant to pay Rent. Landlord
shall not be liable for any injury, loss or damage which may occur to any of
Tenant's Pre-Occupancy Work made in or about the Premises or to any property
placed therein prior to the commencement of the term of the Lease, the same
being at Tenant's sole risk and liability. Tenant shall be liable to Landlord
for any damage to any portion of Premises, the Work or the additional work
related to any approved Change Orders caused by Tenant or any of Tenant's
employees, agents, contractors, consultants, workmen, mechanics, suppliers and
invitees. In the event that the performance of Tenant's Pre-Occupancy Work
causes extra costs to be incurred by Landlord or requires the use of other
Building services, Tenant shall promptly reimburse Landlord for such extra costs
and/or shall pay Landlord for such other Building services at Landlord's
standard rates then in effect.
14. Improvements by Landlord. Landlord and Tenant acknowledge and agree that, in
consideration of Tenant entering into this Lease, Landlord shall construct,
install or otherwise perform at its sole cost the following improvements:
(a) Installation of a security card key access system in the Building
elevator and at the door proposed to be installed at the First
Floor lobby stairway;
(b) Removal of eucalyptus trees (to be mutually approved by Landlord
and Tenant) to allow reasonably unobstructed view of Tenant's
exterior sign from Sorrento Valley Road;
(c) Construct acoustical ceiling, drop sprinkler heads, install carpet
to reasonably match the existing carpet (if available), provide
heating, ventilation and air conditioning, and demolish the
demising walls separating the portions of the Premises currently
in shell condition.
15. Lease Provisions; Conflict. The terms and provisions of the Lease, insofar
as they are applicable, in whole or in part, to this EXHIBIT B, are hereby
incorporated herein by reference, and specifically including all of the
provisions of Section 31 of the Lease. In the event of any conflict between the
terms of the Lease and this EXHIBIT B, the terms of this EXHIBIT B shall
prevail. Any amounts payable by Tenant to Landlord hereunder shall be deemed to
be Additional Rent under the Lease and, upon any default in the payment of same,
Landlord shall have all rights and remedies available to it as provided for in
the Lease.
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SCHEDULE 1 OF EXHIBIT B
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SCHEDULE 1 OF EXHIBIT B
PAGE 2 OF 3
[PICTURE]
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SCHEDULE 1 OF EXHIBIT B
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[PICTURE]
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EXHIBIT C TO LEASE AGREEMENT
RULES & REGULATIONS
This exhibit, entitled "Rules & Regulations", is and shall constitute EXHIBIT C
to that certain Lease Agreement dated June 21, 1999 (the "Lease"), by and
between Legacy-RECP Sorrento OPCO, LLC, a Delaware limited liability company
("Landlord") and NETPARTNERS INTERNET SOLUTIONS, Inc., a Delaware corporation
("Tenant") for the leasing of certain premises located at 10240 Sorrento Valley
Road, 1st (Storage Room), 2nd (All) and 3rd (All) Floors, San Diego, California
(the "Premises"). The terms, conditions and provisions of this EXHIBIT C are
hereby incorporated into and are made a part of the Lease. Any capitalized terms
used herein and not otherwise defined herein shall have the meaning ascribed to
such terms as set forth in the Lease:
1. No advertisement, picture or sign of any sort shall be displayed on or
outside the Premises or the Building without the prior written consent of
Landlord. Landlord shall have the right to remove any such unapproved item
without notice and at Tenant's expense.
2. Tenant shall not regularly park motor vehicles in designated parking areas
after the conclusion of normal daily business activity.
3. Tenant shall not use any method of heating or air conditioning other than
that supplied by Landlord without the prior written consent of Landlord.
4. All window coverings installed by Tenant and visible from the outside of the
Building require the prior written approval of Landlord.
5. Tenant shall not use, keep or permit to be used or kept any foul or noxious
gas or substance or any flammable or combustible materials on or around the
Premises, the Building or the Park.
6. Tenant shall not alter any lock or install any new locks or bolts on any door
at the Premises without the prior written consent of Landlord, unless said door
is part of a private office, in which case Landlord's prior consent is not
required.
7. Tenant agrees not to make any duplicate keys without the prior consent of
Landlord, unless said key operates a lock installed on a private office door, in
which case Landlord's prior consent is not required.
8. Tenant shall park motor vehicles in those general parking areas as designated
by Landlord except for loading and unloading. During those periods of loading
and unloading, Tenant shall not unreasonably interfere with traffic flow within
the Park and loading and unloading areas of other Tenants.
9. Tenant shall not disturb, solicit or canvas any occupant of the Building or
Park and shall cooperate to prevent same.
10. No person shall go on the roof without Landlord's permission.
11. Business machines and mechanical equipment belonging to Tenant which cause
noise or vibration that may be transmitted to the structure of the Building, to
such a degree as to be objectionable to Landlord or other Tenants, shall be
placed and maintained by Tenant, at Tenant's expense, on vibration eliminators
or other devices sufficient to eliminate noise or vibration.
12. All goods, including material used to store goods, delivered to the Premises
of Tenant shall be immediately moved into the Premises and shall not be left in
parking or receiving areas overnight.
13. Tractor trailers which must be unhooked or parked with dolly wheels beyond
the concrete loading areas must use steel plates or wood blocks under the dolly
wheels to prevent damage to the asphalt paving surfaces. No parking or storing
of such trailers will be permitted in the auto parking areas of the Park or on
streets adjacent thereto.
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14. Forklifts which operate on asphalt paving areas shall not have solid rubber
tires and shall only use tires that do not damage the asphalt.
15. Tenant is responsible for the storage and removal of all trash and refuse.
All such trash and refuse shall be contained in suitable receptacles stored
behind screened enclosures at locations approved by Landlord.
16. Tenant shall not store or permit the storage or placement of goods, or
merchandise or pallets or equipment of any sort in or around the Premises, the
Building, the Park or any of the Common Areas of the foregoing. No displays or
sales of merchandise shall be allowed in the parking lots or other Common Areas.
17. Tenant shall not permit any animals, including, but not limited to, any
household pets, to be brought or kept in or about the Premises, the Building,
the Park or any of the Common Areas of the foregoing.
18. Tenant shall not permit any motor vehicles to be washed on any portion of
the Premises or in the Common Areas of the Park, nor shall Tenant permit
mechanical work or maintenance of motor vehicles to be performed on any portion
of the Premises or in the Common Areas of the Park.
19. Tenant shall not waste electricity, water or air conditioning and agrees to
cooperate fully with Landlord to assure the most effective operation of the
Building's heating, ventilation and air conditioning and to comply with any
governmental energy-saving rules, laws or regulations of which Tenant has
notice, and shall refrain from attempting to adjust controls other than room
thermostats installed for Tenant's use. Tenant shall keep corridor doors closed,
and shall close window coverings at the end of each business day. Heat and air
conditioning shall be provided during ordinary business hours of generally
recognized business days, but not less than the hours of 7:00 a.m. to 6:00 p.m.
on Monday through Friday and 8:00 a.m. to 1:00 p.m. on Saturday (excluding in
any event Sundays and legal holidays).
20. Tenant shall have access to the Premises at all times. However, Landlord
reserves the right to exclude from the Building (unless Tenant leases the entire
Building) between the hours of 6:00 p.m. and 7:00 a.m. the following day, or
such other hours as may be established from time to time by Landlord, and on
Saturdays, Sundays and legal holidays, any person unless that person is known to
the person or employee in charge of the Building, has a pass, is properly
identified, or has been authorized by Tenant (as long as Tenant has notified
Landlord in advance). Tenant shall be responsible for all persons for whom its
requests passes and shall be liable to Landlord for all acts or omissions of
such persons. Landlord shall not be liable for damages for any error with regard
to the admission to or exclusion from the Building of any person. Landlord
reserves the right to prevent access to the Building in case of invasion, mob,
riot, public excitement or other commotion by closing the doors or by other
appropriate action. Should Landlord install a security card key access system,
Tenant shall pay Landlord Landlord's actual cost for each security card issued
to Tenant (including new and replacement cards).
21. Tenant shall close and lock the doors of its Premises and entirely shut off
all water faucets or other water apparatus, and, except with regard to Tenant's
computers and other equipment which requires utilities on a twenty-four hours
basis, all electricity, gas or air outlets before Tenant and its employees leave
the Premises. Tenant shall be responsible for any damage or injuries sustained
by other tenants or occupants of the Building or by Landlord for noncompliance
with this rule.
22. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not
be used for any purpose other than that for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein. The expense of
any breakage, stoppage or damage resulting from the violation of this rule shall
be borne by the tenant who, or whose employees or invoices, shall have caused
it.
23. Landlord reserves the right to exclude or expel from the Building any person
who, in Landlord's judgment, is intoxicated or under the influence of liquor or
drugs or who is in violation of any of the Rules and Regulations of the
Building.
24. Tenant shall not use in any space or in the public halls of the Building any
mailcarts or hand trucks except those equipped with rubber tires and side guards
or such other material handling equipment as Landlord may
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approve. Tenant shall not bring any other vehicles of any kind into the Building
except as provided in the Parking Rules and Regulations.
25. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
26. Tenant assumes any and all responsibility for protecting its Premises from
theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed.
27. Landlord reserves the right to make such other and reasonable Rules and
Regulations (including Parking Rules and Regulations) as, in its judgment, may
from time to time be needed for safety and security, for care and cleanliness of
the Building and for the preservation of good order therein. Tenant agrees to
abide by all such Rules and Regulations hereinabove stated and any additional
rules and regulations which are adopted.
28. Tenant shall be responsible for the observation of all of the foregoing
rules by Tenant's employees, agents, representatives, contractors, consultants,
clients, customers, invitees, guests, subtenants and assignees.
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EXHIBIT E
HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE
Your cooperation in this matter is appreciated. Initially, the information
provided by you in this Hazardous Materials Disclosure Certificate is necessary
for the Lessor (identified below) to evaluate and finalize a lease agreement
with you as lessee. After a lease agreement is signed by you and the Lessor (the
"Lease Agreement"), on an annual basis in accordance with the provisions of the
signed Lease Agreement, you are to provide an update to the information
initially provided by you in this certificate. The information contained in the
initial Hazardous Materials Disclosure Certificate and each annual certificate
provided by you thereafter will be maintained in confidentiality by Lessor
subject to release and disclosure as required by (i) any lenders and owners and
their respective environmental consultants, (ii) any prospective purchaser(s) of
all or any portion of the property on which the Premises are located, (iii)
Lessor to defend itself or its lenders, partners or representatives against any
claim or demand, and (iv) any laws, rules, regulations, orders, decrees or
ordinances, including, without limitation, court orders or subpoenas. Any and
all capitalized terms used herein, which are not otherwise defined herein, shall
have the same meaning ascribed to such term in the signed Lease Agreement. Any
questions regarding this certificate should be directed to, and when completed,
the certificate should be delivered to:
Lessor's Agent: Legacy Partners Commercial, Inc.
6480 Weathers Place, Suite 245
San Diego, California 92121
Phone: (619) 453-4800
Name of (Prospective) Lessee: __________________________________________________
Mailing Address: _______________________________________________________________
________________________________________________________________________________
Contact Person, Title and Telephone Number(s): _________________________________
Contact Person for Hazardous Waste Materials Management and Manifests and
Telephone Number(s): ___________________________________________________________
________________________________________________________________________________
Address of (Prospective) Premises: _____________________________________________
Length of (Prospective) initial Term: __________________________________________
1. GENERAL INFORMATION:
Describe the initial proposed operations to take place in, on, or about
the Premises, including, without limitation, principal products processed,
manufactured or assembled services and activities to be provided or
otherwise conducted. Existing lessees should describe any proposed changes
to on-going operations.
__________________________________________________________________________
__________________________________________________________________________
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<PAGE> 50
2. USE, STORAGE AND DISPOSAL OF HAZARDOUS MATERIALS
2.1 Will any Hazardous Materials be used, generated, stored or disposed
of in, on or about the Premises? Existing lessees should describe
any Hazardous Materials which continue to be used, generated, stored
or disposed of in, on or about the Premises.
Wastes Yes [ ] No [ ]
Chemical Products Yes [ ] No [ ]
Other Yes [ ] No [ ]
If Yes is marked, please explain: __________________________________
____________________________________________________________________
____________________________________________________________________
If Yes is marked in Section 2.1, attach a list of any Hazardous Materials
to be used, generated, stored or disposed of in, on or about the Premises,
including the applicable hazard class and an estimate of the quantities of
such Hazardous Materials at any given time; estimated annual throughput;
the proposed location(s) and method of storage (excluding nominal amounts
of ordinary household cleaners and janitorial supplies which are not
regulated by any Environmental Laws); and the proposed location(s) and
method of disposal for each Hazardous Material, including, the estimated
frequency, and the proposed contractors or subcontractors. Existing
lessees should attach a list setting forth the information requested above
and such list should include actual data from on-going operations and the
identification of any variations in such information from the prior year's
certificate.
3. STORAGE TANKS AND SUMPS
3.1 Is any above or below ground storage of gasoline, diesel, petroleum,
or other Hazardous Materials in tanks or sumps proposed in, on or
about the Premises? Existing lessees should describe any such actual
or proposed activities.
Yes [ ] No [ ]
If Yes, please explain: ____________________________________________
____________________________________________________________________
____________________________________________________________________
4. WASTE MANAGEMENT
4.1 Has your company been issued an EPA Hazardous Waste Generator I.D.
Number? Existing lessees should describe any additional
identification numbers issued since the previous certificate.
Yes [ ] No [ ]
4.2 Has your company filed a biannual or quarterly reports as a
hazardous waste generator? Existing lessees should describe any new
report filed.
Yes [ ] No [ ]
If yes, attach a copy of the most recent report filed.
5. WASTEWATER TREATMENT AND DISCHARGE
5.1 Will your company discharge wastewater or other wastes to:
______ storm drain? ______ sewer?
______ surface water? ______ no wastewater or other wastes
discharged
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<PAGE> 51
Existing lessees should indicate any actual discharges. If so,
describe the nature of any proposed or actual discharge(s).
____________________________________________________________________
____________________________________________________________________
5.2 Will any such wastewater or waste be treated before discharge?
Yes [ ] No [ ]
If yes, describe the type of treatment proposed to be conducted.
Existing lessees should describe the actual treatment conducted.
____________________________________________________________________
____________________________________________________________________
6. AIR DISCHARGES
6.1 Do you plan for any air filtration systems or stacks to be used in
your company's operations in, on or about the Premises that will
discharge into the air; and will such air emissions be monitored?
Existing lessees should indicate whether or not there are any such
air filtration systems or stacks in use in, on or about the Premises
which discharge into the air and whether such air emissions are
being monitored.
Yes [ ] No [ ]
If Yes, please describe: ___________________________________________
____________________________________________________________________
____________________________________________________________________
6.2 Do you propose to operate any of the following types of equipment,
or any other equipment requiring an air emissions permit? Existing
lessees should specify any such equipment being operated in, on or
about the Premises.
______ Spray booth(s) ______ Incinerator(s)
______ Dip tank(s) ______ Other (Please describe)
______ Drying oven(s) ______ No Equipment Requiring Air
Permits
If Yes, please describe: ___________________________________________
____________________________________________________________________
____________________________________________________________________
7. HAZARDOUS MATERIALS DISCLOSURES
7.1 Has your company prepared or will it be required to prepare a
Hazardous Materials management plan ("Management Plan") pursuant to
Fire Department or other governmental or regulatory agencies'
requirements? Existing lessees should indicate whether or not a
Management Plan is required and has been prepared.
Yes [ ] No [ ]
If yes, attach a copy of the Management Plan. Existing lessees
should attach a copy of any required updates to the Management Plan.
3
<PAGE> 52
7.2 Are any of the Hazardous Materials, and in particular chemicals,
proposed to be used in your operations in, on or about the Premises
regulated under Proposition 65? Existing lessees should indicate
whether or not there are any new Hazardous Materials being so used
which are regulated under Proposition 65.
Yes [ ] No [ ]
If Yes, please explain: ____________________________________________
____________________________________________________________________
____________________________________________________________________
8. ENFORCEMENT ACTIONS AND COMPLAINTS
8.1 With respect to Hazardous Materials or Environmental Laws, has your
company ever been subject to any agency enforcement actions,
administrative orders, or consent decrees or has your company
received requests for information, notice or demand letters, or any
other inquiries regarding its operations? Existing lessees should
indicate whether or not any such actions, orders or decrees have
been, or are in the process of being, undertaken or if any such
requests have been received.
Yes [ ] No [ ]
If yes, describe the actions, orders or decrees and any continuing
compliance obligations imposed as a result of these actions, orders
or decrees and also describe any requests, notices or demands, and
attach a copy of all such documents. Existing lessees should
describe and attach a copy of any new actions, orders, decrees,
requests, notices or demands not already delivered to Lessor
pursuant to the provisions of Section 29 of the signed Lease
Agreement.
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
8.2 Have there ever been, or are there now pending, any lawsuits against
your company regarding any environmental or health and safety
concerns?
Yes [ ] No [ ]
If yes, describe any such lawsuits and attach copies of the
complaint(s), cross-complaint(s), pleadings and all other documents
related thereto as requested by Lessor. Existing lessees should
describe and attach a copy of any new complaint(s),
cross-complaint(s), pleadings and other related documents not
already delivered to Landlord pursuant to the provisions of Section
29 of the signed Lease Agreement.
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
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<PAGE> 53
8.3 Have there been any problems or complaints from adjacent tenants,
owners or other neighbors at your company's current facility with
regard to environmental or health and safety concerns? Existing
lessees should indicate whether or not there have been any such
problems or complaints from adjacent tenants, owners or other
neighbors at, about or near the Premises.
Yes [ ] No [ ]
If yes, please describe. Existing lessees should describe any such
problems or complaints not already disclosed to Lessor under the
provisions of the signed Lease Agreement
____________________________________________________________________
____________________________________________________________________
9. PERMITS AND LICENSES
9.1 Attach copies of all Hazardous Materials permits and licenses
including a Transporter Permit number issued to your company with
respect to its proposed operations in, on or about the Premises,
including, without limitation, any wastewater discharge permits, air
omissions permits, and use permits or approvals. Existing lessees
should attach copies of any new permits and licenses as well as any
renewals of permits or licenses previously issued.
The undersigned hereby acknowledges and agrees that (A) this Hazardous Materials
Disclosure Certificate is being delivered in connection with, and as required
by, Landlord in connection with the evaluation and finalization of a Lease
Agreement and will be attached thereto as an exhibit; (B) that this Hazardous
Materials Disclosure Certificate is being delivered in accordance with, and as
required by, the provisions of Section 29 of the Lease Agreement; and (C) that
Lessee shall have and retain full and complete responsibility and liability with
respect to any of the Hazardous Materials disclosed in the HazMat Certificate
notwithstanding Lessor's receipt and/or approval of such certificate. Lessee
further agrees that none of the following described acts or events shall be
construed or otherwise interpreted as either (a) excusing, diminishing or
otherwise limiting Lessee from the requirement to fully and faithfully perform
its obligations under the Lease with respect to Hazardous Materials, including,
without limitation, Lessee's indemnification of the Indemnitees and compliance
with all Environmental Laws, or (b) imposing upon Lessor, directly or
indirectly, any duty or liability with respect to any such Hazardous Materials,
including, without limitation, any duty on Landlord to investigate or otherwise
verify the accuracy of the representations and statements made therein or to
ensure that Lessee is in compliance with all Environmental Laws; (i) the
delivery of such certificate to Lessor and/or Lessor's acceptance of such
certificate, (ii) Lessor's review and approval of such certificate, (iii)
Lessor's failure to obtain such certificate from Lessee at any time, or (iv)
Lessor's actual or constructive knowledge of the types and quantities of
Hazardous Materials being used, stored, generated, disposed of or transported on
or about the Premises by Lessee or Lessee's Representatives. Notwithstanding the
foregoing or anything to the contrary contained herein, the undersigned
acknowledges and agrees that Lessor and its partners, lenders and
representatives may, and will, rely upon the statements, representations,
warranties, and certifications made herein and the truthfulness thereof in
entering into the Lease Agreement and the continuance thereof throughout the
term, and any renewals thereof, of the Lease Agreement.
I, (print name) ________________________________, acting with full authority to
bind the (proposed) Lessee and on behalf of the (proposed) Lessee, certify,
represent and warrant that the information contained in this certificate is true
and correct.
TENANT
By: ___________________________________
Title: ________________________________
Date: _________________________________
5
<PAGE> 54
EXHIBIT F
FIRST AMENDMENT TO LEASE AGREEMENT
CHANGE OF COMMENCEMENT DATE
This First Amendment to Lease Agreement (the "Amendment") is made and entered
into to be effective as of __________________________________, by and between
________________________ ("Landlord"), and ________________________ ("Tenant"),
with reference to the following facts:
RECITALS
A. Landlord and Tenant have entered into that certain Lease Agreement dated
______________ (the "Lease"), for the leasing of certain premises containing
approximately _______________ rentable square feet of space located at
________________________________________, California (the "Premises") as
such Premises are more fully described in the Lease.
B. Landlord and Tenant wish to amend the Commencement Date of the Lease.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1. Recitals: Landlord and Tenant agree that the above recitals are true and
correct.
2. The Commencement Date of the Lease shall be _______________________.
3. The last day of the Term of the Lease (the "Expiration Date") shall be
______________________.
4. The dates on which the Base Rent will be adjusted are:
for the period __________ to __________ the monthly Base Rent shall be
$_______________;
for the period __________ to __________ the monthly Base Rent shall be
$_______________; and
for the period __________ to __________ the monthly Base Rent shall be
$_______________.
5. Effect of Amendment: Except as modified herein, the terms and conditions
of the Lease shall remain unmodified and continue in full force and
effect. In the event of any conflict between the terms and conditions of
the Lease and this Amendment, the terms and conditions of this Amendment
shall prevail.
6. Definitions: Unless otherwise defined in this Amendment, all terms not
defined in this Amendment shall have the meaning set forth in the Lease.
7. Authority: Subject to the provisions of the Lease, this Amendment shall
be binding upon and inure to the benefit of the parties hereto, their
respective heirs, legal representatives, successors and assigns. Each
party hereto and the persons signing below warrant that the person
signing below on such party's behalf is authorized to do so and to bind
such party to the terms of this Amendment.
8. The terms and provisions of the Lease are hereby incorporated in this
Amendment.
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<PAGE> 55
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and
year first above written.
TENANT
By: ___________________________________
Title: ________________________________
Date: _________________________________
LANDLORD
Legacy Partners Commercial, Inc.
By: ___________________________________
2
<PAGE> 56
EXHIBIT G (TENANT/LANDLORD)
TENANT'S INITIAL HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE
Your cooperation in this matter is appreciated. Initially, the information
provided by you in this Hazardous Materials Disclosure Certificate is necessary
for the Landlord (identified below) to evaluate and finalize a lease agreement
with you as tenant. After a lease agreement is signed by you and the Landlord
(the "Lease Agreement"), on an annual basis in accordance with the signed Lease
Agreement, you are to provide an update to the information initially provided by
you in this certificate. The information contained in the initial Hazardous
Materials Disclosure Certificate and each annual certificate provided by you
thereafter will be maintained in confidentiality by Landlord subject to release
and disclosure as required by (i) any lenders and owners and their respective
environmental consultants, (ii) any prospective purchaser(s) of all or any
portion of the property on which the Premises are located, (iii) Landlord to
defend itself or its lenders, partners or representatives against any claim or
demand, and (iv) any laws, rules, regulations, orders, decrees, or ordinances,
including, without limitation, court orders or subpoenas. Any and all
capitalized terms used herein, which are not otherwise defined herein, shall
have the same meaning ascribed to such term in the signed Lease Agreement. Any
questions regarding this certificate should be directed to, and when completed,
the certificate should be delivered to:
Lessor: Legacy-RECP Sorrento OPCO, LLC
c/o Legacy Partners Commercial, Inc.
6480 Weathers Place, Suite 245
San Diego, California 92121
Phone: (619) 453-4800
Name of (Prospective) Lessee: NETPARTNERS INTERNET SOLUTIONS, Inc.
Mailing Address: _______________________________________________________________
________________________________________________________________________________
Contact Person, Title and Telephone Number(s): _________________________________
Contact Person for Hazardous Waste Materials Management and Manifests and
Telephone Number(s): ___________________________________________________________
Address of (Prospective) Premises: 10240 Sorrento Valley Road, 2nd and 3rd
Floors, San Diego, CA
Length of (Prospective) initial Term: Three (3) years
1. GENERAL INFORMATION:
Describe the initial proposed operations to take place in, on, or about
the Premises, including, without limitation, principal products processed,
manufactured or assembled services and activities to be provided or
otherwise conducted. Existing tenants should describe any proposed changes
to on-going operations.
__________________________________________________________________________
__________________________________________________________________________
1
<PAGE> 57
2. USE, STORAGE AND DISPOSAL OF HAZARDOUS MATERIALS
2.1 Will any Hazardous Materials be used, generated, stored or disposed
of in, on or about the Premises? Existing tenants should describe
any Hazardous Materials which continue to be used, generated, stored
or disposed of in, on or about the Premises.
Wastes Yes [ ] No [ ]
Chemical Products Yes [ ] No [ ]
Other Yes [ ] No [ ]
If Yes is marked, please explain: __________________________________
____________________________________________________________________
____________________________________________________________________
2.2 If Yes is marked in Section 2.1, attach a list of any Hazardous
Materials to be used, generated, stored or disposed of in, on or
about the Premises, including the applicable hazard class and an
estimate of the quantities of such Hazardous Materials at any given
time; estimated annual throughput; the proposed location(s) and
method of storage (excluding nominal amounts of ordinary household
cleaners and janitorial supplies which are not regulated by any
Environmental Laws); and the proposed location(s) and method of
disposal for each Hazardous Material, including, the estimated
frequency, and the proposed contractors or subcontractors. Existing
tenants should attach a list setting forth the information requested
above and such list should include actual data from on-going
operations and the identification of any variations in such
information from the prior year's certificate.
3. STORAGE TANKS AND SUMPS
3.1 Is any above or below ground storage of gasoline, diesel, petroleum,
or other Hazardous Materials in tanks or sumps proposed in, on or
about the Premises? Existing tenants should describe any such actual
or proposed activities.
Yes [ ] No [ ]
If Yes, please explain: ____________________________________________
____________________________________________________________________
____________________________________________________________________
4. WASTE MANAGEMENT
4.1 Has your company been issued an EPA Hazardous Waste Generator I.D.
Number? Existing tenants should describe any additional
identification numbers issued since the previous certificate.
Yes [ ] No [ ]
4.2 Has your company filed a biannual or quarterly reports as a
hazardous waste generator? Existing tenants should describe any new
report filed.
Yes [ ] No [ ]
If yes, attach a copy of the most recent report filed.
5. WASTEWATER TREATMENT AND DISCHARGE
5.1 Will your company discharge wastewater or other wastes to:
______ storm drain? ______ sewer?
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<PAGE> 58
______ surface water? ______ no wastewater or other wastes
discharged
Existing tenants should indicate any actual discharges. If so,
describe the nature of any proposed or actual discharge(s).
____________________________________________________________________
____________________________________________________________________
5.2 Will any such wastewater or waste be treated before discharge?
Yes [ ] No [ ]
If yes, describe the type of treatment proposed to be conducted.
Existing tenants should describe the actual treatment conducted.
____________________________________________________________________
____________________________________________________________________
6. AIR DISCHARGES
6.1 Do you plan for any air filtration systems or stacks to be used in
your company's operations in, on or about the Premises that will
discharge into the air; and will such air emissions be monitored?
Existing tenants should indicate whether or not there are any such
air filtration systems or stacks in use in, on or about the Premises
which discharge into the air and whether such air emissions are
being monitored.
Yes [ ] No [ ]
If Yes, please describe: ___________________________________________
____________________________________________________________________
____________________________________________________________________
6.2 Do you propose to operate any of the following types of equipment,
or any other equipment requiring an air emissions permit? Existing
tenants should specify any such equipment being operated in, on or
about the Premises.
______ Spray booth(s) ______ Incinerator(s)
______ Dip tank(s) ______ Other (Please describe)
______ Drying oven(s) ______ No Equipment Requiring Air
Permits
If Yes, please describe: ___________________________________________
____________________________________________________________________
____________________________________________________________________
7. HAZARDOUS MATERIALS DISCLOSURES
7.1 Has your company prepared or will it be required to prepare a
Hazardous Materials management plan ("Management Plan") pursuant to
Fire Department or other governmental or regulatory agencies'
requirements? Existing tenants should indicate whether or not a
Management Plan is required and has been prepared.
Yes [ ] No [ ]
If yes, attach a copy of the Management Plan. Existing tenants
should attach a copy of any required updates to the Management Plan.
3
<PAGE> 59
7.2 Are any of the Hazardous Materials, and in particular chemicals,
proposed to be used in your operations in, on or about the Premises
regulated under Proposition 65? Existing tenants should indicate
whether or not there are any new Hazardous Materials being so used
which are regulated under Proposition 65.
Yes [ ] No [ ]
If Yes, please explain: ____________________________________________
____________________________________________________________________
____________________________________________________________________
8. ENFORCEMENT ACTIONS AND COMPLAINTS
8.1 With respect to Hazardous Materials or Environmental Laws, has your
company ever been subject to any agency enforcement actions,
administrative orders, or consent decrees or has your company
received requests for information, notice or demand letters, or any
other inquiries regarding its operations? Existing tenants should
indicate whether or not any such actions, orders or decrees have
been, or are in the process of being, undertaken or if any such
requests have been received.
Yes [ ] No [ ]
If yes, describe the actions, orders or decrees and any continuing
compliance obligations imposed as a result of these actions, orders
or decrees and also describe any requests, notices or demands, and
attach a copy of all such documents. Existing tenants should
describe and attach a copy of any new actions, orders, decrees,
requests, notices or demands not already delivered to Landlord
pursuant to the provisions of Section 29 of the signed Lease
Agreement.
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
8.2 Have there ever been, or are there now pending, any lawsuits against
your company regarding any environmental or health and safety
concerns?
Yes [ ] No [ ]
If yes, describe any such lawsuits and attach copies of the
complaint(s), cross-complaint(s), pleadings and all other documents
related thereto as requested by Landlord. Existing tenants should
describe and attach a copy of any new complaint(s),
cross-complaint(s), pleadings and other related documents not
already delivered to Landlord pursuant to the provisions of Section
29 of the signed Lease Agreement.
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
8.3 Have there been any problems or complaints from adjacent tenants,
owners or other neighbors at your company's current facility with
regard to environmental or health and safety concerns? Existing
tenants should indicate whether or not there have been any such
problems or complaints from adjacent tenants, owners or other
neighbors at, about or near the Premises.
Yes [ ] No [ ]
4
<PAGE> 60
If yes, please describe. Existing tenants should describe any such
problems or complaints not already disclosed to Lessor under the
provisions of the signed Lease Agreement
____________________________________________________________________
____________________________________________________________________
9. PERMITS AND LICENSES
9.1 Attach copies of all Hazardous Materials permits and licenses
including a Transporter Permit number issued to your company with
respect to its proposed operations in, on or about the Premises,
including, without limitation, any wastewater discharge permits, air
omissions permits, and use permits or approvals. Existing tenants
should attach copies of any new permits and licenses as well as any
renewals of permits or licenses previously issued.
The undersigned hereby acknowledges and agrees that (A) this
Hazardous Materials Disclosure Certificate is being delivered in
connection with, and as required by, Landlord in connection with the
evaluation and finalization of a Lease Agreement and will be
attached thereto as an exhibit; (B) that this Hazardous Materials
Disclosure Certificate is being delivered in accordance with, and as
required by, the provisions of Section 29 of the Lease Agreement;
and (C) that Tenant shall have and retain full and complete
responsibility and liability with respect to any of the Hazardous
Materials disclosed in the HazMat Certificate notwithstanding
Landlord's/Tenant's receipt and/or approval of such certificate.
Tenant further agrees that none of the following described acts or
events shall be construed or otherwise interpreted as either (a)
excusing, diminishing or otherwise limiting Tenant from the
requirement to fully and faithfully perform its obligations under
the Lease with respect to Hazardous Materials, including, without
limitation, Tenant's indemnification of the Indemnitees and
compliance with all Environmental Laws, or (b) imposing upon
Landlord, directly or indirectly, any duty or liability with respect
to any such Hazardous Materials, including, without limitation, any
duty on Lessor to investigate or otherwise verify the accuracy of
the representations and statements made therein or to ensure that
Tenant is in compliance with all Environmental Laws; (i) the
delivery of such certificate to Landlord and/or Landlord's
acceptance of such certificate, (ii) Tenant's review and approval of
such certificate, (iii) Landlord's failure to obtain such
certificate from Tenant at any time, or (iv) Landlord's actual or
constructive knowledge of the types and quantities of Hazardous
Materials being used, stored, generated, disposed of or transported
on or about the Premises by Tenant or Tenant's Representatives.
Notwithstanding the foregoing or anything to the contrary contained
herein, the undersigned acknowledges and agrees that Landlord and
its partners, lenders and representatives may, and will, rely upon
the statements, representations, warranties, and certifications made
herein and the truthfulness thereof in entering into the Lease
Agreement and the continuance thereof throughout the term, and any
renewals thereof, of the Lease Agreement.
I, (print name) ________________________________, acting with full authority to
bind the (proposed) Tenant and on behalf of the (proposed) Tenant, certify,
represent and warrant that the information contained in this certificate is true
and correct.
TENANT
NETPARTNERS INTERNET SOLUTIONS, Inc.
By: ___________________________________
Title: ________________________________
Date: _________________________________
5
<PAGE> 61
EXHIBIT H
SIGN CRITERIA
Tenant shall be entitled to display its business name on signs to be mounted in
the following locations, provided such exact locations shall be subject to
Landlord's reasonable approval:
(A) Tenant's name and logo on the cast fascia of the Building;
(B) Tenant's name and logo in the Building's first-floor lobby at the bottom
of the second-floor "catwalk,"
(C) Tenant's name and logo adjacent to Tenant's Premises entry doors on the
second and third floors;
(D) Tenant's name and logo on a monument sign to be installed at the entrance
to the driveway on Sorrento Valley Road. (Tenant shall pay one-half of the
costs of the monument sign structure, in addition to the entire cost of
Tenant's name and logo);
(E) Tenant's name and logo on the west fascia of the Building, but only if
signage rights at this location are also granted to one or more other
tenants.
In addition to the above, Landlord shall construct a "way-finding" sign at a
locations near the bridge showing the addresses of the Buildings within the Park
with arrows pointing in the direction such building is located. The cost of such
sign shall be divided equally between Landlord and Tenant.
Notwithstanding the above, all aspects of said signage (including, but not
limited to, size, font, color, location, etc.) shall be subject to Landlord's
reasonable approval, and must meet governmental and quasi-governmental
regulations. Furthermore, all signage shall be non-exclusive and may be shared
by other tenants.
The fabrication and installation of all Tenant signage shall be at Tenant's sole
expense. The removal of said signage and repair of any damage caused by such
removal at the end of the Term shall also be at Tenant's sole expense.
<PAGE> 62
ADDENDUM ONE
OPTION TO EXTEND THE LEASE
The Addendum One ("Addendum") is incorporated as a part of that certain Lease
Agreement dated June 21, 1999 (the "Lease"), by and between Legacy-RECP Sorrento
OPCO, LLC, a Delaware limited liability company ("Landlord") and NETPARTNERS
INTERNET SOLUTIONS, Inc., a Delaware corporation ("Tenant") for the leasing of
certain premises located at 10240 Sorrento Valley Road, 1st (Storage Room), 2nd
(All) and 3rd (All) Floors, San Diego, California as more particularly described
in Exhibit A to the Lease (the "Premises"). Any capitalized terms used herein
and not otherwise defined herein shall have the meaning ascribed to such terms
as set forth in the Lease.
1. Grant of Extension Option. Subject to the provisions of this Addendum, if
tenant has not at any time been in default of its obligations beyond applicable
cure periods more than three (3) times during any twelve (12) month period of
the initial term of this Lease (a "Chronic Default"), or is not in default in
the performance of any of its obligations under this Lease beyond applicable
cure periods at the time of Tenant's exercise of this option to extend the
initial term of this Lease, Tenant shall have the right, at its option (the
"Option"), to extend the initial term of the Lease for one (1) additional Three
(3) year period (the "Extended Term").
2. Tenant's Option Notice. If Landlord does not receive written notice from
Tenant of its exercise of this Option on date which is not more than two hundred
seventy (270) days nor less than one hundred eighty (180) days prior to the end
of the initial term of the Lease ("Option Notice"), all rights under this Option
shall automatically lapse and terminate and shall be of no further force or
effect. Time is of the essence herein.
3. Establishing the Monthly Base Rent for the Extended Term. The monthly Base
Rent for the Extended Term shall be the then current market rent for similar
space within the competitive market area of the Premises (the "Fair Rental
Value") agreed upon by and between Landlord and Tenant and their agents
appointed for this purpose. The "Fair Rental Value" of the Premises shall be
defined to mean the current market rental value of the Premises as of the
commencement of the Extended Term, taking into consideration all relevant
factors, including length of term, the uses permitted under the Lease, the
quality size, design and location of the Premises, including the condition and
value of the existing tenant improvements, and the monthly base rent paid by
tenants for premises comparable to the Premises, and located within the
competitive market area of the Premises.
If Landlord and Tenant are unable to agree on the Fair Rental Value for the
Extended Term within ten (10) days of receipt by Landlord of the Option Notice,
Landlord and Tenant each, at its cost and by giving notice to the other party,
shall appoint a competent and disinterested commercial real estate MAI appraiser
(hereinafter "appraiser") with at least ten (10) years' full-time commercial
real estate appraisal experience in the geographical area of the Premises to set
the Fair Rental Value for the Extended Term. If either Landlord or Tenant does
not appoint an appraiser within ten (10) days after the other party has given
notice of the name of its appraiser, the single appraiser appointed shall be the
sole appraiser and shall set the Fair Rental Value for the Extended Term. If two
(2) appraisers are appointed by Landlord the Tenant as stated in this paragraph,
they shall meet promptly and attempt to set the Fair Rental Value. If the two
(2) appraiser are unable to agree within ten (10) days after the second
appraiser has been appointed, they shall attempt to select a third appraiser,
meeting the qualifications stated in this paragraph within ten (10) days after
the last day the two (2) appraisers agree given to set the Fair Rental Value. If
they are unable to agree on the third appraiser, either Landlord or Tenant by
giving ten (10) days' notice to the other party, can apply to the Presiding
Judge of the Superior Court of the county in which the Premises is located for
the selection of a third appraiser who meets the qualifications stated in this
paragraph. Landlord and Tenant each shall bear on one-half (1/2) of the cost of
appointing the third appraiser and of paying the third appraiser's fee. The
third appraiser, however selected, shall be a person who has not previously
acted in any capacity for either Landlord or Tenant. Within fifteen (15) days
after the selection of the third appraiser, the third appraiser shall determine
the Fair Rental Value for the Extended Term, which Fair Rental Value shall not
be higher than the highest Fair Rental Value nor lower than the lowest Fair
Rental Value submitted by the first two appraisers as the Fair Rental Value for
the Extended Term. If either of the first two appraisers fails to submit their
opinion of the Fair Rental Value , then the single Fair Rental Value submitted
shall automatically be the monthly Base Rent for the Extended Term.
<PAGE> 63
Upon determination of the initial monthly Base Rental for the Extended Term,
pursuant to the terms outlined above, Landlord and Tenant shall immediately
execute an amendment to the Lease. Such amendment, shall set forth among other
things, the initial monthly Base Rent for the Extended Term, and the actual
commencement date and expiration date of the Extended Term and shall otherwise
be on the same terms and provisions of the Lease to the extent then applicable
(by way of example only, the provisions of Exhibit B to the Lease may not be
applicable during the Extended Term). Tenant shall have no other right to
further extend the term of the Lease under this Addendum unless Landlord and
Tenant otherwise expressly agree in writing.
4. Condition of Premises and Brokerage Commissions for the Extended Term. If
Tenant timely and properly exercises this Option, in accordance with the terms
contained herein: (1) Tenant shall accept the Premises in its then "As-Is"
condition and, accordingly, Landlord shall not be required to perform any
additional improvements to the Premises; and (2) Tenant hereby agrees that it
will solely be responsible for any and all brokerage commissions and finder's
fees payable to any broker now or hereafter procured for hired by Tenant or who
otherwise claims a commission based on any act or statement of Tenant ("Tenant's
Broker") in connection with this Option; and Tenant hereby further agrees that
Landlord shall in no event or circumstance be responsible for the payment of any
such commissions and fees to Tenant's Broker.
5. Limitations On, and Conditions To, Extension Option. At Landlord's option,
all rights of Tenant under this Option shall terminate and be of no force or
effect if any of the following individual events occur or any combination
thereof occur: (1) Tenant has been in Chronic Default at any time during the
initial term of the Lease, or is in default in the performance of any of its
obligations under this Lease beyond any applicable cure periods at the time of
Tenant's exercised of this Option; and/or (2) Tenant's financial condition is
unacceptable to Landlord at the time of Tenant's delivery to Landlord of the
Option Notice (provided, however, if there is not any substantial adverse change
in Tenant's net profits during the prior three (3) fiscal quarters of Tenant's
operations then Tenant's then existing financial condition shall be acceptable
to Landlord); and/or (3) Tenant has failed to exercise properly the Option
described in this Addendum in a timely manner in strict accordance with the
provisions of this Addendum, and/or (4) Tenant no longer has lawful possession
of the Premises under the Lease, or if the Lease has been terminated earlier,
pursuant to the terms of the Lease.
6. Time is of the Essence. Time is of the essence with respect to each and every
time period set forth in this Addendum.
<PAGE> 64
ADDENDUM TWO
RIGHT OF FIRST REFUSAL
This Addendum Two is incorporated as a part of that certain Lease Agreement
dated June 21, 1999 (the "Lease"), by and between Legacy-RECP Sorrento OPCO,
LLC, a Delaware limited liability company ("Landlord") and NETPARTNERS INTERNET
SOLUTIONS, Inc., a Delaware corporation ("Tenant") for the leasing of certain
premises located at 10240 Sorrento Valley Road, 1st (Storage Room), 2nd (All)
and 3rd (All) Floors, San Diego, California (the "Premises").
During the initial term of the Lease only, Tenant shall have a continuous First
Right to Lease ("Right of First Refusal") all or a portion of the continuous
space within the First Floor of Building 10240 (consisting of approximately
24,086 square feet), and the vacant space at Building 10220 (consisting of
approximately 15,590 square feet), as outlined on Exhibit A attached hereto and
made a part hereof (the "Expansion Space"). Tenant's right, as granted herein,
is subject tot he following conditions:
i. Tenant's Right of First Refusal shall be void if Tenant is currently
in default or has been in default more than three (3) times during any twelve
(12) month period of the initial Term of this Lease, in the performance of any
of its obligations under the Lease;
ii. Tenant's Right of First Refusal shall be subject to Landlord's
review and approval of Tenant's then current financial condition; and
iii. Tenant's Right of First Refusal shall be subject to the rights of
the then existing tenant pursuant to its existing Lease, as such Lease may be
modified, amended or extended.
Provided the above conditions are satisfied, and upon Landlord's receipt of a
third party offer to lease the Expansion Space which Landlord is willing to
accept, Landlord will offer this Right of First Refusal to Tenant in writing
stating all material terms on which Landlord proposes to lease such Expansion
Space to Tenant and Tenant shall have five (5) business days after deliver of
such notice to notify Landlord in writing ("Election Notice") of Tenant's
election to lease all the Expansion Space upon those terms. If Tenant fails to
notify Landlord of Tenant's election to lease the Expansion Space within the
time specified herein, it shall be deemed that (i) Tenant has elected not to
lease said Expansion Space, and (ii) Landlord may thereafter enter into a Lease
Agreement with a third party. Time is of the essence herein.
In the event Tenant exercises this Right of First Refusal as herein provided,
Tenant shall provide Landlord an additional Security Deposit equal to the Rent
due for the first month of Tenant's lease term for the Expansion Space, and the
parties shall have ten (10) working days after Landlord receives the Election
Notice from Tenant in which to execute an amendment to the Lease setting forth
the agree-upon terms. Upon full execution of an amendment for the Expansion
Space, the nonrefundable deposit shall be credited toward Rent or security
deposit for the Expansion Space, as agreed between the parties.
This Right of Refusal shall terminate and be of no force and effect if, at any
time, Tenant is or has been in default of the performance of any of the
covenants, conditions or agreements to be performed under this Lease, or the
Premises are being subleased at the time of this Right of First Refusal is
offered.
This Right of First Refusal is personal to Tenant and may not be assigned,
voluntarily or involuntarily, separate from or as a part of the Lease.
Should Tenant exercise the Right herein, Landlord and Tenant shall execute an
amendment to this Lease, adding the Expansion Space to the Premises and
adjusting the Rent and Tenant's Share set forth in the Basic Lease Information.
If Tenant does not elect to exercise the Right herein, based upon the material
terms proposed by Landlord, all Rights under this Right of First Refusal shall
terminate and be of no further force and effect.
<PAGE> 65
FIRST AMENDMENT TO LEASE AGREEMENT
This First Amendment to Lease Agreement (the "Amendment") is made and entered
into to be effective as of August 2, 1999, by and between Legacy-RECP Sorrento
OPCO, LLC, a Delaware limited liability company ("Landlord"), and WebSENSE,
Inc., a Delaware corporation ("Tenant"), with reference to the following facts:
RECITALS
A. Landlord and NetPartners Internet Solutions Inc., have entered into that
certain Lease Agreement dated June 21, 1999 (the "Lease"), for the leasing
of certain premises containing approximately 41,259 rentable square feet
of space located at 10240 1st (Storage Room), 2nd (All) and 3rd (All)
Floors, San Diego, California (the "Premises") as such Premises are more
fully described in the Lease.
B. NetPartners Internet Solutions, Inc., has changed it's name to WebSENSE,
Inc.
C. Landlord and Tenant wish to amend the location of the Storage Room of the
First Floor.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1. Recitals: Landlord and Tenant agree that the above recitals are true
and correct.
2. Exhibit A. ("Premises") of the Lease is hereby deleted in its
entirety and replaced with Exhibit A attached hereto.
3. Effect of Amendment: Except as modified herein, the terms and
conditions of the Lease shall remain unmodified and continue in full
force and effect. In the event of any conflict between the terms and
conditions of the Lease and this Amendment, the terms and conditions
of this Amendment shall prevail.
4. Definitions: Unless otherwise defined in this Amendment, all terms
not defined in this Amendment shall have the meaning set forth in
the Lease.
5. Authority: Subject to the provisions of the Lease, this Amendment
shall be binding upon and inure to the benefit of the parties
hereto, their respective heirs, legal representatives, successors
and assigns. Each party hereto and the persons signing below warrant
that the persons signing below on such party's behalf is authorized
to do so and to bind such party to the terms of this Amendment.
6. The terms and provisions of the Lease are hereby incorporated in
this Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and
year first above written.
TENANT: LANDLORD:
WebSENSE, Inc. Legacy-RECP Sorrento OPCO, LLC
a Delaware corporation a Delaware limited liability company
By: /s/ [illegible] By: Legacy Partners Commercial, Inc.
-------------------------------
Its: VP Financing As Manager and Agent of Landlord
-------------------------------
Date: August 4, 1999
------------------------------- By: /s/ [illegible]
-------------------------------
By: /s/ [illegible]
-------------------------------
Its: CEO Date: 9/1/99
-------------------------------
Date: August 4, 1999
-------------------------------
<PAGE> 66
EXHIBIT A
(CONTINUED)
[PICTURE]
[PICTURE]
11
<PAGE> 67
EXHIBIT A - PREMISES
This exhibit, entitled "Premises", is and shall constitute EXHIBIT A to that
certain First Amendment to Lease Agreement dated August 2, 1999 (the
"Amendment"), by and between Legacy-RECP Sorrento OPCO, LLC, a Delaware limited
liability company ("Landlord") and WEBSENSE, Inc., a Delaware corporation
("Tenant") for the leasing of certain premises at 10240 Sorrento Valley Road,
1st (Storage Room), 2nd (All) and 3rd (All) Floors, San Diego, California (the
"Premises").
The premises consist of the rentable square footage of space specified in the
Base Lease Information and has the address specified in the Base Lease
Information. The Premises are a part of and are contained in the Building
specified in the Base Lease Information. The cross-hatched area depicts the
Premises within the Building.
[PICTURE]
[PICTURE]
12
<PAGE> 68
ESTOPPEL CERTIFICATE
<TABLE>
<CAPTION>
<S> <C>
RE: Netpartners Internet Solutions, Inc., a Delaware corporation
----------------------------------------------------------------------
Tenant's Full Name
10240 Sorrento Valley Road Suite No.:
-------------------------- ----------------
Full Address
San Diego, CA 92121
------------------------------------------------------
City, State, Zip
Legacy RECP Sorrento QPCO, LLC
------------------------------------------------------
(Borrower)
TO: FREMONT INVESTMENT & LOAN
------------------------------------------------------
(Lender)
ATTN: Debi Williams
</TABLE>
Sir/Madam:
RECITALS
1. Borrower is either Lessor or the successor-in-interest to Lessor and has
applied for a loan (the "loan") from Lender.
2. The proposed Loan will be secured by, among other things, the Lease
Agreement (the "Lease") reference herein.
3. The undersigned (hereinafter called "Lessee") is the Lessee of the
above-referenced property under the following lease agreement:
3.1 Date of Lease: June 21, 1999
------------------------------------------------------
3.2 Name of Original Lessor: RECP Sorrento OPCO, LLC
--------------------------------------------
3.3 Name of Original Lessee: NETPARTNERS INTERNET SOLUTIONS, Inc.,
--------------------------------------------
company name was changed to WebSENSE, Inc. per the First Amendment
--------------------------------------------------------------------
to Lease
--------------------------------------------------------------------
3.4 Suite or Unit Number: 10240 Sorrento Valley Road
-----------------------------------------------
3.5 Net Rentable S.F.: 41,259 square feet
--------------------------------------------------
3.6 Expiration date of existing term: August 31, 2002
-----------------------------------
3.7 Number and length of options (if none, write none): One additional
-----------------
3 years
--------------------------------------------------------------------
3.8 There are no Assignments, Amendments, Addendums, Modifications,
Extensions and/or Options to the Lease, except for (if none, write
none): Addendum 1, Option To Extend The Lease (dated 6/21/99),
--------------------------------------------------------------
Addendum 2, Right of First Offer (dated 6/21/99), and First
--------------------------------------------------------------------
Amendment To Lease Agreement Change of Commencement Date, (dated
--------------------------------------------------------------------
6/2/99)
--------------------------------------------------------------------
3.9 Current Fixed Monthly Base Rent: $54,452.00
------------------------------------
3.10 Current Total Monthly Expense Reimbursement (if none, write none):
$9,065.00
3.11 Total Parking Spaces Leased (if none, write none): One exclusive and
------------------
designated
--------------------------------------------------------------------
3.12 Total Current Parking Rent (if none, write none): None
-------------------
3.13 Present or Future Rent Abatement (if none, write none): None
-------------
4. Said lease agreement, together with the assignments, amendments,
addendums, modifications, extensions and/or options described above
(collectively called "Lease") constitute the entire agreement between
Lessee and Lessor with respect to the Leased Premises.
<PAGE> 69
Fremont Investment & Loan
Estoppel Certificate
Page 2
5. As of this date the Lease is in full force and effect.
5.1 Lessee is the actual occupant and is in possession of the Leased
Premises.
5.2 Lessee has not assigned, transferred or hypothecated it's interest
under the Lease.
5.3 All construction and installation of tenant improvements required to
be performed by, or paid by Lessor, under the Lease have been
completed and the Leased Premises has been accepted by Lessee. All
expenditures have been made and costs paid that are required of the
Lessee under the lease.
6. As of this date, no breach exists on the part of Lessee under the Lease.
7. To the best knowledge of Lessee, as of this date, no breach exists on the
part of Lessor under the Lease.
8. As to the rent:
8.1 No rent has been prepaid more than thirty (30) days in advance of
its' due date.
8.2 Lessee has no offsets or credits against rents payable.
8.3 Lessee has no claim against Lessor for any security or other
deposits other than the sum, which was paid pursuant to the terms of
the Lease.
8.4 The Fixed Monthly Base Rent, referenced above, does not include any
expense reimbursement or reimbursement for tenant improvements or
rental charges based on a percentage of sales.
9. Lessee does not engage in any activity on or about the Leased Premises
which constitutes or causes a Hazardous Substance Activity and Lessee does
not know of, nor has any reasonable cause to believe that a Hazardous
Substance, or a condition involving or resulting from the same, has come
to be located in, or, under or about the Leased Premises except for the
following.
(if none write "none"): __________________________________________________
The term "Hazardous Substance Activity" means any actual, proposed or threatened
storage, holding, existence, release, omission, discharge, generation,
processing, treatment, abatement, removal, disposition, handling or
transportation by any person of any Hazardous Substance from, under, into or on
the Leased Premises or the real property and improvements of which the Leased
Premises is a part, or surrounding property. The term "Hazardous Substance"
means (a) any chemical, compound, material, mixture or substance that is now or
hereafter defined or listed in, or otherwise classified pursuant to, any
Environmental Laws as a "hazardous substance", "hazardous material", "hazardous
waste", "extremely hazardous waste", "acutely hazardous waste", "radioactive
waste", "infectious waste", "biohazardous waste", "toxic substance",
"pollutant", "toxic pollutant", "contaminant" as well as any formulation not
mentioned herein intended to define, list or classify substances by reason of
deleterious properties such as ignitability, corrosivity, reactivity,
carcinogenicity, toxicity, reproductive toxicity, "EP toxicity", or "TCLP
toxicity"; (b) petroleum, natural gas, natural gas liquids, liquefied natural
gas, synthetic gas usable for fuel (or mixtures of natural gas and such
synthetic gas) and ash produced by a resource recovery facility utilizing a
municipal solid waste stream, and drilling fluids, produced waters and other
wastes associated with the exploration, development or production of crude oil,
natural gas, or geothermal resources; (c) "hazardous substance" as defined in
Section 25281(f) of the California Health and Safety Code; (d) "waste" as
defined in Section 13050(d) of the California Water Code; (e) asbestos in any
form; (f) urea formaldehyde foam insulation; (g) polychlorinated biphenyls
(PCBs); (h) radon; and (i) any other chemical, material, or substance exposure
to which is limited or regulated by any Governmental Agency because of its
quantity, concentration, or physical or chemical characteristics, or which poses
a significant present or potential hazard to human health or safety or to the
environment if released into the workplace or the environment. "Hazardous
Substances" shall not include ordinary
<PAGE> 70
Fremont Investment & Loan
Estoppel Certificate
Page 3
office supplies and repair, maintenance and cleaning supplies maintained in
reasonable and necessary quantities and used in accordance with all
Environmental Laws. The term "Environmental Laws" means any and all present and
future federal, state and local laws, ordinances, regulations, policies and any
other requirements of any governmental agency exercising jurisdiction over the
Leased Premises, Lessee or Lessor relating to health, safety, the environment or
to any Hazardous Substances, including without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), the
Resource Conservation Recovery Act (RCRA), the Hazardous Materials
Transportation Act, the Toxic Substance Control Act, the California
Environmental Quality Act and the applicable provisions of the California Health
and Safety Code, California Labor Code and the California Water Code, each
Endangered Species Act, the Clean Water Act, the Occupational Safety and Health
Act, as hereafter amended from time to time, and the present and future rules,
regulations and guidance documents promulgated under any of the foregoing.
10. Except as may be specifically set forth in the Lease, Lessee does not have
any right to renew or extend the term of the Lease nor any option or
preferential right to purchase all or any part of the Leased Premises or
all or any part of the building and premises of which the Leased Premises
are a part, nor any right, title or interest with respect to the Leased
Premises other than as Lessee under the lease.
11. Lessee understands that Lendor may make a loan secured by the Leased
Premises and that if it does so, it's action will be in material reliance
on this certificate.
LESSEE:
Dated: _________, ____ ____________________ _________________ _______________
Authorized Signature (Notary Required) Title/Position
<PAGE> 71
Fremont Investment & Loan
Estoppel Certificate
Page 4
ACKNOWLEDGEMENT (to be completed by Notary)
State of California )
) ss.
County of _________________ )
On ____________________ before me, ___________________________, Notary Public,
personally appeared _______________________________________, personally know to
me (or proved to me on the basis of satisfactory evidence) to be the person
whose name is subscribed to the within instrument and acknowledged to me that
he/she executed the same in his/her authorized capacity, and that by his/her
signature on the instrument the person, or the entity upon behalf of which the
person acted, executed the instrument.
WITNESS my hand and official seal.
______________________________________
Signature of Notary Public
LESSOR:
The undersigned Lessor under the above-described Lease hereby certifies that the
information contained in the foregoing certificate is true and correct and that
the party to whom this statement is addressed may rely upon said information.
Dated: _________, ____ _______________________________________ _______________
Authorized Signature Title/Position
Terry Thompson, Vice President
Date:__________________________________
<PAGE> 1
EXHIBIT 10.7
NETPARTNERS INTERNET SOLUTIONS, INC,
1998 EQUITY INCENTIVE PLAN
ADOPTED APRIL 28, 1998
APPROVED BY STOCKHOLDERS ON APRIL 28, 1998
1. PURPOSES.
(a) The purpose of this Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company, and its Affiliates,
may be given an opportunity to benefit from increases in value of the stock of
the Company through the granting of (i) Incentive Stock Options, (ii)
Nonstatutory Stock Options, (iii) stock bonuses, and (iv) rights to purchase
restricted stock, all as defined below.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company or
its Affiliates, to secure and retain the services of new Employees, Directors
and Consultants, and to provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Stock Awards issued under the Plan
shall, in the discretion of the Board or any Committee to which responsibility
for administration of the Plan has been delegated pursuant to subsection 3(c),
be either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, or (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and in such form as issued pursuant to Section 6,
and a separate certificate or certificates will be issued for shares purchased
on exercise of each type of Option.
2. DEFINITIONS.
(a) "Affiliate" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(e) "COMPANY" means NetPartners Internet Solutions, Inc., a Delaware
corporation.
1
<PAGE> 2
(f) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means
that the service of an individual to the Company, whether as an Employee,
Director or Consultant, is not interrupted or terminated. The Board or the chief
executive officer of the Company may determine, in that party's sole discretion,
whether Continuous Status as an Employee, Director or Consultant shall be
considered interrupted in the case of: (i) any leave of absence approved by the
Board or the chief executive officer of the Company, including sick leave,
military leave or any other personal leave; or (ii) transfers between the
Company, Affiliates or their successors.
(h) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.
(i) "DIRECTOR" means a member of the Board.
(j) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(k) "EXCHANGE ACt" means the Securities Exchange Act of 1934, as
amended.
(l) "FAIR MARKET VALUE" means the value of the common stock as
determined in good faith by the Board.
(m) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(n) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange, or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system.
(o) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
("Regulation S-K")), does not possess an interest in any other transaction as to
which disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in
2
<PAGE> 3
a business relationship as to which disclosure would be required under 404(b) of
Regulation S-K; or (ii) is otherwise considered a "non-employee director" for
purposes of Rule 16b-3
(p) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(q) "OFFICER" means (i) prior to the Listing Date, any person designated
by the Company as an officer and (ii) from and after the Listing Date, a person
who is an officer of the Company within the meaning of Section 16 of the
Exchange Act and the rules and regulations promulgated thereunder.
(r) "OPTION" means a stock option granted pursuant to the Plan.
(s) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(t) "OPTIONEE" means a person to whom an Option is granted pursuant to
the Plan or, if applicable, such other person who holds an outstanding Option.
(u) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
the Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(v) "PLAN" means this 1998 Equity Incentive Plan.
(w) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect with respect to the Company at the time discretion
is being exercised regarding the Plan.
(x) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(y) "STOCK AWARD" means any right granted under the Plan, including any
Option, any stock bonus, and any right to purchase restricted stock.
(z) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
3
<PAGE> 4
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; whether a Stock Award will be an Incentive Stock Option, a
Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock,
or a combination of the foregoing; the provisions of each Stock Award granted
(which need not be identical), including the time or times when a person shall
be permitted to receive stock pursuant to a Stock Award; and the number of
shares with respect to which a Stock Award shall be granted to each such person.
(2) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(3) To amend the Plan or a Stock Award as provided in Section 13.
(c) The Board may delegate administration of the Plan to a committee of
the Board composed of not fewer than two (2) members (the "Committee"), all of
the members of which Committee may be, in the discretion of the Board,
Non-Employee Directors and/or Outside Directors. If administration is delegated
to a Committee, the Committee shall have, in connection with the administration
of the Plan, the powers theretofore possessed by the Board, including the power
to delegate to a subcommittee of two (2) or more Outside Directors any of the
administrative powers the Committee is authorized to exercise (and references in
this Plan to the Board shall thereafter be to the Committee or such a
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Additionally, prior to the Listing Date, and
notwithstanding anything to the contrary contained herein, the Board may
delegate administration of the Plan to any person or persons and the term
"Committee" shall apply to any person or persons to whom such authority has been
delegated. Notwithstanding anything in this Section 3 to the contrary, the Board
or the Committee may delegate to a committee of one or more members of the Board
the authority to grant Stock Awards to eligible persons who (1) are not then
subject to Section 16 of the Exchange Act and/or (2) are either (i) not then
Covered Employees and are not expected to be Covered Employees at the time of
recognition of income resulting from such Stock Award, or (ii) not persons with
respect to whom the Company wishes to comply with Section 162(m) of the Code.
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4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 13 relating to adjustments upon
changes in stock, the stock that may be issued pursuant to Stock Awards shall
not exceed in the aggregate Two Million (2,000,000) shares of the Company's
common stock. If any Stock Award shall for any reason expire or otherwise
terminate, in whole or in part, without having been exercised in full, the stock
not acquired under such Stock Award shall revert to and again become available
for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY
(a) Incentive Stock Options may be granted only to Employees. Stock
Awards other than Incentive Stock Options and may be granted only to Employees,
Directors or Consultants.
(b) No person shall be eligible for the grant of an Option or an award
to purchase restricted stock if, at the time of grant, such person owns (or is
deemed to own pursuant to Section 424(d) of the Code) stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or of any of its Affiliates unless the exercise price of such Option
is at least one hundred ten percent (110%) of the Fair Market Value of such
stock at the date of grant and the Option is not exercisable after the
expiration of five (5) years from the date of grant, or in the case of a
restricted stock purchase award, the purchase price is at least one hundred
percent (100%) of the Fair Market Value of such stock at the date of grant.
(c) Subject to the provisions of Section 13 relating to adjustments upon
changes in stock, no person shall be eligible to be granted Options covering
more than Five Hundred Thousand (500,000) shares of the Company's common stock
in any twelve (12)-month period; provided, however, that to the extent that
Options are granted in connection with the commencement of employment of any
person, the total number of shares of Company's common stock covered under such
Options may equal to an amount not to exceed Five Hundred Thousand (500,000)
shares. This subsection 5(c) shall not apply prior to the Listing Date and,
following the Listing Date, shall not apply until (i) the earliest of: (A) the
first material modification of the Plan (including any increase to the number of
shares reserved for issuance under the Plan in accordance with Section 4); (B)
the issuance of all of the shares of common stock reserved for issuance under
the Plan; (C) the expiration of the Plan; or (D) the first meeting of
stockholders at which directors are to be elected that occurs after the close of
the third calendar year following the calendar year in which occurred the first
registration of an equity security under section 12 of the Exchange Act; or (ii)
such other date required by Section 162(m) of the Code and the rules and
regulations promulgated thereunder.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each
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Option shall include (through incorporation of provisions hereof by reference in
the Option or otherwise) the substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be
not less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted; the exercise price or
each Nonstatutory Stock Option shall be not less than eighty-five percent (85%)
of the Fair Market Value of the stock subject to the Option on the date the
Option is granted. Notwithstanding the foregoing, an Option (whether an
Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an
exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for another option
in a manner satisfying the provisions of Section 424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other common stock of the Company, (B)
according to a deferred payment or other arrangement (which may include, without
limiting the generality of the foregoing, the use of other common stock of the
Company) with the person to whom the Option is granted or to whom the Option is
transferred pursuant to subsection 6(d), or (C) in any other form of legal
consideration that may be acceptable to the Board. In the case of any deferred
payment arrangement, interest shall be compounded at least annually and shall be
charged at the minimum rate of interest necessary to avoid the treatment as
interest, under any applicable provisions of the Code, of any amounts other than
amounts stated to be interest under the deferred payment arrangement. In
addition, to the extent required by applicable law, the "par value" of the stock
will not be subject to any deferred payment arrangement and will be paid in cash
at the time the Option is exercised.
(d) TRANSFERABILITY. Prior to the Listing Date, an Option (whether an
Incentive Stock Option or a Nonstatutory Stock Option) shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Option is granted only
by such person. From and after the Listing Date, a Nonstatutory Stock Option may
be transferable to the extent provided in the Option Agreement; provided,
however, that if the Option Agreement does not specifically provide for
transferability, then such Nonstatutory Stock Option shall not be transferable
except by will or by the laws of descent and distribution. Notwithstanding the
foregoing, the person to whom the Option is granted may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionee, shall thereafter be
entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the
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Option may become exercisable ("vest") with respect to some or all of the shares
allotted to that period, and may be exercised with respect to some or all of the
shares allotted to such period and/or any prior period as to which the Option
became vested but was not fully exercised. The Option may be subject to such
other terms and conditions on the time or times when it may be exercised (which
may be based on performance or other criteria) as the Board may deem
appropriate. The vesting provisions of individual Options may vary, provided,
however that prior to the Listing Date, each Option will provide for vesting of
at least twenty percent (20%) per year of the total number of shares subject to
the Option. Notwithstanding the foregoing, an Option granted to an Officer,
Director or Consultant may become fully exercisable, subject to reasonable
conditions such as continued employment, at any time or during any period
established by the Company or of any of its Affiliates. The provisions of this
subsection 6(e) are subject to any Option provisions governing the minimum
number of shares as to which an Option may be exercised.
(f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it as of the date of resignation) but only
within such period of time ending on the earlier of (i) the date three (3)
months following the termination of the Optionee's Continuous Status as an
Employee, Director or Consultant (or such longer or shorter period, which shall
not be less than thirty (30) days, specified in the Option Agreement), or (ii)
the expiration of the term of the Option as set forth in the Option Agreement;
provided however, if the Optionee is terminated for cause, then the Option shall
terminate on the date Optionee's Continuous Service ceases. If, at the date of
termination, the Optionee is not entitled to exercise his or her entire Option,
the shares covered by the unexercisable portion of the Option shall revert to
and again become available for issuance under the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified in
the Option Agreement, the Option shall terminate, and the shares covered by such
Option shall revert to and again become available for issuance under the Plan.
An Optionee's Option Agreement may also provide that if the exercise of
the Option following the termination of the Optionee's Continuous Status as an
Employee, Director, or Consultant (other than upon the Optionee's death or
disability) would result in liability under Section 16(b) of the Exchange Act,
then the Option shall terminate on the earlier of (i) the expiration of the term
of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day
after the last date on which such exercise would result in such liability under
Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may
also provide that if the exercise of the Option following the termination of the
Optionee's Continuous Status as an Employee, Director or Consultant (other than
upon the Optionee's death or disability) would be prohibited at any time solely
because the issuance of shares would violate the registration requirements under
the Securities Act, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in the first paragraph of this
subsection 6(f), or (ii) the expiration of a period of three (3) months after
the termination of the Optionee's Continuous Status as an Employee, Director or
Consultant during which the exercise of the Option would not be in violation of
such registration requirements.
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(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status
as an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it as of the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period, which in no
event shall be less than six (6) months, specified in the Option Agreement), or
(ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, at the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
(h) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within a period specified in the Option Agreement after the termination of,
the Optionee's Continuous Status as an Employee, Director or Consultant, the
Option may be exercised (to the extent the Optionee was entitled to exercise the
Option as of the date of death) by the Optionee's estate, by a person who
acquired the right to exercise the Option by bequest or inheritance or by a
person designated to exercise the option upon the Optionee's death pursuant to
subsection 6(d), but only within the period ending on the earlier of (i) the
date eighteen (18) months following the date of death (or such longer or shorter
period, which in no event shall be less than six (6) months, specified in the
Option Agreement), or (ii) the expiration of the term of such Option as set
forth in the Option Agreement. If, at the time of death, the Optionee was not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after death, the Option is not exercised within
the time specified herein, the Option shall terminate, and the shares covered by
such Option shall revert to and again become available for issuance under the
Plan.
(i) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased shall be subject to a repurchase right in favor of the Company, with
the repurchase price to be equal to the original purchase price of the stock, or
to any other restriction the Board determines to be appropriate. Prior to the
Listing Date, however, any unvested shares so purchased shall be subject to a
repurchase right in favor of the Company, with the repurchase price to be equal
to the original purchase price of the stock, or to any other restriction the
Board determines to be appropriate; provided, however, that (i) the right to
repurchase at the original purchase price shall lapse at a minimum rate of
twenty percent (20%) per year over five (5) years from the date the Option was
granted, and (ii) such right shall be exercisable only within (A) the ninety
(90)-day period following the termination of employment or the relationship as a
Director or Consultant, or (B) such longer period as may be agreed to by the
Company and the Optionee (for example, for purposes of satisfying the
requirements of Section 1202(c)(3) of the Code (regarding "qualified small
business stock")), and (iii) such right shall be exercisable only for cash or
cancellation of purchase money indebtedness for the shares. Notwithstanding the
foregoing, shares received on exercise of an Option by an Officer, Director or
Consultant may be subject to additional or greater restrictions.
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(j) RIGHT OF REPURCHASE. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to
repurchase all or any part of the vested shares exercised pursuant to the
Option; provided, however, that (i) such repurchase right shall be exercisable
only within (A) the ninety (90) day period following the termination of
employment or the relationship as a Director or Consultant (or in the case of a
post-termination exercise of the Option, the ninety (90)-day period following
such post-termination exercise), or (B) such longer period as may be agreed to
by the Company and the Optionee (for example, for purposes of satisfying the
requirements of Section 1202(c)(3) of the Code (regarding "qualified small
business stock")), (ii) such repurchase right shall be exercisable for less than
all of the vested shares only with the Optionee's consent, and (iii) such right
shall be exercisable only for cash or cancellation of purchase money
indebtedness for the shares at a repurchase price equal to the greater of (A)
the stock's Fair Market Value at the time of such termination. Notwithstanding
the foregoing, shares received on exercise of an Option by an Officer, Director
or Consultant may be subject to additional or greater restrictions specified in
the Option Agreement.
(k) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to exercise
a right of first refusal following receipt of notice from the Optionee of the
intent to transfer all or any part of the shares exercised pursuant to the
Option.
7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be in such
form and shall contain such terms and conditions as the Board or the Committee
shall deem appropriate. The terms and conditions of stock bonus or restricted
stock purchase agreements may change from time to time, and the terms and
conditions of separate agreements need not be identical, but each stock bonus or
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions as appropriate:
(a) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board or Committee shall
determine and designate in such Stock Award Agreement, but in no event shall the
purchase price be less than eighty-five percent (85%) of the stock's Fair Market
Value on the date such award is made. In addition, any Stock Award made to a 10%
stockholder (as defined in Section 5(b)) shall have a purchase price not less
than one hundred and ten percent (110%) of the stock's Fair Market Value on the
date such award is made. Notwithstanding the foregoing, the Board or the
Committee may determine that eligible participants in the Plan may be awarded
stock pursuant to a stock bonus agreement in consideration for past services
actually rendered to the Company or for its benefit.
(b) TRANSFERABILITY. Rights under a stock bonus or restricted stock
purchase agreement shall be transferable by the grantee only upon such terms and
conditions as are set forth in the applicable Stock Award Agreement, as the
Board or the Committee shall determine
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in its discretion, so long as stock awarded under such Stock Award Agreement
remains subject to the terms of the agreement.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or the Committee, according to a
deferred payment or other arrangement with the person to whom the stock is sold;
or (iii) in any other form of legal consideration that may be acceptable to the
Board or the Committee in its discretion. Notwithstanding the foregoing, the
Board or the Committee to which administration of the Plan has been delegated
may award stock pursuant to a stock bonus agreement in consideration for past
services actually rendered to the Company or for its benefit.
(d) VESTING. Shares of stock sold or awarded under the Plan may, but
need not, be subject to a repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board or the
Committee. The applicable agreement shall provide (i) that the right to
repurchase at the original purchase price shall lapse at a minimum rate of
twenty percent (20%) per year over five (5) years from the date the Stock Award
was granted, and (ii) such right shall be exercisable only (A) within the ninety
(90) day period following the termination of employment or the relationship as a
Director or Consultant, or (B) such longer period as may be agreed to by the
Company and the holder of the Stock Award (for example, for purposes of
satisfying the requirements of Section 1202(c)(3) of the Code (regarding
"qualified small business stock")), and (iii) such right shall be exercisable
only for cash or cancellation of purchase money indebtedness for the shares.
Should the right of repurchase be assigned by the Company, the assignee shall
pay the Company cash equal to the difference between the original purchase price
and the stock's Fair Market Value if the original purchase price is less than
the stock's Fair Market Value.
(e) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event a Participant's Continuous Status as an Employee,
Director or Consultant terminates, the Company may repurchase or otherwise
reacquire, subject to the limitations described in subsection 7(d), any or all
of the shares of stock held by that person which have not vested as of the date
of termination under the terms of the stock bonus or restricted stock purchase
agreement between the Company and such person.
8. CANCELLATION AND RE-GRANT OF OPTIONS.
(a) The Board or the Committee shall have the authority to effect, at
any time and from time to time, (i) the repricing of any outstanding Options
under the Plan and/or (ii) with the consent of the affected holders of Options,
the cancellation of any outstanding Options under the Plan and the grant in
substitution therefor of new Options under the Plan covering the same or
different numbers of shares of stock, but having an exercise price per share not
less than eighty-five percent (85%) of the Fair Market Value (one hundred
percent (100%) of the Fair Market Value in the case of an Incentive Stock
Option) or, in the case of a 10% stockholder (as described in subsection 5(b)),
not less than one hundred ten percent (110%) of the Fair Market Value) per share
of stock on the new grant date. Notwithstanding the foregoing, the Board or the
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Committee may grant an Option with an exercise price lower than that set forth
above if such Option is granted as part of a transaction to which section 424(a)
of the Code applies.
(b) Shares subject to an Option canceled under this Section 8 shall
continue to be counted against the maximum award of Options permitted to be
granted pursuant to subsection 5(c) of the Plan. The repricing of an Option
under this Section 8, resulting in a reduction of the exercise price, shall be
deemed to be a cancellation of the original Option and the grant of a substitute
Option; in the event of such repricing, both the original and the substituted
Options shall be counted against the maximum awards of Options permitted to be
granted pursuant to subsection 5(c) of the Plan. The provisions of this
subsection 8(b) shall be applicable only to the extent required by Section
162(m) of the Code.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Stock Awards.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Stock Award; provided,
however, that this undertaking shall not require the Company to register under
the Securities Act either the Plan, any Stock Award or any stock issued or
issuable pursuant to any such Stock Award. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
and sale of stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell stock upon exercise of such Stock Awards
unless and until such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
(a) Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.
11. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a
Stock Award may first be exercised or the time during which a Stock Award or any
part thereof will vest pursuant to subsection 6(e), 7(d) or 8(b),
notwithstanding the provisions in the Stock Award stating the time at which it
may first be exercised or the time during which it will vest.
(b) Neither an Employee, Director or Consultant nor any person to whom a
Stock Award is transferred under subsection 6(d), 7(b), or 8(b) shall be deemed
to be the holder of, or to have any of the rights of a holder with respect to,
any shares subject to such Stock Award unless and until such person has
satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
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(c) Throughout the term of any Stock Award, the Company shall deliver to
the holder of such Stock Award, not later than one hundred twenty (120) days
after the close of each of the Company's fiscal years during the term of such
Stock Award, a balance sheet and an income statement. This subsection shall not
apply (i) after the Listing Date, or (ii) when issuance is limited to key
employees whose duties in connection with the Company assure them access to
equivalent information.
(d) Nothing in the Plan or any instrument executed or Stock Award
granted pursuant thereto shall confer upon any Employee, Director, Consultant or
other holder of Stock Awards any right to continue in the employ of the Company
or any Affiliate (or to continue acting as a Director or Consultant) or shall
affect the right of the Company or any Affiliate to terminate the employment of
any Employee with or without cause the right of the Company's Board of Directors
and/or the Company's stockholders to remove any Director as provided in the
Company's By-Laws and the provisions of the General Corporations Law of the
State of Delaware, or the right to terminate the relationship of any Consultant
subject to the terms of such Consultant's agreement with the Company or
Affiliate.
(e) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(f) The Company may require any person to whom a Stock Award is granted,
or any person to whom a Stock Award is transferred pursuant to subsection 6(d),
7(b) or 8(b), as a condition of exercising or acquiring stock under any Stock
Award, (1) to give written assurances satisfactory to the Company as to such
person's knowledge and experience in financial and business matters and/or to
employ a purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters, and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (2) to
give written assurances satisfactory to the Company stating that such person is
acquiring the stock subject to the Stock Award for such person's own account and
not with any present intention of selling or otherwise distributing the stock.
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Stock Award has been registered under
a then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
(g) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or local
tax withholding obligation
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relating to the exercise or acquisition of stock under a Stock Award by any of
the following means or by a combination of such means: (1) tendering a cash
payment; (2) authorizing the Company to withhold shares from the shares of the
common stock otherwise issuable to the participant as a result of the exercise
or acquisition of stock under the Stock Award; or (3) delivering to the Company
owned and unencumbered shares of the common stock of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the plan, or subject
to any Stock Award (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the type(s) and maximum number of securities subject to the Plan
pursuant to subsection 4(a) and the maximum number of securities subject to
award to any person during any twelve (12) month period pursuant to subsection
5(c), and the outstanding Stock Awards will be appropriately adjusted in the
type(s) and number of securities and price per share of stock subject to such
outstanding Stock Awards. Such adjustments shall be made by the Board or the
Committee, the determination of which shall be final, binding and conclusive.
(The conversion of any convertible securities of the Company shall not be
treated as a "transaction not involving the receipt of consideration by
Company.")
(b) In the event of: (1) a merger or consolidation in which the Company
is not the surviving corporation; or (2) a reverse merger in which the Company
is the surviving corporation but the shares of the Company's common stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise; then: (i) any surviving corporation or acquiring corporation shall
assume any Stock Awards outstanding under the Plan or shall substitute similar
stock awards (including an award to acquire the same consideration paid to the
stockholders in the transaction described in this subsection 12(b)) for those
outstanding under the Plan, or (ii) in the event any surviving corporation or
acquiring corporation refuses to assume such Stock Awards or to substitute
similar stock awards for those outstanding under the Plan, (A) with respect to
Stock Awards held by persons then performing services as Employees, Directors or
Consultants, the vesting of such Stock Awards (and, if applicable, the time
during which such Stock Awards may be exercised) shall be accelerated prior to
such event and the Stock Awards terminated if not exercised after such
acceleration and at or prior to such event, and (B) with respect to any other
Stock Awards outstanding under the Plan, such Stock Awards shall be terminated
if not exercised prior to such event. In the event of: (x) a, dissolution or
liquidation, or (y) a sale of all or substantially all of the assets of the
Company, the outstanding Options shall terminate if not exercised prior to such
event; unless, in the event of such a sale of all or substantially all of the
assets of the Company, the acquiring person or entity agrees to assume the
Options outstanding under the Plan.
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13. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder approval is necessary for the Plan to
satisfy the requirements of Section 422 of the code, Rule 16b-3 under the
Exchange Act or any Nasdaq or securities exchange listing requirements.
(b) The Board may in its sole discretion submit any other amendment to
the Plan for stockholder approval, including, but not limited to, amendments to
the Plan intended to satisfy the requirements of Section 162(m) of the Code and
the regulations promulgated thereunder regarding the exclusion of
performance-based compensation from the limit on corporate deductibility of
compensation paid to certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide eligible Employees
with the maximum benefits provided or to be provided under the provisions of the
Code and the regulations promulgated thereunder relating to Incentive Stock
Options and/or to bring the Plan and/or Incentive Stock Options granted under it
into compliance therewith.
(d) Rights and obligations under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Stock Award was
granted and (ii) such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms of
any one or more Stock Award; provided, however, that the rights and obligations
under any Stock Award shall not be impaired by any such amendment unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
14. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on August 28, 2008, which date shall
be within ten (10) years from the date the Plan is adopted by the Board or
approved by the stockholders of the Company, whichever is earlier. No Stock
Awards may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) Rights and obligations under any Stock Award granted while the Plan
is in effect shall not be impaired by suspension or termination of the Plan,
except with the written consent of the person to whom the Stock Award was
granted.
15. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Stock
Awards granted under the Plan shall be exercised unless and until the Plan has
been approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board.
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EXHIBIT 10.8
STANDARD TERMS AND CONDITIONS RELATING TO
NONSTATUTORY STOCK OPTIONS
UNDER THE 1998 EQUITY INCENTIVE PLAN OF
NETPARTNERS INTERNET SOLUTIONS, INC.
The following Standard Terms and Conditions Relating to Nonstatutory
Stock Options (the "Terms and Conditions") apply to the Nonstatutory Stock
Options granted under the 1998 Equity Incentive Plan of NetPartners Internet
Solutions, Inc. (the "Plan"), the applicable terms of which are hereby
incorporated by reference and made a part of these standard Terms and
Conditions. In turn, these Terms and Conditions are incorporated by reference
into each such Option. Whenever capitalized terms are used in these Terms and
Conditions, they shall have the meaning specified (i) in the Plan, (ii) in the
NetPartners Internet Solutions, Inc. Notice of Grant of Stock Options (the
"Facing Page") into which these Terms and Conditions are incorporated by
reference, or (iii) below, unless the context clearly indicates to the contrary.
As used herein and in the Plan, the "Option Agreement" shall mean the Notice of
Grant of Stock Options Facing Page and these Terms and Conditions as
incorporated therein. The masculine pronoun shall include the feminine and
neuter, and the singular the plural, where the context so indicates.
1. TERM OF OPTION. Subject to the maximum time limitations in Article 6
of the Plan, the term of the Option shall be the period commencing on the date
of the Option Agreement and ending on the Expiration Date (as defined in the
Facing Page), unless terminated earlier as provided herein or in the Plan.
2. EXERCISE PRICE. The exercise price of the Option granted hereby shall
be not less than eighty-five percent (85%) of the Fair Market Value of the
shares of Common Stock acquired upon exercise of each Option (the "Option
Shares") on the date the Option is granted; provided, however, if the Optionee
owns (or is deemed to own pursuant to Section 424(d) of the Code) stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company (or any of its Affiliates), the exercise price
of the Option shall be not less than one hundred ten percent (110%) of the Fair
Market Value of the Option Shares on the date the Option is granted.
3. EXERCISE OF OPTION.
(a) The Facing Page shall set forth the rate at which the Option
Shares shall become subject to purchase by Optionee; provided, however, such
Option Shares shall become subject to purchase ("vest") at an annual rate which
is not less than twenty percent (20%) of the total Option Shares subject to the
Option over the five (5) year period commencing with the date of the grant of
the Option.
(b) Optionee shall exercise the Option to the extent exercisable, in
whole or in part, by sending written notice to the Company in the form attached
hereto as Exhibit A of his intention to purchase Option Shares hereunder,
together with a check in the amount of the full purchase price of the Option
Shares to be purchased. Except as otherwise provided in the Plan,
<PAGE> 2
Optionee shall not exercise the Option at any one time with respect to less than
the minimum number of Option Shares as is set forth on the Facing Page.
(c) Optionee agrees to complete and execute any additional documents
which the Company reasonably requests that Optionee complete in order to comply
with applicable federal, state and local securities laws, rules and regulations.
(d) Subject to the Company's compliance with all applicable laws,
rules and regulations relating to the issuance of such Option Shares and
Optionee's compliance with all the terms and conditions of the Option Agreement,
these Terms and Conditions and the Plan, the Company shall promptly deliver the
Option Shares to the Optionee.
(e) Except as otherwise provided herein or in the Plan, the Option
may be exercised during the lifetime of the Optionee only by the Optionee.
4. OPTION NOT TRANSFERABLE. The Option granted hereunder shall not be
transferable in any manner other than upon the death of Optionee as provided in
the Plan. More particularly (but without limiting the foregoing), the Option may
not be assigned, transferred (except as expressly provided herein), pledged or
hypothecated in any way, shall not be assignable by operation of law and shall
not be subject to execution, attachment or similar process. Any attempted
assignment, transfer, pledge, hypothecation or other disposition of the Option
contrary to the provisions hereof, or the levy of any execution, attachment or
similar process upon the Option, shall be null and void and without effect.
5. TERMINATION OF OPTION.
(a) To the extent not previously exercised, the Option shall
terminate on the Expiration Date; provided, however, that except as otherwise
provided in this Section 5 the Option may not be exercised more than thirty (30)
days after the Termination of Employment or Consulting Relationship of Optionee
for any reason (other than upon Optionee's death or disability). Within such
thirty (30) day period, Optionee may exercise the Option only to the extent the
same was exercisable on the date of such termination and said right to exercise
shall terminate at the end of such period.
(b) In the event of the Termination of Employment or Consulting
Relationship of Optionee as a result of Optionee's disability, the Option shall
be exercisable for a period of twelve (12) months from the date of such
termination, but in no event later than the Expiration Date and only to the
extent that the Option was exercisable on the date of such termination.
(c) In the event of the Termination of Employment or Consulting
Relationship of Optionee as a result of Optionee's death, the Option shall be
exercisable by the Optionee's estate (or by the person who acquires the right to
exercise the Option by will or by the laws of descent and distribution) for a
period of twelve (12) months from the date of such termination, but in no event
later than the Expiration Date and only to the extent that the Optionee was
entitled to exercise the Option on the date of death.
(d) Notwithstanding the preceding paragraphs of this Section 5, if
the Company's Board of Directors determines in good faith that Optionee has
committed an act of
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fraud, theft, other act of dishonesty, act of moral turpitude, or any other act
materially inimical to the interest of the Company, the Option (including the
right to purchase Option Shares hereunder which have accrued but remain
unexercised) shall cease to be exercisable simultaneously with such act.
(e) Notwithstanding anything herein to the contrary, no portion of
any Option which is not exercisable by the Optionee upon the Termination of
Employment or Consulting Relationship of such Optionee shall thereafter become
exercisable, regardless of the reason for such termination.
6. NO RIGHT TO CONTINUED RELATIONSHIP. The Option does not confer upon
Optionee any right to continue in his capacity as an Employee, Consultant or
Director of the Company, nor does it limit in any way the right of the Company
to terminate Optionee's relationship with the Company at any time, with or
without cause.
7. RIGHT OF REPURCHASE OF OPTION SHARES.
(a) Notwithstanding any provision herein to the contrary, the Option
Shares issued pursuant to the Option shall be subject to a right, but not an
obligation, of repurchase by the Company (the "Right of Repurchase"), at the
price determined under subsection (b) below, if prior to the Expiration Date or
the termination of the Right of Repurchase as provided in Section 9(d) below, a
Termination of Employment or Consulting Relationship occurs for any reason,
including as a result of Optionee's death or disability. Option Shares issued by
the Company shall not be transferable by the Optionee during the period during
which the Right of Repurchase applies, and the Company may take such steps as it
deems necessary to ensure compliance with this restriction.
(b) The price per share at which the Company may exercise the Right
of Repurchase (the "Repurchase Price") shall be the higher of (i) the price the
Optionee paid for such Option Shares or (ii) the Fair Market Value of such
Option Shares on the date the Company exercises its Right of Repurchase, as
determined in good faith by the Company's Board of Directors (or an officer
appointed by the Board of Directors for such purpose).
(c) The Company's Right of Repurchase shall terminate if not
exercised by written notice from the Company to the Optionee within ninety (90)
days of the Termination of Employment or Consulting Relationship, unless the
Termination of Employment or Consulting Relationship occurs under section 5(b),
or 5(c), in which case, within fifteen (15) months. If the Company exercises its
Right of Repurchase, it shall give notice thereof to the Optionee within such
ninety (90) day (or 15 month) period, and, upon receipt of such notice, the
Optionee shall immediately endorse and deliver to the Company the stock
certificate(s) representing the Option Shares being repurchased, and the Company
shall then promptly pay, pursuant to the provisions of Section 7(d) below, the
total Repurchase Price to the Optionee. If the Company exercises its Right of
Repurchase it shall exercise its right with respect to all (not some) of such
Option Shares.
(d) The Repurchase Price shall be paid first by cancellation of any
obligation for accrued but unpaid interest outstanding under notes issued by the
Optionee upon purchase of
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<PAGE> 4
the Option Shares (if any), next by cancellation of principal outstanding under
such notes (if any), and finally by payment in cash of the balance due.
(e) In the event the Company does not elect to exercise its Right of
Repurchase within the specific period as outlined in section 7(b), the Option
Shares shall no longer be subject to repurchase by the Company pursuant to this
Section 7.
8. RIGHT OF FIRST REFUSAL. Optionee agrees that he will not sell or
otherwise transfer any Option Shares (including transfer by operation of law) at
any time after the expiration of the Right of Repurchase and prior to the
termination of this section pursuant to Section 9(d) below unless such Option
Shares shall first be offered to the Company as follows:
(a) The Optionee shall deliver a notice (the "Notice") to the
Company, stating (i) the Optionee's bona fide intention to sell or transfer such
Option Shares, (ii) the number of such Option Shares to be sold or transferred,
(iii) the consideration for which the Optionee proposes to sell or transfer such
Option Shares, (iv) the terms of payment of such consideration and any other
terms and conditions of sale, and (v) the name of the proposed purchaser or
transferee.
(b) Within thirty (30) days after receipt of the Notice, the Company
may elect to purchase any or all of the Option Shares to which the Notice
refers, for the consideration per share and upon the terms and conditions
specified in the Notice, except as set forth in Section 8(e) below for transfers
involving non-cash consideration. If the Company elects not to purchase all such
Option Shares, the Company may assign its right to purchase the remaining Option
Shares. The Company's assignees may elect, within thirty (30) days after receipt
by the Company of the Notice, to purchase any or all Option Shares to which the
Notice refers which the Company has not elected to purchase, for the
consideration per share and upon the terms and conditions specified in the
Notice, except as set forth in Section 8(e) below. An election to purchase shall
be made by written notice to the Optionee, specifying the number of Option
Shares to be purchased. If the Company and/or its assignees elect to so purchase
the offered Option Shares, they shall complete the purchase of such shares
within sixty (60) days after receipt by the Company of the Notice, unless a
longer period is set forth in the Notice.
(c) If the Company and/or its assignees do not elect to so purchase
all of such offered Option Shares within such thirty (30) day period, Optionee
shall have no obligation to transfer such Option Shares to the Company and/or
its assignees and Optionee shall have a period of thirty (30) days thereafter to
transfer all (but not less than all) of such Option Shares to the transferee
referred to in the Notice and for the same consideration and on the other terms
as set forth therein; provided, however, that prior to any transfer of such
Option Shares, the proposed transferee shall execute and deliver to the Company
an agreement with the Company, in form and substance satisfactory to the
Company, pursuant to which such transferee agrees to be subject to the relevant
provisions of the Option Agreement.
(d) In the event that such Option Shares are not transferred to the
transferee referred to in the Notice and in accordance with the terms of the
Option Agreement within such 30-day period, the restrictions on transfer
provided in this Section 8 shall again become applicable to the Option Shares.
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<PAGE> 5
(e) If part or all of the purchase consideration specified in a
Notice delivered by the Optionee pursuant to this Section 8 is other than cash
or purchaser's promissory note or other evidence of indebtedness, the Company
and its assignee(s) shall have the right to purchase any or all of the Option
Shares specified in the Notice for a cash price equal to the Fair Market Value
of the number of Option Shares to be so purchased by the Company and/or its
assignee(s). The Fair Market Value of any Option Shares shall be as determined
in good faith by the Company's Board of Directors (or an officer appointed by
the Board of Directors for such purposes).
9. OTHER PROVISIONS REGARDING TRANSFER.
(a) Optionee, as a condition for accepting any Option Shares, shall
not sell, transfer or pledge any Option Shares subject to the Right of
Repurchase described in Section 7 or the right of first refusal described in
Section 8 hereof, other than in the manner expressly permitted in the Option
Agreement, and any such sale, transfer or pledge of the Option Shares in
violation of this Agreement shall be void. The Company shall not be required (i)
to transfer on its books any Option Shares which shall have been sold or
transferred in violation of any of the provisions set forth in the Option
Agreement or (ii) to treat as the owner of such Option Shares or accord the
right to vote or pay dividends to any transferee to whom such Option Shares
shall have been so transferred.
(b) Notwithstanding anything to the contrary contained herein,
Optionee is under no restrictions as to the transfer by him of any or all of the
issued Option Shares to his Related Transferees (as defined herein) provided
that each such Related Transferee shall first (i) execute a written consent to
be bound by all of the relevant provisions of the Option Agreement in form and
substance satisfactory to the Company and (ii) give a duplicate original of such
consent to the Company. The "Related Transferees" of the Optionee as used herein
shall consist of the Optionee's spouse, his lineal descendants, and trusts for
the benefit of any Optionee or of the foregoing, Optionee and/or his minor
lineal descendants. In the event of any transfer by the Optionee to his Related
Transferees of all or any part of the Option Shares (or in the event of any
subsequent transfer by any such Related Transferee to another Related Transferee
of the Optionee), such Related Transferees shall receive and hold the Option
Shares subject to the relevant terms of the Option Agreement and the Optionee's
rights and obligations hereunder as though the Option Shares were still owned by
the Optionee and shall together with the Optionee continue to be deemed to be
the "Optionee" for purposes of the Option Agreement, including without
limitation restrictions on the transfer of Option Shares. There shall be no
further transfer of the Option Shares by a Related Transferee except between and
among such Related Transferee, the Optionee and other Related Transferees of the
Optionee, or except as permitted by the Option Agreement. The Company advises
the Optionee to seek independent tax counsel prior to transferring any Option
Shares to any Related Transferee.
(c) The Optionee hereby grants to the Company a security interest in
the Option Shares for the purpose of ensuring that a transfer in violation of
the restrictions set forth in Sections 7, 8 and 9 of this Agreement does not
occur. In furtherance of such security interest, the Company may, at its option,
retain the certificate(s) evidencing the Option Shares, together with stock
assignments executed in blank by the Optionee, until such transfer restrictions
terminate in accordance with Section 9(d). The Optionee hereby grants to any
officer(s) of the
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<PAGE> 6
Company the power of attorney to cause the Option Shares to be transferred on
the books of the Company in the event the Company and/or its assignees
repurchase some or all of the Option Shares in accordance with the Option
Agreement.
(d) The transfer restrictions provided in Sections 7, 8 and 9 hereof
shall terminate upon the earlier to occur of (i) the effectiveness of a
registration statement (other than a registration statement pursuant to any
employee, purchase, savings, option, bonus, appreciation, profit sharing,
thrift, incentive or similar plan of the Company) filed by the Company under the
Securities Act in connection with the initial public offering of its securities,
and the completion of the sale of securities made pursuant to such registration
statement for an aggregate amount of at least $10,000,000, and (ii) such other
conditions as the Board of Directors may determine in its sole discretion.
10. NOTICE OF TAX ELECTION. If Optionee makes any tax election relating
to the treatment of the Option Shares under the Internal Revenue Code of 1986,
as amended, Optionee shall promptly notify the Company of such election.
11. MARKET STAND-OFF.
(a) In connection with any underwritten public offering by the
Company of its equity securities pursuant to an effective registration statement
filed under the Securities Act, including the Company's initial public offering,
Optionee shall not sell, make any short sale of, loan, hypothecate, pledge,
grant any option for the purchase of, or otherwise dispose of or transfer for
value or otherwise agree to engage in any of the foregoing transactions with
respect to any of the Option Shares without the prior written consent of the
Company and its underwriters, for such period of time from and after the
effective date of such registration statement as may be requested by the Company
or such underwriters. This Section 11 shall only remain in effect for the one
hundred and eighty (180) day period immediately following the effective date of
the Company's initial public offering and shall thereafter terminate.
(b) Notwithstanding the foregoing, Optionee shall be subject to the
market stand-off provisions of this Section 11 only if the executive officers
and directors of the Company are also subject to similar arrangements which are
no less restrictive.
(c) In order to enforce the provisions of this Section 11, the
Company may impose stop-transfer instructions with respect to the Option Shares
until the end of the applicable stand-off period.
12. ACKNOWLEDGMENTS OF OPTIONEE. Optionee acknowledges and agrees that:
(a) Optionee and his transferees shall have no rights as a
shareholder with respect to any Option Shares until the date of the issuance of
a stock certificate evidencing such Option Shares. No adjustment shall be made
for dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued, except as provided in Article 14 of
the Plan.
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<PAGE> 7
(b) All certificates representing the Option Shares shall have
endorsed thereon the following legends, the provisions of which are hereby
incorporated into the Option Agreement:
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES
LAWS OF ANY STATE AND HAVE BEEN ISSUED AND SOLD PURSUANT TO AN EXEMPTION
FROM THE ACT AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED BY
THE HOLDERS THEREOF AT ANY TIME EXCEPT (1) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT FILED UNDER THE ACT COVERING THE SECURITIES, OR
(2) IF, IN THE REASONABLE OPINION OF COUNSEL TO THE CORPORATION, SUCH
SHARES MAY BE TRANSFERRED WITHOUT SUCH REGISTRATION.
IN ADDITION, SALE, TRANSFER OR HYPOTHECATION OF THIS SECURITY IS
RESTRICTED BY THE PROVISIONS OF A NONSTATUTORY STOCK OPTION AGREEMENT
(AND THE STANDARD TERMS AND CONDITIONS RELATING TO NONSTATUTORY STOCK
OPTIONS INCORPORATED THEREIN) ENTERED INTO BY THE CORPORATION AND THIS
SHAREHOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE
CORPORATION AND ALL OF THE PROVISIONS OF WHICH ARE INCORPORATED HEREIN.
13. INVESTMENT REPRESENTATIONS. As an inducement to the Company to grant
the Option and issue the Option Shares to the Optionee, the Optionee hereby
makes the following representations and warranties, and authorizes the Company
to rely upon the same:
(a) The Optionee will acquire the Option Shares for investment for
his own account, not for resale, without any intention of or view toward or for
participating, directly or indirectly, in a distribution of the Option Shares or
any portion thereof.
(b) The Optionee understands that an investment in the Company is
speculative, that any possible profits therefrom are uncertain, and that he must
bear the economic risks of the investment in the Company for an indefinite
period of time.
(c) The Optionee understands that the Option Shares have not been
registered under the Securities Act in reliance on the exemption provided by
Rule 701 promulgated thereunder for compensatory benefit plans; and that the
Option Shares have not been registered or qualified under the "blue sky" laws of
any state.
(d) The Optionee understands that the Option Shares may have to be
held indefinitely unless they are subsequently registered under the Securities
Act and qualified or registered under other applicable securities laws, rules
and regulations, which is unlikely, or unless an exemption from such
qualification or registration is available.
(e) The Optionee understands and agrees that (i) the legends set
forth in Section 12(b) hereof will be placed on the certificate(s) evidencing
the Option Shares and, except
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<PAGE> 8
as otherwise provided in Section 12(b), on certificate(s) issued to transferees;
(ii) the stock records of the Company will be noted with respect to such
restrictions; (iii) the Company will not be under any obligation to register the
Option Shares or to comply with any exemption available for sale of the Option
Shares without registration; and (iv) the information or conditions necessary to
permit routine sales of securities of the Company under Rule 144 of the
Securities Act are not now available and it is not likely that they will become
available in the foreseeable future.
(f) The Optionee is a bona fide resident and domiciliary of, not a
temporary transient resident of, and has his principal residence in, the state
or other jurisdiction set forth under Optionee's signature in the Option
Agreement, and Optionee does not have any present intention of moving his
principal residence from such state or jurisdiction.
14. WITHHOLDING TAXES. Whenever Option Shares are to be issued under the
Option Agreement, the Company shall have the right to require Optionee to remit
to the Company an amount sufficient to satisfy federal, state and local
withholding tax requirements prior to issuance and/or delivery of any
certificate or certificates for such Option Shares.
15. FINANCIAL INFORMATION. The Corporation shall provide to each
Optionee on an annual basis a copy of the annual financial report prepared by
the Company's independent certified public accountants.
16. MISCELLANEOUS.
(a) The Option Agreement shall bind and inure to the benefit of the
parties' heirs, legal representatives, successors and permitted assigns.
(b) The Option Agreement, the Plan, and these Terms and Conditions
constitute the entire agreement between the parties pertaining to the subject
matter contained herein and they supersede all prior and contemporaneous
agreements, representations and understandings of the parties. No supplement,
modification or amendment of the Option Agreement shall be binding unless
executed in writing by all of the parties. No waiver of any of the provisions of
the Option Agreement shall be deemed or shall constitute a waiver of any other
provisions, whether or not similar, nor shall any waiver constitute a continuing
waiver. No waiver shall be binding unless executed in writing by the party
making the waiver. In the event there exists any conflict or discrepancy between
any of the terms in the Plan and the Option Agreement, the terms of the Plan
shall be controlling. A copy of the Plan has been delivered to the Optionee and
also may be inspected by Optionee at the principal office of the Company.
(c) Should any portion of the Plan, the Option Agreement or these
Terms and Conditions be declared invalid and unenforceable, then such portion
shall be deemed to be severable from the Option Agreement and shall not affect
the remainder hereof.
(d) All notices to be sent hereunder shall be delivered in person or
sent by United States Mail, certified and postage prepaid, to Optionee at the
address set forth on the Facing Page of the Option Agreement or to the Company
at its principal place of business, Attention: President. Any change in the
address to which notices shall be sent under the Option
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Agreement to the Optionee shall be made by the Optionee upon ten (10) days'
written notice to the Company.
(e) The Option Agreement shall be construed according to the laws of
the State of Delaware.
17. VESTING ACCELERATION FOR ONE YEAR EMPLOYEES.
(a) In the event of a Change in Control (as defined herein) any
surviving corporation or acquiring corporation shall assume this Option
Agreement or shall substitute a similar Option Agreement. In the event any
surviving or acquiring corporation refuses to assume this Option Agreement or to
substitute a similar Option Agreement, and if the Optionee has been employed by
the Company for a minimum of a consecutive twelve (12) month period, then (i)
the vesting (and, if applicable, the exercisability) of this Option Agreement
shall be accelerated immediately prior to such event, and (ii) any Company
repurchase option or reacquisition right with respect to shares acquired by the
Optionee under this Option Agreement shall lapse immediately prior to such event
and the shares shall be fully vested.
(b) In addition, if the Optionee has been employed by the Company
for a minimum of a consecutive twelve (12) month period, and if the surviving or
acquiring corporation assumes this Option Agreement, and if within twenty-four
(24) months following a Change in Control one of the following events occurs:
(i) Optionee's Continuous Service is terminated by the acquiror or successor
without Cause (as defined herein); (ii) the principal place of the performance
of Optionee's responsibilities (the "Principal Location") is changed to a
location more than fifty (50) miles from Optionee's Principal Location
immediately prior to the Change in Control; or (iii) there is a material
reduction in Optionee's compensation or responsibilities (not involving a
termination of Continuous Service for Cause); then the unvested portion of
Optionee's Options shall immediately become fully vested and exercisable and any
Company repurchase option or reacquisition right with respect to shares acquired
by the Optionee under this Option Agreement shall immediately lapse and the
shares shall be fully vested.
(c) For the purposes of this Option Agreement, "Cause" shall mean:
(i) conviction of any felony or any crime involving moral turpitude or
dishonesty; (ii) participation in a fraud or act of dishonesty against the
Company; (iii) willful and material breach of the Company's policies; (iv)
intentional and material damage to the Company's property; (v) material breach
of the Optionee's Proprietary Information and Inventions Agreement; or (vi)
death and physical or mental disability.
(d) For purposes of this Option Agreement, a "Change in Control"
shall mean: (i) any consolidation or merger of the Company with or into any
other corporation or other entity or person, or any other corporate
reorganization, in which the shareholders of the Company immediately prior to
such consolidation, merger or reorganization, own less than 50% of the company's
voting power immediately after such consolidation, merger or reorganization, or
any transaction of series of related transactions in which in excess of fifty
percent (50%) of the Company's voting power is transferred; or (ii) a sale,
lease or other disposition of all or substantially all of the assets of the
Company.
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(e) For purposes of this Option Agreement, "Continuous Service"
shall mean Optionee's service with the Company or an Affiliate, whether as an
Employee, Director or Consultant is not interrupted or terminated. The Board or
the Chief Executive Officer of the Company may determine, in that party's sole
discretion, whether Continuous Service shall be considered interrupted in the
case of: (i) any leave of absence approved by the Board or the Chief Executive
Officer of the Company, including sick leave, military leave, or any other
personal leave; or (ii) transfers between locations of the Company or between
the Company, Affiliates or their successors.
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EXHIBIT A
NOTICE OF EXERCISE OF NONSTATUTORY STOCK OPTION
To: NETPARTNERS INTERNET SOLUTIONS, INC.
____________________________________
____________________________________
Attention: President
I, a resident of the State of _________________________, hereby exercise
my nonstatutory stock option granted by NETPARTNERS INTERNET SOLUTIONS, INC., a
Delaware corporation (the "Company"), pursuant to a Nonstatutory Stock Option
Agreement dated _________________________, subject to all the terms and
provisions thereof and notify the Company of my desire to purchase ____________
shares of Common Stock of the Company at the exercise price of
__________________ Dollars ($__________) per share pursuant to said option.
I agree to complete and execute any additional documents which the
Company may request that I complete in order to comply with applicable federal,
state and local securities laws, rules and regulations.
Dated: __________________
________________________________ ________________________________
Social Security or Name:
Taxpayer I.D. Number
Address:
________________________________
________________________________
________________________________
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 14, 2000, in the Registration Statement (Form
S-1) and related Prospectus of Websense, Inc. for the registration of shares
of its common stock.
Our audits also included the financial statement schedule of Websense, Inc.
listed in Item 16(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Diego, California
January 25, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,735
<SECURITIES> 0
<RECEIVABLES> 3,829
<ALLOWANCES> 253
<INVENTORY> 0
<CURRENT-ASSETS> 14,639
<PP&E> 2,989
<DEPRECIATION> 1,042
<TOTAL-ASSETS> 16,756
<CURRENT-LIABILITIES> 9,417
<BONDS> 1,497
0
70
<COMMON> 84
<OTHER-SE> 1,488
<TOTAL-LIABILITY-AND-EQUITY> 16,756
<SALES> 8,647
<TOTAL-REVENUES> 8,647
<CGS> 2,274
<TOTAL-COSTS> 2,274
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 236
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> (9,254)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,254)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,254)
<EPS-BASIC> (1.25)
<EPS-DILUTED> (1.25)
</TABLE>
