<PAGE>
As filed with the Securities and Exchange Commission on April 7, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NETWORK ENGINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 3572 04-3064173
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial
incorporation or Classification Code Identification Number)
organization) Number)
61 Pleasant Street, Randolph, Massachusetts 02368-4137
(781) 961-4400
(Address Including Zip Code, and Telephone Number Including Area Code, of
Registrant's Principal Executive Offices)
-----------
Lawrence A. Genovesi
Network Engines, Inc.
Chairman of the Board, President, Chief Executive Officer and Chief Technology
Officer
61 Pleasant Street, Randolph, Massachusetts 02368-4137
(781) 961-4400
(Name, Address Including Zip Code and Telephone Number Including Area Code, of
Agent for Service)
-----------
Copies to:
Philip P. Rossetti, Esq. Michael A. Conza, Esq.
Hale and Dorr LLP Testa, Hurwitz & Thibeault, LLP
60 State Street, Boston, Massachusetts 125 High Street, Boston, Massachusetts
02109 02110
Telephone: (617) 526-6000 Telephone: (617) 248-7000
Telecopy: (617) 526-5000 Telecopy: (617) 248-7100
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
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,
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 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 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
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<TABLE>
<CAPTION>
Title of each class of Proposed Maximum Amount of
securities to be registered Aggregate Offering Price(1) Registration Fee(2)
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<S> <C> <C>
Common Stock, $.01 par value per share.. $86,250,000 $22,770
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</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933,
as amended.
(2) Calculated pursuant to Rule 457(a) based on an estimate of the proposed
maximum aggregate offering price including the amount attributable to the
underwriters' overallotment option.
-----------
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 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--April 7, 2000
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Prospectus
, 2000
[LOGO OF NETWORKENGINES]
Shares of Common Stock
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Network Engines, The Offering:
Inc.:
. We are offering to
. We develop, market the public
and provide shares of our
integrated, common stock.
scalable and
powerful server . The underwriters
appliances that have an option to
deliver Internet purchase up to
application additional
functionality. shares from us to
cover over-
. Network Engines, allotments.
Inc.
61 Pleasant Street . This is the
Randolph, initial public
Massachusetts offering of our
02368-4137 common stock.
(781) 961-4400
. We plan to use the
Proposed Symbol & proceeds from this
Market: offering for
research and
. We have applied development, sales
for quotation on and marketing
the Nasdaq including
National Market international
under the symbol expansion,
"NENG." potential
acquisitions of
businesses,
technologies or
products and
general corporate
purposes.
. Closing: ,
2000.
--------------------------------------------
<TABLE>
<CAPTION>
Per
Share Total
-------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Network Engines:
-------------------------------------------
</TABLE>
This investment involves risk. See "Risk Factors" beginning on page 5.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Dain Rauscher Wessels
Robertson Stephens
DLJdirect Inc.
<PAGE>
[The inside front cover includes a depiction of a number of clusters of
varying numbers of our WebEngine Roadster products which are connected to the
Internet. The Internet is represented by a wavy gold band. In turn, the
Internet is connected to a depiction of a person using an Internet browser to
manage the clusters of servers to which it is connected through the Internet.
Beneath the graphic is the following text: We develop, market and provide
integrated, scalable and powerful server appliances that deliver Internet
application functionality. Our customers may select the number and type of each
server that they need, utilize them separately or combine them into clusters,
locate them geographically as needed, and manage them from a single location
without the support of on-site technicians. Beneath the text is our logo.]
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, 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 the
prospectus or any sale of the common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary................. 1
Risk Factors....................... 5
Forward-Looking Statements and
Industry Data..................... 20
Use of Proceeds.................... 21
Dividend Policy.................... 21
Capitalization..................... 22
Dilution........................... 23
Selected Financial Data............ 24
Management's Discussion and
Analysis of Results of Operations
and Financial Conditions.......... 27
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business......................... 35
Management....................... 50
Related Party Transactions....... 60
Principal Stockholders........... 64
Description of Capital Stock..... 66
Shares Eligible For Future Sale.. 71
Underwriting..................... 74
Legal Matters.................... 76
Experts.......................... 77
Where You Can Find Additional
Information..................... 77
Index To Financial Statements.... F-1
</TABLE>
We have applied for a trademark registration for "Network Engines," and our
trademarks, among others, include "WebEngine Roadster NT," "WebEngine Roadster
LX," "WebEngine Viper NT," "WebEngine Viper LX," "AdminEngine" and
"CommerceEngine." This prospectus also contains other trademarks, servicemarks
and tradenames that are the property of other parties.
i
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock we are offering and the
financial statements and related notes to those statements that appear
elsewhere in this prospectus.
Unless otherwise indicated, all information in this prospectus:
. gives effect to the conversion of all outstanding shares of preferred
stock into shares of common stock effective upon the closing of this
offering;
. assumes that the underwriters will not exercise their over-allotment
option;
. assumes an initial offering price of $ per share, the midpoint of
our initial public offering price range;
. reflects a -for- stock split which will be effected prior to this
offering;
. reflects the filing of our second amended and restated certificate of
incorporation, to be made upon the closing of this offering; and
. reflects the adoption of our second amended and restated by-laws, to be
effective upon the closing of this offering.
Network Engines, Inc.
We develop, market and provide integrated, scalable and powerful server
appliances that deliver Internet application functionality. Server appliances
are a new category of computer network infrastructure devices that deliver
specific functionality through a combination of pre-packaged hardware and
software. Unlike general-purpose servers, our server appliances are high-
powered, compact products with extensive, integrated remote management
capabilities and a choice of operating systems, applications and computing
power. Our customers may select the number and type of each server that they
need, utilize them separately or combine them into clusters, locate them
geographically as needed, and manage them from a single location without the
support of on-site technicians. Our server appliances are designed to meet the
complex needs and requirements of e-commerce and Internet-based organizations,
including "dot com" companies, web hosting providers, application service
providers and Internet service providers.
We offer a broad range of server appliance products, consisting of the
WebEngine family, CommerceEngine and AdminEngine. Our product line enables our
customers to create Internet content delivery systems with a wide range of
power at a reduced total cost of ownership. Our server appliances are easy to
install and configure and are designed to meet our customers' needs by
combining specific application functionality within small physical packaging.
In order to meet the preferences of a wide range of customers, we offer server
appliances with either Windows or Linux operating systems and with a range of
applications. Our server appliances can be used as individual fully-functioning
devices, or can be connected in clusters of up to 256 appliances, either of the
same or different types, to increase the application processing power and
functionality of the appliance cluster. In addition, our server appliance
products contain integrated hardware and software features that allow a single
point of management for the entire cluster and "lights out" management, which
is the ability to manage the appliance remotely without any on-site
technicians.
1
<PAGE>
The openness and accessibility of the Internet enable large and small
organizations to enter this competitive environment by creating Internet sites
and establishing their own network infrastructures. New and emerging
organizations hoping to grow, and well-financed organizations hoping to
increase market share, typically seek to reduce "time-to-revenue," the length
of time between developing their online ideas and the availability of their web
sites to their potential customers. The increase in Internet traffic and demand
for greater bandwidth has resulted in more utilization of remote server
facilities, such as co-location facilities, to house servers for Internet-
related businesses.
Traditionally, organizations have built their Internet solutions with
general-purpose servers, requiring extensive time and technical resources which
increase overall cost of ownership. To extend the power and features of a
general-purpose server, organizations must integrate numerous discrete hardware
and software elements, such as operating systems, applications, security
systems, load balancers and management tools. This approach is not well-suited
for use in remote server facilities because it typically creates large, complex
systems that require substantial facility space. In addition, few vendors, if
any, provide remote lights out management capabilities, which increases the
need for dedicated attention of on-site information technology professionals.
When organizations use general-purpose servers to handle Internet traffic, they
typically face a higher total cost of ownership since equipment, facility costs
and operating expenses are high and time-to-revenue is increased.
The server appliance was developed to address the shortcomings of general-
purpose servers. International Data Corporation estimates that the worldwide
market for server appliances will grow to $8.0 billion in 2003 from
approximately $50.0 million in 1998, a compounded annual growth rate of 176%.
As market acceptance of server appliances grows, we expect that users will
increasingly demand products that meet specific functional requirements and
reduce total cost of ownership factors, including time-to-revenue, packaging
density, installation and management functionality.
We have assembled a research and development team of highly-skilled
engineers with significant experience in high-density packaging, server design,
embedded management, networking and software. This team will allow us to build
upon our current technology platforms, expand the features and functionality of
our suite of server appliances and develop additional products that maintain
our technological advantages. In addition, we have formed strategic
partnerships with leading technology vendors that will enhance our total
product offerings. We sell our products through a direct sales organization and
through a network of channels that includes systems integrators, distributors
and licensed manufacturers.
Our objective is to become the leading global provider of scalable Internet
server appliances. We intend to increase market acceptance of server appliances
for Internet-based applications by providing and expanding a range of specific-
purpose server appliances that can be easily scaled to increase application
power and can be easily integrated into managed clusters.
--------------------
Our principal executive offices are located at 61 Pleasant Street, Randolph,
Massachusetts 02368-4137 and our telephone number is (781) 961-4400. Our World
Wide Web site address is www.networkengines.com. The information on our web
site is not incorporated by reference into this prospectus.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered................................ shares
Common stock to be outstanding after this offering.. shares
Use of proceeds..................................... For research and
development, sales and
marketing including
international expansion,
potential acquisitions of
businesses, technologies
or products and general
corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.............. NENG
</TABLE>
The number of shares that will be outstanding after the offering is based on
the number of shares outstanding as of March 31, 2000 and excludes:
. shares of common stock issuable upon exercise of stock options
outstanding as of March 31, 2000, with a weighted average exercise price
of $ per share, of which options to purchase shares were then
exercisable;
. shares of common stock reserved for issuance upon exercise of
warrants outstanding as of March 31, 2000 with a weighted average
exercise price of $ per share; and
. shares of common stock reserved for future grant under our stock
plans.
See "Capitalization," "Management--Benefit Plans" and "Description of
Capital Stock."
3
<PAGE>
Summary Financial Data
(in thousands, except per share data)
The following summary financial data should be read in conjunction with our
financial statements and related notes and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
data. The statement of operations data for the years ended September 30, 1998
and 1999 is derived from audited financial statements included elsewhere in
this prospectus. The statement of operations data for the three months ended
December 31, 1998, March 31, 1999, June 30, 1999, September 30, 1999 and
December 31, 1999 and the balance sheet data as of December 31, 1999 are
derived from our unaudited financial statements.
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding shares of our series A,
series B, series C and series D preferred stock into shares of common stock, as
if the shares had converted immediately upon issuance.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended -----------------------------------------------------------
September 30,
---------------- December 31, March 31, June 30, September 30, December 31,
1998 1999 1998 1999 1999 1999 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 1,102 $ 6,031 $ 223 $ 893 $ 908 $ 4,007 $ 4,415
Gross profit (loss)..... (489) 1,298 (162) 10 (96) 1,546 1,802
Loss from operations.... (3,625) (5,247) (1,240) (1,325) (1,757) (925) (1,616)
Net loss................ (4,199) (5,830) (2,170) (1,000) (1,753) (907) (1,586)
Net loss attributable to
common stockholders.... (4,199) (6,053) (2,170) (1,009) (1,763) (1,111) (2,396)
Pro forma net loss per
common share--basic and
diluted................ $ (1.58) $ (0.31)
======= =======
Shares used in computing
pro forma basic and
diluted net loss per
common share........... 3,697 5,144
</TABLE>
The pro forma as adjusted balance sheet data as of December 31, 1999 gives
effect to the conversion of all outstanding shares of preferred stock into
shares of common stock and has been adjusted to give effect to the sale of
shares of common stock offered hereby at the assumed initial public offering
price of $ per share, less underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
As of December 31, 1999
---------------------------
Pro Forma
Actual As Adjusted
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and restricted cash........ $ 25,255 $
Working capital................................... 25,327
Total assets...................................... 30,934
Long-term debt, less current portion.............. 129
Redeemable convertible preferred stock............ 38,527
Total stockholders' equity (deficit).............. (12,099)
</TABLE>
4
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider the following risks and the other information in this prospectus
before deciding to invest in our common stock. Our business and results of
operations could be seriously harmed by any of the following risks. The trading
price of our common stock could decline due to any of these risks, and you may
lose part or all of your investment.
Risks Related to Our Financial Results
We began selling our current products in June 1999, February 2000 and the third
quarter of fiscal 2000 and, as a result, you may have difficulty evaluating our
business and operating results.
We did not begin shipping our current products until quite recently. We
began shipping our WebEngine Blazer and AdminEngine in June 1999 and February
2000, respectively. We began shipping our WebEngine Roadster, WebEngine Viper
and CommerceEngine products in the third quarter of fiscal 2000. An investor in
our common stock must consider the risks and difficulties we may encounter as
an early-stage company in the new and rapidly evolving market for server
appliances. Because of our limited operating history in the server appliance
market, it is difficult to discern trends that may emerge and affect our
business. Our limited historical financial performance may make it difficult
for you to evaluate the success of our business to date and to assess its
future viability. We cannot be certain that our business strategy will be
successful.
We have a history of losses and may experience losses in the future, which
could result in the market price of our common stock declining.
Since our inception, we have incurred significant net losses, including net
losses of $4.2 million in 1998 and $5.8 million in 1999. In addition, we had an
accumulated deficit of $13.0 million as of December 31, 1999. We believe that
our future growth depends upon the success of our new product development and
sales and marketing efforts, which will require us to incur significant product
development, sales and marketing and administrative expenses. As a result, we
will need to generate significant revenues to achieve profitability. We cannot
be certain that we will achieve profitability in the future or, if we achieve
profitability, that we will be able to sustain it. If we do not achieve and
maintain profitability, the market price for our common stock may decline,
perhaps substantially.
We anticipate that our expenses will increase substantially in the next 12
months as we:
. increase our direct sales and marketing activities;
. develop our technology, expand our existing product lines and create and
market additional server appliance products;
. make additional investments to develop our brand;
. develop additional strategic alliances with third-party technology
vendors;
. expand our distribution and reseller channels; and
. implement additional internal systems, develop additional infrastructure
and hire additional management to keep pace with our growth.
5
<PAGE>
Any failure to significantly increase our revenues and control costs as we
implement our product and distribution strategies would also harm our ability
to achieve and maintain profitability and could negatively impact the market
price of our common stock.
We may not be able to sustain our current revenue growth rates, which could
cause our stock price to decline.
Although our revenues grew in 1998, grew rapidly in 1999 and have grown
rapidly in 2000, we do not believe that we will maintain this rate of revenue
growth. This is because we started from a small base of revenue, and it is
difficult to achieve high percentage increases over a larger revenue base. In
addition, growing competition, the incremental manner in which customers
implement server appliances and our inexperience in selling our products could
also affect our revenue growth. Any significant decrease in our rate of revenue
growth after this offering could result in a decrease in our stock price.
We derive a substantial portion of our revenues from a small number of
customers, and our revenues may decline significantly if any major customer
cancels or delays a purchase of our products.
A relatively small number of customers accounted for a significant portion
of our net revenues. In the fiscal year ended September 30, 1999, sales to
InterVu, International Business Machines, or IBM, and Microsoft (WebTV)
accounted for 46%, 28% and 14% of net revenues, respectively. In the quarter
ended December 31, 1999, sales to IBM and Microsoft (WebTV), accounted for 53%
and 18% of net revenues, respectively. If any of our large customers stop or
delay purchases, our revenues and profitability may be adversely affected.
Revenues from a relatively small number of our licensed manufacturer, OEM and
direct sales customers may account for a significant portion of our net
revenues. Accordingly, unless and until we diversify and expand our customer
base, our future success will depend upon the timing and size of future
purchase orders, if any, from our largest customers and, in particular:
. the success of our licensed manufacturer and OEM customers in marketing
our products;
. the product requirements of our direct sales customers; and
. the financial and operational success of our licensed manufacturer, OEM
and direct sales customers.
Some of our customers are significantly larger than we are and have
sufficient bargaining power to demand lower prices and better terms. The loss
of any one of our major customers or the delay of significant orders from these
customers could reduce or delay our recognition of revenues, harm our
reputation in the industry and reduce our ability to predict cash flow
accurately. Further, if any of our licensed manufacturer or OEM customers use
our licensed technologies to develop new competing products, our ability to
sell our products directly and our revenue could be adversely affected.
Our quarterly revenues and operating results may fluctuate; any resulting
failure to meet market expectations may cause the price of our common stock to
decline.
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter because our current
products are relatively new and the future
6
<PAGE>
growth of the market for our products is uncertain. In fact, all five of our
server appliance products were released in the last year, with three released
in the current fiscal quarter. If our quarterly revenues or operating results
fall below the expectations of investors or public market research analysts,
the price of our common stock could decline substantially. Factors that are
likely to cause quarterly fluctuations in our operating results include:
. shifts in the timing of product releases;
. delays or cancellations of orders by a few customers from our currently
limited customer base;
. the timing of large orders;
. temporary shortages in supply from vendors;
. fluctuations in production or demand;
. changes in our pricing policies or those of our competitors;
. our ability to expand our operations and the amount and timing of
expansion-related and infrastructure expenditures;
. political instability, or natural disasters, in the countries in which
we operate or in which we seek to expand;
. technical difficulties and information system outages; and
. global economic conditions.
A large proportion of our expenses, including those related to research and
development, sales and marketing, general and administrative functions and
amortization of deferred compensation, are essentially fixed in the short term.
As a result, if our net sales are less than forecasted, our quarterly operating
results are likely to be adversely affected.
If an anticipated decrease in sales of our WebEngine Blazer products is not
offset by increased sales of our newer products, our revenues will decrease.
We have derived substantially all of our revenues since June 1999 from sales
of our WebEngine Blazer product. During 1999, sales of our WebEngine Blazer
product accounted for approximately 74% of our total revenues. We expect that
this product will continue to account for a significant but decreasing
proportion of our total revenues for the next six months as we increase the
volume of sales of our recently introduced products. Any factors adversely
affecting the pricing of or demand for our WebEngine Blazer product, including
competition or technological change, could cause revenues for this product to
decline sooner than expected and cause our business to suffer. Also any factors
that adversely affect the acceptance of our newer products could prevent us
from offsetting the predicted decrease in revenues from WebEngine Blazer sales.
Factors that may affect the market acceptance of our products, some of which
are beyond our control, include the following:
. the growth and changing requirements of the server appliance market;
. the performance, quality, price and total cost of ownership of our
products;
7
<PAGE>
. the availability, price, quality and performance of competing products
and technologies; and
. the successful development of our relationships with licensed
manufacturers, OEMs and existing and potential channel partners.
We may not succeed in developing and marketing new types of server appliance
products, and our operating results may decline as a result.
We have recently released CommerceEngine and AdminEngine and are developing
additional types of server appliance products. Developing new products that
meet the needs of the server appliance market requires significant additional
expense and development resources. If we fail to successfully develop and
market new products, our operating results will suffer.
If we cannot increase our sales volumes, reduce our costs or introduce higher
margin products to offset potential reductions in the average unit price of our
products, our operating results may suffer.
If the commodification of products in the server appliance market increases,
the average unit price of our products may decrease in the future. The average
unit price of our products may also decrease in response to changes in product
mix, competitive pricing pressures, new product introductions by us or our
competitors or other factors. If we are unable to offset a decrease in our
average selling prices by increasing our sales volumes, our revenues will
decline. Changes in the mix of sales of our products, including the mix of
higher margin sales of products sold in smaller quantities and somewhat lower
margin sales of products sold in larger quantities, could adversely affect our
operating results for future quarters. To maintain our gross margins, we also
must continue to reduce the manufacturing cost of our products. Our current
reliance on our single manufacturer, SCI Systems, may not allow us to do so.
Further, as average unit prices of our current products decline, we must
develop and introduce new products and product enhancements that will enable us
to sell our products at higher margins.
Risks Related to Growth of the Internet and the Server Appliance Market
If server appliances are not increasingly adopted as a means to deliver
information and conduct commerce over the Internet, the market price for our
common stock could decline as a result of lower revenues or reduced investor
expectations.
We expect that substantially all of our revenues will continue to come from
sales of our current and future server appliance products. As a result, we
depend on the growing use of server appliances as a means to deliver
information and conduct commerce over the Internet. The market for server
appliance products, particularly those using the Internet to deliver
information and process commercial transactions, has only recently begun to
develop and is evolving rapidly. Because this market is new, we cannot predict
its potential size or future growth rate. Our revenues may not continue to grow
and the market price for our common stock could decline if the server appliance
market does not grow rapidly.
8
<PAGE>
We believe that our expectations for the growth of the server appliance
market may not be fulfilled if customers continue to use general-purpose
servers. The role of our server appliances could, for example, be limited if
general-purpose servers become better at performing the functions currently
being performed by our specific-purpose server appliances or are offered at a
lower cost. This could force us to lower the prices of our products or result
in fewer sales of our products.
If the market for server appliance products does not grow because organizations
of a certain size in our target market are not receptive to them, our revenues
may not grow.
Large web hosting and application service providers that offer hosting
services may not be as receptive to our products as other organizations,
because their buying programs are more likely to be based on established,
proprietary operating systems and general-purpose servers. In addition, we
expect that Internet service providers that specialize in providing Internet
access and non-hosting services to consumers will not be substantial purchasers
of our products. Consolidation has recently begun to occur in the web hosting
and application service provider market, with many large web hosting and
application service providers acquiring smaller and regional companies.
Continued consolidation in this market could result in some of our customers
being absorbed into larger organizations. This consolidation may increase the
number of larger corporations which may not be as receptive to our products,
and as a result, our revenues would not grow and may even decrease.
Potential increases or changes in governmental regulation of Internet
communication and commerce could discourage the growth of the Internet for such
purposes, which could seriously harm our business.
Due to concerns arising from the increasing use of the Internet, a number of
laws and regulations have been, and may be, adopted covering issues such as
user privacy, taxation, pricing, acceptable content and quality of products and
services. This legislation could dampen the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. Further, due to the global nature of the Internet, it is
possible that multiple federal, state or foreign jurisdictions might attempt to
regulate Internet transmissions or levy sales or other taxes relating to
Internet-based activities. Moreover, the applicability to the Internet of
existing laws, such as those governing property ownership, libel and personal
privacy, is uncertain. We cannot assess the possible negative impact of any
future regulation of the Internet on our business.
Risks Related to Our Product Manufacturing
Because we depend on sole source and limited source suppliers for key
components, we are susceptible to supply shortages that could prevent us from
shipping customer orders on time, if at all, and result in lost sales.
We depend upon single source and limited source suppliers for our industry-
standard processors and power supplies and our custom-printed circuit boards,
chassis and sheet metal parts. We also depend on limited sources to supply
several other industry-standard components. We have in the past experienced,
and may in the future experience, shortages of, or difficulties in acquiring,
these components. In particular, there have also been recent industry-wide
shortages and delays in the production of commodities such as high-performance
processor boards, memory chips and disk
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drives. These shortages have been of limited duration and have not yet caused
delays in production of our products. However, shortages in supply of these key
components for an extended time would cause delays in the production of our
products, prevent us from satisfying our contractual obligations and meeting
customer expectations, and result in lost sales. If we are unable to buy
components we need or if we are unable to buy such components at acceptable
prices, we will not be able to manufacture and deliver our products on a timely
or cost-effective basis to our customers. Any such inability could result in
our quarterly revenue or operating results falling below the expectations of
our stockholders or public market research analysts, which could cause the
price of our common stock to decline substantially.
We may be unable to manufacture the targeted volume of our products, or any
products at all, if our outside manufacturer is unable to meet our
manufacturing needs.
We rely on a single contract manufacturer to produce our products. In the
future, we may need to find new outside manufacturers to manufacture our
products in higher volume and at lower costs to meet increased demand and
competition. We may not find an outside manufacturer that meets our needs.
Alternatively, we may need to expand production to another plant owned by our
current manufacturer, SCI Systems. We do not have a written agreement with SCI
Systems that guarantees production levels. We may not be able to enter into a
written agreement with SCI Systems that provides for appropriate production
levels or costs in the future. SCI Systems may not have additional facilities
available when we need them. Additionally, qualifying a new outside
manufacturer and commencing volume production or expanding production to
another facility owned by SCI Systems will be expensive and time consuming. For
example, in addition to the manufacturing of our products in Hookset, New
Hampshire, we recently began having products manufactured at another SCI
Systems facility in Augusta, Maine. Commencing production at this facility
required six weeks of preparation. We have limited internal manufacturing
capacity. If we are required or choose to change outside manufacturers, we may
lose sales and customer relationships may suffer.
In addition, the commencement of the manufacturing of our products at the
second SCI Systems manufacturing site or any additional sites we may need in
the future may cause transitional problems, including delays and quality
control issues, that could cause us to lose sales and impair our ability to
achieve profitability.
We use rolling forecasts based on anticipated product orders to determine
our component requirements. Lead times for materials and components that we
order vary significantly and depend on factors including specific supplier
requirements, contract terms and current market demand for those components. As
a result, our component requirement forecasts may not be accurate. If we
overestimate our component requirements, we may have excess inventory, which
would increase our costs. If we underestimate our component requirements, we
may have inadequate inventory, which could interrupt our manufacturing and
delay delivery of our products to our customers. Any of these occurrences would
negatively impact our business and operating results.
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Risks Related to Our Marketing and Sales Efforts
We need to expand our direct sales channel and build our indirect sales
channel, and if we fail to do so our growth could be limited.
In order to increase market awareness and sales of our products, we will
need to substantially expand our direct sales programs and build our indirect
sales operations, both domestically and internationally. If we fail in this
endeavor, our growth will be limited. To date, we have relied primarily on our
direct sales force to generate demand for our products. We have recently
expanded our direct sales force and plan to hire additional sales personnel.
Competition for qualified sales people is intense, and we might not be able to
hire the quality and number of sales people we require.
We may incur significant costs to promote our brand that may not result in the
desired brand recognition by customers or increased sales.
In a fast growing market such as the market for server appliances, we
believe that establishing a strong brand is necessary to compete successfully
in the long-term. In order to attract and retain customers, we believe that our
brand must be recognized and viewed favorably by end users. Although we intend
to advertise and promote our brand, we cannot be certain that these strategies
will be successful. If we are unable to design and implement effective
marketing campaigns or otherwise fail to promote and maintain our brand, our
sales could decline. Our business may also suffer if we incur excessive
expenses in an attempt to promote and maintain our brand without the expected
or desired increase in revenues.
Our expansion to international markets may result in higher personnel costs and
could reduce our operating margins due to the higher costs of international
sales.
We must find channel partners to sell our products to international markets
or develop a direct international sales presence to significantly increase our
international sales. We may incur higher personnel costs by hiring direct sales
staff that may not result in an increase in our revenues. We may not realize
corresponding increases in operating margins from increases in international
sales due to the higher costs of these sales. Our sales outside of the United
States have represented an insignificant portion of our total revenues. To
date, we have relied primarily on direct sales staff and have only recently
begun to seek international channel partners outside of the United States. Even
if we successfully expand our direct and indirect international selling
efforts, we cannot be certain that we will be able to create or increase
international market demand for our products.
If we are unable to expand our customer service and support organization, we
may not be able to retain our existing customers and attract new customers.
We currently have a small customer service and support organization and will
need to increase our staff to support new customers and the expanding needs of
our existing customers. Hiring customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of server appliance products.
If we are unable to expand our customer service and support organization, we
may not be able to retain our existing customers and attract new customers.
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Risks Related to Competition Within Our Industry
We may not be able to effectively compete against providers of general-purpose
servers or specific-purpose servers as a result of their greater financial
resources and brand awareness.
In the market for server appliances, we face significant competition from
larger companies who market general-purpose or specific-purpose servers and
have greater financial resources and name recognition than we do. We believe
that Compaq, Dell, Hewlett-Packard, IBM, Sun Microsystems, Cobalt, CacheFlow,
Network Appliance, TruSolutions, Penguin Computing and Qsol.com or other server
manufacturers, each of which is currently competing with us by selling general-
purpose or specific-purpose servers, could also introduce comparable server
appliance products that include the functionality that we currently provide in
our products at lower prices. Many of these companies have larger and more
established service organizations to support these products. These and other
large competitors may be able to leverage their existing resources, including
their service organizations, and provide a wider offering of products and
higher levels of support on a more cost-effective basis than we can. In
addition, such companies may be able to undertake more extensive promotional
activities, adopt more aggressive pricing policies and offer more attractive
terms to their customers than we can. If these large competitors provide lower
cost server appliances with greater functionality or support than our products,
or if some of their products are comparable to ours and are offered as part of
a range of products that is broader than ours, our products could become
undesirable. Even if the functionality of competing products is equivalent to
ours, we face a substantial risk that a significant number of customers would
elect to pay a premium for similar functionality rather than purchase products
from a less-established vendor.
We may face competition in the future from established companies that have
only recently entered the server appliance market, such as Intel, Novell or
Oracle, or from emerging companies, as well as from new market entrants.
Barriers to entry in the server appliance market are relatively low. Increased
competition may negatively affect our business and future operating results by
leading to price reductions, higher selling expenses or a reduction in our
market share.
Our revenues could be reduced if general-purpose server manufacturers make
acquisitions in order to join their extensive distribution capabilities with
our smaller competitors' products.
Compaq, Dell, Hewlett-Packard, IBM, Sun Microsystems and other server
manufacturers may not only develop their own server appliance solutions, but
they may also acquire or establish cooperative relationships with our other
current competitors, including smaller private companies. Because general-
purpose server manufacturers have significant financial and organizational
resources available, they may be able to quickly penetrate the server appliance
market by leveraging the technology and expertise of smaller companies and
utilizing their own extensive distribution channels. For example, Whistle, a
server appliance company, was recently acquired by IBM. We expect that the
server appliance industry will experience consolidation. It is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share through consolidation.
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We may sell fewer products if other vendors' products are no longer compatible
with ours or other vendors bundle their products with those of our competitors
and sell them at lower prices.
Our ability to sell our products depends in part on the compatibility of our
products with other vendors' software and hardware products. Developers of
these products may change their products so that they will no longer be
compatible with our products. These other vendors may also decide to bundle
their products with other server appliances for promotional purposes and
discount the sales price of the bundle. If that were to happen, our business
and future operating results could suffer if we were no longer able to offer
commercially viable products.
Server appliance products are subject to rapid technological change due to
changing operating system software and network hardware and software
configurations, and our products could be rendered obsolete by new
technologies.
The server appliance market is characterized by rapid technological change,
frequent new product introductions and enhancements, potentially short product
life cycles, changes in customer demands and evolving industry standards. Our
products could be rendered obsolete if products based on new technologies are
introduced or new industry standards emerge.
New products and product enhancements can require long development and
testing periods, which requires us to hire and retain increasingly scarce,
technically competent personnel. Significant delays in new product releases or
significant problems in installing or implementing new products could seriously
damage our business. We have on occasion experienced delays in the scheduled
introduction of new and enhanced products and cannot be certain that we will
avoid similar delays in the future.
Our future success depends upon our ability to enhance existing products,
develop and introduce new products, satisfy customer requirements and achieve
market acceptance. We cannot be certain that we will successfully identify new
product opportunities and develop and bring new products to market in a timely
and cost-effective manner.
Risks Related to Our Products' Dependence on Intellectual Property
and Our Use of Our Brand
We rely upon contractual provisions and domestic trademark laws to protect our
proprietary rights, which may not be sufficient to protect our intellectual
property.
Our products are differentiated from those of our competitors by our
internally developed software and hardware and the manner in which they are
integrated into our products. If we fail to protect our intellectual property,
other vendors could sell products with features similar to ours, and this could
reduce demand for our products.
We protect our intellectual property through a combination of copyright,
trade secret and trademark laws. We have no patents and are not currently in
the process of applying for any patents. We generally enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to our intellectual property
and the distribution of our
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<PAGE>
server appliances, integrated software, documentation and other proprietary
information. We believe that such measures afford only limited protection.
Others may develop technologies that are similar or superior to our technology
or design around the copyrights and trade secrets we own. Despite the
precautions we have taken:
. laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
. current federal laws that prohibit software copying provide only limited
protection from software piracy, and effective trademark, copyright and
trade secret protection may be unavailable or limited in foreign
countries;
. other companies may claim common law trademark rights based upon state
or foreign laws that precede the federal registration of our marks; and
. policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the
extent of this unauthorized use.
In addition, the laws of the countries in which we decide to market our
services and solutions may offer little or no effective protection of our
proprietary technology. Reverse engineering, unauthorized copying or other
misappropriation of our proprietary technology could enable third-parties to
benefit from our technology without paying us for it, which would significantly
harm our business. Our means of protecting our proprietary rights may be
inadequate.
We have invested substantial resources in developing our products and our
brand, and our operating results would suffer if we were subject to a
protracted infringement claim or one with a significant damages award.
Substantial litigation regarding intellectual property rights and brand
names exists in our industry. We expect that server appliance products may be
increasingly subject to third-party infringement claims as the number of
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. We are not aware that our products employ
technology that infringes any proprietary rights of third parties. However,
third parties may claim that we infringe their intellectual property rights.
Any claims, with or without merit, could:
. be time-consuming to defend;
. result in costly litigation;
. divert our management's attention and resources;
. cause product shipment delays; or
. require us to enter into royalty or licensing agreements.
Royalty or licensing agreements may not be available on terms acceptable to
us, if at all. A successful claim of product infringement against us or our
failure or inability to license the infringed or similar technology could
adversely affect our business because we would not be able to sell the impacted
product without redeveloping it or incurring significant additional expenses.
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<PAGE>
Other Risks Related to Our Business
Failure to manage our growth successfully could lead to inefficiencies in
conducting our business, increased expenses or slower growth.
Over the past several years, our operations have expanded greatly. Our
growth has placed, and will continue to place, a significant strain on our
management, operating and financial systems, as well as sales and marketing and
administrative resources. As of March 31, 2000, we had a total of 125
employees, an increase from a total of 33 employees as of December 31, 1998.
Additional growth will further strain these resources. If we cannot manage our
expanding operations, we may not be able to continue to grow or we may grow at
a slower rate. To manage any future growth effectively, we must continue to
improve our financial and accounting systems, inventory and production
controls, reporting and procedures, integrate new personnel and manage expanded
operations. If we fail to do so, the quality of our products and our ability to
respond to our customers' needs and retain key personnel would cause our
business to suffer. Also, we may fail to add capacity in a cost-effective
manner or allow our operating costs to escalate faster than planned.
If we fail to recruit and retain a significant number of qualified technical
personnel and sales and marketing personnel, we may not be able to develop and
introduce our products on a timely basis.
We require the services of a substantial number of qualified technical
personnel. The market for this personnel is characterized by intense
competition, as well as a high level of employee mobility, which makes it
particularly difficult to attract and retain the qualified technical personnel
we require. We have experienced, and we expect to continue to experience,
difficulty in hiring and retaining highly-skilled employees with appropriate
technical qualifications. If we are unable to recruit and retain a sufficient
number of technical personnel, we may not be able to complete development of,
or upgrade or enhance our products in a timely manner.
The expansion of our sales and marketing department will also require the
hiring and retention of personnel for whom there is also a high demand. If we
are unable to recruit and retain a sufficient number of sales and marketing
personnel, we may not be able to increase market awareness of our products and
generate sales of our products as quickly as we would like.
Our success depends on our ability to manage and expand our international
operations profitably.
We currently conduct limited business activity outside of North America.
However, we expect international revenue to account for a more significant
percentage of our total revenue in the future. We believe that we must continue
to expand our international sales and fulfillment activities in order to be
successful. There are certain risks inherent in conducting international
operations, including:
. added fulfillment complexities in operations, including multiple
languages, multiple currencies, multiple bills of materials and multiple
stock-keeping units;
. exposure to currency fluctuations;
. longer payment cycles;
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<PAGE>
. greater difficulties in accounts receivable collections;
. the complexity of ensuring compliance with multiple U.S. and foreign
regulatory requirements, particularly differing laws on intellectual
property rights and export control; and
. labor practices, difficulties in staffing and managing foreign
operations, political instability and potentially adverse tax
consequences.
As we attempt to expand our international sales, any of these factors may
have an adverse effect on our international operations and, consequently, on
our business and results of operations.
If we are unable to find suitable acquisition candidates, our growth could be
impeded.
A component of our business strategy is the acquisition of, or investment
in, complementary businesses, technologies or products. Our ability to identify
and invest in suitable acquisition and investment candidates on acceptable
terms is crucial to this strategy. We may not be able to identify, acquire or
make investments in promising acquisition candidates on acceptable terms.
Moreover, in pursuing acquisition and investment opportunities, we may be in
competition with other companies having similar growth and investment
strategies. Competition for these acquisitions or investment targets could
result in increased acquisition or investment prices and a diminished pool of
businesses, technologies, services or products available for acquisition or
investment. An inability to find suitable acquisition or investment candidates
at reasonable prices could slow our growth rate.
Our acquisition strategy could have an adverse effect on customer satisfaction
and our operating results.
Acquisitions involve a number of risks, including:
. adverse effects on our reported operating results due to accounting
charges associated with the acquisitions;
. difficulties in management and integration of the acquired business;
. increased expenses, including compensation expense resulting from newly-
hired employees;
. diversion of management resources and attention; and
. potential disputes with sellers of acquired businesses, technologies,
services or products.
We rely on the services of our founder and other key personnel, and those
persons' knowledge of our business and technical expertise would be difficult
to replace.
Our products and technologies are complex and we are substantially dependent
upon the continued service of our existing engineering personnel, and
especially Lawrence A. Genovesi, our President, Chief Executive Officer and
Chief Technology Officer. We do not have employment agreements with any of our
officers. The loss of any of our key employees could adversely affect our
business and slow our product development processes or sales and marketing
efforts. Although we maintain a key person life insurance policy on Mr.
Genovesi, the amount of this insurance may be inadequate to compensate us for
his loss.
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Errors in our products or the failure of our products to conform to our
specifications could result in our customers demanding refunds from us or
asserting claims for damages against us.
Because our server appliance products are complex, they could contain errors
or bugs that can be detected at any point in a product's life cycle. In the
past we have discovered errors in some of our products and have experienced
delays in the shipment of our products during the period required to correct
these errors or we have had to replace defective products that were already
shipped. These delays and replacements have principally related to new product
releases. To date, none of these delays has materially affected our business.
While we continually test our products for errors and work with customers
through our customer support services to identify and correct bugs in our
software and other product problems, errors in our products may be found in the
future. Although many of these errors may prove to be immaterial, any of these
errors could be significant. Detection of any significant errors may result in:
. the loss of or delay in market acceptance and sales of our products;
. diversion of development resources;
. injury to our reputation; or
. increased maintenance and warranty costs.
These problems could harm our business and future operating results. Product
errors or delays could be material, including any product errors or delays
associated with the introduction of new products or the versions of our
products that support Windows or Linux operating systems. We warrant that our
products will operate in accordance with our specifications. If our products
fail to conform to these specifications, customers could demand a refund for
the purchase price or assert claims for damages.
Moreover, because our products are used in connection with critical
distributed computing systems services, we may receive significant liability
claims if our products do not work properly. Our agreements with customers
typically contain provisions intended to limit our exposure to liability
claims. However, these limitations may not preclude all potential claims.
Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. Any such claims, whether or not
successful, could seriously damage our reputation and our business.
International laws and regulations may expose us to litigation and other
potential costs.
Our plans to expand international operations will increase our exposure to
international laws and regulations. If we cannot comply with foreign laws and
regulations, which are often complex and subject to variation and unexpected
changes, we could incur unexpected costs and potential litigation. For example,
the governments of foreign countries might attempt to regulate our products and
services or levy sales or other taxes relating to our activities. In addition,
foreign countries may impose tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers, any of which could make
it more difficult to conduct our business. The European Union recently enacted
its own privacy regulations that may result in limits on the collection and use
of certain user information, which, if applied to the sale of our services,
could negatively impact our results of operations.
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<PAGE>
We may need additional capital that may not be available to us and, if raised,
may dilute your ownership interest in us.
We may need to raise additional funds to develop or enhance our services and
solutions, to fund expansion, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. Additional financing may
not be available on terms that are acceptable to us. If we raise additional
funds through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders would be reduced and these securities
might have rights, preferences and privileges senior to those of our current
stockholders. If adequate funds are not available on acceptable terms, our
ability to fund our expansion, take advantage of unanticipated opportunities,
develop or enhance products or services, or otherwise respond to competitive
pressures would be significantly limited.
Risks Related to this Offering
Our executive officers and existing stockholders will continue to control us
after this offering and could delay or prevent a change in control.
After this offering, our executive officers and existing stockholders and
their affiliates will together control approximately % of our outstanding
common stock. As a result, these stockholders, if they act together, will be
able to control all matters requiring approval of a majority of our
stockholders, including the election and removal of directors and any merger,
sale of assets and other significant corporate transactions. This control
could:
. delay or prevent a change in control of Network Engines;
. deprive our stockholders of an opportunity to receive a premium for
their common stock as part of a sale of Network Engines or its assets;
and
. affect the market price of our common stock.
We have anti-takeover defenses that could delay or prevent an acquisition and
could adversely affect the price of our common stock.
After this offering, the board of directors will have the authority to issue
up to 5,000,000 shares of preferred stock and, without any further vote or
action on the part of the stockholders, will have the authority to determine
the price, rights, preferences, privileges and restrictions of the preferred
stock. This preferred stock, if issued, might have preference over the rights
of the holders of common stock and could adversely affect the price of our
common stock. Although the issuance of this preferred stock will provide us
with flexibility in connection with possible acquisitions and other corporate
purposes, this issuance may make it more difficult for a third party to acquire
us or to acquire a majority of our outstanding voting stock. We currently have
no plans to issue preferred stock.
In addition, our second amended and restated certificate of incorporation,
second amended and restated by-laws and equity compensation plans include
provisions that may deter an unsolicited offer to purchase Network Engines.
These provisions, coupled with the provisions of the Delaware General
Corporation Law, may delay or impede a merger, tender offer or proxy contest
involving Network
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Engines. For example, our board of directors will be divided into three
classes, only one of which will be elected at each annual meeting. These
factors may further delay or prevent a change of control of our business. See
"Description of Capital Stock--Delaware Law and Certain Charter and By-Law
Provisions; Anti-Takeover Effects."
The price of our common stock after this offering may be lower than the price
you pay.
If you purchase shares of our common stock in this offering, you will pay a
price that was not established in a competitive market. Rather, you will pay a
price that we negotiated with the representatives of the underwriters based
upon a number of factors. The price of our common stock that will prevail in
the market after this offering may be lower than the price you pay. See
"Underwriting."
Our stock price may be highly volatile which could result in substantial losses
for investors.
The trading price of our common stock is likely to be volatile. The stock
market in general, and the market for technology and Internet-related companies
in particular, has experienced extreme volatility. This volatility has often
been unrelated to the operating performance of particular companies. We cannot
be sure that an active public market for our common stock will develop or
continue after this offering. Investors may not be able to sell their common
stock at or above our initial public offering price. Prices for the common
stock will be determined in the marketplace and may be influenced by many
factors, including variations in our financial results, changes in earnings
estimates by industry research analysts, investors' perceptions of us and
general economic, industry and market conditions.
Future sales by existing stockholders could depress the market price of our
common stock.
Sales of a substantial number of shares of our common stock in the public
market after this offering could depress the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities. See "Shares Eligible for Future Sale."
Management will have broad discretion as to the use of proceeds of this
offering and may not use these funds effectively.
Our management will retain broad discretion to allocate the proceeds of this
offering. Management's failure to apply these funds effectively could have an
adverse effect on our ability to implement our strategy.
We are at risk of securities class action litigation that could result in
substantial costs and divert management's attention and resources.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. Due to the potential volatility of our stock price, we may be the
target of securities litigation in the future. Securities litigation could
result in substantial costs and divert management's attention and resources.
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FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. In some cases you can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will," and "would" or similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of
operations or of our financial position or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed above in
the section captioned "Risk Factors," as well as any cautionary language in
this prospectus, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. Before you invest in our common stock, you
should be aware that the occurrence of the events described in these risk
factors and elsewhere in this prospectus could have an adverse effect on our
business, results of operations and financial position.
This prospectus contains industry data related to our business and the
server appliance industry. This industry data includes projections that are
based on a number of assumptions. If these assumptions turn out to be
incorrect, actual results may differ from the projections based on these
assumptions. The failure of the server appliance market to grow at these
projected rates may have a material adverse effect on our business, results of
operations and financial condition, and the market price of our common stock.
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USE OF PROCEEDS
We expect the net proceeds from our sale of shares of common stock will
be approximately $ , at an assumed initial public offering price of $ per
share less underwriting discounts and commissions and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $ .
The principal purposes of this offering are to establish a public market for
our common stock, increase visibility in the marketplace, facilitate our future
access to public capital markets, provide liquidity to existing stockholders
and obtain additional working capital.
We expect to use the proceeds from this offering for research and
development, sales and marketing including international expansion, potential
acquisitions of businesses, technologies or products and general corporate
purposes. No specific acquisitions are currently planned and no portion of the
net proceeds has been allocated for any acquisition. Pending such uses of the
net proceeds, we intend to invest these proceeds in investment grade, interest-
bearing securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all of our future earnings, if any, for
use in the operation and expansion of our business.
Under the terms of our existing credit agreement, we are prohibited from
paying any cash dividends without the prior written consent of our lender.
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CAPITALIZATION
The following table sets forth our cash position and total capitalization
as of December 31, 1999.
The pro forma as adjusted column of the table gives effect to the:
. conversion of all outstanding shares of our preferred stock into shares
of common stock upon the closing of this offering; and
. sale in this offering of shares of common stock at an assumed
initial public offering price of $ per share, less underwriting
discounts and commissions and estimated offering expenses payable by us.
This table should be read in conjunction with our financial statements and
notes thereto, which can be found at the end of this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
----------------------------
Pro Forma
Actual As Adjusted
(in thousands)
<S> <C> <C>
Cash, cash equivalents and restricted cash........ $ 25,255 $
============= ==========
Current portion of long-term debt................. $ 227 $
============= ==========
Long-term debt, less current portion.............. $ 129 $
Redeemable convertible preferred stock:
Series D Convertible Preferred Stock, $.01 par
value; 3,581,554 shares and no shares
authorized, issued and outstanding, actual and
pro forma as adjusted, respectively............ 25,567
Series C Convertible Preferred Stock, $.01 par
value; 1,123,549 shares and no shares
authorized, issued and outstanding, actual and
pro forma as adjusted, respectively............ 9,166
Series B Convertible Preferred Stock, $.01 par
value; 357,142 shares and no shares authorized,
issued and outstanding, actual and pro forma as
adjusted, respectively......................... 2,750
Series A Convertible Preferred Stock, $.01 par
value; 185,250 shares and no shares authorized,
issued and outstanding, actual and pro forma as
adjusted, respectively......................... 1,044
------------- ----------
Total redeemable convertible preferred stock.. 38,527
Stockholders' equity (deficit):
Common stock, $.01 par value; 16,000,000 shares
authorized and 1,661,256 shares issued and
outstanding, actual; 100,000,000 shares
authorized and shares issued and
outstanding pro forma as adjusted.............. 17
Additional paid-in capital...................... 5,425
Accumulated deficit............................. (13,020)
Note receivable from stockholder................ (90)
Deferred stock compensation..................... (4,431)
------------- ----------
Total stockholders' equity (deficit).......... (12,099)
------------- ----------
Total capitalization........................ $ 26,557 $
============= ==========
</TABLE>
This information excludes shares of common stock issuable upon exercise
of options outstanding as of , 2000 at a weighted average exercise price
of $ per share, shares of common stock issuable upon exercise of
warrants outstanding as of , 2000 at a weighted average exercise price of
$ per share, shares of common stock reserved for issuance under our 1999
stock incentive plan, shares of common stock reserved for issuance under
our 2000 employee stock purchase plan and shares of common stock reserved
for issuance under our 2000 director stock option plan.
22
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999, was $26.4
million, or approximately $ per share. Pro forma net tangible book value
per share represents the pro forma stockholders' equity divided by the pro
forma number of shares of common stock outstanding, giving effect to the
conversion of all outstanding shares of preferred stock. After giving effect to
the sale of the shares of common stock being offered at an assumed
initial public offering price of $ per share less underwriting discounts
and commissions and estimated offering expenses payable by us, our pro forma
net tangible book value at December 31, 1999, would have been $ million,
or approximately $ per share. This represents an immediate increase in pro
forma net tangible book value of $ per share to existing stockholders and
an immediate dilution in net tangible book value in $ per share to new
investors in common stock in this offering. The following table illustrates
this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
Pro forma net tangible book value per shares as of December 31,
1999.............................................................. $
Increase attributable to new investors.............................
Pro forma net tangible book value per share after offering...........
----
Dilution per share to new investors.................................. $
====
</TABLE>
The following table sets forth, on a pro forma basis as of December 31,
1999, the differences between the number of shares of common stock purchased,
the total consideration paid and the average price per share paid by existing
stockholders and by the new investors purchasing shares of common stock in this
offering, before deducting underwriting discounts and commissions and estimated
offering expenses payable by us, at the assumed initial public offering price
of $ per share.
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration Average
-------------- -------------- Price Per
Number Percent Amount Percent Share
<S> <C> <C> <C> <C> <C>
Existing stockholders................... % $ % $
New public investors....................
--- --- ---- ---
Total................................. % $ %
=== === ==== ===
</TABLE>
The foregoing discussion excludes any shares to be issued in connection with
the over-allotment option and excludes any shares of common stock issuable upon
the exercise of options or warrants. As of , 2000, there were shares
of common stock issuable upon exercise of options outstanding at a weighted
average exercise price of $ per share, shares of common stock issuable
upon exercise of warrants outstanding at a weighted average exercise price of
$ per share, shares of common stock reserved for issuance under our 1999
stock incentive plan, shares of common stock reserved for issuance under
our 2000 employee stock purchase plan and shares of common stock reserved
for issuance under our 2000 director stock option plan. To the extent that any
shares are issued upon exercise of options or warrants that were outstanding at
December 31, 1999 or granted after that date, or reserved for future issuance
under our stock plans, there may be further dilution to new investors.
23
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere
in this prospectus. The statement of operations data for the fiscal years ended
September 30, 1997, 1998 and 1999 and the balance sheet data as of September
30, 1998 and 1999 are derived from our financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, included elsewhere in this
prospectus. The statement of operations data for the years ended September 30,
1995 and 1996 and the balance sheet data as of September 30, 1995, 1996 and
1997 are derived from our audited financial statements not included elsewhere
in this prospectus. The statement of operations data for the three months ended
December 31, 1998, March 31, 1999, June 30, 1999, September 30, 1999 and
December 31, 1999 and the balance sheet data as of December 31, 1999 are
derived from our unaudited financial statements. The unaudited financial
statements have been prepared on the same basis as our audited financial
statements and, in our opinion, include all adjustments, consisting only of
normal recurring adjustments, which we consider necessary for a fair
presentation of our results of operations and financial position for these
periods. These historical results are not necessarily indicative of results to
be expected for any future period.
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding shares of preferred stock
into shares of common stock, as if the shares had converted immediately upon
issuance. Accordingly, accretion of preferred stock to redemption value has not
been included in the calculation of unaudited pro forma basic and diluted net
loss per share.
24
<PAGE>
Selected Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended September 30, December 31,
----------------------------------------- ----------------
1995 1996 1997 1998 1999 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 661 $1,515 $ 609 $ 1,102 $ 6,031 $ 223 $ 4,415
Cost of revenues........ 335 718 465 1,591 4,733 385 2,613
------ ------ ------- ------- ------- ------- -------
Gross profit (loss).... 326 797 144 (489) 1,298 (162) 1,802
Operating expenses:
Research and
development........... 92 169 395 923 2,564 317 1,174
Sales and marketing.... 98 233 477 1,593 2,920 558 1,615
General and
administrative........ 257 268 396 620 934 203 432
Stock compensation..... -- -- -- -- 127 -- 197
------ ------ ------- ------- ------- ------- -------
Total operating
expenses............ 447 670 1,268 3,136 6,545 1,078 3,418
Income (loss) from
operations............. (121) 127 (1,124) (3,625) (5,247) (1,240) (1,616)
Interest income
(expense), net......... (27) (69) (33) (574) (897) (930) 30
------ ------ ------- ------- ------- ------- -------
Income (loss) before
extraordinary item..... (148) 58 (1,157) (4,199) (6,144) (2,170) (1,586)
Extraordinary gain on
extinguishment of
debt................... -- -- -- -- 314 -- --
------ ------ ------- ------- ------- ------- -------
Net income (loss)....... (148) 58 (1,157) (4,199) (5,830) (2,170) (1,586)
Accretion of redeemable
convertible preferred
stock.................. -- -- -- -- (223) -- (810)
------ ------ ------- ------- ------- ------- -------
Net income (loss)
attributable to common
stockholders........... $ (148) $ 58 $(1,157) $(4,199) $(6,053) $(2,170) $(2,396)
====== ====== ======= ======= ======= ======= =======
Income (loss) per common
share before
extraordinary item--
basic and diluted...... $(0.14) $ 0.05 $ (0.91) $ (3.28) $ (4.81) $ (1.66) $ (1.75)
Extraordinary item per
common share--basic and
diluted................ -- -- -- -- 0.24 -- --
------ ------ ------- ------- ------- ------- -------
Net income (loss) per
common share--basic and
diluted................ $(0.14) $ 0.05 $ (0.91) $ (3.28) $ (4.57) $ (1.66) $ (1.75)
====== ====== ======= ======= ======= ======= =======
Shares used in computing
basic and diluted net
income (loss) per
common share........... 1,070 1,210 1,271 1,280 1,325 1,310 1,366
Pro forma net loss per
common share--basic and
diluted (unaudited).... $ (1.58) $ (0.31)
======= =======
Shares used in computing
basic and diluted pro
forma net loss per
common share
(unaudited)............ 3,697 5,144
</TABLE>
<TABLE>
<CAPTION>
As of September 30, As of
----------------------------------- December 31,
1995 1996 1997 1998 1999 1999
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
restricted cash............ $ 11 $ 32 $ 16 $ 113 $ 1,535 $ 25,255
Working capital (deficit)... (8) 204 (97) (3,937) 1,897 25,327
Total assets................ 313 804 699 1,730 5,864 30,934
Long-term debt, less current
portion.................... 61 82 58 69 158 129
Redeemable convertible
preferred stock............ -- -- 1,000 1,000 12,467 38,527
Total stockholders' equity
(deficit).................. (45) 227 (953) (4,554) (9,897) (12,099)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
December 31, March 31, June 30, September 30, December 31,
1998 1999 1999 1999 1999
(in thousands)
<S> <C> <C> <C> <C> <C>
Net revenues............ $ 223 $ 893 $ 908 $4,007 $ 4,415
Cost of revenues........ 385 883 1,004 2,461 2,613
------- ------- ------- ------ -------
Gross profit (loss).... (162) 10 (96) 1,546 1,802
Operating expenses:
Research and
development........... 317 550 640 1,057 1,174
Sales and marketing.... 558 589 778 995 1,615
General and
administrative........ 203 186 206 339 432
Stock compensation..... -- 10 37 80 197
------- ------- ------- ------ -------
Total operating
expenses............ 1,078 1,335 1,661 2,471 3,418
Loss from operations.... (1,240) (1,325) (1,757) (925) (1,616)
Interest income
(expense), net......... (930) 11 4 18 30
------- ------- ------- ------ -------
Loss before
extraordinary item..... (2,170) (1,314) (1,753) (907) (1,586)
Extraordinary gain on
extinguishment of
debt................... -- 314 -- -- --
------- ------- ------- ------ -------
Net loss................ $(2,170) $(1,000) $(1,753) $ (907) $(1,586)
======= ======= ======= ====== =======
As a Percentage of Net
Revenues:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 172.6 98.9 110.6 61.4 59.2
------- ------- ------- ------ -------
Gross profit (loss).... (72.6) 1.1 (10.6) 38.6 40.8
Operating expenses:
Research and
development........... 142.2 61.6 70.5 26.4 26.6
Sales and marketing.... 250.2 66.0 85.7 24.8 36.6
General and
administrative........ 91.0 20.8 22.7 8.5 9.8
Stock compensation..... -- 1.1 4.0 2.0 4.4
------- ------- ------- ------ -------
Total operating
expenses............ 483.4 149.5 182.9 61.7 77.4
------- ------- ------- ------ -------
Loss from operations.... (556.0) (148.4) (193.5) (23.1) (36.6)
Interest income
(expense), net......... (417.1) 1.2 0.4 0.5 0.7
------- ------- ------- ------ -------
Loss before
extraordinary item..... (973.1) (147.2) (193.1) (22.6) (35.9)
Extraordinary gain on
extinguishment of
debt................... -- 35.2 -- -- --
------- ------- ------- ------ -------
Net loss................ (973.1)% (112.0)% (193.1)% (22.6)% (35.9)%
======= ======= ======= ====== =======
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our financial
statements and related notes included elsewhere in this prospectus. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this prospectus.
Overview
We develop, market and provide integrated, scalable and powerful server
appliances that deliver Internet application functionality. Server appliances
are a new category of computer network infrastructure devices that deliver
specific network functionality through a combination of pre-packaged hardware
and software. Unlike general-purpose computer servers, our server appliances
are high-powered compact products with extensive, integrated remote management
capabilities and flexible choices in operating systems, applications and
computing power. Our customers may select the number and type of each server
that they need, utilize them separately or combine them into clusters, locate
them geographically as needed, and manage them from a single location without
the support of on-site technicians. Our server appliances are designed to meet
the complex needs and requirements of e-commerce and Internet-based
organizations, including dot com companies, web hosting providers, application
service providers and Internet service providers.
We were incorporated in 1989 as PowerStation Technologies, Inc. to provide
systems integration and consulting services. In fiscal 1994, we transitioned
our business by becoming a developer of fault-tolerant high-density general-
purpose computers, our P6000 product line. In September 1997, we changed our
name to Network Engines, Inc. and began expending substantial research and
development efforts to leverage our legacy general-purpose computer technology
into server appliance products. Research and development expenses increased
significantly from $395,000 to $923,000 to $2.6 million in fiscal 1997, 1998
and 1999, respectively.
In June 1999, we introduced our WebEngine Blazer product, which is our first
generation of server appliances. Since July 1999, substantially all of our
revenue has been attributable to the WebEngine Blazer product as we
discontinued development and sales of the P6000 product line upon the
introduction of our server appliances. Additionally, we introduced our
AdminEngine server appliance in February 2000 and our WebEngine Roadster,
WebEngine Viper and CommerceEngine server appliances in the third quarter of
fiscal 2000.
Since we began focusing on server appliances in 1998, we have incurred
substantial costs to develop our technology and products, to recruit and train
personnel for our engineering, sales and marketing and technical support
departments, and to establish an administrative organization. As a result, we
had an accumulated deficit of $13.0 million as of December 31, 1999. We
anticipate that our operating expenses will increase substantially in the
future as we increase our sales and marketing operations, develop new channels,
fund greater levels of research and development, expand our technical support
and improve our operational and financial systems. Accordingly, we will need to
generate significant revenues to achieve profitability. In addition, our
limited operating history in the server appliance market makes it difficult for
us to predict future operating results, and,
27
<PAGE>
accordingly, there can be no assurances that we will sustain revenue growth or
achieve profitability in future quarters.
We derive revenues from the sale of our products to customers and from
license fees. License fees are generated by granting certain customers a right
to manufacture specific configurations of our product and to distribute that
product under their name. For direct sales and sales to resellers, we recognize
revenues upon delivery, provided evidence of an arrangement has been received,
no obligations remain outstanding and collectibility is reasonably assured. For
the license agreements, we recognize license revenues upon sell through to the
licensee's customers.
We entered into a license agreement with IBM in July 1999 that granted IBM a
license to manufacture our WebEngine Blazer hardware design. We also entered
into a license agreement with Micronpc.com in October 1999 that granted them a
license to manufacture our WebEngine Blazer hardware design and to distribute
our software. Until these partners were able to manufacture the licensed
product for themselves, we were manufacturing the product for them and charging
them a higher unit sales price for this service than we would have received in
license fees had they manufactured the product. As of March 31, 2000, we expect
that substantially all future revenue from IBM and Micronpc.com will be license
revenues. Accordingly, the revenue per unit for these customers will decrease.
However, since these licensees will be manufacturing the units, we will not
incur any substantial cost of revenues and our gross profit as a percentage of
revenue will be high for license revenues. There are no minimum license fee
commitments under either of these agreements.
We sell our products through a direct sales force, through systems
integrators acting as resellers, and to OEMs and licensed manufacturers.
Substantially all of our sales to date have been to customers in the United
States. We intend to expand our reseller channel in the United States and to
establish an international indirect channel.
Cost of revenues includes cost of materials, manufacturing costs,
manufacturing personnel expenses, obsolescence charges, packaging, license fees
and shipping and warranty costs.
We expect our gross profit to be affected by:
. fluctuations in demand for our products;
. the mix of product revenues versus license revenues;
. the timing and size of customer orders;
. the mix of products sold;
. the mix of sales channels through which our products are sold;
. the mix of sales within and outside North America;
. new product introductions by us and our competitors;
. changes in our pricing policies;
. changes in component costs; and
. the volume manufacturing prices we are able to obtain from our contract
manufacturers.
28
<PAGE>
Research and development expenses consist primarily of salaries and related
expenses for personnel engaged in research and development, fees paid to
consultants and outside service providers, material costs for prototype and
test units and other expenses related to the design, development, testing and
enhancements of our products. We expense all of our research and development
costs as they are incurred. We believe that a significant level of investment
in product research and development is required to remain competitive.
Accordingly, we expect to continue to devote substantial resources to product
research and development such that research and development expenses will
increase in absolute dollars but will continue to fluctuate as a percentage of
net revenues.
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in sales, marketing and customer support
functions, as well as costs associated with trade shows, public relations and
marketing materials. We intend to expand our sales and marketing operations and
efforts substantially, both domestically and internationally, in order to
increase market awareness and to generate sales of our products. Accordingly,
we expect our sales and marketing expenses to increase in absolute dollars but
continue to fluctuate as a percentage of net revenues.
General and administrative expenses consist primarily of salaries and other
related costs for executive, finance, accounting, information technology,
facilities and human resources personnel, as well as accounting, legal, other
professional fees and allowance for doubtful accounts. We expect these expenses
to increase in absolute dollars but continue to fluctuate as a percentage of
net revenues as we add administrative personnel and incur additional costs
related to the growth of our business, expansion of our information
infrastructure and our operation as a public company.
As of December 31, 1999, we recorded deferred stock compensation on our
balance sheet of $4.8 million in connection with stock option and restricted
stock grants to our employees and directors that were granted between February
1, 1999 and December 31, 1999. Such amount represents the difference between
the exercise price and the deemed fair value of our common stock for financial
reporting purposes at the date of grant. We will amortize this stock
compensation over the vesting period of the related options. During the three
months ended December 31, 1999, we amortized $197,000 of stock compensation.
As of December 31, 1999, we had net operating loss carryforwards for both
federal and state income tax purposes of approximately $8.1 million available
to offset future taxable income. These net operating loss carryforwards expire
beginning in 2019 and 2004, respectively. We have not recognized any benefit
from the future use of loss carryforwards for these periods because of the
uncertainty surrounding their realization.
Our net loss attributable to common stockholders includes accretion charges
to increase the carrying amount of our redeemable convertible preferred stock
to the amount we would be required to pay if the preferred stock were to be
redeemed. All preferred stock will automatically convert to common stock as a
result of this offering. As a result, there will not be any such accretion
charges in the future related to our redeemable convertible preferred stock.
We had 125 employees as of March 31, 2000, a substantial increase from 48 as
of September 30, 1999 and 33 as of December 31, 1998. This rapid growth has
placed significant
29
<PAGE>
demands on our management and operational resources. In order to manage our
growth effectively, we must implement and improve our operational systems,
procedures and controls on a timely basis. If our total revenues do not
increase relative to our operating expenses, our management systems do not
expand to meet increasing demands, we fail to attract, assimilate and retain
qualified personnel or our management otherwise fails to manage our expansion
effectively, we could experience a decline in our revenues and operating
results.
Results of Operations
In light of the significant change in our business related to the
introduction of our server appliance products, we have decided to present a
comparison of results for (1) the three months ended December 31, 1999 versus
the three months ended September 30, 1999 and (2) the three months ended
September 30, 1999 versus the three months ended June 30, 1999, because we
believe that such comparisons are the most meaningful presentation of our
operating results.
Three Months Ended December 31, 1999 and Three Months Ended September 30, 1999
Net Revenues
Net revenues increased to $4.4 million for the three months ended December
31, 1999 from $4.0 million for the three months ended September 30, 1999. The
increase was primarily due to increased sales volumes of our WebEngine Blazer
product.
Gross Profit (Loss)
Gross profit increased to $1.8 million for the three months ended December
31, 1999 from $1.5 million for the three months ended September 30, 1999. Gross
profit as a percentage of net revenues increased to 40.8% for the three months
ended December 31, 1999 from 38.6% for the three months ended September 30,
1999. The increase in gross profit was primarily due to increased sales volume
of our WebEngine Blazer product and decreased obsolescence charges because of
the finalization of P6000 inventory obsolescence charges in September 1999.
Operating Expenses
Research and Development. Research and development expenses increased to
$1.2 million for the three months ended December 31, 1999 from $1.1 million for
the three months ended September 30, 1999. The increase in research and
development expenses was primarily due to an increase in research and
development personnel during the period from 15 employees to 37 employees that
was partially offset by decreased consultant expenses and lower expenses
related to prototype and test units.
Sales and Marketing. Sales and marketing expenses increased to $1.6 million
for the three months ended December 31, 1999 from $1.0 million for the three
months ended September 30, 1999. The increase in sales and marketing expenses
was primarily due to an increase in sales, marketing and customer support
personnel during the period from 15 employees to 33 employees.
30
<PAGE>
General and Administrative. General and administrative expenses increased to
$432,000 for the three months ended December 31, 1999 from $339,000 for the
three months ended September 30, 1999. The increase in general and
administrative expenses was primarily due to an increase in general and
administrative personnel during the period from six employees to ten employees.
Stock Compensation. For the three months ended December 31, 1999, we
recorded deferred stock compensation of $3.2 million relating to stock options
and restricted stock granted to employees and directors versus $708,000
recorded for the three months ended September 30, 1999. These amounts are being
amortized over the vesting periods of the granted options. Stock-based
compensation increased to $197,000 for the three months ended December 31, 1999
from $80,000 for the three months ended September 30, 1999.
Three Months Ended September 30, 1999 and Three Months Ended June 30, 1999
Net Revenues
Net revenues increased to $4.0 million for the three months ended September
30, 1999 from $908,000 for the three months ended June 30, 1999. The increase
in net revenues was primarily due to the June introduction of our WebEngine
Blazer product that accounted for substantially all of the net revenues for the
three months ended September 30, 1999.
Gross Profit (Loss)
Gross profit (loss) increased to $1.5 million for the three months ended
September 30, 1999 from ($96,000) for the three months ended June 30, 1999.
Gross profit (loss) as a percentage of net revenues increased to 38.6% for the
three months ended September 30, 1999 from (10.6%) for the three months ended
June 30, 1999. The increase in gross profit was primarily due to increased
sales related to the introduction of our WebEngine Blazer product.
Operating Expenses
Research and Development. Research and development expenses increased to
$1.1 million for the three months ended September 30, 1999 from $640,000 for
the three months ended June 30, 1999. The increase in research and development
expenses was primarily due to an increase in research and development personnel
during the period from nine employees to 15 employees, as well as increased
consultant expenses and increased prototype and test unit costs.
Sales and Marketing. Sales and marketing expenses increased to $1.0 million
for the three months ended September 30, 1999 from $778,000 for the three
months ended June 30, 1999. The increase in sales and marketing expenses was
primarily due to an increase in sales commissions associated with our increased
net revenues.
General and Administrative. General and administrative expenses increased to
$339,000 for the three months ended September 30, 1999 from $206,000 for the
three months ended June 30, 1999. The increase in general and administrative
expenses was primarily due to increased legal and accounting fees, increased
facilities costs and increased costs related to the expansion of our
information systems infrastructure.
31
<PAGE>
Stock Compensation. For the three months ended September 30, 1999, we
recorded deferred stock compensation of $708,000 relating to stock options
granted to employees versus $368,000 recorded for the three months ended June
30, 1999. These amounts are being amortized over the vesting periods of the
granted options. Stock-based compensation increased to $80,000 for the three
months ended September 30, 1999 from $37,000 for the three months ended June
30, 1999.
As a result of our limited history with our server appliance products, we
cannot forecast operating expenses based on historical results. Accordingly, we
may incur expenses, in part, based on future revenue projections. Most of our
expenses are fixed in nature, and we may not be able to quickly reduce spending
if revenues are lower than we have projected. Our ability to forecast our
quarterly sales accurately is limited, which makes it difficult to predict the
quarterly revenues that we will recognize. We expect that our business,
operating results and financial condition would be harmed if revenues did not
meet projections. Investors should not rely on the results of one quarter as an
indication of future performance.
We expect that our revenues and operating results may vary significantly
from quarter to quarter, and we anticipate that our expenses will increase
substantially for at least the next two fiscal years as we:
. increase our sales and marketing activities, including expanding our
North American direct sales force, establishing an international
presence and commencing our initial advertising campaign;
. expand our indirect channels, both domestically and internationally;
. develop our technology, expand our product lines and market new
products; and
. pursue strategic relationships and acquisitions.
Liquidity and Capital Resources
Since fiscal 1997, we have financed our operations primarily through the
sale of equity securities, borrowings and the sale of our products. As of
December 31, 1999, we had raised approximately $37.3 million, net of offering
costs, from the issuance of preferred stock. As of December 31, 1999, we had
$24.9 million in cash and cash equivalents.
In April 2000, we amended an equipment line of credit agreement to provide
for an additional $2.0 million of equipment financing and a $4.0 million
working capital revolving line of credit. The additional equipment financing is
separated into two consecutive six-month borrowing periods for $1.0 million
beginning on the date of amendment. Interest at the rate of prime plus 1.25% is
payable monthly. Any outstanding balances at the end of each of the two
borrowing periods will be repaid in 36 equal monthly installments. The
revolving line of credit matures in April 2001 and bears interest at prime plus
1%.
Cash used in operating activities was $768,000, $3.4 million, $5.1 million
and $1.2 million in fiscal 1997, 1998, 1999 and for the three months ended
December 31, 1999, respectively. Cash used in fiscal 1997 was primarily due to
a net loss of $1.2 million and an increase in inventories, offset in part by
decrease in accounts receivable and increases in accrued expenses and non-cash
charges for depreciation, inventory reserves and provision for doubtful
accounts expenses. Cash used in fiscal
32
<PAGE>
1998 was primarily due to a net loss of $4.2 million and increases in accounts
receivable and inventories, offset in part by increases in accounts payable and
accrued expenses and non-cash charges for depreciation, inventory reserves and
amortization of discount on notes payable. Cash used in fiscal 1999 was
primarily due to a net loss of $5.8 million and increases in accounts
receivable and inventories, offset in part by increases in accounts payable and
accrued expenses and non-cash charges for depreciation, inventory reserves and
amortization of discount on notes payable. Cash used for the three months ended
December 31, 1999 was primarily due to a net loss of $1.6 million and increases
in accounts receivable, inventories and prepaid expenses, offset in part by an
increase in accounts payable and non-cash charges for depreciation, inventory
reserves and stock-based compensation.
Cash used in investing activities was $185,000, $343,000, $723,000 and
$784,000 in fiscal 1997, 1998, 1999 and for the three months ended December 31,
1999, respectively. Cash used in investing activities was primarily for
purchases of property and equipment and, for the three months ended December
31, 1999, providing a $279,000 letter of credit as a security deposit on our
new leased facilities in Canton, Massachusetts.
Cash provided by financing activities was $937,000, $3.8 million, $7.2
million and $25.4 million in fiscal 1997, 1998, 1999 and for the three months
ended December 31, 1999, respectively. Cash provided by financing activities
consisted primarily of proceeds from private sales of preferred stock and
bridge loans from stockholders. These bridge loans were subsequent to our sale
of series A preferred stock in fiscal 1997 and eventually converted into a
combination of series B and series C preferred stock in fiscal 1999.
We intend to continue to invest heavily in the development of new products
and enhancements to our existing products. Our future liquidity and capital
requirements will depend upon numerous factors, including:
. the costs and timing of expansion of sales and marketing activities;
. the costs and timing of expansion of product development efforts and the
success of these development efforts;
. the extent to which our existing and new products gain market
acceptance;
. the level and timing of license revenues;
. the costs involved in maintaining and enforcing intellectual property
rights;
. market developments;
. the costs and timing of expanding and improving our facilities;
. available borrowings under line of credit arrangements; and
. other factors.
We believe that the proceeds from this offering, together with our current
cash and any cash generated from operations and from current debt financing,
will be sufficient to meet our operating and capital requirements for at least
the next 12 months. However, it is possible that we may require additional
funds within this period. We have no current plans, and we are not currently
negotiating, to obtain additional funds following the completion of this
offering. The factors described above will
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affect our future capital requirements and the adequacy of our available funds.
In addition, whether or not we need to raise additional funds to meet our
anticipated cash needs during the next 12 months, we may need to raise
additional funds beyond this time. Any additional funds may be raised through
public or private financings, strategic relationships or other arrangements. We
cannot assure you that such funding, if needed, will be available on terms
attractive to us, or at all. Furthermore, any additional equity financing may
be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. If we fail to raise capital when needed, our failure
could have a negative impact on our ability to pursue our business strategy and
achieve and maintain profitability.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS 133, as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," is effective for fiscal years
beginning after June 15, 2000. SFAS 133 will be effective for our fiscal year
ended September 30, 2001. We believe the adoption of this statement will not
have a significant impact on our financial position, results of operations or
cash flows.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This bulletin summarizes certain views of the staff of the
Securities and Exchange Commission on applying generally accepted accounting
principles to revenue recognition in financial statements. The staff of the
Securities and Exchange Commission believes that revenue is realized or
realizable and earned when all of the following criteria are met: persuasive
evidence of an arrangement exists; delivery has occurred or services have been
rendered; the seller's price to the buyer is fixed or determinable; and
collectibility is reasonably assured. We do not expect the application of SAB
101 to have a material impact on our financial position or results of
operations.
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BUSINESS
Overview
We develop, market and provide integrated, scalable and powerful server
appliances that deliver Internet application functionality. Server appliances
are a new category of computer network infrastructure devices that deliver
specific functionality through a combination of pre-packaged hardware and
software. Unlike general-purpose servers, our server appliances are high-
powered, compact products with extensive, integrated remote management
capabilities and a choice of operating systems, applications and computing
power. Our customers may select the number and type of each server that they
need, utilize them separately or combine them into clusters, locate them
geographically as needed, and manage them from a single location without the
support of on-site technicians. Our server appliances are designed to meet the
complex needs and requirements of e-commerce and Internet-based organizations,
including dot com companies, web hosting providers, application service
providers and Internet service providers.
We offer a broad range of server appliance products, consisting of the
WebEngine family, CommerceEngine and AdminEngine. Our product line enables our
customers to create Internet content delivery systems with a wide range of
power at a reduced total cost of ownership. Our server appliances are easy to
install and configure and are designed to meet our customers' needs by
combining specific application functionality within small physical packaging.
In order to meet the preferences of a wide range of customers, we offer server
appliances with either Windows or Linux operating systems and with a range of
applications. Our server appliances can be used as individual fully-functioning
devices or can be connected in clusters of up to 256 appliances, either of the
same or different types, to increase the application processing power and
functionality of the appliance cluster. In addition, our server appliance
products contain integrated hardware and software features that allow lights
out management and a single point of management for the entire cluster, which
enhance the ability to manage remotely.
We have assembled a research and development team of highly-skilled
engineers with significant experience in high-density packaging, server design,
embedded management, networking and software. This team enables us to build
upon our current technology platforms, expand the features and functionality of
our suite of server appliances and develop additional products that maintain
our technological advantages. In addition, we have developed strategic
relationships with leading technology vendors that will enhance our total
product offerings. We sell our products through a direct sales organization and
through a network of channels that includes systems integrators, distributors
and licensed manufacturers.
Our objective is to become the leading global provider of scalable Internet
server appliances. We intend to increase market acceptance of server appliances
for Internet-based applications by providing and expanding a range of specific-
purpose server appliances that can be easily scaled to increase application
power and can be easily integrated into managed clusters.
Industry Background
The emergence of the Internet as a global communications medium for e-
commerce and information delivery is now well-accepted. The openness and
accessibility of the Internet enable
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large and small organizations, either new or established, to enter this
competitive environment by creating Internet sites and establishing their own
network infrastructures. New and emerging organizations hoping to grow, and
well-financed organizations hoping to increase market share, typically seek to
reduce time-to-revenue.
Organizations seek to appeal to a wide range of users and to generate large
volumes of activity at their web sites, resulting in significant Internet
traffic. The growth and complexity in Internet use and functionality,
including streaming media, dynamic content and e-commerce transactions, have
led to increased demand for greater bandwidth and processing power. The
increase in Internet traffic and demand for greater bandwidth has resulted in
more utilization of remote server facilities, such as co-location facilities,
to house servers for Internet-related businesses. Co-location facilities,
which provide strategically located secure data center space with high-speed
network connections to the Internet, can improve network performance to end
users by reducing the distance between end users and Internet servers.
Traditionally, organizations have built their Internet solutions with
general-purpose servers. This method requires extensive time and technical
resources and capabilities which increases overall cost of ownership,
including time and cost of implementation. To extend the power and features of
a general-purpose server, organizations must integrate numerous discrete
hardware and software elements, such as operating systems, applications,
security systems, load balancers and management tools, which increases overall
costs and time-to-revenue. This approach is not well-suited for use in remote
server facilities because it typically creates large, complex systems that
require substantial facility space. In addition, most vendors' offerings
include limited management and few vendors, if any, provide remote lights out
management capabilities, which increases the need for dedicated attention of
on-site information technology professionals. When organizations use general-
purpose servers to handle Internet traffic, they typically face a higher total
cost of ownership since equipment, facility costs and operating expenses are
high and time-to-revenue is increased.
To address the shortcomings of general-purpose servers, many organizations
are seeking well-designed solutions for Internet applications that meet a
common set of requirements. These organizations include e-commerce and
Internet-based businesses, such as dot com companies, web hosting providers,
application service providers and Internet service providers. Their
requirements include:
. pre-packaged functionality to reduce or eliminate the need for custom
integration by the end user;
. high-density physical packaging that provides high-performance server
hardware in small, rack-mounted devices to minimize the costs of co-
location space rental;
. an integrated management system that enables administrators to
extensively control their server appliances remotely, even in the case
of system failure; and
. built-in clustering capability that enables users to easily scale the
power and functionality of their solution as user demand grows and
evolves.
The server appliance, a combination of computing hardware and software that
is designed to deliver a single application function, was developed to address
the shortcomings of general-purpose
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servers. International Data Corporation estimates that the worldwide market for
server appliances will grow to $8.0 billion in 2003 from approximately $50.0
million in 1998, a compounded annual growth rate of 176%. As market acceptance
of server appliances grows, we expect that users will increasingly demand
products that meet specific functional requirements and reduce total cost of
ownership factors, including time-to-revenue, packaging density, installation
and management functionality. In addition, specific customer preferences for
operating systems, applications and computing power play important roles in
customer selection of server appliances. Therefore, server appliance vendors
who offer a choice in these areas will have a broader market opportunity.
The Network Engines Solution
We develop, market and provide a selection of server appliances that deliver
Internet application functionality to meet the requirements of e-commerce and
Internet-based organizations, including dot com companies, web hosting
providers, application service providers and Internet service providers. Our
server appliances are high-powered, compact products with extensive, integrated
remote management capabilities and a choice of operating systems, applications
and computing power. Our product line enables our customers to create Internet
solutions at a reduced total cost of ownership. Our customers may select the
number and type of each appliance that they need, utilize them separately or
combine them into clusters, locate them geographically as needed, and manage
them from a single remote location with the support of a limited number of
customer-provided technicians. We believe that the following elements of our
solution will position us to become a leading provider of scalable Internet
server appliances for medium- to large-sized organizations using Internet-based
applications:
High Performance in a Small Package. Our products integrate high performance
components in a small package enabling our customers to minimize hosting or co-
location costs for servers. All of our products today are 1U (1.75 inches) in
height, which is typically one-half to one-third the height of the leading,
currently available general-purpose servers with the same processing power.
This is important because our customers typically use multiple server
appliances and must pay for the amount of rack space the servers require. Our
server appliances minimize the space requirements for our customers without
loss of computing power, thereby reducing the rental costs for rack space at
co-location facilities.
Ease of Installation and Use. Each of our server appliances is pre-
configured and is capable of performing its assigned application when it is
unpacked and connected. The typical installation consists of the user entering
one or sometimes a few configuration parameters (such as the network address)
either through the front-panel liquid crystal display or an Internet browser.
Customers do not need to integrate other hardware, operating systems,
applications or management software. Each appliance has built-in management for
installation, configuration and error reporting, as well as application
management capabilities specific to the appliance type. With these features, we
believe our servers enable our customers to decrease time-to-revenue and lower
cost of ownership.
Integrated Remote Management. Our server appliances contain integrated
hardware and software components that allow lights out management capable of
monitoring and operating our server appliances even if a server's operating
system is not functioning. Each of our server appliances is designed with a
dedicated embedded processor and extensive, embedded software for
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system management and communications. Customers can monitor and control our
appliances in dispersed, remote locations using an Internet connection and an
Internet browser. In addition, our management system enables customers to
develop rules-based decision-making, whereby errors or performance conditions
in a remote cluster can trigger actions ranging from simple notification to a
complex series of automatic responses. This remote management capability
enables customers to customize and centralize system administration and scale
their Internet solutions without hiring a proportionate number of technicians.
Dynamic Scalability. Our server appliances can be easily connected to form a
cluster, or to augment an existing cluster, to meet both varied and rapidly
changing management and performance requirements, thereby reducing costs. The
performance of individual networking applications can be increased rapidly and
without interruption by increasing the number of server appliances in a cluster
devoted to that application. Our proprietary connection technology
automatically recognizes new Network Engines appliances and assigns addresses
without interruption, instantly establishing communication with, and control
of, our server appliances added to a working cluster.
Selection of Operating Systems, Applications and Computing Power. We offer
customers appliances with a choice of operating systems, a range of
applications and varying degrees of computing power and functionality. Our
customers have differing requirements for operating systems, either Windows or
Linux, applications and computing power. By offering these choices, our
products appeal to a broad range of customers.
The Network Engines Strategy
Our objective is to become the leading global provider of scalable Internet
server appliances. The following elements of our strategy will be pursued to
achieve this goal:
Broaden Our Server Appliance Product Line. We believe that each medium- to
large-scale Internet server appliance customer has specific application and
appliance requirements that result in the need for a variety of server
appliances. To increase our appeal to the server appliance market, we are
seeking to broaden our product line beyond our current web content and e-
commerce appliances to include products designed specifically for streaming
content, storage, database management, system security and other purposes. In
addition, we intend to continue to meet the evolving needs of our customers by
offering a product line with varying levels of performance and a choice of
operating systems.
Continue Hardware and Software Innovation. With our technology expertise, we
plan to remain at the forefront of hardware and software innovation for the
server appliance market. Utilizing our software expertise, we seek to ensure
that our products have intuitive user interfaces and that they may be easily
installed, configured and remotely managed. We also plan to continue to enhance
the performance of our hardware platforms and their remote manageability, while
maintaining our leadership in compact packaging. We will continue to enhance
the combinations of hardware and software in our server appliances to address
the evolving needs of the Internet.
Expand Research and Development. We will continue our research and
development efforts, including the hiring of qualified technical personnel, in
an effort to enhance existing products and
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develop new products. In order to offer our customers the best possible
products and to accommodate their future software and hardware choices and
their legacy technology equipment, we will also seek to continue to develop
relationships with key technology vendors that enhance our total product
offerings. With our expanded research and development capabilities, we intend
either to integrate new technologies into our products or to enhance the
management and interoperability of our products within our customers'
installations. For example, we have already established relationships with a
leader in load balancing, a leader in encryption for secure web transactions,
and a leader in high-speed cluster interconnections.
Build Multi-tier Distribution Capability. We sell our products through a
direct sales force, through systems integrators acting as resellers, and to
OEMs and licensed manufacturers. We intend to expand and utilize a direct sales
organization to build our relationships with large end-user customers and to
maintain a good understanding of their changing and expanding market
requirements. In addition, we intend to continue building relationships with
network systems integrators to provide our products more effectively to this
and other market segments. We are expanding our distribution network to include
several international equipment distributors and an Internet-based channel
fulfillment program. A key element of our distribution strategy is to continue
to license our technology and sell our products to significant licensed
manufacturers and OEMs and to seek additional licensed manufacturer and OEM
relationships. For example, we have licensing relationships with IBM and
Micronpc.com and an OEM relationship with VA Linux. We believe these
relationships will assist us in establishing market presence and increasing our
product sales.
Establish Strong Brand Identity. We seek to establish company name
recognition and identification in our targeted market to enhance our sales
efforts. We intend to employ an aggressive public relations campaign and
creative marketing strategies to build market awareness of our products. We
intend to continue to incorporate innovative hardware designs with easy-to-use,
stylish web management interfaces to reinforce our brand name and establish a
strong competitive advantage.
Invest in Businesses, Products and Technologies. We intend to pursue
strategic acquisitions of, or investments in, businesses, products and
technologies that will provide us with additional industry expertise, enhance
our range of product offerings, expand our development and production capacity,
broaden our client base and expand our geographical presence.
Products
Network Engines' Internet Appliance Architecture is our approach to building
high-performance, high-density, scalable appliances targeted at e-commerce and
Internet-based organizations, such as dot com companies, web hosting providers,
application service providers and Internet service providers. This architecture
enables us to combine the hardware and software needed to install, manage,
optimize and expand our customers' Internet-based applications.
Inherent in our architecture is the concept that simple, comprehensive
management of customer installations is as important as ease of set up. All of
our products can be managed from any location using a standard web browser or
industry-standard network protocol-compliant application, enabling network
managers to operate more efficiently without sacrificing site performance and
availability.
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All of our products are designed within this Internet Appliance Architecture
framework. Each of our server appliances has the following common
characteristics:
. it is a complete, integrated, standalone specific-purpose server
appliance;
. it can be easily installed, requiring simple configuration information
to be entered through the front-panel liquid crystal display or an
Internet browser;
. it can be grouped in a load-balanced cluster with additional appliances
of its own type to increase the power of the solution;
. it includes hardware and software that enable centralized management and
allow the addition of the appliance to a cluster; and
. its management functionality can be extended by the addition of our
management appliance, AdminEngine, to its cluster.
We currently offer WebEngine, CommerceEngine and AdminEngine server
appliances.
WebEngine Product Offerings
The WebEngine family of products includes the WebEngine Roadster NT,
WebEngine Roadster LX, WebEngine Viper NT, WebEngine Viper LX and WebEngine
Blazer. Each WebEngine server appliance may be easily and rapidly deployed to
handle Internet-based information. Each member of the WebEngine family has
distinct features developed to provide a customized solution for the range of
organizations that provide information over the Internet, from entry-level
home-based businesses to large-scale, rapid-growth Internet businesses.
We have committed significant research and development resources to offer
our WebEngine products with either Windows or Linux operating systems in the NT
and LX versions of the Roadster and Viper. This choice accommodates customer
preferences for operating systems and applications. The software in each of the
NT and LX products is as follows:
. the NT products incorporate Microsoft Windows NT Server version 4.0,
Microsoft Internet Information Server, our customized management
software, Microsoft Index Server and Microsoft Management Console; and
. the LX products incorporate Linux software, including Red Hat version
6.1, the Apache web server version 1.3.9, our customized management
software, and software for file transfer protocol access, a domain name
server and a variety of e-mail servers.
WebEngine Roadster and WebEngine Viper. The WebEngine Roadster and Viper
products incorporate Intel processing components on a 1U rack mountable
platform. The Roadster and Viper products can be used as standalone servers, if
a customer needs to dedicate an affordable server appliance to individual web
sites or end users. These products can also be grouped into a cluster of
servers containing up to 256 of our appliances. Setup is easy and management of
the Roadsters and Vipers can be handled through the front-panel liquid crystal
display or an Internet browser.
The WebEngine Roadster NT and LX products are our entry-priced server
appliances. The WebEngine Viper NT and LX products have either one or two Intel
Pentium III processors, allowing for higher performance and speed. We commenced
commercial shipment of the WebEngine Roadster and WebEngine Viper in the third
quarter of fiscal 2000.
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WebEngine Blazer. The WebEngine Blazer utilizes the same hardware platform
as the Viper products. Blazers are available without an operating system to
allow for complete customer configuration or they may be ordered with Windows
or Linux operating systems already installed. Like our other products, the
Blazer includes a backup management network connection and an industry-standard
network connection to give our customers a powerful, scalable hardware platform
with our standard management features. We commenced commercial shipment of the
WebEngine Blazer in June 1999.
AdminEngine
The AdminEngine enables the management of up to 256 Network Engines
appliances that are grouped in a cluster, from any location, through any
standard web browser or standards-based network management application.
AdminEngine enables a customer to quickly and easily solve a variety of
problems that otherwise would require a technician to travel to the customer's
server room, which is often located in a remote facility. Using an Internet
browser, customers can reboot any Network Engines server from a network drive,
reset it for a local reboot, and power it up or down. AdminEngine also allows
our customers to closely monitor performance of their appliances and to
establish rules that will enable our servers to notify the customer of unusual
events. We commenced commercial shipment of the AdminEngine in February 2000.
CommerceEngine
The CommerceEngine is our server appliance which customers can use to
increase their ability to process secure Internet commercial transactions. The
CommerceEngine incorporates a hardware-based secure transaction processor in a
1U rack-mountable appliance with specialized secure transaction processing
software. CommerceEngine is based on industry standards and is compatible with
a wide variety of encryption tools, as well as communications and security
protocols. CommerceEngine gives our customers the performance benefits of
hardware-based secure transaction processing, without complicated installation
and configuration and it can be scaled by adding additional CommerceEngines and
our WebEngine appliances. The manageability of the CommerceEngine can be
increased by grouping multiple units in a cluster with our AdminEngine. We
commenced commercial shipment of the CommerceEngine in the third quarter of
fiscal 2000.
Technology
A key benefit of our server appliances is the integration of hardware and
software technologies to provide a complete solution for our users. Our server
appliance hardware and software technology is integrated with many industry-
standard technologies to create server appliance solutions.
Hardware Platforms
We have made significant investments in the development of hardware
platforms that combine very high-density packaging of industry-standard
components with management features for clustered server appliances.
High-density packaging. We believe that we have been a leader in the
development of server hardware utilizing standard Intel Pentium III processors
in a 1U rack mountable device. We have
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developed significant expertise in cooling and monitoring temperatures to
maintain operating conditions within specifications for the included
components.
Management. The processing board of each of our server appliances contains
hardware and software dedicated to the management of that particular appliance
and contributes to our ability to achieve lights out management. This
management section of the processing board is connected to our management
appliance by a network connection, as well as a backup management connection,
known as a cluster management bus. Although our management appliance normally
uses the principal network connection to communicate with each of our
appliances, it is able to switch to the cluster management bus when
communications through the network connection are not available.
Software
We have made significant investments in the development of our software
applications that are integrated with our hardware platforms to provide:
. substantial management capability of our server appliances in each
appliance independently or using our AdminEngine to manage a cluster of
appliances;
. support for both Windows and Linux operating systems; and
. an intuitive user interface for ease of installation, configuration and
management.
Our software is incorporated at three levels: standard appliance management
software in all of our WebEngine and CommerceEngine products; specific
appliance management software in each of our WebEngine and CommerceEngine
products and AdminEngine software in our AdminEngine management server
appliance.
Standard Appliance Management. Each of our WebEngine and CommerceEngine
products includes software that allows the appliance to be managed as a
standalone device. In addition, each of these server appliances includes
software to enable enhanced management communications using our AdminEngine if
that appliance is added to a managed cluster of our appliances. This built-in
software reports on hardware conditions, including temperatures, voltage
measurements, fan rotation and similar operating conditions. It also provides
performance statistics, including numbers of transactions, processor
utilization, disk and memory utilization and related measurements. This
software reports on the presence and working condition of application and
system software components. Each server appliance incorporates software that
can execute management instructions, such as restarting the operating system or
resetting power.
Specific Appliance Management. Management software is also included in each
appliance for normal application management functions, depending on the level
of management provided by the application builder. For example, Roadster NT and
Viper NT provide a simple interface to Microsoft's Internet Information Server-
included management features which provide the same functions for this
application. Roadster LX and Viper LX include proprietary software for the
creation and management of web site partitions-functionality that is not
included with the Apache application.
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AdminEngine Application. Our AdminEngine appliance application incorporates
several key items of technology:
. Internet Browser interface. AdminEngine utilizes any standard browser
software for presentation of its Java-based user interface. The
AdminEngine interface was designed for easy navigation from screen to
screen and the ability to present an easy-to-understand top-level
interface that can also present detailed technical information to the
more experienced administrator.
. Rules-based decision-making. AdminEngine enables users to develop a set
of rules for management actions based on the information reported to
AdminEngine from other appliances in the cluster. Rules may be based on
error or performance conditions, and actions can range from simple
notification to a complex series of management responses.
. Cluster management bus control. AdminEngine manages the connections
between appliances grouped in a cluster using a cluster management bus,
which does not rely on a normal network connection. This device
automatically recognizes new appliances when they are first connected
and assigns bus addresses for future reference. It subsequently uses the
cluster management bus software and associated application logic to
communicate with appliances if they are no longer responding on the
network.
. External appliance interface. The AdminEngine provides a standard point
of control for products developed by our third-party technology
providers to be managed as part of a cluster of our appliances.
Customers
Our customers include companies with e-commerce web sites and high-traffic
Internet web sites, as well as web hosting providers such as application
service providers and Internet service providers. These customers include
providers of streaming video service, web content services, television-based
web services, e-commerce, web portals and emerging web technologies. Customers
also include OEMs and parties that are licensed to build products based on our
product designs. In the fiscal year ended September 30, 1999, sales to InterVu,
IBM and Microsoft (WebTV) accounted for 46%, 28% and 14% of net revenues,
respectively. For the three months ended December 31, 1999, sales to each of
IBM and Microsoft (WebTV) accounted for 53% and 18% of our net revenues,
respectively.
Our customers include:
Akamba InfoLibria NetScaler
Arlan & Associates Information Technology Network Storage Solutions
Audiotalk Networks Systems NovaWiz
BeVocal iVillage.com Rearden Steel
Bluedog.com Lucent Technologies Revit Technology
Comet Systems Mi8 Ticketmaster Online-City
Enosus Systems Microsoft (WebTV) Search
IBM Mission Critical Visualize Video
Infobank Computer Motorola VocaLoca
NetCreations
Sales
We sell our products through a direct sales organization and through a
network of channels that includes systems integrators, distributors and
licensed manufacturers. We are continuing to expand our
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relationships with channel partners and establish an Internet channel. As of
March 31, 2000, we employed 34 people in sales.
Direct Sales
Our direct sales organization sells to large users of Internet-based
applications and dot com companies and focuses on organizations who require
multiple numbers of our server appliances to meet the demands of their
applications. We have regional sales managers and technical sales engineers
that are located in and serve strategic metropolitan areas, including Atlanta,
Boston, Dallas, Los Angeles, New York, Philadelphia, San Francisco and
Washington D.C. Our sales managers and sales engineers work in teams to analyze
our prospective customers' requirements and propose solutions that meet their
needs. Our sales teams maintain close relationships with our customers after
our products have been installed to ensure our customers remain satisfied. Our
sales managers are compensated with a base salary and commissions which are
based on their attainment of sales quotas. In addition to a base salary, our
sales engineers receive bonus payments based on the sales revenues generated by
their assigned customers.
Channel Sales
Our indirect sales efforts in the United States are primarily focused on
enhancing our network of domestic systems integrators and resellers with
significant experience with networking applications. We are also focusing on
developing additional indirect sales channels as we initiate sales activities
outside the United States, primarily in Europe and Asia.
Licensing and OEM Relationships
We have established three significant OEM and licensed manufacturer
relationships under which our products, manufactured either by us or another
company, are branded and sold under another company's label. We will continue
to seek out additional licensing relationships to broaden our sales capacity in
the market.
In July 1999, we entered into a license agreement with IBM that allows IBM
to manufacture its own version of our WebEngine Blazer product. This agreement
expires in January 2002, but may be terminated by IBM at any time.
In October 1999, we entered into a license agreement with Micronpc.com, that
allows manufacture of a version of our WebEngine Blazer. This agreement expires
in October 2000, but may be terminated by Micronpc.com at any time upon 60 days
written notice.
In March 2000, we entered into an OEM agreement with VA Linux that permits
VA Linux to resell our WebEngine Blazer as part of their server product line.
This agreement expires in March 2001.
Marketing
Our marketing objectives include building market awareness and acceptance of
Network Engines and our products, as well as generating qualified customer
leads. We attend trade shows, send out direct mail, and provide information
about our company and our products on our web site.
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We also conduct public relations activities utilizing the services of Beaupre
& Co., a division of Brodeur Worldwide. Our executives speak at industry
events and provide briefings to industry analysts and trade press. We have
begun advertising in local and trade publications to promote our products to
our target markets. Our marketing goals include the following:
. to plan and build an integrated program addressing both internal and
external audiences, including prospects, customers, business and trade
press, industry analysts and investors;
. to position us as a leader in providing a wide range of server
appliances for the Internet;
. to design and implement media and tactical programs that communicate
effectively with our target audiences; and
. to clearly and consistently communicate our positioning in our marketing
programs.
As of March 31, 2000, we employed ten people in marketing.
Support Services
We believe that our ability to consistently provide high-quality customer
service and support will be a key factor in attracting and retaining
customers. We provide support for our products through technical sales
engineers who are located in our sales offices and through our customer
support staff based in our Canton, Massachusetts facility. Our support
activities include direct support to our customers through our web site, which
offers technical information designed to assist in answering frequently asked
questions and in problem diagnosis and resolution. We also provide telephone
support via a help desk, e-mail support, and remote control support that
provides direct access from our support personnel to our customers' systems
for diagnosis and problem resolution. We have also recently engaged the
services of IBM as a subcontractor to provide on-site support in U.S.
locations where we do not have our own service personnel. Our service
arrangement with IBM, which provides next-day, on-site customer support visits
and after-hours phone-in help desk support, is expected to be operational by
the second half of fiscal 2000. This agreement is terminable by either party
upon 90 days prior written notice.
We provide a warranty program for all of our products, which is typically
one year in duration for all parts replacement. Our standard terms and
conditions provide that a customer may return a defective product for repair
or replacement during the warranty period. In addition, during the warranty
period, it has been our practice to send our customers a replacement unit in
advance of their returning a unit experiencing problems. The customer then
swaps units, returning the damaged unit to our depot repair facility in
Canton, Massachusetts. We plan to add additional repair facilities as we build
our distribution capability to be able to provide this level of service on a
worldwide basis. As of March 31, 2000, we employed five people in support
services.
Manufacturing
We use contract manufacturers to produce most of our products. We also have
our own manufacturing employees and manufacturing facilities to build
prototypes and initial units of our new server appliance hardware products.
Our in-house capability is also currently used to perform final assembly,
testing and quality assurance processes, although many of these activities
will be
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transferred to our manufacturer, SCI Systems. SCI Systems currently utilizes
two of their facilities to build our server appliances-one in Hookset, New
Hampshire and the other in Augusta, Maine.
Some of our sub-assemblies, such as chassis, central processing unit
motherboards, and power supplies are manufactured to our specifications while
other sub-assemblies such as disk drives are commodity items. This approach
allows us to maintain design control in areas where we add significant value
and to benefit from market economies with respect to commodity items.
Our contract manufacturing strategy allows us to:
. reduce our capital expenditures;
. conserve the working capital that would be required to fund inventory;
. adjust manufacturing volumes more quickly to meet changes in demand; and
. operate with reduced space dedicated to manufacturing operations.
Research & Development
We believe that our future success depends on our ability to build upon our
current technology platforms, expand the features and functionality of our
suite of server appliances, and develop additional products that maintain our
technological advantages. We have assembled a team of highly skilled engineers
with significant industry experience in high-density packaging, server design,
embedded management, networking, software, quality assurance and technical
documentation. As of March 31, 2000, we employed 42 people in this group.
We will continue to integrate our own hardware and software designs with
industry-standard components, such as operating systems and processor
technologies. We also intend to combine technology from other industry sources
into our server appliances where appropriate in order to meet functionality and
time-to-market objectives. We currently have new server appliances and new
hardware platforms under development that are intended to increase the choices
of server appliances we offer to our customers. Included in this development
activity are server appliances for network attached storage, for Internet
caching, for load balancing and for streaming video. These research and
development activities for our server appliances range from feasibility studies
to active development efforts. It is possible that we may choose to abandon any
or all of these activities without bringing them to market.
Our product development expenses for fiscal 1998, 1999 and the three months
ended December 31, 1999, were $923,000, $2.6 million and $1.2 million,
respectively. We expect our product development expenses to increase as we hire
additional research and development personnel to develop new products and
enhance our existing products.
Strategic Relationships
We have developed, and will continue to seek to develop, relationships with
key technology vendors that enhance our product offerings. We believe the use
of industry standard technologies, wherever possible, can reduce the cost of
our development activities and the cost of our products to our customers. We
also believe that the integration of non-standard technologies from these key
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<PAGE>
vendors can allow us to bring products to market more quickly and to reduce the
costs that would result from developing the capability ourselves. In addition,
we believe that extending the management capabilities of our products to
provide management of some of these key vendors products will assist us in
meeting the needs of our customers to manage their Internet systems that
include products from other vendors.
Competition
Our markets are new, rapidly evolving and highly competitive, and we expect
this competition to persist and intensify in the future. We face competition
primarily from server vendors that provide solutions for network computing
systems.
Our principal competitors are general-purpose server manufacturers such as
Compaq, Dell, Hewlett-Packard, IBM and Sun Microsystems, some of which have
begun manufacturing special versions of their general-purpose server products
for sale as server appliances. We also compete with server appliance vendors
such as Cobalt, Network Appliance and CacheFlow, who have expanding product
lines with several types of server appliances. In addition, we compete with
computer companies who specialize in building very compact rack-mounted server
products, but who do not typically include software in their offerings.
Examples of these competitors are TruSolutions, Penguin Computing and Qsol.com.
We believe that we compete favorably on factors that are important to our
target market, including packaging density, ease of installation and
configuration, clustering capability to build large configurations of our
server appliances, management capabilities for co-located servers and a wide
range of appliance choices.
We expect competition in the server appliance market to increase
significantly as more companies enter the market and current competitors expand
their product lines. Many of these potential competitors may have significant
competitive advantages, including greater name recognition, more resources to
apply to the development, marketing and sales of their products, and more
established sales channels.
Intellectual Property
We have invested significantly in the development of proprietary technology
for our products and our operations frequently incorporate proprietary and
confidential information. We rely upon a combination of copyright and trademark
laws and non-disclosure and other intellectual property contractual
arrangements to protect our proprietary rights. We protect our software,
documentation and other written materials under trade secret and copyright
laws, which only provide limited protection. We do not hold any patents and
currently have no patent applications pending. We cannot be certain that any
patents we seek will be issued or that, if issued, those patents will not be
challenged. We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to and
distribution of our software, documentation and other proprietary information.
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Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our products is difficult, and we cannot be
certain that the steps we have taken will prevent misappropriation of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States. In addition, our
competitors might independently develop similar technology or duplicate our
product or circumvent any patents or our other intellectual property rights.
Due to rapid technological change, we believe that factors such as the
technological and creative skills of our personnel, new product developments
and enhancements to existing products are more important than the various legal
protections of our technology to establishing and maintaining a technology
leadership position.
We have applied for a trademark registration for "Network Engines," and our
trademarks, among others, include "WebEngine Roadster NT," "WebEngine Roadster
LX," "WebEngine Viper NT," "WebEngine Viper LX," "AdminEngine" and
"CommerceEngine." This prospectus also contains other trademarks, servicemarks
and tradenames that are the property of other parties.
Employees
Our success in recruiting, hiring and training large numbers of full-time
and skilled employees and, if the need arises, obtaining large numbers of
temporary employees during periods of increased product demand, is critical to
our ability to produce high quality products on a timely basis. As of March 31,
2000, we employed 125 employees. In addition, we may hire temporary employees
during the year depending on market acceptance of our products. We believe that
the demographics surrounding our headquarters, and our reputation and
compensation package, should allow us to continue to attract and retain
qualified employees.
We are committed to training our employees and we believe that we maintain
good employee relations.
Facilities
Our current corporate headquarters is located in a facility in Randolph,
Massachusetts, consisting of approximately 15,000 square feet of office space.
This facility is leased under a month-to-month lease and in late-May we intend
to complete the relocation of the company to our new corporate headquarters in
Canton, Massachusetts. The new headquarters consists of approximately 52,000
square feet of space, which is being redesigned to suit our needs. We are
leasing an additional 12,000 square feet of manufacturing and office space in
Canton until our new headquarters is completed. We are also looking to lease
additional space. We believe that the Canton facility and additional or
alternative available spaces will be adequate to meet our requirements for the
foreseeable future. In addition, we have regional sales offices in the
following strategic metropolitan areas: Los Angeles, New York, San Francisco
and Washington, D.C.
Legal Proceedings
On December 29, 1999, a former employee, George Flate, commenced a lawsuit
against us, a current officer and director and a former officer and director in
a Massachusetts state court. Mr. Flate
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alleges that he was unlawfully terminated as Vice President of OEM Sales in an
effort to deprive him of commission payments. He is seeking undisclosed damages
based on two contractual claims relating to his employment, although we
anticipate he will claim damages in the multi-million dollar range. Currently,
the matter is in the early stages of discovery. Although we believe these
claims are without merit and we intend to vigorously defend each claim asserted
in the complaint, an adverse resolution of either of these claims might
conceivably require the payment of substantial monetary damages. Moreover, our
defense against these claims might result in the expenditure of significant
financial and managerial resources.
We are, from time to time, a party to other litigation arising in the normal
course of our business. Management believes that none of these other actions,
individually or in the aggregate, will have a material adverse effect on our
financial position or results of operations.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, and their ages and positions as of
March 31, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
<C> <C> <S>
Lawrence A. Genovesi....... 41 Chairman of the Board of Directors, President,
Chief Executive Officer and Chief Technology
Officer
Douglas G. Bryant.......... 42 Vice President of Administration, Chief
Financial Officer, Treasurer and Secretary
Timothy J. Dalton.......... 48 Vice President of Manufacturing
William B. Elliott......... 55 Vice President of Marketing
Rene E. Thibault........... 49 Vice President of Sales
Robert F. Wambach.......... 39 Vice President of Engineering
John A. Blaeser(2)......... 58 Director
Lawrence Kernan(1)(2)...... 46 Director
Dennis A. Kirshy(1)........ 57 Director
Frank M. Polestra.......... 74 Director
Michael H. Shanahan(1)(2).. 43 Director
Robert M. Wadsworth(1)(2).. 39 Director
</TABLE>
- ---------------------
(1) Member of the compensation committee
(2) Member of the audit committee
Set forth below is certain information regarding the professional experience
for each of the above-named persons.
Lawrence A. Genovesi is our founder and has served as our Chairman of the
Board, President, Chief Executive Officer and Chief Technology Officer since
October 1989. Mr. Genovesi also founded and served as Chief Executive Officer
of New England Interconnection Devices, Inc., a contract manufacturer, from May
1985 to July 1988. From October 1982 to January 1983, Mr. Genovesi served as
Vice President of Engineering for Microsystems International, Inc., a computer
manufacturer. From June 1981 to December 1982, Mr. Genovesi served as Director
of Engineering for CPU Systems, Corp., a computer manufacturer and reseller.
Douglas G. Bryant has served as our Secretary and Vice President of
Administration since March 2000, our Treasurer since January 1998 and our Chief
Financial Officer since September 1997. Prior to joining Network Engines, Mr.
Bryant served as Chief Financial Officer of CrossComm Corporation, a
manufacturer of internetworking products including routers and switches, from
July 1996 to June 1997, and as Corporate Controller from September 1989 to June
1996.
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Timothy J. Dalton has served as Vice President of Manufacturing since
November 1997. From November 1996 to November 1997, Mr. Dalton served as
Operations Manager of Axil Computer Corporation, a privately-held designer and
manufacturer of eight-way SMP servers. From January 1994 to July 1996, Mr.
Dalton served as Director of Manufacturing Engineering of Concurrent Computer
Corporation, a designer and manufacturer of Real Time Fault Tolerant servers
for the financial and telecommunications industries.
William B. Elliott has served as Vice President of Marketing since December
1997. Previously, Mr. Elliott served as Vice President of Operations for
Dynaflo, Inc. from May 1997 to December 1997. From October 1996 to May 1997,
Mr. Elliott served as Vice President of Sales and Marketing for Anysoft, Inc.,
a producer of utility software that enhances the interchange of information
between legacy and modern Windows-based applications. Mr. Elliott served as
Vice President of Telecommunications at Stratus Computer from November 1993 to
April 1996, and as Vice President of International Sales for Stratus'
telecommunications division from October 1990 to November 1993.
Rene E. Thibault has been Vice President of Sales since July 1999. Prior to
joining Network Engines, Mr. Thibault served as Vice President of Sales and
Marketing for Voice Request Corporation, a developer of speech-enabled call
routing systems, from January 1997 to June 1999. From October 1995 to December
1996, Mr. Thibault served as Vice President of Sales for Centigram
Communications Corporation, a manufacturer of multimedia messaging and personal
assistant servers. Mr. Thibault also served as Director of Sales for Centigram
from September 1990 to September 1995.
Robert F. Wambach has served as Vice President of Engineering since May
1999. Prior to joining Network Engines, Mr. Wambach served as Senior Director
of VPN Programs at Shiva Corporation, a manufacturer of hardware and software
to enable the connectivity of enterprise networks, which was ultimately
acquired by a subsidiary of Intel and renamed Intel Network Systems, from
February 1999 to May 1999, Senior Director of Platform Engineering from June
1998 to February 1999, and Director of Hardware Engineering from June 1997 to
June 1998. Mr. Wambach held various engineering management positions with
Fujitsu-Nexion (formerly Nexion) from May 1993 to June 1997.
John A. Blaeser has been a director of Network Engines since October 1999.
Since January 1996, Mr. Blaeser has served as President, Chief Executive
Officer and Chairman of the Board of Concord Communications Inc., a maker of e-
business management solutions. Mr. Blaeser served as Managing General Partner
of EG&G Venture Partners from January 1990 to December 1995.
Lawrence Kernan has served as a Director of Network Engines since October
1999. Mr. Kernan has been a Principal of MDT Advisers, Inc., an investment and
venture capital firm, since December 1991. Mr. Kernan has also served as a
director of Keurig, Inc., a manufacturer of coffee brewing equipment, as
Chairman of the Board of Directors, since April 1995. Mr. Kernan has previously
served as a director at First American Financial Corporation, ADS Technologies,
Inc., Cobotyx, Inc. and Visage, Inc.
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Dennis A. Kirshy has served as a Director of Network Engines since July
1997. Mr. Kirshy is a private investor and has advised and invested in small
technology companies in the networking, internetworking and computer industries
since February 1993. Mr. Kirshy is also a director of several privately-held
companies in the networking and computer peripherals arena.
Frank M. Polestra has served as a Director of Network Engines since May
1997. Mr. Polestra has been Managing Director of Ascent Venture Management,
Inc., a manager of venture funds and investor in early-stage companies in the
Northeastern United States, since March 1999. Mr. Polestra is a Managing Member
or General Partner of each of the general partners of Ascent Venture Partners,
L.P., Ascent Venture Partners II, L.P. and Ascent Venture Partners III, L.P.
Mr. Polestra is also a partner of Le Serre. Prior to his position with Ascent
Venture Management, Mr. Polestra was President, Director and General Partner of
Pioneer Capital Corporation, a venture capital management firm, from 1981 to
1999. Mr. Polestra is also a director of several privately-held companies.
Michael H. Shanahan has served as a Director of Network Engines since
January 1999. Mr. Shanahan has served as General Partner of Egan-Managed
Capital, L.P., a venture capital firm managing a portfolio of investments in
technology companies, since co-founding that firm in February 1997. From April
1982 to February 1997, Mr. Shanahan was a Partner with Eastech Management
Company, a manager of venture capital funds with investments in technology
companies. Mr. Shanahan is also a director of several privately-held companies.
Robert M. Wadsworth has served as a Director of Network Engines since
December 1999. He has been a Managing Director of HarbourVest Partners, LLC, a
global private equity firm investing in Internet and information technology
companies on a worldwide basis, since January 1997. Mr. Wadsworth has also been
a General Partner of Hancock Venture Partners, the predecessor organization to
HarbourVest, since December 1988. Mr. Wadsworth is also a member of the board
of directors of the following companies: Banyan Systems, Inc., Blue Sky
Software Corporation, Cardiff Software, Inc., Communication Systems Technology,
Inc., Concord Communications, Inc., Nuera Communications, Inc., Oasis
Technology Ltd., Outsourcing Services Group, Polaris Service, Inc.,
Switchboard.com, Inc., Tally Systems Corporation and Trintech Group Limited.
Election of Directors
Upon the closing of this offering, the board of directors will be divided
into three classes, each of whose members will serve for a staggered three-year
term. Dennis A. Kirshy and Michael H. Shanahan will serve in the class whose
term expires in 2001; Lawrence Kernan and Frank M. Polestra will serve in the
class whose term expires in 2002; and Lawrence A. Genovesi, John A. Blaeser and
Robert M. Wadsworth will serve in the class whose term expires in 2003. Upon
the expiration of the term of a class of directors, directors in such class
will be elected for three-year terms at the annual meeting of stockholders in
the year in which such term expires.
Each officer serves at the discretion of the board of directors and holds
office until his or her successor is elected and qualified or until his or her
earlier resignation or removal. A voting agreement among us and several of our
stockholders provides for the nomination and election of directors by certain
of our 5% stockholders. Messrs. Genovesi, Blaeser, Kernan, Kirshy, Polestra,
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Shanahan and Wadsworth were elected to the board of directors pursuant to the
voting agreement. The voting agreement terminates upon the closing of this
offering.
Compensation of Directors
We intend to grant stock options on an annual basis under our director plan
and may grant other equity awards from time-to-time to our non-employee
directors pursuant to our 1999 plan or director plan.
Board Committees
The board of directors has established a compensation committee and an audit
committee. The compensation committee, which consists of Messrs. Kernan,
Kirshy, Shanahan and Wadsworth, reviews executive salaries, administers any
bonus, incentive compensation and stock option plans, and approves the salaries
and other benefits of our executive officers. In addition, the compensation
committee consults with our management regarding pension and other benefit
plans and our compensation policies and practices. The audit committee, which
consists of Messrs. Blaeser, Kernan, Shanahan and Wadsworth, reviews the
professional services provided by our independent accountants, the independence
of such accountants from our management, our annual financial statements and
our system of internal accounting controls. The audit committee also reviews
such other matters with respect to our accounting, auditing and financial
reporting practices and procedures as it may find appropriate or may be brought
to its attention.
Compensation Committee Interlocks and Insider Participation
Prior to the formation of a compensation committee, the board of directors
as a whole made decisions concerning the compensation of executive officers.
Mr. Genovesi, an executive officer, was a member of our board of directors when
it performed the functions generally performed by a compensation committee
including determining the compensation of executive officers. However, Mr.
Genovesi did not participate in any discussions regarding his compensation. For
a description of transactions between us and certain of our directors, Messrs.
Genovesi, Kernan, Kirshy, Polestra, Shanahan and Wadsworth, and entities
affiliated with our directors, see "Related Party Transactions" below.
Executive Compensation
The following table sets forth, for the fiscal year ended September 30,
1999, the cash compensation paid and shares underlying options granted to our:
. Chief Executive Officer; and
. five other most highly compensated executive officers who received, or
would have received, annual compensation in excess of $100,000, referred
to collectively as the named executive officers.
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<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Compensation
Awards
------------
Annual
Compensation (1) Shares
---------------- Underlying
Name and Principal Position Salary Bonus Options (2)
<S> <C> <C> <C>
Lawrence A. Genovesi........................... $146,154 -- --
Chief Executive Officer
Douglas G. Bryant.............................. 111,538 -- 59,940
Chief Financial Officer
William B. Elliott............................. 111,538 -- 51,000
Vice President of Marketing
Timothy J. Dalton.............................. 111,538 -- 48,600
Vice President of Manufacturing
Rene E. Thibault............................... 34,039 $18,750(4) 139,200
Vice President of Sales (3)
Robert F. Wambach.............................. 43,269 -- 104,400
Vice President of Engineering (5)
</TABLE>
- ---------------------
(1) In accordance with the rules of the Securities and Exchange Commission,
the compensation set forth in the table does not include medical, group
life or other benefits which are available to all of our salaried
employees, and certain perquisites and other benefits, securities or
property which do not exceed the lesser of $50,000 or 10% of the person's
salary and bonus shown in the table.
(2) We did not award any stock appreciation rights or make any long-term
incentive payments during fiscal 1999 to the named executive officers.
Options granted to the named executive officers were granted at fair
market value as determined by the board of directors based on all factors
available to the board of directors on the grant date.
(3) Mr. Thibault joined us in July 1999. On an annualized basis, Mr. Thibault
would have earned a salary of $150,000 and an incentive-based compensation
target of $75,000.
(4) Comprised of commissions paid based on revenue generated.
(5) Mr. Wambach joined us in April 1999. On an annualized basis, Mr. Wambach
would have earned a salary of $125,000.
In the table above, columns required by the regulations of the Securities
and Exchange Commission have been omitted where no information was required to
be disclosed under those columns.
Option Grants in the Last Fiscal Year
The following table sets forth grants of stock options for the year ended
September 30, 1999 to each individual named in the Summary Compensation Table.
We have never granted any stock appreciation rights.
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<PAGE>
The exercise prices represent our board's estimate of the fair market value
of the common stock on the grant date. In establishing these prices, our board
considered many factors, including our financial condition and operating
results, recent transactions and the market for comparable stocks.
The amounts shown as potential realizable value represent hypothetical gains
that could be achieved for the respective options if exercised at the end of
the option term. These amounts represent certain assumed rates of appreciation
in the value of our common stock. The 5% and 10% assumed annual rates of
compounded stock price appreciation are mandated by rules by the Securities and
Exchange Commission and do not represent our estimate or projection of the
future price of our common stock. The potential realizable value is calculated
based on the ten year term of the option at its time of grant on the assumption
that the share value appreciates from the fair market value at the time of
grant at the indicated compounded annual rate and that the option is exercised
and sold on the last day of its term for the appreciated stock price. Actual
gains, if any, on stock option exercises depend on the future performance of
our common stock. The amounts reflected in the table may not necessarily be
achieved and do not reflect the actual appreciation in value from the time of
grant.
We granted these options under our 1999 plan. Each option has a maximum term
of ten years, subject to earlier termination if the optionee's services are
terminated. Each option represents the right to purchase one share of common
stock.
The percentage of total options granted to our employees in the last fiscal
year is based on options to purchase an aggregate of 637,590 shares of common
stock granted during fiscal 1999.
The following table contains information concerning the grant of options to
purchase shares of our common stock to each of our named executive officers
during the fiscal year ended September 30, 1999:
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Number of % of Total Stock Price
Securities Options Exercise Appreciation for
Underlying Granted To of Base Option Term
Options Employees in Price Expiration ---------------------
Name Granted Fiscal Year ($/Sh) Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Lawrence A. Genovesi.... -- -- % $ -- -- $ -- $ --
Douglas G. Bryant....... 59,940 9.4 0.33 2/24/09 12,565 31,843
William B. Elliott...... 51,000 8.0 0.33 2/24/09 10,691 27,094
Timothy J. Dalton....... 48,600 7.6 0.33 2/24/09 10,188 25,819
Rene E. Thibault........ 139,200 21.8 0.33 7/22/09 29,181 73,950
Robert F. Wambach....... 104,400 16.4 0.33 5/26/09 21,886 55,462
</TABLE>
Fiscal Year-End Option Values
The following table sets forth information for each of the named executive
officers with respect to the value of options outstanding as of September 30,
1999. There was no public trading market for our common stock as of September
30, 1999. Accordingly, as permitted by the rules of the Securities and Exchange
Commission, these values have been calculated on the basis of the fair market
value of
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<PAGE>
our common stock as of September 30, 1999, of $0.60 per share, as determined by
the board of directors, less the aggregate exercise price.
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Shares Unexercised Options In-The-Money Options
Acquired at September 30, 1999 at September 30, 1999
on Value --------------------- ----------------------
Name Exercise Realized Vested Unvested Vested Unvested
<S> <C> <C> <C> <C> <C> <C>
Lawrence A. Genovesi.... -- -- -- -- $ -- $ --
Douglas G. Bryant....... -- -- 19,451 84,949 8,105 26,404
William B. Elliott...... -- -- 15,750 71,250 6,563 22,038
Timothy J. Dalton....... -- -- 9,187 60,413 3,828 17,882
Rene E. Thibault........ -- -- -- 139,200 -- 37,120
Robert F. Wambach....... -- -- -- 104,400 -- 27,840
</TABLE>
Benefit Plans
1999 Stock Incentive Plan. Our 1999 stock incentive plan, as amended, was
originally adopted by our board of directors in October 1999 and approved by
our stockholders in November 1999. Up to 3,219,161 shares of our common stock
(subject to adjustment in the event of stock splits and other similar events)
currently may be issued pursuant to awards granted under the 1999 plan. The
number of shares that may be issued pursuant to the 1999 plan will be increased
annually beginning on October 1, 2000 by the lesser of:
. shares;
. 5% of the outstanding shares on the date of the increase; or
. a lesser amount determined by the board of directors.
Share increases may not exceed an aggregate of shares during the term of
the 1999 plan.
The 1999 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock awards and other stock-based awards. Our officers,
employees, directors, consultants and advisors are eligible to receive awards
under the 1999 plan. The granting of awards under the 1999 plan is
discretionary. Under present law, however, incentive stock options may be
granted only to employees. Under the 1999 plan, no participant may receive any
award for more than 500,000 shares in any calendar year.
We may grant options at an exercise price less than, equal to or greater
than the fair market value of our common stock on the date of grant. Under
present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue
Code may not be granted at an exercise price less than the fair market value of
the common stock on the date of grant or less than 110% of the fair market
value in the case of incentive stock options granted to optionees holding more
than 10% of the voting power of Network Engines. The 1999 plan permits our
board of directors to determine how optionees may pay the exercise price of
their options, including by cash, check or, in connection with a "cashless
exercise," through a broker, by surrender to us of shares of common stock, by
delivery to us of a promissory note, or by any combination of the permitted
forms of payments.
Our board of directors administers the 1999 plan. Our board of directors has
the authority to adopt, amend and repeal the administrative rules, guidelines
and practices relating to the plan and to
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<PAGE>
interpret its provisions. It may delegate authority under the 1999 plan to one
or more committees of the board of directors and, subject to certain
limitations, to one or more of our executive officers. Subject to any
applicable limitations contained in the 1999 plan, our board of directors or a
committee of the board of directors or executive officer to whom our board of
directors delegates authority, as the case may be, selects the recipients of
awards and determines:
. the number of shares of common stock covered by options and the dates
upon which such options become exercisable;
. the exercise price of options;
. the duration of options; and
. the number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase
price.
Typically, for each option granted, 25% of the shares become exercisable on
the first anniversary of the option grant and the remainder become exercisable
in 12 equal installments at the rate of 6.25% of the shares each three-month
period following the first anniversary of the option grant.
The plan provides that in the event of a merger, liquidation or other
acquisition event, each outstanding option or restricted stock award shall be
assumed or an equivalent option or award substituted by the successor
corporation, as determined by our board of directors, unless the successor
corporation refuses to assume or substitute for the option or award, in which
case those options or awards shall become fully vested and free of restrictions
prior to the consummation of the acquisition event.
No award may be granted under the 1999 plan after October 21, 2009, but the
vesting and effectiveness of awards previously granted may extend beyond that
date. As of March 31, 2000, 345,000 shares of common stock have been awarded
and are subject to restrictions on transfer. Our board of directors may at any
time amend, suspend or terminate the 1999 plan, except that no award granted
after an amendment of the 1999 plan and designated as subject to Section 162(m)
of the Internal Revenue Code by our board of directors shall become
exercisable, realizable or vested, to the extent the amendment was required to
grant the award, unless and until the amendment is approved by our
stockholders.
2000 Employee Stock Purchase Plan. Our 2000 employee stock purchase plan was
adopted by the board of directors in March 2000 and will be approved by the
stockholders in May 2000. The employee stock purchase plan authorizes the
issuance of up to a total of shares of common stock to participating
employees.
All of our employees, including our employee-directors, who are customarily
employed by us for more than 20 hours a week and who are customarily employed
by us for at least five months in a calendar year are eligible to participate
in the employee stock purchase plan. Employees who would immediately after the
grant own 5% or more of the total combined voting power or value of our stock
or any subsidiary are not eligible to participate.
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The employee stock purchase plan permits eligible employees to purchase
common stock through payroll deductions, which may not exceed 15% of an
employee's compensation, subject to certain limitations. On the first day of a
designated payroll deduction period, referred to as the offering period, we
will grant to each eligible employee who has elected to participate in the
employee stock purchase plan an option to purchase shares of common stock. On
the last day of the offering period, the employee is deemed to have exercised
the option, at the option exercise price, to the extent of accumulated payroll
deductions. Under the terms of the employee stock purchase plan, the option
price is an amount equal to 85% of the fair market value per share of the
common stock on either the first day or the last day of the offering period,
whichever is lower. The first offering period under the employee stock purchase
plan will commence on the first date that we have filed with the Securities and
Exchange Commission an effective registration statement on Form S-8 for
purposes of registering under the Securities Act of 1933, or the Securities
Act, all shares of our common stock issuable under the employee stock purchase
plan, and shall end on December 31, 2000. The compensation committee may, in
its discretion, choose an offering period of 12 months or less for each of the
offerings and choose a different offering period for each offering.
If an employee is not a participant on the last day of the offering period,
the employee is not entitled to exercise any option, and the amount of the
employee's accumulated payroll deductions will be refunded. An employee's
rights under the employee stock purchase plan terminate upon voluntary
withdrawal from the employee stock purchase plan at any time, or when such
employee ceases employment for any reason, except that upon termination of
employment because of death, the employee's beneficiary has a right to the
accumulated payroll deductions in the participant's account.
2000 Director Stock Option Plan. Our 2000 director stock option plan was
adopted by our board of directors in March 2000 and will be approved by our
stockholders in May 2000. Under the director plan, our directors who are not
employees of Network Engines or a subsidiary of Network Engines receive non-
statutory options to purchase shares of common stock. A total of shares of
common stock may be issued upon the exercise of options granted under the
director plan.
Pursuant to the director plan, each non-employee director who first becomes
a non-employee director after the closing of this offering will be granted an
option to purchase shares of common stock on the date of his or her
initial election to our board of directors, which will vest ratably over four
years on each anniversary of the date of grant. In addition, each non-employee
director will receive an option to purchase shares of common stock on the
date of each annual meeting of stockholders commencing with the 2001 annual
meeting of stockholders (other than a director who was initially elected to the
board of directors at any such annual meeting or, if previously, at any time
after the prior year's annual meeting). The options granted annually vest upon
the earlier of one year from the date of grant or the date immediately
preceding the next annual meeting of stockholders, so long as the optionee
remains our director. The exercise price per share of all such options will be
the fair market value of a share of common stock on the date of grant.
Employee Savings and Retirement Plan. We have an employment savings and
retirement plan. The plan covers all of our full-time employees. Under the
plan, participants may elect to defer a portion of their eligible compensation,
subject to certain limitations. We do not match employee contributions to the
plan.
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<PAGE>
Management Incentive Plan. The compensation committee adopted a management
incentive plan in February 2000. Under this plan, commencing with the quarterly
period ending June 30, 2000, we will pay on a quarterly basis to each of our
vice presidents and our president a percentage of their respective annual base
salaries if we achieve our net revenue targets for that quarter. For the
quarters ending June 30, 2000 and September 30, 2000, the compensation
committee determined that the executives will receive 12.5% of their respective
annual base salaries if targets for those periods are met.
Limitation of Liability and Indemnification
Our second amended and restated certificate of incorporation provides that
we will indemnify our directors and officers against all expenses and
liabilities reasonably incurred in connection with the service for or on our
behalf and that our directors will not be personally liable for monetary
damages to us for breaches of their fiduciary duty as directors, unless they
violated their duty of loyalty to us or our stockholders, acted in bad faith,
knowingly or intentionally violated the law, authorized illegal dividends or
redemptions or derived an improper personal benefit from their action as
directors. See "Description of Capital Stock--Limitation of Liability and
Indemnification."
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<PAGE>
RELATED PARTY TRANSACTIONS
Transfer of P6000 Product Line
In April 2000, we sold all of our inventory and test equipment related to
the P6000 product line to Copernicus Systems, Inc., which is wholly-owned by
Cheryl H. Smith. Ms. Smith, the wife of Mr. Genovesi, is a co-founder,
stockholder and former director and officer of Network Engines. Our production
and development of the P6000 product line has been discontinued and we have
fully reserved for these assets on our balance sheet. In exchange for these
assets, Copernicus Systems, Inc. agreed to pay to us royalties on future sales
of the inventory and agreed to support P6000 units for which we have
obligations under warranty or service contracts.
Loan and Guarantee from Lawrence A. Genovesi and Cheryl H. Smith
In April 1993, Mr. Genovesi and Ms. Smith loaned us $26,175 in exchange for
a promissory note bearing interest at 10% annually made in their favor. In
January 1996, Ms. Smith also loaned us $4,300 in exchange for a promissory note
bearing interest at 12% annually in her favor. The interest rate on each note
was reduced by one-half in January 1999. These notes were paid in full and
canceled in August 1999.
In order to receive a Small Business Administration guarantee of 90% of a
$100,000 note obtained in May 1994, Mr. Genovesi and Ms. Smith granted a second
mortgage on their personal residence to the Small Business Administration. We
repaid the loan in fiscal 1999.
Severance Arrangements with Cheryl H. Smith
In January 1998, we and Ms. Smith executed a Severance Agreement and
Release, pursuant to which we paid Ms. Smith approximately $72,000 and engaged
Copernicus & Co., which is wholly-owned by Ms. Smith, as a consultant for one
month at a fee of $300 per day. We and Ms. Smith released each other from most
claims related to her employment by us.
Issuances of Preferred Stock to Directors and 5% Holders
We have issued four series of preferred stock. Each series A, series B and
series C preferred share is convertible upon the completion of this offering
into three shares of our common stock. Each series D preferred share is
convertible upon the completion of this offering into one share of our common
stock. We issued the following number of shares of each series of preferred
stock on the following dates:
. On April 9, 1997, we issued an aggregate of 185,250 shares of series A
preferred stock at $5.40 per share or $1.80 per share of common stock on
an as-converted basis;
. On January 13, 1999, we issued an aggregate of 357,142 shares of series
B preferred stock at $7.70 per share or $2.57 per share of common stock
on an as-converted basis;
. On January 13 and June 30, 1999, we issued an aggregate of 1,123,549
shares of series C preferred stock at $7.70 per share or $2.57 per share
of common stock on an as-converted basis; and
. On December 20, 1999, we issued an aggregate of 3,581,554 shares of
series D preferred stock at $7.05 per share or $7.05 per share of common
stock on an as-converted basis.
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<PAGE>
The following directors and 5% holders of our common stock and entities
controlled by such persons or entities were issued the following number of
shares of each series of preferred stock in exchange for cash or the
cancellation of bridge notes:
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Preferred Preferred Preferred Preferred
Stock Stock Stock Stock
<S> <C> <C> <C> <C>
5% Holders
Ascent Venture Partners II, L.P.(1)... 148,200 285,714 111,298 --
MD Co................................. -- -- 388,941 141,844
Egan-Managed Capital, L.P............. -- -- 291,698 106,383
HarbourVest VI-Direct Fund, L.P....... -- -- -- 1,985,816
Canaan Equity Partners II, LLC........ -- -- -- 709,220
Directors
Dennis A. Kirshy...................... -- -- 6,493 2,056
Lawrence Kernan(2).................... -- -- 1,298 --
Frank M. Polestra(3).................. -- -- 9,740 --
</TABLE>
- ---------------------
(1) Ascent Venture Partners II, L.P. acquired all of its series A preferred
stock and series B preferred stock and 77,922 of its series C preferred
stock from Pioneer Ventures Limited Partnership II.
(2) Mr. Kernan may be deemed to beneficially own shares purchased by MD Co.,
which purchased 388,941 shares of series C preferred stock and 141,844
shares of series D preferred stock.
(3) Mr. Polestra may be deemed to beneficially own shares held by each of
Ascent Venture Partners, L.P., which purchased 37,050, 71,428, and 27,824
shares of series A preferred stock, series B preferred stock and series C
preferred stock, respectively, Ascent Venture Partners II, L.P., which
purchased 148,200, 285,714 and 111,298 shares of series A preferred stock,
series B preferred stock and series C preferred stock, respectively,
Ascent Venture Partners III, L.P., which purchased 283,688 shares of
series D preferred stock, and Le Serre, which purchased 4,544 shares of
series C preferred stock.
Issuances of Common Stock to Directors and 5% Holders of our Common Stock
On March 16, 2000, our board authorized the issuance of 5,000 shares of
restricted common stock to each of Messrs. Kernan, Polestra and Wadsworth and
Egan-Managed Capital, L.P.
On November 18, 1999, we sold 150,000 shares of common stock to Mr. Genovesi
for $0.60 per share in exchange for a $90,000 full recourse promissory note.
The note from Mr. Genovesi is due on demand or on November 18, 2004 and accrues
interest at 6.08% compounded annually. Pursuant to a stock restriction
agreement, these 150,000 shares vest on a quarterly basis beginning on December
31, 1999 and ending on September 30, 2002. Each quarter, the amount that vests
is determined based on the attainment of net revenue and net profit objectives
set by the board of directors.
We sold 90,000 shares of common stock to Mr. Kirshy for $0.18 per share on
January 7, 1998. Pursuant to a stock restriction agreement, these 90,000 shares
vest over three years, one-third on June 30, 1998 and 8.375% of the remainder
each quarter until June 30, 2000. We sold 30,000 shares of
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<PAGE>
common stock to Mr. Kirshy for $0.60 per share on November 18, 1999. Pursuant
to a stock restriction agreement, one-half of these 30,000 shares vest one year
after the sale and 12.5% of the remainder vest each quarter thereafter.
We sold 75,000 shares of common stock to Mr. Blaeser for $0.60 per share on
November 18, 1999. Pursuant to a stock restriction agreement, these 75,000
shares vest over four years, 25% upon the expiration of one year and 6.25% at
the end of each quarter thereafter.
Issuance of Promissory Notes
We have issued the following subordinated promissory notes bearing interest
at 10% per annum to 5% holders of our common stock and entities controlled by
such persons, all of which have been cancelled in exchange for series B or
series C preferred stock:
<TABLE>
<CAPTION>
Name Dates of Issuance Aggregate Amount
<S> <C> <C>
Ascent Venture Partners II,
L.P.(1)........................... 10/16/1997-11/2/1998 $2,720,000
MD Co.............................. 12/8/1998 428,571(2)
Egan-Managed Capital, L.P.......... 12/8/1998 321,429(2)
Frank Polestra(3).................. 8/12/1998 75,000(4)
</TABLE>
- ---------------------
(1) The notes held by Ascent Venture Partners, L.P. and Ascent Venture
Partners II, L.P. were originally acquired by Pioneer Ventures Limited
Partnership and Pioneer Ventures Limited Partnership II, respectively.
(2) Bore interest at a rate of 15% per annum.
(3) Mr. Polestra is a Managing Member or General Partner of each of the
general partners which control Ascent Venture Partners, L.P., Ascent
Venture Partners II, L.P. and Ascent Venture Partners III, L.P.
(4) Mr. Polestra could have been deemed to beneficially own $680,000 in
promissory notes issued to Ascent Venture Partners, L.P., $2,720,000 in
promissory notes issued to Ascent Venture Partners II, L.P., and a $25,000
promissory note issued to Le Serre.
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<PAGE>
Issuance of Warrants to Purchase Common Stock
Between October 16, 1997 and January 13, 1999, in connection with the sale
of promissory notes or series C preferred stock, we issued warrants to purchase
an aggregate of 682,200 shares of our common stock at an exercise price of
$0.91667 per share with a ten year term to the following holders of 5% or more
of our common stock on a fully converted basis and a director.
<TABLE>
<CAPTION>
Original Revised
Number of Number of
Shares of Shares of
Common Stock Common Stock
Underlying Underlying
Name (1) Warrants Warrants (2) Dates of Issuance
<S> <C> <C> <C>
Ascent Venture Partners
II, L.P.(3).............. 151,125 288,600 10/16/1997-11/2/1998
MD Co..................... 218,571 NA 12/8/1998 and 1/13/1999
Egan-Managed Capital,
L.P...................... 163,929 NA 12/8/1998 and 1/13/1999
Frank Polestra............ 4,164(4) 8,325(5) 11/2/1998
------- -------
Total.................... 537,789 679,425
======= =======
</TABLE>
- ---------------------
(1) See Notes to Table of Beneficial Ownership in "Principal Stockholders" for
information relating to the beneficial ownership of the referenced shares.
(2) Reflects modification of the number of shares underlying bridge warrants
issued on October 16, 1997, January 30, 1998, May 21, 1998, June 4, 1998,
August 12, 1998, by agreements dated December 8, 1998 by and among Network
Engines, Pioneer Ventures Limited Partnership, Pioneer Ventures Limited
Partnership II, Mr. Polestra, Le Serre and other investors who received
warrants on those dates.
(3) The warrants held by each of Ascent Venture Partners, L.P. and Ascent
Venture Partners II, L.P. were originally issued to Pioneer Ventures
Limited Partnership and Pioneer Ventures Limited Partnership II,
respectively.
(4) Mr. Polestra may be deemed to beneficially own warrants to purchase 37,782
shares of common stock issued to Ascent Venture Partners, L.P., warrants to
purchase 151,125 shares of common stock issued to Ascent Venture Partners,
II, L.P., and a warrant to purchase 1,386 shares of common stock issued to
Le Serre.
(5) Mr. Polestra may be deemed to beneficially own warrants to purchase 72,150
shares of common stock issued to Ascent Venture Partners, L.P., warrants to
purchase 288,600 shares of common stock issued to Ascent Venture Partners
II, L.P. and a warrant to purchase 2,775 shares of common stock issued to
Le Serre.
Issuance of Options to Purchase Common Stock
We have granted options to executive officers, and we intend to grant
additional options to our directors and executive officers in the future. See
"Management--Option Grants in Last Fiscal Year," "--Benefit Plans" and "--
Director Compensation."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of March 31, 2000 and as adjusted to reflect
the sale of the shares in this offering by:
. each person who is known by us to own beneficially more than 5% of the
outstanding shares of common stock;
. each of our directors and named executive officers; and
. all our directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Prior to Owned After the
the Offering(1) Offering(1)
----------------- ---------------
Name and Address of Beneficial Owner Number Percent Number Percent
<S> <C> <C> <C> <C>
HarbourVest Partners VI--Direct Fund,
L.P...................................... 1,985,816 17.6%
c/o HarbourVest Partners, LLC
One Financial Center, 44th Floor
Boston, Massachusetts 02111
Ascent Venture Partners II, L.P. ......... 1,924,236 17.0
255 State Street
Boston, Massachusetts 02109
MD Co..................................... 1,527,238 13.5
125 Cambridge Park Drive
Cambridge, Massachusetts 02140-2314
Egan-Managed Capital, L.P................. 1,145,406 10.1
Thirty Federal Street
Boston, Massachusetts 02110
Canaan Equity Partners II, LLC(2)......... 709,220 6.3
105 Rowayton Avenue
Rowayton, Connecticut 06853-1436
Directors and Executive Officers
Lawrence A. Genovesi(3)................... 1,050,000 9.3
Douglas G. Bryant(4)...................... 46,518 *
Timothy J. Dalton(5)...................... 28,312 *
William B. Elliott(6)..................... 36,187 *
Rene E. Thibault(7)....................... 26,100 *
Robert F. Wambach(8)...................... 26,100 *
John A. Blaeser........................... 75,000 *
Lawrence Kernan(9)........................ 1,531,132 13.6
Dennis A. Kirshy(10)...................... 135,535 1.2
Frank M. Polestra(11)..................... 2,742,932 24.3
Michael H. Shanahan(12)................... 1,145,406 10.1
Robert M. Wadsworth(13)................... 1,985,816 17.6
All executive officers and directors as a
group (12 persons)(14)................... 8,829,038 78.2%
</TABLE>
- ---------------------
* Less than 1% of the outstanding common stock.
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<PAGE>
- ---------------------
(1) The number of shares of common stock deemed outstanding prior to this
offering includes: (i) 11,292,768 shares of common stock outstanding as of
March 31, 2000; and (ii) shares issuable pursuant to options and
warrants held by the respective person which may be exercised within 60
days after March 31, 2000 set forth below. The number of shares of common
stock deemed outstanding after this offering includes the shares that we
are offering for sale in this offering. 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. Unless
otherwise indicated below, to our knowledge, all persons named in the
table have sole voting and investment power with respect to their shares
of common stock, except to the extent authority is shared by spouses under
applicable law. The fact that we have included these "beneficially owned"
shares, however, does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner of the shares. Unless
otherwise indicated, the address of each person listed is c/o Network
Engines, Inc., 61 Pleasant Street, Randolph, MA 02368.
(2) Includes 464,540 shares owned by Caanan Equity II L.P., 36,879 shares
owned by Caanan Equity II Entrepeneurs LLC, and 207,801 shares owned by
Caanan Equity II L.P. (QP).
(3) Includes 300,000 shares of common stock owned by Cheryl H. Smith, the wife
of Mr. Genovesi. Mr. Genovesi disclaims beneficial ownership of all shares
owned by Ms. Smith.
(4) Includes 6,525 shares subject to options exercisable within 60 days
following March 31, 2000.
(5) Includes 4,350 shares subject to options exercisable within 60 days
following March 31, 2000.
(6) Includes 3,187 shares subject to options exercisable within 60 days
following March 31, 2000.
(7) Includes 8,700 shares subject to options exercisable with 60 days
following March 31, 2000.
(8) Consists of 26,100 shares subject to options exercisable within 60 days
following March 31, 2000.
(9) Includes 1,527,238 shares owned by MD Co. Mr. Kernan may be deemed to have
or share voting or investment power with respect to these shares. He is a
Principal of MDT Advisers, Inc., which controls MD Co. Mr. Kernan
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest in the shares.
(10) Includes 3,000 shares of common stock held by Mr. Kirshy's son, Wade G.
Kirshy. Mr. Kirshy disclaims beneficial ownership of the 3,000 shares
held by Wade G. Kirshy.
(11) Includes 16,407 shares owned by Le Serre, 481,056 shares owned by Ascent
Venture Partners, L.P., 1,924,236 shares owned by Ascent Venture Partners
II, L.P. and 283,688 shares owned by Ascent Venture Partners III, L.P.
Mr. Polestra may be deemed to have or share voting or investment power
with respect to these shares. Mr. Polestra is a Managing Member or
General Partner of each of the general partners which control Ascent
Venture Partners, L.P., Ascent Venture Partners II, L.P. and Ascent
Venture Partners III, L.P. Mr. Polestra disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest in the
shares.
(12) Includes 1,145,406 shares owned by Egan-Managed Capital, L.P. Mr.
Shanahan may be deemed to have or share voting or investment power with
respect to these shares. He is a General Partner of Egan-Managed Capital,
L.P. Mr. Shanahan disclaims beneficial ownership of these shares except
to the extent of his pecuniary interest in the shares.
(13) Includes 1,985,816 shares owned by HarbourVest Partners VI--Direct Fund,
L.P. Mr. Wadsworth may be deemed to have or share voting or investment
with respect to these shares. He is a Managing Director of HarbourVest
Partners, LLC, which controls HarbourVest Partners VI-Direct Fund, L.P.
Mr. Wadsworth disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest in the shares.
(14) Includes 68,512 shares subject to options exercisable within 60 days
following March 31, 2000.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Because this is a summary description, it does not describe every term of
our capital stock contained in our second amended and restated certificate of
incorporation. We refer you to the provisions of Delaware corporate law and of
our second amended and restated certificate of incorporation and our second
amended and restated by-laws, which you can access through EDGAR at
www.sec.gov/edgarhp.htm.
Effective upon the closing of this offering, our authorized capital stock
will consist of 100,000,000 shares of common stock, $.01 par value per share.
As of December 31, 1999, we had outstanding:
. shares of common stock held by 30 stockholders of record;
. shares of preferred stock held by 42 stockholders of record;
. options to purchase shares of common stock; and
. warrants to purchase shares of common stock.
Upon the closing of this offering, all outstanding shares of preferred stock
will automatically convert into shares of common stock. The options
and warrants will remain outstanding.
The following summary description of our capital stock is not intended to be
complete and is qualified in its entirety by reference to the provisions of
applicable law and to our second amended and restated certificate of
incorporation and second amended and restated by-laws, filed as exhibits to the
registration statement of which this prospectus is a part.
Common Stock
Based upon the number of shares outstanding as of December 31, 1999, giving
effect to the conversion of all shares of preferred stock into shares
of common stock upon the closing of this offering, and giving effect to the
issuance of the shares of common stock offered by us in this offering, there
will be shares of common stock outstanding upon the closing of this
offering. In addition, as of December 31, 1999, there were outstanding stock
options for the purchase of a total of shares of common stock and warrants
for the purchase of shares of common stock.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders at the annual meeting of
stockholders and do not have cumulative voting rights. Directors are elected by
a plurality of the votes of the shares present in person or by proxy at the
meeting and entitled to vote in such 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 therefor, subject to any
preferential dividend rights of outstanding preferred stock. Upon the
liquidation, dissolution or winding up of Network Engines, the holders of
common stock are entitled to receive ratably our net assets available after the
payment of all our debts and other liabilities, subject to the prior rights of
any outstanding preferred stock. Holders of our common stock have no
preemptive, subscription, redemption or conversion rights, nor are they
entitled to the benefit of any
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<PAGE>
sinking fund. The outstanding shares of common stock are, and the shares
offered by us in this offering will be, when issued and paid for, validly
issued, fully paid and nonassessable. The rights, powers, 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 our board of directors may designate and issue in the future.
Preferred Stock
Our board of directors will be authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of up to 5,000,000 shares of preferred stock, in one or
more series. Each such series of preferred stock shall have such number of
shares, designations, preferences, voting powers, qualifications and special or
relative rights or privileges as shall be determined by our board of directors,
which may include, among others, dividend rights, voting rights, redemption
provisions, liquidation preferences, conversion rights and preemptive rights.
Our stockholders have granted the board of directors authority to issue the
preferred stock and to determine its rights and preferences in order to
eliminate delays associated with a stockholder vote on specific issuances. The
rights of the holders of common stock will be subject to the rights of holders
of any preferred stock issued in the future. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could adversely affect the voting power or other
rights of the holders of common stock, and could make it more difficult for a
third party to acquire, or discourage a third party from attempting to acquire,
a majority of our outstanding voting stock.
Registration Rights
According to the terms of an investor rights agreement, beginning six months
following the date of the closing of this offering, the holders of shares
of common stock and shares of common stock issuable upon conversion of
warrants, including Ascent Venture Partners II, L.P., HarborVest VI-Direct
Fund, L.P., MD Co., Egan-Managed Capital, L.P. and Canaan Equity Partners II
LLC, may require us to file a registration statement under the Securities Act.
To demand such registration, stockholders holding an aggregate of of those
shares must request that we file a registration statement to register the
resale of their shares. Those stockholders must also request registration of
enough shares so that the offering would have an anticipated aggregate offering
price of $5.0 million. We are required to effect up to two of these demand
registrations.
Additionally, these holders of shares of common stock will have
incidental registration rights with respect to the future registration of our
shares of common stock under the Securities Act; these holders are entitled to
notice of any future registration and to include their shares in such
registration.
At any time we become eligible to file a registration statement on Form S-3
under the Securities Act, upon the request of holders of not less than
shares of common stock, we must effect a registration on Form S-3. However, the
registration must have a minimum anticipated aggregate offering price of $1.0
million.
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These registration rights are subject to conditions and limitations,
including, in the case of an underwritten public offering, the right of the
managing underwriter to limit the number of shares of common stock to be
included in the registration. We are generally required to bear all the
expenses of registrations under the investor rights agreement, except
underwriting discounts and commissions. The investor rights agreement also
contains our commitment to indemnify the holders of registration rights for
certain losses they might incur in connection with registrations under the
agreement. Registration of any of the shares of common stock held by
stockholders with registration rights would result in those shares becoming
freely tradeable without restriction under the Securities Act.
Warrants
As of December 31, 1999, the following warrants to purchase a total of
940,170 shares of our common stock were outstanding:
<TABLE>
<CAPTION>
Number of
Shares of
Common Stock Exercise Price Expiration Date
<S> <C> <C>
21,000 $1.3333 July 31, 2002
54,795 0.1833 August 31, 2002
24,000 0.9167 February 23, 2003
111,000 0.9167 October 15, 2007
83,250 0.9167 January 29, 2008
22,200 0.9167 May 20, 2008
88,800 0.9167 June 3, 2008
127,650 0.9167 August 12, 2008
5,550 0.9167 September 8, 2008
19,425 0.9167 November 2, 2008
300,000 0.9167 December 8, 2008
82,500 0.9167 January 13, 2009
</TABLE>
Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover Effects
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. 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 business combination is approved
in a prescribed manner. 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.
Our second amended and restated certificate of incorporation and second
amended and restated by-laws provide for the division of the board of directors
into three classes, as nearly equal in size as possible, with staggered three-
year terms. See "Management--Election of Directors." Under our second amended
and restated certificate of incorporation and second amended and restated by-
laws
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<PAGE>
any vacancy on the board of directors, however occurring, including a vacancy
resulting from an enlargement of the board, may only be filled by vote of a
majority of the directors then in office. The classification of the board of
directors and the limitations on the removal of directors and filling of
vacancies 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 Network
Engines.
Our second amended and restated certificate of incorporation and second
amended and restated by-laws also provide that, after the closing of this
offering, any action required or permitted to be taken by our stockholders at
an annual meeting or special meeting of stockholders may only be taken if it is
properly brought before such meeting and may not be taken by written action in
lieu of a meeting. Our second amended and restated certificate of incorporation
and second amended and restated by-laws further provide that special meetings
of the stockholders may only be called by the Chairman of the board of
directors, the Chief Executive Officer, the President, or by the board of
directors. Under the second amended and restated by-laws, in order for any
matter to be considered "properly brought" before a meeting, a stockholder must
comply with certain requirements regarding advance notice to us. The foregoing
provisions could have the effect of delaying until the next stockholders'
meeting stockholder actions which are favored by the holders of a majority of
our outstanding voting securities. These provisions may also discourage another
person or entity from making a tender offer for our common stock, because such
person or entity, even if it acquired a majority of our outstanding voting
securities, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting,
and not by written consent.
The General Corporation Law of Delaware 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 by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Our second amended and restated by-laws may
be amended or repealed by a majority vote of the board of directors or the
holders of a majority of the shares of our capital stock issued and outstanding
and entitled to vote, subject to any limitations set forth in the restated by-
laws. The stockholder vote would be in addition to any separate class vote that
might in the future be required pursuant to the terms of any series of
preferred stock that might be outstanding at the time any such amendments are
submitted to stockholders.
Limitation of Liability and Indemnification
Our second amended and restated certificate of incorporation provides that
our directors and officers shall be indemnified by us to the fullest extent
authorized by Delaware law, as it now exists or may in the future be amended,
against all expenses and liabilities reasonably incurred in connection with the
service for or on our behalf. In addition, our second amended and restated
certificate of incorporation provides that our directors will not be personally
liable for monetary damages to us for breaches of their fiduciary duty as
directors, unless they violated their duty of loyalty to us or our
stockholders, acted in bad faith, knowingly or intentionally violated the law,
authorized illegal dividends or redemptions or derived an improper personal
benefit from their action as directors.
69
<PAGE>
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is EquiServe Trust
Company.
Nasdaq National Market Listing
We have applied for quotation of our common stock on the Nasdaq National
Market under the trading symbol "NENG."
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering (assuming no exercise of the underwriters'
over-allotment option), we will have outstanding an aggregate of shares of
common stock, assuming no exercise of outstanding options or warrants. Of the
total outstanding shares, the shares sold in this offering will be freely
tradeable without restriction or further registration under the Securities Act
except that any shares held by our affiliates, as that term is defined under
the Securities Act, may generally only be sold in compliance with the
limitations of Rule 144 as described below.
Sales of Restricted Shares
The remaining shares of common stock held by existing stockholders are
"restricted shares," which means they were issued and sold by us in reliance on
exemptions from the registration requirements of the Securities Act. Of these
restricted shares, shares will be eligible for sale in the public market
without restriction upon the date of this prospectus and an additional of
these restricted shares will be so eligible 90 days after that date in reliance
on Rule 144(k) and Rule 701, respectively. of the restricted shares will be
eligible for sale commencing on or after such 90th day pursuant to the other
provisions of Rule 144. In general, under these other provisions of Rule 144, a
stockholder who has beneficially owned restricted shares for at least one year
is entitled to sell, within any three-month period, a number of those shares
that does not exceed the greater of:
. one percent of the then outstanding shares of common stock
(approximately shares immediately after this offering); or
. the average weekly trading volume in the common stock as reported by
Nasdaq during the four calendar weeks preceding the date on which notice
of such sale is filed, provided certain requirements concerning
availability of public information, manner of sale and notice of sale
are satisfied.
In addition, our affiliates must comply with the restrictions and requirements
of Rule 144, other than the one-year holding period requirement, in order to
sell shares of common stock which are not restricted securities. Under Rule
144(k), a stockholder who is not one of our affiliates and has not been our
affiliate for at least three months prior to the sale and who has beneficially
owned restricted shares for at least two years may resell such shares without
compliance with the foregoing requirements.
of the restricted shares will be subject to "lock-up" agreements
providing that the stockholders will not offer, sell or otherwise dispose of
any shares owned by them for a period of 180 days after the date of this
offering. However, holders of such restricted shares who have not been
executive officers or directors of our company on or since the date of this
prospectus may offer, sell or otherwise dispose of 25% of those shares on the
later of 90 days after the date of this offering or on the second trading day
after the first public release of our quarterly results, if the last recorded
sale price on the Nasdaq National Market for 20 of the 30 trading days ending
on such date is at least twice the price per share in the initial public
offering. These stockholders may also offer, sell or otherwise dispose of an
additional 25% of those shares 135 days after the date of this offering if the
price per share of common stock has achieved the same target level for the 30
trading day period
71
<PAGE>
ending on such 135th day. However, Donaldson, Lufkin & Jenrette Securities
Corporation, may in its sole discretion, at any time without notice, release
all or any portion of the shares subject to lock-up agreements. Upon expiration
of the lock-up agreements, additional shares will become eligible for sale
pursuant to Rule 144(k), additional shares will become eligible for sale
under the other provisions of Rule 144 and additional shares will become
eligible for sale under Rule 701.
Eligibility of Restricted Shares for Sale in the Public Market
(Listed by date upon which shares become saleable)
<TABLE>
<CAPTION>
Number of
Date Shares Comments
<S> <C> <C>
On the date of this Shares saleable under Rule 144(k)
prospectus..................
90 days after the date of Shares saleable under Rules 144 and 701
this prospectus.............
Later of 90 days after the
effective date or second
trading day following first Shares saleable under Rules 144 and 701
public release of quarterly
earnings(1).................
135 days after the effective Shares saleable under Rules 144 and 701
date(1).....................
180 days after the effective
date (expiration of lock- Shares saleable under Rules 144 and 701
up).........................
</TABLE>
- ---------------------
(1) The number of shares listed may be offered, sold or traded provided that
the last recorded sale price per share for 20 of the 30 trading days ending
on such date is at least twice the initial public offering price per share.
Options and Employee Compensation Shares
Rule 701 provides that currently outstanding shares of common stock acquired
under our employee compensation plans may be resold beginning 90 days after the
date of this prospectus by:
. persons, other than our affiliates, subject only to the manner of sale
provisions of Rule 144; and
. our affiliates under Rule 144 without compliance with its one-year
minimum holding period, subject to certain limitations.
At , approximately shares of common stock were issuable pursuant to
vested options or pursuant to other rights granted under our 1999 plan of which
approximately shares are not subject to lock-up agreements with the
underwriters and will be eligible for sale in the public market in accordance
with Rule 701 under the Securities Act beginning 90 days after the date of this
prospectus.
Subject to the consent of Donaldson, Lufkin & Jenrette Securities
Corporation as required by the underwriting agreement or after the expiration
of the 180-day lock-up period, we intend to file one or more registration
statements on Form S-8 under the Securities Act following the date of this
prospectus, to register up to shares of common stock underlying outstanding
stock options or other rights granted pursuant to our 1999 plan, employee stock
purchase plan and director plan, including the shares of common stock
subject to options vested as of , 2000, and shares of common stock
reserved for issuance under our 1999 plan, employee stock purchase
72
<PAGE>
plan and director plan. Such registration statements are expected to become
effective upon filing. At such time, approximately shares of common stock
issuable upon the exercise of options granted as of and covered by these
registration statements will be vested and eligible for sale in the public
market upon the exercise of underlying options to the extent not previously
sold pursuant to Rule 701.
Registration Rights
After this offering, the holders of shares of common stock and
shares of common stock issuable upon conversion of warrants will be entitled to
certain rights with respect to the registration of their shares under the
Securities Act. After any such registration of these shares, such shares will
be freely tradeable without restriction under the Securities Act. These sales
could cause the market price of our common stock to decline. See "Description
of Capital Stock--Registration Rights."
Pricing of the Offering
Prior to this offering, there has been no public market for our common
stock, and no predictions can be made as to the effect, if any, that market
sales of shares of common stock from time to time, or the availability of
shares for future sale, may have on the market price for the common stock.
Sales of substantial amounts of common stock, or the perception that such sales
could occur, could adversely effect prevailing market prices for the common
stock and could impair our future ability to obtain capital through an offering
of equity securities.
73
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 2000, the underwriters named below, who are represented
by Donaldson, Lufkin & Jenrette Securities Corporation, Dain Rauscher
Incorporated, FleetBoston Robertson Stephens Inc., and DLJdirect Inc., have
severally agreed to purchase from us the number of shares of common stock set
forth opposite their names below:
<TABLE>
<CAPTION>
Number
Underwriters of Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.................
Dain Rauscher Incorporated..........................................
FleetBoston Robertson Stephens Inc..................................
DLJdirect Inc.......................................................
----
Total.............................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
to purchase and accept delivery of the shares of common stock offered by this
prospectus are subject to approval by their counsel of legal matters concerning
the offering and to conditions that must be satisfied by us. The underwriters
are obligated to purchase and accept delivery of all of the shares of common
stock offered by this prospectus, other than those shares covered by the over-
allotment option described below, if any are purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to dealers, including the
underwriters, at such price less a concession not in excess of $ per
share. The underwriters may allow, and such dealers may re-allow, to other
dealers a concession not in excess of $ per share. After the initial
offering of the common stock, the public offering price and other selling terms
may be changed by the representatives at any time without notice. The
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
An electronic prospectus will be available on the web site maintained by
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation. Other than the prospectus in electronic format, the information on
this web site relating to the offering is not part of this prospectus and has
not been approved or endorsed by us or the underwriters, and should not be
relied on by prospective investors.
We have granted to the underwriters an option, exercisable for 30 days after
the date of this prospectus, to purchase, from time to time, in whole or in
part, up to an aggregate of additional shares of common stock at
the initial public offering price less underwriting discounts and
74
<PAGE>
commissions. The underwriters may exercise the option solely to cover over-
allotments, if any, made in connection with the offering. To the extent that
the underwriters exercise the option, each underwriter will become obligated,
subject to conditions contained in the underwriting agreement, to purchase its
pro rata portion of such additional shares based on the underwriter's
percentage underwriting commitment.
We have agreed to indemnify the underwriters against liabilities which may
arise in connection with the offering, including liabilities under the
Securities Act, or to contribute to payments that the underwriters may be
required to make.
Each of Network Engines, our executive officers and directors and certain of
our stockholders have agreed, subject to certain exceptions, not to (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock or (ii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with
the ownership of any common stock (regardless of whether any of the
transactions described in clause (i) or (ii) is to be settled by the delivery
of common stock, or such other securities, in cash or otherwise) for a period
of 180 days after the date of this prospectus without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation. However, up to 50% of
the shares of common stock subject to the restrictions described above (other
than shares owned by directors and executive officers) will be released from
these restrictions under the conditions described under the caption "Shares
Eligible for Future Sale--Sales of Restricted Shares."
In addition, during such 180-day period, we have also agreed not to file any
registration statement with respect to the registration of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation. Furthermore, none of our stockholders have registration
rights, which have not been waived, that may be exercised during such 180-day
period.
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price of the shares of common stock
offered by this prospectus will be determined by negotiation among us and the
underwriters. The factors to be considered in determining the initial public
offering price include:
. the history of and the prospects for the industry in which we compete;
. our past and present operations;
. the historical results of operations;
. our prospects for future earnings;
. the recent market prices of securities of generally comparable
companies; and
. the general condition of the securities markets at the time of the
offering.
The underwriters have reserved up to shares of the common stock to be
sold in this offering for sale to some of our employees and associates of our
employees and directors, and to
75
<PAGE>
other individuals or companies who have commercial arrangements or personal
relationships with us. Through this directed share program, we intend to ensure
that those individuals and companies that have supported us, or who are in a
position to support us in the future, have the opportunity to purchase our
common stock at the same price that we are offering our shares to the general
public. Prospective participants will not receive any investment materials
other than a copy of this prospectus, and will be permitted to participate in
this offering at the initial public price presented on the cover page of this
prospectus. No commitment to purchase shares by any participant in the directed
share program will be accepted until after the registration statement, of which
this prospectus is a part, is effective and an initial public offering price
has been established. The number of shares available for sale to the general
public will be reduced by the number of shares sold through the directed share
program. Any shares reserved for the directed share program which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered hereby.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered in any jurisdiction where action for that purpose is required. The
shares of common stock offered may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering materials or
advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and observe any restrictions
relating to the offering and the distribution of this prospectus. This
prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any shares of commons stock offered in any jurisdiction in which such an
offer or a solicitation is unlawful.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot the offering, creating a
syndicate short position. The underwriters may bid for and stabilize the price
of the common stock. In addition, the underwriting syndicate may reclaim
selling concessions from syndicate members and selected dealers if they
repurchase previously distributed common stock in syndicate covering
transactions, in stabilizing transactions or otherwise. These activities may
stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these activities,
and may end any of these activities at any time.
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts and for the
underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
76
<PAGE>
EXPERTS
Our financial statements as of September 30, 1999 and 1998 and for each of
the three years in the period ended September 30, 1999 included in this
prospectus have been so included in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given upon the authority
of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 to register with the Commission the shares of our common
stock described in this prospectus. This prospectus is part of that
registration statement, and provides you with a general description of the
common stock being registered and offered, but does not include all of the
information you can find in the registration statement or the exhibits to the
registration statement. You should refer to the registration statement and its
exhibits for more information about our business and the shares of common stock
being registered.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file with the Commission at the
Commission's public reference room at 450 Fifth Street, N.W., Judiciary Plaza,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained at prescribed rates by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.
77
<PAGE>
NETWORK ENGINES, INC.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants........................................ F-2
Balance Sheets as of September 30, 1997 and 1998 and as of December 31,
1999 (unaudited)........................................................ F-3
Statement of Operations for the years ended September 30, 1997, 1998 and
1999 and the three months ended December 31, 1998 and 1999 (unaudited).. F-4
Statement of Stockholders' Equity (Deficit) for the years ended September
30, 1997, 1998 and 1999 and the three months ended December 31, 1999
(unaudited)............................................................. F-5
Statement of Cash Flows for the years ended September 30, 1997, 1998 and
1999 and the three months ended December 31, 1998 and 1999 (unaudited).. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Network Engines, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Network Engines,
Inc. at September 30, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 1999
in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 22, 1999, except as to
Note 13 for which the date is April 7, 2000
F-2
<PAGE>
NETWORK ENGINES, INC.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
As of As of
September 30, December 31, 1999
---------------- -------------------
1998 1999 Actual Pro Forma
(unaudited)
(Note 2)
Assets
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 113 $ 1,435 $ 24,876 $ 24,876
Restricted cash........................ -- 100 379 379
Accounts receivable, less allowance for
doubtful accounts of $107, $227 and
$258 at September 30, 1998, 1999 and
December 31, 1999 (unaudited),
respectively.......................... 492 2,025 2,215 2,215
Inventories............................ 587 1,251 1,728 1,728
Prepaid expenses and other current
assets................................ 86 222 506 506
------- ------- -------- --------
Total current assets................... 1,278 5,033 29,704 29,704
Property and equipment, net............. 452 831 1,147 1,147
Other assets............................ -- -- 83 83
------- ------- -------- --------
Total assets.......................... $ 1,730 $ 5,864 $ 30,934 $ 30,934
======= ======= ======== ========
<CAPTION>
Liabilities, Redeemable Preferred Stock
and Stockholders' Equity (Deficit)
<S> <C> <C> <C> <C>
Current liabilities:
Bridge loans........................... $ 3,717 $ -- $ -- $ --
Accounts payable....................... 752 2,354 3,560 3,560
Accrued interest....................... 247 -- -- --
Accrued expenses....................... 363 614 493 493
Deferred revenue....................... 29 105 97 97
Current portion of capital lease
obligations........................... 21 48 56 56
Notes payable.......................... 86 15 171 171
------- ------- -------- --------
Total current liabilities.............. 5,215 3,136 4,377 4,377
Capital lease obligations, net of
current portion........................ 69 132 120 120
Notes payable........................... -- 26 9 9
------- ------- -------- --------
Total liabilities...................... 5,284 3,294 4,506 4,506
Commitments and contingencies (Note 10)
Redeemable convertible preferred stock:
Series D redeemable convertible
preferred stock, $.01 par value,
3,581,554 shares authorized; 3,581,554
and no shares issued and outstanding
at December 31, 1999 (unaudited) and
pro forma December 31, 1999
(unaudited) (liquidation preference of
$25,250 at December 31, 1999
(unaudited)).......................... -- -- 25,567 --
Series C redeemable convertible
preferred stock, $.01 par value,
1,123,549 shares authorized;
1,123,549, 1,123,549 and no shares
issued and outstanding at September
30, 1999, December 31, 1999
(unaudited) and pro forma December 31,
1999 (unaudited) (liquidation
preference of $8,651 at December 31,
1999 (unaudited))..................... -- 8,705 9,166 --
Series B redeemable convertible
preferred stock, $.01 par value,
360,000 shares authorized; 357,142,
357,142 and no shares issued and
outstanding at September 30, 1999,
December 31, 1999 (unaudited) and pro
forma December 31, 1999 (unaudited)
(stated at liquidation preference).... -- 2,750 2,750 --
Series A redeemable convertible
preferred stock, $.01 par value,
185,250 shares authorized; 185,250,
185,250, 185,250 and no shares issued
and outstanding at September 30, 1998,
1999, December 31, 1999 (unaudited)
and pro forma December 31, 1999
(unaudited) (liquidation preference of
$1,000 at December 31, 1999
(unaudited)).......................... 1,000 1,012 1,044 --
------- ------- -------- --------
Total redeemable convertible preferred
stock................................. 1,000 12,467 38,527 --
Stockholders' equity (deficit):
Common stock, $.01 par value,
16,000,000 shares authorized;
1,362,900, 1,371,945, 1,661,256 and
10,240,633 shares issued and
outstanding at September 30, 1998,
1999, December 31, 1999 (unaudited)
and pro forma December 31, 1999
(unaudited)........................... 14 14 17 102
Additional paid-in capital............. 1,036 2,962 5,425 43,867
Accumulated deficit.................... (5,604) (11,434) (13,020) (13,020)
Note receivable from stockholder....... -- -- (90) (90)
Deferred stock compensation............ -- (1,439) (4,431) (4,431)
------- ------- -------- --------
Total stockholders' equity (deficit)... (4,554) (9,897) (12,099) 26,428
------- ------- -------- --------
Total liabilities, redeemable
convertible preferred stock and
stockholders' equity (deficit)....... $ 1,730 $ 5,864 $ 30,934 $ 30,934
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
NETWORK ENGINES, INC.
STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
September 30, December 31,
------------------------- ----------------
1997 1998 1999 1998 1999
<S> <C> <C> <C> <C> <C>
Net revenues...................... $ 609 $ 1,102 $ 6,031 $ 223 $ 4,415
Cost of revenues (excluding stock
compensation of $16 and $12 for
the year ended September 30, 1999
and the three months ended
December 31, 1999 (unaudited),
respectively).................... 465 1,591 4,733 385 2,613
------- ------- ------- ------- -------
Gross profit (loss).............. 144 (489) 1,298 (162) 1,802
Operating expenses:
Research and development
(excluding stock compensation of
$37 and $48 for the year ended
September 30, 1999 and the three
months ended December 31, 1999
(unaudited), respectively)...... 395 923 2,564 317 1,174
Selling and marketing (excluding
stock compensation of $53 and
$58 for the year ended September
30, 1999 and the three months
ended December 31, 1999
(unaudited), respectively)...... 477 1,593 2,920 558 1,615
General and administrative
(excluding stock compensation of
$21 and $79 for the year ended
September 30, 1999 and the three
months ended December 31, 1999
(unaudited), respectively)...... 396 620 934 203 432
Stock compensation............... -- -- 127 -- 197
------- ------- ------- ------- -------
Total operating expenses......... 1,268 3,136 6,545 1,078 3,418
------- ------- ------- ------- -------
Loss from operations.............. (1,124) (3,625) (5,247) (1,240) (1,616)
Interest income................... 12 18 52 2 50
Interest expense.................. (45) (592) (949) (932) (20)
------- ------- ------- ------- -------
Loss before extraordinary item.... (1,157) (4,199) (6,144) (2,170) (1,586)
Extraordinary gain on
extinguishment of debt........... -- -- 314 -- --
------- ------- ------- ------- -------
Net loss.......................... $(1,157) $(4,199) $(5,830) $(2,170) $(1,586)
Accretion of redeemable
convertible preferred stock...... -- -- (223) -- (810)
------- ------- ------- ------- -------
Net loss attributable to common
stockholders..................... $(1,157) $(4,199) $(6,053) $(2,170) $(2,396)
======= ======= ======= ======= =======
Loss per common share before
extraordinary item--basic and
diluted.......................... $ (0.91) $ (3.28) $ (4.81) $ (1.66) $ (1.75)
Extraordinary item per common
share--basic and diluted......... $ -- $ -- $ 0.24 $ -- $ --
------- ------- ------- ------- -------
Net loss per common share--basic
and diluted...................... $ (0.91) $ (3.28) $ (4.57) $ (1.66) $ (1.75)
======= ======= ======= ======= =======
Shares used in computing basic and
diluted net loss per common
share............................ 1,271 1,280 1,325 1,310 1,366
Pro forma net loss per common
share--basic and diluted
(unaudited)...................... $ (1.58) $ (0.31)
======= =======
Shares used in computing basic and
diluted pro forma net loss per
common share (unaudited)......... 3,697 5,144
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
NETWORK ENGINES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Note Total
Common Stock Additional Receivable Deferred Stockholders'
---------------- Paid-in Accumulated from Stock Equity
Shares Amount Capital Deficit Stockholder Compensation (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1996................... 1,257,900 $ 13 $ 462 $ (248) $-- $ -- $ 227
Issuance of common
stock.................. 15,000 -- 25 -- -- -- 25
Issuance costs
associated with Series
A redeemable
convertible preferred
stock.................. -- -- (48) -- -- -- (48)
Net loss................ -- -- -- (1,157) -- -- (1,157)
--------- ---- ------ -------- ---- ------- --------
Balance, September 30,
1997................... 1,272,900 13 439 (1,405) -- -- (953)
Issuance of restricted
common stock........... 90,000 1 16 -- -- -- 17
Issuance of common stock
warrants in connection
with bridge loans...... -- -- 581 -- -- -- 581
Net loss................ -- -- -- (4,199) -- -- (4,199)
--------- ---- ------ -------- ---- ------- --------
Balance, September 30,
1998................... 1,362,900 14 1,036 (5,604) -- -- (4,554)
Issuance costs
associated with Series
C redeemable
convertible preferred
stock.................. -- -- (188) -- -- -- (188)
Issuance of common stock
upon stock option
exercise............... 9,045 -- 2 -- -- -- 2
Issuance of common stock
warrants in connection
with bridge loans...... -- -- 608 -- -- -- 608
Issuance of common stock
warrants in connection
with Series C
redeemable convertible
preferred stock........ -- -- 157 -- -- -- 157
Issuance of common stock
options to consultants
and compensation
expense for stock
option modifications... -- -- 4 -- -- -- 4
Deferred stock
compensation related to
grants of stock
options................ -- -- 1,566 -- -- (1,566) --
Amortization of deferred
stock compensation to
expense................ -- -- -- -- -- 127 127
Accretion of redeemable
convertible preferred
stock to redemption
value.................. -- -- (223) -- -- -- (223)
Net loss................ -- -- -- (5,830) -- -- (5,830)
--------- ---- ------ -------- ---- ------- --------
Balance, September 30,
1999................... 1,371,945 14 2,962 (11,434) -- (1,439) (9,897)
Issuance of common stock
upon stock option
exercises (unaudited).. 34,311 -- 8 -- -- -- 8
Issuance of restricted
common stock
(unaudited)............ 255,000 3 150 -- (90) -- 63
Issuance costs
associated with Series
D redeemable
convertible preferred
stock (unaudited)...... -- -- (74) -- -- -- (74)
Deferred stock
compensation related to
grants of stock options
(unaudited)............ -- -- 3,189 -- -- (3,189) --
Amortization of deferred
stock compensation to
expense (unaudited).... -- -- -- -- -- 197 197
Accretion of redeemable
convertible preferred
stock to redemption
value (unaudited)...... -- -- (810) -- -- -- (810)
Net loss (unaudited).... -- -- -- (1,586) -- -- (1,586)
--------- ---- ------ -------- ---- ------- --------
Balance, December 31,
1999 (unaudited)....... 1,661,256 $ 17 $5,425 $(13,020) $(90) $(4,431) $(12,099)
========= ==== ====== ======== ==== ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
NETWORK ENGINES, INC.
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended September Ended
30, December 31,
------------------------- ----------------
1997 1998 1999 1998 1999
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss......................... $(1,157) $(4,199) $(5,830) $(2,170) $(1,586)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.... 88 194 361 64 106
Provision for inventory
reserves........................ 35 350 663 70 83
Amortization of discount on note
payable......................... -- 348 841 841 --
Provision for doubtful
accounts........................ 37 50 120 30 30
Gain on extinguishment of debt
................................ -- -- (314) -- --
Compensation expense related to
common stock options............ -- -- 131 -- 197
Changes in operating assets and
liabilities:
Accounts receivable............. 435 (427) (1,653) 423 (220)
Inventories..................... (307) (587) (1,327) (261) (560)
Prepaid expenses and other
current assets................. (14) (71) (136) (67) (284)
Accounts payable................ (11) 447 1,602 (43) 1,206
Accrued interest and expenses... 126 458 325 (44) (121)
Deferred revenue................ -- 29 76 (5) (8)
------- ------- ------- ------- -------
Net cash used in operating
activities.................... (768) (3,408) (5,141) (1,162) (1,157)
Cash flows used in investing
activities:
Purchase of property and
equipment....................... (185) (343) (623) (61) (422)
Deposit of restricted cash....... -- -- (100) -- (279)
Increase in other assets......... -- -- -- -- (83)
------- ------- ------- ------- -------
Net cash used in investing
activities.................... (185) (343) (723) (61) (784)
Cash flows from financing
activities:
Proceeds from bridge loans....... -- 3,950 1,100 1,100 --
Proceeds from notes payable...... -- 4 56 56 2,205
Payments on notes payable........ (40) (112) (101) (11) (2,066)
Payments on capital lease
obligations..................... -- (11) (27) -- (4)
Proceeds from issuance of common
stock........................... 25 17 2 -- 71
Proceeds from issuance of
redeemable convertible preferred
stock, net...................... 952 -- 6,156 -- 25,176
------- ------- ------- ------- -------
Net cash provided by financing
activities.................... 937 3,848 7,186 1,145 25,382
------- ------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents............. (16) 97 1,322 (78) 23,441
Cash and cash equivalents,
beginning of period.............. 32 16 113 113 1,435
------- ------- ------- ------- -------
Cash and cash equivalents, end of
period........................... $ 16 $ 113 $ 1,435 $ 35 $24,876
======= ======= ======= ======= =======
Supplemental cash flow
information:
Interest paid.................... $ 29 $ 29 $ 36 $ 7 $ 20
Non-cash transactions:
Acquisition of property and
equipment under capital leases.. $ -- $ 101 $ 117 $ -- $ --
Bridge loans and accrued interest
converted to Series B and C
redeemable convertible preferred
stock........................... $ -- $ -- $ 5,057 $ -- $ --
Restricted common stock issued in
exchange for note receivable
from stockholder................ $ -- $ -- $ -- $ -- $ 90
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Business
Network Engines, Inc. (the "Company") develops, markets and provides
integrated and scalable server appliances that deliver Internet application
functionality. The Company markets its products principally in North America
through a direct sales organization, as well as through indirect channels
consisting of original equipment manufacturers, resellers and systems
integrators. The Company reports results in one operating segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes product revenue upon delivery, provided evidence of
an arrangement has been received, no obligations remain outstanding and
collectibility is reasonably assured. The Company recognizes license revenue
upon sell through to the licensees' end users. License revenue was immaterial
for all periods presented in these financial statements. The Company accrues
for anticipated returns and warranty costs upon product delivery. Revenue from
support contracts is recognized ratably over the term of the agreement.
Unaudited Interim Financial Data
The interim financial data as of December 31, 1999 and for the three months
ended December 31, 1998 and 1999 have been derived from unaudited financial
statements of the Company. Management believes these unaudited financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for such periods. Results for the three months ended
December 31, 1998 and 1999 have not been audited and are not necessarily
indicative of results to be expected for the full fiscal year.
Concentrations of Risk
Credit. Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents,
restricted cash and trade receivables. The Company invests primarily in money
market funds of major financial institutions. The Company provides credit to
customers in the normal course of business and does not require collateral
from its customers but routinely assesses their financial strength. The
Company maintains reserves for potential credit losses and such losses have
been within management's expectations.
Customers. Revenue of approximately $207,000 (34%), $140,000 (23%) and
$128,000 (21%) was attributable to three customers during the year ended
September 30, 1997. Revenue of approximately $562,000 (51%) and $132,000 (12%)
was attributable to two customers during the year ended September 30, 1998.
Revenue of approximately $2,774,000 (46%), $1,689,000 (28%) and $844,000 (14%)
was attributable to three customers during the year ended September 30, 1999.
F-7
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue of approximately $107,000 (48%), $45,000 (20%) and $44,000 (19%) was
attributable to three customers during the three months ended December 31, 1998
(unaudited) and revenue of approximately $2,326,000 (53%) and $795,000 (18%)
was attributable to two customers during the three months ended December 31,
1999 (unaudited).
One customer accounted for approximately $491,000 (82%) of accounts
receivable at September 30, 1998, three customers accounted for approximately
$1,809,000 (80%) of accounts receivable as of September 30, 1999 and four
customers accounted for approximately $1,861,000 (75%) of accounts receivable
at December 31, 1999 (unaudited).
Suppliers. Although the Company generally uses standard parts and components
for its products, certain processor board components are currently available
only from a single source. Other components and subassemblies are available
only from limited sources. Although the Company believes that these components
and subassemblies are sufficiently available from alternate sources in a
reasonable amount of time, the reduction or interruption of supply, a
significant price increase or engineering changes required by the use of
alternate components and subassemblies could adversely affect the Company's
operating results.
Fair Value of Financial Instruments
Financial instruments, including cash, cash equivalents, restricted cash,
accounts receivable, accounts payable and redeemable convertible preferred
stock, are carried in the financial statements at amortized cost which
approximated fair value as of September 30, 1997, 1998 and 1999 and December
31, 1999 (unaudited).
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. At September 30,
1999, the Company's cash equivalents of $1,372,000 consisted of investments in
money market funds. These investments are stated at cost, which approximated
fair value. At September 30, 1998, the Company had no cash equivalents. At
September 30, 1999, $100,000 of cash was restricted and pledged as collateral
to the Company's primary contract manufacturer. At December 31, 1999, $379,000
of cash was restricted and pledged as collateral to the Company's primary
contract manufacturer and its facility landlord (unaudited).
Inventories
Inventories are valued at the lower of cost or market, with cost determined
using the first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Property and equipment
held under capital leases are stated at the present
F-8
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
value of the minimum lease payments at the inception of the lease and are
amortized using the straight-line method over the lesser of the life of the
related asset or the term of the lease. Upon retirement or sale, the cost of
the assets disposed of and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the determination of
net income or loss. Repairs and maintenance are charged to expense as incurred.
Research and Development
Research and development costs, except for certain software development
costs, are expensed as incurred. Software development costs incurred after
technological feasibility has been achieved and until the products are
available for general release are capitalized and amortized as the greater of
the ratio of current revenues to total expected revenues from the product or
straight-line method over the remaining estimated economic life of the product.
Costs of internally developed software which qualify for capitalization have
not been material to date.
Accounting for Stock-Based Compensation
Stock options and restricted stock issued to employees and members of the
Company's Board of Directors are accounted for in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations ("APB 25"); accordingly, compensation expense is
recorded for options and restricted stock awarded to employees and directors to
the extent that the exercise or purchase prices are less than the common
stock's fair market value on the date of grant, where the number of shares and
exercise or purchase price are fixed. The difference between the fair value of
the Company's common stock and the exercise or purchase price of the stock
option or restricted stock award is recorded as deferred stock compensation.
Deferred stock compensation is amortized to compensation expense over the
vesting period of the underlying stock option or restricted stock. The Company
follows the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") (see
Note 8). Stock-based awards to non-employees are accounted for under provisions
of SFAS 123.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and the tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. A valuation reserve against deferred tax assets is
recorded, if based upon weighted available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized.
F-9
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of two components, net income (loss)
and other comprehensive income (loss). Comprehensive loss is equal to net loss
for the years ended September 30, 1997, 1998 and 1999 and the three month
periods ended December 31, 1998 and 1999 (unaudited).
Net Loss Per Common Share--Historical
Basic net loss per common share is computed by dividing net loss
attributable to common stockholders by the weighted average number of common
shares outstanding. Restricted common shares that are vested at the end of each
reporting period have been included as common shares outstanding for the basic
net loss per share calculation during that period; unvested restricted shares
have not been included in the basic net loss per common share calculation.
There is no difference between basic and diluted net loss per share since
potential common shares from the conversion of redeemable convertible preferred
stock and the exercises of options and warrants are dilutive for all periods
presented. The calculations of diluted net loss per common share for the years
ended September 30, 1997, 1998 and 1999 and the three months ended December 31,
1998 and 1999 do not include 655,545, 1,557,198, 6,712,854, 1,889,373
(unaudited) and 10,653,297 (unaudited) potential shares of common stock
equivalents, including common stock options and warrants and redeemable
convertible preferred stock, respectively.
Net Loss Per Common Share--Pro Forma
The unaudited pro forma net loss per common share for the year ended
September 30, 1999 and the three months ended December 31, 1999 is calculated
assuming the automatic conversion of all preferred stock outstanding had
occurred as of the beginning of the period or as of the date of issuance of the
preferred stock, if later. Therefore, accretion of the redeemable convertible
preferred stock is excluded from the calculation of pro forma net loss per
common share. The redeemable convertible preferred stock automatically converts
into 8,579,377 shares of common stock upon the completion of the Company's
initial public offering. The calculations of pro forma diluted net loss per
common share for the year ended September 30, 1999 and the three months ended
December 31, 1999 do not include 1,715,031 and 2,073,920 (unaudited) potential
shares of common stock equivalents as their inclusion would be dilutive,
respectively.
Unaudited Pro Forma Balance Sheet
Under the terms of the Company's redeemable convertible preferred stock, all
shares of such preferred stock will automatically convert into common stock
upon completion of the Company's initial public offering of common stock. The
unaudited pro forma balance sheet reflects the conversion of the outstanding
shares of redeemable convertible preferred stock into 8,579,377 shares of
common stock, as if the conversions had occurred on December 31, 1999.
F-10
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
disclosures of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates and would impact future
results of operations and cash flows.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS 133, as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," is effective for fiscal years
beginning after June 15, 2000. Because the Company does not currently hold any
derivative instruments and does not currently engage in hedging activities, the
adoption of SFAS 133 is not expected to have a material impact on its financial
position or operating results.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This bulletin summarizes certain views of the staff of the
Securities and Exchange Commission (the "Staff") on applying generally accepted
accounting principals to revenue recognition in financial statements. The Staff
believes that revenue is realized or realizable and earned when all of the
following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the seller's price to the
buyer is fixed or determinable; and collectibility is reasonably assured. The
Company does not expect the application of SAB 101 to have a material impact on
the Company's financial position or results of operations.
3. INVENTORIES
Inventories consisted of the following at September 30, 1998, 1999 and
December 31, 1999 (unaudited) (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1998 1999 1999
<S> <C> <C> <C>
Raw materials........................................ $ 293 $ 845 $ 839
Work in process...................................... 121 120 265
Finished goods....................................... 173 286 624
----- ------- ------
$ 587 $ 1,251 $1,728
===== ======= ======
</TABLE>
F-11
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
Useful Life 1998 1999
<S> <C> <C> <C>
Office furniture and
equipment 5 years $163 $351
Engineering and production
equipment 3 years 173 404
Computer equipment and
software 3 years 335 642
Leasehold improvements Lesser of 3 years or lease term 210 210
---- -----
881 1,607
Less: accumulated
depreciation and
amortization 429 776
---- -----
$452 $831
==== =====
</TABLE>
As of September 30, 1998 and 1999, the Company had approximately $89,000 and
$165,000 (net of approximately $11,000 and $53,000 of accumulated amortization)
of office furniture, computer software and equipment under capital leases,
respectively.
Depreciation and amortization expense was approximately $88,000, $194,000
and $361,000 for the years ended September 30, 1997, 1998 and 1999,
respectively.
5. BRIDGE LOANS
During the year ended September 30, 1998, the Company issued a series of
uncollateralized subordinated promissory notes totaling $3,950,000 that were
payable on demand with an interest rate of 10% per annum. As of September 30,
1998, no principal or interest had been paid. In connection with these
promissory notes, the Company granted warrants to purchase 658,293 shares of
common stock at an exercise price of $0.92 per share. These warrants were
immediately exercisable on the date of issue and expire after ten years. The
fair value of the warrants on the date of issue of approximately $581,000 was
recorded in stockholders' equity (deficit) and as a discount on the related
notes payable. The discount was amortized as interest expense over the
estimated life of the notes and resulted in additional interest expense of
$348,000 and $233,000 during the years ended September 30, 1998 and 1999,
respectively.
During the year ended September 30, 1999, the Company issued a series of
uncollateralized subordinated promissory notes totaling $1,100,000 that were
payable on demand with interest rates of 10% and 15%. In connection with these
notes, the Company granted warrants to purchase 319,425 shares of the Company's
common stock at an exercise price of $0.92 per share. The fair value of the
warrants on the date of issue of approximately $608,000 was recorded in
stockholders' equity (deficit) and as a discount on the related notes payable.
The discount was amortized as interest expense during the year ended September
30, 1999.
F-12
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
On January 13, 1999, the Company converted approximately $2,750,000 of the
subordinated promissory notes into 357,142 shares of Series B redeemable
convertible preferred stock ("Series B Preferred") and approximately $2,300,000
of the subordinated promissory notes plus approximately $7,000 of accrued
interest into 299,631 shares of Series C redeemable convertible preferred stock
("Series C Preferred"). The note holders forgave $263,245 of accrued interest
upon the conversion of the subordinated promissory notes. The interest
forgiveness has been recorded as an extraordinary gain on extinguishment of
debt.
6. NOTES PAYABLE
Notes payable consisted of the following at September 30, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Equipment line of credit....................................... $ -- $41
Note payable................................................... 17 --
Credit card debt............................................... 44 --
10% note payable to officer and stockholders................... 21 --
12% note payable to former officer and stockholder............. 4 --
----- ---
Total notes payable............................................ 86 41
Less current portion........................................... 86 15
----- ---
Long-term notes payable........................................ $ -- $26
===== ===
</TABLE>
In May 1994, the Company issued a $100,000 note payable to a bank with 60-
monthly payments of principal and interest through May 1999. The interest rate
on the note was determined monthly as prime plus 2.25%. In accordance with the
note's terms, this note was paid in full as of May 1999.
In March 1996, the Company obtained a credit card with a maximum limit of
$50,000. The interest rate on the credit card is prime plus 6.75% (14.75%, 15%
and 15.25% at September 30, 1999, 1998 and 1997, respectively).
At September 30, 1998, the Company had an uncollateralized note payable of
approximately $21,000 with two stockholders. The original maturity of this note
payable was April 30, 1996 and the Company had been charged a late payment fee
of 3% per month since the maturity date. At September 30, 1998, the Company had
an additional uncollateralized note payable of approximately $4,000 with a
former officer and stockholder. No interest or late fees had been paid on
either note as of September 30, 1998. During the year ended September 30, 1999,
the Company entered into an agreement with the holders of the related party
notes whereby the interest rate on each note was halved, no further interest
accrued after January 13, 1999 and all late fees were waived. In total,
approximately $51,000 of interest and late fees were forgiven during the year
ended September 30, 1999. Both notes and the remaining accrued interest were
paid in full in August 1999. The interest forgiveness and waiver of late fees
have been recorded as an extraordinary gain on extinguishment of debt.
F-13
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In November 1998, the Company entered into a line of credit for the purchase
of equipment with a maximum limit of $60,000. The interest rate on the line is
determined on the average daily balance of prime plus 1.0% (9.0% at September
30, 1999). Under the terms of the agreement, any equipment advances that were
outstanding on November 30, 1998 (approximately $56,000) were payable in 34
equal monthly installments of principal, plus accrued interest, commencing
December 31, 1998. Equipment advances, once repaid, may not be re-borrowed. The
line of credit is collateralized by substantially all of the assets of the
Company.
The aggregate amounts of notes payable due as of September 30, 1999 were as
follows (in thousands):
<TABLE>
<S> <C>
Year ended September 30,
2000.................................................................. $22
2001.................................................................. 21
2002.................................................................. 2
---
Total payments........................................................ 45
Less amounts representing interest.................................... 4
---
41
Less amounts due within one year...................................... 15
---
Long-term portion..................................................... $26
===
</TABLE>
On September 28, 1998, the Company entered into an Accounts Receivable
Purchase Agreement (the "Agreement") with a bank. Under the terms of the
Agreement, the bank agreed to pay the Company 85% of approved receivables and
hold the remaining 15% in reserve until collected by the bank. The total of all
receivables purchased may not exceed $1,000,000 at any time. The Company is
charged a finance fee of 1% per month on outstanding Purchased Receivables and
a one-time administrative fee for each Purchased Receivable of .25% of the
receivable. Receivables purchased are collateralized by all of the assets of
the Company. The term of this Agreement is for one year and from year to year
thereafter unless terminated by either party. No amounts were outstanding under
this Agreement at September 30, 1998 or 1999.
F-14
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. STOCKHOLDERS' EQUITY (DEFICIT)
Redeemable Convertible Preferred Stock
The following table summarizes redeemable convertible preferred stock
activity (in thousands, except share data):
<TABLE>
<CAPTION>
Redeemable
Convertible
Preferred Stock
-----------------
Shares Amount
<S> <C> <C>
April 1997 issuance of Series A redeemable convertible
preferred stock....................................... 185,250 $ 1,000
--------- -------
Balance, September 30, 1997 and 1998................... 185,250 1,000
January 1999 issuance of Series B redeemable
convertible preferred stock upon conversion of bridge
loans................................................. 357,142 2,750
January 1999 issuance of Series C redeemable
convertible preferred stock upon conversion of bridge
loans................................................. 299,631 2,307
January 1999 issuance of Series C redeemable
convertible preferred stock for cash.................. 422,102 3,093
June 1999 issuance of Series C redeemable convertible
preferred stock for cash.............................. 401,816 3,094
Accretion of redeemable convertible preferred stock to
redemption value...................................... -- 223
--------- -------
Balance, September 30, 1999............................ 1,665,941 12,467
December 1999 issuance of Series D redeemable
convertible preferred stock for cash (unaudited)...... 3,581,554 25,250
Accretion of redeemable convertible preferred stock to
redemption value (unaudited).......................... -- 810
--------- -------
Balance, December 31, 1999 (unaudited)................. 5,247,495 $38,527
========= =======
</TABLE>
As of September 30, 1999, the Company had three series of redeemable
convertible preferred stock: Series A preferred stock ("Series A Preferred"),
Series B Preferred and Series C Preferred (collectively, the "Preferred Stock")
and had reserved 4,997,823 shares of its common stock for the conversion of all
Preferred Stock.
The Preferred Stock is convertible into common stock at any time, at the
option of the holder, based on specified formulas, subject to anti-dilution
adjustments, as defined. At September 30, 1999, each share of Preferred Stock
was convertible into three shares of common stock. Each share of Series B
Preferred and Series C Preferred will automatically convert into common stock
upon an initial public offering of common stock at a price per share of at
least $7.70 and proceeds to the Company of at least $30,000,000. Each share of
Series A Preferred will automatically convert into common stock upon an initial
public offering of common stock at a price per share of at least $5.40 and
proceeds to the Company of at least $10,000,000. Additionally, at the election
of 75% of the
F-15
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
holders of Series A Preferred or Series B Preferred, all shares of Series A
Preferred or Series B Preferred, respectively, will automatically convert into
shares of common stock.
Holders of the Preferred Stock are entitled to votes equaling the number of
shares of common stock into which their shares may be converted. The holders of
Preferred Stock are entitled to annual, cumulative dividends of $0.432 for
Series A Preferred and $0.693 for Series B Preferred and Series C Preferred
when and if declared by the Company's Board of Directors. If the Company pays
dividends of less than the total amount of unpaid dividends, such payments will
be made first to the holders of Series C Preferred until paid in full, then to
the holders of Series B Preferred until paid in full and then to the holders of
Series A Preferred. No dividends may be paid to the holders of common stock
until all unpaid dividends on the Preferred Stock have been paid.
In the event of liquidation, dissolution or winding up of the Company, the
holders of Series C Preferred are entitled to a liquidation preference of $7.70
per share plus all declared and unpaid dividends thereon, prior to any
distributions to holders of the Series A Preferred, Series B Preferred or
common stock. Upon satisfaction of the Series C Preferred liquidation
preference, the holders of Series B Preferred are entitled to a liquidation
preference of $7.70 per share plus all declared and unpaid dividends thereon,
prior to any distributions to holders of the Series A Preferred or common
stock. Upon the satisfaction of the Series C Preferred and Series B Preferred
liquidation preferences, the holders of Series A Preferred are entitled to a
liquidation preference of $5.40 per share plus all declared and unpaid
dividends thereon, prior to any distributions to holders of common stock.
However, to the extent any net assets available for distribution to
shareholders exceeds $125 million, the entire amount of such assets would be
distributed ratably among the holders of shares of common stock and Preferred
Stock as if converted into shares of common stock.
The Company, upon written notice from the holders of at least two-thirds of
the Series C Preferred, is obligated to redeem all or any portion (but not less
than one-third of the shares of the holders electing to redeem) of the
Preferred Stock after January 2003. The redemption price per share for the
Series C Preferred would be the sum of the liquidation value per share and the
amount calculated as the current valuation of the Company less the aggregate
liquidation value for all shares of Preferred Stock divided by the fully
diluted number of outstanding shares of common stock. If based on the then
current valuation of the Company, the net assets available for distribution to
shareholders exceeds $125 million, then the redemption price for each share of
Series C Preferred would be the amount payable if the entire net assets of the
Company were distributed ratably among the holders of shares of common stock
and Preferred Stock as if converted into shares of common stock. The redemption
price per share for Series B Preferred would be the liquidation value per
share. The redemption price per share for holders of Series A Preferred would
be the greater of the liquidation value per share or the current fair market
value per share that factors in aggregate consideration received upon the
assumed exercise of all derivative securities. If the Company does not have
sufficient funds for all requested redemptions, payment will be made first to
the holders of Series C Preferred until paid in full, then to the holders of
Series B Preferred until paid in full and then to the holders of Series A
Preferred. The Company has the option to redeem shares for cash or
F-16
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
in the form of an 18-month pre-payable note bearing interest at prime plus 2%,
secured by the available assets of the Company.
Common Stock
On November 12, 1999, the Company completed a three-for-one split of the
Company's common stock, which was effected as a 200% stock dividend distributed
to holders of common stock of record as of October 21, 1999 (the "Stock
Split"). All common stock share and per share amounts that appear in the
financial statements and the notes thereto have been restated to reflect this
Stock Split.
On January 7, 1998, the Company issued 90,000 shares of restricted stock at
$0.18 per share to a director of the Company. In accordance with the restricted
stock agreement, the Company has the right to buy back any unvested shares at
the same purchase price if the director ceases to be affiliated with the
Company. Shares vest 33% as of June 30, 1998 and 8.375% per quarter thereafter.
As of September 30, 1999, 22,613 shares remained unvested.
In November 1999, the Company issued 255,000 shares of restricted stock at
$0.60 per share to certain officers and directors of the Company. Of these
shares, 30,000 shares vest 50% on November 18, 2000 and 12.5% per quarter
thereafter and 75,000 shares vest 25% on November 18, 2000 and 6.25% per
quarter thereafter. The remaining 150,000 shares vest quarterly upon the
achievement of certain financial targets or in December 2004, whichever is
earlier. Unvested restricted shares are subject to forfeiture in the event that
an employee ceases to be employed by the Company or a director ceases to be a
director of the Company. The Company recorded deferred stock compensation of
$1,206,000, which represents the excess of the fair value of the restricted
shares at the date of issue over the purchase price. Compensation expense will
be recognized ratably over the vesting period of the restricted stock. For the
three months ended December 31, 1999, the Company recognized $38,000 of related
stock compensation expense.
In connection with the November 1999 restricted stock grants, the Company
accepted a recourse note payable from an officer of the Company in the amount
of $90,000. This note has an interest rate of 6.08% and is payable on the
earlier of demand by the Company or November 18, 2004.
8. STOCK OPTION PLAN
Options to purchase shares of the Company's common stock have been granted
to employees and directors under the Company's 1997 Stock Incentive Plan (the
"1997 Plan"), which was adopted by the Board of Directors in November 1997. A
maximum of 954,600 shares of common stock may be issued under the amended 1997
Plan. Options are granted for terms of up to ten years and vest over varying
periods, generally 25% on the first anniversary of the grant date and
thereafter in equal quarterly installments over the next three years. The
option price per share is determined by the Board of Directors.
F-17
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
On October 21, 1999, the Company's Board of Directors approved, subject to
shareholder approval, the Company's 1999 Stock Incentive Plan (the "1999
Plan"). Under the 1999 Plan, stock option and restricted stock or other stock-
based awards for up to 944,561 shares of common stock may be issued to
employees, officers, directors, consultants and advisors of the Company.
Stock option activity for the 1997 Plan and 1999 Plan (the "Plans"), since
October 1, 1997 was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
<S> <C> <C>
Outstanding, October 1, 1997.......................... -- $ --
Granted............................................. 352,860 0.18
Exercised........................................... (90,000) 0.18
Canceled............................................ (19,500) 0.18
---------
Outstanding, September 30, 1998....................... 243,360 0.18
Granted............................................. 637,590 0.35
Exercised........................................... (9,045) 0.18
Canceled............................................ (97,044) 0.21
---------
Outstanding, September 30, 1999....................... 774,861 0.32
Granted (unaudited)................................. 431,600 1.22
Exercised (unaudited)............................... (34,311) 0.23
Canceled (unaudited)................................ (34,500) 0.33
---------
Outstanding, December 31, 1999 (unaudited)............ 1,137,650 0.66
========= =====
</TABLE>
As of September 30, 1999 and December 31, 1999, options to purchase 79,966
and 60,577 shares of common stock were exercisable with a weighted-average
exercise price of $0.20 and $0.20, respectively. No options were exercisable at
September 30, 1998. The weighted average fair value of options granted during
the year ended September 30, 1998 was $0.05 per share; all options were granted
with an exercise price equal to fair market value. The weighted average fair
values of options granted during the year ended September 30, 1999 with
exercise prices equal to the fair market value and with exercise prices at
below fair market value were $0.04 (12,750 options) and $2.62 (624,840 options)
per share, respectively. As of September 30, 1999 and December 31, 1999
(unaudited), 80,694 and 373,155 shares were available for future grants under
the Plans.
The following table summarizes the stock options outstanding at December 31,
1999 (unaudited):
<TABLE>
<CAPTION>
Number of Remaining Number of
Exercise Options Contractual Options
Price Outstanding Life (in years) Exercisable
<S> <C> <C> <C>
$0.18 145,710 8.06 58,327
0.33 517,740 9.35 --
0.60 362,900 9.88 2,250
3.00 111,300 10.00 --
--------- ------
1,137,650 60,577
========= ======
</TABLE>
F-18
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
During the year ended September 30, 1999 and the three months ended December
31, 1999 (unaudited), the Company recorded deferred compensation for restricted
stock and stock options granted to employees at prices deemed to be below fair
market value for financial reporting purposes of approximately $1,566,000 and
$3,189,000, respectively. The Company is recognizing the compensation expense
over the vesting period. The Company recognized compensation expense relating
to deferred compensation of approximately $127,000 and $197,000 for the year
ended September 30, 1999 and the three months ended December 31, 1999
(unaudited), respectively.
Had compensation expense for the Company's Plans been determined based on
the fair value at the date of grant for awards made since the Plans' adoption,
consistent with the provisions of SFAS 123, the Company's net loss attributable
to common stockholders and net loss per common share for the years ended
September 30, 1998 and 1999 would have increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1999
-------------------- --------------------
Net Net
Net loss loss Net loss loss
attributable per attributable per
to common common to common common
stockholders share stockholders share
(in thousands, except per share data)
<S> <C> <C> <C> <C>
As reported..................... $(4,199) $(3.28) $(6,053) $(4.57)
Pro forma....................... (4,201) (3.28) (6,066) (4.58)
</TABLE>
For this purpose, the fair value of options at the date of grant were
estimated using the minimum value method with the following assumptions: risk-
free interest rate of 6.0% and 5.5% for 1998 and 1999, respectively; no
dividend yield; no volatility factor; and a weighted-average expected life of
the options of five years. However, because the determination of the fair value
of all options granted after the Company becomes a publicly-traded entity will
include an expected volatility factor, because most options vest over periods
of up to four years and because additional option grants are expected to be
made subsequent to September 30, 1999, the pro forma effects of applying the
fair value method may be materially different in future years.
9. STOCK WARRANTS
During the years ended September 30, 1998 and 1999, the Company issued
warrants to purchase 658,293 and 319,425 shares of common stock, respectively,
in connection with the issuance of a series of subordinated promissory notes.
Each warrant expires ten years from the date of issuance and has an exercise
price of $0.92 per share. The number of shares and the exercise price are
subject to anti-dilution adjustments. In the event that the Company is
obligated to redeem all or any portion of the Preferred Stock, the Company must
concurrently redeem an equivalent portion of these warrants. The fair value of
the warrants on the date of issue of approximately $588,000 and $608,000 for
the warrants issued in fiscal year 1998 and 1999, respectively, was recorded in
additional paid-in capital and interest expense over the estimated life of the
notes.
F-19
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
During the year ended September 30, 1999, the Company entered into
agreements with the holders of the 1998 subordinated promissory notes whereby
the warrants originally issued were reduced from the right to purchase 658,293
shares of common stock to 438,450 shares of common stock. Also, during the year
ended September 30, 1999, the Company issued warrants to purchase 82,500 shares
of common stock to some of the holders of Series C Preferred, in connection
with that financing. Each warrant expires ten years from the date of issuance
and has an exercise price of $0.92 per share. The number of shares and the
exercise price are subject to anti-dilution adjustments. In the event the
Company is obligated to redeem all or any portion of the Preferred Stock, the
Company must concurrently redeem an equivalent portion of these warrants. The
fair value of the warrants of approximately $157,000 was recorded as a discount
on the Series C Preferred and in additional paid-in capital.
Prior to October 1, 1997, the Company issued warrants for the right to
purchase 99,795 shares of common stock. These warrants have exercise prices
which range from $0.18 per share to $1.33 per share and expire at various dates
between August 31, 2002 and February 23, 2003. These warrants, which were
issued in connection with notes payable, were determined to have an aggregate
value of $41,000 on the various dates of grant and were recorded in additional
paid-in capital and interest expense over the life of the related notes
payable.
As of September 30, 1999, the Company had reserved 940,170 shares of common
stock for the exercise of all of the Company's outstanding warrants.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
As of September 30, 1999, the Company had five months remaining on its
corporate headquarters lease. This lease provides for base rent and certain
additional expenses such as utilities and taxes. The Company also leases sales
offices in Virginia and California. These additional office leases expire
during fiscal year 2000. Extensions of sales office leases will be executed as
needed. Rent expense was approximately $18,000, $37,000 and $50,000 for the
years ended September 30, 1997, 1998 and 1999, respectively. As of September
30, 1999, the future noncancelable lease payments on all committed operating
leases were $23,502 for the year ended September 30, 2000.
Capital Leases
The Company leases certain furniture, equipment and software under non-
cancelable capital leases. The lease terms range from 36 to 60 months and have
interest rates of 12% to 15.5%. As of September 30, 1999, the required monthly
installment of principal and interest for all capital leases was approximately
$6,000.
F-20
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under all noncancelable capital leases as of
September 30, 1999 were as follows (in thousands):
<TABLE>
<S> <C>
Year ended September 30,
2000................................................................. $ 74
2001................................................................. 74
2002................................................................. 61
2003................................................................. 13
----
Total payments....................................................... 222
Less amounts representing interest................................... 42
----
Present value of future minimum payments............................. 180
Less amounts due within one year..................................... 48
----
Long-term portion.................................................... $132
====
</TABLE>
Contingencies
As a normal incidence of the nature of the Company's business, various
claims, charges and litigation have been asserted or commenced against the
Company arising from or related to employee relations. Management does not
believe these claims will have a material adverse effect of the financial
position or results of operations of the Company.
11. INCOME TAXES
Due to the loss incurred during fiscal years 1997, 1998 and 1999, the
Company did not record a provision for any federal or state income taxes in
those years. The following is a reconciliation between the amount of the
Company's income taxes utilizing the U.S. federal statutory rate and the
Company's actual provision for income taxes for the years ended September 30,
1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
At U.S. federal statutory rate................. $(393) $(1,428) $(1,781)
State taxes, net of federal effect............. (92) (261) (381)
Research and development credits............... (17) (20) (92)
Non-deductible stock option compensation
charge........................................ -- -- 43
Non-deductible expenses and other charges...... 1 132 (103)
Effect of change in valuation allowance........ 501 1,577 2,314
----- ------- -------
Provision for income taxes..................... $ -- $ -- $ --
===== ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-21
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
purposes. As of September 30, 1998 and 1999, net deferred tax assets consisted
of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Net operating losses.................................... $ 1,795 $ 2,690
Tax credit carryforwards................................ 86 238
Capitalized research and engineering.................... -- 1,227
Temporary differences................................... 298 338
------- -------
Total deferred tax asset................................ 2,179 4,493
Valuation allowance..................................... (2,179) (4,493)
------- -------
Net deferred tax asset.................................. $ -- $ --
======= =======
</TABLE>
A valuation allowance is established if it is more likely than not that all
or a portion of the deferred tax asset will not be realized. Accordingly, as of
September 30, 1998 and 1999, a valuation allowance was recorded for the full
amount of the deferred tax asset due to the uncertainty of their realization.
As of September 30, 1999, the Company had net operating loss carryforwards
for both federal and state income tax purposes of approximately $6.7 million,
which expire at various dates through 2019 and 2004, respectively. The Company
also has available research and development credits for federal and state
income tax purposes of approximately $140,000 and $109,000, respectively, which
expire at various dates through 2014.
12. EMPLOYEE SAVINGS PLAN
The Company sponsors a savings plan for its employees, who meet certain
eligibility requirements, which is designed to be a qualified plan under
section 401(k) of the Internal Revenue Code. Eligible employees are permitted
to contribute to the 401(k) plan through payroll deductions within statutory
and plan limits. The Company does not contribute to the plan.
13. SUBSEQUENT EVENTS
Series D Preferred Stock Offering
On December 20, 1999, the Company issued 3,581,554 shares of Series D
redeemable convertible preferred stock ("Series D Preferred"), for proceeds to
the Company of $25,250,000, prior to any fees or offering costs.
Each share of Series D Preferred is convertible at any time at the option of
the holder into one share of common stock, subject to anti-dilution
adjustments, as defined. Each share of Series D Preferred will automatically be
converted into shares of common stock upon the closing of an initial public
offering of the Company's common stock at a price per share of at least $17.625
and proceeds to the Company of at least $30,000,000.
F-22
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Each share of Series D Preferred entitles the holder to the number of votes
equal to the number of shares of common stock issuable upon conversion. The
Series D Preferred holders have the right to receive cumulative dividends, when
and if declared by the Board of Directors, at a rate of $0.6345 per share per
annum. If the Company pays less than the total amount of dividends then
accrued, such payment will be made first to the holders of Series D Preferred
and Series C Preferred on a pro-rata basis until paid in full before any
payments are made to the holders of Series B Preferred and Series A Preferred.
The Series D Preferred has a liquidation preference of $7.05 per share plus
all declared and unpaid dividends. If the Company distributes less than the
total liquidation preference, such payments will be made first to the holders
of Series D Preferred and Series C Preferred on a pro-rata basis until paid in
full before any payments are made to holders of Series B Preferred and Series A
Preferred. Both the holders Series D Preferred and Series C Preferred
participate ratably, as if converted into shares of common stock, with holders
of common stock up to a maximum of four times their respective purchase price
per share. However, if the amount of net assets to be distributed to common
shareholders is greater than four times the Series D Preferred and Series C
Preferred purchase price, then the holders of Series D Preferred and Series C
Preferred will be liquidated as if converted into shares of common stock.
The Series D Preferred has a redemption provision that is substantially
identical to the Series C Preferred except that the Series D Preferred will be
redeemed prior to the Series C Preferred. The redemption option for all series
of Preferred Stock begins on the fourth anniversary of the Series D Preferred
closing and will extend to the time of a public offering. After the affirmative
election of redemption and payment to all holders of Series D Preferred, the
holders of Series C Preferred, Series B Preferred and Series A Preferred may
elect to redeem all or a portion, but not less than one-third, of their shares.
The Series D Preferred has the same pre-emptive rights as the Series C
Preferred and has anti-dilution protection. In connection with the Series D
Preferred offering, the Company increased the number of authorized shares of
common stock to 16,000,000.
Litigation
On December 29, 1999, a former employee commenced a lawsuit against the
Company, a current officer and director and a former officer and director for
unlawful termination of employment. Although the Company intends to vigorously
defend these claims, an adverse resolution could have a material impact of the
Company's future results of operations.
F-23
<PAGE>
NETWORK ENGINES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Office Leases
During October and November 1999, the Company entered into operating leases
for its new corporate headquarters located in Massachusetts and additional
sales offices located in New York, Virginia and California. The term of the
lease for the corporate headquarters is five years, plus an additional five-
month commitment for temporary office space. The sales offices all have
commitment terms of three months or less. The total noncancelable lease
payments for all new committed operating leases are approximately $3,028,000
over the next five years.
Increase of Authorized Shares of the 1999 Plan
In March 2000, the Company's Board of Directors approved, subject to
shareholder approval, an increase of 1,320,000 in the number of shares
authorized under the 1999 Plan.
Line of Credit
In April 2000, the Company amended its equipment line of credit to provide
for an additional amount of $2,000,000 and to provide a working capital
revolving line of credit of $4,000,000. The additional equipment line amount is
separated into two consecutive six-month borrowing periods for $1,000,000
beginning on the date of amendment. The equipment line amount has an interest
rate of prime plus 1.25%, which is payable monthly. Any outstanding balances at
the end of each of the equipment line borrowing periods will be repaid in 36
equal monthly installments. The working capital line of credit bears interest
at prime plus 1% and matures in April 2001.
F-24
<PAGE>
[The inside back cover includes a picture of a cluster of five of our
WebEngine Roadster products. Above the picture appears the following text:
"Scalable Internet Server Appliances." Below the picture appears our logo.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO OF NETWORKENGINES]
Shares of Common Stock
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette
Dain Rauscher Wessels
Robertson Stephens
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or our affairs have not
changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 2000 (25 days after the date of this prospectus), all dealers
that effect transactions in these shares of common stock may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter in its offering and when selling
previously unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC registration fee................................................ $22,770
NASD filing fee..................................................... 9,125
Nasdaq National Market listing fee..................................
Printing and engraving expenses.....................................
Legal fees and expenses.............................................
Accounting fees and expenses........................................
Blue Sky fees and expenses (including legal fees)...................
Transfer agent and registrar fees and expenses......................
Miscellaneous.......................................................
-------
Total...........................................................
=======
</TABLE>
The Registrant will bear all expenses shown above.
Item 14. Indemnification of Directors and Officers.
The Registrant's Second Amended and Restated Certificate of Incorporation
(the "Restated Certificate") provides that, except to the extent prohibited by
the Delaware General Corporation Law (the "DGCL"), the Registrant's directors
shall not be personally liable to the Registrant or its stockholders for
monetary damages for any breach of fiduciary duty as directors of the
Registrant. Under the DGCL, the directors have a fiduciary duty to the
Registrant which is not eliminated by this provision of the Restated
Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the DGCL
for breach of the director's duty of loyalty to the Registrant, for acts or
omissions which are found by a court of competent jurisdiction to be not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by the DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws. The Registrant has obtained liability
insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL including for an unlawful payment of dividend or
unlawful stock purchase or redemption, or (iv) for any transaction from which
the director derived an
II-1
<PAGE>
improper personal benefit. The DGCL provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors and officers may be entitled under the corporation's by-laws, any
agreement, a vote of stockholders or otherwise. The Restated Certificate
eliminates the personal liability of directors to the fullest extent permitted
by the DGCL and, together with the Registrant's Second Amended and Restated By-
Laws (the "Restated By-Laws"), provides that the Registrant shall fully
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) by reason of the fact that
such person is or was a director or officer of the Registrant, or is or was
serving at the request of the Registrant as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding. Reference is made to the
Registrant's Form of Amended and Restated Certificate of Incorporation and Form
of Amended and Restated By-Laws filed as Exhibits 3.2 and 3.4 hereto,
respectively.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Registrant against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Act"). Reference is made to
the form of Underwriting Agreement to be filed as Exhibit 1.1 hereto.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement, the
Registrant has issued the following securities that were not registered under
the Securities Act as summarized below:
(a) Issuances of Capital Stock:
. On April 9, 1997, we sold to Pioneer Ventures Limited Partnership and
Pioneer Ventures Limited Partnership II an aggregate of 185,250 shares
of series A convertible preferred stock for $1,000,000.
. On January 7, 1998, we sold to Mr. Kirshy 90,000 shares of our common
stock, subject to a stock restriction agreement, for $16,499.97.
. On January 13, 1999, we sold to Pioneer Ventures Limited Partnership and
Pioneer Ventures Limited Partnership II an aggregate of 357,142 shares
of series B convertible preferred stock for $2,749,993.40.
. On January 13, 1999, we sold to existing and new investors an aggregate
of 721,733 shares of series C convertible participating preferred stock
for $5,557,344.10. On June 30, 1999, we sold to existing and new
investors an additional 401,816 shares of series C convertible
participating preferred stock for $3,093,983.20.
. On November 18, 1999, we sold to Mr. Genovesi, Mr. Blaeser and Mr.
Kirshy an aggregate of 255,000 shares of our common stock, subject to
stock restriction agreements, for $153,000.
II-2
<PAGE>
. On December 20, 1999, we sold to existing and new investors an aggregate
of 3,581,554 shares of series D convertible participating preferred
stock for $25,249,955.70.
(b) Issuances of Warrants. On the following dates we issued warrants to
purchase the following number of shares of our common stock at an exercise
price of $0.91667:
. October 16, 1997, 55,575 shares. On December 8, 1998, the number of
shares of common stock underlying these warrants was revised to equal
111,000.
. January 30, 1998, 41,682 shares. On December 8, 1998, the number of
shares of common stock underlying these warrants was revised to equal
83,250.
. May 21, 1998, 11,115 shares. On December 8, 1998, the number of shares
of common stock underlying these warrants was revised to equal 22,200.
. June 4, 1998, 44,460 shares. On December 8, 1998, the number of shares
of common stock underlying these warrants was revised to equal 88,800.
. August 12, 1998, 63,825 shares. On December 8, 1998, the number of
shares of common stock underlying these warrants was revised to equal
127,650.
. September 8, 1998, 2,775 shares. On December 8, 1998, the number of
shares of common stock underlying this warrant was revised to equal
5,550.
. November 2, 1998, 19,425 shares.
. December 8, 1998, 300,000 shares.
. January 13, 1999, 82,500 shares.
(c) Certain Grants and Exercises of Stock Options. The Registrant's 1999
Stock Incentive Plan was approved by the Board of Directors in October 1999,
subject to stockholder approval. As of March 31, 2000, options to purchase
398,840 shares of common stock had been exercised for a consideration of
$38,610 under the Registrant's 1999 Stock Incentive Plan and options to
purchase 1,417,407 shares of common stock were outstanding under the
Registrant's 1999 Stock Incentive Plan.
(d) Certain Issuances of Promissory Notes. On the following dates, the
Registrant issued promissory notes in the following aggregate amounts each at
an interest rate of 10% per year:
. October 16, 1997, $1,000,000.
. January 30, 1998, $750,000.
. May 21, 1998, $200,000.
. June 4, 1998, $800,000.
. August 12, 1998, $1,150,000.
. September 8, 1998, $50,000.
. November 2, 1998, $350,000.
. December 8, 1998, $750,000.
II-3
<PAGE>
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock, Rule 701 of
the Securities Act. All of the foregoing securities are deemed restricted
securities for the purposes of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Description
<C> <S>
*1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the Registrant
*3.2 Form of Second Amended and Restated Certificate of Incorporation of
the Registrant, to be filed upon the closing of this offering
3.3 By-Laws of the Registrant
*3.4 Form of Amended and Restated By-Laws of the Registrant, to be
effective upon the closing of this offering
*4.1 Specimen common stock certificate
4.2 Provisions of the Second Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws of the Registrant
defining the rights of holders of common stock of the Registrant
(included in Exhibits 3.1, 3.2, 3.3 and 3.4)
*5.1 Opinion of Hale and Dorr LLP
10.1 Lease for 15 Dan Road, Canton, Massachusetts
10.2 The Registrant's 1999 Stock Incentive Plan
10.3 Form of Incentive Stock Option Agreement under the Registrant's 1999
Stock Incentive Plan
*10.4 The Registrant's 2000 Employee Stock Purchase Plan
*10.5 The Registrant's 2000 Director Stock Option Plan
10.6 Investor Rights Agreement, dated December 20, 1999, among the
Registrant and certain investors in our preferred stock and warrants
10.7 Voting Trust Agreement, dated October 1, 1995 among Mr. Genovesi and
Ms. Smith, as trustees, and members of their families.
10.8 Restricted Stock Agreement with Lawrence Genovesi, dated November 18,
1999, under the 1999 Stock Incentive Plan
10.9 Restricted Stock Agreement with Dennis Kirshy, dated January 7, 1998,
under the 1997 Stock Incentive Plan
10.10 Restricted Stock Agreement with Dennis Kirshy, dated November 18,
1999, under the 1999 Stock Incentive Plan
10.11 Restricted Stock Agreement with John Blaeser, dated November 18, 1999,
under the 1999 Stock Incentive Plan
*10.12 P6000 Asset Purchase Agreement between the Registrant and Copernicus
Systems, Inc.
10.13 Loan Modification Agreement, dated as of April 5, 2000, between the
Registrant and Silicon Valley Bank
*23.1 Consent of Hale and Dorr LLP (included in Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
24.1 Powers of Attorney (see page II-6)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
27.5 Financial Data Schedule
</TABLE>
- ---------------------
* To be filed by amendment.
(b) Financial Statement:
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the Delaware General
Corporation Law, the Restated Certificate of the registrant, the Underwriting
Agreement, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purpose of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the
Act shall be deemed to be part of this Registration Statement as of the time it
was declared effective.
(2) For purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Randolph, Massachusetts, on this 7th
day of April, 2000.
NETWORK ENGINES, INC.
By /s/ Lawrence A. Genovesi
_____________________________________
Lawrence A. Genovesi
Chairman of the Board, President,
Chief Executive Officer and Chief
Technology Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers, directors and authorized representatives of
Network Engines, Inc. hereby severally constitute and appoint Lawrence A.
Genovesi, Douglas G. Bryant and Philip P. Rossetti, and each of them singly,
our true and lawful attorneys with full power to them, and each of them singly,
with full powers of substitution and resubstitution, to sign for us and in our
names in the capacities indicated below, the Registration Statement on Form S-1
filed herewith and any and all pre-effective and post-effective amendments to
said Registration Statement, and any subsequent Registration Statement for the
same offering which may be filed under Rule 462(b), and generally to do all
such things in our names and on our behalf in our capacities as officers and
directors to enable Network Engines, Inc. to comply with the provisions of the
Securities Act of 1933, as amended, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorneys, or any of them, or their substitute or
substitutes, to said Registration Statement and any and all amendments thereto
or to any subsequent Registration Statement for the same offering which may be
filed under Rule 462(b).
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Lawrence A. Genovesi Chairman of the Board of April 7, 2000
____________________________________ Directors, President, Chief
Lawrence A. Genovesi Executive Officer and Chief
Technology Officer
(Principal Executive Officer)
/s/ Douglas G. Bryant Chief Financial Officer April 7, 2000
____________________________________ (Principal Financial
Douglas G. Bryant Officer)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ John A. Blaeser Director April 7, 2000
____________________________________
John A. Blaeser
/s/ Lawrence Kernan Director April 7, 2000
____________________________________
Lawrence Kernan
/s/ Dennis A. Kirshy Director April 7, 2000
____________________________________
Dennis A. Kirshy
/s/ Frank M. Polestra Director April 7, 2000
____________________________________
Frank M. Polestra
/s/ Michael H. Shanahan Director April 7, 2000
____________________________________
Michael H. Shanahan
/s/ Robert M. Wadsworth Director April 7, 2000
____________________________________
Robert M. Wadsworth
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
<C> <S>
*1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the Registrant
*3.2 Form of Second Amended and Restated Certificate of Incorporation of
the Registrant, to be filed upon the closing of this offering
3.3 By-Laws of the Registrant
*3.4 Form of Amended and Restated By-Laws of the Registrant, to be
effective upon the closing of this offering
*4.1 Specimen common stock certificate
4.2 Provisions of the Second Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws of the Registrant
defining the rights of holders of common stock of the Registrant
(included in Exhibits 3.1, 3.2, 3.3 and 3.4)
*5.1 Opinion of Hale and Dorr LLP
10.1 Lease for 15 Dan Road, Canton, Massachusetts
10.2 The Registrant's 1999 Stock Incentive Plan
10.3 Form of Incentive Stock Option Agreement under the Registrant's 1999
Stock Incentive Plan
*10.4 The Registrant's 2000 Employee Stock Purchase Plan
*10.5 The Registrant's 2000 Director Stock Option Plan
10.6 Investor Rights Agreement, dated December 20, 1999, among the
Registrant and certain investors in our preferred stock and warrants
10.7 Voting Trust Agreement, dated October 1, 1995 among Mr. Genovesi and
Ms. Smith, as trustees, and members of their families.
10.8 Restricted Stock Agreement with Lawrence Genovesi, dated November 18,
1999, under the 1999 Stock Incentive Plan
10.9 Restricted Stock Agreement with Dennis Kirshy, dated January 7, 1998,
under the 1997 Stock Incentive Plan
10.10 Restricted Stock Agreement with Dennis Kirshy, dated November 18,
1999, under the 1999 Stock Incentive Plan
10.11 Restricted Stock Agreement with John Blaeser, dated November 18, 1999,
under the 1999 Stock Incentive Plan
*10.12 P6000 Asset Purchase Agreement between the Registrant and Copernicus
Systems, Inc.
10.13 Loan Modification Agreement, dated as of April 5, 2000, between the
Registrant and Silicon Valley Bank
*23.1 Consent of Hale and Dorr LLP (included in Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney (see page II-6)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
27.5 Financial Data Schedule
</TABLE>
- ---------------------
* To be filed by amendment.
<PAGE>
EX 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
-------------------------------------------------
OF
--
NETWORK ENGINES, INC.
--------------------
Pursuant to Sections 242 and 245
of the General Corporation Law of
the State of Delaware
---------------------
Network Engines, Inc. (the "Corporation"), a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"General Corporation Law"), hereby certifies as follows:
1. The name of the corporation is Network Engines, Inc. The
corporation was originally incorporated on September 17, 1999.
2. This Amended and Restated Certificate of Incorporation was
adopted by unanimous written consent of the Board of Directors in
accordance with Sections 141, 242 and 245 of the General Corporation Law,
the Board of Directors of the Corporation duly adopted and declared
advisable this Amended and Restated Certificate of Incorporation, which
restates and integrates and further amends the Certificate of
Incorporation of the Corporation. This Amended and Restated Certificate of
Incorporation was then approved by written consent of the stockholders of
the Corporation given in accordance with the provisions of Sections 228,
242 and 245 of the General Corporation Law (prompt notice of such action
having been given to those stockholders who did not consent in writing).
The resolution setting forth this Amended and Restated Certificate of
Incorporation is as follows:
RESOLVED: That the Certificate of Incorporation of the Corporation, as
- --------
amended, be and hereby is amended and restated in its entirety so
that the same shall read as follows:
FIRST: The name of the Corporation is:
Network Engines, Inc.
SECOND: The address of its registered office in the State of Delaware is
Corporation Trust Center, 120 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted
by the Corporation is as follows:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
<PAGE>
-2-
FOURTH:
The authorized capital stock of Network Engines, Inc., a Delaware
corporation (the "Corporation") consists of:
-----------
16,000,000 shares of Common Stock, $0.01 par value per share ("Common
------
Stock");
-----
185,250 shares of Series A Convertible Preferred Stock, $0.01 par
value per share ("Series A Preferred Stock");
------------------------
357,142 shares of Series B Convertible Preferred Stock, $0.01 par
value per share ("Series B Preferred Stock"); and
------------------------
1,123,549 shares of Series C Convertible Participating Preferred Stock,
$0.01 par value per share ("Series C Preferred Stock").
------------------------
3,591,554 shares of Series D Convertible Participating Preferred Stock,
$0.01 par value per share ("Series D Preferred Stock").
------------------------
The following is a statement of the respective preferences, voting powers,
qualifications, and special or relative rights and privileges of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock (collectively, "Preferred Stock"), and Common Stock.
---------------
For purposes of this Article FOURTH:
"Original Issuance Date" means the date such shares of Series A Preferred
----------------------
Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock, as the case may be, were first issued, whether by the Corporation or the
Corporation's predecessor, a Massachusetts corporation by the same name (the
"Predecessor").
"Majority Series A Holders" means, collectively, the record holders of at
-------------------------
least two-thirds of the shares of Common Stock issued or issuable upon
conversion of the shares of Series A Preferred.
"Majority Series B Holders" means, collectively, the record holders of at
-------------------------
least two-thirds of the shares of Common Stock issued or issuable upon
conversion of the shares of Series B Preferred.
"Majority Series C Holders" means, collectively, the record holders of at
-------------------------
least two-thirds of the shares of Common Stock issued or issuable upon
conversion of the shares of Series C Preferred.
<PAGE>
-3-
"Majority Series D Holders" means, collectively, the record holders of at
-------------------------
least two-thirds of the shares of Common Stock issued or issuable upon
conversion of the shares of Series D Preferred.
SECTION 1. Dividends.
(a) Dividend Accruals and Payments. The holders of shares of Preferred
Stock will be entitled to receive, if, as, and when declared by the
Corporation's board of directors (the "Board of Directors"), cumulative
dividends at the annual rate of (i) $0.4318491 per share of Series A Preferred
Stock (the "Accruing Series A Dividend"), (ii) $0.693 per share of Series B
Preferred Stock, (iii) $0.693 per share of Series C Preferred Stock and (iv)
$0.6345 per share of Series D Preferred Stock (each such dividend amount to be
subject to proportionate adjustment in the event of any stock dividend, stock
split, combination of shares, reorganization, recapitalization, reclassification
or other similar event affecting the relevant series of Preferred Stock and
occurring after the Original Issuance Date), in each case payable in preference
and priority to any payment of any dividend on any other class or series of
capital stock ranking junior to the relevant series of Preferred Stock,
including without limitation Common Stock. Such dividends will accrue on a daily
basis commencing with the Original Issuance Date (regardless of subsequent
transfers) of each share of Preferred Stock (which, with respect to shares
issued in connection with the merger of the Corporation and the Predecessor,
shall be the date that such shares were originally issued by the Predecessor)
whether or not declared.
No dividend or other distribution (other than a stock dividend
giving rise to an adjustment under Section 4(e) hereof and made in accordance
with the provisions of Section 6 hereof) will be paid, declared, or set apart
for payment in respect of any share of Common Stock unless a dividend is paid or
declared and set apart for payment in respect of each outstanding share of
Preferred Stock in an amount at least equal to the sum of (i) the amount of any
unpaid dividends accrued with respect to such share of Preferred Stock pursuant
to the above provisions of this Section 1 (a), plus (ii) the product of (A) the
amount of dividends so paid, declared, or set apart for each share of Common
Stock, multiplied by (B) the number of shares of Common Stock into which such
share of Preferred Stock is then convertible pursuant to Section 4(a) hereof. In
the event of the conversion of any shares of Preferred Stock into shares of
Common Stock pursuant to Section 4 hereof, all accrued and unpaid dividends on
such shares of Preferred Stock will be canceled and no dividends will be payable
in respect of such shares of Preferred Stock.
(b) Ratable Allocation of Dividends. If at any time the Corporation pays
less than the total amount of dividends then accrued but unpaid in respect of an
outstanding shares of Preferred Stock, such payment will be distributed ratably:
(i) first, on a pari passu basis among the holders of shares of
Series D Preferred Stock and Series C Preferred Stock pro rata in
proportion to the aggregate accrued but unpaid dividend on the shares of
Series D Preferred Stock and/or Series C Preferred Stock held by each such
holder; and then
(ii) after (and only after) full payment of all amounts payable to
the holders of Series D Preferred Stock and Series C Preferred Stock,
respectively, in respect of
<PAGE>
-4-
dividends, among the holders of shares of Series B Preferred Stock pro
rata in proportion to the aggregate accrued but unpaid dividends on the
shares of Series B Preferred Stock held by each such holder; and then
(iii) after (and only after) full payment of all amounts payable to
the holders of Series D Preferred Stock, Series C Preferred Stock and
Series B Preferred Stock, respectively, in respect of dividends, among the
holders of shares of Series A Preferred Stock pro rata in proportion to
the aggregate accrued but unpaid dividends on the shares of Series A
Preferred Stock held by each such holder,
SECTION 2. Liquidation, Dissolution, or Winding-Up.
(a) Distributions to Holders of Preferred Stock and Common Stock. Subject
to the final paragraph of this Section 2(a), in the event of any liquidation,
dissolution, or winding-up of the Corporation, whether voluntary or involuntary
the holders of outstanding shares of Preferred Stock will be entitled to be paid
out of the assets of the Corporation available for distribution to shareholders:
(i) Before any payment is made to or set aside for the holders of
shares of any other class or series of capital stock, including without
limitation Series A Preferred Stock, Series B Preferred Stock, and Common
Stock,
(A) an amount per share of Series D Preferred Stock (with
respect to Series D Preferred Stock, its "Liquidation Value") equal
-----------------
to the sum of (x) $7.05 (such amount to be subject to proportionate
adjustment in the event of any stock dividend, stock split,
combination of shares, reorganization, recapitalization,
reclassification or other similar event affecting the Series D
Preferred Stock and occurring after the Original Issuance Date),
plus (y) an amount equal to the aggregate of all dividends accrued
but unpaid in respect of such share of Series D Preferred Stock; and
(B) an amount per share of Series C Preferred Stock (with
respect to Series C Preferred Stock, its "Liquidation Value") equal
-----------------
to the sum of (x) $7.70 (such amount to be subject to proportionate
adjustment in the event of any stock dividend, stock split,
combination of shares, reorganization, recapitalization,
reclassification or other similar event affecting the Series C
Preferred Stock and occurring after the Original Issuance Date),
plus (y) an amount equal to the aggregate of all dividends accrued
but unpaid in respect of such share of Series C Preferred Stock;
provided, that such amount equal to aggregate accrued but unpaid
dividends, in the case of Series D Preferred Stock and Series C Preferred
Stock, will only be payable to the extent of the Corporation's earnings
available for the payment of dividends.
(ii) Subject to the prior and superior rights of the holders of
Series D Preferred Stock and Series C Preferred Stock, before any payment
is made to or set aside for the
<PAGE>
-5-
holders of Series A Preferred Stock or Common Stock, an amount per share
of Series B Preferred Stock (with respect to Series B Preferred Stock, its
"Liquidation Value") equal to the sum of (A) $7.70 (such amount to be
-----------------
subject to proportionate adjustment in the event of any stock dividend,
stock split, combination of shares, reorganization, recapitalization,
reclassification or other similar event affecting the Series B Preferred
Stock and occurring after the Original Issuance Date), plus (B) an amount
equal to the aggregate of all dividends accrued but unpaid in respect of
such share of Series B Preferred Stock; provided, that such amount equal
to aggregate accrued but unpaid dividends will only be payable to the
extent of the Corporation's earnings available for the payment of
dividends.
(iii) Subject to the prior and superior rights of the holders of
Series D Preferred Stock, Series C Preferred Stock and Series B Preferred
Stock, before any payment is made to or set aside for the holders of
Common Stock, an amount per share of Series A Preferred Stock (with
respect to Series A Preferred Stock, its "Liquidation Value") equal to the
-----------------
sum of (A) $5.39811 (such amount to be subject to proportionate adjustment
in the event of any stock dividend, stock split, combination of shares,
reorganization, recapitalization, reclassification or other similar event
affecting the Series A Preferred Stock and occurring after the Original
Issuance Date), plus (B) an amount equal to the aggregate of all Accruing
Series A Dividends accrued but unpaid in respect of such share of Series A
Preferred Stock; provided, that such amount equal to aggregate Accruing
Series A Dividends will only be payable to the extent of the Corporation's
earnings available for the payment of dividends.
If upon any liquidation, dissolution, or winding-up of the
Corporation, the assets lawfully available to be distributed to the holders of
Preferred Stock under the foregoing provisions are insufficient to permit
payment to such stockholders of their full respective preferential amounts, then
all of the assets of the Corporation lawfully available for distribution will be
distributed among the holders of shares of Preferred Stock in accordance with
the relative priorities set forth above (i.e., first ratably to the holders of
shares of Series D Preferred Stock and Series C Preferred Stock, on a pari passu
basis, in proportion to the relative Liquidation Values of Series D Preferred
Stock and Series C Preferred Stock, until such holders have received the entire
amount to which they are entitled in respect of such shares, then to the holders
of shares of Series B Preferred Stock until such holders have received the
entire amount to which they are entitled in respect of such shares, and then to
the holders of shares of Series A Preferred Stock until such holders have
received the entire amount to which they are entitled in respect of such
shares).
After (and only after) all payments owing to the holders of
Preferred Stock as described above have been made in full, any assets remaining
available for distribution will be distributed ratably among the holders of
shares of Common Stock, Series D Preferred Stock and Series C Preferred Stock
(for this Purpose, treating each share of Series D Preferred Stock and Series C
Preferred Stock as though it were the number of shares of Common Stock into
which each of Series D Preferred Stock and Series C Preferred Stock is then
convertible pursuant to Section 4 hereof); provided that, in no event shall the
ratable distribution among the holders of
<PAGE>
-6-
Common Stock, Series D Preferred Stock and Series C Preferred Stock result in
the holders of Series D Preferred Stock and Series C Preferred Stock receiving
an amount (respectively, as to Series D Preferred Stock and Series C Preferred
Stock, their "Maximum Participating Payment") in excess of (A) $7.05 and $7.70,
-----------------------------
respectively (such amounts to be subject to proportionate adjustment in the
event of any stock dividend, stock split, combination of shares, reorganization,
recapitalization, reclassification or other similar event affecting the Series D
Preferred Stock or Series C Preferred Stock and occurring, respectively, after
the Original Issuance Date), multiplied by (B) four.
(b) Deemed Liquidations. A consolidation or merger of the Corporation with
or into any other person(s) or entity(-ies) (other than a wholly owned
subsidiary of the Corporation) or a sale (whether in a single transaction or a
series of related transactions) of all or substantially all of the assets of the
Corporation, or other similar transaction, will be regarded as a liquidation,
dissolution, or winding-up of the affairs of the Corporation within the meaning
of this Section 2: provided, however, that each holder of Preferred Stock will
have the right to elect the benefits of the provisions of Section 4(a) hereof in
lieu of receiving payment in liquidation, dissolution, or winding-up of the
Corporation pursuant to this Section 2; and provided, further, that if the
holders of more than two-thirds of the outstanding shares of any series of
Preferred Stock elect to avail themselves, or to forgo, the benefits of Section
4(a) hereof, such holders may require that the other holders of shares of such
series of Preferred Stock will be bound by the same election, and such other
holders will be so bound. For purposes of the Certificate of Incorporation,
references to "substantially all of the assets of the Corporation" (or similar
--------------------------------------------------
expressions) mean the sale or other disposition, other than in the ordinary
course of business of more than 50% of such assets, as determined by reference
to the fair market value of such assets.
(c) Non-Cash Distributions. In the event of a liquidation, dissolution, or
winding-up of the Corporation resulting in the availability of assets other than
cash for distribution to the holders of shares of Preferred Stock, the holders
of Preferred Stock will be entitled to a distribution of cash and/or other
assets equal in value to the liquidation preference and other distribution
rights stated in Section 2(a). In the event that such distribution to the
holders of shares of Preferred Stock will include any assets other than cash,
the Board of Directors will first determine in good faith and with due care the
value of such assets for such purpose, and will notify all holders of shares of
Preferred Stock of such determination. The value of such assets for purposes of
the distribution under this Section 2(c) will be the value as so determined by
the Board of Directors, unless the holders of at least a majority of the
outstanding shares of any series of Preferred Stock object thereto in writing
within 15 days after the date of such notice.
(d) Dispute Resolution Procedures. In the event of such objection, the
valuation of such assets for purposes of a distribution, as a result of a
liquidation, dissolution, or winding-up pursuant to this Section 2, will be
determined by an arbitrator selected by the objecting stockholders and the Board
of Directors, or in the event a single arbitrator cannot be agreed upon within
10 days after the written objection sent by the objecting stockholders in
accordance with the previous sentence, the valuation of such assets will be
determined by arbitration in which (i) the objecting stockholders will name in
their notice of objection one arbitrator, (ii) the Board of Directors will name
a second arbitrator within 15 days from the receipt of such notice, (iii) the
<PAGE>
-7-
two arbitrators thus selected will select a third arbitrator within 15 days
thereafter, and (iv) the three arbitrators thus selected will determine the
valuation of such assets within 15 days thereafter for purposes of such
distribution by majority vote. In the event the third arbitrator is not selected
as provided herein, then such arbitrator will be selected by the President of
the American Arbitration Association ("AAA"). The costs of such arbitration will
be borne by the Corporation or by the holders of Preferred Stock (on a pro rata
basis out of the assets otherwise distributable to them) as follows: (i) If the
valuation as determined by the arbitrators is greater than 90% of the valuation
as determined by the Board of Directors, the holders of Preferred Stock will pay
the costs of the arbitration, and (ii) otherwise, the Corporation will bear the
costs of the arbitration. The arbitration will be held in Boston, Massachusetts
in accordance with the rules of the AAA. The award made by the arbitrators will
be binding upon the Corporation and the holders of Preferred Stock, no appeal
may be taken from such award, and judgment thereon may be entered in any court
of competent jurisdiction.
SECTION 3. Voting Rights. Except as otherwise expressly provided herein or
as required by applicable law, the holder of each share of Preferred Stock will
be entitled to vote on all matters submitted to a vote or consent of
stockholders. Each share of Preferred Stock will entitle the holder thereof to
such number of votes per share as will equal the number of shares of Common
Stock into which such share of Preferred Stock is convertible pursuant to
Section 4(a) hereof as of the record date for the determination of stockholders
entitled to vote on such matter, or if no record date is established, at the
date such vote is taken or any written consent of stockholders is solicited.
Except as otherwise provided herein or required by applicable law, the holders
of shares of Preferred Stock and Common Stock, respectively, will vote together
as a single class on all matters submitted to a vote or consent of stockholders.
SECTION 4. Conversion. Shares of Preferred Stock will be subject to
conversion into shares of Common Stock or other securities, properties, or
rights, as set forth in this Section 4.
(a) Holders' Option to Convert.
(i) Subject to and in compliance with the provisions of this Section
4, any shares of Preferred Stock may, at any time or from time to time at
the option of the holder, be converted into fully paid and non-assessable
shares of Common Stock. The number of shares of Common Stock to which a
holder of Preferred Stock will be entitled upon such .conversion will be
the product obtained by multiplying the number of shares of Preferred
Stock being converted by the Applicable Conversion Rate for the relevant
series of Preferred Stock (determined as provided in Section 4(c) hereof).
(ii) To exercise conversion rights under this Section 4(a), a holder
of Preferred Stock to be so converted will surrender the certificate or
certificates representing the shares being converted to the Corporation at
its principal office, and will give written notice to the Corporation at
that office that such holder elects to convert such shares. Such notice
will also state the name or names (with address or addresses) in which the
certificate or certificates for shares of Common Stock issuable upon such
conversion will be issued. The certificate or certificates for shares of
Preferred Stock surrendered for
<PAGE>
-8-
conversion will be accompanied by evidence of proper assignment thereof to
the Corporation. The date when such written notice is received by the
Corporation together with the certificate or certificates representing the
shares of Preferred Stock being converted, will be the "Conversion Date."
---------------
As promptly as practicable after the Conversion Date, the Corporation will
issue and will deliver to the holder of the shares of Preferred Stock
being converted, a certificate or certificates in such denominations as
such holder may request in writing for the number of full shares of Common
Stock issuable upon the conversion of such shares of Preferred Stock in
accordance with the provisions of this Section 4, plus cash as provided in
Section 4(j) below in respect of any fraction of a share of Common Stock
issuable upon such conversion. Such conversion will be deemed to have been
effected immediately prior to the close of business on the Conversion
Date, and at such time the rights of the holder as holder of the converted
shares of Preferred Stock will cease and the person or persons in whose
name or names any certificate or certificates for shares of Common Stock
will be issuable upon such conversion will be deemed to have become the
holder or holders of record of shares of Common Stock represented thereby.
(b) Automatic Conversion.
(i) Upon Qualified Public Offering or Required Conversion. Each
share of Preferred Stock outstanding will be converted into the number of
fully paid and non-assessable shares of Common Stock into which such share
is then convertible pursuant to Section 4(a) hereof, automatically and
without further action:
(A) in the case of the Series B Preferred Stock and the Series
C Preferred Stock only, immediately upon the closing of a "Qualified
Public Offering." "Qualified Public Offering" means a
firm-commitment underwritten public offering of shares of Common
Stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), at a
per-share price to the public not less than 300% of the then
"Applicable Conversion Value", of the Series C Preferred Stock
pursuant to Sections 4(e), 4(f), 4(g) or 4(h) hereof, resulting in
gross proceeds to the Corporation of at least $30,000,000 (before
underwriting discounts and commissions and offering expenses),.
(B) in the case of the Series A Preferred Stock only,
immediately upon the closing of a firm commitment underwritten
public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and
sale of Common Stock for the account of the Corporation to the
public at an initial public offering price per share of not less
than $16.19 (subject to proportionate adjustment in the event of any
stock split, stock dividend, combination or reclassification of
shares, or other similar event, in each event affecting the Common
Stock and occurring after the Original Date of Issuance of the
Series A Preferred Stock) and with net proceeds to the Corporation
of not less than $10,000,000;
<PAGE>
-9-
(C) in the case of Series A Preferred Stock and/or Series B
Preferred Stock only, at the "Required Conversion Time" (as defined
below); and
(D) in the case of Series D Preferred Stock only, immediately
upon the closing of a firm commitment underwritten public offering
pursuant to in effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock
for the account of the Corporation to the public at an initial
public offering price per share of not less than $17.625 (subject to
proportionate adjustment in the event of any stock split, stock
dividend, combination or reclassification of shares, or other
similar event, in each event affecting the Common Stock and
occurring after the Original Date of Issuance of the Series D
Preferred Stock) and with net proceeds to the Corporation of not
less than $30,000,000.
(ii) Required Conversion. In the event that the Corporation receives
the written request (the "Required Conversion Request") executed by the
---------------------------
holders of at least 75% of the then outstanding shares of Series A
Preferred Stock or Series B Preferred Stock that requests that all
outstanding shares of such applicable series of Preferred Stock be
converted into Common Stock at a specified time on a specified date, which
time and date may be determined by the occurrence of certain events
specified in the Required Conversion Request (the "Required Conversion
-------------------
Time"), provided such Required Conversion Tune is no later than sixty days
----
after the date of the Required Conversion Request, then the Corporation
within seven days of receipt of the Required Conversion Request will send
notice to all holders of the applicable series of Preferred Stock advising
them of receipt of the Required Conversion Request and all shares of such
applicable series of Preferred Stock outstanding at the Required
Conversion Time will automatically be converted into shares of Common
Stock at the Required Conversion Time.
(iii) Procedures upon Automatic Conversion. Upon any automatic
conversion of any shares of Preferred Stock into shares of Common Stock
pursuant to this Section 4(b), the holders of such converted shares will
surrender the certificates formerly representing such shares at the office
of the Corporation or of any transfer agent for Common Stock. Thereupon,
there will be issued and delivered to each such holder, promptly at such
office and in his name as shown on such surrendered certificate or
certificates, a certificate or certificates for the number of shares of
Common Stock into which such shares of Preferred Stock were so converted
and cash as provided in Section 4(j) below in respect of any fraction of a
share of Common Stock issuable upon such conversion. The Corporation will
not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such conversion unless and until certificates formerly
evidencing the converted shares of Preferred Stock are either delivered to
the Corporation or its transfer agent, as hereinafter provided, or the
holder thereof notifies the, Corporation or such transfer agent that such
certificates have been lost, stolen, or destroyed and executes and
delivers an agreement to indemnify the Corporation from any loss incurred
by it in connection therewith.
<PAGE>
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(c) Applicable Conversion Rate.
The conversion rate in effect at any time in respect of the Series A
Preferred Stock (the "Applicable Conversion Rate" for such series of Preferred
--------------------------
Stock) will equal the quotient obtained by dividing (i) $5.39811, by (ii) the
Applicable Conversion Value of the Series A Preferred Stock, calculated as
hereinafter provided.
The conversion rate in effect at any time in respect of the Series B
Preferred Stock (the "Applicable Conversion Rate" for such series of Preferred
--------------------------
Stock) will equal the quotient obtained by dividing (i) $7.70, by (ii) the
Applicable Conversion Value of the Series B Preferred Stock, calculated as
hereinafter provided.
The conversion rate in effect at any time in respect of the Series C
Preferred Stock (the "Applicable Conversion Rate" for such series of Preferred
--------------------------
Stock) will equal the quotient obtained by dividing (i) $7.70, by (ii) the
Applicable Conversion Value of the Series C Preferred Stock, calculated as
hereinafter provided.
The conversion rate in effect at any time in respect of the Series D
Preferred Stock (the "Applicable Conversion Rate" for such series of Preferred
--------------------------
Stock) will equal the quotient obtained by dividing (i) $7.05, by (ii) the
Applicable Conversion Value of the Series D Preferred Stock, calculated as
hereinafter provided.
(d) Applicable Conversion Value. The Applicable Conversion Value in effect
on the Original Issuance Date of the Series D Preferred Stock, and until first
adjusted in accordance with Section 4(e) or 4(f) hereof, will be (i) in the case
of the Series A Preferred Stock, $1.79937, (ii) in the case of the Series B
Preferred Stock, $2.5666667, (iii) in the case of the Series C Preferred Stock,
$2.5666667, and (iv) in the case of the Series D Preferred Stock, $7.05.
(e) Adjustments for Extraordinary Common Stock Events. Upon the happening
of an "Extraordinary Common Stock Event" (as defined in Section 4(m) hereof),
automatically and without further action, and simultaneously with the happening
of such Extraordinary Common Stock Event, the Applicable Conversion Value for
each series of Preferred Stock will be adjusted by multiplying the then
effective Applicable Conversion Value for such series of Preferred Stock by a
fraction, the numerator of which will be the number of shares of Common Stock
outstanding (excluding treasury stock) immediately before such Extraordinary
Common Stock Event and the denominator of which will be the number of shares of
Common Stock outstanding (excluding treasury stock) immediately after such
Extraordinary Common Stock Event, and the product so obtained will thereafter be
the Applicable Conversion Value for such series of Preferred Stock. The
Applicable Conversion Value for such series of Preferred Stock, as so adjusted,
will be readjusted in the same manner upon the happening of any successive
Extraordinary Common Stock Event or Events.
(f) Adjustments for Diluting Issues.
(i) There shall be the following adjustments in the event of each
and every dilutive issuance (as described below), except for "Excluded
Issuances" (as defined below
<PAGE>
-11-
in this Section 4(f)(i)), and except with respect to an Extraordinary
Common Stock Event, adjustments in respect of which are provided for in
Section 4(e):
(A) in the case of Series D Preferred Stock, if the
Corporation shall, at any time after the Original Issuance Date of
the Series D Preferred Stock, issue any additional shares of Common
Stock without consideration or for a consideration per share (x)
less than the Applicable Conversion Value for the Series D Preferred
Stock then in effect on the date of and immediately prior to such
issue, but (y) greater than or equal to $2.5666667 (such amount to
be subject to proportionate adjustment in the event of any stock
dividend, stock split, combination of shares, reorganization,
recapitalization, reclassification or other similar event affecting
the Series C Preferred Stock and occurring after the Original
Issuance Date of the Series D Preferred Stock) (as so adjusted from
time to time, the "Maximum Full Ratchet Value"), then, and in such
--------------------------
event, such Applicable Conversion Price shall be reduced,
concurrently with such issue, to the consideration per share
received by the Corporation for such new issue of shares of Common
Stock; and
(B) if at any time while there are any shares of Preferred
Stock outstanding, the Corporation issued or issues any additional
shares of Common Stock at a price per share less than the Applicable
Conversion Value in respect of any series of Preferred Stock (or, in
the case of Series D Preferred Stock, at a price per share less than
the Maximum Full Ratchet Value) as in effect immediately prior to
such issuance or sale, then in each such case such Applicable
Conversion Value will be adjusted to equal the result of the
following formula:
New Applicable
Conversion Value = (P1 x Q1) + (P2 x Q2)
---------------------
(Ql + Q2)
where:
P1 = the Applicable Conversion Value in effect for the
relevant series of Preferred Stock immediately prior to
such issuance of additional shares of Common Stock;
provided that, in the event of the first dilutive
issuance under this Section 4(f)(i)(B), the Applicable
Conversion Value for shares of Series D Preferred Stock
shall be the Maximum Full Ratchet Value, and thereafter
it shall be the Applicable Conversion Value as otherwise
provided in this 4(f)(i)(B));
Q1 = the aggregate number of shares of Common Stock
outstanding (including shares of Common Stock issuable
upon exercise, conversion, and/or exchange of all
outstanding shares of Preferred Stock and other
"Derivative Securities" (as defined in
<PAGE>
-12-
Section 4(n) hereof)) immediately prior to such issuance
of additional shares of Common Stock;
P2 = the average price per share received by the
Corporation for the shares deemed issued in respect of
such issuance of additional shares of Common Stock; and
Q2 = the number of shares of Common Stock deemed issued
in respect of such issuance of additional shares of
Common Stock.
Notwithstanding any other provision hereof, none of the
following issuances (the "Excluded Issuances") will be deemed issuances of
------------------
additional shares of Common Stock for purposes of this Section 4(f):
(A) the issuance of Common Stock issued as a stock
dividend to holders of Common Stock or upon any subdivision or
combination of shares of Common Stock;
(B) the issuance of any shares of Common Stock upon
conversion of shares of convertible preferred stock;
(C) the issuance of Common Stock upon exercise,
conversion or exchange of stock or other securities
(outstanding on the Original Issuance Date of the Series D
Preferred Stock) convertible or exchangeable for shares of
Common Stock, including, without limitation, options, warrants
and other rights to acquire shares of Common Stock or
securities convertible into or exchangeable for shares of
Common Stock;
(D) the issuance, at any time after the Original
Issuance Date of the Series D Preferred Stock, of up to
1,613,411 shares of Common Stock or such greater number as is
approved by vote of not less than a majority of the
non-employee directors of the Company, or the grant of
options, restricted stock or other stock-based awards
therefor, including shares issued upon exercise of options
outstanding the Original Issuance Date of the Series D
Preferred Stock (such amount to be subject to proportionate
adjustment in the event of any stock dividend, stock split,
combination of shares, reorganization, recapitalization,
reclassification or other similar event affecting such shares
and occurring after the Original Issuance Date of the Series D
Preferred Stock) to officers, directors, consultants and
employees of the Company or any subsidiary pursuant to any
plan, agreement or arrangement approved by a vote of not less
than a majority of the Board of Directors of the Company (it
being understood that any shares subject to options that
expire or terminate unexercised or shares that are repurchased
pursuant to a restricted stock agreement shall not count
towards the maximum number set forth above;
<PAGE>
-13-
(E) any issuance of securities to a bank or other
institution providing debt financing to the Company, if such
issuance is approved by the Board of Directors of the Company,
including the affirmative vote or consent of one director
nominated by the Majority Series A Holders, one director
nominated by the Majority Series C Holders and one director
nominated by the Majority Series D Holders;
(F) securities issued solely in consideration for the
acquisition (whether by merger or otherwise) by the Company or
any of its subsidiaries of all or substantially all of the
stock or assets of any other entity;
(G) any other issuance of securities solely for non-cash
consideration, if such issuance is approved by the Board of
Directors of the Company, including the affirmative vote or
consent of one director nominated by the Majority Series A
Holders, one director nominated by the Majority Series C
Holders and one director nominated by the Majority Series D
Holders, and such vote or consent makes specific reference to
the waiver of any preemptive rights of the holders of
Preferred Stock; or
(H) shares of Common Stock sold by the Company in an
underwritten public offering pursuant to an effective
registration statement under the Securities Act.
For purposes of this Section 4(f), if a part or all of the
consideration received by the Corporation in connection with the issuance of
shares of Common Stock or the issuance of any of the securities described below
in paragraph (ii) of this Section 4(f) consists of property other than cash,
such consideration will be deemed to have the same value as is recorded on the
books of the Corporation with respect to receipt of such property so long as
such recorded value was determined reasonably and in good faith and with due
care by the Board of Directors of the Corporation, and will otherwise be deemed
to have a value equal to its fair market value.
(ii) For purposes of this Section 4(f), the issuance of any
Derivative Securities, except for the Excluded Issuances, will be deemed
an issuance of shares of Common Stock if the "Net Consideration Per Share"
(as defined in Section 4(f)(ii)(A) and (B) hereof) that may be received by
the Corporation for such Common Stock is less than an Applicable
Conversion Value at the time of such issuance, and except as hereinafter
provided, an adjustment in such Applicable Conversion Value will be made
upon each such issuance in the manner provided in Section 4(f)(i) as if
such Common Stock were issued for such Net Consideration Per Share. No
adjustment of any Applicable Conversion Value will be made under this
Section 4(f) upon the issuance of any additional shares of Common Stock
that are issued upon the exercise, conversion, or exchange of any
Derivative Securities if any such adjustment was previously made upon the
issuance of such Derivative Securities. Any adjustment of an Applicable
Conversion Value with respect to this Section 4(f)(ii) will be disregarded
if, as, and to the extent that the Derivative Securities that gave rise to
such adjustment expire or are canceled without having been exercised, so
that such Applicable Conversion Value effective immediately
<PAGE>
-14-
upon such cancellation or expiration will be equal to the Applicable
Conversion Value for the relevant series of Preferred Stock that otherwise
would have been in effect immediately prior to the time of the issuance of
the expired or canceled Derivative Securities, with such additional
adjustments as subsequently would have been made to such Applicable
Conversion Value had the expired or canceled Derivative Securities not
been issued. In the event that the terms of any Derivative Securities
previously issued by the Corporation are changed (whether by their terms
or for any other reason) so as to lower the Net Consideration Per Share
payable with respect thereto (whether or not the issuance of such
Derivative Securities originally gave rise to an adjustment of the
Applicable Conversion Value), each Applicable Conversion Value will be
recomputed as of the date of such change, so that each Applicable
Conversion Value effective immediately upon such change will be equal to
the Applicable Conversion Value for the relevant series of Preferred Stock
in effect at the time of the issuance of the Derivative Securities subject
to such change, adjusted for the issuance thereof in accordance with the
terms thereof after giving effect to such change, and with such additional
adjustments as subsequently would have been made to such Applicable
Conversion Value had the Derivative Securities been issued on such changed
terms. Notwithstanding the foregoing, no readjustment shall he made if
such readjustment would have the effect of increasing the Applicable
Conversion Value to an amount that exceeds the lower of (i) the Applicable
Conversion Value on the original adjustment date or (ii) the Applicable
Conversion Value that would have resulted from any issuance of shares of
Common Stock or Derivative Securities between the original adjustment date
and such later adjustment date. For purposes of this Section 4(f)(ii), the
Net Consideration Per Share that may be received by the Corporation will
be determined as follows:
(A) "Net Consideration Per Share" means the amount equal to
---------------------------
the total amount of consideration, if any, received by the
Corporation for the issuance of such Derivative Securities, plus the
minimum amount of additional consideration, if any, payable to the
Corporation upon exercise, conversion, and/or exchange thereof for
shares of Common Stock, divided by the maximum number of shares of
Common Stock that would be issued if all such Derivative Securities
were exercised or converted at such Net Consideration Per Share.
(B) The Net Consideration Per Share that may be received by
the Corporation will be determined in each instance as of the date
of issuance of Derivative Securities without giving effect to any
possible future price adjustments or rate adjustments that may be
applicable with respect to such Derivative Securities and which are
contingent upon future events; provided, that in the case of an
adjustment to be made as a result of a change in terms of such
Derivative Securities, the Net Consideration Per Share will be
determined as of the date of such change.
(g) Adjustments for Reclassifications. If the Common Stock issuable upon
the conversion of Preferred Stock is changed into the same or a different number
of shares of any class(es) or series of stock, whether by reclassification or
otherwise (other than an Extraordinary
<PAGE>
-15-
Common Stock Event or a reorganization, merger, consolidation, or sale of assets
provided for elsewhere in this Section 4), then and in each such event the
holder of each share of Preferred Stock will have the right thereafter to
convert such share into the kind and amount of shares of stock and other
securities and property receivable upon such reorganization, reclassification,
or other change by holders of the number of shares of Common Stock into which
such shares of Preferred Stock might have been converted immediately prior to
such reclassification or change, all subject to further adjustment as provided
herein.
(h) Adjustments for Reorganizations. If at any time or from time to time
there is a capital reorganization of Common Stock (other than a subdivision,
combination of shares, reclassification, or exchange of shares provided for
elsewhere in this Section 4) or a merger or consolidation of the Corporation
with or into another company, or the sale of all or substantially all of the
Corporation's assets to any other person, then, as a part of and as a condition
to the effectiveness of such reorganization, merger, consolidation, or sale,
lawful and adequate provision will be made so that if the Corporation is not the
surviving corporation, each share of Preferred Stock will be converted into a
share of capital stock of the surviving corporation having equivalent
preferences, rights, and privileges, except that in lieu of being able to
convert into shares of Common Stock of the Corporation or the successor
corporation, the holders of shares of Preferred Stock (including any such
capital stock issued upon conversion of Preferred Stock) will thereafter be
entitled to receive upon conversion of Preferred Stock (including any such
capital stock issued upon conversion of Preferred Stock) the number of shares of
stock or other securities or property of the Corporation or of the successor
corporation resulting from such merger or consolidation or sale, to which a
holder of the number of shares of Common Stock deliverable upon conversion of
such share of Preferred Stock immediately prior to the capital reorganization,
merger, consolidation, or sale would have been entitled on such capital
reorganization, merger, consolidation, or sale. In any such case, appropriate
provisions will be made with respect to the rights of the holders of Preferred
Stock (including any such capital stock issued upon conversion of Preferred
Stock) after the reorganization, merger, consolidation, or sale to the end that
the provisions of this Section 4 (including without limitation provisions for
adjustment of the relevant Applicable Conversion Value and the number of shares
issuable upon conversion of such Preferred Stock or other capital stock) will
thereafter be applicable, as nearly as may be, with respect to any shares of
stock, securities, or assets to be deliverable thereafter upon the conversion of
such Preferred Stock or other capital stock.
Except as otherwise provided in Section 2(b) hereof, upon the
occurrence of a capital reorganization, merger, or consolidation of the
Corporation or the sale of all or substantially all its assets, as such events
are more fully set forth in the first paragraph of this Section 4(h), each
holder of Preferred Stock will have the option of electing treatment of his
shares of Preferred Stock under either this Section 4(h) or Section 2(a) hereof,
notice of which election will be submitted in writing to the Corporation at its
principal offices no later than 10 days before the effective date of such event,
provided, that any such notice will be effective if given not later than 15 days
after the date of the Corporation's notice, pursuant to Section 8, with respect
to such event. Subject to the provisions of Section 2(b) hereof, a holder who
fails to give such notice of election pursuant to this Section 4(h) will be
deemed to have elected treatment under this Section 4(h) in lieu of treatment
under Section 2(a).
<PAGE>
-16-
(i) Certificate as to Adjustments. In each case of an adjustment or
readjustment of any Applicable Conversion Rate, the Corporation will promptly
furnish each holder of the relevant series of Preferred Stock with a
certificate, prepared by the Corporation's chief financial officer (or if so
requested by the Majority Series A Holders, Majority Series B Holders, Majority
Series C Holders, or Majority Series D Holders, then by the Corporation's
independent certified public accountants) showing such adjustment or
readjustment, and stating in detail the facts upon which such adjustment or
readjustment is based.
(j) Fractional Shares. No fractional shares of Common Stock or scrip
representing fractional shares will be issued upon conversion of shares of
Preferred Stock. Instead of any fractional shares of Common Stock that would
otherwise be issuable upon conversion of shares of Preferred Stock, the
Corporation will pay to the holder of the shares of Preferred Stock that were
converted a cash adjustment in respect of such fraction in an amount equal to
the same fraction of the market price per share of Common Stock (as determined
by, or in a manner reasonably prescribed by, the Board of Directors) at the
close of business on the Conversion Date.
(k) Partial Conversion. In the event some but not all of the shares of
Preferred Stock represented by a certificate or certificates surrendered by a
holder are converted, the Corporation will execute and deliver to or on the
order of the holder, at the expense of the Corporation, a new certificate
representing the number of shares of Preferred Stock that were not converted.
(l) Reservation of Common Stock. The Corporation will at all times reserve
and keep available out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the conversion of shares of Preferred Stock,
such number of shares of Common Stock as will from time to time be sufficient to
effect the conversion of a outstanding shares of Preferred Stock, and if at any
time the number of authorized but unissued shares of Common Stock will not be
sufficient to effect the conversion of all then outstanding shares of Preferred
Stock, then subject to the provisions of Section 6 hereof, the Corporation will
take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as will be sufficient for such purpose.
(m) Extraordinary Common Stock Event. As used herein, "Extraordinary
-------------
Common Stock Event" means (i) the issuance of additional shares of Common Stock
- ------------------
as a dividend or other distribution on outstanding Common Stock, (ii) the
subdivision of outstanding shares of Common Stock into a greater number of
shares of Common Stock, or (iii) the combination of outstanding shares of Common
Stock into a smaller number of shares of Common Stock; in each case occurring
after the Original Issuance Date of the Series D Preferred Stock.
(n) Derivative Securities. As used herein, "Derivative Securities" means
---------------------
(i) all shares of stock and other securities that are convertible, directly or
indirectly, into or exchangeable for shares of Common Stock and (ii) all
options, warrants, and other rights to acquire shares of Common Stock or
securities convertible, directly or indirectly, into or exchangeable for shares
of Common Stock.
(o) Further Adjustment Provisions. In the event that, at any time as a
result of an adjustment made pursuant to this Section 4, the holder of any
shares of Preferred Stock upon
<PAGE>
-17-
thereafter surrendering such shares for conversion will become entitled to
receive any shares or other securities of the Corporation other than shares of
Common Stock, the Applicable Conversion Rate in respect of such other shares or
securities so receivable upon conversion of such shares of Preferred Stock will
thereafter be adjusted, and will be subject to further adjustment from time to
time, in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the relevant series of Preferred Stock contained in
this Section 4, and the remaining provisions hereof with respect to such series
of Preferred Stock will apply on like or similar terms to any such other shares
or securities.
SECTION 5. Redemption.
(a) Redemption Request. On December 20, 2003, or the first or second
anniversary thereof (the "Anniversary Date"), the holders of Preferred Stock may
redeem their shares of Preferred Stock; provided that all of the Series D
Preferred Stock must have been redeemed pursuant to this Section 5 or otherwise
be no longer issued or outstanding before any other Preferred Stock may be
redeemed. The Majority Series D Holders (or the Majority Series C Holders, in
the event all of the shares of Series D Preferred Stock have been redeemed or
are otherwise no longer issued and outstanding) may request redemption of all or
any portion (but not less, than one-third of the initial number of shares
purchased by the holders of Preferred Stock requesting redemption) of the shares
of Preferred Stock held by such holders by giving written notice (a "Redemption
----------
Notice") to the Corporation no less than 60 days prior to the Anniversary Date
- ------
specifying the number of shares to be redeemed from such holders. (The date upon
which such notice is provided to the Corporation is referred to herein as a
"Redemption Notice Date.") Upon receipt of a Redemption Notice, the Corporation
-----------------------
will send a copy of the Redemption Notice to each other holder of shares of
Preferred Stock then eligible to redeem such shares, if any, and each such other
holder, by written notice to the Corporation given not later than 20 days after
such holder's receipt thereof, may request redemption of all or any portion of
the shares of Preferred Stock held by such holder (but with respect to each
series of Preferred Stock, if such holder desires redemption of any shares of
such series, it must request redemption of at least one-third of the shares of
such series of Preferred Stock held by such holder). In no event shall any
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock
be eligible for redemption prior to such time as all of the Series D Preferred
Stock has been redeemed. The Corporation will redeem all shares of Preferred
Stock that all such eligible holders request to be redeemed, at a Redemption
Price determined in accordance with Section 5(b) or 5(c), as applicable, on a
date (the "Redemption Date") selected by the Corporation that is not later than
15 days after the Redemption Price is finally determined in accordance with
Section 5(b) or 5(c), as applicable.
(b) Redemption Price - Series D Preferred Stock and Series C Preferred
Stock.
(i) The Redemption Price per share of Series D Preferred Stock and
Series C Preferred Stock will be determined in accordance with the
following formula, provided, that for purposes of this formula, the term
(V - ALV) will never be less than zero:
<PAGE>
-18-
Series C and Series D
Redemption Price per share = LV/sh. + (V - ALV)
---------
(#Shs.)
in which:
LV/sh- = the Liquidation Value of such share of Series D Preferred
Stock or Series C Preferred Stock;
V = the valuation of the Corporation, as finally determined in
accordance with Sections 5(b)(ii)-(iv) below; plus the aggregate
consideration, if any, payable to the Corporation upon full
exercise, conversion, and/or exchange of all outstanding Derivative
Securities, EO the extent that such aggregate consideration is not
included in such valuation of the Corporation as so determined;
ALV = the aggregate Liquidation Value of all outstanding shares of
Preferred Stock (for this purpose, including any shares of Preferred
Stock that are issuable upon exercise, conversion, and/or exchange
of outstanding Derivative Securities);
#Shs. = the aggregate number of outstanding shares of Common Stock,
including for this purpose shares of Common Stock issuable upon
exercise, conversion, and/or exchange of all outstanding shares of
Preferred Stock and other Derivative Securities.
In the event that the Redemption Price for the Series D Preferred
Stock or Series C Preferred Stock per share is greater than the respective
Maximum Participating Payments for the Series D Preferred Stock or Series C
Preferred Stock (as defined in Section 2(a) above), then the Redemption Price
per share such Preferred Stock will be equal to the greater of (A) that person's
Maximum Participating Payment on a per share basis and (B) the amount to which
they would have been entitled on a per share of Common Stock basis, valued in
accordance with this Section 5(b) (assuming all of the shares of Preferred
Stock, Common Stock and Derivative securities had been exchanged for or
converted into Common Stock), had the holders of Series D Preferred Stock or
Series C Preferred Stock, as the case may be, converted their shares into Common
Stock and the Company were liquidated pursuant to Section 2 hereof.
(ii) Promptly upon receipt of a Redemption Notice, the Corporation
will retain a reputable investment banking firm reasonably acceptable to
the holders of at least a majority in aggregate Liquidation Value of the
shares of Preferred Stock to be redeemed on the Redemption Date (the
"Redeeming Holders"). As promptly as is practicable, such investment
-----------------
banking firm will deliver to the Corporation a written report as to the
fair market value of the Corporation as a whole, on a going-concern basis,
using customary and appropriate valuation methods, as of the date of the
most recent audited financial statements of the Corporation; provided,
that if such date is more than six months prior to the Redemption Notice
Date, then another audit as of the most recent practicable date may (at
the option of the Redeeming Holders) be conducted and used for such
purpose,
<PAGE>
-19-
and the out-of-pocket expenses of such audit will be payable out of the
proceeds of such redemption and will be borne by the redeeming
stockholders pro rata in proportion to the relative proceeds to be
received by each of them in respect of such redemption. Upon receipt of
such report, the Corporation will promptly send a copy thereof to each of
the redeeming stockholders.
Notwithstanding the foregoing, in the case of any such valuation
pursuant to this Section 5(b)(ii) that is prepared in connection with the
redemption of any shares of Series D Preferred Stock, such valuation shall
determine the highest price that an independent third party would pay for shares
of Series D Preferred Stock being redeemed, assuming there is a reasonable time,
for the sale to take place and no discount for any restrictions on transfer or
minority ownership position of the holder of such shares of Series D Preferred
Stock being redeemed.
(iii) The valuation set forth in such report (the "First Valuation")
---------------
will be conclusive and binding on the Corporation and the redeeming
stockholders unless within 14 days after receipt of such report, the
holders of at least a majority in aggregate Liquidation Value of the
shares to be redeemed on the Redemption Date notify the Corporation in
writing that they disagree with such valuation. If such stockholders do so
notify the Corporation, they will promptly engage another investment
banking firm to render another written report as to the fair market value
of the Corporation as of the appropriate valuation date, a copy of which
will be promptly delivered to the Corporation.
(iv) If the Corporation does not agree with the valuation of the
Corporation set forth in the second investment banking firm's report (the
"Second Valuation"), then either (i) if the Corporation and the holders of
----------------
at least a majority in aggregate Liquidation Value of the shares of
Preferred Stock to be redeemed will so agree, the redemption price will be
the arithmetic mean of the First Valuation and the Second Valuation, or
(ii) if the Corporation and such holders do not so agree, the matter will
be submitted to binding arbitration in accordance with the procedures set
forth in Section 2(d) hereof, except with respect to the payment of the
costs of such arbitration. The arbitrators' discretion will be limited to
selecting either the First Valuation (in which case the costs of such
arbitration will be payable out of the proceeds of such redemption and
will be borne by the redeeming stockholders pro rata in proportion to the
relative proceeds to be received by each of them in respect of such
redemption) and the Second Valuation (in which case the costs of such
arbitration will be payable by the Corporation), and the results of such
arbitration will be binding and conclusive on the Corporation, the
redeeming stockholders, and all other persons and entities.
(c) Redemption Price - Series A Preferred Stock and Series B Preferred
Stock. The redemption price per share of Series B Preferred Stock will be the
Liquidation Value of such share. The redemption price per share of Series A
Preferred Stock will be the greater of:
(i) the Liquidation Value of such share; or
(ii) the quotient of (A) the sum of (1) the valuation of the
Corporation, as finally determined in accordance with Sections
5(b)(ii)-(iv) above, plus (2) the aggregate
<PAGE>
-20-
consideration, if any, payable to the Corporation upon exercise,
conversion, and/or exchange of all outstanding Derivative Securities,
divided by (B) the aggregate number of outstanding shares of Common Stock,
including for this purpose shares of Common Stock issuable upon exercise,
conversion, and/or exchange of all outstanding shares of Preferred Stock
and other Derivative Securities.
(d) Insufficient Funds. If the Corporation on any Redemption Date does not
have sufficient funds legally available to redeem all shares of Preferred Stock
for which redemption has been requested pursuant to Section 5(a) hereof, then it
will to the maximum lawful extent redeem such shares on the following basis:
(i) first, the Corporation will redeem all shares of Series D
Preferred Stock for which redemption has been requested pursuant to
Section 5(a) hereof, from the holders thereof pro rata in proportion to
the number of shares of Series D Preferred Stock held by each such holder;
and then
(ii) after (and only after) the Corporation has redeemed all shares
of Series D Preferred Stock for which redemption has been requested
pursuant to Section 5(a) hereof, the Corporation will redeem the shares of
Series C Preferred Stock for which redemption has been so requested, from
the holders thereof pro rata in proportion to the number of shares of
Series C Preferred Stock held by each such holder; and then
(iii) after (and only after) the Corporation has redeemed all shares
of Series C Preferred Stock for which redemption has been requested
pursuant to Section 5(a) hereof, the Corporation will redeem the shares of
Series B Preferred Stock for which redemption has been so requested, from
the holders thereof pro rata in proportion to the number of shares of
Series B Preferred Stock held by each such holder; and then
(iv) after (and only after) the Corporation has redeemed all, shares
of Series C Preferred Stock and Series B Preferred Stock, respectively,
for which redemption has been requested pursuant to Section 5(a) hereof,
the Corporation will redeem the shares of Series A Preferred Stock for
which redemption has been so requested, from the holders thereof pro rata
in proportion to the number of shares of Series A Preferred Stock held by
each such holder.
In the event that the Corporation fails to redeem shares for which
redemption is requested pursuant to Section 5(a) hereof for any reason other
than that set forth in the preceding paragraph, then during the period from the
Redemption Date through the date on which such shares are redeemed, the
Redemption Price of such shares will bear interest at a per-annum rate equal to
the lower of 18% and the highest rate permitted by applicable law.
(e) Mechanics of Redemption. Each holder of shares of Preferred Stock to
be redeemed will surrender the certificate or certificates representing such
shares to the Corporation at the Corporation's principal executive office or
such other location specified by the Corporation, and thereupon, subject to the
following sentence, the Corporation will pay the Redemption Price
<PAGE>
-21-
for such shares in immediately available funds, by wire transfer to an account
designated by the holder of such shares or by certified or bank check payable to
the order of such holder.
Subject to the following provisions, the Corporation will have the
option to pay the aggregate Redemption Price payable to any redeeming holder in
whole or in part by delivery of a promissory note of the Corporation, in form
reasonably satisfactory to such holder, in an original principal amount equal to
the aggregate Redemption Price for such holder's shares being redeemed, payable
in full (subject to prepayment without penalty and to acceleration on customary
terms, including upon the bankruptcy or insolvency of the Corporation) in 18
months, bearing interest at a floating rate equal to 2% above the rate announced
from time to time by The First National Bank of Boston (or its successor) as its
corporate "base rate," and secured by a security interest in all of the assets
of the Corporation. If the Corporation exercises its option to pay part of the
Redemption Price in promissory notes, it will pay the aggregate Redemption Price
payable to each redeeming holder in the same relative proportions of cash and
promissory notes. Any such notes issued to the holders of Series A Preferred
Stock, Series B Preferred Stock and/or Series C Preferred Stock will be fully
subordinated in right of payment to the notes issued to the holders of Series D
Preferred Stock; any such notes issued to the holders of Series A Preferred
Stock and/or Series B Preferred Stock will be fully subordinated in right of
payment to the notes issued to the holders of Series C Preferred Stock; and any
such notes issued to the holders of Series A Preferred Stock will be fully
subordinated in right of payment to the notes issued to the holders of Series B
Preferred Stock.
Each stock certificate surrendered for redemption will be canceled
and retired. If the number of shares represented by any certificate surrendered
in respect of any such redemption exceeds the number of shares to be redeemed
from the holder thereof, the Corporation will issue and deliver to the
surrendering holder a new certificate representing the unredeemed balance of
such shares.
(f) Termination of Redemption. The right to redeem any shares of Preferred
Stock shall terminate immediately prior to closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
Common Stock for the account of the Corporation to the public at an initial
public offering price per share of not less than $17.625 (subject to
proportionate adjustment in the event of any stock split, stock dividend,
combination or reclassification of shares, or other similar event, in each event
affecting the Common Stock and occurring after the Original Issuance Date of the
Series D Preferred Stock) and with net proceeds to the Corporation of not less
than $30,000,000.
SECTION 6. Negative Covenants.
(a) Stockholder Approval Required. So long as any shares of Preferred
Stock are outstanding, the Corporation will not do any of the following things
without the affirmative vote or written consent of, or a waiver from (i) the
holders of at least 70% of the Common Stock issued or issuable upon conversion
of the Preferred Stock and, (ii) only in the case of any action (other than
actions specified in Section 6(a)(iii) hereof or actions specified in Section
6(a)(ix)
<PAGE>
-22-
hereof that concern actions in Section 6(a)(iii) hereof) that adversely affects
the rights hereunder of any series of Preferred Stock without similarly
affecting the rights hereunder of the other series of Preferred Stock, the
holders of 60% of each series of Preferred Stock so adversely affected, and any
attempt to take such actions without the required vote, written consent or
waiver will be wholly void; provided that, without limiting the generality or
the foregoing, the authorization of any shares of capital stock with preference
or priority over any series of Preferred Stock as to the right to receive either
dividends or amounts distributable upon liquidation, dissolution or winding up
of the Corporation shall not be deemed to affect adversely such series of
Preferred Stock:
(i) Amend the Corporation's Certificate of Incorporation, including,
without limitation, to amend or change in any way the terms or number of
authorized shares of Preferred Stock or any series thereof or the Common
Stock, or reclassify any Common Stock into shares having any preference or
priority as to the payment of dividends or the distribution of assets
superior to or on a parity with any such preference or priority of the
Preferred Stock;
(ii) Authorize, designate, issue, or sell any shares of capital
stock or other securities (i) ranking senior to or pari passu with any
series of Preferred Stock with respect to voting rights or rights to
receive dividends or other distributions (including without limitation
upon any actual or deemed liquidation, dissolution, or winding-up of the
Corporation), or (ii) other than the Excluded Issuances specified in
Section 4(f) above;
(iii) Authorize or effect any liquidation, dissolution, or
winding-up of the Corporation, any merger or consolidation of the
Corporation with or into any other company or entity, or any sale, license
as licensor, lease as lessor, exchange, conveyance or other transfer or
disposal of all or substantially all of the assets of the Corporation, if,
in the case of a merger or consolidation, at least a majority of the
voting power of the Corporation, or the surviving corporation, as the case
may be, would not be owned by persons who held capital stock of the
corporation before the merger or consolidation;
(iv) Engage in any material line of business other than that in
which the Corporation is engaged on the Original Issuance Date of the
Series C Preferred Stock or which is reasonably incident thereto;
(v) Declare, pay, or set aside any dividend or other distribution in
respect of any shares of capital stock or other equity securities of the
Corporation, other than in respect of Series D, Preferred Stock, while any
shares of Series D Preferred Stock are issued and outstanding, or declare,
pay, or set aside any dividend or other distribution in respect of any
shares of capital stock or other equity securities of the Corporation,
other than Preferred Stock, thereafter;
(vi) Redeem, purchase, or otherwise acquire for value, directly or
indirectly through subsidiaries or otherwise (or pay into or set aside for
a sinking fund for such purpose), any shares of Common Stock or any other
capital stock or equity securities of the Corporation (other than
redemption of shares of Preferred Stock in accordance with Section 5
hereof) or any Derivative Securities or other rights to acquire equity
securities
<PAGE>
-23-
of the Corporation, except that these provisions will not prohibit the
Corporation from repurchasing such shares or securities from former
employees, consultants, or directors of the Corporation pursuant to terms
approved by the Board of Directors, including at least one director
nominated by the Majority Series A Holders, one director nominated by the
Majority Series C Holders and one director nominated by the Majority
Series D Holders;
(vii) Take any other action or enter into any other agreements that
might conflict with the Corporation's obligations hereunder with respect
to the holders of Preferred Stock; or
(viii) Increase the number of directors constituting the
Corporation's Board of Directors to a number greater than seven.
(ix) Obligate itself to do any of the foregoing.
(b) Board Approval Required. Without also receiving the affirmative vote
or written consent of a majority of the Corporation's directors, including the
affirmative vote or consent of at least two directors of the Corporation
nominated by the Majority Series A Holders and/or the Majority Series C Holders,
the Corporation may not:
(i) Lend any funds or extend any credit to any person or entity,
other than the extension of credit to customers on customary terms in the
ordinary course of business and the advancing of reasonable expenses for
employee travel and other business expenses in accordance with usual past
practices and in the ordinary course of business; or incur any liability,
whether as guarantor or otherwise, in respect of the indebtedness or other
obligations of any other person or entity;
(ii) Make or incur any single capital expenditure (including without
limitation by way of related or installment purchases or otherwise) of
over $50,000;
(iii) Increase the compensation (including without limitation the
salary, bonus eligibility, equity compensation, or other employee
benefits) payable by the Corporation to Lawrence A. Genovesi, Cheryl H.
Smith or any of the executive officers of the Corporation;
(iv) Sell, license as licensor, lease as lessor, or otherwise
transfer or dispose of any right, title, or interest in or to any patents,
patent applications, mask works, trademarks, trade names, service marks,
logos, registered copyrights and licenses used in or necessary to the
Corporation businesses as being conducted as of January 13, 1999, or any
technology, know-how, trade secrets, processes, formulas, techniques, and
unregistered copyrights used in or necessary to the Corporation's
business, in each case, other than in the ordinary course of the
Corporation's business consistent with past practice;
(v) Incur or permit to remain outstanding any Indebtedness (as
defined below) in excess of the sum of (1) 80% of the Corporation's
accounts receivable (net of any
<PAGE>
-24-
reserve for uncollectible accounts), and (2) 50% of the value of the
Corporation's inventories of raw materials and finished goods (but
excluding work-in-process); or
(vi) Amend the Corporation's by-laws.
For the purposes of this Section 6:
"Indebtedness" means (a) all indebtedness for borrowed money, whether
------------
current or long-term, or secured or unsecured, (b) all indebtedness for the
deferred purchase price of property or services represented by a note or
security agreement, (c) all indebtedness created or arising under any
conditional sale or other title retention agreement (even though the rights and
remedies of the seller or lender under such agreement in the event of default
may be limited to repossession or sale of such property), (d) all indebtedness
secured by a purchase money mortgage or other lien to secure all or part of the
purchase price of property subject to such mortgage or lien, (e) all obligations
under leases that have been or must be, in accordance with GAAP (as defined
below), recorded as capital leases in respect of which it is liable as lessee,
(f) any liability in respect of banker's acceptances or letters of credit, and
(g) all indebtedness of any person that is directly or indirectly guaranteed by
the Corporation or that it has agreed (contingent or otherwise) to purchase or
otherwise acquire or in respect of which it has otherwise assured a creditor
against loss.
"GAAP" means generally accepted accounting principles that are (i)
----
consistent with principles promulgated or adopted by the Financial Accounting
Standards Board and its predecessors, (ii) applied on a basis consistent with
prior periods, and (iii) such that, insofar as the use of accounting principles
is pertinent, a certified public accountant could deliver an unqualified opinion
with respect to financial statements in which such principles have been properly
applied.
SECTION 7. No Reissuance of Shares of Preferred Stock. No share or shares
of Preferred Stock acquired by the Corporation by reason of redemption,
purchase, conversion, or otherwise will be reissued, and all such shares will be
canceled, retired, and eliminated from the shares that the Corporation is
authorized to issue. The Corporation will from time to time take such
appropriate corporate action as may be necessary to reduce the authorized number
of shares of Preferred Stock accordingly.
SECTION 8. Notices of Record Dates, Etc. Except as may be otherwise agreed
in writing by the holders of at least 60% Common Stock issued or issuable upon
conversion of the Preferred Stock, in the event (i) the Corporation establishes
a record date to determine the holders of any class of securities who are
entitled to receive any dividend or other distribution, or (ii) there is to
occur any capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation, or any transfer of all or substantially all of
the assets of the Corporation to any other company, or any other entity or
person, or any voluntary or involuntary dissolution, liquidation, or winding-up
of the Corporation, the Corporation will deliver to each holder of Preferred
Stock, in accordance with Section 11(a) hereof, and at least 20 days prior to
such record date or the proposed effective date of the transaction specified
therein, as the case may be, a notice specifying (a) the date of such record
date for the purpose of such dividend or distribution and a description
<PAGE>
-25-
of such dividend or distribution, (b) the date on which any such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation, or
winding-up is expected to become effective, and (c) the time, if any, that is to
be fixed, as to when the holders of record of Common Stock (or other securities)
will be entitled to exchange their shares of Common Stock (or other securities)
for cash, securities, and/or other property deliverable upon such reorganization
reclassification, transfer, consolidation, merger, dissolution, liquidation, or
winding-up.
SECTION 9. Other Rights. Except as otherwise provided in the Corporation's
Certificate of Incorporation, as amended, shares of Preferred Stock and shares
of Common Stock will be identical in all respects (each share of Preferred Stock
having equivalent rights to the number of shares of Common Stock into which it
is then convertible pursuant to Section 4(a) hereof), will have the same powers,
preferences, and rights, without preference of any such class or share over any
other such class or share, and will be treated as a single class of stock for
all purposes.
SECTION 10. Common Stock.
(a) Voting Rights. Except as otherwise expressly provided herein or as
required by applicable law, the holder of each share of Common Stock will be
entitled to vote on all matters submitted to a vote or consent of stockholders.
Each share of Common Stock will entitle the holder thereof to one vote. Except
as otherwise provided herein or required by applicable law, the holders of
shares of Preferred Stock and Common Stock, respectively, will vote together as
a single class on all matters submitted to a vote or consent of stockholders.
(b) Liquidation Rights. Subject to the prior and superior rights of the
holders of outstanding shares of Preferred Stock and to the final paragraph of,
Section 2(a) hereof, upon any liquidation, dissolution, or winding-up of the
Corporation, whether voluntary or involuntary, and after payment to the holders
of outstanding shares of Preferred Stock of the Liquidation Value of the shares
of Preferred Stock held by them, any assets remaining available for distribution
to stockholders will be distributed ratably among the holders of shares of
Series D Preferred Stock, Series C Preferred Stock and the holders of shares of
Common Stock as provided in Section 2(a) hereof.
(c) Dividends. Subject to the prior and superior rights of the holders of
outstanding share of Preferred Stock, the holders of shares of Common Stock will
be entitled to receive dividends if, as, and when declared by the Board of
Directors.
SECTION 11. Miscellaneous.
(a) Notices. All notices, requests, payments, instructions, or other
documents to be given hereunder shall be in writing and shall be deemed
delivered (i) two business days after being sent by registered or certified
mail, return receipt requested, postage prepaid or (ii) one business day after
being sent via a reputable nationwide overnight courier service guaranteeing
next business day delivery, in each case to the registered holders of the
Corporation's capital stock; provided, that subject to the provisions of the
Corporation's by-laws as in effect at the relevant
<PAGE>
-26-
time, any notice of meeting and/or proxy materials sent by the Corporation to an
of its stockholders may be sent by any reasonable means.
(b) Transfer Taxes, Etc. The Corporation will pay any and all stock
transfer, documentary stamp taxes, and the like that may be payable in respect
of any issuance or delivery of shares of Preferred Stock or share of Common
Stock or other securities issued in respect of shares of Preferred Stock
pursuant hereto or certificates representing such shares or securities. The
Corporation will not, however, be required to pay any such tax that may be
payable in respect of any transfer involved in the issuance or delivery of
shares of Preferred Stock or Common Stock or other securities in a name other
than that in which such shares were originally registered, or in respect of any
payment to any person other than the original registered holder thereof with
respect to any such shares, and will not be required to make any such issuance,
delivery or payment unless and until the person otherwise entitled to such
issuance, delivery, or payment has paid to the Corporation the amount of any
such tax or has established, to the satisfaction of the Corporation, that such
tax has been paid or is not payable.
(c) Transfer Agents. From time to time, the Corporation may appoint, and
discharge and change a transfer agent for any series of Preferred Stock and/or
the Common Stock. Upon any such appointment or discharge of a transfer agent,
the Corporation will send written notice thereof to each holder of record of the
relevant series of Preferred Stock or the Common Stock.
FIFTH. Subject to the provisions of Section 6 of Article FOURTH, the
number of authorized shares of Common Stock may be increased or decreased (but
not below the number of shares thereof then outstanding) by the affirmative vote
of the holders of a majority of the stock of the Corporation entitled to vote,
irrespective of the provisions of Section 242(b)(2) of the General Corporation
Law of Delaware.
SIXTH. The name and mailing address of the sole incorporator are as
follows:
NAME MAILING ADDRESS
---- ---------------
Lawrence A. Genovesi 61 Pleasant Street
Randolph, MA 02368
SEVENTH. In furtherance of and not in limitation of powers conferred by
statute, it is further provided:
1. Election of directors need not be by written ballot.
2. Subject to the provisions of Section 6 of Article FOURTH, the
Board of Directors is expressly authorized to adopt, amend or repeal the By-Laws
of the Corporation, except with respect to any provision thereof which by law or
the By-Laws requires action by the stockholders.
<PAGE>
-27-
EIGHTH. Except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability. No amendment to or repeal of this provision shall apply to or have
any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment.
NINTH.
1. Actions, Suits and Proceedings Other than by or in the Right of the
-------------------------------------------------------------------
Corporation. The Corporation shall indemnify each person who was or is a party
- -----------
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he 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 any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. Notwithstanding
anything to the contrary in this Article, except as set forth in Section 7
below, the Corporation shall not indemnify an Indemnitee seeking indemnification
in connection with a proceeding (or part thereof) initiated by the Indemnitee
unless the initiation thereof was approved by the Board of Directors of the
Corporation. Notwithstanding anything to the contrary in this Article, the
Corporation shall not indemnify an Indemnitee to the extent such Indemnitee is
reimbursed from the proceeds of insurance, and in the event the Corporation
makes any indemnification payments to an Indemnitee and such Indemnitee is
subsequently reimbursed from the proceeds of insurance, such Indemnitee shall
promptly refund such indemnification payments to the Corporation to the extent
of such insurance reimbursement.
2. Actions or Suits by or in the Right of the Corporation. The Corporation
------------------------------------------------------
shall indemnify any indemnitee who was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was, or has agreed to become, a director or officer of the
Corporation, or is or was serving, or has agreed to serve, at the request of the
Corporation, as a director, officer or trustee of, or in a similar capacity
with, another corporation,
<PAGE>
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partnership, joint venture, trust or other enterprise (including any employee
benefit plan), or by reason of any action alleged to have been taken or omitted
in such capacity, against all expenses (including attorneys' fees) and, to the
extent permitted by law, amounts paid in settlement actually and reasonably
incurred by him or on his behalf in connection with such action, suit of
proceeding and any appeal therefrom, if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery of Delaware shall determine upon application that, despite the
adjudication of such liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
(including attorneys' fees) which the Court of Chancery of Delaware shall deem
proper.
3. Indemnification for Expenses of Successful Party. Notwithstanding the
------------------------------------------------
other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or nolo contendere by the Indemnitee, (iv) an adjudication that the
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.
4. Notification and Defense of Claim. As a condition precedent to his
---------------------------------
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee, of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such claim,
other than as provided below in this Section 4. The Indemnitee shall have the
right to employ his own counsel in connection with such claim, but the fees and
expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the Corporation and the Indemnitee in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnitee shall be at the expense of the Corporation, except
as otherwise
<PAGE>
-29-
expressly provided by this Article. The Corporation shall not be entitled,
without the consent of the Indemnitee, to assume the defense of any claim
brought by or in the right of the Corporation or as to which counsel for the
Indemnitee shall have reasonably made the conclusion provided for in clause (ii)
above.
5. Advance of Expenses. Subject to the provisions of Section 6 below, in
-------------------
the event that the Corporation does not assume the defense pursuant to Section 4
of this Article of any action, suit, proceeding or investigation of which the
Corporation receives notice under this Article, any expenses (including
attorneys' fees) incurred by an Indemnitee in defending a civil or criminal
action, suit, proceeding or investigation or any appeal therefrom shall be paid
by the Corporation in advance of the final disposition of such matter; provided,
--------
however, that the payment of such expenses incurred by an Indemnitee in advance
- -------
of the final disposition of such matter shall be made only upon receipt of an
undertaking by or on behalf of the Indemnitee to repay all amounts so advanced
in the event that it shall ultimately be determined that the Indemnitee is not
entitled to be indemnified by the Corporation as authorized in this Article.
Such undertaking shall be accepted without reference to the financial ability of
the Indemnitee to make such repayment.
6. Procedure for Indemnification. In order to obtain indemnification or
-----------------------------
advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as ii reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by the Corporation of the written request
of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the
Corporation determines within such 60-day period that the Indemnitee did not
meet the applicable standard of conduct set forth in Section 1 or 2, as the case
may be. Such determination shall be made in each instance by (a) a majority vote
of the directors of the Corporation consisting of persons who are not at that
time parties to the action, suit or proceeding in question ("disinterested
directors"), whether or not a quorum, (b) a majority vote of a quorum of the
outstanding Shares of stock of all classes entitled to vote for directors,
voting as a single class, which quorum shall consist of stockholders who are not
at that time parties to the action, suit or proceeding in question, (c)
independent legal counsel (who may, to the extent permitted by law, be regular
legal counsel to the Corporation), or (d) a court of competent jurisdiction.
7. Remedies. The right to indemnification or advances as granted by this
--------
Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or part, or if no
disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise required by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advancement of expenses under
this Article shall be on the Corporation. Neither the failure of the Corporation
to have made a determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee has met
the applicable standard of conduct, nor an actual determination by the
Corporation pursuant to Section 6 that the Indemnitee has not met such
applicable standard of
<PAGE>
-30-
conduct, shall be a defense to the action or create a presumption that the
Indemnitee has not met the applicable standard of conduct. The Indemnitee's
expenses (including attorneys' fees) incurred in connection with successfully
establishing his right to indemnification, in whole or in part, in any such
proceeding shall also be indemnified by the Corporation.
8. Subsequent Amendment. No amendment, termination or repeal of this
--------------------
Article or of the relevant provisions of the General Corporation Law of Delaware
or any other applicable laws shall affect or diminish in any way the rights of
any Indemnitee to indemnification under the provisions hereof with respect to
any action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the final adoption of such
amendment, termination or repeal.
9. Other Rights. The indemnification and advancement of expenses provided
------------
by this Article shall not be deemed exclusive of any other rights to which an
Indemnitee seeking indemnification or advancement of expenses may be entitled
under any law (common or statutory), agreement or vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in any other capacity while holding office for the Corporation,
and shall continue as to an Indemnitee who has ceased to be a director or
officer, and shall inure to the benefit of the estate, heirs, executors and
administrators of the Indemnitee.
Nothing contained in this Article shall be deemed to prohibit, and the
Corporation is specifically authorized to enter into, agreements with officers
and directors providing indemnification rights and procedures different from
those set forth in this Article. In addition, the Corporation may, to the extent
authorized from time to time by its Board of Directors, grant indemnification
rights to other employees or agents of the Corporation or other persons serving
the Corporation and such rights may be equivalent to, or greater or less than,
those set forth in this Article.
10. Partial Indemnification. If an Indemnitee is entitled under any
-----------------------
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. Insurance. The Corporation may purchase and maintain insurance, at its
---------
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise (including any employee benefit plan) against any expense, liability
or loss incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnity such
person against such expense, liability or loss under the General Corporation Law
of Delaware.
12. Merger or Consolidation. If the Corporation is merged into or
-----------------------
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any
<PAGE>
-31-
action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the date of such merger or
consolidation.
13. Savings Clause. If this Article or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
14. Definitions. Terms used herein and defined in Section 145(h) and
-----------
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).
15. Subsequent Legislation. If the General Corporation Law of Delaware is
----------------------
amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, then the Corporation shall indemnify such persons to
the fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
TENTH. The corporation may be a general or limited partner in any business
enterprise it would have power to conduct by itself.
ELEVENTH. The corporation may, by contract, grant to some or all of the
security holders of the corporation preemptive rights to acquire stock of the
corporation, but no security holder shall have the preemptive right except as
specifically so granted or as granted pursuant to a bylaw adopted by the
stockholders.
TWELFTH. Subject to the provisions of Section 6 of Article FOURTH, the
vote of a majority of the outstanding shares of each class of stock outstanding
and entitled to vote thereon shall be sufficient to approve any agreement of
merger or consolidation of the corporation with or into another corporation or
of another corporation into the corporation, or to approve any sale, lease or
exchange of substantially all of the assets of the corporation, notwithstanding
any provision of law that would otherwise require a greater vote in the absence
of this provision.
THIRTEENTH. Subject to the provisions of Section 6 of Article FOURTH, the
corporation may from time to time offer to purchase and purchase shares from any
stockholder of the corporation upon fair and reasonable terms and at a fair and
reasonable price, whether or not the stockholder owns a controlling interest in
the corporation, without offering to any other stockholder an equal opportunity
to sell a ratable number, or any, of his shares of stock in the corporation to
the corporation upon comparable terms or at a
<PAGE>
-32-
comparable price, or to make any offer to repurchase whatsoever to other
stockholders of the corporation.
FOURTEENTH. Subject to the provisions of Section 6 of Article FOURTH, the
Corporation reserves the right to amend, alter, change or repeal any provision
contained in this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute and this Certificate of Incorporation, and all rights
conferred upon stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, the Corporation has caused its corporate seat to be
affixed hereto and this Amended and Restated Certificate of Incorporation to be
signed by its President this 17th day of December, 1999.
NETWORK ENGINES. INC.
/s/ Lawrence A. Genovesi
-------------------------------
Lawrence A. Genovesi
President
<PAGE>
Exhibit 3.3
BY-LAWS
OF
NETWORK ENGINES, INC.
(A Delaware Corporation)
<PAGE>
BY-LAWS
TABLE OF CONTENTS
Page
----
Article 1 - Stockholders ..................................................... 1
1.1 Place of Meetings ............................................... 1
-----------------
1.2 Annual Meeting .................................................. 1
-------------
1.3 Special Meetings ................................................ 1
----------------
1.4 Notice of Meetings .............................................. 1
------------------
1.5 Voting List ..................................................... 1
-----------
1.6 Quorum .......................................................... 2
------
1.7 Adjournments .................................................... 2
------------
1.8 Voting and Proxies .............................................. 2
------------------
1.9 Action at Meeting ............................................... 2
-----------------
1.10 Action without Meeting .......................................... 2
----------------------
Article 2 - Directors ........................................................ 3
2.1 General Powers ................................................... 3
--------------
2.2 Number: Election and Qualification ............................... 3
----------------------------------
2.3 Enlargement of the Board ......................................... 3
------------------------
2.4 Tenure ........................................................... 3
------
2.5 Vacancies ........................................................ 3
---------
2.6 Resignation ...................................................... 3
-----------
2.7 Regular Meetings ................................................. 3
----------------
2.8 Special Meetings ................................................. 3
----------------
2.9 Notice of Special Meetings ....................................... 4
--------------------------
2.10 Meetings by Telephone Conference Calls .......................... 4
--------------------------------------
2.11 Quorum .......................................................... 4
------
2.12 Action at Meeting ............................................... 4
-----------------
2.13 Action by Consent ............................................... 4
-----------------
2.14 Removal ......................................................... 4
-------
2.15 Committees ...................................................... 4
----------
2.16 Compensation of Directors ....................................... 5
-------------------------
Article 3 - Officers ......................................................... 5
3.1 Enumeration ...................................................... 5
-----------
3.2 Election ......................................................... 5
--------
3.3 Qualification .................................................... 5
-------------
3.4 Tenure ........................................................... 5
------
3.5 Resignation and Removal .......................................... 5
-----------------------
3.6 Vacancies ........................................................ 6
---------
3.7 Chairman of the Board and Vice-Chairman of the Board ............. 6
----------------------------------------------------
3.8 President ........................................................ 6
---------
3.9 Vice Presidents .................................................. 6
---------------
-i-
<PAGE>
3.10 Secretary and Assistant Secretaries ............................. 6
-----------------------------------
3.11 Treasurer and Assistant Treasurers .............................. 7
----------------------------------
3.12 Salaries ........................................................ 7
--------
Article 4 - Capital Stock .................................................... 7
4.1 Issuance of Stock ................................................ 7
-----------------
4.2 Certificates of Stock ............................................ 7
---------------------
4.3 Transfers ........................................................ 8
---------
4.4 Lost, Stolen or Destroyed Certificates ........................... 8
--------------------------------------
4.5 Record Date ...................................................... 8
-----------
Article 5 - General Provisions ............................................... 9
5.1 Fiscal Year ...................................................... 9
-----------
5.2 Corporate Seal ................................................... 9
--------------
5.3 Waiver of Notice ................................................. 9
----------------
5.4 Voting of Securities ............................................. 9
--------------------
5.5 Evidence of Authority ............................................ 9
---------------------
5.6 Certificate of Incorporation .....................................10
----------------------------
5.7 Transactions with Interested Parties .............................10
------------------------------------
5.8 Severability .....................................................10
------------
5.9 Pronouns .........................................................10
--------
Article 6 - Amendments .......................................................10
6.1 By the Board of Directors ........................................10
-------------------------
6.2 By the Stockholders ..............................................11
-------------------
-ii-
<PAGE>
BY-LAWS
OF
NETWORK ENGINES, INC.
(A Delaware Corporation)
ARTICLE 1 - Stockholders
1.1 Place of Meetings. All meetings of stockholders shall be held at such
-----------------
place within or without the State of Delaware as may be designated from time to
time by the Board of Directors or the President or, if not so designated, at the
registered office of the corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the election of
--------------
directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Board of
Directors or the President (which date shall not be a legal holiday in the place
where the meeting is to be held) at the time and place to be fixed by the Board
of Directors or the President and stated in the notice of the meeting. If no
annual meeting is held in accordance with the foregoing provisions, the Board of
Directors shall cause the meeting to be held as soon thereafter as convenient.
If no annual meeting is held in accordance with the foregoing provisions, a
special meeting may be held in lieu of the annual meeting, and any action taken
at that special meeting shall have the same effect as if it had been taken at
the annual meeting, and in such case all references in these By-laws to the
annual meeting of the stockholders shall be deemed to refer to such special
meeting.
1.3 Special Meetings. Special meetings of stockholders may be called at
----------------
any time by the President or by the Board of Directors. Business transacted at
any special meeting of stockholders shall be limited to matters relating to the
purpose or purposes stated in the notice of meeting.
1.4 Notice of Meetings. Except as otherwise provided by law, written
------------------
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
1.5 Voting List. The officer who has charge of the stock ledger of the
-----------
corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, at a place within the city where the meeting is to
be held. The list shall also be produced and kept at
-1-
<PAGE>
the time and place of the meeting during the whole time of the meeting, and may
be inspected by any stockholder who is present.
1.6 Quorum. Except as otherwise provided by law, the Certificate of
------
Incorporation or these By-laws, the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business.
1.7 Adjournments. Any meeting of stockholders may be adjourned to any
------------
other time and to any other place at which a meeting of stockholders may be held
under these By-laws by the stockholders present or represented at the meeting
and entitled to vote, although less than a quorum, or, if no stockholder is
present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.
1.8 Voting and Proxies. Each stockholder shall have one vote for each
------------------
share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Certificate of Incorporation. Each stockholder of record entitled to vote
at a meeting of stockholders, or to express consent or dissent to corporate
action in writing without a meeting, may vote or express such consent or dissent
in person or may authorize another person or persons to vote or act for him by
written proxy executed by the stockholder or his authorized agent and delivered
to the Secretary of the corporation. No such proxy shall be voted or acted upon
after three years from the date of its execution, unless the proxy expressly
provides for a longer period.
1.9 Action at Meeting. When a quorum is present at any meeting, the
-----------------
holders of shares of stock representing a majority of the votes cast on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of shares of stock of
that class representing a majority of the votes cast on a matter) shall decide
any matter to be voted upon by the stockholders at such meeting, except when a
different vote is required by express provision of law, the Certificate of
Incorporation or these By-Laws. When a quorum is present at any meeting, any
election by stockholders shall be determined by a plurality of the votes cast on
the election.
1.10 Action without Meeting. Any action required or permitted to be taken
----------------------
at any annual or special meeting of stockholders of the corporation may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, is signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote on such action were present and voted. Prompt notice of the
taking of corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
-2-
<PAGE>
ARTICLE 2 - Directors
2.1 General Powers. The business and affairs of the corporation shall be
--------------
managed by or under the direction of a Board of Directors, who may exercise all
of the powers of the corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law, may
exercise the powers of the full Board until the vacancy is filled.
2.2 Number; Election and Qualification. The number of directors which
----------------------------------
shall constitute the whole Board of Directors shall be determined by resolution
of the stockholders or the Board of Directors, but in no event shall be less
than one. The number of directors may be decreased at any time and from time to
time either by the stockholders or by a majority of the directors then in
office, but only to eliminate vacancies existing by reason of the death,
resignation, removal or expiration of the term of one or more directors. The
directors shall be elected at the annual meeting of stockholders by such
stockholders as have the right to vote on such election. Directors need not be
stockholders of the corporation.
2.3 Enlargement of the Board. The number of directors may be increased at
------------------------
any time and from time to time by the stockholders or by a majority of the
directors then in office.
2.4 Tenure. Each director shall hold office until the next annual meeting
------
and until his successor is elected and qualified, or until his earlier death,
resignation or removal.
2.5 Vacancies. Unless and until filled by the stockholders, any vacancy in
---------
the Board of Directors, however occurring, including a vacancy resulting from an
enlargement of the Board, may be filled by vote of a majority of the directors
then in office, although less than a quorum, or by a sole remaining director. A
director elected to fill a vacancy shall be elected for the unexpired term of
his predecessor in office, and a director chosen to fill a position resulting
from an increase in the number of directors shall hold office until the next
annual meeting of stockholders and until his successor is elected and qualified,
or until his earlier death, resignation or removal.
2.6 Resignation. Any director may resign by delivering his written
-----------
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.7 Regular Meetings. Regular meetings of the Board of Directors may be
----------------
held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.
2.8 Special Meetings. Special meetings of the Board of Directors may be
----------------
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of
-3-
<PAGE>
the Board, President, two or more directors, or by one director in the event
that there is only a single director in office.
2.9 Notice of Special Meetings. Notice of any special meeting of directors
--------------------------
shall be given to each director by the Secretary or by the officer or one of the
directors calling the meeting. Notice shall be duly given to each director (i)
by giving notice to such director in person or by telephone at least 48 hours in
advance of the meeting, (ii) by sending a telegram or telex, or delivering
written notice by hand, to his last known business or home address at least 48
hours in advance of the meeting, or (iii) by mailing written notice to his last
known business or home address at least 72 hours in advance of the meeting. A
notice or waiver of notice of a meeting of the Board of Directors need not
specify the purposes of the meeting.
2.10 Meetings by Telephone Conference Calls. Directors or any members of
--------------------------------------
any committee designated by the directors may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation by such means shall constitute
presence in person at such meeting.
2.11 Quorum. A majority of the total number of the whole Board of
------
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; provided, however, that in no case shall less than one-third
(1/3) of the number so fixed constitute a quorum. In the absence of a quorum at
any such meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice other than announcement at the meeting,
until a quorum shall be present.
2.12 Action at Meeting. At any meeting of the Board of Directors at which
-----------------
a quorum is present, the vote of a majority of those present shall be sufficient
to take any action, unless a different vote is specified by law, the Certificate
of Incorporation or these By-Laws.
2.13 Action by Consent. Any action required or permitted to be taken at
-----------------
any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the Board or committee.
2.14 Removal. Except as otherwise provided by the General Corporation Law
-------
of Delaware, any one or more or all of the directors may be removed, with or
without cause, by the holders of a majority of the shares then entitled to vote
at an election of directors, except that the directors elected by the holders of
a particular class or series of stock may be removed without cause only by vote
of the holders of a majority of the outstanding shares of such class or series.
2.15 Committees. The Board of Directors may designate one or more
----------
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members of the committee present
-4-
<PAGE>
at any meeting and not disqualified from voting, whether or not he or they
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board of Directors and subject to the provisions of the General Corporation Law
of the State of Delaware, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the corporation and may authorize the seal of the corporation to be
affixed to all papers which may require it. Each such committee shall keep
minutes and make such reports as the Board of Directors may from time to time
request. Except as the Board of Directors may otherwise determine, any committee
may make rules for the conduct of its business, but unless otherwise provided by
the directors or in such rules, its business shall be conducted as nearly as
possible in the same manner as is provided in these By-laws for the Board of
Directors.
2.16 Compensation of Directors. Directors may be paid such compensation
-------------------------
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
ARTICLE 3 - Officers
3.1 Enumeration. The officers of the corporation shall consist of a
-----------
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board, a Vice-Chairman of the Board, and one or more Vice Presidents, Assistant
Treasurers, and Assistant Secretaries. The Board of Directors may appoint such
other officers as it may deem appropriate.
3.2 Election. The President, Treasurer and Secretary shall be elected
--------
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3 Qualification. No officer need be a stockholder. Any two or more
-------------
offices may be held by the same person.
3.4 Tenure. Except as otherwise provided by law, by the Certificate of
------
Incorporation or by these By-laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.
3.5 Resignation and Removal. Any officer may resign by delivering his
-----------------------
written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
Any officer may be removed at any time, with or without cause, by vote of
a majority of the entire number of directors then in office.
-5-
<PAGE>
Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer for
any period following his resignation or removal, or any right to damages on
account of such removal, whether his compensation be by the month or by the year
or otherwise, unless such compensation is expressly provided in a duly
authorized written agreement with the corporation.
3.6 Vacancies. The Board of Directors may fill any vacancy occurring in
---------
any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his successor is elected and qualified, or until his
earlier death, resignation or removal.
3.7 Chairman of the Board and Vice-Chairman of the Board. The Board of
----------------------------------------------------
Directors may appoint a Chairman of the Board and may designate the Chairman of
the Board as Chief Executive Officer. If the Board of Directors appoints a
Chairman of the Board, he shall perform such duties and possess such powers as
are assigned to him by the Board of Directors. If the Board of Directors
appoints a Vice-Chairman of the Board, he shall, in the absence or disability of
the Chairman of the Board, perform the duties and exercise the powers of the
Chairman of the Board and shall perform such other duties and possess such other
powers as may from time to time be vested in him by the Board of Directors.
3.8 President. The President shall, subject to the direction of the Board
---------
of Directors, have general charge and supervision of the business of the
corporation. Unless otherwise provided by the Board of Directors, he shall
preside at all meetings of the stockholders and, if he is a director, at all
meetings of the Board of Directors. Unless the Board of Directors has designated
the Chairman of the Board or another officer as Chief Executive Officer, the
President shall be the Chief Executive Officer of the corporation. The President
shall perform such other duties and shall have such other powers as the Board of
Directors may from time to time prescribe.
3.9 Vice Presidents. Any Vice President shall perform such duties and
---------------
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
3.10 Secretary and Assistant Secretaries. The Secretary shall perform such
-----------------------------------
duties and shall have such powers as the Board of Directors or the President may
from time to time prescribe. In addition, the Secretary shall perform such
duties and have such powers as are incident to the office of the secretary,
including without limitation the duty and power to give notices of all meetings
of stockholders and special meetings of the Board of Directors, to attend all
meetings of stockholders and the Board of Directors and keep a record of the
proceedings, to maintain a stock ledger and prepare lists of stockholders and
their addresses as required, to be
-6-
<PAGE>
custodian of corporate records and the corporate seal and to affix and attest to
the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Secretary, the Assistant Secretary, (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.11 Treasurer and Assistant Treasurers. The Treasurer shall perform such
----------------------------------
duties and shall have such powers as may from time to time be assigned to him by
the Board of Directors or the President. In addition, the Treasurer shall
perform such duties and have such powers as are incident to the office of
treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the corporation, to deposit funds of
the corporation in depositories selected in accordance with these By-laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.
The Assistant Treasurers shall perform such duties and possess such powers
as the Board of Directors, the President or the Treasurer may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Treasurer, the Assistant Treasurer, (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
3.12 Salaries. Officers of the corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
ARTICLE 4 - Capital Stock
4.1 Issuance of Stock. Unless otherwise voted by the stockholders and
-----------------
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 Certificates of Stock. Every holder of stock of the corporation shall
---------------------
be entitled to have a certificate, in such form as may be prescribed by law and
by the Board of Directors, certifying the number and class of shares owned by
him in the corporation. Each such certificate shall be signed by, or in the name
of the corporation by, the Chairman or Vice-Chairman, if any,
-7-
<PAGE>
of the Board of Directors, or the President or a Vice President, and the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary
of the corporation. Any or all of the signatures on the certificate may be a
facsimile.
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the By-laws,
applicable securities laws or any agreement among any number of shareholders or
among such holders and the corporation shall have conspicuously noted on the
face or back of the certificate either the full text of the restriction or a
statement of the existence of such restriction.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of each certificate representing shares of such
class or series of stock, provided that in lieu of the foregoing requirements
there may be set forth on the face or back of each certificate representing
shares of such class or series of stock a statement that the corporation will
furnish without charge to each stockholder who so requests a copy of the full
text of the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
4.3 Transfers. Except as otherwise established by rules and regulations
---------
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate representing such shares
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of Incorporation
or by these By-laws, the corporation shall be entitled to treat the record
holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
to such stock, regardless of any transfer, pledge or other disposition of such
stock until the shares have been transferred on the books of the corporation in
accordance with the requirements of these By-laws.
4.4 Lost, Stolen or Destroyed Certificates. The corporation may issue a
--------------------------------------
new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.
4.5 Record Date. The Board of Directors may fix in advance a date as a
-----------
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in
-8-
<PAGE>
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action. Such record date shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 10 days after the
date of adoption of a record date for a written consent without a meeting, nor
more than 60 days prior to any other action to which such record date relates.
If no record date is fixed, 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 before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is properly delivered to the corporation. The record date
for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating to such purpose.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
ARTICLE 5 - General Provisions
5.1 Fiscal Year. Except as from time to time otherwise designated by the
-----------
Board of Directors, the fiscal year of the corporation shall begin on the first
day of October in each year and end on the last day of September in each year.
5.2 Corporate Seal. The corporate seal shall be in such form as shall be
--------------
approved by the Board of Directors.
5.3 Waiver of Notice. Whenever any notice whatsoever is required to be
----------------
given by law, by the Certificate of Incorporation or by these By-laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, cable or any other
available method, whether before, at or after the time stated in such waiver, or
the appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.
5.4 Voting of Securities. Except as the directors may otherwise designate,
--------------------
the President or Treasurer may waive notice of, and act as, or appoint any
person or persons to act as, proxy or attorney-in-fact for this corporation
(with or without power of substitution) at, any meeting of stockholders or
shareholders of any other corporation or organization, the securities of which
may be held by this corporation.
5.5 Evidence of Authority. A certificate by the Secretary, or an Assistant
---------------------
Secretary, or a temporary Secretary, as to any action taken by the stockholders,
directors, a committee or any officer or representative of the corporation shall
as to all persons who rely on the certificate in good faith be conclusive
evidence of such action.
-9-
<PAGE>
5.6 Certificate of Incorporation. All references in these By-laws to the
----------------------------
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
5.7 Transactions with Interested Parties. No contract or transaction
------------------------------------
between the corporation and one or more of the directors or officers, or between
the corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his or their votes are counted for such purpose, if:
(1) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of Directors or
the committee, and the Board or committee in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum;
(2) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
5.8 Severability. Any determination that any provision of these By-laws is
------------
for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-laws.
5.9 Pronouns. All pronouns used in these By-laws shall be deemed to refer
--------
to the masculine, feminine or neuter, singular or plural, as the identity of the
person or persons may require.
ARTICLE 6 - Amendments
6.1 By the Board of Directors. These By-laws may be altered, amended or
-------------------------
repealed or new by-laws may be adopted by the affirmative vote of a majority of
the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present, except with respect to any provision
thereof which by law requires action of the stockholders.
-10-
<PAGE>
6.2 By the Stockholders. These By-laws may be altered, amended or repealed
-------------------
or new by-laws may be adopted by the affirmative vote of the holders of a
majority of the shares of the capital stock of the corporation issued and
outstanding and entitled to vote at any regular meeting of stockholders, or at
any special meeting of stockholders, provided notice of such alteration,
amendment, repeal or adoption of new by-laws shall have been stated in the
notice of such special meeting.
-11-
<PAGE>
Exhibit 10.1
LEASE AGREEMENT
---------------
LANDLORD: New Boston Batterymarch Limited Partnership
TENANT: Network Engines, Inc.
PREMISES: 15 Dan Road
Canton, Massachusetts
SUBMISSION NOT AN OPTION
------------------------
THE SUBMISSION OF THIS LEASE FOR EXAMINATION AND NEGOTIATION DOES NOT CONSTITUTE
AN OFFER TO LEASE, A RESERVATION OF, OR OPTION FOR THE PREMISES AND SHALL VEST
NO RIGHT IN ANY PARTY. TENANT OR ANYONE CLAIMING UNDER OR THROUGH TENANT SHALL
HAVE THE RIGHTS TO THE PREMISES AS SET FORTH HEREIN AND THIS LEASE BECOMES
EFFECTIVE AS A LEASE ONLY UPON EXECUTION, ACKNOWLEDGMENT AND DELIVERY THEREOF BY
LANDLORD AND TENANT TO EACH OTHER, REGARDLESS OF ANY WRITTEN OR VERBAL
REPRESENTATION OF ANY AGENT, MANAGER OR EMPLOYEE OF LANDLORD TO THE CONTRARY.
FROM THE OFFICE OF:
Rappaport, Aserkoff and Rappaport
One Longfellow Place
Suite 3611
Boston, MA 02114
<PAGE>
LEASE
New Boston Batterymarch Limited Partnership
("Landlord")
TO
Network Engines, Inc.
("Tenant")
Table of Contents
-----------------
SECTION I. PREMISES..........................................................1
SECTION II. USE..............................................................1
SECTION III. TERM............................................................2
SECTION IV. RENT.............................................................2
SECTION V. CONSTRUCTION AND PREPARATION OF THE PREMISES......................3
SECTION VI. BUILDING AND EQUIPMENT...........................................6
SECTION VII. FLOOR LOAD, HEAVY MACHINERY.....................................7
SECTION VIII. SERVICES.......................................................7
SECTION IX. UTILITIES........................................................7
SECTION X. RENTABLE AREA.....................................................8
SECTION XI. ADDITIONAL RENT..................................................8
SECTION XII. REMOVAL OF GOODS AND TENANT'S REPAIRS..........................12
SECTION XIII. SALES TAX.....................................................12
SECTION XIV. IMPROVEMENTS AND ALTERATIONS...................................13
SECTION XV. INSPECTION......................................................13
SECTION XVI. CASUALTY.......................................................13
SECTION XVII. EMINENT DOMAIN................................................15
SECTION XVIII. INDEMNIFICATION..............................................16
SECTION XIX. PROPERTY OF TENANT.............................................16
SECTION XX. INJURY AND DAMAGE...............................................17
SECTION XXI. ASSIGNMENT, MORTGAGING AND SUBLETTING..........................17
SECTION XXII. SIGNS, BLINDS AND DRAPERIES...................................18
SECTION XXIII. COMPLIANCE WITH INSURANCE....................................19
SECTION XXIV. INFLAMMABLES, ODORS...........................................19
SECTION XXV. DEFAULT........................................................19
SECTION XXVI. SUBORDINATION.................................................21
SECTION XXVII. NOTICES......................................................21
SECTION XXVIII. RULES AND REGULATIONS.......................................22
SECTION XXIX. QUIET ENJOYMENT...............................................22
ii
<PAGE>
SECTION XXX. BINDING AGREEMENT..............................................22
SECTION XXXI. PARTNERSHIP...................................................22
SECTION XXXII. SEISIN.......................................................22
SECTION XXXIII. INSURANCE...................................................23
SECTION XXXIV. SUBROGATION, INSURANCE PREMIUMS..............................23
SECTION XXXV. SHORING.......................................................24
SECTION XXXVI. REZONING.....................................................24
SECTION XXXVII. SEPARABILITY................................................24
SECTION XXXVIII. WAIVER OF TRIAL BY JURY....................................24
SECTION XXXIX. NO WAIVER....................................................24
SECTION XL. HOLDING OVER....................................................24
SECTION XLI. TEMPORARY SPACE................................................25
SECTION XLII. CAPTIONS, PLURAL, GENDER......................................25
SECTION XLIII. BROKERAGE....................................................25
SECTION XLIV. HAZARDOUS WASTE...............................................26
SECTION XLV. SECURITY DEPOSIT...............................................27
SECTION XLVI. LANDLORD'S RIGHT TO PERFORM FOR TENANT........................27
SECTION XLVII. GOVERNING LAW................................................27
SECTION XLVIII. RIGHT OF FIRST OFFER........................................27
SECTION XLIX. MULTIPLE COUNTERPARTS.........................................28
SECTION XLX. RENEWAL OPTION.................................................28
iii
<PAGE>
THIS LEASE (the "Lease") made and entered into this 19th day of October,
1999 by and between NEW BOSTON BATTERYMARCH LIMITED PARTNERSHIP, a Delaware
Limited Partnership, having a business address at One Longfellow Place, Suite
3612, Boston, Massachusetts 02114 (hereinafter called "Landlord") and NETWORK
ENGINES, INC. (hereinafter called "Tenant").
SECTION I. PREMISES. Landlord leases to Tenant, and Tenant hereby hires
--------- --------
and takes from Landlord the following described premises subject to the
mortgages as hereinafter provided.
The "Premises" are that portion of a building in the Town of Canton,
Commonwealth of Massachusetts, having a mailing address of 15 Dan Road, Canton,
Massachusetts (hereinafter called the "Building") substantially as shown
cross-hatched or outlined in, Exhibit A, (the "Lease Plan") hereto attached and
---------
made a part hereof, consisting of approximately 51,935 square feet of net
rentable area (the "Net Rentable Area") in the Building as shown on Exhibit A.
---------
The Building, which consists of approximately 142,073 square feet of net
rentable area and the adjacent building known as 45 Dan Road, which consists of
approximately 132,697 square feet of net rentable area, and the parcel of land
(as described in Exhibit A-1.) on which both are located are hereinafter
------------
referred to as the "Property".
Landlord reserves and excepts all rights of ownership and use in all
respects outside the Premises, including, without limitation, the Building and
all other structures and improvements and plazas, parking areas, and common
areas on the Property, except that at all times during the term of this Lease,
Tenant shall have a reasonable means of access from the street to the Premises
and shall have the parking rights set forth herein. Without limitation of the
foregoing reservation of rights by Landlord, it is understood that with regard
to the Building, Landlord in its sole discretion shall have the right to change,
relocate and eliminate facilities therein, to permit the use of or lease of all
or part thereof for exhibition and displays, to sell, lease or dedicate all or
part thereof to public use; and further that Landlord shall have the right to
make changes in, additions to and eliminations from the Building, and other
structures and improvements on the Property, the Premises excepted provided, in
each case, that there is no unreasonable interference with Tenant's use and
enjoyment of the Premises.
SECTION II. USE. Tenant shall have the right to use, in common with others
---------- ---
so entitled, all Common Areas associated with the Building and located in the
Building or on the Property including all hallways, elevators, loading docks,
freight elevators, access ways, walkways, nonexclusive parking areas, courtyards
and landscaped areas. Landlord reserves the right, in its sole and unfettered
discretion, to limit, relocate, or diminish the nonexclusive parking areas,
provided the Landlord shall maintain a minimum parking ratio of four spaces per
1000 square feet of net rentable area at all times on the Property, and Tenant
shall be entitled to the use of the same. Tenant shall use the Premises for
general office use, fight assembly and product testing and other reasonable uses
incidental and related thereto, provided that Tenant shall not use, permit nor
suffer anything to be done or anything to he brought into or kept in the
Premises or on the Property which in Landlord's reasonable judgment occasions
discomfort or annoyance
<PAGE>
to any other tenants or occupants of the Building and parking area or which may
tend to impair the reputation or appearance of the Building or the Property or
tend to interfere with the proper and economic operation of the Building,
parking area or the Property by Landlord, or which shall violate the Certificate
of Occupancy for the Building or any law or regulation of any governmental body.
If, due to Tenant's specific use of the Premises, improvements or alterations to
the Premises or the Building are necessary to comply with any requirements
imposed by law, Tenant shall pay the entire cost of improvements or alterations.
Landlord hereby states, that to the best of its knowledge, and without any
representation or warranty that, on the Commencement Date (as hereinafter
defined), the Building and the Property will comply with all laws, codes and
ordinances then in effect.
SECTION III. TERM. The term of this Lease shall be a period of five (5)
----------- ----
years, commencing on the later to occur of February 1, 2000 or substantial
completion of Landlord's Work (hereinafter defined) (such later date being
hereinafter referred to as "Commencement Date") and terminating at 11:59 p.m.
the day immediately preceding the fifth (5th) anniversary of the Commencement
Date (unless the Commencement Date is other than the first day of a calendar
month, in which case this Lease shall terminate on the last day of the calendar
month in which the fifth (5th) anniversary of the Commencement Date occurs)
(hereinafter referred to as "Termination Date"). The term "Lease Year" shall
mean the twelve (12) month period commencing upon the Commencement Date, (or, if
the Commencement Date occurs on other than the first day of a calendar month,
commencing on the first day of the first calendar month occurring after the
Commencement Date, with the first Lease Year in such case also to include the
period between the Commencement Date and the beginning of the following month),
and each successive twelve (12) month period during the term hereof. In the
event that the Commencement Date herein is not a date certain, at the request of
either party at any time following initial occupancy of the Premises by Tenant,
Landlord and Tenant shall execute a written memorandum reflecting the date of
initial occupancy and confirming the Commencement Date.
The Landlord's Work shall be deemed substantially complete upon the
earlier to occur of (i) taking of possession of the Premises by Tenant and the
operation of its business therein or (ii) upon the issuance of a certificate of
substantial completion by Landlord's architect, and to the extent applicable, a
temporary or permanent certificate of occupancy from the appropriate department,
notwithstanding that minor or insubstantial details of construction, mechanical
adjustment or decoration which do not materially interfere with Tenant's ability
to conduct business in the Premises remain to be performed.
SECTION IV. RENT. Tenant shall pay "Rent" at the annual rate of $10.75
---------- ----
Dollars ($10.75) per square foot for Lease Years One through Three, and $11.85
per Net Rentable Area for Lease Years Four and Five, for the Net Rentable Area
of the Premises as set forth in Section I of this Lease.
The Rent shall be paid in equal installments of one-twelfth (1/12) of the
annual Rent in advance of the first day of each calendar month.
- 2 -
<PAGE>
Tenant shall pay a proportionate part of such monthly installment for any
fraction of a calendar month at the beginning or end of the Lease term.
In the event that the Rent is not paid within ten (10) days after the due
date, Landlord shall assess and Tenant shall pay a late charge in an amount
equal to interest at the rate of prime rate plus two percent (2%) on the unpaid
balance from the date said Rent became due. All other charges which Tenant is
required to pay hereunder, together with all interest and penalties that may
accrue thereon, shall be deemed to be "Additional Rent" and in the event of
non-payment thereof by Tenant, Landlord shall have all the rights and remedies
with respect thereto as would accrue to Landlord for non-payment of Rent. Tenant
shall pay the Rent and Additional Rent without demand or notice and without
deduction, abatement, counterclaim, or set-off, except as expressly set forth
herein to the Landlord in care of New Boston Management Services, Inc., Agent
for New Boston Batterymarch Limited Partnership, One Longfellow Place, Suite
3612, Boston, Massachusetts 02114-2434, or at such other place as designated
from time to time by Landlord in writing.
SECTION V. CONSTRUCTION AND PREPARATION OF THE PREMISES.
--------- --------------------------------------------
(A) Landlord's Work.
---------------
(1) Landlord shall install a separate entrance to the Premises from
the parking area and new restrooms as required by code in the Premises for
Tenant's exclusive use at Landlord's sole cost and expense, in accordance with
plans and specification approved by Tenant, such approval shall not be
unreasonably withheld or delayed. In addition, Landlord shall do the work
described on Exhibit B attached hereto in accordance with final plans and
---------
specifications, to be prepared by Tenant's Architect and reviewed and approved
by Landlord, which approval shall not be unreasonably withheld or delayed
(hereinafter referred to as "Build-Out Drawings"). The Build-Out Drawings shall
be prepared in accordance with the requirements of Tenant's space and shall be
reviewed by or on behalf of Landlord within ten (10) days of completion of said
Build-Out Drawings. Any disapproval by Landlord of the Build-Out Drawings shall
be accompanied by a reasonably specific statement of reasons therefor. Tenant
shall cause the Build-Out Drawings to be revised in a manner reasonably
sufficient to remedy Landlord's objections and/or respond to Landlord's concerns
and for such revised plans to be redelivered to Landlord, and Landlord shall
either approve or disapprove the revised Build-Out Drawings within ten (10) days
following the date of submission thereof. The process of submission, review and
revision (if requested by Landlord) shall continue until such time as Landlord
has approved the Build-Out Drawings. Landlord shall perform the work shown on
the Build-Out Drawings (hereinafter referred to as "Landlord's Work") in a good
and workmanlike manner, in accordance with all laws, rules, regulations and
ordinances applicable thereto, and pursuant to a Town of Canton Building Permit.
Landlord's Work shall be done by Landlord's choice of contractors such choice to
be subject to the approval of Tenant, which approval shall not be unreasonably
withheld or delayed, (hereinafter referred to as "General Contractor") pursuant
to a Stipulated Sum AIA Document A101 Standard Form of Agreement Between Owner
and Contractor. Tenant shall have no authority to make changes to the Build-Out
Drawings after approval of the same by Landlord and
- 3 -
<PAGE>
Tenant, whether by change order or otherwise, absent Landlord's prior written
consent, which consent shall not be unreasonably withheld or delayed
(hereinafter referred to as "Tenant Change Orders"). Such approval, if given,
shall be conditioned upon Tenant agreeing only if: (a) any increased costs
incurred as a result of any such Change Orders shall be included within the
"Excess TI" (as hereinafter defined), and (b) Tenant agrees that if such changes
shall cause a delay in achieving substantial completion, Tenant's obligation to
pay Rent and Additional Rent shall commence as if such Change Orders had not
been agreed to by Landlord, and substantial completion had not been so delayed.
(2) Prior to the commencement of Landlord's Work, Landlord shall
provide Tenant with the General Contractor's firm quote for the cost of
performing Landlord's Work. Tenant shall either approve said quote or shall be
deemed to have approved said quote if it fails to notify Landlord of its
disapproval in writing within ten (10) days of receipt of said quote. If
approved or deemed approved, Landlord shall enter into a Stipulated Sum AIA
Document A101 Standard Form of Agreement between Owner and Contractor in the
contract amount of said firm quote. Landlord warrants that the cost of
performing the scope of Landlord's Work as shown on the Build-Out Drawings shall
not exceed the General Contractor's firm quote, subject, however, to cost
increases due to Change Orders for work required by public authorities having
jurisdiction in order to permit the issuance of a Town of Canton Building Permit
or Certificate of Occupancy. Landlord shall provide an allowance of up to
$415,480.00 (hereinafter referred to as the "TI Contribution") towards the
actual costs of performing Landlord's Work (hereinafter referred to as the "TI
Contribution"). The costs of performing Landlord's Work in excess of the TI
Contribution shall be borne by Tenant (hereinafter referred to as the "Excess
TI."). Tenant shall reimburse the Excess TI, if any, to Landlord in two
installments, fifty percent (50%) of which shall be paid prior to commencement
of that portion of Landlord's Work which exceeds the TI Contribution (and five
(5) business days after written demand therefor), and fifty percent (50%) of
which shall be paid upon substantial completion of Landlord's Work and shall
reflect a reconciliation of the actual Excess TI amount. In that Landlord will
not commence Landlord's Work until such time as it receives payment from Tenant
for the first Excess TI Installment, for each day which elapses after the date
on which such payment is due, Tenant shall pay to Landlord a penalty equal to
one days' worth of Rent.
(3) The Landlord's Work shall be deemed substantially complete upon
the issuance of certificate of substantial completion by Landlord's architect,
and to the extent applicable, the issuance of a temporary or permanent
certificate of occupancy from the appropriate department, notwithstanding that
minor or insubstantial details of construction, mechanical adjustment or
decoration which do not materially interfere with Tenant's ability to conduct
business in the Premise remain to be performed.
(4) The taking of possession of the Premises by Tenant shall be
conclusive evidence of the acceptance of the Premises by Tenant and that the
Premises are in good and satisfactory condition, in accordance with Landlord's
obligations hereunder, subject to (i) latent defects, and (ii) any "punchlist
items" identified by Tenant to Landlord within ten (10) business days of
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Tenant's taking of possession. Landlord shall complete or repair or cause to be
completed or repaired all of the foregoing matters at no cost or expense to
Tenant promptly following Landlord's receipt of notice of the need for such
completion or repair.
(b) Tenant's Work. Tenant shall do the work, if any, shown on Exhibit B,
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("Tenant's Work") as the work on the part of the Tenant, in a good and
workmanlike manner in accordance with "Plans and Specifications" which have
Landlord's written approval, not to be unreasonably withheld or delayed, prior
to the commencement of Tenant's Work. Tenant shall furnish and install any and
all necessary trade fixtures, equipment and other items necessary for the proper
conduct of Tenant's business. "Plans and Specifications", as used in this
Section V(b) and in Section XIV shall mean documents and drawings sufficient for
contract bidding and work completion. All of the foregoing work and all work
Tenant may undertake pursuant to Section XIV of this lease shall be done in
accordance with all laws, rules, regulations and ordinances applicable thereto,
including, if necessary, compliance with the Americans With Disabilities Act,
and the acquisition by Tenant of a Town of Canton Building Permit. In no event
shall Landlord be required to provide or install any trade fixtures or
equipment.
Tenant agrees to employ for any work it may do pursuant to Sections V (b)
and XIV of this Lease one or more responsible contractors whose labor will work
in harmony with other labor working in and on the Building and Property and with
suppliers of materials for use in construction in and on the Building and
Property, and especially Tenant agrees that it will not do or permit to be done
anything which would cause any labor difficulty in connection with any
construction in and on the Building and Property.
Tenant shall require all such contractors employed by Tenant to carry
Worker's Compensation Insurance in accordance with statutory requirements and to
carry Commercial General Liability Insurance and Automobile Liability Insurance
covering such contractors in or about the Premises, Building or Property in
amounts not less than One Million ($1,000,000) Dollars combined single limits
for property damage, for injury or death of more than one person in a single
accident and to submit certificates of insurance evidencing such coverage to
Landlord prior to commencement of such work. Tenant agrees to indemnify and hold
harmless Landlord from all claims, actions, demands and causes of actions
occasioned by Tenant's contractors being on or about the Premises or the
Building or the Property of which the same form a part and from Tenant's
contractors performing work in the Premises.
All contractors, subcontractors, mechanics, laborers, materialmen, and
others who perform any work, labor or services, or furnish any materials, or
otherwise participate in the labor or services, or furnish any materials, or
otherwise participate in the improvement of the Premises shall be and are hereby
given notice that Tenant is not authorized to subject Landlord's interest in the
Premises, Building or Property to any claim for mechanics', laborers' and
materialmen's liens, and all persons dealing directly or indirectly with Tenant
may not look to the Premises, Building or Property as security for payment.
Tenant shall save Landlord harmless from and against all expenses, liens, claims
or damages to either property or person which may or might arise by reason of
the making of any such additions, improvements, alterations and/or
installations.
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SECTION VI. BUILDING AND EQUIPMENT.
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(a) Landlord's Obligations. Landlord shall keep in good and operable
condition and repair, consistent with other buildings of similar quality and
age, the structure and exterior of the Building, HVAC and life safety systems,
the water and sewer connection to a single point in the Premises, the electrical
service to a single distribution point serving the Premises, and the gas service
to a single distribution point serving the Premises (except for such equipment
and service lines installed by Tenant and except as otherwise provided in this
Lease), and the exterior parking area serving the Building. The Landlord shall
keep the sidewalks, stairways, and all other means of ingress and egress for the
Premises and all public portions of the Building in good and operable repair and
in a reasonably clean and safe condition. Landlord reserves the right to
interrupt, curtail, stop and suspend the furnishing of any services and
operation of the plumbing and electrical, heating and air conditioning systems
when necessary by reason of accident or emergency or for repairs, alterations,
replacements or improvements, which may become necessary or when it cannot
secure supplies or labor or by reason of any other cause beyond its control,
without liability or any abatement of Rent or Additional Rent being due thereby.
Landlord shall use diligent efforts to minimize the disruption of Tenant's
business and, where possible, Landlord shall perform repairs after normal
business hours.
Notwithstanding the foregoing, if as a result of:
1. Landlord's negligence, misconduct or intentional actions, or
failure to fulfill any covenant or provision of this Lease on its part to be
performed (unless such failure is caused in whole or substantially in part by
the action or inaction of Tenant) which negligence, misconduct, intentional
actions, or failure affects the life safety, mechanical, electrical and/or
plumbing systems of the Building ("Essential Services"); or
2. the United States Environmental Protection Agency, or any other
federal, state or municipal governmental agency, officially declaring the
Building or the Premises untenantable (unless such condition is caused in whole
or in part by the action or inaction of Tenant), the conduct of Tenant's
business is materially and adversely interfered with ("Material Failure to
Provide Services"), or for any other reason causing a material failure to
provide services for a period of thirty (30) days, then Tenant shall have the
right hereinafter set forth. During such period of Material Failure to Provide
Services, Landlord will, if reasonably practical, arrange for the provision of
Essential Services on an interim basis via temporary measures until final
corrective measures can be accomplished. In the event a Material Failure to
Provide Services is not remedied by Landlord within five (5) consecutive
business days after written notice thereof from a corporate officer of Tenant,
then Tenant shall have the right to abate the Rent and Additional Rent due or
becoming due under this Lease until said Material Failure to Provide Services is
remedied by Landlord, but only to the extent that the foregoing conditions
materially and adversely interfere with Tenant's business in the Premises. Said
rent abatement shall be taken as a credit in four (4) equal installments against
Tenant's rental obligations for the next four (4) successive calendar months
hereunder.
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(b) Tenant's Obligations. Tenant will maintain the Premises including all
--------------------
mechanical and electrical and plumbing systems within the Premises;; all
partitions, walls (other than the structure of load bearing walls), doors,
loading docks and windows of the Premises; and all other portions thereof in the
condition each of the same were in at the time of the delivery thereof to
Tenant, but in all events in good and tenantable working order, condition and
repair and will repair and replace the same when necessary so as to comply with
the foregoing, except only for reasonable wear and tear and damage by casualty
for which and to the extent Landlord is required to purchase casualty insurance
as provided in this Lease.
SECTION VII. FLOOR LOAD, HEAVY MACHINERY. Tenant shall not place a load
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upon any floor of the Premises exceeding the floor load per square foot area
which floor was designed to carry and which is allowed by law. Landlord reserves
the right to prescribe the position of all file cabinets, business machinery and
mechanical equipment (including safes) which Tenant may place in the Premises.
Business machines and mechanical equipment shall be placed and maintained by
Tenant at Tenant's expense in settings sufficient to prevent transmission of
noise and vibration to any other part of the Building in which the Premises are
located. Any moving of any machinery and/or equipment into, out of, or within
the Premises shall be done only with the prior written consent of Landlord in
each instance, which consent shall not be unreasonably withheld or delayed, and
shall be at the sole risk and hazard of Tenant and Tenant will indemnify and
save Landlord harmless against and from any liability, loss, injury, claim or
suit resulting directly or indirectly from such moving. In the event riggers
shall be required to accomplish such moving, only persons holding a Master
Rigger's License shall perform the work. Tenant shall not in any way break, cut
into, or damage the exterior perimeter walls or insulating panels of the
Building in installing, ventilating or exhausting its equipment or in any other
manner.
SECTION VIII. SERVICES. Landlord shall provide:
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(a) Electricity for normal lighting of the outside of the Building and
parking lot areas.
(b) Electric service to one distribution point serving only the Premises,
(c) Gas service to roof mounted heating and air conditioning units serving
only the Premises.
(d) Water and sewer to the Premises.
(e) Such other services as are currently available to the Premises and
Building (in the capacities now available), including but not limited to
landscaping, snow removal and common area maintenance and cleaning (including
the health club and cafeteria).
SECTION IX. UTILITIES. Tenant shall pay for all gas, electricity and
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telephone services furnished to the Premises by Landlord or any other supplier,
exclusive of gas and electricity for HVAC service to the Premises. Electricity
and gas shall be separately metered to Tenant and shall be billed directly to
Tenant by the appropriate public utility company or, if same are not so
separately metered, same shall be billed to Landlord and Landlord, in turn,
shall invoice Tenant for its portion thereof based on "check meters" to be
installed by Landlord at its cost (provided that the rates charged by Landlord
may not exceed Landlord's actual cost or the rate that would be charged to
Tenant if Tenant were a direct customer of the public utility provider).
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The listing of any utility service in the previous sentence shall not constitute
a representation that such utility service is available to the Premises, except
that Landlord represents and warrants to Tenant that the Premises will be
serviced by the existing BellAtlantic underground telecommunications service.
SECTION X. RENTABLE AREA. The Net Rentable Area shall be the area stated
--------- -------------
in Exhibit A and Section I of this Lease.
---------
SECTION XI. ADDITIONAL RENT. In addition to the Rent set forth in Section
---------- ---------------
IV of this Lease, Tenant shall pay Landlord as Additional Rent its proportionate
share of the Taxes and the Operating Costs as set forth in this Section XI. For
the purposes of this Section XI, the following words and terms shall have the
following meaning:
(a) "Tenant's Building Proportionate Share" of the total Taxes and
Operating Costs shall be the percentage based on the ratio of (a) the Rentable
Area of the Premises to (b) the Rentable Area of the Building. As of the
Commencement Date, Tenant's Building Proportionate Share of Taxes and Operating
Costs shall allocable solely to the Building shall be thirty-six and fifty-six
one hundredths percent (36.56%). Taxes and Operating Costs allocable to the
Building shall include, without limitation, real estate taxes, common electric,
lobby and common area fees, trash and management fees (not to exceed market
rates) for the Building. All allocations for Taxes and Operating Costs as
between the Building and the Property shall be done on a fair and equitable
basis and are subject to change.
(b) "Tenant's Property Proportionate Share" of the total of Taxes and
Operating Costs allocable to the Property consisting of 15-45 Dan Road shall be
the percentage based on the ratio of (i) the Rentable Area of the Premises to
(ii) the Rentable Area of the Property, which as of the Commencement Date is
eighteen and ninety one hundredths percent 18.90%). Taxes and Operating Costs
allocable to the Property shall include, without limitation, landscaping, snow
removal, cafeteria expenses, health club expenses, parking expenses and taxes
attributable to the parking lot and insurance.
(c) "Tax Year" shall mean the twelve month period commencing July 1, 1999,
and each twelve month period commencing on an anniversary of said date during
the term of the lease.
(d) "Taxes" shall mean the real estate taxes and assessments imposed upon
Landlord with respect to the parcel commonly known as 15-45 Dan Road, Canton,
Massachusetts, as such parcel is defined in the records of the Assessor's Office
of Canton on January 1, 1999 including all structures located thereon, and any
and all other taxes, levies, betterments, assessments and charges arising from
the ownership and/or operation of said parcel and all the structures located
thereon which are or shall be imposed by a National, State or Municipal or other
authorities which are or may become a lien upon Landlord and/or said parcel, but
excluding any fee or penalty levied on Landlord for late payment thereof. If, or
to the extent that, due to a future change in the method of taxation any
franchise, profit or other tax shall be levied against Landlord in substitution
or in lieu of any tax which would otherwise constitute a real estate tax, such
franchise, profit or other tax shall be deemed to constitute "Taxes" for the
purposes hereof. It is recognized and agreed by Landlord and Tenant that it is
their intention by this paragraph to
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include in "Taxes" that which in tax year 1999 was commonly known in Canton as
"real estate taxes", including that portion covered by the school tax rate, and
any type of tax or assessment which may, throughout the term hereof be
substituted, in whole or in part therefor. If, in any tax year after the tax
year 1999, the Town of Canton or any of its departments, shall require Landlord
to pay for any service which during the fiscal tax year 1999 was provided by
said Town of Canton or any of its departments without requiring payment by
Landlord, then all such payments due on account of services rendered during any
tax year after the tax year 1999 shall, for purposes of this Section XI(a) be
considered and treated as real estate taxes for the tax year for which such
payments are due. Without in any way limiting the generality of the preceding
sentence some of the services for which the Town of Canton or any of its
departments might require payment are: police protection, fire protection,
public schools, library services, park services, building inspections. Water and
sewer use charges are covered elsewhere in this Lease and the same shall not
enter into the calculations made under this Section XI(a).
Taxes for such fiscal Tax Year.
(e) "Operating Costs" shall mean all costs reasonably incurred and
expenditures of whatever nature made by the Landlord, whether directly or by
allocation, in the operation, management, repair, cleaning and maintenance of
the Building, Premises, Property, related equipment and facilities and
appurtenant parking and landscaped areas, heating and cooling equipment (except
to the extent the same are separately borne by tenants), including but not
limited to the following:
1. All costs for fire, extended coverage, casualty, liability,
workers compensation, rental interruption insurance, and all other bonds and
insurance as may be required by the holder or guarantor of the mortgage upon the
Building in which the Premises are located, or otherwise reasonably required.
2. Water and sewer charges.
3. Landscaping and snow removal.
4. Rubbish removal.
5. Electricity and gas charges except to the extent that the same
are separately metered or apportioned to tenants, including without limitation,
the cost of electric current for the operation of public lights inside and
outside the Building, and the parking area.
6. Security service equipment and contracts, if any.
7. Exterminating services and contracts.
8. Wages including all fringe benefits, federal and state payroll,
unemployment and old age taxes paid by Landlord on account of all employees, up
to the level of Building Manager, who are employed in, about or on account of
the land, Building or other improvements of which the Premises are a part.
Employees shall include administrative and overhead personnel.
9. The cost of labor and materials used in cleaning the Building,
surrounding areaways and windows in the Building, the Property, and the parking
area.
10. Supplies.
11. All costs for permits and fees, except those associated with
work undertaken solely for an individual tenant.
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12. The cost of any capital improvements or additions made to the
Building designed to reduce operating expense or required by applicable law not
in effect as of the date hereof after the commencement of the term of this
Lease, such cost thereof to be amortized over such improvement's or addition's
useful life together with interest on the unamortized balance at the rate which
is two percent (2%) above the prime rate from time to time charged by
BankBoston, or its successor, or such higher rate as may be paid by Landlord for
funds borrowed to construct said capital improvements or additions, it being
agreed that in each lease year there shall be included in Operating Costs only
such years allocable share of the amortization and interest described in this
Section XI(e)12.
13. All management fees paid for the Manager of the Building, and
all asset management fees, provided that all such management fees under no
circumstances may exceed 5% of the base rents received from the Building.
The following items shall be excluded from Operating Costs:
i. legal fees for lease negotiations and disputes with tenants and
legal and auditing fees, other than legal and auditing fees
reasonably incurred in connection with maintenance and operation of
the Building, or in connection with the preparation of statements
required pursuant to Additional Rent or lease escalation provisions
contained in tenant leases;
ii. costs and expenses for which Landlord receives compensation through
proceeds of insurance or condemnation awards;
iii. costs of correcting, defects in the Building or the Building
equipment or replacing the defective equipment to the extent such
costs may relate to items covered by warranties or manufacturers,
suppliers or contractors or otherwise borne by parties other than
Landlord
iv. cost of repairs or replacements incurred by reasons of fire or other
casualty or caused by the exercise of the right of eminent domain or
compensable to Landlord; by virtue of insurance carried or required
to be carried by Landlord;
v. interest or penalties resulting from delinquent payments by
Landlord, provided such delinquent payments are not caused by
Tenant;
vi. the cost of the removal and remediation, as required by law, of any
and all such hazardous materials, provided and so long as such
materials were not introduced into the Premises by Tenant;
vii. fines, penalties and interest, provided such fees, fines or
penalties are not the result of actions or inaction by Tenant;
viii. leasing commissions.
(f) "Aggregate Taxes and Operating Costs" shall mean the total of (a)
Tenant's Building Proportionate Share of Taxes and Operating Costs and (b)
Tenant's Property Proportionate Share of Taxes and Operating Costs in any
calendar year.
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(g) "Taxes and Operating Costs Excess" shall mean the amount by which the
Aggregate Taxes and Operating Costs in any calendar year exceed three and
sixty-three one hundredths dollars ($3.63) per square foot per annum.
(h) Estimated payments by Tenant on account of Tenant's Taxes and
Operating Cost Excess shall be made on the first day of each and every calendar
month during the Term of this Lease, beginning on the Commencement Date, in the
fashion herein provided for the payment of Rent. The monthly amount so to be
paid to Landlord shall be sufficient to provide Landlord by the end of each
Lease Year a sum equal to Tenant's required payments on account of the Taxes and
Operating Costs Excess for such Lease Year. Within ninety (90) days after the
end of each Lease Year, Landlord shall submit to Tenant a reasonably detailed
accounting of Taxes and Operating Costs for the Building and the Property for
such Lease Year, and Landlord shall certify to the accuracy thereof. If
estimated payments theretofore made for such Lease Year by Tenant exceed
Tenant's required payment on account thereof for such Lease Year, according to
such statement, Landlord shall credit the amount of overpayment against
subsequent obligations of Tenant with respect to Taxes and Operating Costs
Excess (or refund such overpayment if the Term of this Lease has ended and
Tenant has no further obligation to Landlord); but, if the required payments on
account thereof for such Lease Year are greater than the estimated payments (if
any) theretofore made on account thereof for such Year, Tenant shall make
payment to Landlord within thirty (30) days after being so advised by Landlord.
(i) Provided that Tenant is not in default beyond the expiration of any
applicable notice and cure period, Tenant shall have the right to audit the
books, records and computations of Landlord relative to Landlord's Aggregate
Taxes and Operating Costs, provided: (i) Tenant gives Landlord thirty (30) days'
prior written notice of its intent to audit, (ii) the audit occurs during
Landlord's normal business hours and in Landlord's principal offices, (iii)
Tenant may only audit said records and books once during each calendar year,
(iv) Tenant may only conduct the audit of a calendar year's books and records
within twelve (12) months after receipt of the final statement for the item in
question for such calendar year, (v) the auditor shall not be compensated on a
contingency basis, (vi) Tenant provides Landlord a copy of the auditor's report,
(vii) the auditor agrees to execute a confidentiality agreement with respect to
such audit. All of the information obtained through said audit as well as any
compromise, settlement, or adjustment reached between Landlord and Tenant
relative to the results of the audit shall be held in strict confidence by
Tenant and Tenant's officers, agents and employees and shall not be revealed in
any manner to any person except upon the written consent of Landlord, which
consent may be withheld in Landlord's reasonable discretion, or if required
pursuant to any litigation between Landlord and Tenant materially related to the
facts disclosed by such audit, or if otherwise required by law. Landlord shall
have all rights allowed by law or equity if Tenant, its officer, agents or
employees and/or auditor violate the terms of this provision. The right of audit
provided in this Section shall not be construed as postponing or delaying any
payment of Rent provided for herein.
If Tenant's audit demonstrates that the annual statement does not comply
with the provisions of this Section, Tenant shall notify Landlord in writing
within the twelve (12) month
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period described above, informing Landlord of the amount of the overpayment, and
Landlord shall pay such amount within thirty (30) days with interest thereon at
the rate of 1.5% per month, unless Landlord in good faith contests such amount.
If Landlord in good faith contests such amount, then either Landlord or Tenant
shall have the right, upon notice to the other, to initiate the following
dispute resolution procedure: Tenant and Landlord shall endeavor to reconcile
such dispute within thirty (30) days after the written notice from Tenant. If
the parties are unable to resolve such dispute, they shall jointly select a
third, independent party who shall make a final and binding decision within
thirty (30) days after being selected. The third party's fee shall be paid by
the party against whom such decision is rendered. The cost of Tenant's audit
shall be borne by the Tenant unless the Tenants audit (or the decision of the
arbitrator, if applicable) discloses that the disputed amount exceeds the actual
amount properly allocable to Tenant by more than five (5%) percent (a "Material
Discrepancy"), in which case the reasonable expenses of the audit, and the
amount of any overpayment (together with interest at the rate of 1.5% per month
from the end of the Lease Year to the date paid) shall be paid by Landlord to
Tenant upon demand.
PART YEARS:: If the Commencement Date or the Termination Date occurs in
the midst of a calendar year, Tenant shall be liable for only that portion of
the Taxes and Operating Costs Excess with respect to such calendar year
represented by a fraction, the numerator of which is the number of days of the
herein Term which falls within the calendar year, and the denominator of which
is three hundred sixty-five (365).
EFFECT OF TAKING: In the event of any taking of the Building or the land
upon which it stands under circumstances whereby this lease shall not terminate
under the provisions of Section XVII, and in the event the valuation of the
Building or the Property is lowered to reflect the taking, the $3.63 per square
feet amount set forth in Section X(c) shall be lowered proportionately in
relation to the reduced valuation.
SURVIVAL OF OBLIGATIONS: Any obligation under this Section XI of Tenant
which shall not have been paid at the expiration of the Term of this Lease shall
survive such obligation and shall be paid when and as the amount of same shall
be determined to be due.
SECTION XII. REMOVAL OF GOODS AND TENANT'S REPAIRS. At the expiration of
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the term, Tenant will remove its goods and effects (except as elsewhere provided
herein) and will peaceably yield up to the Landlord the Premises in as good
order and condition as when delivered to it, excepting ordinary wear and tear
(which shall not be deemed to include holes in walls or floors or special wiring
caused by installation of Tenant's Fixtures or equipment), repairs required to
be made by Landlord and damage by fire or unavoidable casualty.
The Tenant shall be responsible for all damages or injury to the Premises,
fixtures, appurtenances and equipment of Landlord, and to the Building and the
Property, caused by Tenant's installation or removal of furniture, fixtures or
equipment.
SECTION XIII. SALES TAX. In the event that any sales tax shall be levied
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by the Commonwealth of Massachusetts, or the Town of Canton, or any other
authority having jurisdiction, upon the rent and Additional Rent received by
Landlord from Tenant, the exact
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amount of such tax shall be paid by Tenant to Landlord at the same time each
installment of rent and Additional Rent is paid to the Landlord.
SECTION XIV. IMPROVEMENTS AND ALTERATIONS. The Tenant may place such
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partitions, fixtures, (including light fixtures), personal property, machinery,
motors and the like (subject to Section VII) in the Premises and may make, at
its own expense, such improvements and alterations as have the prior written
approval of Landlord, which approval shall not be unreasonably withheld or
delayed, in each instance provided that all work done by Tenant in the Premises
shall be done in accordance with all zoning, building, fire and other codes
applicable thereto. All fixtures, equipment, improvements and appurtenances
attached to or built into the Premises prior to or during the term shall be and
remain part of the Premises as of the end of the term unless specifically
excluded elsewhere in this Lease. In the case of damage or destruction of such
items during the term, Tenant shall have the right to recover its loss from any
insurance company with which it has insured the same notwithstanding that any of
such things might be considered part of the Premises at the end of the term.
Except for alterations or improvements that Tenant has the right to make and/or
for which Landlord gave its consent, Tenant shall remove any or all of such
fixtures, equipment, improvements and alterations at the end of the term.
Landlord may not require removal of pipes, wires and the like from the walls,
ceilings or floors, provided that the Tenant properly cuts, caps and disconnects
such pipes and wires and seals them off in a safe and lawful manner flush with
the applicable wall, floor or ceiling and redecorates the area consistent with
the remainder of the Premises. Tenant shall be responsible for any damage to the
Building caused by malfunction of equipment due to the removal of its property
as aforesaid.
SECTION XV. INSPECTION. The Landlord and any mortgagee of the Building or
---------- ----------
of the Property, or of Landlord's interest therein, and their representatives
shall have the right at all times to enter the Premises upon reasonable prior
notice to inspect the same and to make repairs or replacements therein as
required by this Lease and to introduce conduits and pipes or ducts; provided,
however, that the Landlord shall use reasonable efforts not to disturb the
Tenant's use and occupancy
SECTION XVI. CASUALTY. If the Premises or the Building shall be damaged or
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destroyed by fire or other casualty insurable under standard coverage insurance
to the extent of less than fifty percent (50%) of the reasonable replacement
value thereof at the time of such damage or destruction, Landlord shall, except
as otherwise provided herein, repair and/or rebuild the same with reasonable
diligence, but Landlord's obligation hereunder shall be limited to the
performance of Landlords work, if any, in accordance with Exhibit B hereof and
---------
shall also be subject to zoning and building laws then applicable to the
Premises. Landlord's obligation hereunder shall be limited to the proceeds
received and retained by Landlord under the insurance policy which is allocable
to the Premises and Landlord shall not be obligated to commence such repairs
and/or rebuilding until such insurance proceeds are released to Landlord. Tenant
shall repair or restore with due diligence all trade fixtures, equipment and
other installations theretofore installed by Tenant and damaged or destroyed by
such fire or casualty and shall be entitled to
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<PAGE>
retain all insurance proceeds relating thereto. If the Premises or the building
of which they are a part shall be damaged or destroyed to the extent of fifty
percent (50%) or more of the reasonable replacement value thereof at the time of
such damage or destruction, or shall be damaged or destroyed as a result of a
risk which is not covered by insurance, or shall be damaged or destroyed to any
extent by any cause in the last year of the then current term of this Lease
(unless Tenant shall have exercised prior to the date of said fire or other
casualty or then exercises any remaining option to extend the term of this
Lease), or if the Property (whether or not including the Premises or the
Building) should be damaged or destroyed to the extent of twenty-five percent
(25%) or more of the reasonable replacement value thereof at the time of such
damage or destruction, the Landlord may at its sole election restore or rebuild
the Premises, the Building or the Property, as the case may be, or terminate
this Lease; provided, however, Tenant's Lease shall not be the only lease in the
Building so terminated in the event lease termination is on account of damage or
destruction to the extent of twenty-five percent (25%) or more of the reasonable
replacement value of the Property; and provided further, however, if said
termination is as a result of a fire or other casualty having occurred during
the last year of the then current term of this Lease, Tenant may invalidate said
termination by exercising within thirty (30) days after Landlord's notice of
termination any remaining option to extend the term of this Lease,
In any instance where Landlord shall have an election to terminate this
Lease by reason of such damage or destruction, it shall give Tenant notice of
its election within sixty (60) days after such damage or destruction. Tenant
shall, during any period of reconstruction or repair of the Premises, the
Building and/or of the Property continue the operation of its business in the
Premises to the extent reasonably practicable. If the Premises or any part
thereof, or the Building shall be damaged or destroyed by fire or other casualty
(irrespective of the time when such damage or destruction shall occur, and
irrespective of whether or not Landlord shall be insured against the perils
causing same) and if as a result thereof the Premises shall be rendered
untenantable to an extent which would reasonably require the Tenant to curtail a
part of its business operation, then a just proportion of the Rent and
Additional Rent reserved hereunder shall be suspended or abated according to the
extent to which Tenant may be reasonably required to discontinue its business in
the Premises until the work of restoration to be done by Landlord as aforesaid
shall be substantially completed and (i) sixty (60) days shall have elapsed from
the date of completion of the Landlords restoration work, or (ii) the Tenant
shall be operating in the entire Premises, whichever shall first occur, or (iii)
if this Lease and the term hereof shall terminate as hereinbefore provided,
until such termination.
In the event the Lease is not terminated and Landlord shall fail to
achieve substantial completion of such repairs and restoration within six (6)
months from the time of destruction or casualty, (provided, however, that such
time period shall be extended day-for-day by any delays caused by Tenant and for
up to a maximum of thirty (30) days as a result of any force majeure), and
Tenants use and enjoyment of the Premises is then materially impaired by the
uncompleted restoration, Tenant may, at its option, deliver notice (the "Notice
of Intent to Terminate") to Landlord of Tenants intent to terminate this Lease.
If Landlord fails to achieve substantial
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completion of such repair and restoration within thirty (30) days of Landlord's
receipt of the Notice of Intent to Terminate, then Tenant may at its option
terminate this Lease by delivering a further notice of termination (the
"Termination Notice") to Landlord at any time thereafter, but prior to
substantial completion of such repair and restoration, whereupon the Lease shall
end on the date of such Termination Notice.
SECTION XVII. EMINENT DOMAIN. If the whole of the Premises, the Building,
------------ --------------
or the Property, shall be taken by condemnation or rights of eminent domain (the
words "condemnation" and "eminent domain" as used herein to include purchase in
lieu thereof) hereinafter collectively referred to as "taking", then the term
hereof shall cease as of the day of the vesting of title or as of the day
possession shall be taken thereunder, whichever is earlier. If forty percent
(40%) or more of the Property shall be taken (whether or not the Building or the
Premises is within said forty percent (40%) or if forty percent (40%) or more of
the Premises or forty percent (40%) or more of the Building of which the
Premises are a part are a part shall be taken, Landlord shall be entitled to
terminate this Lease effective as of the day of vesting of title or as of the
day possession shall be taken thereunder, whichever Landlord shall elect, by
giving Tenant notice of its election within sixty (60) days of such vesting of
title or taking of possession; provided, however, Tenant's Lease shall not be
the only lease in the Building so terminated in the event lease termination is
on account of a taking of forty percent (40%) or more of the Property; but if
Landlord does not elect so to terminate this Lease, it shall with due diligence
restore the Premises and/or the Building and/or the Property to an architectural
unit as nearly like its condition prior to such taking as shall be practical. If
twenty-five percent (25%) or more of the Premises shall be taken, or if fifty
percent (50%) or more of the Building of which the Premises are a part shall be
taken including in such taking some portion of the Premises, Tenant shall be
entitled to terminate this Lease by giving notice to Landlord to that effect
within sixty (60) days following the taking of possession of the Premises, in
which event this Lease and the term hereof shall cease and terminate as of the
end of the calendar month in which such notice shall be given. If this lease is
not terminated as hereinbefore provided, either by Landlord or Tenant, all of
the provisions hereof shall continue in effect, but in case there shall be a
reduction of the floor area of the Premises by reason of such taking, the Rent
and Additional Rent shall be equitably abated to the extent of the reduction of
the floor area of the Premises from the time possession shall be taken for the
balance of the term. During the restoration work to be done by Landlord, if any,
a just proportion of the Rent and Additional Rent herein reserved shall be
suspended or abated according to the extent that Tenant may be reasonably
required to discontinue its business in the Premises until the work shall be
completed. Tenant shall during any period of such work continue the operation of
its business in the Premises to the extent reasonably practicable. In the event
of restoration, Landlords obligation to restore shall be limited to the
obligations of Landlord in connection with the original construction as set
forth on Exhibit B and limited to the extent of the damages awarded for the
---------
taking and released to Landlord. Landlord's obligations shall also be subject to
zoning and building laws then applicable to the Premises. Tenant shall repair or
restore all trade fixtures or equipment and other installations theretofore
installed by Tenant. All damages
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awarded for any taking, whether for the whole or a part of the Premises, the
Building, of the balance of the Property, or otherwise, shall belong to and be
the property of Landlord whether such damages shall be awarded as compensation
for diminution in value to the leasehold or to any fee or otherwise; provided,
however, that Tenant shall be entitled to receive and retain any amounts which
may be specifically awarded to it by reason of the loss of its trade fixtures or
furniture. Tenant shall have the right to prosecute any claim for its relocation
or moving expenses.
SECTION XVIII. INDEMNIFICATION.
------------- ---------------
Tenant and Landlord shall save the other harmless, and will exonerate and
indemnify the other, from and against any and all claims, liabilities or
penalties asserted by or on behalf of any person, firm or public authority:
(a) on account of or based upon any injury to person, or loss of or damage
to property, sustained or occurring on the Premises on account of or based upon
the act, omission, fault, or neglect of the indemnifying party, its servants,
agents, employees, licensees, invitees and guests;
(b) on account of or based upon any injury to person or loss of or damage
to property, sustained or occurring elsewhere (other than on the Premises) in or
about the Building (and, in particular, without limiting the generality of the
foregoing on or about the elevators, stairways, public corridors, sidewalks,
concourses, arcades, approaches, areaways, roof, outside parking areas, or other
appurtenances and facilities used in connection with the Building or Premises)
arising out of the use or occupancy of the Building or Premises by the Tenant or
Landlord (as the case may be) or by any person claiming by, through or under the
indemnifying party, unless caused by or resulting from the indemnified party's
negligence; and in addition to and not in limitation of either the foregoing
subdivision (a) or this subdivision (b)
(c) on account of or based upon (including monies due on account of) any
work or things whatsoever done (other than by the indemnified party or its
contractors, or agents or employees of either) on the Premises during the term
of this Lease and during the period of time, if any, prior to the Rent
Commencement Date that Tenant may have been given access to the Premises and, in
respect of any of the foregoing, from and against all costs, expenses (including
reasonable attorney's fees), and liabilities incurred in or in connection with
any such claim, or any action or proceeding brought thereon and in case any
action or proceeding be brought against the indemnified party by reason of any
such claim, the indemnifying party, upon notice from the indemnified party,
shall, at the indemnifying party's expense, resist or defend such action or
proceeding and employ counsel therefor reasonably satisfactory to the
indemnified party, it being agreed that such counsel as may act for insurance
underwriters of the indemnifying party engaged in such defense shall he deemed
satisfactory.
SECTION XIX. PROPERTY OF TENANT. In addition to and not in limitation of
----------- ------------------
the forgoing, Tenant covenants and agrees that all of its merchandise, furniture
and property of every kind, nature and description which may be in or upon the
Premises, Building or Property, in the public corridors, or on the sidewalks,
areaways, and approaches thereto, or outside parking
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<PAGE>
areas during the term hereof, shall be at the sole risk and hazard of
Tenant, and that if the whole or any part thereof shall be damaged, destroyed,
stolen or removed by any cause whatsoever, no part of said damage or loss shall
be charged to or borne by Landlord, unless due to any act or omission of
Landlord, its servants, agents, employees, licensees, invitees or guests. Tenant
shall, at Tenants expense, obtain and keep in force "all risk" property
insurance covering Tenant against damage to or loss of any personal property,
fixtures, and equipment of Tenant, and providing for waiver of subrogation by
Tenant's insurer against Landlord and coverage for the full replacement cost of
such property.
SECTION XX. INJURY AND DAMAGE. Landlord shall not be liable for any injury
---------- -----------------
or damage to persons or property resulting from fire, explosion, falling
plaster, steam, gas, electricity, electrical disturbance, water, rain or snow,
or leaks from any part of the Building, Property or parking area, or from the
pipes, appliances, or plumbing works or from the roof, street or subsurface or
from any other place or from dampness or by any other cause of whatever nature,
whether caused by other tenants or persons in the Building or in any parking
area or caused by operations in construction of any private, public or
quasi-public work, unless due to the negligence or willful misconduct of
Landlord, its servants, agents, employees, licensees, invitees or guests; nor
shall Landlord be liable for any latent defect in the Premises, Building or
Property, unless Tenant has provided notice to Landlord of such defect, and
Landlord fails to cure same.
SECTION XXI. ASSIGNMENT, MORTGAGING, AND SUBLETTING. Tenant covenants and
----------- --------------------------------------
agrees that neither this Lease nor the term and estate hereby granted, nor any
interest herein or therein, will be assigned, mortgaged, pledged, encumbered or
otherwise transferred, and that neither the Premises, nor any part thereof will
be encumbered in any manner by reason of any act or omission on the part of
Tenant, or used or occupied, or utilized for desk space or for mailing
privileges, by anyone other than Tenant, or for any use or purpose other than as
stated herein, or be Sublet or offered or advertised for subletting, without the
prior written consent of Landlord in every case which consent shall not be
unreasonably withheld or delayed. If Tenant shall sublet the Premises, having
first obtained Landlord's consent, at a rental in excess of the Rent due and
payable by Tenant under the provisions of this Lease, such excess Rent shall be
split equally between the Tenant and the Landlord after deduction of the
Tenant's expenses, it being agreed, however, that Landlord shall not be
responsible for any deficiency if Tenant shall sublet the Premises at a rental
less than that provided for herein. Further, it is agreed that in lieu of
withholding or granting its consent Landlord may, within twenty (20) days of
receipt of a request for consent from Tenant, cancel this Lease as to the entire
Premises or as to so much of the Premises as Tenant has proposed for assignment
or subletting. If Landlord shall elect to cancel this Lease as to all or a
portion of the Premises, it shall give Tenant written notice of its election,
which notice shall set forth a "termination date" which shall be not less than
forty-five (45) or more than ninety (90) days from the receipt by Landlord of
Tenant's request to assign or sublet, and on that "termination date" Tenant
shall surrender the Premises for which this Lease has been canceled in
accordance with the provisions of this Lease relating to the surrender of the
Premises as the expiration of the term of this Lease. If the cancellation shall
be as to a portion of the
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Premises only, then the Rent and the Additional Rent shall be adjusted
proportionately to reflect said cancellation. It is hereby expressly understood
and agreed, however, if Tenant is a corporation, that the subletting,
assignment, or transfer of this Lease, and the term and estate granted, to any
corporation into which Tenant is merged or with which Tenant is consolidated, or
to any affiliate or acquirer of the stock or assets of Tenant, which corporation
shall have a net worth at least equal to that of Tenant immediately prior to
such merger or consolidation (such corporation being hereinafter called
"Assignee"), without the prior written consent of Landlord shall not be deemed
to be prohibited hereby, if, and upon the express condition that, Assignee and
Tenant shall promptly execute, acknowledge, and deliver to Landlord an agreement
in form and substance satisfactory to Landlord whereby Assignee shall agree to
be bound by and upon the covenants, agreements, terms, provisions and conditions
set forth in this Lease on the part of Tenant to be performed and whereby
Assignee shall expressly agree that the provisions of this Section XXI shall,
notwithstanding such assignment transfer, continue to be binding upon it with
respect to all future assignments and transfers. Notwithstanding any permitted
assignment or subletting, Tenant shall at all times remain directly, primarily
and fully responsible and liable for the payment of all sums payable under this
Lease and for compliance with an of its obligations as tenant under this Lease.
The listing of any name other than that of Tenant, whether on the doors of the
Premises or on the Building directory, or otherwise, shall not operate to vest
any right or interest in this lease or in the Premises or be deemed to be the
written consent of Landlord mentioned in this Section XXI, it being expressly
understood that such listing is a privilege extended by Landlord revocable at
will by written notice to Tenant.
If this Lease is assigned, or if the Premises or any part thereof is
sublet or occupied by anybody other than Tenant, Landlord may, after default by
Tenant, collect Rent from the Assignee, subtenant or occupant, and apply the net
amount collected to the Rent herein reserved, but no such assignment,
subletting, occupancy or collection shall he deemed a waiver of this covenant,
or the acceptance of the Assignee, subtenant or occupant as a tenant, or a
release of Tenant from the further performance by Tenant of covenants on the
part of Tenant herein contained. The consent by Landlord to an assignment or
subletting shall not in any way be construed to relieve Tenant from obtaining
the express consent in writing of Landlord to any further assignment or
subletting. No assignment, subletting or use of the Premises by an affiliate of
Tenant shall affect the purpose for which the Premises may be used stated in
Section II.
SECTION XXII. SIGNS, BLINDS AND DRAPERIES. No signs or blinds may be put
------------ ---------------------------
on or in any window by Tenant. Tenant may hang its own draperies, provided that
they shall not in any way interfere with the Building standard blinds or be
visible from the exterior of the Building and that such draperies are so hung
and installed that when drawn, the Building standard blinds are automatically
also drawn. Any signs or letters in the public corridors or on the doors must be
submitted to Landlord for written approval before installation, which
installation shall be at the sole expense of Tenant. Tenant shall have the
right, at its cost and expense, subject to the prior approval of Landlord, which
approval shall not be unreasonably withheld or delayed, to place its name on the
Building's directory in the lobby and install a sign above the entrance to the
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Premises, and further, subject to permitting, applicable building codes
and rights of other tenants, Tenant shall have the right to install, at its own
cost and expense a monument sign on the Property.
SECTION XXIII. COMPLIANCE WITH INSURANCE. Tenant will not do or omit to do
------------- --------------------------
to keep anything in, upon or about the Premises which may prevent the obtaining
of any fire, liability or other insurance upon or written in connection with the
Premises, Building, Property or any parking area or which may make any such
insurance void or voidable, or which may create any extra premiums or increase
the rate of any such insurance over that normally applicable to the office
buildings unless the Tenant pays such extra or increased premiums.
SECTION XXIV. INFLAMMABLES, ODORS. Tenant shall not bring or permit to be
------------ -------------------
brought or keep in or on the Premises or elsewhere in the Building, any
inflammable, combustible or explosive fluids, material, chemical or substance
other than those used in the ordinary course of Tenant's business pursuant to
the permitted uses set forth in Section II hereof, or cause or permit any odors
of cooking or other processes, or any unusual or other objectionable odors to
emanate from or permeate the Premises.
SECTION XXV. DEFAULT.
----------- -------
Any one of the following shall be deemed to be an "Event of Default":
(a) Failure on the part of Tenant to pay Rent, Additional Rent or other
charges for which provision is made herein on or before the date on which the
same become due and payable and such failure continues for five (5) business
days after Landlord has sent to Tenant two (2) notices of such default. However,
if: (i) Landlord shall have sent to Tenant a notice of such default, even though
the same shall have been cured and this Lease not terminated; and (ii) during
the twelve (12) month period in which said notice of default has been sent by
Landlord to Tenant, Tenant thereafter shall default in any monetary payment, the
same shall be deemed to be an Event of Default upon Landlord giving Tenant
written notice thereof, without the five (5) business day grace period set forth
above.
(b) With respect to a non-monetary default under this Lease, failure of
Tenant to cure the same within thirty (30) days following notice from Landlord
to Tenant of such default (or such longer period as may be required, if such
default cannot be cured within thirty (30) days). Notwithstanding the thirty
(30) day cure period provided in the preceding sentence, Tenant shall be
obligated to diligently proceed to cure such default; and if Tenant fails so to
do, the same shall be deemed to be an Event of Default.
(c) The commencement of any of the following proceedings, with such
proceeding not being dismissed within sixty (60) days after it has begun: (i)
the estate hereby created being taken on execution or by other process of law;
(ii) Tenant being judicially declared bankrupt or insolvent according to law;
(iii) an assignment being made of the property of Tenant for the benefit of
creditors; (iv) a receiver, guardian, conservator, trustee in involuntary
bankruptcy or other similar officer being appointed to take charge of all or any
substantial part of Tenant's property by a court of competent jurisdiction; or
(v) a petition being filed for the reorganization of Tenant under any provisions
of the Bankruptcy Act now or hereafter enacted.
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<PAGE>
(d) Tenant filing a petition for reorganization or for rearrangements
under any provisions of the Bankruptcy Act now or hereafter enacted, and
providing a plan for a debtor to settle, satisfy or to extend the time for the
payment of debts.
(e) Execution by Tenant of an instrument purporting to assign Tenant's
interest under this Lease or sublet the whole or a portion of the Premises to a
third party without Tenant having first obtained Landlord's prior express
consent to said assignment or subletting.
If an Event of Default shall occur, then in addition to any other remedy
Landlord may have at law or equity, Landlord may (i) apply the Security Deposit,
if any, specified in Section XLV toward the satisfaction and cure of such Event
of Default, (ii) cure Tenant's Event of Default at Tenant's cost and expense,
and/or (iii) Landlord may lawfully enter the Premises or any part thereof in the
name of the whole or mail a notice of termination addressed to Tenant at the
Premises and repossess the same as of the former estate of the Landlord and
expel the Tenant and those claiming under the Tenant without being deemed guilty
of any manner of trespass and without prejudice to any other remedies which the
Landlord may have for arrears of Rent or Additional Rent or preceding breach of
covenant, and upon entry or mailing as aforesaid. In case of Lease termination,
whether as aforesaid or otherwise, this Lease shall terminate and the Tenant
covenants that it will indemnify the Landlord against all expenses together with
interest at the rate of prime rate plus two percent (2%) per month which
Landlord may incur in collecting such amount or in obtaining possession of, or
in reletting the Premises, (including such reasonable brokerage commissions,
alterations, repairs and decorations in the Premises as Landlord in its sole
judgment considers advisable or necessary to relet the same), which the Landlord
may incur by reason of such termination during the residue of the term. The
Landlord may elect to receive as damages upon termination under this Section XXV
either the amount by which, at the termination of this Lease, the present value
of the aggregate of the Rent and Additional Rent and other charges (including
escalations projected on the basis of experience under the Lease) projected over
the period from such termination until the normal expiration date of the term
exceeds the aggregate projected rental value of the Premises for such period, or
amounts equal to the Rent and Additional Rent and other charges which would have
been payable had the Lease not so terminated, payable upon the due dates as
specified herein (subject to offset for net rents actually received from
reletting after subtraction of the expenses of reletting). Landlord shall use
reasonable efforts to relet the Premises as the law may require, on such terms
and conditions as Landlord in its sole discretion may determine (including a
term different from the term, rental concessions, and alterations to, and
improvement of, the Premises); however, Landlord shall not be obligated to relet
the Premises at below market rate, nor shall Landlord be obligated to relet the
Premises before leasing other portions of the Building. Landlord shall not be
liable for, nor shall Tenant's obligations hereunder be diminished because of,
Landlord's failure to relet the Premises or to collect rent due for such
reletting. In the event of reletting, Landlord shall have no liability to
account to Tenant for any excess in proceeds received from such reletting.
Landlord and Tenant agree that the notice provisions provided in this
Section are in lieu of those provided in Massachusetts General Laws Chapter 186,
Section 11.
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SECTION XXVI. SUBORDINATION. This Lease is subject and subordinate in all
------------- --------------
respects to all mortgages which may now or hereafter be placed on or affect the
real property of which the Promises are a part, or Landlord's interest or estate
therein, and to each advance made and/or hereafter to be made under any such
mortgages, and to all renewals, modifications, consolidations, replacements and
extensions thereof and all substitutions therefor. This Section XXVI shall be
self-operative and no further instrument of subordination shall be required. In
confirmation of such subordination, Tenant shall execute and deliver promptly
any certificate that Landlord and/or any mortgagee and their respective
successors in interest may request. Notwithstanding the generality of the
foregoing provisions of this Section XXVI, Tenant agrees that any such mortgagee
shall have the right at any time to subordinate any such mortgages or other
instruments of security to this Lease on such terms and subject to such
conditions as such mortgagee may deem appropriate in its discretion. Tenant
further covenants and agrees upon demand by Landlords mortgagee at any time,
before or after the institution of any proceedings for the foreclosure of any
such mortgages or other instruments of security, or sale of the Building
pursuant to any such mortgages or other instruments of security (which agreement
shall survive any such foreclosure sale), to attorn to such mortgagee or such
purchaser upon any such sale and to recognize such purchaser as Landlord under
this Lease, provided that Tenant's possession shall not be disturbed except
under the terms of this Lease, and further agrees to execute any and all
documents as such mortgagee may require to confirm such attornment.
Landlord and Tenant acknowledge that they willon or about the date of
execution hereof, enter into a Subordination, Nondisturbance and Attornment
Agreement ("SNDA") with Citizens Bank Of Massachusetts ("Current Lender")
respecting this Lease in the form attached hereto as Exhibit "C" and by this
-----------
reference made a part hereof. Landlord represents and warrants to Tenant that
there are no mortgages currently affecting the Property or Premises, except for
the mortgage held by Current Lender.
SECTION XXVII. NOTICES.
-------------- --------
Any notice or demand by Tenant to Landlord shall be served by Sheriff, Constable
or by hand delivery, certified mail, postage prepaid, or recognized overnight
courier, addressed to Landlord as set forth below, until otherwise directed in
writing by the Landlord, and any notice or demand by Landlord to Tenant shall be
served by Sheriff, Constable or by hand delivery or certified mail, postage
prepaid, or recognized overnight courier, to the Tenant as set forth below.
To Landlord: New Boston Batterymarch Limited Partnership
One Longfellow Place, Suite 3612
Boston, Massachusetts 02114
with a copy to: Rappaport, Aserkoff & Rappaport
One Longfellow Place, Suite 3611
Boston, Massachusetts 02114
To Tenant: Network Engines, Inc.
15 Dan Road
Canton, Massachusetts 02021
Attn: Douglas G. Bryant
with a copy to: Hale and Dorr LLP
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<PAGE>
60 State Street
Boston, Massachusetts 02109
Attention: Jeffrey A. Hermanson Esq.
It is agreed that certified mail shall be conclusively deemed received one
day after it is mailed, postage prepaid, and that an item sent by recognized
overnight courier shall be conclusively deemed received the day it is scheduled
to be delivered.
SECTION XXVIII. RULES AND REGULATIONS. Tenant will faithfully observe and
--------------- ----------------------
comply with the "Rules and Regulations" annexed hereto and such other further
Rules and Regulations as Landlord hereafter at any time or from time to time may
make and may communicate in writing to Tenant, which in the reasonable judgment
of Landlord shall be necessary for the reputation, operation, safety, care or
appearance of the Building, any parking garage, the outside parking areas, or
the preservation of good order in the said Building, the Property, parking area,
or the operation of maintenance of the Building, or the equipment thereof, or
the Property, or the comfort of tenants or others in the Building; provided,
however, that in the case of any conflict between the provisions of this Lease
and any such Rules and Regulations, the provisions of this Lease shall control,
and provided further, and provided further, Landlord shall use all reasonable
efforts to uniformly enforce the Rules and Regulations or the terms, covenants
or conditions in any other lease as against any other tenant and, provided
however, Landlord shall not be liable to Tenant for violation of the same by any
other tenant, or any other tenant's servants, employees, agents, visitors,
invitees or licensees.
SECTION XXIX. QUIET ENJOYMENT. The Tenant, on paying the said Rent and
------------- ----------------
Additional Rent and performing the covenants of this Lease on its part to be
performed shall and may peaceably and quietly have, hold and enjoy the Premises
for the term aforesaid and any extension thereof.
SECTION XXX. BINDING AGREEMENT. This Lease shall bind and inure to the
------------ ------------------
benefit of the parties hereto and their respective heirs, representatives,
successors and assigns. This Lease contains the entire agreement of the parties
and may not be modified except by instrument in writing signed by the parties
hereto.
SECTION XXXI. PARTNERSHIP. During such time as the Landlord shall be a
------------- ------------
limited partnership, Tenant agrees that it shall not hold any partner of
Landlord personally responsible for any of the covenants of Landlord under this
Lease, and in the event it has a claim against Landlord, Tenant shall look only
to the assets of the partnership for satisfaction thereof. Tenant specifically
agrees to look solely to Landlord's interest in the Building for recovery of any
judgment from Landlord; it being specifically agreed that neither the Landlord
nor anyone claiming by, through or under Landlord shall ever be personally
liable for any such judgment, or for the payment of any monetary obligation to
Tenant.
SECTION XXXII. SEISIN. In the event of a sale or other disposition of the
-------------- -------
Building and/or land underlying it by Landlord, Landlord shall be entirely free
and relieved from the performance and observance thereafter of all covenants and
obligations of Landlord hereunder, it being understood and agreed in that the
successor to Landlord's ownership shall thereupon and
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thereafter assume and perform and observe, any and all of such covenants
and obligations of Landlord.
SECTION XXXIII. INSURANCE. Tenant shall maintain in full force and effect
--------------- ----------
the following insurance written by one or more responsible companies licensed to
do business in Massachusetts in form and content reasonably satisfactory to
Landlord, including, at the request of Landlord, Landlord as an additional
insured with respect to the insurance in subsection (a) below, as its interest
may appear under the Lease, and Tenant shall keep deposited with the Landlord
copies of all policies of insurance, or certificates thereof, with endorsements
on such policies or certificates to the effect that such insurance shall not be
canceled by the insurer without at least fifteen (15) days prior notice to
Landlord.
(a) Commercial General Liability insurance in the broadest form of such
coverage as is available from time to time in the jurisdiction in which the
Premises is located, applying to the use and occupancy of the Premises and the
business operated by Tenant and on an occurrence basis in an amount not less
than Three Million Dollars ($3,000,000) combined single limit for property
damage and for any personal injury, including death, to one or more than one
person arising out of any one incident, or such greater commercially reasonable
amount as may be recommended by Landlord's insurance advisor or required by
Landlord's mortgagee.
(b) Worker's compensation insurance covering all employees, and, if Tenant
shall contract with any independent contractor for the furnishing of labor,
materials or services to Tenant, Tenant shall require such independent
contractor to maintain Worker's compensation insurance covering all its
employees and all the employees of any subcontractor.
(c) Personal Property - Landlord shall not be liable to Tenant for, unless
such loss, cost or damage is due to the negligence or willful misconduct of
Landlord, or its servants, agents, employees, licensees, invitees or guests, and
Tenant shall carry extended coverage property damage insurance covering Tenant's
personal property located at the Premises (furniture, fixtures and equipment on
a replacement cost basis) and Tenant improvements, if any, including:
1. Damage to or loss of property entrusted to employees of the
Landlord.
2. Loss of property through thefts regardless of where the theft
takes place.
3. Damage to property regardless of where the damage takes place.
4. Damage to or loss of property caused by other tenants or
occupants of the building or caused by visitors to or in the building.
It is specifically understood that Landlord's insurance does not cover any
personal property of Tenant and Tenant shall not make any claim for loss of or
damage to such property against Landlord or Landlord's insurance carrier and
shall not permit its insurance carrier to make any claim for loss or damage to
such property against Landlord or Landlord's insurance carrier.
Landlord agrees that it will at all times during the term of this Lease
carry fire, hazard and extended coverage insurance insuring the full insurable
replacement value of the Building and the 45 Dan Road building and Landlord's
contents in each of same.
SECTION XXXIV. SUBROGATION, INSURANCE PREMIUMS. Landlord and Tenant hereby
-------------- --------------------------------
waive any rights each may have against the other in connection with any of the
- 23 -
<PAGE>
damage occasioned to Landlord or Tenant, as the case may be, their respective
property, the Building or its contents, arising from covered causes of loss for
which property insurance is carried or required to be carried pursuant to this
Lease. Each party on behalf of their respective insurance companies insuring
their respective property against any such loss, waive any right of subrogation
that it may have against the other party.
SECTION XXXV. SHORING. If an excavation shall be made upon land adjacent
------------- --------
to the Premises by a third party not affiliated with or employed by Landlord, or
shall be authorized to be made, Tenant shall afford to the person causing or
authorized to cause such excavation, license to enter upon the Premises for the
purpose of doing such work as said person shall deem necessary to preserve the
Building from injury or damage and to support the same by proper foundations
without any claims for damages or indemnity against Landlord, or diminution or
abatement of Rent.
SECTION XXXVI. REZONING. Tenant agrees that he will not oppose any
-------------- ---------
application for rezoning or variance instituted by Landlord, his successors or
assigns.
SECTION XXXVII. SEPARABILITY. If any provisions or any part of any
--------------- -------------
provision of this Lease or if the application of any provisions of any part of
this Lease to any person, entity, or circumstance shall be held invalid by a
court of competent jurisdiction, such invalidity shall have no effect on any
other provision or any part of any provision of this Lease or its application to
any other person, entity, or circumstance.
SECTION XXXVIII. WAIVER OF TRIAL BY JURY. Landlord and Tenant agree that
---------------- ------------------------
they shall, and hereby do, waive trial by jury in any action arising out of
Tenants use and occupancy of the Premises.
SECTION XXXIX. NO WAIVER. The failure of either Landlord or Tenant to seek
-------------- ----------
redress for violation of, or to insist upon the strict performance of this
Lease, or any of the rules and regulations set forth in this Lease or hereafter
adopted by Landlord as herein provided, shall not constitute a waiver in any
respect nor prevent a subsequent act, which originally constituted a violation,
from having all force and effect of an original violation. The receipt by
Landlord of Rent or Additional Rent with knowledge of the breach of any covenant
of this Lease shall not be deemed a waiver of such breach. No payment by Tenant
or receipt by Landlord of a lesser amount than the monthly Rent herein
stipulated shall be deemed to be other than on account, nor shall any
endorsement or statement on any check, nor any letter accompanying any check or
payment as Rent be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlords right to recover the
balance of such Rent or Additional Rent or pursue any other remedy in this Lease
provided.
SECTION XL. HOLDING OVER. In the event Tenant or any party claiming by,
----------- -------------
through or under Tenant shall hold over the Premises or any part thereof after
the termination of this lease, such holding over shall constitute and be
construed as a tenancy at sufferance only, provided that all the terms of this
Lease shall apply except that the Rent set forth in Section IV shall be
calculated at a daily rate equal to one hundred fifty percent (150%) of the Rent
reserved
- 24 -
<PAGE>
in said Section IV. Nothing contained in this Section XL shall be construed as
Landlord's consent to Tenant holding over.
SECTION XLI. TEMPORARY SPACE. Landlord agrees that, beginning October 1,
------------ ----------------
1999 and continuing through January 31, 2000 Tenant shall have the right to
occupy and use 13,000 square feet of Net Rentable Area in 45 Dan Road as shown
on Exhibit A-1 attached hereto and by this reference made a part hereof (the
-----------
"Temporary Space"). Such Temporary Space will be delivered by Landlord to Tenant
upon the execution hereof, in broom-clean condition, but such Temporary Space
otherwise shall be leased by Tenant in its "as-is" condition. Tenant will pay
rent on the Temporary Space at the rate of Eleven and 50/100 Dollars ($11.50)
per square foot of Net Rentable Area actually occupied (which rate includes an
electricity charge of seventy-five cents ($0.75) per square foot of Net Rentable
Area actually occupied, payable monthly in advance and prorated for partial
months, and shall pay for all interior space cleaning.
SECTION XLII. CAPTIONS, PLURAL, GENDER. The captions are inserted only as
------------- -------------------------
a matter of convenience and for reference and in no way define, limit or
describe neither the scope of this Lease nor the intent of any provisions
hereof. Whenever a masculine or singular pronoun is used in this Lease, it shall
include the feminine and plural thereof whenever the context so permits or
requires.
SECTION XLIII. BROKERAGE. Tenant covenants that it has dealt with no
-------------- ----------
broker other than the brokers specified at the end of this Section XLIII, as
Tenant's Broker and as Landlord's Broker, in locating the Premises by this Lease
and in negotiating this Lease and Tenant further covenants and agrees that it
shall hold Landlord harmless from any and all claims which may be asserted by
any real estate broker other than the brokers specified at the end of this
Section XLIII, as Tenant's Broker and as Landlord's Broker, who claims that he
showed or referred the Tenant to the Landlord or to the Premises for any
transaction involving or resulting in this Lease or Premises hereby.
Landlord covenants that it has dealt with no broker other than the brokers
specified at the end of this Section XLIII, as Tenant's Broker and as Landlord's
Broker, in locating the Premises by this Lease and in negotiating this Lease and
Landlord further covenants and agrees that it shall hold Tenant harmless from
any and all claims which may be asserted by any real estate broker other than
the brokers specified at the end of this Section XLIII, as Tenant's Broker and
as Landlord's Broker, who claims that he showed or referred the Landlord to the
Tenant or to the Premises for any transaction involving or resulting in this
Lease or Premises hereby. Landlord shall pay any commission, broker's fee or
other compensation owed to the brokers specified in this section.
Tenant's Broker: Warren L. Brown, Boston Commercial Properties, Inc.
Landlord's Broker: Cushman & Wakefield
In the event that Tenant and Landlord agree to renew and/or extend the
term of this Lease, in connection with any option contained herein or otherwise,
Landlord shall not be responsible for the payment of any fee or commission to
any broker or other third party, including
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<PAGE>
any broker identified in the herein, who is retained by Tenant in connection
with such renewal and/or extension.
SECTION XLIV. HAZARDOUS WASTE.
------------- ----------------
(a) For the purpose of this Section XLIV - "Hazardous Substance" shall
mean (excepting materials used in the ordinary course of Tenant's business
pursuant to the permitted uses set forth in Section II hereof) any waste,
substance or other material which may be dangerous to health or environment,
including, without limitation, all "hazardous wastes", Hazardous materials",
Hazardous substance", "toxic substance", "oil", "infectious medical waste" and
"hazardous medical waste" as defined in any federal, state, or local law,
regulation or ordinance, including without limitation Chapter 21E of the
Massachusetts General Laws or otherwise.
(b) Tenant shall not dump, flush or in any way introduce any Hazardous
Substances, which are regulated under the Resource Conservation and Recovery Act
of 1976, as amended, (42 U.S.C. Section 6901, et. seq. "RCRA") the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 as amended (42
U.S.C. 9601 et. seq. "CERCLA"), the Superfund Amendments and Reauthorization Act
of 1986 ("SARA"), Public Law 99-499, 100 Stat 1613, et seq., and/or any other
applicable Municipal, federal, state law, into the sewerage, drainage or other
waste disposal system serving the Premises, the Building and/or the Property.
(c) Tenant shall not generate, use, store or dispose of Hazardous
Substances regulated under RCRA, CERCLA, SARA and/or any other applicable
Municipal, federal or state environmental law, in or on the Premises, the
building of which the same form a part of Premises, the Building or the
Property, nor transport Hazardous Substances from the Premises, the Building of
which the same form a part or the Property except in compliance with RCRA,
CERCLA, SARA, and any other applicable Municipal, federal or state environmental
law.
(d) Tenant shall promptly notify Landlord in writing of any incident in
the Premises, the Building or the Property which might require the filing of a
notice under any statute described in Section XLIV (b) of this Lease.
(e) Tenant shall indemnify and hold Landlord harmless from any and all
costs, liabilities, demands, claims, civil or criminal actions, or causes of
action, civil or criminal penalties, dries, losses, liens, assessments, damages,
liabilities, costs, disbursements, expenses or fees of any kind or any nature
(including without limitation all clean-up costs and attorney's fees) which may
at any time he imposed upon, incurred by or asserted or awarded against Landlord
arising out of or on account of Tenant's failure to comply with the provisions
of Section XLIV of this Lease, where due to any action or non-action of Tenant.
(f) Landlord hereby states that, on the Commencement Date, it has no
knowledge of any contamination by any hazardous waste, hazardous substances,
toxic substances, toxic chemicals, pollutants or contaminant in the Building and
the Property, as each is defined by any and all relevant Federal, State or local
environmental laws and regulations and to the best of its knowledge the Premises
and Property are free from and asbestos containing materials.
- 26 -
<PAGE>
(g) If any Hazardous Substances are discovered in the Premises or the
Property during the term of this Lease or any extensions, then, provided and so
long as such materials were not introduced into the Premises by Tenant, Landlord
shall be responsible at its sole cost and expense for the removal and
remediation, as required by law.
SECTION XLV. SECURITY DEPOSIT. Landlord shall hold and retain a security
------------ -----------------
deposit in cash or an irrevocable and automatically renewing Letter of Credit,
issued by a bank reasonably approved by Landlord, in the amount of $279,150.62,
representing six months Rent. If the Tenant is not then in default beyond
default beyond grace or cure periods in accordance with this Lease, the Security
Deposit hereunder shall be reduced to $186,100.40 on February 1, 2001.
Thereafter, if the Tenant is not then in default beyond grace or cure periods in
accordance with this Lease, the Security Deposit hereunder shall be reduced to
$139,575.30 on February 1, 2002, reduced to $93,050.02 on February 1, 2003.
Thereafter, in the event that Tenant issues an initial public stock offering
that realizes a minimum of $20,000,000.00, the security deposit will immediately
be reduced to$46,525.10.
The Security Deposit shall be delivered to Landlord on or before December
1, 1999 and shall be held throughout the term hereof as security for the
faithful performance by Tenant of each and every term, condition, covenant and
provision of this Lease. Landlord may apply an or any portion of the Security
Deposit to repair damage to the Premises or to the restoration thereof or to any
Rent and Additional Rent, including Taxes and Operating Costs which may be due
from Tenant to Landlord. In the event that Landlord shall so apply all or any
portion of the said security deposit, Tenant shall immediately upon notice,
restore the same to its full amount as required hereunder. All or any portion of
the security deposit remaining at the expiration or other termination of this
lease which has not been so applied shall be returned to Tenant.
Amount of Initial Security Deposit: $279,150.62.
SECTION XLVI. LANDLORD'S RIGHT TO PERFORM FOR TENANT. Landlord shall have
------------- ---------------------------------------
the right, but shall not be required, to pay such sums and do any act which
requires the expenditures of moneys which may be necessary or appropriate by
reason of failure or neglect of the Tenant to perform any of the provisions of
this Lease, and in the event of the exercise of such right by the Landlord, the
Tenant agrees to pay to the Landlord forthwith upon demand the cost of
performing the same, plus interest at prime plus two percent (2%) per month of
such cost; and if Tenant shall default in such payment, the Landlord shall have
the same rights and remedies as the Landlord has hereunder for the failure of
the Tenant to pay the Rent or Additional Rent. Landlord may exercise the
foregoing rights without waiving any other of its rights or releasing Tenant
from any of its obligations under this Lease, and the exercise of these rights
shall not be deemed and obligation of Landlord to perform such right in the
future.
SECTION XLVII. GOVERNING LAW. This Lease shall be governed by the
-------------- --------------
provisions hereof and by the laws of the state in which the Premises are
located, as the same may vary from time to time.
SECTION XLVIII. RIGHT OF FIRST OFFER. Provided Tenant is not in default
--------------- ---------------------
beyond applicable grace or cure periods of its obligations hereunder, and
subject to the rights of
- 27 -
<PAGE>
any existing Building tenants, Landlord shall provide Tenant with written notice
(the "Right of First Offer Notice") of any space located in the Building which
is available or will become available for lease. Landlord's Right of First Offer
Notice to Tenant shall set forth the Premises' square footage, the availability
date, the term of occupancy (which term shall be coterminous with the Term of
this Lease), the Rent, the base amount for the purpose of computing Tax and
Operating Cost Excess, and the tenant improvements to be performed by Landlord,
if any. The terms and conditions contained in the Right of First Offer Notice
(the "Offer") shall reflect Landlord's good faith determination of the then
current fair market rental terms available for comparable premises in the
Building to new tenants. Tenant shall have fifteen (15) days following receipt
of the Right of First Offer Notice to accept said space on the terms and
conditions offered, and if Tenant shall fail to accept the Offer within said
fifteen (15) day period, Tenant shall have waived its right to the space.
Landlord may, within sixty (60) days of such waiver, enter into a lease for all
or any portion of said space upon substantially similar terms and conditions as
contained in Landlord's Right of First Offer Notice, but in no event shall the
rent and other financial obligations be substantially less than those contained
in the Offer. In the event that Tenant waives (or is deemed to have waived) its
rights with respect to said space Tenant's right of first offer to lease the
space shall terminate and shall be null and void, and Landlord shall have no
further obligation to lease any additional space to Tenant and may lease any or
all of the additional space to another party upon such terms and conditions as
Landlord may deem appropriate, except as provided above, free and clear of any
rights in favor of Tenant contained in this Section. In the event Tenant accepts
the offer of any space pursuant to this Section XLIX, Landlord and Tenant shall
execute an amendment to this Lease, setting forth the terms and conditions for
the lease by Tenant of the space so acquired.
SECTION XLIX. MULTIPLE COUNTERPARTS. This Lease may be executed
------------- ----------------------
simultaneously in two or more counterparts, each of which shall be deemed an
original but all of which shall constitute one and the same instrument.
SECTION L. RENEWAL OPTION. Provided the Tenant is not in default beyond
---------- ---------------
any applicable grace or cure period hereunder, Tenant shall have the right to
extend the term of this Lease for one (1) additional term of five (5) years
("Extended Term") commencing upon the expiration of the initial term. Tenant
shall exercise the right to extend the term of this Lease by written notice to
Landlord no later nine (9) months prior to the expiration of the term. The Rent
for the Extended Term shall be the greater of the then current Rent or the
Market Rent as hereafter defined. The market rent ("Market Rent") shall be
determined by Landlord based on leases then currently under negotiation or
recently executed for the Property. If no such leases are under negotiation or
have been recently executed, then Market Rent shall be reasonably determined by
Landlord based on comparable office space in the town or city in which the
Premises are located (if any such space exists) taking into account, among other
factors, amenities, setting, location and demographics. Landlord shall notify
Tenant of the Market Rent within a reasonable period after Tenant notifies
Landlord that Tenant is exercising the option to extend, provided Landlord shall
not be required to set the Market Rent prior to ten (10) months
- 28 -
<PAGE>
before the expiration of the Term. If Tenant disagrees with Landlord's
determination of the Market Rent and the parties are unable to agree upon a
Market Rent within thirty (30) days after Landlord's notice thereof, then the
Market Rent shall be determined by appraisal made as hereinafter provided by a
board of three (3) reputable independent commercial real estate brokers, each of
whom shall have at least ten (10) years of experience in the Greater Boston
office rental market and each of whom is hereinafter referred to as "appraiser".
Tenant and Landlord shall each appoint one such appraiser and the two (2)
appraisers so appointed shall appoint the third appraiser. The cost and expenses
of each appraiser appointed separately by Tenant and Landlord shall be home by
the party who appointed the appraiser. The cost and expenses of the third
appraiser shall be shared equally by Tenant and Landlord. Landlord and Tenant
shall appoint their respective appraisers at least five (5) months prior to
commencement of the period for which Market Rent is to be determined and shall
designate the appraisers so appointed by notice to the other party. The two
appraisers so appointed and designated shall appoint the third appraiser at
least four (4) months prior to the commencement of such period and shall
designate such appraiser by notice to Landlord and Tenant. The board of three
(3) appraisers shall determine the Market Rent of the space in question as of
the commencement of the period to which the Market Rent shall apply and shall
notify Landlord and Tenant of their determinations at least sixty (60) days
prior to the commencement of such period. If the determinations of the Market
Rent of any two (2) or all three (3) appraisers shall be identical in amount,
said amount shall be deemed to be the Market Rent of the subject space. If the
determinations of all three (3) appraisers shall be different in the amount, the
average of the two (2) values nearest in amount shall be deemed the Market Rent.
The Market Rent of the subject space determined in accordance with the
provisions of this Section shall be binding and conclusive on Tenant and
Landlord. All of the covenants, agreements, terms and conditions contained in
this Lease shall apply to the Extended Term.
SECTION XLXL. ESTOPPEL CERTIFICATES.
------------- ----------------------
From time to time, either party on at least ten (10) days prior written
request by the other party, will deliver to requesting party a statement in
writing certifying that this Lease is unmodified and in full force and effect
(or if there shall have been modifications, that the same is in full force and
effect as modified and stating the modifications) and the dates to which the
Rent, Additional Rent and other charges have been paid and stating whether or
not the requesting party is in default in performance of any covenant, agreement
or condition contained in this Lease and, if so, specifying each such default of
which certifying party may have knowledge.
- 29 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands and seals as
of the day and year first above written.
Landlord:
NEW BATTERYMARCH LIMITED PARTNERSHIP
BY New Boston Fund IV, Inc.,
Its General Partner
By: /s/ James W. Rappaport
--------------------------------------
Its: Vice President and Treasurer
Tenant:
NETWORK ENGINES, INC.
By: /s/ Lawrence A. Genovesi
--------------------------------------
Its: CEO and President
- 30 -
<PAGE>
EXHIBIT A
---------
Lease Plan
(follows this page)
<PAGE>
[Existing Conditions and Tenant Demising Location Plan]
<PAGE>
[Exhibit A-1, site map]
<PAGE>
[Exhibit A-2, Network Engines Temporary Space]
<PAGE>
EXHIBIT A-1
-----------
LAND DESCRIPTION
The land at 15-45 Dan Road, Canton, consisting of four parcels of land,
follows: Norfolk County, Massachusetts, bounded and described as follows:
PARCEL I (LOT 3)
SOUTHEASTERLY by the Northwesterly line of Dan Road, five hundred fifty-five
(555) feet;
WESTERLY by Lot 2 as shown on said plan hereinafter mentioned, six hundred
twenty and 58/100 (620.58) feet,
NORTHERLY by land now or formerly of Joseph F. Jones, six hundred three and
13/100 (603.13) feet; and
EASTERLY by land now or formerly of Barrow Associates, four hundred forty-two
and 07/100 (442.07) feet.
Said parcel is shown as lot numbered 3 on a plan drawn by Schoenfield Associates
Incorporated, Alfred Gargaro, Surveyor, dated February 10, 1971 - March 13,
1972, as modified and approved by the Land Court, filed in the Land Registration
Office as No. 3708 1 A, a copy of a portion of which is filed in the Norfolk
Registry District with Certificate No. 101534.
PARCEL II (LOT 4)
EASTERLY by lot numbered 3, shown on the plan hereinafter referred to, one
hundred fifty and 13/100 (150.13) feet;
SOUTHERLY by land now or formerly of Nathaniel Wentworth, et al, six hundred
three and 13/100 (603.13) feet;
WESTERLY by land now or formerly of Marie T. Coen, one hundred fifty and 69/100
(150.69) feet; and
NORTHERLY by land now or formerly of Alfoma Realty Corp., six hundred one and
30/100 (601.30) feet. Said parcel is shown as lot numbered 4 on a plan drawn by
Norwood Engineering Co., Inc., Surveyors, dated May 22, 1970, as approved by the
Land Court, filed in the Land Registration Office as No. 18675F, a copy of a
portion of which is filed in Norfolk Registry District with Certificate of Title
No. 89183.
PARCEL III (LOT 8)
SOUTHEASTELRLY by Dan Road, as shown on plan hereinafter referred to, two
hundred five and 36/100 (205.36) feet;
SOUTHWESTERLY by lot numbered 9, as shown on said plan, six hundred eighty-eight
and 73/100 (688.73) feet;
NORTHWESTERLY by land now or formerly of Marie T. Coen, two hundred one and
16/100 (201.16) feet and
- 2 -
<PAGE>
NORTHEASTERLY by lot numbered 3, as indicated on said plan, six hundred twenty
and 58/100 (620.55) feet.
Said parcel is shown as lot numbered 8 on a plan drawn by Schoenfeld Associates
Inc., Surveyors, dated May 27, 1977, as approved by the Land Court, filed in the
Land Registration office as No. 3708 1 B, a copy of a portion of which is filed
in Norfolk Registry District with Certificate No. 104592.
PARCEL IV (LOT 10)
SOUTHEASTERLY by Dan Road, as shown on plan hereinafter referred to, three
hundred ninety-four and 64/100 (394.64) feet;
SOUTHWESTERLY by lot numbered 11, as shown on said plan, eight hundred thirty
eight and 11/100 (838.11) feet;
NORTHWESTERLY by land now or formerly of Marie T. Coen, four hundred ninety-four
and 36/100 (494.36) feet; and
NORTHEASTERLY by lot numbered 8, as indicated on said plan, six hundred eighty
eight and 73/100 (688.73) feet.
Said parcel is shown as lot numbered 10 on a plan drawn by Schoenfeld
Associates, Inc., Surveyors, dated July 7, 1978, as approved by the Land Court,
filed in the Land Registration Office as No. 37081C, a copy of a portion of
which is filed in Norfolk Registry District with Certificate No. 108667.
Together with the appurtenant rights and easements as set forth in an instrument
granted by Alfoma Realty Corp. to Boston Sand & Gravel Co., dated November 22,
1966 and filed with Norfolk County Registry District of the Land Court as
Document No. 279452, in accordance with the terms thereof.
- 3 -
<PAGE>
EXHIBIT B
---------
Landlord's Work Follows this page
Tenant's Work: None
<PAGE>
EXHIBIT C
---------
FORM OF
-------
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
-------------------------------------------------------
15-45 DAN ROAD
--------------
CANTON, MASSACHUSETTS
---------------------
This Agreement made as of the ___ day of _____________, 1999, by and
between (i) Network Engines, Inc. organized under the laws of the State of
having an address (hereinafter
referred to as "Lessee"), (ii) NEW BOSTON BATTERYMARCH LIMITED PARTNERSHIP, a
Delaware limited partnership having an address c/o New Boston Fund, Inc., One
Longfellow Place, Suite 3612, Boston, Massachusetts 02114-2434 (hereinafter
referred to as "Lessor") and (iii) CITIZENS BANK OF MASSACHUSETTS, a
Massachusetts banking corporation having a place of business at 28 State Street,
Boston, Massachusetts 02109 (hereinafter referred to as "Mortgagee").
WHEREAS, Mortgagee has made a loan to Lessor (the "Loan") secured by a
Mortgage and Security Agreement dated January 15, 1997 and filed with the
Norfolk County Registry District of the Land Court as Document #754878 (the
"Mortgage") on land owned by Lessor located at 15-45 Dan Road in Canton,
Massachusetts (the "Premises") upon which is situated an office building
commonly known as "15 Dan Road"(the "Building"); and
WHEREAS, Lessee has entered into a written lease dated October , 1999 (the
"Lease") with Lessor for approximately 51,935 square feet of space in the
Building, together with certain rights and appurtenances thereto described in
the Lease with respect to the balance of the premises (collectively, the
"Demised Premises").
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
Lessee, Mortgagee and Lessor do hereby agree as follows:
1. Lessee and Mortgagee hereby agree that:
(i) the Lease shall be, and the same hereby is, made subordinate in
each and every respect to the lien of the Mortgage and to all advances made
thereunder and to all extensions and modifications thereof and amendments
thereto; and
(ii) any of the foregoing notwithstanding, if the interests of
Lessor in the Premises shall be acquired by Mortgagee by reason of foreclosure
of the Mortgage or other proceedings brought to enforce the rights of Mortgagee,
by deed in lieu of foreclosure or by any other method, or acquired by any other
purchaser or purchasers pursuant to a foreclosure sale (Mortgagee or such
purchaser(s), as the case may be, being referred to as "Purchaser"), (a) the
Lease and the rights of Lessee thereunder shall continue in full force and
effect and shall not be terminated or disturbed, except in accordance with the
terms of the Lease, and (b) Mortgagee will
<PAGE>
not join Lessee as a party defendant in any action or proceeding to foreclose
the Mortgage for the purpose of terminating the Lease. Lessee shall be bound to
Purchaser, and Purchaser shall be bound to Lessee, under all of the terms,
covenants, and conditions of the Lease for the balance of the term thereof
remaining, and any extensions or renewals thereof which may be effected in
accordance with any option therefor contained in the Lease, with the same and
force and effect as if Purchaser were the lessor under the Lease; provided that:
(a) Lessee is not in default, beyond the expiration of any
applicable notice and cure periods, under any provision
of the Lease or this Agreement at the time Mortgagee
exercises any such right, remedy, or privilege;
(b) the Lease at the time is in force and effect according
to its original terms or with such amendments or
modifications as Mortgagee shall have approved as
provided below;
(c) Lessee thereafter continues to fully and punctually
perform all of its obligations under the Lease without
default thereunder; and
(d) Lessee attorns to Purchaser as provided below; and
(iii) in the event of any foreclosure of the Mortgage by Mortgagee,
its successors or assigns, or at the request of Mortgagee at any time pursuant
to the assignment of the Lease to Mortgagee, Lessee will recognize Mortgagee,
its successors and assigns, as the new lessor under the Lease and will attorn to
and continue to be bound by each and every term of the Lease; and upon such
attornment, the Lease and the rights of Lessee shall continue in full force and
effect as if it were a direct Lease between Mortgagee, or any Purchaser, and
Lessee upon all of the terms, covenants and conditions of the Lease for the
balance of the term thereof remaining; provided, however, Mortgagee, or any
Purchaser, shall not be:
(a) liable for any act or omission of any prior landlord
(including Lessor) except to the extent the same occurs
after Mortgagee, or any Purchaser, succeeds to Lessor's
interest under the Lease; or
(b) subject to any offsets or defenses which Lessee might
have against any prior landlord (including Lessor): or
(c) bound by any rent or additional rent which Lessee might
have paid for more than one (1) month in advance to any
prior landlord (including Lessor); or
(d) bound by any amendment or modification of the Lease
that, reduces the rent, term or space leased thereunder
or increases the obligations of the landlord thereunder,
without Mortgagee's prior written consent; or
- 2 -
<PAGE>
(e) liable for any security deposit or other sums held by
any prior landlord (including Lessor) unless the same
was actually received by Mortgagee, but Lessee shall
have full recourse against any such prior landlord
(including Lessor) prior landlord (including Lessor) to
recover the security deposit held by or deposited with
it; or
(f) required to rebuild or repair the Building or any part
thereof in the event of casualty damage to or
condemnation of any material portion of the Building or
the Demised Premises.
(iv) Mortgagee may at any time unilaterally subordinate (or cause to he
subordinated) the lien of the Mortgage on the Premises to the Lease.
2. Lessee hereby: (i) acknowledges receipt of notice that pursuant to an
Assignment of Leases and Rents from Lessor, all leases and rents involving the
Building, including the Lease, are assigned to Mortgagee as security for the
Loan; (ii) acknowledges that it has received no notice of any sale, transfer or
assignment of the Lease or of rentals thereunder by Lessor, other than pursuant
to said Assignment of Leases and Rents; and (iii) agrees that it will not join
in any change or modification of the Lease that reduces the rent, term or space
leased thereunder or increases the obligations of the landlord thereunder,
anticipate rentals thereunder, or agree to terminate the Lease or surrender the
Demised Premises, without the prior written consent of Mortgagee; and
3. Lessee hereby agrees that upon Mortgagee's written demand, it will make
all payments of rent then and thereafter due to Lessor directly to Mortgagee and
not to Lessor or any independent rental agent which Lessor might at any time
utilize and Lessor hereby authorizes such payments to Mortgagee and hereby
releases Lessee from all liability with respect to such payments; and
4. Lessee hereby agrees that: (i) the interest of the Lessor in the Lease
has been assigned to Mortgagee solely as security for the Loan; (ii) Mortgagee
assumes no duty, liability or obligation whatsoever under the Lease, or any
extension or renewal thereof, by virtue of said assignment or this Agreement and
(iii) Mortgagee shall not be or become subject to any liability or obligation to
Lessee, under the Lease or otherwise, unless and until Mortgagee shall have
obtained title to the Premises, by foreclosure or otherwise, and then only to
the extent of liabilities or obligations accruing under the Lease subsequent to
the date that Mortgagee has obtained title to the Premises and then only for the
period of time that Mortgagee holds title to the Premises; and
5. Lessee hereby: (i) agrees to notify Mortgagee, its successors and
assigns, in writing at the notice address set forth above for Mortgagee, or at
any other address specified in writing to Lessee, of any default on the part of
Lessor under the Lease and (ii) grants to Mortgagee, its successors and assigns,
the right and opportunity to cure any such default within the same grace period
as is given to Lessor for remedying such default, plus, in each case, an
- 3 -
<PAGE>
additional period of thirty (30) days after the later of (a) the expiration of
such grace period, or (b) the date on which Lessee has served notice of such
default upon Mortgagee, its successors or assigns.
6. This Agreement shall be binding upon and shall inure to the benefit of
Lessee, Lessor and Mortgagee and their respective heirs, executors,
administrators, successors and assigns, as the case may be.
IN WITNESS WHEREOF the parties hereto have executed this Agreement, under
seal, as of the day and year first written above.
LESSEE:
_______________________________________
By:____________________________________
Title:_________________________________
MORTGAGEE:
CITIZENS BANK OF MASSACHUSETTS
By:____________________________________
Kevin Boyle
Senior Vice President
LESSOR:
NEW BOSTON BATTERYMARCH LIMITED PARTNERSHIP
By its sole General Partner:
New Boston Fund IV, Inc.
By:____________________________________
Jerome L. Rappaport, Jr.
President
- 4 -
<PAGE>
STATE OF
COUNTY OF
In __________________________, in said County and State, on the ___ day of
__________________, 1999, before me personally appeared _________________, the
_________________________ of _______________________, to me known and known by
me to be the party executing the foregoing instrument and he/she acknowledged
said instrument by him/her executed to be his/her free act and deed in his/her
capacity as aforesaid and the free act and deed of __________________________.
______________________________
Notary Public
My commission expires:
- 5 -
<PAGE>
COMMONWEALTH OF MASSACHUSETTS
COUNTY OF SUFFOLK
In Boston, in said County and State, on the ___ day of ____________, 1999,
before me personally appeared Kevin Boyle, the Senior Vice President of Citizens
Bank of Massachusetts, to me known and known by me to be the party executing the
foregoing instrument and he acknowledged said instrument by him executed to he
his free act and deed in his capacity as aforesaid and the free act and deed of
Citizens Bank of Massachusetts.
______________________________
Notary Public
My commission expires:
- 6 -
<PAGE>
COMMONWEALTH OF MASSACHUSETTS
COUNTY OF SUFFOLK
In Boston, in said County and State, on the ___ day of ____________, 1999,
before me personally appeared Jerome L. Rappaport, Jr., the President of New
Boston Fund IV, Inc., the sole General Partner of New Boston Research Limited
Partnership, to me known and known by me to be the party executing the foregoing
instrument and he acknowledged said instrument by him executed to he his free
act and deed in his capacity as aforesaid and the free act and deed of New
Boston Fund IV, Inc. and of New Boston Research Limited Partnership.
______________________________
Notary Public
My commission expires:
- 7 -
<PAGE>
EXHIBIT D
---------
MASSACHUSETTS LEGAL HOLIDAYS
*January 1 -- New Years Day
Third Monday in January -- Martin Luther King, Jr. Day
Third Monday in February -- Washington's Birthday
Third Monday in April -- Patriot's Day
Last Monday in May -- Memorial Day
*July 4 -- Independence Day
First Monday in September -- Labor Day
Second Monday in October -- Columbus Day
*November 11 -- Veteran's Day
Fourth Thursday in November -- Thanksgiving Day
*December 25 -- Christmas Day
*Should any of these dates fall on a Sunday, the Holiday is observed on
the following Monday.
<PAGE>
RULES AND REGULATIONS
The following Rules and Regulations constitute a part of the Lease and of
Tenant's obligations thereunder in respect of Tenant's use and occupancy of the
Premises in the Building.
I. BUILDING HOURS
1.1 If you wish to use the Building during times other than normal
business hours provided in the Lease, please obtain pass-cards for authorized
members of your staff from the Building Management Office. As additional
security, all persons entering the Building after hours are required to sign in
and out in a logbook provided for that purpose. This rule shall be inapplicable
if Tenant's Premises are independently secured by Tenant.
1.2 You are advised, for the protection and safety of your personnel, to
lock front doors at the end of each working day. Front doors also should be
locked whenever your receptionist leaves the area.
1.3 If you have night-line telephone service, please submit a list of
numbers and personnel to the Building Management Office. This will enable the
Landlord to contact your office after 6:00 p.m. on the occasions when visitors
call after normal working hours.
1.4 If you wish to remove fixtures or materials from your premises after
6:00 p.m. or to have work performed after 6:00 p.m., by someone who does not
have a Building pass, the Building Management Office must be notified in advance
in writing, unless the visitor will enter through an entrance separately secured
by Tenant.
II. ELEVATORS, DELIVERIES AND PARKING
2.1 If you expect delivery of any bulky material, notify the Building
Management Office reasonably in advance so that freight elevators may be
scheduled and elevator pads may be installed if necessary. This protects both
your shipment and the elevators. For the convenience of all, passenger elevators
may not be used for deliveries.
2.2 All larger deliveries must be made from the designated Building
loading dock area. Large deliveries can be expedited by notifying the Building
Management Office 24 hours in advance. The receiving area can accommodate
certain types and sizes of vehicles. All hand trucks used for deliveries must be
equipped with rubber bumpers and tires.
2.3 The loading dock may be used only for deliveries. No vehicles are
allowed to stand or park in this area after unloading nor are vehicles allowed
to park at the loading dock for service calls. You should advise your vendors
and suppliers of this rule. Any vehicles abusing the truck dock privileges are
subject to being towed at the owner's expense.
III. GENERAL USE OF BUILDING AND PREMISES
3.1 Tenants are not permitted to place or store property on the sidewalks,
passageways, parking areas or courtyards adjacent to the Building or in the
elevators, vestibules, stairways, or corridors (except where exclusive to the
Tenant and except as may be necessary for brief periods during deliveries).
3.2 No bicycles or animals may be brought into or kept in or about the
Building or premises, except seeing-eye dogs.
3.3 Rubbish, rags, sweepings, acid and any and all harmful or damaging
substances may not be deposited in the lavatories or in the janitor closets.
Please make arrangements with the Building Management Office for disposal of any
unusual trash.
IV. REPAIRS AND SERVICES
4.1 You are responsible for all general repairs and maintenance of your
Premises including, but not limited to, Tenant supplied supplementary air
conditioning, exterior doors, and exterior signs. All repairs, installations, or
alterations to the Building or its fixtures must first be approved and scheduled
by the Building Manager.
4.2 All requests for work to be done in your Premises by any of the
Building Management Staff should he directed to the Building Manager. Building
employees are not
<PAGE>
permitted to perform any work outside their regular duties except upon special
instructions from the Building Manager.
4.3 All schedules for the performance of your construction and repair work
must be coordinated by the Building Manager to avoid conflicts with various
building construction and maintenance schedules. Tenants must inform the
Building Manager, at least 72 hours before any work is to begin, of the nature
of the work, where and when it is to be performed, the name of the contractor or
concern doing the work, and the name of the individual who will supervise the
performance of the work. You will be required to obtain from the persons doing
work certificates of insurance coverage, signed hen waivers, and payment and
performance bond in form and substance satisfactory to the Landlord. Work may
not begin until such requirements have been satisfied.
4.4 Landlord shall purchase and install, at your expense, all lamps,
tubes, bulbs, starters and ballasts.
V. FLOOR LOAD - HEAVY MACHINERY
5.1 You may not place a load upon any floor in the Premises or Building
exceeding the floor load which such floor was designed to carry and which is
allowed by law. Landlord reserves the right to prescribe the weight and
positions of all business machines and mechanical equipment, including safes,
all of which shall be so placed as to distribute the weight. You shall place and
maintain your business machines and mechanical equipment in settings sufficient,
in Landlord's judgment, to absorb and prevent vibration, noise and annoyance.
You may not move any safe, heavy machinery, heavy equipment, freight, bulky
matter or fixtures into or out of the Building without Landlord's prior consent,
which consent may include a requirement to provide insurance, naming Landlord as
an insured, in such amounts as Landlord may deem reasonable. Notwithstanding the
foregoing, proper placement of all such business machines, etc. in the Premises
shall be your responsibility as Tenant.
5.2 If any such safe, machinery, equipment, freight, bulky matter or
fixtures requires special handling, you must employ only persons holding a
Master Riggers's License to do such work; and all work in connection therewith
must comply with applicable laws and regulations. Any such moving shall be at
your own sole risk and hazard and you, as Tenant, will defend, exonerate,
indemnify and save Landlord harmless against and from any liability, loss,
injury, claim or Suit resulting directly or indirectly from such moving.
VI. ELECTRICAL SYSTEM: ENERGY CONSERVATION: WATER
6.1 In order to assure that the Building's electrical standards are not
exceeded and to avert possible adverse effect on the Building's electric system,
you may not, without Landlord's prior consent, connect any fixtures, appliances
or equipment to the Building's electric distribution system other than standard
office equipment, such as typewriters, pencil sharpeners, adding machines,
hand-held or desk top calculators, dictaphones, office computers and copies.
6.2 Notwithstanding anything to the contrary contained in the Lease,
Landlord reserves the right to implement policies and procedures it deems, in
its reasonable judgment, to be necessary or expedient in order to conserve
and/or preserve energy and related services, or to be necessary or required in
order to comply with applicable government laws, rules, regulations, codes,
orders and standards.
6.3 If you shall use water for any purpose other than for ordinary
lavatory and drinking purposes, Landlord may assess a reasonable charge for the
additional water so used, or install a water meter and thereby measure your
water consumption for all water purposes. In the latter event, you shall pay the
cost of the meter and the cost of installation thereof and shall keep such meter
and installation equipment in good working order and repair. You agree to pay
for water consumed, as shown on such meter, together with the sewer charge based
on such meter charges, as and when bills are rendered, and in default in making
such payment Landlord may pay such charges and collect the same from you as an
additional charge.
6.4 The windows of the Building are designed for superior insulation and
to reduce glare. Building standard blinds or drapes present and elegant
appearance and contribute to the effectiveness of the Building's heating and
cooling systems. You should keep the blinds or drapes closed when windows are
exposed to the sun's rays in summer and keep them open when the sun is bright
enough to provide warmth during the winter months.
<PAGE>
VII. SIGNS AND ADVERTISING
Except as hereinafter provided, you may not place on the exterior of the
Premises (including both interior and exterior surfaces or doors and interior
surfaces of windows) or on any part of the Building outside the Premises, any
signs, symbol, advertisement or the like visible to the public view outside of
the Premises. Landlord shall withhold consent for signs or lettering on the
entry doors to the Premises, unless such signs conform to Building standards
adopted by Landlord. All signage must be in accordance with a plan or sketch of
the sign to be placed on such entry doors submitted to and approved by Landlord
in advance. Landlord agrees, however, to maintain a tenant directory in the
lobby of the Building in which will be placed your name and the location of the
Premises in the Building. Neither Landlord's name, nor the name of the Building
or any Center, Office Park or other complex of which the Building is a part, or
the name of any other structure erected therein shall be used without Landlord's
consent in any advertising material (except on business stationery or as an
address in advertising matter), nor shall any such name, as aforesaid, be used
in any undignified, confusing, detrimental or misleading manner.
VIII. LIFE SAFETY AND EMERGENCY PROCEDURES
In case of emergency situations such as power failure, water leaks or
serious injury, call the Building Management Office immediately. In case of fire
or smoke, pull the nearest alarm (located on your floor) and then call the
Building Management Office.
IX. SMOKE FREE ENVIRONMENT
Smoking is not permitted in the lobby, hallways, corridors or stairs.
<PAGE>
Exhibit 10.2
NETWORK ENGINES, INC.
1999 STOCK INCENTIVE PLAN
-------------------------
1. Purpose
-------
The purpose of this 1999 Stock Incentive Plan (the "Plan") of Network
Engines, Inc., a Delaware corporation (the "Company"), is to advance the
interests of the Company's stockholders by enhancing the Company's ability to
attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity
ownership opportunities and performance-based incentives and thereby better
aligning the interests of such persons with those of the Company's stockholders.
Except where the context otherwise requires, the term "Company" shall include
any present or future subsidiary corporations of Network Engines, Inc. as
defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and
any regulations promulgated thereunder (the "Code").
2. Eligibility
-----------
All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options, restricted stock or other
stock-based awards (each, an "Award") under the Plan. Any person who has been
granted an Award under the Plan shall be deemed a "Participant."
3. Administration, Delegation
--------------------------
(a) Administration by Board of Directors. The Plan will be administered by
------------------------------------
the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
<PAGE>
(b) Delegation to Executive Officers. To the extent permitted by
--------------------------------
applicable law, the Board may delegate to one or more executive officers of the
Company the power to make Awards and exercise such other powers under the Plan
as the Board may determine, provided that the Board shall fix the maximum number
of shares subject to Awards and the maximum number of shares for any one
Participant to be made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable law,
-------------------------
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). If and when the common
stock, $.01 par value per share, of the Company (the "Common Stock") is
registered under the Securities Exchange Act of 1934 (the "Exchange Act"), the
Board shall appoint one such Committee of not less than two members, each member
of which shall be an "outside director" within the meaning of Section 162(m) of
the Code and a "non-employee director" as defined in Rule 16b-3 promulgated
under the Exchange Act." All references in the Plan to the "Board" shall mean
the Board or a Committee of the Board or the executive officer referred to in
Section 3(b) to the extent that the Board's powers or authority under the Plan
have been delegated to such Committee or executive officer.
4. Stock Available for Awards
--------------------------
(a) Number of Shares. Subject to adjustment under Section 4(c), Awards may
----------------
be made under the Plan for up to 1,899,161 shares of Common Stock. If any Award
expires or is terminated, surrendered or canceled without having been fully
exercised or is forfeited in whole or in part or results in any Common Stock not
being issued, the unused Common Stock covered by such Award shall again be
available for the grant of Awards under the Plan, subject, however, in the case
of Incentive Stock Options (as hereinafter defined), to any limitation required
under the Code. Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
(b) Per-Participant Limit. Subject to adjustment under Section 4(c), for
---------------------
Awards granted after the Common Stock is registered under the Exchange Act, the
maximum number of shares with respect to which an Award may be granted to any
Participant under the Plan shall be 500,000 per calendar year. The
per-participant limit described in this Section 4(b) shall be construed and
applied consistently with Section 162(m) of the Code.
(c) Adjustment to Common Stock. In the event of any stock split, stock
--------------------------
2
<PAGE>
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, (i) the number and class of securities available
under this Plan, (ii) the number and class of security and exercise price per
share subject to each outstanding Option, (iii) the repurchase price per
security subject to each outstanding Restricted Stock Award, and (iv) the terms
of each other outstanding stock-based Award shall be appropriately adjusted by
the Company (or substituted Awards may be made, if applicable) to the extent the
Board shall determine, in good faith, that such an adjustment (or substitution)
is necessary and appropriate. If this Section 4(c) applies and Section 8(e)(1)
also applies to any event, Section 8(e)(1) shall be applicable to such event,
and this Section 4(c) shall not be applicable.
5. Stock Options
-------------
(a) General. The Board may grant options to purchase Common Stock (each,
-------
an "Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option."
(b) Incentive Stock Options. An Option that the Board intends to be an
-----------------------
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the
--------------
time each Option is granted and specify it in the applicable option agreement.
(d) Duration of Options. Each Option shall be exercisable at such times
-------------------
and subject to such terms and conditions as the Board may specify in the
applicable option agreement. No Option will be granted for a term in excess of
10 years.
(e) Exercise of Option. Options may be exercised only by delivery to
------------------
3
<PAGE>
the Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 5(f) for the number of shares for
which the Option is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an
---------------------
Option granted under the Plan shall be paid for as follows:
(i) in cash or by check, payable to the order of the Company;
(ii) except as the Board may otherwise provide in an Option
Agreement, delivery of an irrevocable and unconditional undertaking by a
creditworthy broker to deliver promptly to the Company sufficient funds to pay
the exercise price, or delivery by the Participant to the Company of a copy of
irrevocable and unconditional instructions to a creditworthy broker to deliver
promptly to the Company cash or a check sufficient to pay the exercise price;
(iii) to the extent permitted by the Board and explicitly provided
in an Option Agreement (A) by delivery of shares of Common Stock owned by the
Participant valued at their fair market value as determined by the Board in good
faith ("Fair Market Value"), which Common Stock was owned by the Participant
least six months prior to such delivery, or (B) by payment of such other lawful
consideration as the Board may determine; or
(iv) any combination of the above permitted forms of payment.
6. Restricted Stock
----------------
(a) Grants. The Board may grant Awards entitling recipients to acquire
------
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, "Restricted Stock Award").
(b) Terms and Conditions. The Board shall determine the terms and
--------------------
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
4
<PAGE>
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
7. Other Stock-Based Awards
------------------------
The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including the
grant of shares based upon certain conditions, the grant of securities
convertible into Common Stock and the grant of stock appreciation rights.
8. General Provisions Applicable to Awards
---------------------------------------
(a) Transferability of Awards. Except as the Board may otherwise determine
-------------------------
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.
(b) Documentation. Each Award under the Plan shall be evidenced by a
-------------
written instrument in such form as the Board shall determine. Each Award may
contain terms and conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each type
----------------
of Award may be made alone or in addition or in relation to any other type of
Award. The terms of each type of Award need not be identical, and the Board need
not treat Participants uniformly.
(d) Termination of Status. The Board shall determine the effect on an
---------------------
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
5
<PAGE>
(e) Acquisition Events
------------------
(i) Consequences of Acquisition Events. Upon the occurrence of an
----------------------------------
Acquisition Event (as defined below), each outstanding Option or Award shall be
assumed or an equivalent option or award substituted by the successor
corporation or a parent or subsidiary of the successor corporation, provided
that any such Options substituted for Incentive Stock Options shall satisfy, in
the determination of the Board, the requirements of Section 424(a) of the Code,
unless the successor corporation refuses to assume or substitute for the Option
or Award, in which case (i) the Participant shall have the right to exercise the
Option in full, including with respect to shares of Common Stock as to which it
would not otherwise be exercisable, (ii) all Restricted Stock Awards then
outstanding shall become free of all restrictions prior to the consummation of
the Acquisition Event; and (iii) any other stock-based Awards outstanding shall
become exercisable, realizable or vested in full, or shall be free of all
conditions or restrictions, as applicable to each such Award, prior to the
consummation of the Acquisition Event. If an Option or Award is exercisable in
lieu of assumption or substitution in the event of an Acquisition Event, the
Board shall notify the Participant in writing or electronically that the Option
or Award shall be fully exercisable for a period of not less than forty-five
(45) days from the date of such notice, and the Option or Award shall terminate
upon the expiration of such period.
Each Option or other Award assumed or substituted pursuant to the
immediately preceding paragraph shall include a provision to the effect that
such Option or Award shall become immediately exercisable (or vested) in full
if, on or prior to the first anniversary of the Acquisition Event, the
Participant terminates his or her employment for Good Reason or is terminated
without Cause by the surviving or acquiring corporation. "Good Reason" shall
mean any significant diminution in the optionee's title, authority, or
responsibilities from and after such Acquisition Event or any reduction in the
annual cash compensation payable to the Participant from and after such
Acquisition Event, or the relocation of the Company's place of business at which
the Participant is principally located to a location that is greater than 50
miles from the current site. "Cause" shall mean any willful misconduct by the
Participant which affects the business reputation of the Company or willful
failure by the Participant to perform his or her material responsibilities to
the Company (including, without limitation, breach by the Participant of any
provision of any employment, consulting, advisory, nondisclosure,
non-competition or other similar agreement between the Participant and the
Company). The Participant shall be considered to have been discharged for
"Cause" if the Company determines, within 30 days after the Participant's
resignation, that discharge for Cause was
6
<PAGE>
warranted.
An "Acquisition Event" shall mean: (a) any merger or consolidation which
results in the voting securities of the Company outstanding immediately prior
thereto representing immediately thereafter (either by remaining outstanding or
by being converted into voting securities of the surviving or acquiring entity)
less than 50% of the combined voting power of the voting securities of the
Company or such surviving or acquiring entity outstanding immediately after such
merger or consolidation; (b) any sale of all or substantially all of the assets
of the Company; or (c) the complete liquidation of the Company.
(ii) Assumption of Options Upon Certain Events. The Board may grant
-----------------------------------------
Awards under the Plan in substitution for stock and stock-based awards held by
employees of another corporation who become employees of the Company as a result
of a merger or consolidation of the employing corporation with the Company or
the acquisition by the Company of property or stock of the employing
corporation. The substitute Awards shall be granted on such terms and conditions
as the Board considers appropriate in the circumstances.
(f) Withholding. Each Participant shall pay to the Company, or make
-----------
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. The Board may allow Participants to
satisfy such tax obligations in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law, deduct
any such tax obligations from any payment of any kind otherwise due to a
Participant.
(g) Amendment of Award. The Board may amend, modify or terminate any
------------------
outstanding Award, including but not limited to, substituting therefor another
Award of the some or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(h) Conditions on Delivery of Stock. The Company will not be obligated to
-------------------------------
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection
7
<PAGE>
with the issuance and delivery of such shares have been satisfied, including any
applicable securities laws and any applicable stock exchange or stock market
rules and regulations, and (iii) the Participant has executed and delivered to
the Company such representations or agreements as the Company may consider
appropriate to satisfy the requirements of any applicable laws, rules or
regulations. The Company shall not be obligated to apply for or to obtain any
listing, registration or qualification with respect to any shares of Common
Stock issued pursuant to the Plan.
(i) Acceleration. The Board may at any time provide that any Options shall
------------
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of all restrictions or that any other stock-based Awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
9. Miscellaneous
-------------
(a) No Right To Employment or Other Status. No person shall have any claim
--------------------------------------
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
------------------------
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
(c) Provision for Foreign Participants. The Board of Directors may,
----------------------------------
without amending the Plan, modify awards or options granted to participants who
are foreign nationals or employed outside the United States to recognize
differences in laws, rules, regulations or customs of such foreign jurisdictions
with respect to tax, securities, currency, employee benefit or other matters.
(d) Effective Date and Term of Plan. The Plan shall become effective on
-------------------------------
the date on which it is adopted by the Board, but no Award granted to a
Participant designated as subject to Section 162(m) by the Board shall become
exercisable, vested or realizable, as applicable to such Award, unless and until
the Plan has been approved by the Company's stockholders. No Awards shall be
granted under the Plan after the completion of ten years from the earlier of
8
<PAGE>
(i) the date on which the Plan was adopted by the Board or (ii) the date the
Plan was approved by the Company's stockholders, but Awards previously granted
may extend beyond that date.
(e) Amendment of Plan. The Board may amend, suspend or terminate the Plan
-----------------
or any portion thereof at any time, provided that no Award granted to a
Participant designated as subject to Section 162(m) by the Board after the date
of such amendment shall become exercisable, realizable or vested, as applicable
to such Award (to the extent that such amendment to the Plan was required to
grant such Award to a particular Participant), unless and until such amendment
shall have been approved by the Company's stockholders.
(f) Stockholder Approval. For purposes of this Plan, stockholder approval
--------------------
shall mean approval by a vote of the stockholders in accordance with the
requirements of Section 162(m) of the Code.
(g) Governing Law. The provisions of the Plan and all Awards made
-------------
hereunder shall be governed by and interpreted in accordance with the laws of
the Commonwealth of Massachusetts, without regard to any applicable conflicts of
law.
9
<PAGE>
Exhibit 10.3
NETWORK ENGINES, INC.
Incentive Stock Option Agreement
Granted Under 1999 Stock Incentive Plan
---------------------------------------
1. Grant of Option.
---------------
This agreement evidences the grant by Network Engines, Inc., a Delaware
corporation (the "Company") on ________________ to _________________, an
employee of the Company (the "Participant"), of an option to purchase, in whole
or in part, on the terms provided herein and in the Company's 1999 Stock
Incentive Plan (the "Plan"), a total of ______ shares of common stock, $.01 par
value per share, of the Company ("Common Stock") (the "Shares") at $ per Share.
Unless earlier terminated, this option shall expire on (the "Final Exercise
Date").
It is intended that the option evidenced by this agreement shall be an
incentive stock option as defined in Section 422 of the Internal Revenue Code of
1986, as amended and any regulations promulgated thereunder (the "Code"). Except
as otherwise indicated by the context, the term "Participant", as used in this
option, shall be deemed to include any person who acquires the right to exercise
this option validly under its terms.
2. Vesting Schedule.
----------------
This option will become exercisable ("vest") as to 25% of the original
---
number of Shares on the first anniversary of the date of the grant of the option
(the "Grant Date") and as to an additional 6.25% of the original number of
-----
Shares at the end of each successive full three-month period following the first
anniversary of the Grant Date until the fourth anniversary of the Grant Date.
This option shall expire upon, and will not be exercisable after, the Final
Exercise Date.
The right of exercise shall be cumulative so that to the extent the option
is not exercised in any period to the maximum extent permissible it shall
continue to be exercisable, in whole or in part, with respect to all shares for
which it is vested until the earlier of the Final Exercise Date or the
termination of this option under Section 3 hereof or the Plan.
<PAGE>
3. Exercise of Option.
------------------
(a) Form of Exercise. Each election to exercise this option shall be in
writing, signed by the Participant, and received by the Company at its principal
office, accompanied by this agreement, and payment in full as follows:
(i) in cash or by check, payable to the order of the Company;
(ii) delivery of an irrevocable and unconditional undertaking by a
creditworthy broker to deliver promptly to the Company sufficient funds to pay
the exercise price, or delivery by the Participant to the Company of a copy of
irrevocable and unconditional instructions to a creditworthy broker to deliver
promptly to the Company cash or a check sufficient to pay the exercise price;
(iii) (A) by delivery of shares of Common Stock owned by the
Participant valued at their fair market value as determined by the Board in good
faith, which Common Stock was owned by the Participant at least six months prior
to such delivery, or (B) by payment of such other lawful consideration as the
Board may determine; or
(iv) any combination of the above permitted forms of payment.
The Participant may purchase less than the number of shares covered
hereby, provided that no partial exercise of this option may be for any
fractional share.
(b) Continuous Relationship with the Company Required. Except as otherwise
-------------------------------------------------
provided in this Section 3, this option may not be exercised unless the
Participant, at the time he or she exercises this option, is, and has been at
all times since the date of grant of this option, an employee, officer or
director of, or consultant or advisor to, the Company or any parent or
subsidiary of the Company as defined in Section 424(e) or (f) of the Code (an
"Eligible Participant").
(c) Termination of Relationship with the Company. If the Participant
--------------------------------------------
ceases to be an Eligible Participant for any reason, then, except as provided in
paragraphs (d) and (e) below, the right to exercise this option shall terminate
three months after such cessation or such other period of time as may be
determined by the Board (but in no event after the Final Exercise Date),
provided that this option shall be exercisable only to the extent that the
Participant was entitled to exercise this option on the date of such cessation.
Notwithstanding the foregoing, if the Participant, prior to the Final Exercise
Date,
2
<PAGE>
violates the non-competition, non- disclosure, nonsolicitation or
confidentiality provisions of any employment contract, confidentiality,
nondisclosure or nonsolicitation agreement or other agreement between the
Participant and the Company, the right to exercise this option shall terminate
immediately upon written notice to the Participant from the Company describing
such violation.
(d) Exercise Period Upon Death or Disability. If the Participant dies or
----------------------------------------
becomes disabled (within the meaning of Section 22(e)(3) of the Code) prior to
the Final Exercise Date while he or she is an Eligible Participant and the
Company has not terminated such relationship for "cause" as specified in
paragraph (e) below, this option shall be exercisable, within the period of one
year following the date of death or disability of the Participant by the
Participant, provided that this option shall be exercisable only to the extent
-------- ----
that this option was exercisable by the Participant on the date of his or her
death or disability, and further provided that this option shall not be
exercisable after the Final Exercise Date.
(e) Discharge for Cause. If the Participant, prior to the Final Exercise
-------------------
Date, is discharged by the Company for "cause" (as defined below), the right to
exercise this option shall terminate immediately upon the effective date of such
discharge. "Cause" shall mean willful misconduct by the Participant or willful
failure by the Participant to perform his or her responsibilities to the Company
(including, without limitation, breach by the Participant of any provision of
any employment, consulting, advisory, nondisclosure, nonsolicitation,
non-competition or other similar agreement between the Participant and the
Company), as determined by the Company, which determination shall be conclusive.
The Participant shall be considered to have been discharged for "Cause" if the
Company determines, within 30 days after the Participant's resignation, that
discharge for cause was warranted.
4. Right of First Refusal.
----------------------
(a) If the Participant proposes to sell, assign, transfer, pledge,
hypothecate or otherwise dispose of, by operation of law or otherwise
(collectively, "transfer") any Shares acquired upon exercise of this option,
then the Participant shall first give written notice of the proposed transfer
(the "Transfer Notice") to the Company. The Transfer Notice shall name the
proposed transferee and state the number of such Shares the Participant proposes
to transfer (the "Offered Shares"), the price per share and all other material
terms and conditions of the transfer.
3
<PAGE>
(b) For 30 days following its receipt of such Transfer Notice, the Company
shall have the option to purchase all (but not less than all) of the Offered
Shares at the price and upon the terms set forth in the Transfer Notice. In the
event the Company elects to purchase all of the Offered Shares, it shall give
written notice of such election to the Participant within such 30-day period.
Within 10 days after his receipt of such notice, the Participant shall tender to
the Company at its principal offices the certificate or certificates
representing the Offered Shares, duly endorsed in blank by the Participant or
with duly endorsed stock powers attached thereto, all in a form suitable for
transfer of the Offered Shares to the Company. Upon receipt of such certificate
or certificates, the Company shall deliver or mail to the Participant a check in
payment of the purchase price for the Offered Shares; provided that if the terms
-------- ----
of payment set forth in the Transfer Notice were other than cash against
delivery, the Company may pay for the Offered Shares on the same terms and
conditions as were set forth in the Transfer Notice.
(c) At and after the time at which the Offered Shares are required to be
delivered to the Company for transfer to the Company pursuant to subsection (b)
above, the Company shall not pay any dividend to the Participant on account of
such Shares or permit the Participant to exercise any of the privileges or
rights of a stockholder with respect to such Offered Shares, but shall, in so
far as permitted by law, treat the Company as the owner of such Offered Shares.
(d) If the Company does not elect to acquire all of the Offered Shares,
the Participant may, within the 30-day period following the expiration of the
option granted to the Company under subsection (b) above, transfer the Offered
Shares to the proposed transferee, provided that such transfer shall not be on
-------- ----
terms and conditions more favorable to the transferee than those contained in
the Transfer Notice. Notwithstanding any of the above, all Offered Shares
transferred pursuant to this Section 4 shall remain subject to the right of
first refusal set forth in this Section 4 and such transferee shall, as a
condition to such transfer, deliver to the Company a written instrument
confirming that such transferee shall be bound by all of the terms and
conditions of this Section 4.
(e) The following transactions shall be exempt from the provisions of this
Section 4:
(i) any transfer of Shares to or for the benefit of any spouse,
child or grandchild of the Participant, or to a trust for their benefit;
4
<PAGE>
(ii) any transfer pursuant to an effective registration statement
filed by the Company under the Securities Act of 1933, as amended (the
"Securities Act"); and
(iii) any transfer of the Shares pursuant to the sale of all or
substantially all of the business of the Company;
provided, however, that in the case of a transfer pursuant to clause (1) above,
- -------- -------
such Shares shall remain subject to the right of first refusal set forth in this
Section 4 and such transferee shall, as a condition to such transfer, deliver to
the Company a written instrument confirming that such transferee shall be bound
by all of the terms and conditions of this Section 4.
(f) The Company may assign its rights to purchase Offered Shares in any
particular transaction under this Section 4 to one or more persons or entities.
(g) The provisions of this Section 4 shall terminate upon the earlier of
the following events:
(1) the closing of the sale of shares of Common Stock in an
underwritten public offering pursuant to an effective registration statement
filed by the Company under the Securities Act; or
(2) the sale of all or substantially all of the capital stock,
assets or business of the Company, by merger, consolidation, sale of assets or
otherwise.
(h) The Company shall not be required (a) to transfer on its books any of
the Shares which shall have been sold or transferred in violation of any of the
provisions set forth in this Section 4, or (b) to treat as owner of such Shares
or to pay dividends to any transferee to whom any such Shares shall have been so
sold or transferred.
5. Agreement in Connection with Public Offering.
--------------------------------------------
The Participant agrees, in connection with the initial underwritten public
offering of the Company's securities pursuant to a registration statement under
the Securities Act, (i) not to sell, make short sale of, loan, grant any options
for the purchase of, or otherwise dispose of any shares of Common Stock held by
the Participant (other than those shares included in the offering) without the
prior written consent of the Company or the underwriters managing such initial
underwritten public offering of the Company's securities for a period of 180
days from the effective date of such registration statement, and (ii) to execute
any
5
<PAGE>
agreement reflecting clause (i) above as may be requested by the Company or the
managing underwriters at the time of such offering.
6. Withholding.
-----------
No Shares will be issued pursuant to the exercise of this option unless
and until the Participant pays to the Company, or makes provision satisfactory
to the Company for payment of, any federal, state or local withholding taxes
required by law to be withheld in respect of this option.
7. Nontransferability of Option.
----------------------------
This option may not be sold, assigned, transferred, pledged or otherwise
encumbered by the Participant, either voluntarily or by operation of law, except
by will or the laws of descent and distribution, and, during the lifetime of the
Participant, this option shall be exercisable only by the Participant.
8. Disqualifying Disposition.
-------------------------
If the Participant disposes of Shares acquired upon exercise of this
option within two years from the date of grant of the option or one year after
such Shares were acquired pursuant to exercise of this option, the Participant
shall notify the Company in writing of such disposition within 15 days thereof.
9. Provisions of the Plan.
----------------------
This option is subject to the provisions of the Plan, a copy of which is
furnished to the Participant with this option.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this option to be executed
under its corporate seal by its duly authorized officer. This option shall take
effect as a sealed instrument.
NETWORK ENGINES, INC.
Dated: By:________________________________________
Name: ___________________________________
Title:___________________________________
PARTICIPANT'S ACCEPTANCE
The undersigned hereby accepts the foregoing option and agrees to the
terms and conditions thereof. The undersigned hereby acknowledges receipt of a
copy of the Company's 1999 Stock Incentive Plan.
PARTICIPANT:
[Name]
______________________________
Address: _____________________
_____________________
7
<PAGE>
Exhibit 10.6
NETWORK ENGINES, INC.
INVESTOR RIGHTS AGREEMENT
This Agreement dated as of December 20, 1999 is entered into by and among
(i) Network Engines, Inc., a Delaware corporation (the "Company"), (ii)
HarbourVest Partners VI - Direct Fund, L.P., a Delaware limited partnership,
Ascent Venture Partners III, L.P., a Delaware limited partnership, Canaan Equity
II L.P. (QP), a Delaware limited partnership, Landmark Co-Investment Partners,
L.P., a Delaware limited partnership, MD Co., a Massachusetts partnership,
Egan-Managed Capital, L.P., a Delaware limited partnership, and Corning
Technology Partners II, L.P., a Massachusetts limited partnership, Corning
Capital Ventures, LLC, a Massachusetts limited liability company and (iii) the
other individuals and entities listed on Exhibit A hereto (collectively, with
---------
the entities in (ii) above, the "Series D Purchasers") and (iv) the individuals
and entities listed on Exhibit B hereto (collectively, the "Prior
---------
Purchasers")(the Series D Purchasers and the Prior Purchasers being collectively
referred to herein as the "Purchasers").
Recitals
--------
WHEREAS, the Company and the Series D Purchasers have entered into a
Series D Convertible Preferred Stock Purchase Agreement of even date herewith
(the "Purchase Agreement");
WHEREAS, the Company and certain of the Prior Purchasers and Series D
Purchasers previously entered into the Preferred Stock Purchase Agreement, dated
January 13, 1999 as amended, (the "Prior Purchase Agreement");
WHEREAS, the Prior Purchase Agreement has been amended to delete the
registration rights and rights of first refusal included therein; and
WHEREAS, the Company and the Purchasers desire to provide for certain
arrangements with respect to (i) the registration of shares of capital stock of
the Company under the Securities Act of 1933 and (ii) the Purchasers' right of
first refusal with respect to certain issuances of securities of the Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, the parties hereto agree as follows:
1. Certain Definitions.
-------------------
As used in this Agreement, the following terms shall have the following
respective meanings:
<PAGE>
"Commission" means the Securities and Exchange Commission, or any other
----------
federal agency at the time administering the Securities Act.
"Common Stock" means the common stock, $.0l par value per share, of the
------------
Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
------------
any successor federal statute, and the rules and regulations of the Commission
issued under such Act, as they each may, from time to time, be in effect.
"Initiating Holders" means the Stockholders initiating a request for
------------------
registration pursuant to Section 2.1(a) or 2.1(b), as the case may be.
"Initial Public Offering" means the initial underwritten public offering
-----------------------
of shares of Common Stock pursuant to an effective Registration Statement.
"Other Holders" shall have the meaning set forth in Section 2.1(d).
-------------
"Majority Series A Holders" means, collectively, the record holders of at
-------------------------
least two-thirds of the shares of Common Stock issued or issuable upon
conversion of the shares of Series A Convertible Preferred Stock, $0.01 par
value per share, of the Company.
"Majority Series C Holders" means, collectively, the record holders of at
-------------------------
least two-thirds of the shares of Common Stock issued or issuable upon
conversion of the shares of Series C Convertible Participating Preferred Stock,
$0.01 par value per share, of the Company.
"Majority Series D Holders" means, collectively, the record holders of at
-------------------------
least two-thirds of the shares of Common Stock issued or issuable upon
conversion of the shares of Series D Convertible Participating Preferred Stock,
$0.01 par value per share, of the Company.
"Prospectus" means the prospectus included in any Registration Statement,
----------
as amended or supplemented by an amendment or prospectus supplement, including
post-effective amendments, and all material incorporated by reference or deemed
to be incorporated by reference in such Prospectus.
"Registration Statement" means a registration statement filed by the
----------------------
Company with the Commission for a public offering and sale of securities of the
Company (other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation).
"Registration Expenses" means the expenses described in Section 2.4.
---------------------
"Registrable Shares" means (i) the shares of Common Stock issued or
------------------
issuable upon conversion of the Shares, (ii) any shares of Common Stock, and any
shares of Common Stock issued or issuable upon the conversion or exercise of any
other securities, acquired by the Purchasers pursuant to Section 3 of this
Agreement and (iii) any other shares of Common Stock
-2-
<PAGE>
issued in respect of such shares (because of stock splits, stock dividends,
reclassifications, recapitalizations, or similar events); provided, however,
that shares of Common Stock which are Registrable Shares shall cease to be
Registrable Shares upon (i) any sale pursuant to a Registration Statement or
Rule 144 under the Securities Act or (ii) any sale in any manner to a person or
entity which, by virtue of Section 4 of this Agreement, is not entitled to the
rights provided by this Agreement. Wherever reference is made in this Agreement
to a request or consent of holders of a certain percentage of Registrable
Shares, the determination of such percentage shall include shares of Common
Stock issuable upon conversion of the Shares even if such conversion has not
been effected.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
successor federal statute, and the rules and regulations of the Commission
issued under such Act, as they each may, from time to time, be in effect.
"Selling Stockholder" means any Stockholder owning Registrable Shares
-------------------
included in a Registration Statement.
"Shares" shall mean the Company's Series A Preferred Stock, $.01 par value
------
per share, Series B Preferred Stock, $.01 par value per share, Series C
Preferred Stock, $.01 par value per share and Series D Preferred Stock, $.0l par
value per share.
"Stockholders" means the Purchasers and any persons or entities to whom
------------
the rights granted under this Agreement are transferred by any Purchasers, their
successors or assigns pursuant to Section 4 hereof.
2. Registration Rights
-------------------
2.1 Required Registrations.
----------------------
(a) At any time after the earlier of (x) December 20, 2002, or
(y) six months after the closing of the Initial Public Offering, a Stockholder
or Stockholders holding in the aggregate at least 35% of the Registrable Shares
then outstanding may request, in writing, that the Company effect the
registration on Form S-1 or Form S-2 (or any successor form) of Registrable
Shares owned by such Stockholder or Stockholders having an aggregate value of at
least $5,000,000 (based on the then current market price or fair value).
(b) At any time after the Company becomes eligible to file a
Registration Statement on Form S-3 (or any successor form relating to secondary
offerings), a Stockholder or Stockholders holding in the aggregate at least 2%
of the Registrable Shares then outstanding may request, in writing, that the
Company effect the registration on Form S-3 (or such successor form), of
Registrable Shares having an aggregate value of at least $1,000,000 (based on
the then current public market price).
(c) Upon receipt of any request for registration pursuant to
this Section 2, the Company shall promptly give written notice of such proposed
registration to all other Stockholders. Such Stockholders shall have the right,
by giving written notice to the Company within 30 days after the Company
provides its notice, to elect to have included in such registration such of
their Registrable Shares as such Stockholders may request in such notice of
-3-
<PAGE>
election, subject in the case of an underwritten offering to the approval of the
managing underwriter as provided in Section 2.1(d) below. Thereupon, the Company
shall, as expeditiously as possible, use its best efforts to effect the
registration on an appropriate registration form of all Registrable Shares which
the Company has been requested to so register (provided, however, that in the
case of a registration requested under Section 2.1(b), the Company will only be
obligated to effect such registration on Form S-3 (or any successor form)).
(d) If the Initiating Holders intend to distribute the
Registrable Shares covered by their request by means of an underwriting, they
shall so advise the Company as a part of their request made pursuant to Section
2.1(a) or (b), as the case may be, and the Company shall include such
information in its written notice referred to in Section 2.1(c). The right of
any other Stockholder to include its Registrable Shares in such registration
pursuant to Section 2.1(a) or (b), as the case may be, shall be conditioned upon
such other Stockholder's participation in such underwriting on the terms set
forth herein.
If the Company desires that any officers or directors of the Company
holding securities of the Company be included in any registration for an
underwritten offering requested pursuant to Section 2.1(d) or if other holders
of securities of the Company who are entitled, by contract with the Company, to
have securities included in such a registration (the "Other Holders") request
such inclusion, the Company may include the securities of such officers,
directors and Other Holders in such registration and underwriting on the terms
set forth herein. The Company shall (together with all Stockholders, officers,
directors and Other Holders proposing to distribute their securities through
such underwriting) enter into an underwriting agreement in customary form
(including, without limitation, customary indemnification and contribution
provisions on the part of the Company) with the managing underwriter; provided
--------
that such underwriting agreement shall not provide for indemnification or
contribution obligations on the part of Stockholders materially greater than the
obligations of the Stockholders pursuant to Section 2.5. Notwithstanding any
other provision of this Section 2.1, if the managing underwriter determines that
the inclusion of all shares requested to be registered would adversely affect
the offering, the Company may limit the number of Registrable Shares to be
included in the registration and underwriting. The Company shall so advise all
holders of Registrable Shares requesting registration, and the number of shares
that are entitled to be included in the registration and underwriting shall be
allocated in the following manner. The securities of the Company held by holders
other than Stockholders and Other Holders shall be excluded from such
registration and underwriting to the extent deemed advisable by the managing
underwriter, and, if a further limitation on the number of shares is required,
the number of shares that may be included in such registration and underwriting
shall be allocated among all Stockholders and Other Holders requesting
registration in proportion, as nearly as practicable, to the respective number
of shares of Common Stock (on an as-converted basis) which they held at the time
the Company gives the notice specified in Section 2.1(c). If any holder of
Registrable Shares, officer, director or Other Holder who has requested
inclusion in such registration as provided above disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, and the securities so withdrawn shall also be withdrawn from
registration. If the managing underwriter has not limited the number of
Registrable Shares or other securities to be underwritten, the Company may
include securities for its own account in such registration if the managing
underwriter so
-4-
<PAGE>
agrees and if the number of Registrable Shares and other securities which would
otherwise have been included in such registration and underwriting will not
thereby be limited.
(e) The Company shall not be required to effect more than two
registrations pursuant to Section 2.1(a). In addition, the Company shall not be
required to effect any registration (other than on Form S-3 or any successor
form relating to secondary offerings) within six months after the effective date
of any other Registration Statement of the Company. For purposes of this Section
2.1(e), a Registration Statement shall not be counted if (i) the Registration
Statement is not declared effective by the Commission or the Initiating Holders
are unable to sell at least 50% of the shares they sought to sell pursuant to
such Registration Statement (unless the Initiating Holders withdraw their
request for such registration (other than as a result of information concerning
the business or financial condition of the Company which is made known to the
Stockholders after the date on which such registration was requested) and elect
not to pay the Registration Expenses therefor pursuant to Section 2.4) or (ii)
the Company sells any shares of Common Stock for its own account pursuant to the
Registration Statement.
(f) If at the time of any request to register Registrable
Shares by Initiating Holders pursuant to this Section 2.1, the Company is
engaged or has plans to engage in a registered public offering or is engaged in
any other activity which, in the good faith determination of the Company's Board
of Directors, would be adversely affected by the requested registration, then
the Company may at its option direct that such request be delayed for a period
not in excess of 90 days from the date of such request, such right to delay a
request to be exercised by the Company not more than once in any 12-month
period.
2.2 Incidental Registration.
-----------------------
(a) Whenever the Company proposes to file a Registration
Statement (other than a Registration Statement filed pursuant to Section 2.1 and
a Registration Statement covering shares to be sold solely for the account of
Other Holders) at any time and from time to time, it will, prior to such filing,
give written notice to all Stockholders of its intention to do so; provided,
--------
that no such notice need be given if no Registrable Shares are to be included
therein as a result of a determination of the managing underwriter pursuant to
Section 2.2(b). Upon the written request of a Stockholder or Stockholders given
within 20 days after the Company provides such notice (which request shall state
the intended method of disposition of such Registrable Shares), the Company
shall use its best efforts to cause all Registrable Shares which the Company has
been requested by such Stockholder or Stockholders to register to be registered
under the Securities Act to the extent necessary to permit their sale or other
disposition in accordance with the intended methods of distribution specified in
the request of such Stockholder or Stockholders; provided that the Company shall
have the right to postpone or withdraw any registration effected pursuant to
this Section 2.2 without obligation to any Stockholder.
(b) If the registration for which the Company gives notice
pursuant to Section 2.2(a) is a registered public offering involving an
underwriting, the Company shall so advise the Stockholders as a part of the
written notice given pursuant to Section 2.2(a). In such event, the right of any
Stockholder to include its Registrable Shares in such registration pursuant to
Section 2.2 shall be conditioned upon such Stockholder's participation in such
underwriting
-5-
<PAGE>
on the terms set forth herein. All Stockholders proposing to distribute their
securities through such underwriting shall enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for the
underwriting by the Company; provided that the Company shall make commercially
--------
reasonable efforts to assist the Stockholders in negotiating terms and
conditions in such underwriting agreement that are reasonably acceptable to the
Stockholders. Notwithstanding any other provision of this Section 2.2, if the
managing underwriter determines that the inclusion of all shares requested to be
registered would adversely affect the offering, the Company may limit the number
of Registrable Shares to be included in the registration and underwriting to not
less than 50% of the total number of securities to be included in the offering;
provided that the foregoing requirement shall not apply to the Initial Public
- --------
Offering. The Company shall so advise all holders of Registrable Shares
requesting registration, and the number of shares that are entitled to be
included in the registration and underwriting shall be allocated in the
following manner. The securities of the Company held by holders other than
Stockholders and Other Holders shall be excluded from such registration and
underwriting to the extent deemed advisable by the managing underwriter, and, if
a further limitation on the number of shares is required, the number of shares
that may be included in such registration and underwriting shall be allocated
among all Stockholders and Other Holders requesting registration in proportion,
as nearly as practicable, to the respective number of shares of Common Stock (on
an as-converted basis) which they held at the time the Company gives the notice
specified in Section 2.2(a). If any Stockholder or Other Holder would thus be
entitled to include more securities than such holder requested to be registered,
the excess shall be allocated among other requesting Stockholders and Other
Holders pro rata in the manner described in the preceding sentence. If any
holder of Registrable Shares or any officer, director or Other Holder
disapproves of the terms of any such underwriting, such person may elect to
withdraw therefrom by written notice to the Company, and any Registrable Shares
or other securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
2.3 Registration Procedures.
-----------------------
(a) If and whenever the Company is required by 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:
(i) file with the Commission a Registration Statement
with respect to such Registrable Shares and use its best efforts to cause that
Registration Statement to become effective as soon as possible;
(ii) as expeditiously as possible prepare and file with
the Commission any amendments and supplements to the Registration Statement and
the prospectus included in the Registration Statement as may be necessary to
comply with the provisions of the Securities Act (including the anti-fraud
provisions thereof) and to keep the Registration Statement effective for 12
months from the effective date or such lesser period until all such Registrable
Shares are sold;
(iii) as expeditiously as possible furnish to each
Selling Stockholder such reasonable numbers of copies of the Prospectus,
including any preliminary Prospectus, in conformity with the requirements of the
Securities Act, and such other documents
-6-
<PAGE>
as such Selling Stockholder may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Shares owned by such Selling
Stockholder;
(iv) as expeditiously as possible use its best efforts
to register or qualify the Registrable Shares covered by the Registration
Statement under the securities or Blue Sky laws of such states as the Selling
Stockholders shall reasonably request, and do any and all other acts and things
that may be necessary or desirable to enable the Selling Stockholders to
consummate the public sale or other disposition in such states of the
Registrable Shares owned by the Selling Stockholder; provided, however, that the
-------- -------
Company shall not be required in connection with this paragraph (iv) to qualify
as a foreign corporation or execute a general consent to service of process in
any jurisdiction;
(v) as expeditiously as possible, cause all such
Registrable Shares to be listed on each securities exchange or automated
quotation system on which similar securities issued by the Company are then
listed;
(vi) promptly provide a transfer agent and registrar for
all such Registrable Shares not later than the effective date of such
registration statement;
(vii) promptly make available for inspection by the
Selling Stockholders, any managing underwriter participating in any disposition
pursuant to such Registration Statement, and any attorney or accountant or other
agent retained by any such underwriter or selected by the Selling Stockholders,
all financial and other records, pertinent corporate documents and properties of
the Company and cause the Company's officers, directors, employees and
independent accountants to supply all information reasonably requested by any
such seller, underwriter, attorney, accountant or agent in connection with such
Registration Statement;
(viii) as expeditiously as possible, notify each Selling
Stockholder, promptly after it shall receive notice thereof, of the time when
such Registration Statement has become effective or a supplement to any
Prospectus forming a part of such Registration Statement has been filed; and
(ix) as expeditiously as possible following the
effectiveness of such Registration Statement, notify each seller of such
Registrable Shares of any request by the Commission for the amending or
supplementing of such Registration Statement or Prospectus.
(b) If the Company has delivered a Prospectus to the Selling
Stockholders and after having done so the Prospectus is amended to comply with
the requirements of the Securities Act, the Company shall promptly notify the
Selling Stockholders and, if requested, the Selling Stockholders shall
immediately cease making offers of Registrable Shares and return all
Prospectuses to the Company. The Company shall promptly provide the Selling
Stockholders with revised Prospectuses and, following receipt of the revised
Prospectuses, the Selling Stockholders shall be free to resume making offers of
the Registrable Shares.
(c) In the event that, in the judgment of the Company, it is
advisable to suspend use of a Prospectus included in a Registration Statement
due to pending material
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<PAGE>
developments or other events that have not yet been publicly disclosed and as to
which the Company believes public disclosure would be detrimental to the
Company, the Company shall notify all Selling Stockholders to such effect, and,
upon receipt of such notice, each such Selling Stockholder shall immediately
discontinue any sales of Registrable Shares pursuant to such Registration
Statement until such Selling Stockholder has received copies of a supplemented
or amended Prospectus or until such Selling Stockholder is advised in writing by
the Company that the then current Prospectus may be used and has received copies
of any additional or supplemental filings that are incorporated or deemed
incorporated by reference in such Prospectus. Notwithstanding anything to the
contrary herein, the Company shall not exercise its rights under this Section
2.3(c) to suspend sales of Registrable Shares for a period in excess of 60 days
in any 365-day period.
2.4 Allocation of Expense. The Company will pay all Registration
---------------------
Expenses for all registrations under this Agreement; provided, however, that if
-------- -------
a registration under Section 2.1 is withdrawn at the request of the Initiating
Holders (other than as a result of information concerning the business or
financial condition of the Company which is made known to the Stockholders after
the date on which such registration was requested) and if the Initiating Holders
elect not to have such registration counted as a registration requested under
Section 2.1, the requesting Stockholders shall pay the Registration Expenses of
such registration pro rata in accordance with the number of their Registrable
Shares included in such registration. For purposes of this Section, the term
"Registration Expenses" shall mean all expenses incurred by the Company in
complying with this Agreement, including, without limitation, all registration
and filing fees, exchange listing fees, printing expenses, fees and expenses of
counsel for the Company and the fees and expenses of one counsel selected by the
Selling Stockholders to represent the Selling Stockholders, state Blue Sky fees
and expenses, and the expense of any special audits incident to or required by
any such registration, but excluding underwriting discounts, selling commissions
and the fees and expenses of Selling Stockholders' own counsel (other than the
one counsel selected to represent all Selling Stockholders).
2.5 Indemnification and Contribution.
--------------------------------
(a) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, the Company will
indemnify and hold harmless each Selling Stockholder, each of its officers,
directors and partners (the "Covered Affiliates"), each underwriter of such
Registrable Shares, and each other person, if any, who controls such Selling
Stockholder or underwriter within the meaning of the Securities Act or the
Exchange Act against any losses, claims, damages or liabilities, joint or
several, to which such Selling Stockholder, Covered Affiliate, underwriter or
controlling person may become subject under the Securities Act, the Exchange
Act, state securities or Blue Sky laws or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement under which such Registrable Shares
were registered under the Securities Act, any preliminary prospectus or final
prospectus contained in the Registration Statement, or any amendment or
supplement to such Registration Statement, or arise out of or are based upon the
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and the
Company will reimburse such Selling Stockholder, Covered Affiliate, underwriter
and each such controlling
-8-
<PAGE>
person for any legal or any other expenses reasonably incurred by such Selling
Stockholder, Covered Affiliate, underwriter or controlling person in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any such case
-------- -------
to the extent that any such loss, claim, damage or liability arises out of or is
based upon any untrue statement or omission made in such Registration Statement,
preliminary prospectus or prospectus, or any such amendment or supplement, in
reliance upon and in conformity with information furnished to the Company, in
writing, by or on behalf of such Selling Stockholder, underwriter or controlling
person specifically for use in the preparation thereof.
(b) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, each Selling
Stockholder, severally and not jointly, will indemnify and hold harmless the
Company, each of its directors and officers and each underwriter (if any) and
each person, if any, who controls the Company or any such underwriter within the
meaning of the Securities Act or the Exchange Act, each other Selling
Stockholder and its Covered Affiliates against any losses, claims, damages or
liabilities, joint or several, to which the Company, such directors and
officers, underwriter or controlling person or other Selling Stockholder may
become subject under the Securities Act, Exchange Act, state securities or Blue
Sky laws or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement under which such Registrable Shares were registered under
the Securities Act, any preliminary prospectus or final prospectus contained in
the Registration Statement, or any amendment or supplement to the Registration
Statement, or arise out of or are based upon any omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, if the statement or omission was made in
reliance upon and in conformity with information relating to such Selling
Stockholder furnished in writing to the Company by or on behalf of such Selling
Stockholder specifically for use in connection with the preparation of such
Registration Statement, prospectus, amendment or supplement; provided, however,
that the obligations of a Selling Stockholder hereunder shall be limited to an
amount equal to the net proceeds to such Selling Stockholder of Registrable
Shares sold in connection with such registration.
(c) Each party entitled to indemnification under this Section
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
--------
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
-------- -------
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section except to the extent that the Indemnifying Party
is adversely affected by such failure. The Indemnified Party may participate in
such defense at such party's expense; provided, however, that the Indemnifying
-------- -------
Party shall pay such expense if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate due to actual
or potential differing interests between the Indemnified Party and any other
party represented by such counsel in such proceeding;
-9-
<PAGE>
provided further that in no event shall the Indemnifying Party be required to
- -------- -------
pay the expenses of more than one law firm per jurisdiction as counsel for the
Indemnified Party. The Indemnifying Party also shall be responsible for the
expenses of such defense if the Indemnifying Party does not elect to assume such
defense. No Indemnifying Party, in the defense of any such claim or litigation
shall, except with the consent of each Indemnified Party, consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect of such claim or
litigation, and no Indemnified Party shall consent to entry of any judgment or
settle such claim or litigation without the prior written consent of the
Indemnifying Party, which consent shall not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 2.5 is
due in accordance with its terms but for any reason is held to be unavailable to
an Indemnified Party in respect to any losses, claims, damages and liabilities
referred to herein, then the Indemnifying Party shall, in lieu of indemnifying
such Indemnified Party, contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities to
which such party may be subject in such proportion as is appropriate to reflect
the relative fault of the Company on the one hand and the Selling Stockholders
on the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative fault of the Company and the Selling
Stockholders shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of material fact related to information
supplied by the Company or the Selling Stockholders and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Selling Stockholders agree that
it would not be just and equitable if contribution pursuant to this Section 2.5
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph of Section 2.5, (a) in no case
shall any one Selling Stockholder be liable or responsible for any amount in
excess of the net proceeds received by such Selling Stockholder from the
offering of Registrable Shares and (b) the Company shall be liable and
responsible for any amount in excess of such proceeds; provided, however, that
-------- -------
no person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation and no Selling
Stockholder shall be required to assume any liability under this Section 2.5(d)
with respect to contribution in excess of what such Selling Stockholder would
have been liable to assume had the indemnification provisions contained in
Section 2.5(a) and (b) been enforceable. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this Section, notify such party
or parties from whom contribution may be sought, but the omission so to notify
such party or parties from whom contribution may be sought shall not relieve
such party from any other obligation it or they may have thereunder or otherwise
under this Section. No party shall be liable for contribution with respect to
any action, suit, proceeding or claim settled without its prior written consent,
which consent shall not be unreasonably withheld.
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<PAGE>
2.6 Other Matters with Respect to Underwritten Offerings. In the
----------------------------------------------------
event that Registrable Shares are sold pursuant to a Registration Statement in
an underwritten offering pursuant to Section 2.1, the Company agrees to (a)
enter into an underwriting agreement containing customary representations and
warranties with respect to the business and operations of the Company and
customary covenants and agreements to be performed by the Company, including
without limitation customary provisions with respect to indemnification by the
Company of the underwriters of such offering; (b) use its best efforts to cause
its legal counsel to render customary opinions to the underwriters with respect
to the Registration Statement; and (c) use its best efforts to cause its
independent public accounting firm to issue customary "cold comfort letters" to
the underwriters with respect to the Registration Statement.
2.7 Information by Holder. Each holder of Registrable Shares
---------------------
included in any registration shall furnish to the Company such information
regarding such holder and the distribution proposed by such holder as the
Company may reasonably request in writing and as shall be required in connection
with any registration, qualification or compliance referred to in this
Agreement.
2.8 "Stand-Off" Agreement; Confidentiality of Notices. Each
------------------------------------------------
Stockholder, if requested by the Company and the managing underwriter of an
underwritten public offering by the Company of Common Stock, shall not sell or
otherwise transfer or dispose of any Registrable Shares or other securities of
the Company held by such Stockholder for a period of 180 days following the
effective date of a Registration Statement filed in connection with the Initial
Public Offering or 90 days following the effective date of a Registration
Statement filed in connection with any secondary offering; provided that all
--------
stockholders of the Company then holding at least 1% of the outstanding Common
Stock (on an as-converted basis) and all officers and directors of the Company
enter into similar agreements.
The Company may impose stop-transfer instructions with respect to the
Registrable Shares or other securities subject to the foregoing restriction
until the end of such 180-day period or 90 day period as the case may be.
Any Stockholder receiving any written notice from the Company regarding
the Company's plans to file a Registration Statement shall treat such notice
confidentially and shall not disclose such information to any person other than
as necessary to exercise its rights under this Agreement.
2.9 Limitations on Subsequent Registration Rights. The Company shall
---------------------------------------------
not, without the prior written consent of Stockholders holding at least 50% of
the Registrable Shares then held by all Stockholders, enter into any agreement
(other than this Agreement) with any holder or prospective holder of any
securities of the Company which grant such holder or prospective holder rights
to include securities of the Company in any Registration Statement, unless (a)
such rights to include securities in a registration initiated by the Company or
by Stockholders are not more favorable than the rights granted to Other Holders
under Sections 2.1 and 2.2 of this Agreement, and (b) no rights are granted to
initiate a registration, other than registration pursuant to a registration
statement on Form S-3 (or its successor) in which Stockholders are entitled to
include Registrable Shares on a pro rata basis with such holders based on the
number of shares of Common Stock (on an as-converted basis) owned by
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<PAGE>
Stockholders and such holders. Notwithstanding the foregoing, any such action
taken pursuant to this Section 2.9 may be effected only in a manner which
affects all holders of Registrable Shares in the same fashion unless such
materially adversely affected holder consents in writing.
2.10 Rule 144 Requirements. After the earliest of (i) the closing of
---------------------
the sale of securities of the Company pursuant to a Registration Statement, (ii)
the registration by the Company of a class of securities under Section 12 of the
Exchange Act, or (iii) the issuance by the Company of an offering circular
pursuant to Regulation A under the Securities Act, the Company agrees to:
(a) make and keep current public information about the Company
available, as those terms are understood and defined in Rule 144;
(b) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements); and
(c) furnish to any holder of Registrable Shares upon request
(i) a written statement by the Company as to its compliance with the reporting
requirements of Rule 144 and of the Securities Act and the Exchange Act (at any
time after it has become subject to such reporting requirements), (ii) a copy of
the most recent annual or quarterly report of the Company, and (iii) such other
reports and documents of the Company as such holder may reasonably request to
avail itself of any similar rule or regulation of the Commission allowing it to
sell any such securities without registration.
2.11 Termination. All of the Company's obligations to register
-----------
Registrable Shares under Sections 2.1 and 2.2 of this Agreement shall terminate
five years after the closing of the Initial Public Offering
3. Right Of First Refusal
----------------------
3.1 Rights of Purchasers.
--------------------
(a) The Company shall not issue, sell or exchange, agree to
issue, sell or exchange, or reserve or set aside for issuance, sale or exchange,
(i) any shares of its Common Stock, (ii) any other equity securities of the
Company, including, without limitation, shares of preferred stock, (iii) any
option, warrant or other right to subscribe for, purchase or otherwise acquire
any equity securities of the Company, or (iv) any debt securities convertible
into capital stock of the Company (collectively, the "Offered Securities"),
unless in each such case the Company shall have first complied with this Section
3.1. The Company shall deliver to each Purchaser a written notice of any
proposed or intended issuance, sale or exchange of Offered Securities (the
"Offer"), which Offer shall (i) identify and describe the Offered Securities,
(ii) describe the price and other terms upon which they are to be issued, sold
or exchanged, and the number or amount of the Offered Securities to be issued,
sold or exchanged, (iii) identify the persons or entities (if known) to which or
with which the Offered Securities are to be offered, issued, sold or exchanged
and (iv) offer to issue and sell to or exchange with such Purchaser (A) a pro
rata portion of the Offered Securities determined by dividing the aggregate
number of shares of Common Stock then held by such Purchaser (giving effect to
the conversion of all
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<PAGE>
shares of convertible preferred stock then held) by the total number of shares
of Common Stock then outstanding (giving effect to the conversion of all
outstanding shares of convertible preferred stock) (the "Basic Amount"), and (B)
any additional portion of the Offered Securities attributable to the Basic
Amounts of other Purchasers as such Purchaser shall indicate it will purchase or
acquire should the other Purchasers subscribe for less than their Basic Amounts
(the "Undersubscription Amount").
(b) To accept an Offer, in whole or in part, a Purchaser must
deliver a written notice to the Company prior to 30 days after the date of
delivery of the Offer, setting forth the portion of the Purchaser's Basic Amount
that such Purchaser elects to purchase and, if such Purchaser shall elect to
purchase all of its Basic Amount, the Undersubscription Amount (if any) that
such Purchaser elects to purchase (the "Notice of Acceptance"). If the Basic
Amounts subscribed for by all Purchasers are less than the total of all of the
Basic Amounts available for purchase, then each Purchaser who has set forth an
Undersubscription Amount in its Notice of Acceptance shall be entitled to
purchase, in addition to the Basic Amounts subscribed for, the Undersubscription
Amount it has subscribed for; provided, however, that if the Undersubscription
-------- -------
Amounts subscribed for exceed the difference between the total of all of the
Basic Amounts available for purchase and the Basic Amounts subscribed for (the
"Available Undersubscription Amount"), each Purchaser who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of the
Available Undersubscription Amount as the Undersubscription Amount subscribed
for by such Purchaser bears to the total Undersubscription Amounts subscribed
for by all Purchasers, subject to rounding by the Board of Directors to the
extent it deems reasonably necessary.
(c) The Company shall have 90 days from the expiration of the
period set forth in Section 3.1(b) above to issue, sell or exchange all or any
part of such Offered Securities which are not purchased by the Purchasers
pursuant to Section 3.1(b) (the "Refused Securities"), but only to the offerees
or purchasers described in the Offer (if so described therein) and only upon
terms and conditions (including, without limitation, unit prices and interest
rates) which are not more favorable, in the aggregate, to the acquiring person
or persons or less favorable to the Company than those set forth in the Offer.
(d) In the event the Company shall propose to sell less than
all the Refused Securities (any such sale to be in the manner and on the terms
specified in Section 3.1(c) above), then each Purchaser may, at its sole option
and in its sole discretion, reduce the number or amount of the Offered
Securities specified in its Notice of Acceptance to an amount that shall be not
less than the number or amount of the Offered Securities that the Purchaser
elected to purchase pursuant to Section 3.1(b) above multiplied by a fraction,
(i) the numerator of which shall be the number or amount of Offered Securities
the Company actually proposes to issue, sell or exchange (including Offered
Securities to be issued or sold to Purchasers pursuant to Section 3.1(b) above
prior to such reduction) and (ii) the denominator of which shall be the original
amount of the Offered Securities. In the event that any Purchaser so elects to
reduce the number or amount of Offered Securities specified in its Notice of
Acceptance, the Company may not issue, sell or exchange more than the reduced
number or amount of the Offered Securities unless and until such securities have
again been offered to the Purchasers in accordance with Section 3.1(a) above.
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<PAGE>
(e) Upon the closing of the issuance, sale or exchange of all
or less than all of the Refused Securities, the Purchasers shall acquire from
the Company, and the Company shall issue to the Purchasers, the number or amount
of Offered Securities specified in the Notices of Acceptance, as reduced
pursuant to Section 3.1(d) above if the Purchasers have so elected, upon the
terms and conditions specified in the Offer. The purchase by the Purchasers of
any Offered Securities is subject in all cases to the preparation, execution and
delivery by the Company and the Purchasers of a purchase agreement relating to
such Offered Securities reasonably satisfactory in form and substance to the
Purchasers and their respective counsel.
(f) Any Offered Securities not acquired by the Purchasers or
other persons in accordance with Section 3.1(c) above may not be issued, sold or
exchanged until they are again offered to the Purchasers under the procedures
specified in this Agreement.
(g) The rights of the Purchasers under this Section 3 shall
not apply to:
(1) Common Stock issued as a stock dividend to holders
of Common Stock or upon any subdivision or combination of shares of Common
Stock;
(2) the issuance of any shares of Common Stock upon
conversion of shares of convertible preferred stock;
(3) the issuance of Common Stock upon exercise,
conversion or exchange of stock or other securities convertible or exchangeable
for shares of Common Stock, including, without limitation, options, warrants and
other rights to acquire shares of Common Stock or securities convertible into or
exchangeable for shares of Common Stock;
(4) the issuance, at any time after the original date of
incorporation of the Company's predecessor (a Massachusetts corporation of the
same name), of up to 2,049,161 shares of Common Stock, or at any time after the
date hereof, of up to 1,613,411 shares of Common Stock, or such greater number
as is approved by vote of not less than a majority of the non-employee directors
of the Company, or the grant of options, restricted stock or other stock-based
awards therefor, including shares issued upon exercise of options outstanding on
the date of this Agreement (such number to be proportionately adjusted in the
event of any stock splits, stock dividends, recapitalizations or similar events
occurring on or after the date of this Agreement) to officers, directors,
consultants and employees of the Company or any subsidiary pursuant to any plan,
agreement or arrangement approved by a vote of not less than a majority of the
Board of Directors of the Company (it being understood that any shares subject
to options that expire or terminate unexercised or shares that are repurchased
pursuant to a restricted stock agreement shall not count towards the maximum
number set forth in this clause (3));
(5) any issuance of securities to a bank or other
institution providing debt financing to the Company, if such issuance is
approved by the Board of Directors of the Company, including the affirmative
vote or consent of one director nominated by the Majority Series A Holders, one
director nominated by the Majority Series C Holders and one director nominated
by the Majority Series D Holders;
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<PAGE>
(6) securities issued solely in consideration for the
acquisition (whether by merger or otherwise) by the Company or any of its
subsidiaries of all or substantially all of the stock or assets of any other
entity;
(7) any other issuance of securities solely for non-cash
consideration, if such issuance is approved by the Board of Directors of the
Company, including the affirmative vote or consent of one director nominated by
the Majority Series A Holders, one director nominated by the Majority Series C
Holders and one director nominated by the Majority Series D Holders, and such
vote or consent makes specific reference to the waiver of the rights of the
Purchasers under this Section 3; or
(8) shares of Common Stock sold by the Company in an
underwritten public offering pursuant to an effective registration statement
under the Securities Act.
3.2 Termination. This Section 3 shall terminate upon the earlier of
-----------
the following events:
(a) The sale of all or substantially all of the assets or business
of the Company, by merger, sale of assets or otherwise; or
(b) The closing of the Initial Public Offering.
4. Transfers of Rights. This Agreement, and the rights and obligations of
-------------------
each Purchaser hereunder, may be assigned by such Purchaser to (i) any person or
entity to which at least 250,000 Shares are transferred by such Purchaser
(except for any transfer requested at any time prior to 120 days after the date
of this Agreement, in which case fewer that 250,000 shares may be transferred),
(ii) any of such Purchaser's stockholders, affiliates, partners, retired
partners, members, general partners or managing members of such Purchaser, (iii)
any liquidating trust established for the benefit of any partners or members of
such Purchaser, or (iv) any investment fund or other entity controlled or
managed by an affiliate of such Purchaser, and such transferee shall be deemed a
"Purchaser" for purposes of this Agreement; provided that the transferee
provides written notice of such assignment to the Company and agrees in writing
to be bound hereby.
5. General.
-------
(a) Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
(b) Specific Performance. In addition to any and all other
--------------------
remedies that may be available at law in the event of any breach of this
Agreement, each Purchaser shall be entitled to specific performance of the
agreements and obligations of the Company hereunder and to such other injunctive
or other equitable relief as may be granted by a court of competent
jurisdiction.
-15-
<PAGE>
(c) Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws of the Commonwealth of
Massachusetts (without reference to the conflicts of law provisions thereof).
(d) Notices. All notices, requests, consents, and other
-------
communications under this Agreement shall be in writing and shall be deemed
delivered (i) three business days after being sent by registered or certified
mail, return receipt requested, postage prepaid or (ii) one business day after
being sent via a reputable nationwide overnight courier service guaranteeing
next business day delivery, in each case to the intended recipient as set forth
below:
If to the Company, at Network Engines, Inc., 61 Pleasant Street, Randolph,
Massachusetts 02368-4137, Attention: President and CEO, or at such other address
or addresses as may have been furnished in writing by the Company to the
Purchasers, with a copy to Hale and Dorr LLP, 60 State Street, Boston, MA 02109,
Attention: Philip P. Rossetti, Esq.;
If to a Purchaser, at the address set forth on Exhibit A for such
---------
Purchaser, or at such other address or addresses as may have been furnished to
the Company in writing by such Purchaser, with a copy to Debevoise & Plimpton,
875 Third Avenue, New York, NY 10022, Attention: David Schwartz, Esq.
Any party may give any notice, request, consent or other communication
under this Agreement using any other means (including, without limitation,
personal delivery, messenger service, telecopy, first class mail or electronic
mail), but no such notice, request, consent or other communication shall be
deemed to have been duly given unless and until it is actually received by the
party for whom it is intended. Any party may change the address to which
notices, requests, consents or other communications hereunder are to be
delivered by giving the other parties notice in the manner set forth in this
Section.
(e) Complete Agreement. This Agreement constitutes the entire
------------------
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersedes all prior agreements and understandings relating to
such subject matter.
(f) Amendments and Waivers. Any term of this Agreement may be
----------------------
amended or terminated and the observance of any term of this Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the holders of at
least a majority of the Registrable Shares held by all of the Stockholders;
provided, that this Agreement may be amended with the consent of the holders of
- --------
less than all Registrable Shares only in a manner which applies to all such
holders in the same fashion. Any such amendment, termination or waiver effected
in accordance with this Section 5(f) shall be binding on all parties hereto,
even if they do not execute such consent. No waivers of or exceptions to any
term, condition or provision of this Agreement, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of any
such term, condition or provision.
(g) Pronouns. Whenever the context may require, any pronouns
--------
used in this Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns and pronouns shall include the
plural, and vice versa.
-16-
<PAGE>
(h) Counterparts; Facsimile Signatures. This Agreement may be
----------------------------------
executed in any number of counterparts, each of which shall be deemed to be an
original, and all of which together shall constitute one and the same document.
This Agreement may be executed by facsimile signatures.
(i) Section Headings. The section headings are for the
----------------
convenience of the parties and in no way alter, modify, amend, limit or restrict
the contractual obligations of the parties.
[The rest of this page is intentionally left blank.]
-17-
<PAGE>
Executed as of the date first written above.
"The Company"
NETWORK ENGINES, INC.
By: /s/ Lawrence A. Genovesi
-----------------------------------------
Lawrence A. Genovesi
President and Chief Executive Officer
"The Series D Purchasers"
HARBOURVEST PARTNERS VI - DIRECT FUND, L.P.
By: HVP VI- DIRECT ASSOCIATES LLC,
as general partner
By: HARBOURVEST PARTNERS, LLC,
its managing member
By: /s/ Ofer Nemirovsky
------------------------------------
Name: Ofer Nemirovsky
Title: Managing Director
CANAAN EQUITY II L.P. (QP)
By: CANAAN EQUITY PARTNERS II LLC
By: /s/ James Furnivall
------------------------------------
its Member/Manager
-18-
<PAGE>
LANDMARK CO-INVESTMENT PARTNERS, L.P.
By: LANDMARK PARTNERS VIII, LLC
its General Partner
By: LANDMARK EQUITY ADVISORS, LLC
its Managing Member
By:/s/ Robert J. Sharfeld
--------------------------------
its Member
ASCENT VENTURE PARTNERS III, L.P.
By: ASCENT VENTURE MANAGEMENT III, LLC
its General Partner
By: /s/ Frank S. Polestra
---------------------------------------
Frank M. Polestra
Manager
MD CO.
By: /s/ Charles A. Levin
---------------------------------------
Name: Charles A. Levin
Partner
EGAN-MANAGED CAPITAL, LP.
By: EMC PARTNERS, L.P.,
its General Partner
By: /s/ Michael H. Shanahan
-----------------------------------
Michael H. Shanahan
its General Partner
-19-
<PAGE>
CORNING TECHNOLOGY PARTNERS II, L.P.
By: CC VENTURES LLP,
its Managing Partner
By: /s/ Dwight B. Corning
-----------------------------------
Dwight B. Corning
its General Partner
CORNING CAPITAL VENTURES, LLC
By: CC VENTURES LLP,
its Managing Member
By /s/ Dwight B. Corning
-----------------------------------
Dwight B. Corning,
its General Partner
/s/ Michael Barza
--------------------------------------------
Michael Barza
PROPRIETORS OF FOREST HILLS CEMETERY
By: /s/ Robert W. Macleod
---------------------------------------
Name: Robert W. Macleod
its Trustee
/s/ Micheal J. Egan
--------------------------------------------
Fitzgerald Partners III, L.P.
/s/ Dr. Per Eldh
--------------------------------------------
Dr. Per Eldh
-20-
<PAGE>
/s/ Richard Golemme
--------------------------------------------
Richard Golemme
FIRST TRUST CORPORATION F/B/O LINDA WILEY
By: /s/ Linda E. Wiley
---------------------------------------
Name: Julie Kornnier
Title: Senior CSR
FIRST TRUST CORPORATION F/B/O ROBERT WILEY
By: /s/ Robert Wiley
---------------------------------------
Name: Julie Kornnier
Title: Senior CSR
--------------------------------------------
James Minchello
/s/ Alexander Levine
--------------------------------------------
Waterline Capital
/s/ Dennis A. Kirshy
--------------------------------------------
Dennis A. Kirshy
/s/ Joseph Golemme
--------------------------------------------
Joseph Golemme
/s/ Chris Clifford
--------------------------------------------
C. Clifford
-21-
<PAGE>
"The Prior Purchasers"
ASCENT VENTURE PARTNERS, L.P.
By: ASCENT VENTURE MANAGEMENT, LLC
its General Partner
By: /s/ Frank M. Polestra
-----------------------------------
Frank M. Polestra
its Manager
ASCENT VENTURE PARTNERS II, L.P.
By: ASCENT VENTURE MANAGEMENT II, L.P.
its General Partner
By: ASCENT MANAGEMENT SBIC CORP., L.P.
its General Partner
By: /s/ Frank M. Polestra
-----------------------------------
Frank M. Polestra
President
/s/ Nancy S. Anthony
--------------------------------------------
Nancy S. Anthony
--------------------------------------------
Walter Foss
--------------------------------------------
Leonard J. Umina
--------------------------------------------
Patrick S. Harris
-22-
<PAGE>
/s/ Frank M. Polestra
--------------------------------------------
Frank M. Polestra
LE SERRE
By:
---------------------------------------
Name:
Title:
/s/ Ernest Godshalk
--------------------------------------------
Ernest Godshalk
/s/ Howard Salwen
--------------------------------------------
Howard Salwen
DWIGHT B. CORNING #3 TRUST
By: /s/ Dwight B. Corning
---------------------------------------
Name: Dwight B. Corning
Title: Trustee
/s/ Paul V. Cox
--------------------------------------------
Paul V. Cox
NEEDHAM RADIOLOGY ASSOCIATES PROFIT
SHARING F/B/O DR. PER ELDH
By:
---------------------------------------
Name:
Title:
-23-
<PAGE>
/s/ Linda Blackington
--------------------------------------------
Linda Blackington
/s/ Timothy G. Clifford
--------------------------------------------
Timothy G. Clifford
--------------------------------------------
Michael E.A. O'Malley
--------------------------------------------
Lawrence Kernan
/s/ Charles A. Levin
--------------------------------------------
Charles A. Levin
--------------------------------------------
R. Schorr Berman
/s/ Christopher W. Lynch
--------------------------------------------
Christopher W. Lynch
/s/ C. W. Dick
--------------------------------------------
C.W. Dick
--------------------------------------------
Leigh E. Michl
-24-
<PAGE>
NICHOLES J. BOLOGNA FAMILY TRUST
By: /s/ Nicholes J. Bologna
---------------------------------------
Name: Nicholes J. Bologna
Title: Trustee
--------------------------------------------
Jay V. Senerchi
-25-
<PAGE>
Exhibit 10.7
DECLARATION AND AGREEMENT OF TRUST
DECLARATION AND AGREEMENT OF TRUST for the purpose of establishing a
VOTTNG TRUST, dated this 1st day of October, 1995, by and among the undersigned
stockholders, in their capacity as stockholders (the "Stockholders") of
PowerStation Technologies, Inc., a Massachusetts corporation (the
"Corporation"), and Lawrence A. Genovesi and Cheryl H. Smith in their capacities
as trustees under this Declaration and Agreement of Trust (the "Voting
Trustees", which term shall be deemed to include a reference to the successors
as Voting Trustees hereunder).
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Stockholders have agreed that it is in their best interests
and the best interests of the Corporation to establish a Voting Trust with
respect to the issued and outstanding shares of common stock of the Corporation
held by them; and
WHEREAS, the Stockholders have also agreed to certain restrictions on the
transfer of the beneficial interest in the shares of common stock so being
transferred to the Voting Trustees; and
WHEREAS, the Stockholders have delivered to the Voting Trustees all of the
certificates for capital stock of the Corporation held by the Stockholders;
NOW, THEREFORE, in consideration for One Dollar ($1.00) and other good and
valuable consideration, the receipt and sufficiency of which is hereby severally
acknowledged, the parties hereto hereby agree as follows:
1. Creation of Trust.
-----------------
(a) The parties hereto acknowledge the deposit with the Voting
Trustees of certificates representing 36,000 shares of the common stock, $.01
par value, of the Corporation, being approximately ten percent (10%) of the
issued and outstanding capital stock of the Corporation (the "Shares"), all of
said certificates being accompanied by suitable endorsements to the Voting
Trustees to permit the transfer of the Shares into the names of the Voting
Trustees. The Voting Trustees shall hold all the Shares IN TRUST for the common
benefit of all the Stockholders of the Corporation who have joined in this
Agreement under the terms and conditions hereinafter set forth.
(b) The parties hereto hereby further acknowledge delivery to the
Stockholders of certificates in the form annexed hereto as Exhibit A executed by
---------
the Voting Trustees ("Voting
1
<PAGE>
Trust Certificates"), certifying to the number of Shares so deposited by the
Stockholders with the Voting Trustees and to be reissued in the names of the
Voting Trustees.
2. Interests of Voting Trustees. It is expressly understood that the
----------------------------
Voting Trustees, in their capacity as such, shall have no beneficial interest in
the equity in the Corporation represented by the Shares, nor in any
distributions paid thereon, whether by way of dividends, distributions, in
liquidation or otherwise, but shall hold all such interests in trust for the
Stockholders.
3. Powers of Voting Trustees.
-------------------------
(a) It shall be the duty of the Voting Trustees to exercise all
rights of a stockholder of the Corporation with respect to the Shares, and to
vote the Shares as the Voting Trustees may determine to be in the best interests
of the Corporation, either in person or by proxy, at all meetings of the
stockholders of the Corporation and to execute any action by written consent,
with respect to all matters which may be brought before such meetings or acted
upon by consent, as fully as each of the Stockholders might have done in the
absence of this Voting Trust Agreement.
(b) Without limiting the foregoing, the Voting Trustees are
specifically authorized, in the exercise of their unrestricted discretion:
(i) to vote for, or to consent to, any increase or decrease
of the capital stock of the Corporation that may
lawfully be submitted to the Stockholders for action;
(ii) to vote in favor of approving any merger, merger
agreement, consolidation, consolidation agreement,
reorganization or recapitalization that may lawfully be
submitted to the Stockholders for action; and, upon any
merger, consolidation, reorganization or
recapitalization becoming effective, to surrender the
Shares to the extent proper and requisite; and to
receive and to hold under this Agreement any and all
voting capital stock of the Corporation or of any other
corporation issued in exchange for the Shares, or
pursuant to the provisions of any such merger,
consolidation, reorganization or recapitalization with
respect to the Shares;
(iii) to vote in favor of approving any plan for the sale of
all or any part of the assets of the Corporation that
may be lawfully submitted to the Stockholders for
action;
(iv) to vote in favor of the mortgage or pledge of all or
substantially all or any part of the assets of the
Corporation;
(v) to vote in favor of the liquidation and dissolution of
the Corporation; and
2
<PAGE>
(vi) to pledge, assign or transfer the Shares as collateral
in connection with any loan made to the Corporation by
any bank or other financial institution upon such terms
and conditions as said Voting Trustees may assent to,
and to sell any Shares free of the beneficial interest
of the Stockholders in the manner and upon the terms to
which the Voting Trustees may have agreed.
4. Dividends and Distributions.
---------------------------
(a) Each holder of a Voting Trust Certificate shall be entitled to
receive payment in cash of his pro rata share of the amount of all cash
dividends received by the Voting Trustees, and shall be entitled to receive his
respective pro rata share of all dividends received by the Voting Trustees in a
form other than cash; provided, however, that in case the Voting Trustees
receive any shares of voting capital stock of the Corporation or of any other
corporation issued in exchange for the Shares, issued by way of a dividend upon
the Shares or pursuant to the provisions of any merger, consolidation,
reorganization or recapitalization, they shall hold such shares subject to this
Agreement (and such shares shall hereafter be considered Shares hereunder) and
shall issue Voting Trust Certificates to the respective holders of Voting Trust
Certificates evidencing their beneficial ownership of such Shares.
(b) Except as otherwise provided in Paragraph (a) above, every
distribution of a dividend received by the Voting Trustees shall be made to the
holders of Voting Trust Certificates appearing of record on the transfer books
kept by the Voting Trustees at the close of business on the day upon which the
holders of stock of the Corporation must have been record owners thereof in
order to entitle them to such dividend. The Trustees may, in their discretion,
direct the Corporation to pay cash dividends directly to the holders of Voting
Trust Certificates entitled thereto.
(c) If the Voting Trustees sell any or all of the Shares from time
to time, or in the event of a partial or total liquidation of the Corporation
and distribution of the proceeds thereof to the Voting Trustees, the Voting
Trustees shall promptly distribute the net proceeds received by them pro rata
among the registered holders of Voting Trust Certificates as of the close of a
business day reasonably established by the Voting Trustees. If such sale of
Shares was of all the Shares held by the Voting Trustees, or if any such
liquidation was a total liquidation of the Corporation, such distribution shall
be made in exchange for and upon the surrender of all the Voting Trust
Certificates, and upon such distribution, this Agreement shall be terminated in
accordance with Section 14 and all obligations and liabilities of the Voting
Trustees hereunder shall terminate.
5. Power of Voting Trustees to Contract with Corporation.
-----------------------------------------------------
(a) Any Voting Trustee may, as an individual, be a stockholder,
director or officer of the Corporation, and may be a holder of Voting Trust
Certificates; and may be interested, directly or indirectly, in the purchase and
sale of the Corporation's stocks, bonds, debentures and other securities. The
Voting Trustees may vote for themselves as directors and officers of the
3
<PAGE>
Corporation and may receive compensation from the Corporation for services
performed by them for it in those or any other capacities.
(b) Each Voting Trustee, in his individual capacity, or any concern
in which he may have an interest, may deal with the Corporation as if he was not
a Voting Trustee hereunder, and any such dealing approved by a majority of the
directors of the Corporation, even though elected by the Voting Trustee, shall
be conclusively presumed to be fair to the Corporation.
6. Liability of Voting Trustees. In holding, disposing of or voting the
----------------------------
Shares, the Voting Trustees shall exercise their best judgment from time to time
to elect suitable officers and directors and to act upon such other matters
which may come before them at stockholders' meetings, all to the end that the
affairs of the Corporation shall be properly managed. Nevertheless, the Voting
Trustees assume no responsibility, in their capacity as Voting Trustees, for the
management of the business and affairs of the Corporation or for any action
taken pursuant to votes so cast so long as the Voting Trustees exercise good
faith and are not in willful default of their fiduciary obligation hereunder. No
Voting Trustee shall be liable for any error of law nor for the default of any
other Voting Trustee.
7. Transfer of Voting Trust Certificates. The Voting Trust Certificates
-------------------------------------
shall be transferable only on the books of the Voting Trustees, to be kept by
them or their agent, on surrender thereof by the registered holder in person or
by attorney (provided that, if rules are from time to time established by the
Voting Trustees with respect to authorization of attorneys, such surrender shall
be in person or by an attorney so authorized), and until so transferred, the
Voting Trustees may treat the registered holder of a Voting Trust Certificate as
the owner for all purposes whatsoever. The transfer books may be closed by the
Voting Trustees at any time prior to the holding of meetings or the payment of
dividends, or for any other purpose.
8. Restriction on Transfer of Voting Trust Certificates.
----------------------------------------------------
(a) Except as provided in paragraph (b) hereof, no Stockholder may
sell, pledge, hypothecate, transfer or otherwise dispose of all or any part of
the interest of the Stockholder in the Shares or the Voting Trust Certificates
held by him.
(b) The restrictions of paragraph (a) shall not apply to:
(i) a transfer on the death of any Stockholder to the
decedent's personal representative, heirs or legatees;
or
(ii) a transfer by any of the parties to this Agreement to
any other party to this Agreement; or
(iii) a transfer by the holder of any Voting Trust Certificate
made with the written consent of all of the other then
holders of Voting Trust Certificates;
4
<PAGE>
provided in each case that such interest in the Shares or Voting Trust
Certificate so transferred shall continue in all respects to be subject to all
the terms, conditions and provisions hereof, unless the holders of all Voting
Trust Certificates otherwise agree.
(c) Without limiting such rights as the parties may have according
to law, it is specifically agreed that any party to this Agreement shall have
the right to seek injunctive relief for a violation of the restrictions on
transfer of any parry's interest in the Shares or Voting Trust Certificates.
9. Resignation and Removal of Voting Trustees.
------------------------------------------
(a) Any Voting Trustee may resign at any time by delivering his
written resignation to the other Voting Trustee(s), if any, with a copy of such
written resignation to the Clerk of the Corporation and each person then holding
a Voting Trust Certificate.
(b) The holders of all of the Voting Trust Certificates may, at a
meeting called for such purpose pursuant to Section 11, remove any Voting
Trustee for cause shown. provided that at such meeting the Voting Trustee shall
be given an opportunity for a hearing on the cause asserted as the basis for
removal.
10. Vacancy; Successors.
-------------------
(a) In the event of the death, declination, resignation or inability
of any of the original Voting Trustees hereunder to serve, the remaining
original Trustee(s) shall be the sole Trustee(s). In the event of the death,
declination, resignation or inability of all the original Trustees to serve,
then Wayne Smith shall serve as Voting Trustee (the "Interim Trustee"). As soon
as practicable, the Interim Trustee shall appoint a new trustee of the Voting
Trust that is mutually acceptable to the executor and/or legal representatives
of the original Voting Trustees' respective estates. After carrying out the
above-stated duties, the Interim Trustee shall resign as trustee of the Voting
Trust. Upon the death, declination, resignation or inability to serve of any of
the alternate Voting Trustees, the remaining Voting Trustees may designate a
successor.
(b) Upon the acceptance by a new Voting Trustee of his appointment
as a successor Voting Trustee, the title to the trust property and all of the
powers herein given to the Voting Trustees shall vest in the remaining and the
new Voting Trustee without further conveyance or formality.
11. Meetings of Holders of Voting Trust Certificates. Whenever the vote of
------------------------------------------------
the holders of Voting Trust Certificates is required, such vote shall be taken
at a special meeting of such holders called by any Voting Trustee or by Voting
Trust Certificate holders holding more than twenty-five percent (25%) of the
beneficial interest under this Agreement, and such meeting shall be held at the
last designated office of the Voting Trustees. Notice of the time and place of
such
5
<PAGE>
meeting shall be given to all of the holders of Voting Trust Certificates not
less than seven (7) days before the day specified in such notice as the day on
which such meeting shall be held.
12. Compensation of Voting Trustees. The Voting Trustees are not to
-------------------------------
receive any compensation for their services hereunder. The Voting Trustees may
employ counsel and such other assistance as may be convenient in the performance
of their functions. The Voting Trustees may receive from the holders of Voting
Trust Certificates reimbursement or indemnity for and against any and all
claims, expenses and liabilities incurred by them or asserted against them in
connection with or growing out of this Agreement or the discharge of their
duties hereunder. Any such claims, expenses or liabilities shall be charged to
the holders of the Voting Trust Certificates pro rata and may be deducted from
dividends or other distributions to them, or may be made a charge payable as a
condition to the delivery of assets out of trust in exchange for Voting Trust
Certificates as provided herein, and the Voting Trustees shall be entitled to a
lien therefor upon the assets held in trust hereunder for such claim, expenses
and liabilities.
13. Loss of Voting Trust Certificates. In case of the loss, destruction or
---------------------------------
mutilation of a Voting Trust Certificate, the Trustees may issue a duplicate of
such certificate upon receipt of satisfactory evidence of such loss, destruction
or mutilation and an indemnity agreement, if the Voting Trustees so require,
against loss or expense in connection with the issuance of a new Voting Trust
Certificate.
14. Term. This Agreement shall continue in full force and effect until
----
terminated upon the happening of any of the following events:
(i) the execution by the Voting Trustees hereunder of a statement
of termination duly filed at the principal office of the
Corporation; or
(ii) the execution of a termination agreement duly signed by all of
the holders of all of the Voting Trust Certificates
outstanding under this Agreement duly filed at the principal
office of the Corporation; or
(iii) the distribution of all assets of the Trust in exchange for
surrender of all Voting Trust Certificates in accordance with
Section 4(c).
15. Notices. Whenever any notice is required to be given to the holders of
-------
Voting Trust Certificates under the terms of this Agreement, such notice shall
be deemed to have been duly given if mailed by registered or certified mail to
each registered holder of the Voting Trust Certificates at his last known
address as shown on the records of the Voting Trustees, and whenever any notice
is required to be given to the Voting Trustees under the terms of this
Agreement, said notice shall be deemed to have been duly given if mailed by
registered or certified mail to the Voting Trustees at c/o PowerStation
Technologies, Inc., 61 Pleasant Street, Randolph, Massachusetts, 02368 or such
other address as the Voting Trustees may hereafter designate by notice to the
holders of Voting Trust Certificates.
6
<PAGE>
16. Agreement and Amendments. Copies of this Agreement, and of every
------------------------
agreement supplemental hereto or amendatory hereof, shall be filed in the
principal office of the Corporation and shall be open to inspection by any
beneficiary of this Trust during normal business hours. This Voting Trust may at
any time be altered or amended only by the vote of those at the time holding all
of the Voting Trust Certificates.
17. Binding Effect; Successors. The terms, conditions and provisions
--------------------------
hereof shall be binding upon and inure to the benefit of the holders from time
to time of the Voting Trust Certificates. Every person entitled to receive
Voting Trust Certificates representing Shares, and their transferees and
assigns, upon accepting the Voting Trust Certificates issued hereunder, shall
become parties to and be bound by the provisions of this Agreement with the same
effect as if they had executed the Agreement. Permitted transferees of the
Voting Trust Certificates shall, whether or not otherwise specified in this
Agreement, succeed to the rights and privileges of their transferors.
18. Governing Law; Severability. This Voting Trust Agreement shall be
---------------------------
deemed made under the laws of the Commonwealth of Massachusetts and, together
with the rights and obligations of the parties hereunder, shall be construed
under and governed by the laws of such Commonwealth. The invalidity or
unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision hereof.
19. Counterparts. This Agreement may be executed in multiple counterparts,
------------
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
20. Additional Parties. Additional holders of the capital stock of the
------------------
Corporation (the "Additional Parties" or "Additional Party") may become parties
to this Agreement by executing a counterpart of this Agreement in substantially
the form attached hereto as Exhibit B. An original copy of this Agreement and
any counterpart subsequently executed shall be kept by the Clerk of the
Corporation. Upon execution of a counterpart to this Agreement, the Additional
Party shall deposit with the Voting Trustees certificate(s) for shares of the
capital stock of the Corporation which shall become subject to this Agreement
and receive in the place thereof Voting Trust Certificate(s) certifying the
number of shares so deposited in the manner provided herein.
21. Effect of Table of Contents and Headings. Any table of contents, title
----------------------------------------
of an article or section heading herein contained is for convenience of
reference only and shall not affect the meaning of construction of any of the
provisions hereof.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed, under seal.
STOCKHOLDERS:
/s/ Wayne Smith
--------------------------------------
Wayne Smith
/s/ Helen Smith
--------------------------------------
Helen Smith
/s/ Laurel Smith
--------------------------------------
Laurel Smith
/s/ Jennifer Smith
--------------------------------------
Jennifer Smith
/s/ June Millison Smith
--------------------------------------
June Smith Millison
/s/ Mildred Genovesi
--------------------------------------
Mildred Genovesi
8
<PAGE>
The undersigned Voting Trustees hereby accept the trust hereby created.
VOTING TRUSTEES:
/s/ Lawrence A. Genovesi
--------------------------------------
Lawrence A. Genovesi
/s/ Cheryl H. Smith
--------------------------------------
Cheryl H. Smith
9
<PAGE>
EXHIBIT A
---------
VOTING TRUST CERTIFICATE
------------------------
POWERSTATION TECHNOLOGIES, INC.
A Massachusetts Corporation
No. 6 10,000 Shares
Lawrence A. Genovesi and Cheryl H. Smith, Voting Trustees of the capital
stock of Powerstation Technologies, Inc. (the "Corporation") under and agreement
dated ________, _____, 1995 by and among the stockholders, in their capacity as
stockholders of the Corporation, party thereto and Lawrence A. Genovesi and
Cheryl H. Smith in their capacity as Voting Trustees (hereinafter called the
"Voting Trust Agreement"), having received certain shares of capital stock of
the Corporation pursuant to such Agreement, hereby certify that Helen Smith will
be entitled to receive a certificate for 10,000 shares of common stock, $.01 par
value, of the Corporation upon the expiration of the Voting Trust Agreement, and
in the meantime shall be entitled to receive payments of dividends or
distributions that may be collected by the undersigned trustees upon a like
number of such shares to the extent and in the manner provided under the terms
of the Voting Trust Agreement.
This certificate is transferable only on the books of the undersigned
trustees by the registered holder in person or by his duly authorized attorney,
and the holder hereof, by accepting this certificate, adopts and ratifies the
Voting Trust Agreement and manifests his consent that the undersigned trustees
may treat the registered holder hereof as the true owner for all purposes except
the delivery of stock certificates, which delivery shall not be made without the
surrender hereof.
This certificate is issued pursuant to, and the rights of the holder
hereof are subject to, all the terms and conditions of the Voting Trust
Agreement.
IN WITNESS WHEREOF, Lawrence A. Genovesi and Cheryl H. Smith as Voting
Trustees have hereunto executed this certificate this ____day ___________, 1995.
/s/ Lawrence A. Genovesi
-----------------------------------
Lawrence A. Genovesi
/s/ Cheryl H. Smith
-----------------------------------
Cheryl H. Smith
<PAGE>
EXHIBIT B
---------
POWERSTATION TECHNOLOGIES, INC.
STOCK RESTRICTION AGREEMENT
Counterpart Signature Page
--------------------------
The undersigned stockholder of PowerStation Technologies, Inc. hereby
agrees to be bound by the terms of that certain Voting Trust Agreement made
effective as of the ______ day of ________, 1995 between Lawrence A. Genovesi
and Cheryl H. Smith in their capacity as Voting Trustees and the original
signatories thereto with the same force and effect as if the undersigned
Stockholder were an original party to the Voting Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand,
effective as of _________, 1995 as an instrument under seal.
STOCKHOLDER:
/s/ Helen C. Smith
-----------------------------------
VOTING TRUSTEES:
/s/ Lawrence A. Genovesi
-----------------------------------
Lawrence A. Genovesi, as Voting Trustee
/s/ Cheryl H. Smith
-----------------------------------
Cheryl H. Smith, as Voting Trustee
<PAGE>
EXHIBIT A
---------
VOTING TRUST CERTIFICATE
------------------------
POWERSTATION TECHNOLOGIES, INC.
A Massachusetts, Corporation
No. 4 1,000 Shares
Lawrence A. Genovesi and Cheryl H. Smith, Voting Trustees of the capital
stock of Powerstation Technologies, Inc. (the "Corporation") under and agreement
dated ___________, _______, 1995 by and among the stockholders, in their
capacity as stockholders of the Corporation, party thereto and Lawrence A.
Genovesi and Cheryl H. Smith in their capacity as Voting Trustees (hereinafter
called the "Voting Trust Agreement"), having received certain shares of capital
stock of the Corporation pursuant to such Agreement, hereby certify that Laurel
Smith will be entitled to receive a certificate for 1,000 shares of common
stock, $.01 par value, of the Corporation upon the expiration of the Voting
Trust Agreement, and in the meantime shall be entitled to receive payments of
dividends or distributions that may be collected by the undersigned trustees
upon a like number of such shares to the extent and in the manner provided under
the terms of the Voting Trust Agreement.
This certificate is transferable only on the books of the undersigned
trustees by the registered holder in person or by his duly authorized attorney,
and the holder hereof, by accepting this certificate, adopts and ratifies the
Voting Trust Agreement and manifests his consent that the undersigned trustees
may treat the registered holder hereof as the true owner for all purposes except
the delivery of stock certificates, which delivery shall not be made without the
surrender hereof.
This certificate is issued pursuant to, and the rights of the holder
hereof are subject to, all the terms and conditions of the Voting Trust
Agreement.
IN WITNESS WHEREOF, Lawrence A. Genovesi and Cheryl H. Smith as Voting
Trustees have hereunto executed this certificate this ______ day ________, 1995.
/s/ Lawrence A. Genovesi
-----------------------------------
Lawrence A. Genovesi
/s/ Cheryl H. Smith
-----------------------------------
Cheryl H. Smith
<PAGE>
EXHIBIT B
---------
POWERSTATION TECHNOLOGIES, INC.
STOCK RESTRICTION AGREEMENT
Counterpart Signature Page
--------------------------
The undersigned stockholder of PowerStation Technologies, Inc. hereby
agrees to be bound by the terms of that certain Voting Trust Agreement made
effective as of the _____ day of _________, 1995 between Lawrence A. Genovesi
and Cheryl H. Smith in their capacity as Voting Trustees and the original
signatories thereto with the same force and effect as if the undersigned
Stockholder were an original party to the Voting Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand,
effective as of _____ ____, 1995 as an instrument under seal.
STOCKHOLDER:
/s/ Laurel Smith
-----------------------------------
VOTING TRUSTEES:
/s/ Lawrence A. Genovesi
-----------------------------------
Lawrence A. Genovesi, as Voting Trustee
/s/ Cheryl H. Smith
-----------------------------------
Cheryl H. Smith, as Voting Trustee
<PAGE>
EXHIBIT A
---------
VOTING TRUST CERTIFICATE
------------------------
POWERSTATION TECHNOLOGIES, INC.
A Massachusetts, Corporation
No. 3 10,000 Shares
Lawrence A. Genovesi and Cheryl H. Smith, Voting Trustees of the capital
stock of Powerstation Technologies, Inc. (the "Corporation") under and agreement
dated ________, ______, 1995 by and among the stockholders, in their capacity as
stockholders of the Corporation, party thereto and Lawrence A. Genovesi and
Cheryl H. Smith in their capacity as Voting Trustees (hereinafter called the
"Voting Trust Agreement"), having received certain shares of capital stock of
the Corporation pursuant to such Agreement, hereby certify that Wayne and Helen
Smith will be entitled to receive a certificate for 10,000 shares of common
stock, $.01 par value, of the Corporation upon the expiration of the Voting
Trust Agreement, and in the meantime shall be entitled to receive payments of
dividends or distributions that may be collected by the undersigned trustees
upon a like number of such shares to the extent and in the manner provided under
the terms of the Voting Trust Agreement.
This certificate is transferable only on the books of the undersigned
trustees by the registered holder in person or by his duly authorized attorney,
and the holder hereof, by accepting this certificate, adopts and ratifies the
Voting Trust Agreement and manifests his consent that the undersigned trustees
may treat the registered holder hereof as the true owner for all purposes except
the delivery of stock certificates, which delivery shall not be made without the
surrender hereof.
This certificate is issued pursuant to, and the rights of the holder
hereof are subject to, all the terms and conditions of the Voting Trust
Agreement.
IN WITNESS WHEREOF, Lawrence A. Genovesi and Cheryl H. Smith as Voting
Trustees have hereunto executed this certificate this _____ day _______, 1995.
/s/ Lawrence A. Genovesi
-----------------------------------
Lawrence A. Genovesi
/s/ Cheryl H. Smith
-----------------------------------
Cheryl H. Smith
<PAGE>
EXHIBIT B
---------
POWERSTATION TECHNOLOGIES, INC.
STOCK RESTRICTION AGREEMENT
Counterpart Signature Page
--------------------------
The undersigned stockholder of PowerStation Technologies, Inc. hereby
agrees to be bound by the terms of that certain Voting Trust Agreement made
effective as of the ___ day of _______, 1995 between Lawrence A. Genovesi and
Cheryl H. Smith in their capacity as Voting Trustees and the original
signatories thereto with the same force and effect as if the undersigned
Stockholder were an original party to the Voting Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand,
effective as of 1995 as an instrument under seal.
STOCKHOLDER:
/s/ Wayne Smith
-----------------------------------
/s/ Helen Smith
-----------------------------------
VOTING TRUSTEES:
/s/ Lawrence A. Genovesi
-----------------------------------
Lawrence A. Genovesi, as Voting
Trustee
/s/ Cheryl H. Smith
-----------------------------------
Cheryl H. Smith, as Voting Trustee
<PAGE>
EXHIBIT A
---------
VOTING TRUST CERTIFICATE
------------------------
POWERSTATION TECHNOLOGIES, INC.
A Massachusetts Corporation
No. 9 4,000 Shares
Lawrence A. Genovesi and Cheryl H. Smith, Voting Trustees of the capital
stock of Powerstation Technologies, Inc. (the "Corporation") under and agreement
dated ________, ____, 1995 by and among the stockholders, in their capacity as
stockholders of the Corporation, party thereto and Lawrence A. Genovesi and
Cheryl H. Smith in their capacity as Voting Trustees (hereinafter called the
"Voting Trust Agreement"), having received certain shares of capital stock of
the Corporation pursuant to such Agreement, hereby certify that Mildred Genovesi
will be entitled to receive a certificate for 4,000 shares of common stock, $.01
par value, of the Corporation upon the expiration of the Voting Trust Agreement,
and in the meantime shall be entitled to receive payments of dividends or
distributions that may be collected by the undersigned trustees upon a like
number of such shares to the extent and in the manner provided under the terms
of the Voting Trust Agreement.
This certificate is transferable only on the books of the undersigned
trustees by the registered holder in person or by his duly authorized attorney,
and the holder hereof, by accepting this certificate, adopts and ratifies the
Voting Trust Agreement and manifests his consent that the undersigned trustees
may treat the registered holder hereof as the true owner for all purposes except
the delivery of stock certificates, which delivery shall not be made without the
surrender hereof.
This certificate is issued pursuant to, and the rights of the holder
hereof are subject to, all the terms and conditions of the Voting Trust
Agreement.
IN WITNESS WHEREOF, Lawrence A. Genovesi and Cheryl H. Smith as Voting
Trustees have hereunto executed this certificate this ____ day ______, 1995.
/s/ Larence A. Genovesi
-----------------------------------
Lawrence A. Genovesi
/s/ Cheryl H. Smith
-----------------------------------
Cheryl H. Smith
<PAGE>
EXHIBIT B
---------
POWERSTATION TECHNOLOGIES, INC.
STOCK RESTRICTION AGREEMENT
Counterpart Signature Page
--------------------------
The undersigned stockholder of PowerStation Technologies, Inc. hereby
agrees to be bound by the terms of that certain Voting Trust Agreement made
effective as of the ____ day of ______, 1995 between Lawrence A. Genovesi and
Cheryl H. Smith in their capacity as Voting Trustees and the original
signatories thereto with the same force and effect as if the undersigned
Stockholder were an original party to the Voting Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand,
effective as of 1995 as an instrument under seal.
STOCKHOLDER:
/s/ Mildred Genovesi
-----------------------------------
VOTING TRUSTEES:
/s/ Lawrence A. Genovesi
-----------------------------------
Lawrence A. Genovesi, as Voting
Trustee
/s/ Cheryl H. Smith
-----------------------------------
Cheryl H. Smith, as Voting Trustee
<PAGE>
EXHIBIT B
---------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
DECLARATION AND AGREEMENT OF TRUST
Counterpart Signature Page
--------------------------
The undersigned stockholder of Network Engines, Inc. hereby agrees to be
bound by the terms of that certain Voting Trust Agreement made effective as of
the 1st day of October, 1995 between Lawrence A. Genovesi and Cheryl H. Smith in
their capacity as Voting Trustees and the original signatories thereto with the
same force and effect as if the undersigned Stockholder were an original party
to the Voting Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand,
effective as of June 23, 1998 as an instrument under seal.
STOCKHOLDER:
/s/ Elizabeth Frye Steele
------------------------------------------
Elizabeth Frye Steele
VOTING TRUSTEES:
/s/ Lawrence A. Genovesi
------------------------------------------
Lawrence A. Genovesi, as Voting Trustee
/s/ Cheryl H. Smith
------------------------------------------
Cheryl H. Smith, as Voting Trustee
<PAGE>
EXHIBIT B
---------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
DECLARATION AND AGREEMENT OF TRUST
Counterpart Signature Page
--------------------------
The undersigned stockholder of Network Engines, Inc. hereby agrees to be
bound by the terms of that certain Voting Trust Agreement made effective as of
the 1st day of October, 1995 between Lawrence A. Genovesi and Cheryl H. Smith in
their capacity as Voting Trustees and the original signatories thereto with the
same force and effect as if the undersigned Stockholder were an original party
to the Voting Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand,
effective as of June 23, 1998 as an instrument under seal.
STOCKHOLDER:
/s/ Bruce E. Smith
------------------------------------------
Bruce E. Smith
VOTING TRUSTEES:
/s/ Lawrence A. Genovesi
------------------------------------------
Lawrence A. Genovesi, as Voting Trustee
/s/ Cheryl H. Smith
------------------------------------------
Cheryl H. Smith, as Voting Trustee
<PAGE>
EXHIBIT B
---------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
DECLARATION AND AGREEMENT OF TRUST
Counterpart Signature Page
--------------------------
The undersigned stockholder of Network Engines, Inc. hereby agrees to be
bound by the terms of that certain Voting Trust Agreement made effective as of
the 1st day of October, 1995 between Lawrence A. Genovesi and Cheryl H. Smith in
their capacity as Voting Trustees and the original signatories thereto with the
same force and effect as if the undersigned Stockholder were an original party
to the Voting Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand,
effective as of June 23, 1998 as an instrument under seal.
STOCKHOLDER:
/s/ Wayne E. Smith, Jr.
------------------------------------------
Wayne E. Smith, Jr.
VOTING TRUSTEES:
/s/ Lawrence A. Genovesi
------------------------------------------
Lawrence A. Genovesi, as Voting Trustee
/s/ Cheryl H. Smith
------------------------------------------
Cheryl H. Smith, as Voting Trustee
<PAGE>
EXHIBIT B
---------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
DECLARATION AND AGREEMENT OF TRUST
Counterpart Signature Page
--------------------------
The undersigned stockholder of Network Engines, Inc. hereby agrees to be
bound by the terms of that certain Voting Trust Agreement made effective as of
the 1st day of October, 1995 between Lawrence A. Genovesi and Cheryl H. Smith in
their capacity as Voting Trustees and the original signatories thereto with the
same force and effect as if the undersigned Stockholder were an original party
to the Voting Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand,
effective as of June 23, 1998 as an instrument under seal.
STOCKHOLDER:
/s/ Laird E. Smith
------------------------------------------
Laird E. Smith, Jr.
VOTING TRUSTEES:
/s/ Lawrence A. Genovesi
------------------------------------------
Lawrence A. Genovesi, as Voting Trustee
/s/ Cheryl H. Smith
------------------------------------------
Cheryl H. Smith, as Voting Trustee
4
<PAGE>
EXHIBIT A
---------
VOTING TRUST CERTIFICATE
------------------------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
A Massachusetts Corporation
No. 10 2,500 Shares
Lawrence A. Genovesi and Cheryl H. Smith, Voting Trustees of the Capital
stock of Network Engines, Inc. (the "Corporation") under an agreement dated
October 1, 1995, by and among the stockholders, in their capacity as
stockholders of the Corporation, party thereto and Lawrence A. Genovesi and
Cheryl H. Smith in their capacity as Voting Trustees (hereinafter called "Voting
Trust Agreement"), having received certain shares of capital stock of the
Corporation pursuant to such Agreement, hereby certify that Elizabeth Frye
Steele will be entitled to receive a certificate for 2,500 shares of the common
stock, $.01 value, of the Corporation upon the expiration of the Voting Trust
Agreement, and in the meantime shall be entitled to receive payments of
dividends or distributions that may be collected by the undersigned trustees
upon a like number of such shares to the extent and in the manner provided under
the terms of the Voting Trust Agreement.
This certificate is transferable only on the books of the undersigned
trustees by the registered holder in person or by his duly authorized attorney,
and the holder hereof, buy accepting this certificate, adopts and ratifies the
Voting Trust Agreement and manifests his consent that the undersigned trustees
may treat the registered holder hereof as the true owner for all purposes except
the delivery of stock certificates, which delivery shall not be made without the
surrender hereof.
This certificate issued pursuant to, and the rights of the holder hereof
are subject to, all the terms and conditions of the Voting Trust Agreement.
IN WITNESS WHEREOF, Lawrence A. Genovesi and Cheryl H. Smith as Voting
Trustees have hereunto executed this certificate this 23rd of June, 1998.
/s/ Lawrence A. Genovesi
------------------------------------------
Lawrence A. Genovesi
/s/ Cheryl H. Smith
------------------------------------------
Cheryl H. Smith
<PAGE>
EXHIBIT A
---------
VOTING TRUST CERTIFICATE
------------------------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
A Massachusetts Corporation
No. 11 2,500 Shares
Lawrence A. Genovesi and Cheryl H. Smith, Voting Trustees of the Capital
stock of Network Engines, Inc. (the "Corporation") under an agreement dated
October 1, 1995, by and among the stockholders, in their capacity as
stockholders of the Corporation, party thereto and Lawrence A. Genovesi and
Cheryl H. Smith in their capacity as Voting Trustees (hereinafter called "Voting
Trust Agreement"), having received certain shares of capital stock of the
Corporation pursuant to such Agreement, hereby certify that Bruce E. Smith will
be entitled to receive a certificate for 2,500 shares of the common stock, $.01
value, of the Corporation upon the expiration of the Voting Trust Agreement, and
in the meantime shall be entitled to receive payments of dividends or
distributions that may be collected by the undersigned trustees upon a like
number of such shares to the extent and in the manner provided under the terms
of the Voting Trust Agreement.
This certificate is transferable only on the books of the undersigned
trustees by the registered holder in person or by his duly authorized attorney,
and the holder hereof, buy accepting this certificate, adopts and ratifies the
Voting Trust Agreement and manifests his consent that the undersigned trustees
may treat the registered holder hereof as the true owner for all purposes except
the delivery of stock certificates, which delivery shall not be made without the
surrender hereof.
This certificate issued pursuant to, and the rights of the holder hereof
are subject to, all the terms and conditions of the Voting Trust Agreement.
IN WITNESS WHEREOF, Lawrence A. Genovesi and Cheryl H. Smith as Voting
Trustees have hereunto executed this certificate this 23rd of June, 1998.
/s/ Lawrence A. Genovesi
------------------------------------------
Lawrence A. Genovesi
/s/ Cheryl H. Smith
------------------------------------------
Cheryl H. Smith
2
<PAGE>
EXHIBIT A
---------
VOTING TRUST CERTIFICATE
------------------------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
A Massachusetts Corporation
No. 12 2,500 Shares
Lawrence A. Genovesi and Cheryl H. Smith, Voting Trustees of the Capital
stock of Network Engines, Inc. (the "Corporation") under an agreement dated
October 1, 1995, by and among the stockholders, in their capacity as
stockholders of the Corporation, party thereto and Lawrence A. Genovesi and
Cheryl H. Smith in their capacity as Voting Trustees (hereinafter called "Voting
Trust Agreement"), having received certain shares of capital stock of the
Corporation pursuant to such Agreement, hereby certify that Wayne E. Smith, Jr.
will be entitled to receive a certificate for 2,500 shares of the common stock,
$.01 value, of the Corporation upon the expiration of the Voting Trust
Agreement, and in the meantime shall be entitled to receive payments of
dividends or distributions that may be collected by the undersigned trustees
upon a like number of such shares to the extent and in the manner provided under
the terms of the Voting Trust Agreement.
This certificate is transferable only on the books of the undersigned
trustees by the registered holder in person or by his duly authorized attorney,
and the holder hereof, buy accepting this certificate, adopts and ratifies the
Voting Trust Agreement and manifests his consent that the undersigned trustees
may treat the registered holder hereof as the true owner for all purposes except
the delivery of stock certificates, which delivery shall not be made without the
surrender hereof.
This certificate issued pursuant to, and the rights of the holder hereof
are subject to, all the terms and conditions of the Voting Trust Agreement.
IN WITNESS WHEREOF, Lawrence A. Genovesi and Cheryl H. Smith as Voting
Trustees have hereunto executed this certificate this 23rd of June, 1998.
/s/ Lawrence A. Genovesi
------------------------------------------
Lawrence A. Genovesi
/s/ Cheryl H. Smith
------------------------------------------
Cheryl H. Smith
3
<PAGE>
EXHIBIT A
---------
VOTING TRUST CERTIFICATE
------------------------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
A Massachusetts Corporation
No. 13 2,500 Shares
Lawrence A. Genovesi and Cheryl H. Smith, Voting Trustees of the Capital
stock of Network Engines, Inc. (the "Corporation") under an agreement dated
October 1, 1995, by and among the stockholders, in their capacity as
stockholders of the Corporation, party thereto and Lawrence A. Genovesi and
Cheryl H, Smith in their capacity as Voting Trustees (hereinafter called "Voting
Trust Agreement"), having received certain shares of capital stock of the
Corporation pursuant to such Agreement, hereby certify that Laird E. Smith will
be entitled to receive a certificate for 2,500 shares of the common stock, $.01
value, of the Corporation upon the expiration of the Voting Trust Agreement, and
in the meantime shall be entitled to receive payments of dividends or
distributions that may be collected by the undersigned trustees upon a like
number of such shares to the extent and in the manner provided under the terms
of the Voting Trust Agreement.
This certificate is transferable only on the books of the undersigned
trustees by the registered holder in person or by his duly authorized attorney,
and the holder hereof, buy accepting this certificate, adopts and ratifies the
Voting Trust Agreement and manifests his consent that the undersigned trustees
may treat the registered holder hereof as the true owner for all purposes except
the delivery of stock certificates, which delivery shall not be made without the
surrender hereof.
This certificate issued pursuant to, and the rights of the holder hereof
are subject to, all the terms and conditions of the Voting Trust Agreement.
IN WITNESS WHEREOF, Lawrence A. Genovesi and Cheryl H. Smith as Voting
Trustees have hereunto executed this certificate this 23rd of June, 1998.
/s/ Lawrence A. Genovesi
------------------------------------------
Lawrence A. Genovesi
/s/ Cheryl H. Smith
------------------------------------------
Cheryl H. Smith
4
<PAGE>
EXHIBIT B
---------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
DECLARATION AND AGREEMENT OF TRUST
Counterpart Signature Page
--------------------------
The undersigned stockholder of Network Engines, Inc. hereby agrees to be
bound by the terms of that certain Voting Trust Agreement made effective as of
the 1st day of October, 1995 between Lawrence A. Genovesi and Cheryl H. Smith in
their capacity as Voting Trustees and the original signatories thereto with the
same force and effect as if the undersigned Stockholder were an original party
to the Voting Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand,
effective as of August 22, 1999 as an instrument under seal.
STOCKHOLDER:
/s/ Wayne E. Smith, Jr.
-----------------------
Wayne E. Smith Jr.
VOTING TRUSTEES:
/s/ Lawrence A. Genovesi
------------------------
Lawrence A. Genovesi, as Voting Trustee
/s/ Cheryl H. Smith
------------------------
Cheryl H. Smith, as Voting Trustee
<PAGE>
EXHIBIT B
---------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
DECLARATION AND AGREEMENT OF TRUST
Counterpart Signature Page
--------------------------
The undersigned stockholder of Network Engines, Inc. hereby agrees to be
bound by the terms of that certain Voting Trust Agreement made effective as of
the 1st day of October, 1995 between Lawrence A. Genovesi and Cheryl H. Smith in
their capacity as Voting Trustees and the original signatories thereto with the
same force and effect as if the undersigned Stockholder were an original party
to the Voting Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand,
effective as of August 22, 1999 as an instrument under seal.
STOCKHOLDER:
/s/ Bruce E. Smith
------------------------
Bruce E. Smith
VOTING TRUSTEES:
/s/ Lawrence A. Genovesi
------------------------
Lawrence A. Genovesi, as Voting Trustee
/s/ Cheryl H. Smith
------------------------
Cheryl H. Smith, as Voting Trustee
<PAGE>
EXHIBIT B
---------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
DECLARATION AND AGREEMENT OF TRUST
Counterpart Signature Page
--------------------------
The undersigned stockholder of Network Engines, Inc. hereby agrees to be
bound by the terms of that certain Voting Trust Agreement made effective as of
the 1st day of October, 1995 between Lawrence A. Genovesi and Cheryl H. Smith in
their capacity as Voting Trustees and the original signatories thereto with the
same force and effect as if the undersigned Stockholder were an original party
to the Voting Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand,
effective as of August 22, 1999 as an instrument under seal.
STOCKHOLDER:
/s/ Laird E. Smith
------------------------
Laird E. Smith
VOTING TRUSTEES:
/s/ Lawrence A. Genovesi
------------------------
Lawrence A. Genovesi, as Voting Trustee
/s/ Cheryl H. Smith
------------------------
Cheryl H. Smith, as Voting Trustee
<PAGE>
EXHIBIT A
---------
VOTING TRUST CERTIFICATE
------------------------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
A Massachusetts Corporation
No. 14 3,334 Shares
Lawrence A. Genovesi and Cheryl H. Smith, Voting Trustees of the Capital
stock of Network Engines, Inc. (the "Corporation") under an agreement dated
October 1, 1995, by and among the stockholders, in their capacity as
stockholders of the Corporation, party thereto and Lawrence A. Genovesi and
Cheryl H. Smith in their capacity as Voting Trustees (hereinafter called "Voting
Trust Agreement"), having received certain shares of capital stock of the
Corporation pursuant to such Agreement, hereby certify that Wayne E. Smith Jr.
will be entitled to receive a certificate for 3,334 shares of the common stock,
$.01 value, of the Corporation upon the expiration of the Voting Trust
Agreement, and in the meantime shall be entitled to receive payments of
dividends or distributions that may be collected by the undersigned trustees
upon a like number of such shares to the extent and in the manner provided under
the terms of the Voting Trust Agreement.
This certificate is transferable only on the books of the undersigned
trustees by the registered holder in person or by his duly authorized attorney,
and the holder hereof, buy accepting this certificate, adopts and ratifies the
Voting Trust Agreement and manifests his consent that the undersigned trustees
may treat the registered holder hereof as the true owner for all purposes except
the delivery of stock certificates, which delivery shall not be made without the
surrender hereof.
This certificate issued pursuant to, and the rights of the holder hereof
are subject to, all the terms and conditions of the Voting Trust Agreement.
IN WITNESS WHEREOF, Lawrence A. Genovesi and Cheryl H. Smith as Voting
Trustees have hereunto executed this certificate this 22nd day of August, 1999.
/s/ Lawrence A. Genovesi
------------------------
Lawrence A. Genovesi
/s/ Cheryl H. Smith
------------------------
Cheryl H. Smith
<PAGE>
EXHIBIT A
---------
VOTING TRUST CERTIFICATE
------------------------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
A Massachusetts Corporation
No. 15 3,333 Shares
Lawrence A. Genovesi and Cheryl H. Smith, Voting Trustees of the Capital
stock of Network Engines, Inc. (the "Corporation") under an agreement dated
October 1, 1995, by and among the stockholders, in their capacity as
stockholders of the Corporation, party thereto and Lawrence A. Genovesi and
Cheryl H. Smith in their capacity as Voting Trustees (hereinafter called "Voting
Trust Agreement"), having received certain shares of capital stock of the
Corporation pursuant to such Agreement, hereby certify that Bruce E. Smith will
be entitled to receive a certificate for 3,333 shares of the common stock, $.01
value, of the Corporation upon the expiration of the Voting Trust Agreement, and
in the meantime shall be entitled to receive payments of dividends or
distributions that may be collected by the undersigned trustees upon a like
number of such shares to the extent and in the manner provided under the terms
of the Voting Trust Agreement.
This certificate is transferable only on the books of the undersigned
trustees by the registered holder in person or by his duly authorized attorney,
and the holder hereof, buy accepting this certificate, adopts and ratifies the
Voting Trust Agreement and manifests his consent that the undersigned trustees
may treat the registered holder hereof as the true owner for all purposes except
the delivery of stock certificates, which delivery shall not be made without the
surrender hereof.
This certificate issued pursuant to, and the rights of the holder hereof
are subject to, all the terms and conditions of the Voting Trust Agreement.
IN WITNESS WHEREOF, Lawrence A. Genovesi and Cheryl H. Smith as Voting
Trustees have hereunto executed this certificate this 22nd day of August, 1999.
/s/ Lawrence A. Genovesi
------------------------
Lawrence A. Genovesi
/s/ Cheryl H. Smith
------------------------
Cheryl H. Smith
2
<PAGE>
EXHIBIT A
---------
VOTING TRUST CERTIFICATE
------------------------
NETWORK ENGINES, INC.
(FORMERLY, POWERSTATION TECHNOLOGIES, INC.)
A Massachusetts Corporation
No. 16 3,333 Shares
Lawrence A. Genovesi and Cheryl H. Smith, Voting Trustees of the Capital
stock of Network Engines, Inc. (the "Corporation") under an agreement dated
October 1, 1995, by and among the stockholders, in their capacity as
stockholders of the Corporation, party thereto and Lawrence A. Genovesi and
Cheryl H. Smith in their capacity as Voting Trustees (hereinafter called "Voting
Trust Agreement"), having received certain shares of capital stock of the
Corporation pursuant to such Agreement, hereby certify that Laird E. Smith will
be entitled to receive a certificate for 3,333 shares of the common stock, $.01
value, of the Corporation upon the expiration of the Voting Trust Agreement, and
in the meantime shall be entitled to receive payments of dividends or
distributions that may be collected by the undersigned trustees upon a like
number of such shares to the extent and in the manner provided under the terms
of the Voting Trust Agreement.
This certificate is transferable only on the books of the undersigned
trustees by the registered holder in person or by his duly authorized attorney,
and the holder hereof, buy accepting this certificate, adopts and ratifies the
Voting Trust Agreement and manifests his consent that the undersigned trustees
may treat the registered holder hereof as the true owner for all purposes except
the delivery of stock certificates, which delivery shall not be made without the
surrender hereof.
This certificate issued pursuant to, and the rights of the holder hereof
are subject to, all the terms and conditions of the Voting Trust Agreement.
IN WITNESS WHEREOF, Lawrence A. Genovesi and Cheryl H. Smith as Voting
Trustees have hereunto executed this certificate this 22nd day of August, 1999.
/s/ Lawrence A. Genovesi
------------------------
Lawrence A. Genovesi
/s/ Cheryl H. Smith
------------------------
Cheryl H. Smith
3
<PAGE>
Exhibit 10.8
NETWORK ENGINES, INC.
Restricted Stock Agreement
Granted Under 1999 Stock Incentive Plan
AGREEMENT made this 18th day of November, 1999 (the "Effective Date"),
between Network Engines, Inc., a Delaware corporation (the "Company"), and
Lawrence A. Genovesi (the "Participant").
For valuable consideration, receipt of which is acknowledged, the parties
hereto agree as follows:
1. Purchase of Shares.
------------------
The Company shall issue and sell to the Participant, and the Participant
shall purchase from the Company, subject to the terms and conditions set forth
in this Agreement and in the Company's 1999 Stock Incentive Plan (the "Plan"),
150,000 shares (the "Shares") of common stock, $.01 par value, of the Company
("Common Stock"), at a purchase price of $.60 per share. For the sake of
clarity, such Shares represent shares of Common Stock following the stock split
which the Board of Directors of the Company approved on October 21, 1999. The
aggregate purchase price for the Shares shall be paid by the Participant by
check payable to the order of the Company or by full recourse promissory note
naming the Company as payee (the "Note") provided that the Note shall be payable
on demand and shall bear interest at the minimum applicable federal rate in
effect. Upon receipt by the Company of payment for the Shares, the Company shall
issue to the Participant one or more certificates in the name of the Participant
for the Shares. The Participant agrees that the Shares shall be subject to the
Purchase Options set forth in Section 2, the right of first refusal set forth in
Section 5 and the restrictions on transfer set forth in Section 4 of this
Agreement.
2. Purchase Options.
----------------
(a) As of the Effective Date, 150,000 Shares shall be considered "Future
Goal Shares," zero (0) shares shall be considered "Vested Shares"
and zero (0) shares shall be considered "Missed Goal Shares."
"Unvested Shares" shall mean the total of Future Goal Shares and
Missed Goal Shares.
(b) A "Business Objective", shall mean the goal for each of the
Company's (i) net revenue and (ii) net profit for each fiscal
quarter beginning with the
1
<PAGE>
fiscal quarter ending December 31, 1999 and ending with the fiscal
quarter ending September 30, 2002 (each, a "Fiscal Quarter"). Such
Business Objectives shall be established by the Board of Directors
of the Company no less frequently than once each fiscal year of the
Company and shall be based on the goals for the Company's Net
Revenue and Net Profit, respectively, as defined in a business plan
approved by the Board of Directors. The Board of Directors may, in
its sole discretion, reduce any Business Objective (i.e., make the
Business Objective easier for the Company to achieve).
The Business Objectives by Fiscal Quarter for the Company's fiscal
year ending September 30,2000 shall be as follows:
Fiscal Quarter Ending Net Revenue Net Income
--------------------- ----------- ----------
December 31, 1999 $3,813,800 $(2,642,000)
March 31, 2000 $4,200,000 $(3,451,000)
June 30, 2000 $7,559,534 $ ( 974,000)
September 30, 2000 $9,426,667 $ ( 287,000)
Business Objectives for subsequent fiscal years shall be set by the
Board of Directors no later than the end of October of such fiscal
year.
An "Achieved Business Objective" shall mean the achievement by the
Company of a Business Objective. A "Missed Business Objective" shall
mean a Business Objective which the Company did not achieve.
Achievement of the Business Objectives for a Fiscal Quarter will be
determined based on the unaudited quarterly financial statements of
the Company, as approved by the Board of Directors within thirty
(30) days after the end of such Fiscal Quarter; any subsequent
adjustments to such financial statements shall have no effect on the
determination of whether or not a Business Objective for such Fiscal
Quarter was achieved. Notwithstanding anything to the contrary in
this Agreement or in the Plan, upon the occurrence of an Acquisition
Event, as defined in the Plan, both Business Objectives for the
Fiscal Quarter in which such Acquisition Event occurs shall be
deemed to be Achieved Business Objectives.
Failure of the Board of Directors to timely establish Business
Objectives or approve a business plan shall not affect any
determination as to the establishment of a Business Objective or the
achievement of Achieved
2
<PAGE>
Business Objectives.
For each Achieved Business Objective, the number of Vested Shares
shall be increased by 6,250 and the number of Future Goal Shares
shall be decreased by 6,250. For each Missed Business Objective, the
number of Missed Goal Shares shall be increased by 6,250 and the
number of Future Goal Shares shall be decreased by 6,250.
For the sake of clarity and by way of illustration, zero, one or two
Business Objectives may be achieved each Fiscal Quarter, thus
resulting in zero, one or two Achieved Business Objectives each
Fiscal Quarter. Accordingly, (i) for any Fiscal Quarter in which
both Business Objectives are achieved, the number of Vested Shares
shall be increased by 12,500 and the number of Future Goal Shares
shall be decreased by 12,500; (ii) for any Fiscal Quarter in which
one Business Objective is achieved and the other Business Objective
is not achieved, the number of Vested Shares shall be increased by
6,250, the number of Missed Goal Shares shall be increased by 6,250
and the number of Future Goal Shares shall be decreased by 12,500;
and (iii) for any Fiscal Quarter in which neither Business Objective
is achieved, the number of Missed Goal Shares shall be increased by
12,500 and the number of Future Goal Shares shall be decreased by
12,500.
(c) At any time, and from time to time, prior to November 18, 2004 (the
"Lapse Date"), the Company shall have the right and options (the
"Missed Goal Purchase Options") to purchase from the Participant,
for a sum of $.60 per share (the "Option Price"), any or all of the
Missed Goal Shares existing at the time such Missed Goal Purchase
Option is exercised by the Company. Immediately following such
exercise, the number of Missed Goal Shares shall be decreased by the
number of shares purchased by the Company by exercising such Missed
Goal Purchase Option.
In the event that the Participant ceases to be employed by the
Company for any reason or no reason, with or without cause, prior to
the Lapse Date, the Company shall have the right and option (the
"Termination Purchase Option", and, together with the Missed Goal
Purchase Options, the "`Purchase Options", or each, a "Purchase
Option") to purchase from the Participant, for the aggregate Option
Price, any or all of the Unvested Shares existing at the time the
Termination Purchase Option becomes exercisable by the Company.
3
<PAGE>
(d) For purposes of this Agreement, employment with the Company shall
include employment with a parent or subsidiary of the Company.
3. Exercise of Purchase Options and Closing.
----------------------------------------
(a) The Company may exercise a Missed Goal Purchase Option by delivering
or mailing to the Participant (or his estate), at any time, a
written notice of exercise of a Missed Goal Purchase Option. Such
notice shall specify the number of Missed Goal Shares to be
purchased. If and to the extent Missed Goal Purchase Options are not
so exercised, the Missed Goal Purchase Options shall automatically
expire and terminate effective upon the Lapse Date.
The Company may exercise the Termination Purchase Option by
delivering or mailing to the Participant (or his estate), within 60
days after the termination of the employment of the Participant with
the Company, a written notice of exercise of the Termination
Purchase Option. Such notice shall specify the number of Unvested
Shares to be purchased. If and to the extent the Termination
Purchase Option is not so exercised by the giving of such a notice
within such 60-day period, the Termination Purchase Option shall
automatically expire and terminate effective upon the expiration of
such 60-day period.
(b) Within 10 days after delivery to the Participant of the Company's
notice of the exercise of a Purchase Option pursuant to subsection
(a) above, the Participant (or his estate) shall, pursuant to the
provisions of the Joint Escrow Instructions referred to in Section
7, tender to the Company at its principal offices the certificate or
certificates representing the Shares which the Company has elected
to purchase in accordance with the terms of this Agreement, duly
endorsed in blank or with duly endorsed stock powers attached
thereto, all in form suitable for the transfer of such Shares to the
Company. Promptly following its receipt of such certificate or
certificates, the Company shall pay to the Participant the aggregate
Option Price for such Shares (provided that any delay in making such
payment shall not invalidate the Company's exercise of the Purchase
Option with respect to such Shares).
(c) After the time at which any Shares are required to be delivered to
the Company for transfer to the Company pursuant to subsection (b)
above, the Company shall not pay any dividend to the Participant on
account of such Shares or permit the Participant to exercise any of
the privileges or
4
<PAGE>
rights of a stockholder with respect to such Shares, but shall, in
so far as permitted by law, treat the Company as the owner of such
Shares.
(d) The Option Price may be payable, at the option of the Company, in
cancellation of all or a portion of any outstanding indebtedness of
the Participant to the Company or in cash (by check) or both.
(e) The Company shall not purchase any fraction of a Share upon exercise
of a Purchase Option.
(f) The Company may assign its Purchase Options to one or more persons
or entities.
4. Restrictions on Transfer.
------------------------
The Participant shall not sell, assign, transfer, pledge, hypothecate or
otherwise dispose of, by operation of law or otherwise (collectively
"transfer"):
(a) any Shares, or any interest therein, that are subject to one or more
Purchase Options, except that the Participant may transfer such
Shares (i) to or for the benefit of any spouse, child or grandchild
of the Participant, or to a trust for their benefit, provided that
--------
such Shares shall remain subject to this Agreement (including,
without limitation, the restrictions on transfer set forth in this
Section 4, the Purchase Options and the right of first refusal set
forth in Section 5) and such permitted transferee shall, as a
condition to such transfer, deliver to the Company a written
instrument confirming that such transferee shall be bound by all of
the terms and conditions of this Agreement or (ii) as part of the
sale of all or substantially all of the Shares of capital stock of
the Company (including pursuant to a merger or consolidation),
provided that, in accordance with the Plan, the securities or other
--------
property received by the Participant in connection with such
transaction shall remain subject to this Agreement; or
(b) any Shares, or any interest therein, that are no longer subject to
the Purchase Options, except in accordance with Section 5 below.
5. Right of First Refusal.
----------------------
Any Shares which are no longer subject to the Purchase Options (because
they are no longer Unvested Shares and/or because the Purchase Options expired)
shall be subject to Sections 2 and 3 of that certain Stockholders' Agreement
dated as of January
5
<PAGE>
13, 1999, as amended and as may be amended from time to time, including, but
not limited to, the amendment and restatement to be executed in December, 1999,
by and among the Company and the Stockholders (as defined therein).
6. Agreement in Connection with Public Offering.
--------------------------------------------
The Participant agrees, in connection with the initial underwritten public
offering of the Company's securities pursuant to a registration statement under
the Securities Act, (i) not to sell, make short sale of, loan, grant any options
for the purchase of, or otherwise dispose of any shares of Common Stock held by
the Participant (other than those shares included in the offering) without the
prior written consent of the Company or the underwriters managing such initial
underwritten public offering of the Company's securities for a period of 180
days from the effective date of such registration statement, and (ii) to execute
any agreement reflecting clause (i) above as may be requested by the Company or
the managing underwriters at the time of such initial offering.
7. Escrow.
------
The Participant shall, upon the execution of this Agreement, execute joint
Escrow Instructions in the form attached to this Agreement as Exhibit A. The
Joint Escrow Instructions shall be delivered to the Treasurer of the Company, as
escrow agent thereunder. The Participant shall deliver to such escrow agent a
stock assignment duly endorsed in blank and hereby instructs the Company to
deliver to such escrow agent, on behalf of the Participant, the certificate(s)
evidencing the Shares issued hereunder. Such materials shall be held by such
escrow agent pursuant to the terms of such joint Escrow Instructions.
8. Restrictive Legends.
-------------------
All certificates representing Shares shall have affixed thereto legends in
substantially the following form, in addition to any other legends that may be
required under federal or state securities laws:
"The shares of stock represented by this certificate are subject to
restrictions on transfer and an option to purchase set forth in a
certain Restricted Stock Agreement between the corporation and the
registered owner of these shares (or his predecessor in interest),
and such Agreement is available for inspection without charge at the
office of the Secretary of the corporation."
6
<PAGE>
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold,
transferred or otherwise disposed of in the absence of an effective
registration statement under such Act or an opinion of counsel
satisfactory to the corporation to the effect that such registration
is not required."
9. Provisions of the Plan.
----------------------
(a) This Agreement is subject to the provisions of the Plan, a copy of
which is furnished to the Participant with this Agreement.
(b) As provided in the Plan, upon the occurrence of an Acquisition Event
(as defined in the Plan), the repurchase and other rights of the
Company hereunder shall inure to the benefit of the Company's
successor and shall apply to the cash, securities or other property
which the Common Stock was converted into or exchanged for pursuant
to such Acquisition Event in the same manner and to the same extent
as they applied to the Common Stock hereunder. If, in connection
with an Acquisition Event, a portion of the cash, securities or
other property received upon the conversion or exchange of the
Common Stock subject hereto is to be placed into escrow to secure
indemnification or similar obligations, the mix between the vested
and unvested portion of such cash, securities or other property that
is placed into escrow shall be the same as the mix between the
vested and unvested portion of such securities or other property
that is not subject to escrow.
10. Investment Representations.
--------------------------
The Participant represents, warrants and covenants as follows:
(a) The Participant is purchasing the Shares for his own account for
investment only, and not with a view to, or for sale in connection
with, any distribution of the Shares in violation of the Securities
Act, or any rule or regulation under the Securities Act.
(b) The Participant has had such opportunity as he has deemed adequate
to obtain from representatives of the Company such information as is
necessary to permit him to evaluate the merits and risks of his
investment in the Company.
7
<PAGE>
(c) The Participant has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in the
purchase of the Shares and to make an informed investment decision
with respect to such purchase.
(d) The Participant can afford a complete loss of the value of the
Shares and is able to bear the economic risk of holding such Shares
for an indefinite period.
(e) The Participant understands that (i) the Shares have not been
registered under the Securities Act and are "restricted securities"
within the meaning of Rule 144 under the Securities Act; (ii) the
Shares cannot be sold, transferred or otherwise disposed of unless
they are subsequently registered under the Securities Act or an
exemption from registration is then available; (iii) in any event,
the exemption from registration under Rule 144 will not be available
for at least one year and even then will not be available unless a
public market then exists for the Common Stock, adequate information
concerning the Company is then available to the public, and other
terms and conditions of Rule 144 are complied with; and (iv) there
is now no registration statement on file with the Securities and
Exchange Commission with respect to any stock of the Company and the
Company has no obligation or current intention to register the
Shares under the Securities Act.
11. Withholding Taxes; Section 83(b) Election.
-----------------------------------------
(a) The Participant acknowledges and agrees that the Company has the
right to deduct from payments of any kind otherwise due to the
Participant any federal, state or local taxes of any kind required
by law to be withheld with respect to the purchase of the Shares by
the Participant or the lapse of the Purchase Option.
(b) The Participant has reviewed with the Participant's own tax advisors
the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The
Participant is relying solely on such advisors and not on any
statements or representations of the Company or any of its agents.
The Participant understands that the Participant (and not the
Company) shall be responsible for the Participant's own tax
liability that may arise as a result of this investment or the
transactions contemplated by this Agreement. The Participant
understands that it may be beneficial in many circumstances to elect
to be taxed at the time of the Shares are purchased
8
<PAGE>
rather than when and as the Company's Purchase Option expires by
filing an election under Section 83(b) of the Code with the IRS
within 30 days from the date of purchase.
THE PARTICIPANT ACKNOWLEDGES THAT IT IS THE PARTICIPANT'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PARTICIPANT REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO
MAKE THIS FILING ON THE PARTICIPANT'S BEHALF.
12. No Rights to Employment.
-----------------------
The Participant acknowledges and agrees that the vesting of the shares
pursuant to Section 2 hereof is earned only by the achievement by the Company of
the Business Objectives during the period of the Participant's continuing
service as an employee at the will of the Company (not through the act of being
hired or purchasing shares hereunder). The Participant further acknowledges and
agrees that the transactions contemplated hereunder and the vesting schedule set
forth herein do not constitute an express or implied promise of continued
engagement as an employee for the vesting period, for any period, or at all.
13. Severability.
------------
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, and each other provision of this Agreement shall be severable and
enforceable to the extent permitted by law.
14. Waiver.
------
Any provision for the benefit of the Company contained in this Agreement
may be waived, either generally or in any particular instance, by the Board of
Directors of the Company.
15. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
Company and the Participant and their respective heirs, executors,
administrators, legal representatives, successors and assigns, subject to the
restrictions on transfer set forth in Sections 4 and 5 of this Agreement.
9
<PAGE>
16. Notice.
------
All notices required or permitted hereunder shall be in writing and deemed
effectively given upon personal delivery or five days after deposit in the
United States Post Office, by registered or certified mail, postage prepaid,
addressed to the other party hereto at the address shown beneath his or its
respective signature to this Agreement, or at such other address or addresses as
either party shall designate to the other in accordance with this Section 16.
17. Pronouns.
--------
Whenever the context may require, any pronouns used in this Agreement
shall include the corresponding masculine, feminine or neuter forms, and the
singular form of nouns and pronouns shall include the plural, and vice versa.
18. Entire Agreement.
----------------
This Agreement and the Plan constitutes the entire agreement between the
parties, and supersedes all prior agreements and understandings, relating to the
subject matter of this Agreement.
19. Amendment.
---------
This Agreement may be amended or modified only by a written instrument
executed by both the Company and the Participant.
20. Governing Law.
-------------
This Agreement shall be construed, interpreted and enforced in accordance
with the internal laws of the State of Delaware without regard to any applicable
conflicts of laws.
21. Participant's Acknowledgments.
-----------------------------
The Participant acknowledges that he: (a) has read this Agreement; (b) has
been represented in the preparation, negotiation and execution of this Agreement
by legal counsel of the Participant's own choice or has voluntarily declined to
seek such counsel; (c) understands the terms and consequences of this Agreement;
and (d) is fully aware of the legal and binding effect of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
NETWORK ENGINES, INC.
By:/s/ Douglas G. Bryant
--------------------------------------
Title: CFO
-----------------------------------
Address: 61 Pleasant Street
Randolph, MA 02368-4137
The Participant has reviewed the provisions of this Agreement, has had an
opportunity to obtain the advice of the Participant's own tax and legal advisors
prior to executing this Agreement and fully understands and agrees to the
provisions hereof. The Participant understands that the law firm of Hale and
Dorr LLP is acting as counsel to the Company in connection with the transactions
contemplated by the Agreement, and is not acting as counsel for the Participant.
/s/ Lawrence A. Genovesi
-----------------------------------------
Lawrence A. Genovesi
Address: 36 Egypt Beach Road
Scituate, MA 02066
11
<PAGE>
Exhibit A
NETWORK ENGINES, INC.
Joint Escrow Instructions
-------------------------
November 18,1999
Mr. Douglas Bryant
Treasurer
Network Engines, Inc.
61 Pleasant Street
Randolph, MA 02368-4137
Dear Sir:
As Escrow Agent for Network Engines, Inc., a Delaware corporation (the
"Company"), and the undersigned person ("Holder"), you are hereby authorized and
directed to hold the documents delivered to you pursuant to the terms of that
certain Restricted Stock Agreement (the "Agreement") of even date herewith, to
which a copy of these Joint Escrow Instructions is attached, in accordance with
the following instructions:
1. Appointment. Holder irrevocably authorizes the Company to deposit with
-----------
you any certificates evidencing Shares (as defined in the Agreement) to be held
by you hereunder and any additions and substitutions to said Shares. Holder does
hereby irrevocably constitute and appoint you as his attorney-in-fact and agent
for the term of this escrow to execute with respect to such Shares all documents
necessary or appropriate to make such Shares negotiable and to complete any
transaction herein contemplated. Subject to the provisions of this paragraph 1
and the terms of the Agreement, Holder shall exercise all rights and privileges
of a stockholder of the Company while the Shares are held by you.
2. Closing of Purchase.
-------------------
(a) Upon any purchase by the Company of any or all of the Shares
pursuant to the Agreement, the Company shall give to Holder and you
a written
12
<PAGE>
notice specifying the purchase price for such Shares, as determined
pursuant to the Agreement, and the time for a closing hereunder (the
"Closing") at the principal office of the Company. Holder and the
Company hereby irrevocably authorize and direct you to close the
transaction contemplated by such notice in accordance with the terms
of said notice.
(b) At the Closing, you are directed (a) to date the stock assignment
form or forms necessary for the transfer of such Shares, (b) to fill
in on such form or forms the number of Shares being transferred, and
(c) to deliver same, together with the certificate or certificates
evidencing the Shares to be transferred, to the Company against the
simultaneous delivery to you of the purchase price for the Shares
being purchased pursuant to the Agreement.
3. Withdrawal. The Holder shall have the right to withdraw from this
----------
escrow any Shares as to which all Purchase Options (as defined in the Agreement)
have terminated or expired.
4. Duties of Escrow Agent.
----------------------
(a) Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
(b) You shall be obligated only for the performance of such duties as
are specifically set forth herein and may rely and shall be
protected in relying or refraining from acting on any instrument
reasonably believed by you to be genuine and to have been signed or
presented by the proper party or parties. You shall not be
personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact of Holder while acting in good
faith and in the exercise of your own good judgment, and any act
done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.
(c) You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person
or Company, excepting only orders or process of courts of law, and
are hereby expressly authorized to comply with and obey orders,
judgments or decrees of any court. In case you obey or comply with
any such order, judgment or decree of any court, you shall not be
liable to any of the parties hereto or to any other person, firm or
Company by reason of such compliance, notwithstanding any such
order, judgment or decree being
13
<PAGE>
subsequently reversed, modified, annulled, set aside, vacated or
found to have been entered without jurisdiction.
(d) You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or
purporting to execute or deliver the Agreement or any documents or
papers deposited or called for hereunder.
(e) You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with
your obligations hereunder and may rely upon the advice of such
counsel.
(f) Your rights and responsibilities as Escrow Agent hereunder shall
terminate if (i) you cease to be Treasurer of the Company or (ii)
you resign by written notice to each party. In the event of a
termination under clause (i), your successor as Treasurer shall
become Escrow Agent hereunder; in the event of a termination under
clause (ii), the Company shall appoint a successor Escrow Agent
hereunder.
(g) If you reasonably require other or further instruments in connection
with these joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such
instruments.
(h) It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of
the securities held by you hereunder, you are authorized and
directed to retain in your possession without liability to anyone
all or any part of said securities until such dispute shall have
been settled either by mutual written agreement of the parties
concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no
appeal has been perfected, but you shall be under no duty whatsoever
to institute or defend any such proceedings.
(i) These Joint Escrow Instructions set forth your sole duties with
respect to any and all matters pertinent hereto and no implied
duties or obligations shall be read into these Joint Escrow
Instructions against you.
(j) The Company shall indemnify you and hold you harmless against any
and all damages, losses, liabilities, costs, and expenses, including
attorneys' fees and disbursements, for anything done or omitted to
be done by you as Escrow Agent in connection with this Agreement or
the
14
<PAGE>
performance of your duties hereunder, except such as shall result
from your gross negligence or willful misconduct.
5. Notice. Any notice required or permitted hereunder shall be given in
------
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail with
postage and fees prepaid, addressed to each of the other parties thereunto
entitled at the following addresses, or at such other addresses as a party may
designate by ten days' advance written notice to each of the other parties
hereto.
COMPANY: Network Engines, Inc.
61 Pleasant Street
Randolph, MA 02368-4137
HOLDER: Notices to Holder shall be sent to the
address set forth below Holder's signature
below.
ESCROW AGENT: Mr. Douglas Bryant
Network Engines, Inc.
61 Pleasant Street
Randolph, MA 02368-4137
6. Miscellaneous.
-------------
(a) By signing these Joint Escrow Instructions, you become a party
hereto only for the purpose of said Joint Escrow Instructions, and
you do not become a party to the Agreement.
(b) This instrument shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted
assigns.
Very truly yours,
NETWORK ENGINES, INC.
By:/s/ Douglas G. Bryant
----------------------------------
Title: CFO
-------------------------------
15
<PAGE>
HOLDER:
/s/ Lawrence A. Genovesi
-------------------------------------
Lawrence A. Genovesi
Address:
36 Egypt Beach Road
Scituate, MA 02066
Date Signed: November 18,1999
ESCROW AGENT:
/s/ Douglas G. Bryant
- ----------------------------
16
<PAGE>
(STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE)
FOR VALUE RECEIVED, I hereby sell, assign and transfer unto Network
Engines, Inc. shares of Common Stock, $.01 par value per share, of Network
Engines, Inc. (the "Corporation") standing in my name on the books of said
Corporation represented by Certificate(s) Number _____ herewith, and do hereby
irrevocably constitute and appoint Lawrence A. Genovesi attorney to transfer the
said stock on the books of the within named Corporation with full power of
substitution in the premises.
Dated: 11/18/99
---------------------------
IN PRESENCE OF
/s/ Lawrence A. Genovesi
--------------------------------------------
Lawrence A. Genovesi
/s/ Douglas G. Bryant
- ---------------------------
NOTICE: The signature(s) to this assignment must correspond with the name
as written upon the face of the certificate, in every particular, without
alteration, enlargement, or any change whatever and must be guaranteed by a
commercial bank, trust company or member firm of the Boston, New York or Midwest
Stock Exchange.
<PAGE>
DEMAND PROMISSORY NOTE
------ ---------- ----
$90,000 November 18, 1999
FOR VALUE RECEIVED, the undersigned, Lawrence A. Genovesi (the
"Borrower"), residing at 36 Egypt Beach Road, Scituate, Massachusetts 02066, by
this demand promissory note (hereinafter the "Note"), absolutely and
unconditionally promises to pay to the order of Network Engines, Inc., a
Delaware corporation (the "Lender") with a principal place of business at 61
Pleasant Street, Randolph, Massachusetts 02368-4137, ON DEMAND AT ANY TIME, or,
if no demand is made prior thereto, on November 18, 2004, the principal sum of
NINETY THOUSAND DOLLARS ($90,000), and to pay interest on the principal sum
outstanding hereunder from time to time from the date hereof as provided herein.
The entire unpaid principal (not at the time overdue) of this Note
outstanding shall bear interest at an annual rate which shall be equal to 6.08%,
compounded annually (the "Rate"). Each overdue amount (whether of principal,
interest or otherwise) payable on or in respect of this Note or the indebtedness
evidenced hereby shall (to the extent permitted by applicable law) bear
interest, from the date on which such amount shall have first become due and
payable in accordance with the terms hereof to the date on which such amount
shall be paid to the holder of this Note (whether before or after judgment) at
all times be three percent (3%) above the Rate (the "Default Rate"). The unpaid
interest accrued on each overdue amount in accordance with the foregoing terms
of this paragraph shall become absolutely due and payable by the Borrower to the
holder hereof on demand by the holder of this Note at any time. Interest on each
overdue amount will continue to accrue, as provided by the foregoing terms of
this paragraph, and will (to the extent permitted by applicable law) be
compounded monthly until the obligations of the Borrower in respect of the
payment of such overdue amount shall be discharged (whether before or after
judgment).
On the earlier to occur of DEMAND, or, if no demand has been made prior
thereto, on November 18, 2004, there shall become absolutely due and payable by
the Borrower hereunder, and the Borrower hereby promises to pay to the holder
hereof without presentment, further demand, protest, notice of protest or any
other formalities of any kind, all of which are hereby expressly and irrevocably
waived by the Borrower, the balance (if any) of the principal hereof then
remaining unpaid, all of the unpaid interest accrued hereon and all (if any)
other amounts payable on or in respect of this Note or the indebtedness
evidenced hereby.
The Borrower absolutely and unconditionally agrees to reimburse the
Lender, on demand, for all its reasonable out-of-pocket expenses, including but
not limited to (a) the reasonable attorney's fees and disbursements and
disbursements incurred or expended in connection with any amendment hereof, and
(b) all attorneys' fees relating to the enforcement of any obligations under
this Note or the satisfaction of any indebtedness of the Borrower hereunder, or
in connection with any litigation proceeding or dispute hereunder in any way
related to the credit hereunder.
<PAGE>
2
All payments on or in respect of this Note or the indebtedness evidenced
hereby shall be made to the holder of this Note without set-off or counterclaim
and free and clear of and without any deduction of any kind for any taxes,
levies, fees, deductions, withholdings, restrictions or conditions of any
nature.
The Borrower will have the right to prepay at any time the unpaid
principal of this Note in full or in part without premium or penalty. There
shall become and be absolutely due and payable by the Borrower on the date of
each prepayment of principal of this Note, and the Borrower hereby promises to
pay on the date of each such prepayment of this Note, all of the unpaid interest
accrued to such date on the amount of principal of this Note being prepaid on
such date. Any principal amount prepaid may not be reborrowed.
Any partial payment of the indebtedness evidenced by this Note shall be
applied by the holder hereof (a) first, to the payment of all of the interest
due and payable on the unpaid principal of this Note at the time of such partial
payment, (b) then, to the payment of all (if any) other amounts (except
principal) due and payable at the time of such partial payment on or in respect
of this Note or the indebtedness evidenced by this Note, and (c) finally, to the
repayment or (as the case may be) the prepayment of the unpaid principal of this
Note due and payable at the time of such partial payment.
All computations of interest payable as provided in this Note shall be
made by the holder hereof on the basis of the actual number of days elapsed
divided by 360.
If any sum would, but for the provisions of this paragraph, become due and
payable on or in respect of this Note or the indebtedness evidenced hereby on a
day which is not a business day, then such sum shall become due and payable on
the business day next succeeding the day on which such sum would otherwise have
become due and payable hereunder, and interest payable hereunder to the holder
hereof shall be adjusted by the holder hereof accordingly.
The failure of the holder of this Note to exercise all or any of its
rights, remedies, powers or privileges hereunder in any instance shall not
constitute a waiver thereof in that or in any other instance.
The Borrower shall remain fully bound until this Note shall be fully paid;
i.e., for the sake of clarity, the holder hereof is entitled to full recourse
against the Borrower for the principal hereof, all of the interest accrued
hereon and all (if any) other amounts payable on or in respect of this Note or
the indebtedness evidenced hereby.
The Borrower hereby irrevocably waives notice of acceptance, presentment,
notice of nonpayment, protest, notice of protest, suit and all other conditions
precedent in connection with the delivery, acceptance, collection and/or
enforcement of this Note or any collateral or security therefor. The Borrower
hereby absolutely and irrevocably consents and submits to the jurisdiction of
the Courts of the Commonwealth of Massachusetts and of any Federal Court located
in the said Commonwealth in connection with any actions or proceedings brought
against the Borrower by the holder hereof arising out of or relating to this
Note.
The Borrower hereby agrees, at the Borrower's own expense, to execute and
deliver, from time to time, any and all further, or other, instruments, and to
perform such acts, as the
<PAGE>
3
Lender may reasonably request to effect the transactions contemplated by this
Note and to provide to the Lender the benefits of all rights, authorities and
remedies conferred upon the Lender by the terms of this Note.
The Borrower has executed this Note in consideration of the issuance and
sale by the Lender to the Borrower of 150,000 shares of common stock, $.01 par
value, of the Borrower, at a purchase price of $.60 per share, pursuant to a
Restricted Stock Agreement, dated on or about even date herewith.
This Note may be assigned by the Lender without the prior written consent
of the Borrower.
This Note is intended to take effect as a sealed instrument. This Note and
the Obligations of the Borrower hereunder shall be governed by and interpreted
and determined in accordance with the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, , this DEMAND PROMISSORY NOTE has been duly executed
by the undersigned, as of the day and in the year first above written.
BORROWER:
/s/ Lawrence A. Genovesi
-----------------------------------------
Lawrence A. Genovesi
Witness:/s/ Douglas G. Bryant
--------------------------
Name: Douglas G. Bryant
-----------------------------
<PAGE>
Exhibit 10.9
NETWORK ENGINES, INC.
Restricted Stock Agreement
Granted Under 1997 Stock Incentive Plan
---------------------------------------
AGREEMENT made this 7th day of January, 1998, between Network Engines,
Inc., a Massachusetts corporation (the "Company"), and Dennis Kirshy (the
"Participant").
For valuable consideration, receipt of which is acknowledged, the parties
hereto agree as follows:
1. Purchase of Shares.
------------------
The Company shall issue and sell to the Participant, and the Participant
shall purchase from the Company, subject to the terms and conditions set forth
in this Agreement and in the Company's 1997 Stock Incentive Plan (the "Plan")
30,000 shares (the "Shares") of common stock, $.01 par value, of the Company
("Common Stock"), at a purchase price of $.55 per share. The aggregate purchase
price for the Shares shall be paid by the Participant by check payable to the
order of the Company or such other method as may be acceptable to the Company.
Upon receipt by the Company of payment for the Shares, the Company shall issue
to the Participant one or more certificates in the name of the Participant for
that number of Shares purchased by the Participant. The Participant agrees that
the Shares shall be subject to the Purchase Option set forth in Section 2 of
this Agreement and the restrictions on transfer set forth in Section 4 of this
Agreement.
2. Purchase Option.
---------------
(a) In the event that the Participant ceases to be employed by the Company
for any reason or no reason, with or without cause, prior to June 30, 2000, the
Company shall have the right and option (the "Purchase Option") to purchase from
the Participant, for a sum of $.55 per share (the "Option Price"), some or all
of the Unvested Shares (as defined below).
"Unvested Shares" means the total number of Shares multiplied by the
Applicable Percentage at the time the Purchase Option becomes exercisable by the
Company. The "Applicable Percentage" shall begin as 100% and shall be reduced by
33 % on June 30, 1998 and shall be reduced by 8.375 upon the completion of each
full three months of employment by the Participant after June 30, 1998, and
shall be zero on or after June 30, 2000.
(b) For purposes of this Agreement, employment with the Company shall
include employment with a parent or subsidiary of the Company.
<PAGE>
3. Exercise of Purchase Option and Closing.
---------------------------------------
(a) The Company may exercise the Purchase Option by delivering or mailing
to the Participant (or his estate), within 60 days after the termination of the
employment of the Participant with the Company, a written notice of exercise of
the Purchase Option. Such notice shall specify the number of Shares to be
purchased. If and to the extent the Purchase Option is not so exercised by the
giving of such a notice within such 60-day period, the Purchase Option shall
automatically expire and terminate effective upon the expiration of such 60-day
period.
(b) Within 10 days after his receipt of the Company's notice of the
exercise of the Purchase Option pursuant to subsection (a) above, the
Participant (or his estate) shall tender to the Company at its principal offices
the certificate or certificates representing the Shares which the Company has
elected to purchase in accordance with the terms of this Agreement, duly
endorsed in blank or with duly endorsed stock powers attached thereto, all in
form suitable for the transfer of such Shares to the Company. Upon its receipt
of such certificate or certificates, the Company shall deliver or mail to the
Participant a check in the amount of the aggregate Option Price therefor.
(c) After the time at which any Shares are required to be delivered to the
Company for transfer to the Company pursuant to subsection (b) above, the
Company shall not pay any dividend to the Participant on account of such Shares
or permit the Participant to exercise any of the privileges or rights of a
stockholder with respect to such Shares, but shall, in so far as permitted by
law, treat the Company as the owner of such Shares.
(d) The Option Price may be payable, at the option of the Company, in
cancellation of all or a portion of any outstanding indebtedness of the
Participant to the Company or in cash (by check) or both.
(e) The Company shall not purchase any fraction of a Share upon exercise
of the Purchase Option, and any fraction of a Share resulting from a computation
made pursuant to Section 2 of this Agreement shall be rounded to the nearest
whole Share (with any one-half Share being rounded upward).
- 2 -
<PAGE>
4. Restrictions on Transfer.
------------------------
The Participant shall not sell, assign, transfer, pledge, hypothecate or
otherwise dispose of, by operation of law or otherwise (collectively
"transfer"):
(a) any Shares, or any interest therein, that are subject to the Purchase
Option, except that the Participant may transfer such Shares to or for the
benefit of any spouse, child or grandchild, or to a trust for their benefit,
provided that such Shares shall remain subject to this Agreement (including
- --------
without limitation the restrictions on transfer set forth in this Section 4, the
Purchase Option and the right of first refusal set forth in Section 5) and such
permitted transferee shall, as a condition to such transfer, deliver to the
Company a written instrument confirming that such transferee shall be bound by
all of the terms and conditions of this Agreement; or
(b) any Shares, or any interest therein, that are no longer subject to the
Purchase Option, except in accordance with Section 5 below.
5. Right of First Refusal.
----------------------
(a) If the Participant proposes to transfer any Shares that are no longer
subject to the Purchase Option (either because they are no longer Unvested
Shares or because the Purchase Option expired unexercised), then the Participant
shall first give written notice of the proposed transfer (the "Transfer Notice")
to the Company. The Transfer Notice shall name the proposed transferee and state
the number of such Shares he proposes to transfer the ("Offered Shares"), the
price per share and all other material terms and conditions of the transfer.
(b) For 30 days following its receipt of such Transfer Notice, the Company
shall have the option to purchase all (but not less than all) of the Offered
Shares at the price and upon the terms set forth in the Transfer Notice. In the
event the Company elects to purchase all of the Offered Shares, it shall give
written notice of such election to the Participant within such 30-day period.
Within 10 days after his receipt of such notice, the Participant shall tender to
the Company at its principal offices the certificate or certificates
representing the Offered Shares, duly endorsed in blank by the Participant or
with duly endorsed stock powers attached thereto, all in form suitable for
transfer of the Offered Shares to the Company. Upon receipt of such certificate
or certificates, the Company shall deliver or mail to the Participant a check in
payment of the purchase price for the Offered Shares; provided that if the terms
of payment set forth in the Transfer Notice were other than cash against
delivery, the Company may pay for the Offered Shares on the same terms and
conditions as were set forth in the Transfer Notice.
(c) If the Company does not elect to acquire all of the Offered Shares,
the Participant may, within the 30-day period following the expiration of the
option granted to the
- 3 -
<PAGE>
Company under subsection (b) above, transfer the Offered Shares to the proposed
transferee, provided that such transfer shall not be on terms and conditions
-------- ----
more favorable to the transferee than those contained in the Transfer Notice.
Notwithstanding any of the above, all Offered Shares transferred pursuant to
this Section 5 shall remain subject to this Agreement (including without
limitation the restrictions on transfer set forth in Section 4 and the right of
first refusal set forth in this Section 5) and such transferee shall, as a
condition to such transfer, deliver to the Company a written instrument
confirming that such transferee shall be bound by all of the terms and
conditions of this Agreement.
(d) After the time at which the Offered Shares are required to be
delivered to the Company for transfer to the Company pursuant to subsection (b)
above, the Company shall not pay any dividend to the Participant on account of
such Offered Shares or permit the Participant to exercise any of the privileges
or rights of a stockholder with respect to such Shares, but shall, in so far as
permitted by law, treat the Company as the owner of such Offered Shares.
(e) The following transactions shall be exempt from the provisions of this
Section 5:
(1) a transfer of Shares to or for the benefit of any spouse, child
or grandchild of the Participant, or to a trust for their benefit;
(2) any transfer pursuant to an effective registration statement
filed by the Company under the Securities Act of 1933, as amended (the
"Securities Act"); and
(3) the sale of all or substantially all of the shares of capital
stock of the Company (including pursuant to a merger or consolidation);
provided, however, that in the case of a transfer pursuant to clause (1) above,
- -------- -------
such Shares shall remain subject to this Agreement (including without limitation
the restrictions on transfer set forth in Section 4 and the right of first
refusal set forth in this Section 5) and such transferee shall, as a condition
to such transfer, deliver to the Company a written instrument confirming that
such transferee shall be bound by all of the terms and conditions of this
Agreement.
(f) The Company may assign its rights to purchase Offered Shares in any
particular transaction under this Section 5 to one or more persons or entities.
(g) The provisions of this Section 5 shall terminate upon the earlier of
the following events:
(1) the closing of the sale of shares of Common Stock in an
underwritten public offering pursuant to an effective registration statement
filed by the Company under the Securities Act; or
- 4 -
<PAGE>
(2) the sale of all or substantially all of the capital stock,
assets or business of the Company, by merger, consolidation, sale of assets or
otherwise.
6. Agreement in Connection with Public Offering.
--------------------------------------------
The Participant agrees, in connection with the initial underwritten public
offering of the Company's securities pursuant to a registration statement under
the Securities Act, (i) not to sell, make short sale of, loan, grant any options
for the purchase of, or otherwise dispose of any shares of Common Stock held by
the Participant (other than those shares included in the offering) without the
prior written consent of the Company or the underwriters managing such initial
underwritten public offering of the Company's securities for a period of 180
days from the effective date of such registration statement, and (ii) to execute
any agreement reflecting clause (i) above as may be requested by the Company or
the managing underwriters at the time of such initial offering.
7. Effect of Prohibited Transfer.
-----------------------------
The Company shall not be required (a) to transfer on its books any of the
Shares which shall have been sold or transferred in violation of any of the
provisions set forth in this Agreement, or (b) to treat as owner of such Shares
or to pay dividends to any transferee to whom any such Shares shall have been so
sold or transferred.
8. Escrow.
------
The Participant shall, upon the execution of this Agreement, execute Joint
Escrow Instructions in the form attached to this Agreement as Exhibit A. The
Joint Escrow Instructions shall be delivered to the Clerk of the Company, as
escrow agent thereunder. The Participant shall deliver to such escrow agent a
stock assignment duly endorsed in blank and hereby instructs the Company to
deliver to such escrow agent, on behalf of the Participant, the certificate(s)
evidencing the Shares issued hereunder. Such materials shall be held by such
escrow agent pursuant to the terms of such Joint Escrow Instructions.
9. Restrictive Legend.
------------------
All certificates representing Shares shall have affixed thereto a legend
in substantially the following form, in addition to any other legends that may
be required under federal or state securities laws:
"The shares of stock represented by this certificate are subject to
restrictions on transfer and an option to purchase set forth in a
certain Stock Restriction Agreement between the corporation and the
registered owner of these shares (or his predecessor in interest),
and such Agreement is available for inspection without charge at the
office of the Clerk of the corporation."
- 5 -
<PAGE>
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold,
transferred or otherwise disposed of in the absence of an effective
registration statement under such Act or an opinion of counsel
satisfactory to the corporation to the effect that such registration
is not required."
10. Provisions of the Plan.
----------------------
This Agreement is subject to the provisions of the Plan, a copy of which
is furnished to the Participant with this Agreement.
11. Investment Representations.
--------------------------
The Participant represents, warrants and covenants as follows:
(a) The Participant is purchasing the Shares for his own account for
investment only, and not with a view to, or for sale in connection with, any
distribution of the Shares in violation of the Securities Act, or any rule or
regulation under the Securities Act.
(b) The Participant has had such opportunity as he has deemed adequate to
obtain from representatives of the Company such information as is necessary to
permit him to evaluate the merits and risks of his investment in the Company.
(c) The Participant has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in the purchase of
the Shares and to make an informed investment decision with respect to such
purchase.
(d) The Participant can afford a complete loss of the value of the Shares
and is able to bear the economic risk of holding such Shares for an indefinite
period.
(e) The Participant understands that (i) the Shares have not been
registered under the Securities Act and are "restricted securities" within the
meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be sold,
transferred or otherwise disposed of unless they are subsequently registered
under the Securities Act or an exemption from registration is then available;
(iii) in any event, the exemption from registration under Rule 144 will not be
available for at least one year and even then will not be available unless a
public market then exists for the Common Stock, adequate information concerning
the Company is then available to the public, and other terms and conditions of
Rule 144 are complied with; and (iv) there is now no registration statement on
file with the Securities and Exchange Commission with respect to any stock of
the Company and the Company has no obligation or current intention to register
the Shares under the Securities Act.
- 6 -
<PAGE>
12. Withholding Taxes; Section 83(b) Election.
-----------------------------------------
(a) The Participant acknowledges and agrees that the Company has the right
to deduct from payments of any kind otherwise due to the Participant any
federal, state or local taxes of any kind required by law to be withheld with
respect to the purchase of the Shares by the Participant or the lapse of the
Purchase Option.
(b) The Participant acknowledges that he has been informed of the
availability of making an election in accordance with Section 83(b) of the
Internal Revenue Code of 1986, as amended; that such election must be filed with
the Internal Revenue Service within 30 days of the transfer of shares to the
Participant; and that the Participant is solely responsible for making such
election.
13. Severability.
------------
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, and each other provision of this Agreement shall be severable and
enforceable to the extent permitted by law.
14. Waiver.
------
Any provision for the benefit of the Company contained in this Agreement
may be waived, either generally or in any particular instance, by the Board of
Directors Company.
15. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
Company and the Participant and their respective heirs, executors,
administrators, legal representatives, successors and assigns, subject to the
restrictions on transfer set forth in Sections 4 and 5 of this Agreement.
16. Notice.
------
All notices required or permitted hereunder shall be in writing and deemed
effectively given upon personal delivery or five days after deposit in the
United States Post Office, by registered or certified mail, postage prepaid,
addressed to the other party hereto at the address shown beneath his or its
respective signature to this Agreement, or at such other address or addresses as
either party shall designate to the other in accordance with this Section 16.
- 7 -
<PAGE>
17. Pronouns.
--------
Whenever the context may require, any pronouns used in this Agreement
shall include the corresponding masculine, feminine or neuter forms, and the
singular form of nouns and pronouns shall include the plural, and vice versa.
18. Entire Agreement.
----------------
This Agreement and the Plan constitutes the entire agreement between the
parties, and supersedes all prior agreements and understandings, relating to the
subject matter of this Agreement.
19. Amendment.
---------
This Agreement may be amended or modified only by a written instrument
executed by both the Company and the Participant.
20. Governing Law.
-------------
This Agreement shall be construed, interpreted and enforced in accordance
with the internal laws of the Commonwealth of Massachusetts without regard to
any applicable conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
NETWORK ENGINES, INC.
By:/s/ Lawrence A. Genovesi
--------------------------------------
Title: President, CEO and CTO
----------------------------
Address:
---------------------------
-----------------------------------
-----------------------------------
/s/ Dennis A. Kirshy
-----------------------------------------
Dennis A. Kirshy
Address:
---------------------------
26 Cart Path Road
-----------------------------------
Weston, MA 02193-2303
-----------------------------------
- 8 -
<PAGE>
Exhibit A
Network Engines, Inc.
Joint Escrow Instructions
-------------------------
January 7, 1998
Clerk
Network Engines, Inc.
61 Pleasant Street
Randolph, MA 02368-4137
Dear Clerk:
As Escrow Agent for Network Engines, Inc., a Massachusetts corporation
(the "Company"), and the undersigned Participant ("Holder"), you are hereby
authorized and directed to hold the documents delivered to you pursuant to the
terms of that certain Restricted Stock Agreement (the "Agreement") of even date
herewith, to which a copy of these Joint Escrow Instructions is attached, in
accordance with the following instructions:
1. Holder irrevocably authorizes the Company to deposit with you any
certificates evidencing Shares (as defined in the Agreement) to be held by you
hereunder and any additions and substitutions to said Shares. Holder does hereby
irrevocably constitute and appoint you as his attorney-in-fact and agent for the
term of this escrow to execute with respect to such Shares all documents
necessary or appropriate to make such Shares negotiable and to complete any
transaction herein contemplated. Subject to the provisions of this paragraph 1
and the terms of the Agreement, Holder shall exercise all rights and privileges
of a stockholder of the Company while the Shares are held by you.
2. Upon any purchase by the Company of the Shares pursuant to the
Agreement, the Company shall give to Holder and you a written notice specifying
the purchase price for the Shares, as determined pursuant to the Agreement, and
the time for a closing hereunder (the "Closing") at the principal office of the
Company. Holder and the Company hereby irrevocably authorize and direct you to
close the transaction contemplated by such notice in accordance with the terms
of said notice.
- 9 -
<PAGE>
3. At the Closing, you are directed (a) to date the stock assignment form
or forms necessary for the transfer of the Shares, (b) to fill in on such form
or forms the number of Shares being transferred, and (c) to deliver same,
together with the certificate or certificates evidencing the Shares to be
transferred, to the Company against the simultaneous delivery to you of the
purchase price for the Shares being purchased pursuant to the Agreement.
4. The Holder shall have the right to withdraw from this escrow any Shares
as to which the Purchase Option (as defined in the Agreement) has terminated or
expired.
5. Your duties hereunder may be altered, amended, modified or revoked only
by a writing signed by all of the parties hereto.
6. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact of Holder while acting in good faith and in
the exercise of your own good judgment, and any act done or omitted by you
pursuant to the advice of your own attorneys shall be conclusive evidence of
such good faith.
7. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or Company, excepting
only orders or process of courts of law, and are hereby expressly authorized to
comply with and obey orders, judgments or decrees of any court. In case you obey
or comply with any such order, judgment or decree of any court, you shall not be
liable to any of the parties hereto or to any other person, firm or Company by
reason of such compliance, notwithstanding any such order, judgment or decree
being subsequently reversed, modified, annulled, set aside, vacated or found to
have been entered without jurisdiction.
8. You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
9. You shall be entitled to employ such legal counsel and other experts as
you may deem necessary properly to advise you in connection with your
obligations hereunder and may rely upon the advice of such counsel.
10. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be Clerk of the Company or if you shall resign by written notice
to each party. In the event of any such termination, the Company shall appoint
any officer of the Company as successor Escrow Agent.
- 10 -
<PAGE>
11. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
12. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
13. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
COMPANY: Network Engines, Inc.
61 Pleasant Street
Randolph, MA 02368-4137
HOLDER: Notices to Holder shall be sent to the address set
forth below Holdees signature below.
ESCROW AGENT: Cheryl Smith
------------
61 Pleasant St.
---------------
Randolph, MA 02368
------------------
14. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions, and you do not become a
party to the Agreement.
15. This instrument shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
Very truly yours,
Network Engines, Inc.
- 11 -
<PAGE>
By:/s/ Lawrence A. Genovesi
------------------------------------
Title: President, CEO and CTO
---------------------------------
- 12 -
<PAGE>
HOLDER:
/s/ Dennis A. Kirshy
---------------------------------------
(Signature)
Dennis A. Kirshy
---------------------------------------
Print Name
Address:
26 Cart Path Road
---------------------------------------
Weston, MA 02193-2303
---------------------------------------
Date Signed: 1/10/98
--------------------------
ESCROW AGENT:
/s/ Cheryl Smith
- -------------------------
- 13 -
<PAGE>
Exhibit 10.10
NETWORK ENGINES, INC.
Restricted Stock Agreement
Granted Under 1999 Stock Incentive Plan
---------------------------------------
AGREEMENT made this 18th day of November, 1999, between Network Engines,
Inc., a Delaware corporation (the "Company"), and Dennis Kirshy (the
"Participant").
For valuable consideration, receipt of which is acknowledged, the parties
hereto agree as follows:
1. Purchase of Shares.
------------------
The Company shall issue and sell to the Participant, and the Participant
shall purchase from the Company, subject to the terms and conditions set forth
in this Agreement and in the Company's 1999 Stock Incentive Plan (the "Plan")
30,000 shares (the "Shares") of common stock, $.01 par value, of the Company
("Common Stock"), at a purchase price of $.60 per share. The aggregate purchase
price for the Shares shall be paid by the Participant by check payable to the
order of the Company or such other method as may be acceptable to the Company.
Upon receipt by the Company of payment for the Shares, the Company shall issue
to the Participant one or more certificates in the name of the Participant for
that number of Shares purchased by the Participant. The Participant agrees that
the Shares shall be subject to the Purchase Option set forth in Section 2 of
this Agreement and the restrictions on transfer set forth in Section 4 of this
Agreement.
2. Purchase Option.
---------------
(a) In the event that the Participant ceases to be employed by the Company
for any reason or no reason, with or without cause, prior to November 18, 2003,
the Company shall have the right and option (the "Purchase Option") to purchase
from the Participant, for a sum of $.60 per share (the "Option Price"), some or
all of the Unvested Shares (as defined below).
"Unvested Shares" means the total number of Shares multiplied by the
Applicable Percentage at the time the Purchase Option becomes exercisable by the
Company. The "Applicable Percentage" shall begin as 100% and shall be reduced by
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50% on November 18, 2000 and shall be reduced by 12.50% upon the completion of
each full three months of employment by the Participant after November 18, 2000,
and shall be zero on or after November 18, 2001.
(b) For purposes of this Agreement, employment with the Company shall
include employment with a parent or subsidiary of the Company.
3. Exercise of Purchase Option and Closing.
---------------------------------------
(a) The Company may exercise the Purchase Option by delivering or mailing
to the Participant (or his estate), within 60 days after the termination of the
employment of the Participant with the Company, a written notice of exercise of
this Purchase Option. Such notice shall specify the number of Shares to be
purchased. If and to the extent the Purchase Option is not so exercised by the
giving of such a notice within such 60-day period, the Purchase Option shall
automatically expire and terminate effective upon the expiration of such 60-day
period.
(b) Within 10 days after his receipt of the Company's notice of the
exercise of the Purchase Option pursuant to subsection (a) above, the
Participant (or his estate) shall tender to the Company at its principal offices
the certificate or certificates representing the Shares which the Company has
elected to purchase in accordance with the terms of this Agreement, duly
endorsed in blank or with duly endorsed stock powers attached thereto, all in
form suitable for the transfer of such Shares to the Company. Upon its receipt
of such certificate or certificates, the Company shall deliver or mail to the
Participant a check in the amount of the aggregate Option Price therefor.
(c) After the time at which any Shares are required to be delivered to the
Company for transfer to the Company pursuant to subsection (b) above, the
Company shall not pay any dividend to the Participant on account of such Shares
or permit the Participant to exercise any of the privileges or rights of a
stockholder with respect to such Shares, but shall, in so far as permitted by
law, treat the Company as the owner of such Shares.
(d) The Option Price may be payable, at the option of the Company, in
cancellation of all or a portion of any outstanding indebtedness of the
Participant to the Company or in cash (by check) or both.
(e) The Company shall not purchase any fraction of a Share upon exercise
of the Purchase Option, and any fraction of a Share resulting from a computation
made pursuant to Section 2 of this Agreement shall be rounded to the nearest
whole Share (with any one-half share being rounded upward).
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4. Restrictions on Transfer.
------------------------
The Participant shall not sell, assign, transfer, pledge, hypothecate or
otherwise dispose of, by operation of law or otherwise (collectively
"transfer"):
(a) any Shares, or any interest therein, that are subject to the Purchase
Option, except that the Participant may transfer such Shares to or for the
benefit of any spouse, child or grandchild, or to a trust for their benefit,
provided that such Shares shall remain subject to this Agreement (including
without limitation the restrictions on transfer set forth in this Section 4, the
Purchase Option and the right of first refusal set forth in Section 5) and such
permitted transferee shall, as a condition to such transfer, deliver to the
Company a written instrument confirming that such transferee shall be bound by
all of the terms and conditions of this Agreement; or
(b) any Shares, or any interest therein, that are no longer subject to the
Purchase Option, except in accordance with Section 5 below.
5. Right of First Refusal.
----------------------
(a) If the Participant proposes to transfer any Shares that are no longer
subject to the Purchase Option (either because they are no longer Unvested
Shares or because the Purchase Option expired unexercised), then the Participant
shall first give written notice of the proposed transfer (the "Transfer Notice")
to the Company. The Transfer Notice shall name the proposed transferee and state
the number of such Shares he proposes to transfer the ("Offered Shares"), the
price per share and all other material terms and conditions of the transfer.
(b) For 30 days following its receipt of such Transfer Notice, the Company
shall have the option to purchase all (but not less than all) of the Offered
Shares at the price and upon the terms set forth in the Transfer Notice. In the
event the Company elects to purchase all of the Offered Shares, it shall give
written notice of such election to the Participant within such 30-day period.
Within 10 days after his receipt of such notice, the Participant shall tender to
the Company at its principal offices the certificate or certificates
representing the Offered Shares, duly endorsed in blank by the Participant or
with duly endorsed stock powers attached thereto, all in form suitable for
transfer of the Offered Shares to the Company. Upon receipt of such certificate
or certificates, the Company shall deliver or mail to the Participant a check in
payment of the purchase price for the Offered Shares; provided that if the terms
of payment set forth in the Transfer Notice were other than cash against
delivery, the Company
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may pay for the Offered Shares on the same terms and conditions as were set
forth in the Transfer Notice.
(c) If the Company does not elect to acquire all of the Offered Shares,
the Participant may, within the 30-day period following the expiration of the
option granted to the Company under subsection (b) above, transfer the Offered
Shares to the proposed transferee, provided that such transfer shall not be on
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terms and conditions more favorable to the transferee than those contained in
the Transfer Notice. Notwithstanding any of the above, all Offered Shares
transferred pursuant to this Section 5 shall remain subject to this Agreement
(including without limitation the restrictions on transfer set forth in Section
4 and the right of first refusal set forth in this Section 5) and such
transferee shall, as a condition to such transfer, deliver to the Company a
written instrument confirming that such transferee shall be bound by all of the
terms and conditions of this Agreement.
(d) After the time at which the Offered Shares are required to be
delivered to the Company for transfer to the Company pursuant to subsection (b)
above, the Company shall not pay any dividend to the Participant on account of
such Offered Shares or permit the Participant to exercise any of the privileges
or rights of a stockholder with respect to such Shares, but shall, in so far as
permitted by law, treat the Company as the owner of such Offered Shares.
(e) The following transactions shall be exempt from the provisions of this
Section 5:
(1) a transfer of Shares to or for the benefit of any spouse, child
or grandchild of the Participant, or to a trust for their benefit;
(2) any transfer pursuant to an effective registration statement
filed by the Company under the Securities Act of 1933, as amended (the
"Securities Act"); and
(3) the sale of all or substantially all of the shares of capital
stock of the Company (including pursuant to a merger or consolidation);
provided, however, that in the case of a transfer pursuant to clause (1) above,
- -------- -------
such Shares shall remain subject to this Agreement (including without limitation
the restrictions on transfer set forth in Section 4 and the right of first
refusal set forth in this Section 5) and such transferee shall, as a condition
to such transfer, deliver to the Company a written instrument confirming that
such transferee shall be bound by all of the terms and conditions of this
Agreement.
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<PAGE>
(f) The Company may assign its rights to purchase Offered Shares in any
particular transaction under this Section 5 to one or more persons or entities.
(g) The provisions of this Section 5 shall terminate upon the earlier of
the following events:
(1) the closing of the sale of shares of Common Stock in an
underwritten public offering pursuant to an effective registration
statement filed by the Company under the Securities Act; or
(2) the sale of all or substantially all of the capital stock,
assets or business of the Company, by merger, consolidation, sale of
assets or otherwise.
6. Agreement in Connection with Public Offering.
--------------------------------------------
The Participant agrees, in connection with the initial underwritten public
offering of the Company's securities pursuant to a registration statement under
the Securities Act, (i) not to sell, make short sale of, loan, grant any options
for the purchase of, or otherwise dispose of any shares of Common Stock held by
the Participant (other than those shares included in the offering) without the
prior written consent of the Company or the underwriters managing such initial
underwritten public offering of the Company's securities for a period of 180
days from the effective date of such registration statement, and (ii) to execute
any agreement reflecting clause (i) above as may be requested by the Company or
the managing underwriters at the time of such initial offering.
7. Effect of Prohibited Transfer.
-----------------------------
The Company shall not be required (a) to transfer on its books any of the
Shares which shall have been sold or transferred in violation of any of the
provisions set forth in this Agreement, or (b) to treat as owner of such Shares
or to pay dividends to any transferee to whom any such Shares shall have been so
sold or transferred.
8. Escrow.
------
The Participant shall, upon the execution of this Agreement, execute Joint
Escrow Instructions in the form attached to this Agreement as Exhibit A. The
Joint Escrow Instructions shall be delivered to the Secretary of the Company, as
escrow agent thereunder. The Participant shall deliver to such escrow agent a
stock assignment duly endorsed in blank and hereby instructs the Company to
deliver to such escrow agent, on behalf of the Participant, the certificate(s)
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<PAGE>
evidencing the Shares issued hereunder. Such materials shall be held by such
escrow agent pursuant to the terms of such Joint Escrow Instructions.
9. Restrictive Legend.
------------------
All certificates representing Shares shall have affixed thereto a legend
in substantially the following form, in addition to any other legends that may
be required under federal or state securities laws:
"The shares of stock represented by this certificate are subject to
restrictions on transfer and an option to purchase set forth in a
certain Stock Restriction Agreement between the corporation and the
registered owner of these shares (or his predecessor in interest),
and such Agreement is available for inspection without charge at the
office of the Secretary of the corporation."
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold,
transferred or otherwise disposed of in the absence of an effective
registration statement under such Act or an opinion of counsel
satisfactory to the corporation to the effect that such registration
is not required."
10. Provisions of the Plan.
----------------------
This Agreement is subject to the provisions of the Plan, a copy of which
is furnished to the Participant with this Agreement.
11. Investment Representations.
--------------------------
The Participant represents, warrants and covenants as follows:
(a) The Participant is purchasing the Shares for his own account for
investment only, and not with a view to, or for sale in connection with, any
distribution of the Shares in violation of the Securities Act, or any rule or
regulation under the Securities Act.
(b) The Participant has had such opportunity as he has deemed adequate to
obtain from representatives of the Company such information as is
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<PAGE>
necessary to permit him to evaluate the merits and risks of his investment in
the Company.
(c) The Participant has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in the purchase of
the Shares and to make an informed investment decision with respect to such
purchase.
(d) The Participant can afford a complete loss of the value of the Shares
and is able to bear the economic risk of holding such Shares for an indefinite
period.
(e) The Participant understands that (i) the Shares have not been
registered under the Securities Act and are "restricted securities" within the
meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be sold,
transferred or otherwise disposed of unless they are subsequently registered
under the Securities Act or an exemption from registration is then available;
(iii) in any event, the exemption from registration under Rule 144 will not be
available for at least one year and even then will not be available unless a
public market then exists for the Common Stock, adequate information concerning
the Company is then available to the public, and other terms and conditions of
Rule 144 are complied with; and (iv) there is now no registration statement on
file with the Securities and Exchange Commission with respect to any stock of
the Company and the Company has no obligation or current intention to register
the Shares under the Securities Act.
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<PAGE>
12. Withholding Taxes; Section 83(b) Election.
-----------------------------------------
(a) The Participant acknowledges and agrees that the Company has the right
to deduct from payments of any kind otherwise due to the Participant any
federal, state or local taxes of any kind required by law to be withheld with
respect to the purchase of the Shares by the Participant or the lapse of the
Purchase Option.
(b) The Participant acknowledges that he has been informed of the
availability of making an election in accordance with Section 83(b) of the
Internal Revenue Code of 1986, as amended; that such election must be filed with
the Internal Revenue Service within 30 days of the transfer of shares to the
Participant; and that the Participant is solely responsible for making such
election.
13. Severability.
------------
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, and each other provision of this Agreement shall be severable and
enforceable to the extent permitted by law.
14. Waiver.
------
Any provision for the benefit of the Company contained in this Agreement
may be waived, either generally or in any particular instance, by the Board of
Directors of the Company.
15. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
Company and the Participant and their respective heirs, executors,
administrators, legal representatives, successors and assigns, subject to the
restrictions on transfer set forth in Sections 4 and 5 of this Agreement.
16. Notice.
------
All notices required or permitted hereunder shall be in writing and deemed
effectively given upon personal delivery or five days after deposit in the
United States Post Office, by registered or certified mail, postage prepaid,
addressed to the other party hereto at the address shown beneath his or its
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respective signature to this Agreement, or at such other address or addresses as
either party shall designate to the other in accordance with this Section 16.
17. Pronouns.
--------
Whenever the context may require, any pronouns used in this Agreement
shall include the corresponding masculine, feminine or neuter forms, and the
singular form of nouns and pronouns shall include the plural, and vice versa.
18. Entire Agreement.
----------------
This Agreement and the Plan constitutes the entire agreement between the
parties, and supersedes all prior agreements and understandings, relating to the
subject matter of this Agreement.
19. Amendment.
---------
This Agreement may be amended or modified only by a written instrument
executed by both the Company and the Participant.
20. Governing Law.
-------------
This Agreement shall be construed, interpreted and enforced in accordance
with the internal laws of the State of Delaware without regard to any applicable
conflicts of laws.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
NETWORK ENGINES, INC.
By: /s/ Lawrence A. Genovesi
--------------------------------------
Title: President, CEO and CTO
---------------------------
/s/ Dennis A. Kirshy
-----------------------------------------
Dennis A. Kirshy
Address:
26 Cart Path Rd.
-----------------------------------------
Weston, MA 02493-2303
-----------------------------------------
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<PAGE>
Exhibit A
Network Engines, Inc.
Joint Escrow Instructions
-------------------------
November 18, 1999
Secretary
Network Engines, Inc.
61 Pleasant Street
Randolph, MA 02368-4137
Dear Secretary
As Escrow Agent for Network Engines, Inc., a Delaware corporation (the
"Company"), and the undersigned Participant ("Holder"), you are hereby
authorized and directed to hold the documents delivered to you pursuant to the
terms of that certain Restricted Stock Agreement (the "Agreement") of even date
herewith, to which a copy of these Joint Escrow Instructions is attached, in
accordance with the following instructions:
1. Holder irrevocably authorizes the Company to deposit with you any
certificates evidencing Shares (as defined in the Agreement) to be held by you
hereunder and any additions and substitutions to said Shares. Holder does hereby
irrevocably constitute and appoint you as his attorney-in-fact and agent for the
term of this escrow to execute with respect to such Shares all documents
necessary or appropriate to make such Shares negotiable and to complete any
transaction herein contemplated. Subject to the provisions of this paragraph 1
and the terms of the Agreement, Holder shall exercise all rights and privileges
of a stockholder of the Company while the Shares are held by you.
2. Upon any purchase by the Company of the Shares pursuant to the
Agreement, the Company shall give to Holder and you a written notice specifying
the purchase price for the Shares, as determined pursuant to the Agreement, and
the time for a closing hereunder (the "Closing") at the principal
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<PAGE>
office of the Company. Holder and the Company hereby irrevocably authorize and
direct you to close the transaction contemplated by such notice in accordance
with the terms of said notice.
3. At the Closing, you are directed (a) to date the stock assignment form
or forms necessary for the transfer of the Shares, (b) to fill in on such form
or forms the number of Shares being transferred, and (c) to deliver same,
together with the certificate or certificates evidencing the Shares to be
transferred, to the Company against the simultaneous delivery to you of the
purchase price for the Shares being purchased pursuant to the Agreement.
4. The Holder shall have the right to withdraw from this escrow any Shares
as to which the Purchase Option (as defined in the Agreement) has terminated or
expired.
5. Your duties hereunder may be altered, amended, modified or revoked only
by a writing signed by all of the parties hereto.
6. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact of Holder while acting in good faith and in
the exercise of your own good judgment, and any act done or omitted by you
pursuant to the advice of your own attorneys shall be conclusive evidence of
such good faith.
7. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or Company, excepting
only orders or process of courts of law, and are hereby expressly authorized to
comply with and obey orders, judgments or decrees of any court. In case you obey
or comply with any such order, judgment or decree of any court, you shall not be
liable to any of the parties hereto or to any other person, firm or Company by
reason of such compliance, notwithstanding any such order, judgment or decree
being subsequently reversed, modified, annulled, set aside, vacated or found to
have been entered without jurisdiction.
8. You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
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<PAGE>
9. You shall be entitled to employ such legal counsel and other experts as
you may deem necessary properly to advise you in connection with your
obligations hereunder and may rely upon the advice of such counsel.
10. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be Secretary of the Company or if you shall resign by written
notice to each party. In the event of any such termination, the Company shall
appoint any officer of the Company as successor Escrow Agent.
11. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
12. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
13. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
COMPANY: Network Engines, Inc.
61 Pleasant Street
Randolph, MA 02368-4137
HOLDER: Notices to Holder shall be sent to the address set
forth below Holder's signature below.
ESCROW AGENT: Lawrence Genovesi
-----------------
61 Pleasant St.
---------------
Randolph, MA 02368
------------------
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14. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions, and you do not become a
party to the Agreement.
15. This instrument shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
Very truly yours,
Network Engines, Inc.
By: /s/ Lawrence A. Genovesi
-----------------------------------
Title: President, CEO and CTO
-------------------------------
HOLDER:
/s/ Dennis A. Kirshy
---------------------------------------
(Signature)
Dennis A. Kirshy
---------------------------------------
Print Name
Address:
26 Cart Path Rd.
---------------------------------------
Weston, MA 02493-2303
---------------------------------------
Date Signed: Nov. 18, 1999
---------------------------
ESCROW AGENT:
/s/ Lawrence A. Genovesi
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<PAGE>
(STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE)
FOR VALUE RECEIVED, I hereby sell, assign and transfer unto Network
Engines, Inc. ____________________ ( ) shares of Common Stock, $.01 par
value per share, of Network Engines, Inc. (the "Corporation") standing in my
name on the books of said Corporation represented by Certificate(s) Number
________ herewith, and do hereby irrevocably constitute and appoint Lawrence A.
Genovesi attorney to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated:
--------------------------------
IN PRESENCE OF
/s/ Dennis A. Kirshy
--------------------------------------
Dennis Kirshy
/s/ Douglas G. Bryant
- -----------------------------
NOTICE: The signature(s) to this assignment must correspond with the name as
written upon the face of the certificate, in every particular, without
alteration, enlargement or any change whatever and must be guaranteed by a
commercial bank, trust company or member firm of the Boston, New York or Midwest
Stock Exchange.
<PAGE>
Dated: November 18,1999
/s/ Dennis A. Kirshy
- -----------------------------
Dennis A. Kirshy
<PAGE>
Exhibit 10.11
NETWORK ENGINES, INC.
Restricted Stock Agreement
Granted Under 1999 Stock Incentive Plan
---------------------------------------
AGREEMENT made this 18th day of November, 1999, between Network Engines,
Inc., a Delaware corporation (the "Company"), and John Blaeser (the
"Participant").
For valuable consideration, receipt of which is acknowledged, the parties
hereto agree as follows:
1. Purchase of Shares.
------------------
The Company shall issue and sell to the Participant, and the Participant
shall purchase from the Company, subject to the terms and conditions set forth
in this Agreement and in the Company's 1999 Stock Incentive Plan (the "Plan")
75,000 shares (the "Shares") of common stock, $.01 par value, of the Company
("Common Stock"), at a purchase price of $.60 per share. The aggregate purchase
price for the Shares shall be paid by the Participant by check payable to the
order of the Company or such other method as may be acceptable to the Company.
Upon receipt by the Company of payment for the Shares, the Company shall issue
to the Participant one or more certificates in the name of the Participant for
that number of Shares purchased by the Participant. The Participant agrees that
the Shares shall be subject to the Purchase Option set forth in Section 2 of
this Agreement and the restrictions on transfer set forth in Section 4 of this
Agreement.
2. Purchase Option.
---------------
(a) In the event that the Participant ceases to be employed by the Company
for any reason or no reason, with or without cause, prior to November 18, 2003,
the Company shall have the right and option (the "Purchase Option") to purchase
from the Participant, for a sum of $.60 per share (the "Option Price"), some or
all of the Unvested Shares (as defined below).
"Unvested Shares" means the total number of Shares multiplied by the
Applicable Percentage at the time the Purchase Option becomes exercisable by the
Company. The "Applicable Percentage" shall begin as 100% and shall be reduced by
1
<PAGE>
25% on November 18, 2000 and shall be reduced by 6.25 upon the completion of
each full three months of employment by the Participant after November 18, 2000,
and shall be zero on or after November 18, 2003.
(b) For purposes of this Agreement, employment with the Company shall
include employment with a parent or subsidiary of the Company.
3. Exercise of Purchase Option and Closing.
---------------------------------------
(a) The Company may exercise the Purchase Option by delivering or mailing
to the Participant (or his estate), within 60 days after the termination of the
employment of the Participant with the Company, a written notice of exercise of
the Purchase Option. Such notice shall specify the number of Shares to be
purchased. If and to the extent the Purchase Option is not so exercised by the
giving of such a notice within such 60-day period, the Purchase Option shall
automatically expire and terminate effective upon the expiration of such 60-day
period.
(b) Within 10 days after his receipt of the Company's notice of the
exercise of the Purchase Option pursuant to subsection (a) above, the
Participant (or his estate) shall tender to the Company at its principal offices
the certificate or certificates representing the Shares which the Company has
elected to purchase in accordance with the terms of this Agreement, duly
endorsed in blank or with duly endorsed stock powers attached thereto, all in
form suitable for the transfer of such Shares to the Company. Upon its receipt
of such certificate or certificates, the Company shall deliver or mail to the
Participant a check in the amount of the aggregate Option Price therefor.
(c) After the time at which any Shares are required to be delivered to the
Company for transfer to the Company pursuant to subsection (b) above, the
Company shall not pay any dividend to the Participant on account of such Shares
or permit the Participant to exercise any of the privileges or rights of a
stockholder with respect to such Shares, but shall, in so far as permitted by
law, treat the Company as the owner of such Shares.
(d) The Option Price may be payable, at the option of the Company, in
cancellation of all or a portion of any outstanding indebtedness of the
Participant to the Company or in cash (by check) or both.
(e) The Company shall not purchase any fraction of a Share upon exercise
of the Purchase Option, and any fraction of a Share resulting from a computation
made pursuant to Section 2 of this Agreement shall be rounded to the nearest
whole Share (with any one-half Share being rounded upward).
2
<PAGE>
4. Restrictions on Transfer.
------------------------
The Participant shall not sell, assign, transfer, pledge, hypothecate or
otherwise dispose of, by operation of law or otherwise (collectively
"transfer"):
(a) any Shares, or any interest therein, that are subject to the Purchase
Option, except that the Participant may transfer such Shares to or for the
benefit of any spouse, child or grandchild, or to a trust for their benefit,
provided that such Shares shall remain subject to this Agreement (including
- --------
without limitation the restrictions on transfer set forth in this Section 4, the
Purchase Option and the right of first refusal set forth in Section 5) and such
permitted transferee shall, as a condition to such transfer, deliver to the
Company a written instrument confirming that such transferee shall be bound by
all of the terms and conditions of this Agreement; or
(b) any Shares, or any interest therein, that are no longer subject to the
Purchase Option, except in accordance with Section 5 below.
5. Right of First Refusal.
----------------------
(a) If the Participant proposes to transfer any Shares that are no longer
subject to the Purchase Option (either because they are no longer Unvested
Shares or because the Purchase Option expired unexercised), then the Participant
shall first give written notice of the proposed transfer (the "Transfer Notice")
to the Company. The Transfer Notice shall name the proposed transferee and state
the number of such Shares he proposes to transfer the ("Offered Shares"), the
price per share and all other material terms and conditions of the transfer.
(b) For 30 days following its receipt of such Transfer Notice, the Company
shall have the option to purchase all (but not less than all) of the Offered
Shares at the price and upon the terms set forth in the Transfer Notice. In the
event the Company elects to purchase all of the Offered Shares, it shall give
written notice of such election to the Participant within such 30-day period.
Within 10 days after his receipt of such notice, the Participant shall tender to
the Company at its principal offices the certificate or certificates
representing the Offered Shares, duly endorsed in blank by the Participant or
with duly endorsed stock powers attached thereto, all in form suitable for
transfer of the Offered Shares to the Company. Upon receipt of such certificate
or certificates, the Company shall deliver or mail to the Participant a check in
payment of the purchase price for the Offered Shares; provided that if the terms
of payment set forth in the Transfer Notice were other than cash against
3
<PAGE>
delivery, the Company may pay for the Offered Shares on the same terms and
conditions as were set forth in the Transfer Notice.
(c) If the Company does not elect to acquire all of the Offered Shares,
the Participant may, within the 30-day period following the expiration of the
option granted to the Company under subsection (b) above, transfer the Offered
Shares to the proposed transferee, provided that such transfer shall not be on
-------- ----
terms and conditions more favorable to the transferee than those contained in
the Transfer Notice. Notwithstanding any of the above, all Offered Shares
transferred pursuant to this Section 5 shall remain subject to this Agreement
(including without limitation the restrictions on transfer set forth in Section
4 and the right of first refusal set forth in this Section 5) and such
transferee shall, as a condition to such transfer, deliver to the Company a
written instrument confirming that such transferee shall be bound by all of the
terms and conditions of this Agreement.
(d) After the time at which the Offered Shares are required to be
delivered to the Company for transfer to the Company pursuant to subsection (b)
above, the Company shall not pay any dividend to the Participant on account of
such Offered Shares or permit the Participant to exercise any of the privileges
or rights of a stockholder with respect to such Shares, but shall, in so far as
permitted by law, treat the Company as the owner of such Offered Shares.
(e) The following transactions shall be exempt from the provisions of this
Section 5:
(1) a transfer of Shares to or for the benefit of any spouse, child
or grandchild of the Participant, or to a trust for their benefit;
(2) any transfer pursuant to an effective registration statement
filed by the Company under the Securities Act of 1933, as amended (the
"Securities Act"); and
(3) the sale of all or substantially all of the shares of capital
stock of the Company (including pursuant to a merger or consolidation);
provided, however, that in the case of a transfer pursuant to clause (1) above,
- -------- -------
such Shares shall remain subject to this Agreement (including without limitation
the restrictions on transfer set forth in Section 4 and the right of first
refusal set forth in this Section 5) and such transferee shall, as a condition
to such transfer, deliver to the Company a written instrument confirming that
such transferee shall be bound by all of the terms and conditions of this
Agreement.
4
<PAGE>
(f) The Company may assign its rights to purchase Offered Shares in any
particular transaction under this Section 5 to one or more persons or entities.
(g) The provisions of this Section 5 shall terminate upon the earlier of
the following events:
(1) the closing of the sale of shares of Common Stock in an
underwritten public offering pursuant to an effective registration statement
filed by the Company under the Securities Act; or
(2) the sale of all or substantially all of the capital stock,
assets or business of the Company, by merger, consolidation, sale of assets or
otherwise.
6. Agreement in Connection with Public Offering.
--------------------------------------------
The Participant agrees, in connection with the initial underwritten public
offering of the Company's securities pursuant to a registration statement under
the Securities Act, (i) not to sell, make short sale of, loan, grant any options
for the purchase of, or otherwise dispose of any shares of Common Stock held by
the Participant (other than those shares included in the offering) without the
prior written consent of the Company or the underwriters managing such initial
underwritten public offering of the Company's securities for a period of 180
days from the effective date of such registration statement, and (ii) to execute
any agreement reflecting clause (i) above as may be requested by the Company or
the managing underwriters at the time of such initial offering.
7. Effect of Prohibited Transfer.
-----------------------------
The Company shall not be required (a) to transfer on its books any of the
Shares which shall have been sold or transferred in violation of any of the
provisions set forth in this Agreement, or (b) to treat as owner of such Shares
or to pay dividends to any transferee to whom any such Shares shall have been so
sold or transferred.
8. Escrow.
------
The Participant shall, upon the execution of this Agreement, execute joint
Escrow Instructions in the form attached to this Agreement as Exhibit A. The
Joint Escrow Instructions shall be delivered to the Clerk of the Company, as
escrow agent thereunder. The Participant shall deliver to such escrow agent a
stock assignment duly endorsed in blank and hereby instructs the Company to
deliver to such escrow agent, on behalf of the Participant, the certificate(s)
5
<PAGE>
evidencing the Shares issued hereunder. Such materials shall be held by such
escrow agent pursuant to the terms of such joint Escrow Instructions.
9. Restrictive Legend.
------------------
All certificates representing Shares shall have affixed thereto a legend
in substantially the following form, in addition to any other legends that may
be required under federal or state securities laws:
"The shares of stock represented by this certificate are subject to
restrictions on transfer and an option to purchase set forth in a
certain Stock Restriction Agreement between the corporation and the
registered owner of these shares (or his predecessor in interest),
and such Agreement is available for inspection without charge at the
office of the Clerk of the corporation."
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold,
transferred or otherwise disposed of in the absence of an effective
registration statement under such Act or an opinion of counsel
satisfactory to the corporation to the effect that such registration
is not required."
10. Provisions of the Plan.
----------------------
This Agreement is subject to the provisions of the Plan, a copy of which
is furnished to the Participant with this Agreement.
11. Investment Representations.
--------------------------
The Participant represents, warrants and covenants as follows:
(a) The Participant is purchasing the Shares for his own account for
investment only, and not with a view to, or for sale in connection with, any
distribution of the Shares in violation of the Securities Act, or any rule or
regulation under the Securities Act.
(b) The Participant has had such opportunity as he has deemed adequate to
obtain from representatives of the Company such information as is necessary to
permit him to evaluate the merits and risks of his investment in the Company.
6
<PAGE>
(c) The Participant has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in the purchase of
the Shares and to make an informed investment decision with respect to such
purchase.
(d) The Participant can afford a complete loss of the value of the Shares
and is able to bear the economic risk of holding such Shares for an indefinite
period.
(e) The Participant understands that (i) the Shares have not been
registered under the Securities Act and are "restricted securities" within the
meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be sold,
transferred or otherwise disposed of unless they are subsequently registered
under the Securities Act or an exemption from registration is then available;
(iii) in any event, the exemption from registration under Rule 144 will not be
available for at least one year and even then will not be available unless a
public market then exists for the Common Stock, adequate information concerning
the Company is then available to the public, and other terms and conditions of
Rule 144 are complied with; and (iv) there is now no registration statement on
file with the Securities and Exchange Commission with respect to any stock of
the Company and the Company has no obligation or current intention to register
the Shares under the Securities Act.
7
<PAGE>
12. Withholding Taxes; Section 83(b) Election.
-----------------------------------------
(a) The Participant acknowledges and agrees that the Company has the right
to deduct from payments of any kind otherwise due to the Participant any
federal, state or local taxes of any kind required by law to be withheld with
respect to the purchase of the Shares by the Participant or the lapse of the
Purchase Option.
(b) The Participant acknowledges that he has been informed of the
availability of making an election in accordance with Section 83(b) of the
Internal Revenue Code of 1986, as amended; that such election must be filed with
the Internal Revenue Service within 30 days of the transfer of shares to the
Participant; and that the Participant is solely responsible for making such
election.
13. Severability.
------------
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, and each other provision of this Agreement shall be severable and
enforceable to the extent permitted by law.
14. Waiver.
------
Any provision for the benefit of the Company contained in this Agreement
may be waived, either generally or in any particular instance, by the Board of
Directors of the Company.
15. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
Company and the Participant and their respective heirs, executors,
administrators, legal representatives, successors and assigns, subject to the
restrictions on transfer set forth in Sections 4 and 5 of this Agreement.
16. Notice.
------
All notices required or permitted hereunder shall be in writing and deemed
effectively given upon personal delivery or five days after deposit in the
United States Post Office, by registered or certified mail, postage prepaid,
addressed to the other party hereto at the address shown beneath his or its
respective signature to this Agreement, or at such other address or addresses as
either party shall designate to the other in accordance with this Section 16.
8
<PAGE>
17. Pronouns.
--------
Whenever the context may require, any pronouns used in this Agreement
shall include the corresponding masculine, feminine or neuter forms, and the
singular form of nouns and pronouns shall include the plural, and vice versa.
18. Entire Agreement.
----------------
This Agreement and the Plan constitutes the entire agreement between the
parties, and supersedes all prior agreements and understandings, relating to the
subject matter of this Agreement.
19. Amendment.
---------
This Agreement may be amended or modified only by a written instrument
executed by both the Company and the Participant.
20. Governing Law.
-------------
This Agreement shall be construed, interpreted and enforced in accordance
with the internal laws of the State of Delaware without regard to any applicable
conflicts of laws.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
NETWORK ENGINES, INC.
By: /s/ Lawrence A. Genovesi
------------------------------
Title: President, CEO and CTO
--------------------------
/s/ John Blaeser
---------------------------------
John Blaeser
Address:
1116 Great Pond Rd.
---------------------------------
North Andover, MA 01845
---------------------------------
10
<PAGE>
Exhibit A
Network Engines, Inc.
Joint Escrow Instructions
-------------------------
November 18, 1999
Secretary
Network Engines, Inc.
61 Pleasant Street
Randolph, MA 02368-4137
Dear Secretary:
As Escrow Agent for Network Engines, Inc., a Delaware corporation (the
"Company"), and the undersigned Participant ("Holder"), you are hereby
authorized and directed to hold the documents delivered to you pursuant to the
terms of that certain Restricted Stock Agreement (the "Agreement") of even date
herewith, to which a copy of these Joint Escrow Instructions is attached, in
accordance with the following instructions:
1. Holder irrevocably authorizes the Company to deposit with you any
certificates evidencing Shares (as defined in the Agreement) to be held by you
hereunder and any additions and substitutions to said Shares. Holder does hereby
irrevocably constitute and appoint you as his attorney-in-fact and agent for the
term of this escrow to execute with respect to such Shares all documents
necessary or appropriate to make such Shares negotiable and to complete any
transaction herein contemplated. Subject to the provisions of this paragraph 1
and the terms of the Agreement, Holder shall exercise all rights and privileges
of a stockholder of the Company while the Shares are held by you.
2. Upon any purchase by the Company of the Shares pursuant to the
Agreement, the Company shall give to Holder and you a written notice specifying
the purchase price for the Shares, as determined pursuant to the Agreement, and
the time for a closing hereunder (the "Closing") at the principal
11
<PAGE>
office of the Company. Holder and the Company hereby irrevocably authorize and
direct you to close the transaction contemplated by such notice in accordance
with the terms of said notice.
3. At the Closing, you are directed (a) to date the stock assignment form
or forms necessary for the transfer of the Shares, (b) to fill in on such form
or forms the number of Shares being transferred, and (c) to deliver same,
together with the certificate or certificates evidencing the Shares to be
transferred, to the Company against the simultaneous delivery to you of the
purchase price for the Shares being purchased pursuant to the Agreement.
4. The Holder shall have the right to withdraw from this escrow any Shares
as to which the Purchase Option (as defined in the Agreement) has terminated or
expired.
5. Your duties hereunder may be altered, amended, modified or revoked only
by a writing signed by all of the parties hereto.
6. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact of Holder while acting in good faith and in
the exercise of your own good judgment, and any act done or omitted by you
pursuant to the advice of your own attorneys shall be conclusive evidence of
such good faith.
7. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or Company, excepting
only orders or process of courts of law, and are hereby expressly authorized to
comply with and obey orders, judgments or decrees of any court. In case you obey
or comply with any such order, judgment or decree of any court, you shall not be
liable to any of the parties hereto or to any other person, firm or Company by
reason of such compliance, notwithstanding any such order, judgment or decree
being subsequently reversed, modified, annulled, set aside, vacated or found to
have been entered without jurisdiction.
8. You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
12
<PAGE>
9. You shall be entitled to employ such legal counsel and other experts as
you may deem necessary properly to advise you in connection with your
obligations hereunder and may rely upon the advice of such counsel.
10. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be Clerk of the Company or if you shall resign by written notice
to each party. In the event of any such termination, the Company shall appoint
any officer of the Company as successor Escrow Agent.
11. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
12. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
13. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
COMPANY: Network Engines, Inc.
61 Pleasant Street
Randolph, MA 02368-4137
HOLDER: Notices to Holder shall be sent to the
address set forth below Holder's
signature below.
ESCROW AGENT: Lawrence Genovesi
-------------------
61 Pleasant St.
-------------------
Randolph, MA 02368
-------------------
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<PAGE>
14. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said joint Escrow Instructions, and you do not become a
party to the Agreement.
15. This instrument shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
Very truly yours,
Network Engines, Inc.
By: /s/ Lawrence A. Genovesi
--------------------------------
Title: President, CEO and CTO
----------------------------
HOLDER:
/s/ J.A. Blaeser
-----------------------------------
(Signature)
John Blaeser
-----------------------------------
Print Name
Address:
1116 Great Pond Rd.
-----------------------------------
North Andover, MA 01845
-----------------------------------
Date Signed: 11/29/99
-----------------------
ESCROW AGENT:
/s/ Lawrence A. Genovesi
- -------------------------------
14
<PAGE>
(STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE)
FOR VALUE RECEIVED, I hereby sell, assign and transfer unto Network
Engines, Inc. ____________________ ( ) shares of Common Stock, $.01 par
value per share, of Network Engines, Inc. (the "Corporation") standing in my
name on the books of said Corporation represented by Certificate(s) Number
___________ herewith, and do hereby irrevocably constitute and appoint Lawrence
A. Genovesi attorney to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated: 11/29/99
-----------------------
/s/ J. A. Blaeser
------------------------------
John Blaeser
IN PRESENCE OF
/s/ Ellen C. Goff
- -----------------------------
NOTICE: The signature(s) to this assignment must correspond with the name as
written upon the face of the certificate, in every particular, without
alteration, enlargement, or any change whatever and must be guaranteed by a
commercial bank, trust company or member firm of the Boston, New York or Midwest
Stock Exchange.
<PAGE>
EXHIBIT 10.13
LOAN MODIFICATION AGREEMENT
This LOAN MODIFICATION AGREEMENT is entered into as of April 5, 2000, by
and between SILICON VALLEY BANK, a California-chartered bank with its principal
place of business at 3003 Tasman Drive, Santa Clara, CA 95054 and with a loan
production office located at Wellesley Office Park, 40 William Street, Suite
350, Wellesley, MA 02481, doing business under the name "Silicon Valley East"
("Bank"), and NETWORK ENGINES, INC., a Delaware corporation with its principal
place of business at 61 Pleasant Street, Randolph, MA 02368 ("Borrower").
RECITALS
Borrower has borrowed money from Bank pursuant to certain Existing Loan
Documents, as defined below. In consideration of certain financial
accommodations from Bank, and Borrower's continuing obligations under the
Existing Loan Documents, Borrower and Bank agree as follows:
AGREEMENT
1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which
may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to,
among other documents, a Loan and Security Agreement dated as of November 2,
1998 between Borrower and Bank originally providing for a revolving credit
facility up to a maximum principal amount of THREE HUNDRED THOUSAND AND
NO/100THS DOLLARS ($300,000) and an equipment line facility up to a maximum
principal amount of TWO HUNDRED SIXTY THOUSAND AND NO/100THS DOLLARS ($260,000)
(the "Loan Agreement").
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred
to as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL. Repayment of the Indebtedness is secured
pursuant to the Loan Agreement. Hereinafter, the Loan Agreement, together with
all other documents securing payment of the Indebtedness, shall be referred to
as the "Existing Loan Documents."
3. DESCRIPTION OF CHANGES IN TERMS.
3.1 Modifications to Definitions. Section 1.1 of the Loan Agreement is
hereby amended by substituting the following definitions for those set forth
therein for the same terms, and in the case of new definitions, by adding those
new definitions to that Section 1.1:
"Committed Revolving Line" means a credit extension of up to FOUR
MILLION AND NO/100THS Dollars ($4,000,000).
"2000 Committed Equipment Line" means a credit extension of up to TWO
MILLION AND N0/100THS Dollars ($2,000,000).
"Credit Extension" means each Advance, Equipment Advance, 2000
Equipment Advance, Letter of Credit or any other extension of credit
by Bank for the benefit of Borrower hereunder.
"2000 Equipment Advance" has the meaning set forth in Section 2.1.4.
"2000 Equipment Availability End Date" has the meaning set forth in
Section 2.1.4.
"Letter of Credit" means a letter of credit or similar undertaking
issued by Bank pursuant to Section 2.1.3.
"Revolving Maturity Date" means APRIL 4, 2001.
<PAGE>
The definition of "Permitted Investment" is amended by adding the
following subparagraph:
(c) the Promissory Note dated November 18, 1999 of Lawrence A.
Genovesi payable to the order of the Borrower in the amount of
$90,000.
Subparagraphs (c) and (d) of the definition of "Permitted Liens" are
hereby replaced in their entirety with the following:
(c) Liens (i) upon or in any Equipment acquired or held by Borrower or
any of its Subsidiaries to secure the purchase price of such Equipment
or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment, or (ii) existing on such Equipment at
the time of its acquisition, provided that the Lien is confined solely
to the property so acquired and improvements thereon, and the proceeds
of such Equipment; and further provided that such liens shall exist as
of April 5, 2000, and, that the aggregate principal amount of the
obligations secured by such liens and the liens in subsection (d) of
this definition, shall not exceed $200,000;
(d) Liens on Equipment leased by Borrower or any Subsidiary pursuant
to an operating lease in the ordinary course of business (including
proceeds thereof and accessions thereto) incurred solely for the
purpose of financing the lease of such Equipment (including Liens
pursuant to leases permitted pursuant to Section 7.1 and Liens arising
from UCC financing statements regarding leases permitted by this
Agreement); provided that such liens shall exist as of April 5, 2000,
and that the aggregate principal amount of the obligations secured by
such liens and the liens in subsection (c) of this definition, shall
not exceed $200,000; and
3.2 Modifications to Revolving Advances. Section 2.1.1(a) of the Loan
Agreement is hereby replaced in its entirety with the following:
2.1.1 Revolving Advances.
(a) Bank will make Advances not exceeding (i) the Committed Revolving
Line or the Borrowing Base, whichever is less minus (ii) the amount of
all outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit). Amounts borrowed under this Section may be repaid
and reborrowed during the term of this Agreement.
3.3 Addition of Letters of Credit. The following Section 2.1.3 is hereby
inserted in the Loan Agreement:
2.1.3 Letters of Credit. Bank will issue or have issued Letters of
Credit for Borrower's account not exceeding (i) the lesser of the
Committed Revolving Line or the Borrowing Base minus (ii) the
outstanding principal balance of the Advances. Each Letter of Credit
will expire no later than 180 days after the Revolving Maturity Date
provided Borrower's Letter of Credit reimbursement obligation is
secured by cash on terms acceptable to Bank at any time after the
Revolving Maturity Date if the term of this Agreement is not extended
by Bank.
3.4 Addition of 2000 Equipment Advances. The following Section 2.1.4 is
hereby inserted in the Loan Agreement:
2
<PAGE>
2.1.4 2000 Equipment Advances.
(a) Subject to and upon the terms and conditions of this Agreement, at
any time from the date hereof through APRIL 4, 2001 (the "2000
Equipment Availability End Date"), Bank agrees to make advances (each
an "2000 Equipment Advance" and collectively, the "2000 Equipment
Advances") to Borrower in an aggregate outstanding amount not to
exceed the 2000 Committed Equipment Line; provided that the total 2000
Equipment Advances made from APRIL 5, 2000 to OCTOBER 4, 2000 shall
not exceed ONE MILLION AND NO/100THS DOLLARS ($1,000,000) and that the
total 2000 Equipment Advances made from OCTOBER 5, 2000 to APRIL 4,
2001 shall not exceed ONE MILLION AND NO/100THS DOLLARS ($1,000,000).
To evidence the 2000 Equipment Advances, Borrower shall deliver to
Bank, at the time of each 2000 Equipment Advance request, an invoice
for the equipment to be purchased or financed. The 2000 Equipment
Advances shall be used only to purchase or finance Equipment and shall
not exceed ONE HUNDRED Percent (100%) of the invoice amount of such
equipment approved from time to time by Bank. Software may, however,
constitute up to THIRTY percent (30%) of aggregate 2000 Equipment
Advances.
(b) Interest shall accrue from the date of each 2000 Equipment Advance
at the rate specified in Section 2.3(a), and shall be payable on the
Payment date for each month through APRIL, 2001, except as otherwise
provided herein. Any 2000 Equipment Advances that are outstanding on
OCTOBER 4, 2000 will be payable in THIRTY-SIX (36) equal monthly
installments of principal, plus all accrued interest, on the Payment
Date of each month commencing NOVEMBER 1, 2000 and ending on OCTOBER
1, 2003. Any 2000 Equipment Advances made after OCTOBER 4, 2000 that
are outstanding on the 2000 Equipment Availability End Date will be
payable in THIRTY-SIX (36) equal monthly installments of principal,
plus all accrued interest, on the Payment Date of each month
commencing MAY 1, 2001 and ending on APRIL 1, 2004. 2000 Equipment
Advances, once repaid, may not be reborrowed.
(c) When Borrower desires to obtain a 2000 Equipment Advance, Borrower
shall notify Bank (which notice shall be irrevocable) by facsimile
transmission to be received no later than 3:00 p.m. Pacific time one
(1) Business Day before the day on which the 2000 Equipment Advance is
to be made. Such notice shall be substantially in the form of Exhibit
B. The notice shall be signed by a Responsible Officer or its
designee and include a copy of the invoice(s) for the Equipment to be
financed. 2000 Equipment Advance requests for Equipment purchased
prior to APRIL 5, 2000 shall be made no later than SIXTY (60) business
days after said date. No 2000 Equipment Advances shall be made on
Equipment purchased after APRIL 5, 2000 more than SIXTY (60) days past
invoice date.
3.5 Modifications to Overadvances. Section 2.2 of the Loan Agreement is
hereby replaced in its entirety by the following:
2.2 Overadvances. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Bank pursuant to Sections 2.1.1 and
2.1.3 of this Agreement is greater than the lesser of (i) the
Committed
3
<PAGE>
Revolving Line or (ii) the Borrowing Base, Borrower shall immediately
pay to Bank, in cash, the amount of such excess.
3.6 Modifications to Interest Rate. Section 2.3(a) of the Loan Agreement
is hereby replaced in its entirety by the following:
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in Section 2.3(b), any
Advances and Equipment Advances shall bear interest, on the average
daily balance thereof, at a per annum rate equal to ONE (1.0)
percentage point above the Prime Rate, and any 2000 Equipment Advances
shall bear interest, on the average daily balance thereof, at a per
annum rate equal to ONE AND ONE QUARTER (1.25) percentage points above
the Prime Rate.
3.7 Modifications to Financial Reporting Covenants. Section 6.3 of the
Loan Agreement is hereby replaced in its entirety by the following:
6.3 Financial Statements, Reports, Certificates. (i) Borrower shall
deliver to Bank:
(a) as soon as available, but in any event within twenty-five (25)
days after the end of each month, a company prepared consolidated
balance sheet and income statement covering Borrower's consolidated
operations during such period, in a form and certified by an officer
of Borrower reasonably acceptable to Bank;
(b) as soon as available, but in any event within one hundred twenty
(120) days after the end of Borrower's fiscal year, audited
consolidated financial statements of Borrower prepared in accordance
with GAAP, consistently applied, together with an unqualified opinion
on such financial statements of an independent certified public
accounting firm reasonably acceptable to Bank;
(c) if Borrower is a reporting company under the Securities and
Exchange Act of 1934, then within five (5) days of filing, copies of
all statements, reports and notices sent or made available generally
by Borrower to its security holders or to any holders of Subordinated
Debt and all reports on Form 10-K, 10-Q and 8-K filed with the
Securities and Exchange Commission;
(d) promptly upon receipt of notice thereof, a report of any legal
actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of One
Hundred Thousand Dollars ($100,000) or more;
(e) such budgets, sales projections, operating plans or other
financial information as Bank may reasonably request from time to
time, and no less frequently than annually, any material changes in
Borrower's operating plans and financial projections.
(f) within twenty-five (25) days after the last day of each month, a
Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged
listings of accounts receivable.
(g) within twenty-five (25) days after the last day of each month,
with the monthly financial statements, and within one hundred twenty
(120) days after the end of Borrower's fiscal year, with the annual
audited financial statements, a Compliance Certificate signed by a
Responsible Officer in substantially the form of Exhibit D hereto.
(ii) Bank shall have a right from time to time hereafter to audit
Borrower's Accounts and Collateral at Borrower's expense, provided
that such audits will be conducted no more often than every twelve
(12) months unless an Event of Default has occurred and is continuing.
Such an audit shall occur within 90 days of APRIL 5, 2000.
4
<PAGE>
3.8 Modifications to Tangible Net Worth. Section 6.9 of the Loan Agreement
is hereby replaced in its entirety by the following:
6.9 Tangible Net Worth. Borrower shall maintain, as of the last day
of each calendar month commencing APRIL 30, 2000, a Tangible Net Worth
of not less than FIFTEEN MILLION AND NO/100THS Dollars ($15,000,000).
3.9 Modifications to Dispositions. Section 7.1 of the Loan Agreement is
hereby replaced in its entirety by the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than
Transfers: (i) of inventory in the ordinary course of business, (ii)
of non-exclusive licenses and similar arrangements for the use of the
property of Borrower or its Subsidiaries in the ordinary course of
business, (iii) that constitute payment of normal and usual operating
expenses in the ordinary course of business, (iv) of worn-out or
obsolete Equipment, or (v) of Borrower's P6000 product line to
Copernicus, Inc., a corporation wholly-owned by Cheryl Smith.
3.10 Modifications to Transactions with Affiliates. Section 7.8 of the
Loan Agreement is hereby replaced in its entirety by the following:
7.8 Transactions with Affiliates. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of
Borrower's business, upon fair and reasonable terms that are no less
favorable to Borrower than would be obtained in an arm's length
transaction with a non-affiliated Person, except for the Promissory
Note dated November 18, 1999 of Lawrence A. Genovesi payable to the
order of Borrower in the amount of $90,000, and except for the
Transfer of Borrower's P6000 product line to Copernicus, Inc., a
corporation wholly-owned by Cheryl Smith.
3.11 Modifications to Intellectual Property Agreements. Section 7.9 of
the Loan Agreement is hereby replaced in its entirety with the following:
7.9 Intellectual Property Agreements. Borrower shall not permit the
inclusion in any material contract to which it becomes a party of any
provisions that could or might in any way prevent the creation of a
security interest in Borrower's rights and interests in any property
included within the definition of the Intellectual Property Assets
acquired under such contracts.
3.12 Modifications to Covenant Default. Section 8.2(b) of the Loan
Agreement is hereby replaced in its entirety with the following:
(b) If Borrower fails or neglects to perform, keep, or observe any
other material term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any
other present or future agreement between Borrower and Bank and as to
any default under such other term, provision, condition, covenant or
agreement that can be cured, has failed to cure such default within
ten (10) days after the occurrence thereof; provided, however, that if
the default cannot by its nature be cured within the ten (10) day
period or cannot after diligent attempts by Borrower be cured within
such ten (10) day period, and such default is likely to be cured
within a reasonable time, then Borrower shall have an additional
reasonable period (which shall not in any case exceed thirty (30)
days) to attempt to cure such
5
<PAGE>
default, and within such reasonable time period the failure to have
cured such default shall not be deemed an Event of Default (provided
that no Credit Extensions will be required to be made during such cure
period);
3.13 Modifications to Insolvency. Section 8.5 of the Loan Agreement is
hereby replaced in its entirety with the following:
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is
commenced against Borrower and is not dismissed or stayed within 30
days (provided that no Credit Extensions will be made prior to the
dismissal of such Insolvency Proceeding);
3.14 Addition of Letter of Credit Remedies. The following Section 9.1(j)
is hereby inserted in the Loan Agreement:
(j) Demand that Borrower (i) deposit cash with Bank in an amount equal
to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under
such Letters of Credit, and Borrower shall forthwith deposit and pay
such amounts, and (ii) pay in advance all Letters of Credit fees
scheduled to be paid or payable over the remaining term of the Letters
of Credit;
3.15 Modifications to Exhibits. Exhibits A, C and D of the Loan Agreement
are hereby replaced in their entirety with Exhibits A, C and D to this
Agreement.
4. FEES. Borrower shall pay to Bank facility fees totaling THIRTY
THOUSAND DOLLARS ($30,000) as well as any out-of-pocket expenses incurred by the
Bank through the date hereof, including reasonable attorneys' fees and expenses,
and after the date hereof, all Bank Expenses, including reasonable attorneys'
fees and expenses, as and when they become due.
5. CONDITIONS TO FURTHER ADVANCES. The obligation of Bank to make further
advances to Borrower under the lines is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory to Bank, the
following:
(i) this Loan Modification Agreement duly executed by Borrower;
(ii) payment of the fees and Bank Expenses then due specified in
Section 4 hereof; and
(iii) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
6. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described in this Loan Modification
Agreement.
7. NO DEFENSES OF BORROWER. Borrower agrees that as of this date, it has
no defenses against any of the obligations to pay any amounts under the
Indebtedness.
8. CONTINUING VALIDITY. Borrower understands and agrees that (i) in
modifying the Existing Loan Documents, Bank is relying upon Borrower's
representations, warranties and agreements, as set forth in the Existing Loan
Documents, (ii) except as expressly modified pursuant to this Loan Modification
Agreement (including the effects of Section 6 hereof), the Existing Loan
Documents remain unchanged and in full force and effect, (iii) Bank's agreement
to modify the Existing Loan Documents pursuant to this Loan Modification
Agreement shall in no way obligate Bank to make any future modifications to the
Existing Loan Documents, (iv) it is the intention of Bank and Borrower to retain
as liable parties all makers and endorsers of the Existing Loan Documents,
unless a party is expressly released by Bank in writing, (v) no maker, endorser
or guarantor will be released by virtue of this Loan Modification Agreement, and
(vi) the terms of this Section 8 apply not only to this Loan Modification
Agreement but also to all subsequent loan modification agreements, if any.
6
<PAGE>
9. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. The laws of the
Commonwealth of Massachusetts shall apply to this Agreement. BORROWER ACCEPTS
FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, UNCONDITIONALLY, THE NON-
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION
IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT, OR PROCEEDING OF ANY
KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS AGREEMENT; PROVIDED,
HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF THE COURTS OF THE
COMMONWEALTH OF MASSACHUSETTS, BORROWER ACCEPTS JURISDICTION OF THE COURTS AND
VENUE IN SANTA CLARA COUNTY, CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND
AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO
ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.
10. EFFECTIVENESS. This Agreement shall become effective only when it
shall have been executed by Borrower and Bank (provided, however, in no event
shall this Agreement become effective until signed by an officer of Bank in
California).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as a sealed instrument as of the date first set forth above.
<TABLE>
<CAPTION>
<S> <C>
"Borrower": NETWORK ENGINES, INC. "Bank": SILICON VALLEY BANK, doing
business as SILICON VALLEY EAST
By: /s/ Lawrence A. Genovesi By: /s/ William R. Howell
----------------------------- -----------------------------
Lawrence A. Genovesi, President & CEO William R. Howell, AVP
SILICON VALLEY BANK
By: /s/ Michelle D. Giannini
-----------------------------
Michelle D. Giannini
Title: Assistant Vice President
---------------------------
(Signed in Santa Clara County, California)
</TABLE>
EXHIBITS A, C AND D FOLLOW
7
<PAGE>
EXHIBIT A TO LOAN AND SECURITY AGREEMENT
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trade styles, trade names,
leases, license agreements, franchise agreements, blueprints, drawings, purchase
orders, customer lists, route lists, infringements, claims, computer programs,
computer discs, computer tapes, literature, reports, catalogs, income tax
refunds, payments of insurance and rights to payment of any kind; all rights to
unpatented inventions, know-how, operating manuals, license rights and
agreements and confidential information, now owned or hereafter acquired;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;
(e) All documents, cash, deposit accounts, securities, investment property,
letters of credit, certificates of deposit, instruments and chattel paper now
owned or hereafter acquired;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter existing, created,
acquired or held; all trademark and service mark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower connected with
and symbolized by such trademarks; all patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same, including
without limitation the patents and patent applications; all mask work or similar
rights available for the protection of semiconductor chips, now owned or
hereafter acquired; all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held; all design rights which may be available to
Borrower now or hereafter existing, created, acquired or held; all claims for
damages by way of past, present and future infringement of any of the rights
included above, with the right, but not the obligation, to sue for and collect
such damages for said use or infringement of the foregoing; all licenses or
other rights to use any of the foregoing, and all license fees and royalties
arising from such use to the extent permitted by such license or rights; all
amendments, renewals and extensions of any of the foregoing; and
(g) All Borrower's Books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for, additions
and accessions to and proceeds and products thereof, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
8
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
<TABLE>
<CAPTION>
Borrower: Network Engines, Inc. Bank: Silicon Valley Bank
61 Pleasant Street 3003 Tasman Drive
Randolph, MA 02368 Santa Clara, CA 95054
<S> <C> <C>
Commitment Amount: $4,000,000
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of ____________ $_________
2. Additions (please explain on reverse) $_________
3. TOTAL ACCOUNTS RECEIVABLE $_________
ACCOUNTS RECEIVABLE DEDUCTIONS
4. Amounts over 90 days $_________
5. Balance of 50% over 90 day accounts $_________
6. Concentration Limits $_________
7. Ineligible Foreign Accounts $_________
8. Governmental Accounts $_________
9. Contra Accounts $_________
10. Promotion or Demo Accounts $_________
11. Intercompany/Employee Accounts $_________
12. Other (please explain on reverse) $_________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_________
14. Eligible Accounts (#3 - #13) $_________
15. LOAN VALUE OF ACCOUNTS (80% of #14) $_________
BALANCES
16. Maximum Loan Amount $4,000,000
17. Total Funds Available (Lesser of #16 or #15) $_________
18. Present balance owing on Line of Credit $_________
19. Outstanding under Sublimits ( ) $_________
20. RESERVE POSITIVE (#17 minus #18 and #19) $_________
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement dated as of November 2, 1998, as may be amended from time to
time, between the undersigned and Silicon Valley Bank.
-------------------------------
BANK USE ONLY
Rec'd By: ___________________
Date: _______________________
Reviewed By: ________________
Compliance Status: Yes / No
-------------------------------
COMMENTS:
_______________________________
By: ____________________________
Authorized Signer
9
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
Borrower: Network Engines, Inc. Bank: Silicon Valley Bank
61 Pleasant Street 3003 Tasman Drive
Randolph, MA 02368 Santa Clara, CA 95054
The undersigned authorized officer of NETWORK ENGINES, INC. hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement dated as of November 2, 1998 between Borrower and Bank, as
may be amended from time to time (the "Agreement"), (i) Borrower is in complete
compliance for the period ending ___________ of all required conditions and
terms except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true, accurate and complete in all material
respects as of the date hereof. Attached herewith are the required documents
supporting the above certification. The Officer further certifies that these
are prepared in accordance with Generally Accepted Accounting Principals (GAAP)
and are consistent from one period to the next except as explained in an
accompanying letter or footnotes. The Officer further expressly acknowledges
Borrower may not request any borrowings at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such compliance is determined not just at the date this certificate is
delivered.
Please indicate compliance status by circling Yes/No under "Complies" column
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
------------------ -------- --------
<S> <C> <C> <C>
Monthly financial statements w/ compliance Monthly within 25 days Yes No
certificate
Annual (CPA Audited) financial statements w/ FYE within 120 days Yes No
compliance certificate
Borrowing base certificate Monthly within 25 days Yes No
A/R agings Monthly within 25 days Yes No
A/R and collateral audit Initial and Annual Yes No
Material revisions to operating plans and Annual Yes No
financial projections
<CAPTION>
Financial Covenants Required Actual Complies
------------------- -------- ------ --------
<S> <C> <C> <C> <C>
MAINTAIN ON A MONTHLY BASIS:
Minimum Quick Ratio - 4/30/00 and thereafter 1.5:1.0 __________:1.0 Yes No
Minimum TNW - 4/30/00 and thereafter $15,000,000 $_____________ Yes No
</TABLE>
Comments Regarding Exceptions:
Sincerely,
___________________________________ ---------------------------------------
Signature BANK USE ONLY
Received by: ________________________
___________________________________ Date: _______________________________
TITLE Reviewed by: ________________________
Compliance Status: Yes No
___________________________________ ---------------------------------------
DATE
10
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-1 of
our report dated November 22, 1999, except as to Note 13 for which the date is
April 7, 2000, relating to the financial statements of Network Engines, Inc.,
which appears in such Registration Statement. We also consent to the references
to us under the headings "Experts" and "Selected Financial Data" in such
Registration Statement.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 7, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 1,435
<SECURITIES> 0
<RECEIVABLES> 2,255
<ALLOWANCES> 227
<INVENTORY> 1,251
<CURRENT-ASSETS> 5,033
<PP&E> 1,607
<DEPRECIATION> 776
<TOTAL-ASSETS> 5,864
<CURRENT-LIABILITIES> 3,136
<BONDS> 0
12,467
0
<COMMON> 14
<OTHER-SE> (9,911)
<TOTAL-LIABILITY-AND-EQUITY> 5,864
<SALES> 6,031
<TOTAL-REVENUES> 6,031
<CGS> 4,733
<TOTAL-COSTS> 4,733
<OTHER-EXPENSES> 6,545
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (949)
<INCOME-PRETAX> (6,144)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,144)
<DISCONTINUED> 0
<EXTRAORDINARY> 314
<CHANGES> 0
<NET-INCOME> (5,830)
<EPS-BASIC> (4.57)
<EPS-DILUTED> (4.57)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 113
<SECURITIES> 0
<RECEIVABLES> 599
<ALLOWANCES> 107
<INVENTORY> 587
<CURRENT-ASSETS> 1,278
<PP&E> 881
<DEPRECIATION> 429
<TOTAL-ASSETS> 1,730
<CURRENT-LIABILITIES> 5,215
<BONDS> 0
1,000
0
<COMMON> 14
<OTHER-SE> (4,568)
<TOTAL-LIABILITY-AND-EQUITY> 1,730
<SALES> 1,102
<TOTAL-REVENUES> 1,102
<CGS> 1,591
<TOTAL-COSTS> 1,591
<OTHER-EXPENSES> 3,136
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (592)
<INCOME-PRETAX> (4,199)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,199)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,199)
<EPS-BASIC> (3.28)
<EPS-DILUTED> (3.28)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 173
<ALLOWANCES> 57
<INVENTORY> 351
<CURRENT-ASSETS> 497
<PP&E> 449
<DEPRECIATION> 247
<TOTAL-ASSETS> 699
<CURRENT-LIABILITIES> 594
<BONDS> 0
1,000
0
<COMMON> 4
<OTHER-SE> (957)
<TOTAL-LIABILITY-AND-EQUITY> 699
<SALES> 609
<TOTAL-REVENUES> 609
<CGS> 465
<TOTAL-COSTS> 465
<OTHER-EXPENSES> 1,268
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (45)
<INCOME-PRETAX> (1,157)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,157)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,157)
<EPS-BASIC> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 24,876
<SECURITIES> 0
<RECEIVABLES> 2,473
<ALLOWANCES> 258
<INVENTORY> 1,728
<CURRENT-ASSETS> 29,704
<PP&E> 1,147
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,934
<CURRENT-LIABILITIES> 4,377
<BONDS> 0
38,527
0
<COMMON> 17
<OTHER-SE> (12,116)
<TOTAL-LIABILITY-AND-EQUITY> 30,934
<SALES> 4,415
<TOTAL-REVENUES> 4,415
<CGS> 2,613
<TOTAL-COSTS> 2,613
<OTHER-EXPENSES> 3,418
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (20)
<INCOME-PRETAX> (1,586)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,586)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,586)
<EPS-BASIC> (1.75)
<EPS-DILUTED> (1.75)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 35
<SECURITIES> 0
<RECEIVABLES> 39
<ALLOWANCES> 0
<INVENTORY> 778
<CURRENT-ASSETS> 1,005
<PP&E> 445
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,454
<CURRENT-LIABILITIES> 6,459
<BONDS> 0
1,000
0
<COMMON> 5
<OTHER-SE> (6,121)
<TOTAL-LIABILITY-AND-EQUITY> 1,454
<SALES> 223
<TOTAL-REVENUES> 223
<CGS> 385
<TOTAL-COSTS> 385
<OTHER-EXPENSES> 1,078
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (932)
<INCOME-PRETAX> (2,170)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,170)
<EPS-BASIC> (1.66)
<EPS-DILUTED> (1.66)
</TABLE>
