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<SEC-DOCUMENT>0001032210-01-500822.txt : 20010717
<SEC-HEADER>0001032210-01-500822.hdr.sgml : 20010717
ACCESSION NUMBER: 0001032210-01-500822
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20010430
FILED AS OF DATE: 20010716
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CACHEFLOW INC
CENTRAL INDEX KEY: 0001095600
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572]
IRS NUMBER: 911715963
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 000-28139
FILM NUMBER: 1682003
BUSINESS ADDRESS:
STREET 1: 650 ALMANOR AVENUE
CITY: SUNNYVALE
STATE: CA
ZIP: 94086
BUSINESS PHONE: 4082202200
MAIL ADDRESS:
STREET 1: 650 ALMANOR AVE
CITY: SUNNYVALE
STATE: CA
ZIP: 94086
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d10k405.txt
<DESCRIPTION>FORM 10-K405
<TEXT>
<PAGE>
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- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended April 30, 2001
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to _________ .
Commission File Number 000-28139
----------------
CACHEFLOW INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 91-1715963
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification)
650 Almanor Avenue
Sunnyvale, California 94085
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (408) 220-2200
Securities registered pursuant to Section 12(b) of the act:
<TABLE>
<S> <C>
Title of each class Name of exchange on which registered
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the act:
Common Stock, $.0001 par value
(Title of Class)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant (based on the closing price for the Common Stock on the Nasdaq
National Market on June 30, 2001) was approximately $146,780,000.
As of June 30, 2001, there were 43,402,514 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
specified portions of the Registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's 2001 Annual Meeting of Stockholders, which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended April 30, 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CACHEFLOW, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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Page
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<C> <S> <C>
PART I.
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 22
Item 3. Legal Proceedings............................................. 23
Item 4. Submission of Matters to a Vote of Security Holders........... 23
Item 4A. Executive Officers of the Registrant.......................... 23
PART II.
Item 5. Market for Registrant's Common Stock and Related Stockholder 24
Matters.......................................................
Item 6. Selected Financial Data....................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition 26
and Results of Operations.....................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 33
Item 8. Financial Statements and Supplementary Data................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting 59
and Financial Disclosure......................................
PART III.
Item 10. Directors and Executive Officers of the Registrant............ 59
Item 11. Executive Compensation........................................ 59
Item 12. Security Ownership of Certain Beneficial Owners and 59
Management....................................................
Item 13. Certain Relationships and Related Transactions................ 59
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8- 60
K.............................................................
Signatures.................................................... 63
</TABLE>
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PART I.
ITEM 1. BUSINESS
The discussion in this report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, including
statements on our expectations, beliefs, intentions or strategies regarding the
future. All forward-looking statements included in this document are based on
information available to us on the date hereof. We assume no obligation to
update any such forward-looking statements. Our actual results could differ
materially from those indicated in such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, changes in macroeconomic conditions, fluctuations in quarterly operating
results, uncertainty in future operating results, litigation, product
concentration, competition, technological changes, management of our growth and
expansion, integration of acquisitions, key employee transitions and other
risks discussed in this item under the heading "Factors Affecting Future
Operating Results" and the risks discussed in our other Securities and Exchange
Commission filings.
Overview
CacheFlow Inc., a Delaware corporation also referred to in this report as
"we" or the "Company", was formed on March 16, 1996. We are focused on content-
smart networking, which is a new layer of infrastructure for intelligently
accelerating, delivering, and managing static, streaming, dynamic, and
application content. To address this new and evolving market, we operate in one
segment to design, develop and market caching appliances and content delivery
technologies that are purpose-built to accelerate and optimize the delivery of
content to end-users over TCP/IP networks. Our products are designed to enable
enterprises and service providers to deliver the right content to the right
place at the right time. We began commercial shipment of our first products, a
line of high-performance caching appliances, in May 1998. Since that time, we
have introduced other caching appliances, which have a variety of
configurations that are designed for the different price, performance, capacity
and reliability requirements of our customers. The list prices of these
appliances increase as they become more highly configured. Substantially all of
our net sales through April 30, 2001 were attributable to sales of our caching
appliance products.
Industry Background
The Internet is significantly changing the way businesses and individuals
communicate and conduct commerce. As a result, the type of content and the
volume of traffic flowing over the Internet are increasing dramatically. With
these expanding types of content and these high volumes of traffic, Internet
and Intranet infrastructures are quickly reaching capacity. Slow response times
and site outages due to heavy demand are common outcomes of these overburdened
network infrastructures. For organizations that rely on these networks for
commerce and/or operational purposes, these problems can be expected to have a
direct, adverse impact on both the top and bottom lines.
By implementing caching technology, these organizations can effectively
address the problems of performance, scalability and management. Caching
enhances how content is delivered, either moving it closer to the requesting
users or accelerating it outward from the web site. There are two primary types
of caching solutions: software-based and appliance. Software-based approaches
consist of a caching software application running on general-purpose hardware
and a general-purpose operating system like Solaris, Linux or Windows 2000.
While these systems offer flexibility, they suffer from complex administration
and potential security breaches of these operating systems.
Much as network routing evolved from a general-purpose to a purpose-built
solution, so has caching. Caching appliances are self-contained solutions,
combining hardware and software that are expressly built for
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caching. The advantages of a specialized appliance are clear. When a device is
designed to perform a dedicated task, it will perform that task more
effectively than a multi-function alternative. The benefits of an appliance
approach to caching are significant: reduced web response times, easier
administration and management, lower network and data center costs, higher
reliability, robust data security and more accurate content.
While caching appliances have emerged as an effective solution to address
existing problems, new types of content like streaming media and web-enabled
applications have pushed existing networks past their limits, slowing
innovation and growth. More bandwidth alone cannot adequately address the
requirements for emerging content demands. Solving this problem requires a more
intelligent infrastructure that combines caching appliances with additional
hardware and software to create a Content Delivery Network (CDN). The essential
ingredients of a CDN, include content acceleration, content management, and
content routing, coupled with content intelligence to enable networks to
intelligently communicate between devices, adapt to usage patterns and
personalize content.
The CacheFlow Solution
CacheFlow designs, develops and markets caching appliances and content
delivery technologies that are purpose-built to accelerate and enhance the
delivery of content to end-users over TCP/IP networks. Our products improve
response time for users and provide network administrators and managers a high
degree of control over the access, flow and delivery of content. Our products
also reduce the number of redundant requests for information that must be
processed and delivered, thus reducing the load on the Internet and corporate
networks. The principal benefits of our caching appliances include:
High Performance. Our purpose-built appliances were designed from
inception for high-performance caching. Our appliances provide high data
throughput and reduce latency, which is the time between initiating a
request for data and the completion of the actual data transfer. Even
content that is not stored in our caching appliances is accelerated when
the request for that content goes through a CacheFlow appliance, since our
appliances simultaneously retrieve numerous objects from the origin server.
In many cases, our appliances double the speed of content delivery.
Ease of Installation and Management. Our products are designed for easy
installation and maintenance, reducing the cost and time required for
implementation and use. Network managers at enterprises and service
providers generally install our appliances in the same racks that hold
their servers and other network equipment. All of our products provide
customers with a range of management features, functions, user interfaces
and modes of operation. In addition, the software and operating systems of
our appliances are designed to efficiently interact with our customers'
existing networking equipment.
Attractive Return on Investment. By allowing content to be served from a
cache located closer to the user, instead of the origin server, our
customers employing our caching appliances require less network capacity
and can reduce data transmission costs. Our customers better utilize the
capacity of their existing network since redundant traffic is removed from
the network and served from the cache. The need for enterprises engaged in
e-commerce to purchase additional servers can be reduced since our caching
appliances eliminate a significant amount of traffic that could otherwise
overload their existing servers. Our products also help to improve the
productivity of Internet users by reducing web response time. Faster
downloading of web content increases productivity and end-user
satisfaction.
Security. Our appliances run on Cache OS, a proprietary and purpose-
built operating system. CacheOS is designed to be less vulnerable to
unauthorized entry than caches based on more commonly understood, general-
purpose operating systems, such as Solaris, Linux or Windows 2000. Because
it was designed specifically for caching, CacheOS consists of far fewer
lines of code than general-purpose operating systems, creating fewer
potential bugs and fewer potential ways to break into the operating system.
In addition, CacheOS employs authentication and filtering capabilities that
limit unauthorized users from accessing or penetrating through the cache.
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Broad Product Suite. Our customers have varying capacity, reliability
and data throughput needs, depending on the size and nature of their
operations. We offer a wide range of products to meet different price,
performance and reliability requirements, and provide an upgrade path to
our customers as they expand their networks. Our products can be deployed
in a variety of environments, ranging from small or remote network
locations to large service providers or enterprise headquarters.
Delivery of Fresh Web Content. Moving content closer to the user
increases network efficiency, but creates the risk that the content
delivered is not up-to-date, or fresh. Caching appliances store content,
but do not originate or own that content, so in order to provide fresh
content, caches must monitor the source of content for changes. Unlike
traditional caches that have no mechanisms to monitor and ensure freshness,
our caching appliances actively check the origin servers and update content
through efficient and sophisticated algorithms that monitor user activity
and the frequency with which source content is changed without requiring
additional capacity or adversely affecting response time. These algorithms
are managed through a control mechanism that allows the network
administrator to easily set the level of freshness delivered by the cache.
The algorithms are self-adapting based on the administrative settings.
Ability to Manage the Flow of Content. Our caching appliances are
installed at points in the customer's infrastructure where all of the
content being requested by a user can flow through our appliances. Our
appliances are able to take advantage of their placement at this network
juncture to provide a range of additional value-added services, including
user authentication, content filtering, user tracking and control of cached
content.
To address the emergence of new types of content like streaming media and
web-enabled applications, CacheFlow is developing a comprehensive product
architecture called cIQ. cIQ is a collection of algorithms and extensible
protocols that enable intelligent communication between caching devices,
adaptation to content and user behavior patterns and customization of content
according to device, network and user type. In addition, cIQ will enable
advanced network services and content processing capabilities such as content
enhancement, personalization, and transformation, secure distribution and
authentication, and user-based policy definition, distribution and enforcement.
cIQ-powered components to be offered by CacheFlow comprise the cIQ Content
Delivery Architecture, a comprehensive architecture for building CDNs. The cIQ
Content Delivery Architecture combines the essential ingredients of a CDN,
including content acceleration, content management, and content routing, with
the content intelligence of cIQ to enable networks to intelligently communicate
between devices, adapt to usage patterns and personalize content.
CacheFlow's end-to-end product portfolio includes optimized edge and server
accelerators, network-based content management and distribution devices, Real,
Microsoft, Apple and MPEG 4 streaming services, Websense and Secure filtering
extensions, and SSL encryption and acceleration technology.
Customers and Applications
The Company generally classifies its customers into two broad categories,
enterprises and service providers. Enterprises typically use our products as a
replacement for proxy servers, for handling e-commerce related traffic, and to
deliver new types of content to their end users. Service providers typically
use our products to reduce their operating costs by improving their use of
network capacity or facilities (i.e., bandwidth gain), or to help generate new
sources of revenue from content providers and/or content consumers
(e.g. broadband services, web hosting, content distribution, etc.). Backlog for
products ordered but not yet shipped was $7.5 million, $14.1 million and none
for the three years ended April 30, 2001, 2000, and 1999.
No customers accounted for more than 10% of our net sales for the years
ended April 30, 2001 and 2000. Three customers individually accounted for over
10% of our net sales, for an aggregate of approximately 33% of our net sales
for the year ended April 30, 1999.
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Enterprises
Proxy Server Replacement: The amount of data traffic over many enterprise
networks has increased significantly. For many enterprises, exchanging and
accessing information over their intranets and from the Internet is a
strategically important tool in increasing productivity. With this dependence
on remote sources of information, enterprises face a number of risks, including
end user access to inappropriate content, unauthorized outside entities gaining
access to their networks, unpredictable network traffic volumes, and new
traffic types that, if not controlled, could have adverse effects on network
capacity and performance. Proxy servers are devices that allow the network
administrator to implement corporate policies to control the flow of
information in and out of the network. However, the growth in data traffic in
large enterprises has outpaced the growth in proxy server capacity, forcing
many network administrators to choose between accommodating growth and
maintaining control. The growth in Internet usage has created a number of
difficulties with the performance, management and reliability of existing proxy
server solutions. Our caching appliances are designed to replace proxy servers
in enterprise networks, enabling Web-dependent organizations to improve the
performance of their networks.
Web Server Acceleration: Many organizations have come to rely on their web
sites as a means of attracting new customers and generating additional revenue.
Increased business use of the Internet, coupled with the widespread adoption of
e-commerce by consumers, has resulted in large amounts of traffic flowing to e-
commerce sites. Many organizations' current network infrastructures are
incapable of handling this increase in traffic, resulting in overburdened
firewalls, which are network security systems, and e-commerce servers, which
are used to process commercial transactions over the Internet, resulting in
fewer transactions per day for the e-commerce site. Furthermore, slower
response times and poor quality of service can lead consumers to become
dissatisfied with the e-commerce experience and either stop making web
purchases or go to a competitor's web site where performance is better, which
can result in a loss of potential revenues.
Deploying caching appliances as part of an e-commerce infrastructure
solution can improve capacity, throughput and response times, while helping to
reduce costs. By storing and delivering frequently requested content from
caching appliances deployed at the network boundary, congested e-commerce sites
can decrease the traffic load from Web servers and firewalls. This can result
in a network that can serve more Web pages faster, improving the end-user
experience and enabling the infrastructure to support more transactions.
Streaming Intranet: The adoption of streaming technology is transforming the
Web from a static medium into a rich multimedia experience. Streaming media
enables better communication with globally distributed employees, suppliers and
customers. With it, enterprises can leverage interactive content for business
applications such as product launches, corporate communications, distance
learning, employee training and earnings announcements. Poor video and audio
quality, however, defeat the purpose of multimedia interaction. Existing
networks weren't designed for streaming applications. An effective
infrastructure must guarantee performance through distribution and
acceleration. Adding bandwidth and server capacity not only is prohibitively
expensive and difficult to manage, but fails to move content closer to users.
CacheFlow provides the infrastructure capability streaming content needs--speed
and intelligent distribution.
Service Providers
Competition in the service provider market is intense. As a result, service
providers are consistently looking for competitive advantage. Competitive
advantage typically comes in one of two forms, reduced operating costs that
contribute to improved profitability, or additional value added services that
become incremental sources of revenue.
Bandwidth Gain Reduces Service Provider Operating Costs: Our caching
appliances store and serve the most frequently requested Internet content
closer to the users requesting that content. By deploying our products
throughout their network, service providers can increase the number of
customers they can service without adding to the traffic levels on their
backbone, or without adding to the network capacity that they purchase from
other service providers. This "bandwidth gain" allows them to improve quality
of service for
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existing customers and provide the infrastructure to scale for new customer
additions, all while preserving valuable network capacity and in turn
controlling operating costs.
Value Added Services Attract More Revenues: Content hosting service
providers are seeking to capitalize on the growth of e-commerce. These
companies manage the e-commerce infrastructure and networks for third party
content providers, allowing them to focus on content and customers rather than
network management. Content hosting providers are using caching to accelerate
the performance of their hosted customers' e-commerce sites. To generate
performance improvements, service providers deploy caching appliances in
various geographically dispersed data center locations and distribute site
content to these caches. When an online user accesses a Web site, they are
actually directed to the cache in close proximity to their location. Since
content does not have to travel through as many network points to reach its
destination, users experience faster response times, resulting in a more
productive web experience.
Products
All of our products are designed as integrated appliances, combining
specialized hardware platforms with our tightly coupled CacheOS operating
system. Streamlined and efficient, CacheOS leverages a number of patent
algorithms to minimize the response time for the delivery of web pages while
ensuring high standards of content freshness. We have specialized our products
around several attributes, including type of content (traditional web or
streaming), type of customer (enterprise or service provider), and type of
deployment (server accelerator or edge accelerator). These specializations
allow us to meet the different price, performance, capacity, feature set, and
reliability requirements of both our customers and our potential customers in
each of our target market segments. Current products include:
Edge Accelerators. Edge accelerators enable organizations to effectively
manage, distribute and accelerate content with high levels of speed and
efficiency. They are deployed between users and the Internet, and
intelligently manage requests for Web and multimedia content. Edge
accelerators also provide advanced content filtering services to allow
users access to appropriate content only through policies set by the
enterprise or service provider.
. 600 Series--The CA-600 Series of edge accelerators are used by
enterprises, service providers and other organizations to manage and
control Web traffic growth and accelerate the delivery of content to end
users. These products deliver high levels of performance, manageability
and scalability and feature a compact design to provide a major
advantage in space-constrained data centers and enterprise environments.
The CA-600 Series products can be installed in minutes and require
little maintenance.
. 6000 Series--The CA-6000 Series of edge accelerators consists of high
performance content delivery solutions for enterprises, service
providers, educational institutions and government agencies. These high-
end edge accelerator products deliver robust performance and reliability
for data center locations and other sites where high-bandwidth and
throughput is required. The CA-6000 Series supports up to 200 Mbps,
offers multiple levels of redundancy, and requires little maintenance.
Server Accelerators. Server accelerators are specifically designed to
improve the performance, scalability, security and manageability of high-
traffic Web sites. They feature a high RAM-to-disk ratio and a built-in
Secure Sockets Layer encryption/decryption processor. This processor can
manage 10-40 times more secure sessions than a standard Web server,
allowing for the acceleration of both public (HTTP) and private (HTTPS)
content. The system software, called CacheOSTM Server Edition, is expressly
tuned for the workload of a high-traffic Web site. This environment is
characterized by a finite amount of site content and access by millions of
users from around the world--dimensions that are exactly opposite of
traditional caching scenarios. Further, the software includes advanced
features like an intelligent "Akamaizer", which automatically prepares
content for the Akamai FreeFlowSM network, and protection against denial-
of-service attacks.
. 700 Series--The SA-700 Series of server accelerators are engineered to
accelerate and scale Web sites with throughput requirements of up to 100
Mbps. These products are packaged in a
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compact design, a major advantage in space-constrained data centers.
The SA-700 Series accelerators integrate seamlessly with a site's
existing systems, are quickly installed, and easy to maintain.
. 7000 Series--The SA-7000 Series is expressly tuned for the workload of a
high-traffic, business-critical Web site with throughput requirements of
up to 400 Mbps. Deployed in minutes "in front of" any Web server, the
SA-7000 dramatically accelerates the delivery of Web content to users
and serves five to ten times the content of a single Web server.
Future Products
cIQ Director. Currently in beta testing, cIQ Director will be an open
distribution management system that integrates hardware and software into an
easy-to-use appliance form factor. cIQ Director is being designed specifically
to manage, distribute and synchronize static, dynamic, secure, application and
multimedia content from the data center to the network edge. cIQ Director is
being designed to provide:
. a single point for securely managing HTTP, HTTPS, FTP and Streaming
content;
. an open, extensible platform that integrates customized services for
intelligent content distribution;
. an entry-point for customized integration with backend systems, such as
billing, storage, or publishing environments;
. a highly reliable and scalable solution for pushing, deleting and
verifying content within the network;
. a centralized point for configuring a network of content-smart
appliances;
. the ability to perform scheduled or ad-hoc content management tasks; and
. logging and reporting of all management activities.
The CacheFlow Strategy
Our objective is to be the leading provider of content-smart networking
solutions by delivering high-performance, innovative caching appliances and
content delivery technologies. Key elements of our strategy include the
following:
Apply our Content Delivery Focus to Targeted Market Segments. Since our
inception, we have focused exclusively on developing caching appliances. We
believe this exclusive focus helps us to rapidly identify and target
attractive market opportunities. We are directing our product development,
marketing and sales activities at specific market segments that we believe
represent attractive opportunities based on a demonstrated need for
caching, the opportunity to sell to numerous customers and the level of
existing competition. We are focused on two market segments: enterprises
and service providers. We intend to use our customer relationships in these
market segments to further penetrate these segments as well as other
related markets.
Enhance Capabilities of our Appliances. We intend to use our
technological expertise to meet the needs of the evolving Internet
acceleration and content delivery market. We plan to continue to develop
both the software and hardware elements of our solution to gain and
maintain a competitive advantage and expand the market for our products.
Our additional efforts to enhance the capabilities of our appliances
include adding more functionality to control the flow of content,
customizing hardware and software to improve performance and developing
enhancements to improve ease of deployment.
Build the CacheFlow Brand. We intend to establish CacheFlow as the
premier brand in the content-smart networking market. We believe that brand
awareness is important to increase market acceptance of caching appliances
generally and to identify us as a leading provider of content-smart
networking solutions. We intend to continue to educate customers,
resellers, systems integrators and original equipment manufacturers about
the value of implementing caching appliances. We believe a thorough
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process of explanation and education of our products will help to promote
brand recognition and to further an overall acceptance and understanding of
content-smart networking. To this end, we intend to continue our
investments in a broad range of marketing and educational programs.
Sales and Marketing
We utilize a combination of our direct sales force, resellers, systems
integrators and distributors as appropriate for each of our target markets. We
believe it is important to maintain our strong international presence and
continue to develop products and services to address international markets. We
support our distribution channels with systems engineers and customer support
personnel that provide technical service and support to our customers. We have
entered into agreements with resellers and network equipment providers such as
Alcatel, CSC, EDS, EMC, Hewlett Packard, Lucent Technologies, Nissho
Electronics, Sumitronics and WestCon. Our marketing efforts focus on increasing
market awareness of our products and technology and on promoting the CacheFlow
brand. Our strategy is to create this awareness through marketing programs that
distinguish our products based on their high level of performance. We have a
number of marketing programs to support the sale and distribution of our
products and to inform existing and potential customers within our target
market segments about the capabilities and benefits of our products. Our
marketing efforts include participation in industry tradeshows, preparation of
competitive analyses, sales training, maintenance of our web site, advertising
and public relations.
Research and Development
We believe that strong product development capabilities are essential to the
continued success and growth of the company. Our research and development
efforts are focused on developing new products as well as improvements and
enhancements to our existing products. Research and development expenses were
$27.7 million, $9.6 million, and $4.0 million for the fiscal years ended April
30, 2001, 2000, and 1999.
Our research and development team consists of engineers with extensive
backgrounds in operating systems, algorithms, computer science, streaming media
and network engineering. We believe that the experience and capabilities of our
research and development professionals represents a competitive advantage for
CacheFlow. In June 2000 the Company acquired SpringBank Networks and in
December 2000 the company acquired Entera, Inc., adding additional engineers to
our staff as well as complimentary technology. We also work closely with our
customers in developing and enhancing our products. Our current research and
development efforts are primarily focused on three strategic initiatives:
. developing our next generation of caching appliances, operating system
and content delivery technologies;
. improving the performance of our current caching appliances, including
data throughput and response time; and
. enhancing the capabilities of our current caching appliances by adding
new features and strengthening existing features.
The market for caching appliances and content delivery technologies is
evolving rapidly. In order to stay competitive, we must make significant
investments in research and development based on what we perceive to be the
direction of the market. We currently spend a significant amount of our
resources on research and development projects and plan to continue to do so
for the foreseeable future. Current research and development projects will
enhance the company's position in the marketplace only if the content delivery
market matures as we anticipate. Failure on our part to anticipate the
direction of the market and develop product that meets those emerging needs
will significantly impair our business and operating results and our financial
condition will be materially adversely affected.
We expect that most of the enhancements to our existing and future products
will be accomplished by a combination of internal development and acquisition.
However, we currently license some technologies and will continue to evaluate
externally developed solutions for integration into our products.
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Manufacturing
We currently outsource the manufacturing of all of the subassemblies and
components of our Internet caching appliances, including printed circuit
boards, custom power supplies, chassis, cables and subassemblies, to third
parties, and we also outsource the majority of final assembly and testing to a
third party assembler. This approach allows us to reduce our investment in
manufacturing capital and to take advantage of the expertise of our vendors.
Our internal manufacturing operations consist primarily of prototype
development, materials planning and procurement, some final assembly, testing
and quality control for a small portion of our newer products. Our standard
parts and components are generally available from more than one vendor. We
typically obtain these components through purchase orders and currently do not
have contractual relationships or guaranteed supply arrangements with these
suppliers. If one of these vendors ceased to provide us with necessary parts
and components, we would likely encounter delays in product production as we
make the transition to another vendor, which would seriously harm our business.
Furthermore, if actual orders do not match our forecasts as we experienced in
the second half of fiscal year 2001, we may have excess or inadequate inventory
of some materials and components or we could incur cancellation charges or
penalties, which would increase our costs or prevent or delay product shipments
and could seriously harm our business.
Competition
The market for caching appliances is intensely competitive, evolving and
subject to rapid technological change. Primary competitive factors that have
typically affected our market include product features such as response time,
capacity, reliability, scalability, and ease of use, as well as price and
customer support. More recently, added functionality that enables customers to
manage and distribute richer, more dynamic forms of Web content (images,
streaming video, etc.) has become an increasingly important competitive factor
in our market. The intensity of this competition is expected to increase in the
future. Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share, any one of which could seriously harm
our business. We may not be able to compete successfully against current or
future competitors and we cannot be certain that competitive pressures we face
will not seriously harm our business. Our competitors vary in size and in the
scope and breadth of the products and services they offer. We encounter
competition from a variety of companies, primarily including Cisco Systems,
Inktomi, Network Appliance, Volera, and various others using publicly
available, free software. In addition, we expect additional competition from
other established and emerging companies as the market for content-smart
networking continues to develop and expand.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base
of customers than we do. In addition, many of our competitors have well-
established relationships with our current and potential customers and have
extensive knowledge of our industry. As a result, our competitors may be able
to respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, marketing,
promotion and sale of their products than we can. Current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the market acceptance of their
products. In addition, our competitors may be able to replicate our products,
make more attractive offers to existing and potential employees and strategic
partners, more quickly develop new products or enhance existing products and
services, or bundle caching appliances in a manner that we cannot provide.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidation.
Intellectual Property and Other Proprietary Rights
We depend significantly on our ability to develop and maintain the
proprietary aspects of our technology. To protect our proprietary technology,
we rely primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets, copyright and trademark laws and patents. Despite
our efforts to
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protect our proprietary rights, unauthorized parties may attempt to copy
aspects of our products or obtain and use information that we regard as
proprietary. Policing unauthorized use of our products is difficult. In
addition, the laws of some foreign countries do not protect our proprietary
rights to as great an extent as do the laws of the United States. Our means of
protecting our proprietary rights may not be adequate and our competitors may
independently develop similar technology, duplicate our products or design
around patents that may be issued to us or our other intellectual property.
We presently have two issued patents, pending United States patent
applications and several pending patent applications in foreign patent offices.
Even when patents are issued, we cannot assure you that we will be able to
detect any infringement or, if infringement is detected, that patents issued
will be enforceable or that any damages awarded to us will be sufficient to
adequately compensate us.
There can be no assurance or guarantee that any products, services or
technologies that we are presently developing, or will develop in the future,
will result in intellectual property that is protectable under law, whether in
the United States or a foreign jurisdiction, that this intellectual property
will produce competitive advantage for us, or that the intellectual property of
competitors will not restrict our freedom to operate or put us at a competitive
disadvantage.
We rely on technology that we license from third parties, including software
that is integrated with internally developed software and used in CacheOS to
perform key functions. For example, we license subscription-filtering
technology from Secure Computing. If we are unable to continue to license any
of this software on commercially reasonable terms, we will face delays in
releases of our software or will be required to drop this functionality from
our software until equivalent technology can be identified, licensed or
developed, and integrated into our current product. Any of these delays could
seriously harm our business.
There has been a substantial amount of litigation in the technology industry
regarding intellectual property rights. It is possible that third parties may
claim that we, or our current or potential future products, infringe their
intellectual property. We expect that companies in the Internet and networking
industries will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows and the functionality of
products in different industry segments overlaps. Any claims, with or without
merit, could be time-consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, which could seriously harm our business.
Employees
As of April 30, 2001, we had a total of 496 employees, comprised of 204 in
research and development, 167 in sales, 10 in marketing, 34 in customer
support, 26 in manufacturing and 55 in general and administrative. Of these
employees, 405 were located in North America with 91 located internationally.
None of our employees is represented by collective bargaining agreements, nor
have we experienced any work stoppages. We consider our relations with our
employees to be good.
Our future operating results depend significantly upon the continued service
of our key technical, sales and senior management personnel, many of who are
not bound by an employment agreement. Competition for these personnel is
intense, and we may not be able to retain them in the future. Our future
success also depends upon our continuing ability to attract and retain highly
qualified individuals. We may experience difficulties managing our financial
and operating performance if we are unable to attract and retain qualified
personnel.
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FACTORS AFFECTING FUTURE OPERATING RESULTS
The discussion in this report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, including
statements on our expectations, beliefs, intentions or strategies regarding
the future. All forward-looking statements included in this document are based
on information available to us on the date hereof. We assume no obligation to
update any such forward-looking statements. Our actual results could differ
materially from those indicated in such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not
limited to, changes in macroeconomic conditions, fluctuations in quarterly
operating results, uncertainty in future operating results, litigation,
product concentration, competition, technological changes, management of our
growth and expansion, integration of acquisitions, key employee transitions
and other risks discussed in this item under the heading "Factors Affecting
Future Operating Results" and the risks discussed in our other Securities and
Exchange Commission filings.
Our business, financial condition and results of operations could be
seriously harmed by any of the following risks. The trading price of our
common stock could decline due to any of these risks.
Risks Related to Macroeconomic Conditions
A continued downturn in macroeconomic conditions could adversely impact our
existing and potential customers' ability and willingness to purchase our
products, which would cause a decline in our sales.
U.S. economic growth slowed significantly in the past several months. In
addition, there is uncertainty relating to the prospects for near-term U.S.
economic growth, as well as uncertainty as to whether the U.S. slowdown will
impact international markets. This slowdown and uncertainty contributed to
delays in decision-making by our existing and potential customers and a
resulting decline in our sales in the second half of fiscal 2001. Continued
uncertainty or a continued slowdown could result in a further decline in our
sales and our operating results could again be below the expectations of
public market analysts and investors. Our stock price has materially declined
as a result of our most recent quarterly operating results, and our stock
price may continue to decline in the event that we fail to meet the
expectations of public market analysts or investors in the future.
Risks Related to the Content-Smart Networking Market
The market for content-smart networking solutions is relatively new and
rapidly evolving, and if this market does not develop as we anticipate, our
sales may not grow and may even decline.
Sales of our products depend on increased demand for content-smart
networking solutions. The market for content-smart networking solutions is a
new and rapidly evolving market. If the market for content-smart networking
solutions fails to grow as we anticipate, or grows more slowly than we
anticipate, our business will be seriously harmed. In addition, our business
will be harmed if the market for content-smart networking solutions continues
to be negatively impacted by uncertainty surrounding macro-economic growth.
Because this market is new, we cannot predict its potential size or future
growth rate.
The increases in our research and development spending reflect our belief
that to maintain our competitive position in a market characterized by rapid
rates of technological advancement, we must continue to invest significant
resources in research and development. There is no guarantee that we will
accurately predict the direction in which the content-smart networking market
will evolve. Failure on our part to anticipate the direction of the market and
develop products that meet those emerging needs will significantly impair our
business and operating results and our financial condition will be materially
adversely affected.
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We are entirely dependent on market acceptance of our content-smart
networking solutions and, as a result, lack of market acceptance of these
solutions could cause our sales to fall.
To date, our content-smart networking products and related services have
accounted for all of our net sales. We anticipate that revenues from our
current product family and services will continue to constitute substantially
all of our net sales for the foreseeable future. As a result, a decline in the
prices of, or demand for, our current product family and services, or their
failure to achieve broad market acceptance, would seriously harm our business.
As of April 30, 2001, the CacheFlow 600, 700, 6000, and 7000 Series products
are the only products that we currently sell. Our CacheFlow 100 and 500 Series
products, which have historically accounted for a substantial portion of our
net sales, have been discontinued and replaced by our CacheFlow 600 and
700 Series products that were introduced in September 2000. The 6000 and 7000
Series products that were introduced in November 2000 replaced our CacheFlow
3000 and 5000 Series products, which have also historically accounted for a
significant portion of our net sales. We cannot be certain that our CacheFlow
600, 700, 6000 or 7000 Series products will continue to achieve any
significant degree of market acceptance.
We expect increased competition and, if we do not compete effectively, we
could experience a loss in our market share and sales.
The market for content-smart networking solutions is intensely competitive,
evolving and subject to rapid technological change. Primary competitive
factors that have typically affected our market include product features such
as response time, capacity, reliability, scalability, and ease of use, as well
as price and customer support. More recently, added functionality that enables
customers to manage and distribute richer, more dynamic forms of Web content
(images, streaming video, etc.) has become an increasingly important
competitive factor in our market. The intensity of competition is expected to
increase in the future. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any one of which
could seriously harm our business. We may not be able to compete successfully
against current or future competitors and we cannot be certain that
competitive pressures we face will not seriously harm our business. Our
competitors vary in size and in the scope and breadth of the products and
services they offer. We encounter competition from a variety of companies,
including primarily Cisco Systems, Inktomi, Network Appliance, Volera, and
various others using publicly available, free software. In addition, we expect
additional competition from other established and emerging companies as the
market for content-smart networking continues to develop and expand.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base
of customers than we do. In addition, many of our competitors have well-
established relationships with our current and potential customers and have
extensive knowledge of our industry. As a result, our competitors may be able
to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
marketing, promotion and sale of their products than we can. The products of
our competitors may have features and functionality that our products do not
have. Current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
the market acceptance of their products. In addition, our competitors may be
able to replicate our products, make more attractive offers to existing and
potential employees and strategic partners, more quickly develop new products
or enhance existing products and services, or bundle content-smart networking
solutions in a manner that we cannot provide. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that competition will increase as a
result of industry consolidation.
Risks Related to Our Business Execution
If we are unable to introduce new products and services that achieve market
acceptance quickly, we could lose existing and potential customers and our
sales would decrease.
We need to develop and introduce new products and enhancements to existing
products on a timely basis that keep pace with technological developments and
emerging industry standards and address the increasingly
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sophisticated needs of our customers. We intend to extend the offerings under
our product family in the future, both by introducing new products and by
introducing enhancements to our existing products. However, we may experience
difficulties in doing so, and our inability to timely and cost-effectively
introduce new products and product enhancements, or the failure of these new
products or enhancements to achieve market acceptance, could seriously harm our
business. Life cycles of our products are difficult to predict, because the
market for our products is new and evolving and characterized by rapid
technological change, frequent enhancements to existing products and new
product introductions, changing customer needs and evolving industry standards.
The introduction of competing products that employ new technologies and
emerging industry standards could render our products and services obsolete and
unmarketable or shorten the life cycles of our products and services. The
emergence of new industry standards might require us to redesign our products.
If our products are not in compliance with industry standards that become
widespread, our customers and potential customers may not purchase our
products.
We are dependent upon key personnel and we must attract, assimilate and retain
other highly qualified personnel in the future or our ability to execute our
business strategy or generate sales could be harmed.
Our business could be seriously disrupted if we do not maintain the
continued service of our senior management, research and development and sales
personnel. We have experienced and may continue to experience transition in our
management team. The chairman of the board, the chief technology officer, and
the chief financial officer have been in their positions six months or less.
All of our employees are employed on an "at-will" basis. Our ability to conduct
our business also depends on our continuing ability to attract, hire, train and
retain a number of highly skilled managerial, technical, sales, marketing and
customer support personnel. New hires frequently require extensive training
before they achieve desired levels of productivity, so a high employee turnover
rate could seriously impair our ability to operate and manage our business. We
are particularly dependent on retaining and potentially hiring additional
personnel to increase our research and development organization. Competition
for personnel is intense, especially in the San Francisco Bay Area, and we may
fail to retain our key employees, or attract, assimilate or retain other highly
qualified personnel in the future. If so, our business would be seriously
harmed.
Our variable sales cycle makes it difficult to predict the timing of a sale or
whether a sale will be made, which makes our quarterly operating results less
predictable.
Because customers have differing views on the strategic importance of
implementing content-smart networking solutions, the time required to educate
customers and sell our products can vary widely. As a result, the evaluation,
testing, implementation and acceptance procedures undertaken by customers can
vary, resulting in a variable sales cycle, which typically ranges from two to
nine months. While our customers are evaluating our products and before they
place an order with us, we may incur substantial sales and marketing expenses
and expend significant management efforts. In addition, purchases of our
products are frequently subject to unplanned processing and other delays,
particularly with respect to larger customers for whom our products represent a
very small percentage of their overall purchase activity. Large customers
typically require approvals at a number of management levels within their
organizations, and, therefore, frequently have longer sales cycles. The
increasingly complex technological issues associated with content-smart
networking solutions, combined with the macro-economic slowdown, contributed to
longer sales cycles in the second half of fiscal year 2001 and a resulting
decline in our sequential quarterly sales. We may experience order deferrals or
loss of sales as a result of lengthening sales cycles.
Revenues in any future quarter may be adversely affected to the extent we
defer recognizing revenue from contracts booked in that quarter.
In the future, we may enter into contracts where we recognize only a portion
of the potential revenue under the contract in the quarter in which we enter
into the contract. For example, we may enter into contracts where the
recognition of revenue is conditioned upon delivery of future elements. As a
result, revenues in any given quarter may be adversely affected to the extent
we enter into contracts where revenue under those contracts must be recognized
in future periods.
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Because we expect our sales to fluctuate and our costs are relatively fixed
in the short term, our ability to forecast our quarterly operating results is
limited, and if our quarterly operating results are below the expectations of
analysts or investors, the market price of our common stock may decline.
Our net sales and operating results are likely to vary significantly from
quarter to quarter. We believe that quarter-to-quarter comparisons of our
operating results should not be relied upon as indicators of future
performance. Our operating results were significantly below the expectations
of public market analysts for the quarter ended January 31, 2001. It is likely
that in some future quarter or quarters, our operating results will again be
below the expectations of public market analysts or investors. When this
occurs, the price of our common stock could decrease significantly. A number
of factors are likely to cause variations in our net sales and operating
results, including factors described elsewhere in this "Factors Affecting
Future Operating Results" section.
We cannot reliably forecast our future quarterly sales for several reasons,
including:
. we have a limited operating history, and the market in which we compete
is relatively new and rapidly evolving;
. our sales cycle varies substantially from customer to customer; and
. our sales cycle has been lengthening as the complexity of content-smart
networking solutions continues to increase.
A high percentage of our expenses, including those related to research and
development, sales and marketing, general and administrative functions and
amortization of deferred compensation and goodwill, are essentially fixed in
the short term. As a result, if our net sales are less than forecasted, our
quarterly operating results are likely to be seriously harmed and our stock
price would likely decline.
If we fail to expand and manage existing sales channels or create additional
sales capabilities, our sales will not grow.
While we recently reduced our direct sales force in response to current
market conditions, we will continually evaluate and modify our current
distribution strategy to meet market requirements. Any direct channel new hire
or new distribution partner will require extensive training and typically take
several months to achieve productivity. Competition for qualified sales
personnel and distribution partners is intense, and we might not be able to
hire the kind and number of candidates we are targeting. If we fail to expand
and manage existing sales channels or create additional sales capabilities,
our business will be seriously harmed.
Many of our indirect channel partners do not have minimum purchase or
resale requirements and carry products that are competitive with our products.
These resellers may not give a high priority to the marketing of our products
or may not continue to carry our products. They may give a higher priority to
other products, including the products of competitors. We may not retain any
of our current indirect channel partners or successfully recruit new indirect
channel partners. Events or occurrences of this nature could seriously harm
our business.
We may not be able to enter into new international markets or continue to
generate a significant level of sales from the international markets in which
we currently operate.
For the year ended April 30, 2001, sales to customers outside of the United
States and Canada accounted for approximately 59% of our net sales. We expect
international customers to continue to account for a significant percentage of
net sales in the future, but we may fail to maintain or increase international
market demand for our products. Also, because our international sales are
currently denominated in United States dollars, an increase in the value of
the United States dollar relative to foreign currencies could make our
products more expensive and, therefore, potentially less competitive in
international markets, and this would decrease our international sales. Our
ability to generate international sales depends on our ability to maintain
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our international operations, including efficient use of existing resources and
effective channel management, and recruit additional international resellers.
To the extent we are unable to do so in a timely manner, our growth, if any, in
international sales will be limited and our business could be seriously harmed.
In addition, if we fail to improve our worldwide operating systems, our ability
to accurately forecast sales demand, manage our supply chain and record and
report financial and management information will be adversely affected,
seriously harming our business.
We have a history of losses, expect to incur future losses and may never
achieve profitability, which could result in the decline of the market price
of our common stock.
We incurred net losses of $519.1 million and $62.7 million for the year
ended April 30, 2001 and 2000, respectively. As of April 30, 2001, we had an
accumulated deficit of $601.9 million. We have not had a profitable quarter
since our inception and we expect to continue to incur net losses in the
future. Our net sales and operating results for the quarter ended January 31,
2001 were significantly below our internal expectations and the expectations of
public market analysts and investors. The price of our common stock has
decreased significantly as a result. Furthermore, our net sales for the quarter
ended April 30, 2001 were flat compared to sales for the quarter ended January
31, 2001. It is likely that in some future quarter or quarters, our operating
results will again be below the expectations of public market analysts or
investors.
We expect to continue to incur significant operating expenses and, as a
result, we will need to generate significant revenues if we are to achieve
profitability. We may never achieve profitability. We expect to incur
substantial non-cash costs relating to the amortization of deferred
compensation and goodwill, which will contribute to our net losses. As of April
30, 2001, we had an aggregate of $33.3 million of deferred compensation and
$164.3 million of goodwill to be amortized. The Company may record additional
compensation expense in the future if management decides to modify existing
option grants, grant below-market stock options, or make acquisitions that
result in the recording of deferred stock compensation. Furthermore, the
Company may record additional goodwill amortization in the future if the
Company acquires additional complementary businesses.
If we are unable to raise additional capital, our ability to effectively
manage our growth or enhance our products could be harmed.
At April 30, 2001, we had approximately $55.4 million in cash and cash
equivalents and $26.2 million in short-term investments. We believe that these
amounts will enable us to meet our capital requirements for at least the next
twelve months. However, if cash is used for unanticipated uses, we may need
additional capital. The development and marketing of new products will require
a significant commitment of resources. In addition, if the market for content-
smart networking solutions develops at a slower pace than anticipated or if we
fail to establish significant market share and achieve a meaningful level of
sales, we could be required to raise substantial additional capital. We cannot
be certain that additional capital will be available to us on favorable terms,
or at all. If we were unable to raise additional capital when we require it,
our business would be seriously harmed.
Because we depend on several third-party manufacturers to build portions of
our products, we are susceptible to manufacturing delays and sudden price
increases, which could prevent us from shipping customer orders on time, if at
all, and may result in the loss of sales and customers.
We rely on several third-party manufacturers to build portions of our
products. If we or our suppliers are unable to manage the relationships with
these manufacturers effectively or if these manufacturers fail to meet our
future requirements for timely delivery, our business would be seriously
harmed. These manufacturers fulfill our supply requirements on the basis of
individual purchase orders or agreements with us. Accordingly, these
manufacturers are not obligated to continue to fulfill our supply requirements,
and the prices we are charged for these components could be increased on short
notice. Any interruption in the operations of any one
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of these manufacturers would adversely affect our ability to meet our scheduled
product deliveries to our customers, which could cause the loss of existing or
potential customers and would seriously harm our business. In addition, the
products that these manufacturers build for us may not be sufficient in quality
or in quantity to meet our needs. Our delivery requirements could be higher
than the capacity of these manufacturers, or lower than the manufacturer's
minimum volume requirements, which would likely result in manufacturing delays,
which could result in lost sales and the loss of existing and potential
customers. We cannot be certain that these manufacturers or any other
manufacturer will be able to meet the technological or delivery requirements of
our current products or any future products that we may develop and introduce.
The inability of these manufacturers or any other of our contract manufacturers
in the future to provide us with adequate supplies of high-quality products, or
the loss of any of our contract manufacturers in the future, would cause a
delay in our ability to fulfill customer orders while we attempt to obtain a
replacement manufacturer. Delays associated with our attempting to replace or
our inability to replace one of our manufacturers would seriously harm our
business.
We may experience production delays, quality control problems and capacity
constraints in manufacturing and assembling our products, which could result
in a decline of sales.
We currently conduct some of the final assembly and testing of our products
at our headquarters in Sunnyvale, California. We have transitioned
manufacturing and assembly for most of our products to a third party assembler
and we may transition additional manufacturing and assembly to them in the
future. If we were unable to utilize this vendor or identify alternate vendors
for manufacturing and assembly, we would be required to make additional capital
investments in new or existing facilities. To the extent any capital
investments are required, our gross margins and, as a result, our business
could be seriously harmed. We may experience production interruptions or
quality control problems in connection with any transition of final assembly,
either of which would seriously harm our business. Our assembler or we may
experience assembly capacity constraints. In the event of any capacity
constraints we may be unable to accept certain orders from, and deliver
products in a timely manner to, our customers. This could result in the loss of
existing or potential customers and would seriously harm our business.
Because some of the key components in our products come from limited sources
of supply, we are susceptible to supply shortages or supply changes, which
could disrupt or delay our scheduled product deliveries to our customers and
may result in the loss of sales and customers.
We currently purchase several key parts and components used in the
manufacture of our products from limited sources of supply. For example, we
purchase custom power supplies and Intel hardware for use in all of our
products. The introduction by Intel or others of new versions of their
hardware, particularly if not anticipated by us, could require us to expend
significant resources to incorporate this new hardware into our products. In
addition, if Intel or others were to discontinue production of a necessary part
or component, we would be required to expend significant resources in locating
and integrating replacement parts or components from another vendor. Qualifying
additional suppliers for limited source components can be time-consuming and
expensive. Any of these events would be disruptive to us and could seriously
harm our business. Further, financial or other difficulties faced by these
suppliers or unanticipated demand for these parts or components could limit the
availability of these parts or components. Any interruption or delay in the
supply of any of these parts or components, or the inability to obtain these
parts or components from alternate sources at acceptable prices and within a
reasonable amount of time, would seriously harm our ability to meet our
scheduled product deliveries to our customers.
Our use of rolling forecasts could lead to excess or inadequate inventory, or
result in cancellation charges or penalties, which could seriously harm our
business.
We use rolling forecasts based on anticipated product orders, product order
history and backlog to determine our materials requirements. Lead times for the
parts and components that we order vary significantly and depend on factors
such as the specific supplier, contract terms and demand for a component at a
given
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time. If actual orders do not match our forecasts, as we experienced in the
second half of fiscal year 2001, we may have excess or inadequate inventory of
some materials and components or we could incur cancellation charges or
penalties, which would increase our costs or prevent or delay product
shipments and could seriously harm our business.
In order to achieve the efficiencies and productivity gains required to
achieve our long-term business model, we will need to improve and implement
new systems, procedures and controls, which could be time-consuming and
costly.
While we recently reduced headcount in response to current market
conditions, we will continually evaluate our internal operational needs based
upon market requirements. If we are unable to effectively manage future growth
and expansion, our business will be seriously harmed. We currently have
research and development facilities in Sunnyvale, California; Redmond,
Washington and Waterloo, Ontario, Canada. The coordination and management of
these product development organizations that are located at different sites
requires significant management attention and coordination, particularly from
our managerial and engineering organizations. If we are unable to coordinate
and manage these separate development organizations, our business will be
seriously harmed.
Our ability to compete effectively and to manage any future expansion of
our operations will require us to continue to improve our financial and
management controls, reporting systems and procedures on a timely basis, and
expand, train and manage our employee work force. The number of our employees
increased from 40 at April 30, 1998 to 496 at April 30, 2001. In February
2000, we implemented a new enterprise resource planning software system that
replaced substantially all of our business and manufacturing systems and we
expect to add more complementary systems in the future. While we have not had
significant problems to date, we recognize that our personnel, systems,
procedures and controls may still prove to be inadequate to support our future
operational expansion.
Undetected software or hardware errors could cause us to incur significant
warranty and repair costs and negatively impact the market acceptance of our
products.
Our products may contain undetected software or hardware errors. These
errors may cause us to incur significant warranty and repair costs, divert the
attention of our engineering personnel from our product development efforts
and cause significant customer relations problems. The occurrence of these
problems could result in the delay or loss of market acceptance of our
products and would likely seriously harm our business. All of our products
operate on our internally developed CacheOS operating system. As a result, any
error in CacheOS will affect all of our products. We have experienced minor
errors in the past in connection with new products. We expect that errors will
be found from time to time in new or enhanced products after commencement of
commercial shipments.
If the protection of our proprietary technology is inadequate, our
competitors may gain access to our technology, and our market share could
decline.
We depend significantly on our ability to develop and maintain the
proprietary aspects of our technology. To protect our proprietary technology,
we rely primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets, copyright and trademark laws and patents. Despite
our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or obtain and use information that we
regard as proprietary. Policing unauthorized use of our products is difficult.
In addition, the laws of some foreign countries do not protect our proprietary
rights to as great an extent as do the laws of the United States. Our means of
protecting our proprietary rights may not be adequate and our competitors may
independently develop similar technology, duplicate our products or design
around patents that may be issued to us or our other intellectual property.
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We presently have two issued patents, pending United States patent
applications and several pending patent applications in foreign patent
offices. Several patent applications pending before the United States Patent
Office have been allowed and are expected to issue as United States patents.
We cannot assure you that any U.S. or international patent will be issued
from these applications. Even if patents are issued, we cannot assure you that
we will be able to detect any infringement or, if infringement is detected,
that patents issued will be enforceable or that any damages awarded to us will
be sufficient to adequately compensate us.
There can be no assurance or guarantee that any products, services or
technologies that we are presently developing, or will develop in the future,
will result in intellectual property that is protectable under law, whether in
the United States or a foreign jurisdiction, that this intellectual property
will produce competitive advantage for us or that the intellectual property of
competitors will not restrict our freedom to operate, or put us at a
competitive disadvantage.
We rely on technology that we license from third parties, including
software that is integrated with internally developed software and used in
CacheOS to perform key functions. For example, we license subscription-
filtering technology from Secure Computing. If we are unable to continue to
license any of this software on commercially reasonable terms, we will face
delays in releases of our software or will be required to drop this
functionality from our software until equivalent technology can be identified,
licensed or developed, and integrated into our current product. Any of these
delays could seriously harm our business.
There has been a substantial amount of litigation in the technology
industry regarding intellectual property rights. It is possible that in the
future third parties may claim that we or our current or potential future
products infringe their intellectual property. We expect that companies in the
Internet and networking industries will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Any claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require us to enter
into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all, which
could seriously harm our business.
Our operations could be significantly hindered by the occurrence of a natural
disaster or other catastrophic event.
Our operations are susceptible to outages due to fire, floods, power loss,
telecommunications failures, and other events beyond our control. In addition,
a substantial portion of our facilities, including our headquarters is located
in Northern California, an area susceptible to earthquakes. We do not carry
earthquake insurance for earthquake-related losses. In recent months, the
western United States (and California in particular) has experienced repeated
episodes of diminished electrical power supply. As a result of these episodes,
certain of our operations or facilities may be subject to "rolling blackouts"
or other unscheduled interruptions of electrical power. The prospect of such
unscheduled interruptions may continue for the foreseeable future and we are
unable to predict their occurrence, duration or cessation. We do not have
back-up facilities and infrastructure for all of our operations in the event
of any such occurrence. Despite our implementation of network security
measures, our servers are vulnerable to computer viruses, break-ins, and
similar disruptions from unauthorized tampering with our computer systems. We
do not carry sufficient business interruption insurance to compensate us for
losses that may occur as a result of any of these events. Any such event could
have a material adverse effect on our business, operating results, and
financial condition.
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Risks Associated with Acquisitions
If we are unable to successfully integrate recently acquired companies, our
ability to execute our business strategy and timely deliver new products to
market could be harmed.
We consummated mergers with SpringBank Networks in June 2000 and Entera,
Inc. in December 2000. Risks we may face with respect to our mergers with these
companies include the potential disruption of our ongoing business and
distraction of management; the difficulty of retaining personnel; and the
maintenance of uniform standards, corporate cultures, controls, procedures and
policies. Our inability to address any of these risks successfully could harm
our business.
We may also make additional acquisitions in the future, although none are
currently planned. Acquisitions of companies, products or technologies entail
numerous risks, including an inability to successfully assimilate acquired
operations and products, diversion of management's attention, loss of key
employees of acquired companies and substantial transaction costs. Some of the
products acquired may require significant additional development before they
can be marketed and may not generate revenue at levels anticipated by us.
Moreover, future acquisitions by us may result in dilutive issuances of equity
securities, the incurrence of additional debt, large one-time write-offs and
the creation of goodwill or other intangible assets that could result in
significant amortization expense. Any of these problems or factors could
seriously harm our business.
Risks Related to Litigation, Claims, Government Regulations, and Securities
Markets
The legal environment in which we operate is uncertain and claims against us
could cause our business to suffer.
Our products operate in part by storing material available on the Internet
and making this material available to end users from our appliance. This
creates the potential for claims to be made against us, either directly or
through contractual indemnification provisions with customers, for defamation,
negligence, copyright or trademark infringement, personal injury, invasion of
privacy or other legal theories based on the nature, content or copying of
these materials. It is also possible that if any information provided through
any of our products contains errors, third parties could make claims against us
for losses incurred in reliance on this information. Our insurance may not
cover potential claims of this type or be adequate to protect us from all
liability that may be imposed.
We could be subject to product liability claims, which are time-consuming and
costly to defend.
Our customers install our content-smart networking solutions directly into
their network infrastructures. Any errors, defects or other performance
problems with our products could negatively impact the networks of our
customers or other Internet users, resulting in financial or other damages to
these groups. These groups may then seek damages from us for their losses. If a
claim were brought against us, we may not have sufficient protection from
statutory limitations or license or contract terms with our customers, and any
unfavorable judicial decisions could seriously harm our business. However, a
product liability claim brought against us, even if not successful, would
likely be time-consuming and costly. A product liability claim could seriously
harm our business reputation.
The adoption of laws that impose taxes on Internet commerce could adversely
affect our business.
Tax authorities at the international, federal, state and local levels are
currently reviewing the appropriate tax treatment of companies engaged in
Internet commerce. Many of our customers are engaged in Internet commerce, and
any taxes imposed on them may adversely impact their businesses and may result
in order cancellations or postponements of product purchases by them, which
would seriously harm our business. Laws regarding the Internet remain largely
unsettled and the adoption or modification of laws or regulations relating to
the Internet, or interpretations of existing law, could seriously harm our
business.
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Because sales of our products are dependent on the increased use and
widespread adoption of the Internet, if use of the Internet does not develop
as we anticipate, our sales may not grow.
Sales of our products depend on the increased use and widespread adoption
of the Internet. Our business would be seriously harmed if the use of the
Internet does not increase as anticipated or if our service provider
customers' Internet-related services are not well received by the marketplace.
The acceptance and use of the Internet in international markets, where we
derive a large portion of our net sales, are in earlier stages of development
than in the United States. If the Internet fails to gain sufficient acceptance
in international markets, our business could be seriously harmed. The
resolution of various issues concerning the Internet will likely affect the
use and adoption of the Internet. These issues include security, reliability,
capacity, congestion, cost, ease of access and quality of service. For
example, in the past certain popular websites experienced denial-of-service
attacks, which called into question the ability of these and other websites to
ensure the security and reliability of their on-line businesses. Even if these
issues are resolved, if the market for Internet-related products and services
fails to develop, or develops at a slower pace than anticipated, our business
would be seriously harmed.
Governmental regulation of the communications industry may negatively affect
our customers and result in decreased demand for our products, which would
cause a decline in our sales.
The jurisdiction of the Federal Communications Commission, or FCC, extends
to the communications industry, to our customers and to the products that our
customers sell. Future regulations set forth by the FCC or other regulatory
bodies may adversely affect Internet-related industries. Regulation of our
customers may seriously harm our business. For example, FCC regulatory
policies that affect the availability of data and Internet services may impede
our customers' penetration into some markets. In addition, international
regulatory bodies are beginning to adopt standards for the communications
industry. The delays that these governmental processes entail may cause order
cancellations or postponements of product purchases by our customers, which
would seriously harm our business.
Our stock price is volatile and, as a result, you may have difficulty
evaluating the value of our stock, and the market price of our stock may
decline.
Since our initial public offering in November 1999 through June 30, 2001,
the closing market price of our common stock has fluctuated significantly
between $3.06 and $164.69. The market price of our common stock may fluctuate
significantly in response to the following factors:
. changes in macro-economic conditions;
. variations in our quarterly operating results;
. changes in financial estimates or investment recommendations by
securities analysts;
. changes in market valuations of Internet-related and networking
companies;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. loss of a major customer;
. additions or departures of key personnel; and
. fluctuations in stock market prices and volumes.
Substantial sales of our common stock could adversely affect our stock price.
Prior to our November 1999 initial public offering, no public market
existed for our common stock. Subsequent to our initial public offering, our
stock price and the daily volume of shares traded have fluctuated
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significantly. In the future, the daily volume of shares traded may decline to
levels that could heighten the volatility of our stock price. As a result,
sales of a substantial number of shares of our common stock could adversely
affect the market price of our common stock by potentially introducing a large
number of sellers of our common stock into a market in which our common stock
price is already volatile, thus driving our common stock price down.
Substantial sales can result for several reasons, including a sale of a large
block of shares by an institutional shareholder, or groups of shareholders,
directors, executives and employees. For example, in February 2001, we issued
approximately 1 million restricted shares to our employees, which vest fifty
percent on November 26, 2001 and fifty percent on February 25, 2002. Many of
these shares will be sold immediately and without restriction into the public
market in November 2001 and February 2002. Any one of these transactions could
adversely affect our stock price.
We are the target of a Class Action Lawsuit, which could result in
substantial costs and divert management attention and resources.
Numerous putative securities class action lawsuits have been filed in the
U.S. District Court for the Southern District of New York against certain
public companies, their underwriters, and other individuals arising out of
each company's public offering. The first putative class action complaint
against us, certain of our current and former officers and directors, and
certain underwriters, was filed on June 8, 2001 in the United States District
Court for the Southern District of New York, and is captioned Colbert Birnet,
L.P. v. CacheFlow Inc., et al., Civil Action No. 01-CV-5143. Since then two
other cases have been filed in the U.S District Court for the Southern
District of New York: Powell v. CacheFlow et al. and Wesley v. CacheFlow et
al. The Complaints in these cases generally allege that the underwriters
obtained excessive and undisclosed commissions in connection with the
allocation of shares of common stock in our initial public offering, and
maintained artificially high market prices through tie-in arrangements which
required customers to buy shares in the after-market at pre-determined prices.
The complaints allege that the company and our current and former officers and
directors violated Sections 11, 12(2) and 15 of the Securities Act of 1933,
and Sections 10(b) (Rule 10b-5 promulgated thereunder) and 20(a) of the
Securities Act of 1934, by making material false and misleading statements in
the prospectus incorporated in our Form S-1 registration statement filed with
the Securities and Exchange Commission in November 1999. Plaintiffs seek an
unspecified amount of damages on behalf of persons who purchased our stock
between November 18, 1999 and December 6, 2000. We anticipate that further
lawsuits making substantially similar allegations may be filed. We believe
that these lawsuits may be coordinated or consolidated. Various plaintiffs
have filed similar actions asserting virtually identical allegations against
approximately fifty other companies. We intend to defend against the
allegations in the complaints vigorously. In the future, other types of
securities class action lawsuits could be filed against us. Securities class
action litigation could result in substantial costs and divert our
management's attention and resources, which could seriously harm our business.
ITEM 2. PROPERTIES
We lease approximately 53,000 square feet for our headquarters facility in
Sunnyvale, California, under a lease that expires on August 31, 2005. We also
lease space for research and development in Redmond, Washington and Waterloo,
Ontario, Canada. In addition, we lease space for sales and support in ten
metropolitan areas in North America. We also lease space for sales and support
in the following countries: Australia, Denmark, France, Germany, Hong Kong,
Japan, the Netherlands, People's Republic of China, Singapore, South Korea,
Spain, Sweden, Taiwan, United Arab Emirates, and the United Kingdom.
In March 2001, we entered into a lease agreement to occupy 46,000 square
feet for a research and development facility in Sunnyvale, California,
beginning in the first quarter of our 2002 fiscal year. We believe that our
existing facilities are adequate to meet current requirements, and that
suitable additional or substitute space will be available, if necessary, to
accommodate any further physical expansion of corporate operations and for any
additional sales offices.
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ITEM 3. LEGAL PROCEEDINGS
See the information set forth in the notes to the consolidated financial
statements entitled "Litigation" and "Subsequent Events" in Item 8, Notes 14
and 17 of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended April 30, 2001.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is biographical summaries of our executive officers as of
July 1, 2001:
Brian NeSmith, 39, has served as President and Chief Executive Officer and a
director of CacheFlow since March 1999. From December 1997 to March 1999, Mr.
NeSmith served as Vice President of Nokia IP, Inc., a security router company,
which acquired Ipsilon Networks, Inc., an IP switching company, where Mr.
NeSmith served as Chief Executive Officer from May 1995 to December 1997. From
October 1987 to April 1995, Mr. NeSmith held several positions at Newbridge
Networks Corporation, a networking equipment manufacturer, including vice
president and general manager of the VIVID group. Mr. NeSmith holds a B.S. in
electrical engineering from the Massachusetts Institute of Technology.
Robert Verheecke, 49, has served as Senior Vice President, Chief Financial
Officer and Secretary of CacheFlow since May 2001. From October 1997 to May
2001, Mr. Verheecke served as a Chief Financial Officer to several early-stage
high technology companies including AlphaBlox; ECnet and 2Bridge. From June
1989 to August 1997, Mr. Verheecke served as Chief Financial Officer at
publicly traded NetFRAME, an early manufacturer of high-performance network
servers, and at Business Objects S.A., a publicly traded decision support
software company. Mr. Verheeckee holds an M.B.A. from the University of
California, Berkeley, a B.S. in Accounting from Santa Clara University, and is
a State of California Certified Public Accountant (CPA).
John Scharber, 41, has served as Vice President and Chief Technology Officer
of CacheFlow since May 2001. From December 2000 to May 2001, Mr. Scharber
served as Vice President of Research and Development for Streaming Technology
at CacheFlow. From September 1997 to December 2000, Mr. Scharber served as
Chief Technology Officer and was a co-founder of privately held Entera, Inc., a
provider of streaming content distribution and management technologies, until
it was acquired by CacheFlow in December 2000. From April 1994 to July 1997,
Mr. Scharber served as Director of Engineering and was a co-founder of
GlobalCenter, a technology company acquired by Exodus Communications, Inc. Mr.
Scharber holds a B.S. in Business Administration from San Jose State
University.
Alan Robin, 45, has served as Senior Vice President of Sales at CacheFlow
since July 1999. From January 1997 to July 1999, Mr. Robin served as Vice
President of Sales of Ipsilon Networks, Inc., an IP switching company, and then
of Nokia IP, Inc., a security router company, which acquired Ipsilon Networks,
Inc. in December 1997. From January 1991 to January 1997, Mr. Robin held a
number of sales and sales management positions at Wellfleet/Bay Networks, a
networking company. Mr. Robin holds an A.B. in chemistry from Kenyon College
and a M.B.A. in finance from Fairleigh Dickenson University.
Don Jaworski, 42, has served as Sr. Vice President of Product Development at
CacheFlow Inc. since June 2000. From May 2000 to June 2000, Mr. Jaworski served
as Chief Executive Officer and Vice President of Engineering of SpringBank
Networks, Inc., a privately held provider of content management solutions,
until it was acquired by CacheFlow in June 2000. From December 1997 to March
2000, Mr. Jaworski served as Vice President of R&D in Nokia IP, Inc., a
security router company, which acquired Ipsilon Networks, Inc., an IP switching
company, where Mr. Jaworski served as Vice President of Engineering from
September 1995 to December 1997. Mr. Jaworski served as Sr. Vice President of
Software Engineering at The 3DO Company from January 1994 to September 1995.
Mr. Jaworski holds a BS in Computer Science from Bowling Green State University
and an MBA from the University of Santa Clara.
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PART II.
ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the Nasdaq National Market under the
symbol "CFLO" since November 19, 1999. Prior to that time, there was no public
market for the common stock. The following table sets forth, for the periods
indicated, the high and low closing prices per share of the common stock as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
For the year ended April 30, 2000:
Third Quarter (since November 19, 1999).................... $164.69 $84.50
Fourth Quarter............................................. $148.00 $30.50
For the year ended April 30, 2001:
First Quarter.............................................. $ 86.50 $37.00
Second Quarter............................................. $157.00 $63.94
Third Quarter.............................................. $144.70 $11.13
Fourth Quarter............................................. $ 15.75 $ 3.06
</TABLE>
Our present policy is to retain earnings, if any, to finance future growth.
We have never paid cash dividends and have no present intention to pay cash
dividends. At July 6, 2001, there were approximately 620 stockholders of record
and the price per share of our common stock was $4.30. We believe that a
significant number of beneficial owners of our common stock hold shares in
street name.
On November 18, 1999, CacheFlow Inc. commenced its initial public offering,
or IPO, pursuant to a Registration Statement on Form S-1 (File No. 333-87997).
In the IPO, CacheFlow Inc. sold an aggregate of 5,750,000 shares of common
stock (including an over-allotment option of 750,000 shares) at $24.00 per
share. The IPO generated aggregate gross proceeds of approximately $138,000,000
for the Company. The aggregate net proceeds to the Company were approximately
$126,502,000, after deducting underwriting discounts and commissions of
approximately $9,660,000 and expenses of the offering of approximately
$1,838,000. The Company intends to continue to use the net proceeds of the IPO
for general corporate purposes, including to fund our operating losses, working
capital needs, expenditures for research and development and sales and
marketing efforts. In addition, we may use a portion of the net proceeds to
fund acquisitions or investments in complementary businesses, technologies, or
products. Pending any of these uses, we will continue to invest the net
proceeds in investment grade, interest-bearing securities.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data from March 13, 1996,
our inception date, through the fiscal year ended April 30, 2001. For
additional discussion regarding the items in this table, refer to Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Period from
Year Ended April 30, March 13, 1996
-------------------------------------- (Inception) to
2001 2000 1999 1998 April 30, 1997
--------- -------- -------- ------- --------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales............... $ 97,739 $ 29,277 $ 7,036 $ -- $ --
Stock compensation(1)... (69,168) (38,405) (3,776) (59) --
Goodwill
amortization(2)........ (98,987) -- -- -- --
Acquired in-process
technology(3).......... (32,200) -- -- -- --
Impairment of
assets(4).............. (272,871) -- -- -- --
Net loss available to
common shareholders.... (519,096) (62,653) (13,202) (5,507) (1,443)
Basic and diluted net
loss per share......... $ (14.44) $ (3.31) $ (2.17) $ (1.43) $ (0.73)
Shares used in computing
basic and diluted net
loss per share......... 35,950 18,935 6,093 3,842 1,965
Pro forma basic and
diluted net loss per
share.................. $ -- $ (2.30) $ (0.79) $ -- $ --
Shares used in computing
pro forma basic and
diluted net loss per
share.................. -- 27,218 16,626 -- --
</TABLE>
<TABLE>
<CAPTION>
As of April 30,
---------------------------------------
2001 2000 1999 1998 1997
-------- -------- ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents, and short-term
investments.......................... $ 81,564 $125,320 $2,291 $7,349 $3,605
Working capital....................... 77,880 126,435 787 6,955 3,589
Total assets.......................... 287,232 140,734 6,716 8,461 3,769
Long-term debt, net of current
portion.............................. -- -- 3,211 7 --
Total stockholder's equity (deficit).. 256,751 132,630 (344) 7,600 3,702
</TABLE>
- --------
(1) Stock compensation primarily includes amortization of deferred stock
compensation as well as one-time charges associated with certain
modifications to stock-based awards.
(2) Goodwill amortization includes charges related to the Company's June 2000
acquisition of SpringBank Networks, Inc. and December 2000 acquisition of
Entera, Inc.
(3) Acquired in-process technology relates to certain research and development
projects assumed in the Entera acquisition which had not yet reached
technological feasibility and had no alternative future use for CacheFlow.
(4) An impairment of assets charge was recorded in the quarter ended April 30,
2001 after the Company's management performed an impairment assessment and
concluded that a substantial portion of the Company's enterprise level
goodwill was not recoverable.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, including
statements on our expectations, beliefs, intentions or strategies regarding the
future. All forward-looking statements included in this document are based on
information available to us on the date hereof. We assume no obligation to
update any such forward-looking statements. Our actual results could differ
materially from those indicated in such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, changes in macroeconomic conditions, fluctuations in quarterly operating
results, uncertainty in future operating results, litigation, product
concentration, competition, technological changes, management of our growth and
expansion, integration of acquisitions, key employee transitions and other
risks discussed in item 1 under the heading "Factors Affecting Future Operating
Results" and the risks discussed in our other Securities and Exchange
Commission filings.
Overview
The Company designs, develops, markets and supports caching appliances and
content delivery technologies that are purpose-built to accelerate and optimize
the delivery of content to end-users over TCP/IP networks. We founded the
Company in March 1996 and began commercial shipment of our first products in
May 1998. Since that time, we have introduced other Internet caching
appliances, which have a variety of hardware configurations designed for the
different price, performance, capacity and reliability requirements of our
customers. The list prices of our caching appliances increase as they become
more highly configured. Substantially all of our net sales through April 30,
2001 were attributable to sales of our Internet caching appliance products. We
anticipate that these products will continue to account for a substantial
portion of our net sales for the foreseeable future.
We have incurred net losses in each quarter since inception. As of April 30,
2001, we had an accumulated deficit of $601.9 million. Our net loss available
to common shareholders for the years ended April 30, 2001, 2000, and 1999 was
$519.1 million, $62.7 million, and $13.2 million. These losses resulted from
significant costs incurred in the development and sale of our products and
services, from amortization of deferred stock compensation and goodwill, and
from charges related to the impairment of certain assets. Additionally, while
demand for our products in the first half of our fiscal year ended April 30,
2001 was consistent with our forecasts, we experienced a severe decline in
demand for our products during our third quarter ended January 31, 2001 and
flat demand during the quarter ended April 30, 2001. We believe this decrease
substantially resulted from macroeconomic factors and a corresponding reduction
in information technology spending. Unless there are changes in current
macroeconomic conditions, we expect the decreased demand experienced in the
third and fourth quarters of fiscal 2001 to continue into fiscal 2002. As a
result, we expect to incur additional operating losses and continued negative
cash flow from operations at least through fiscal year 2002.
Our limited operating history makes the prediction of future operating
results difficult. We believe that period-to-period comparisons of our
operating results should not be relied upon as predictive of future
performance. Our prospects must be considered in light of the risks, expenses
and difficulties encountered by companies at an early stage of development,
particularly companies in new and rapidly evolving markets. We may not be
successful in addressing these risks and difficulties.
Acquisitions
SpringBank Networks, Inc.--On June 5, 2000, the Company acquired all of the
outstanding capital stock of SpringBank Networks, Inc. ("SpringBank"), a
privately held company organized to develop content
26
<PAGE>
management technologies. The acquisition was accounted for under the purchase
method of accounting and accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed based on their estimated fair values on
the acquisition date. Since June 5, 2000, the results of operations of
SpringBank have been included in the Company's Consolidated Statements of
Operations. Purchase consideration totaled approximately $177 million and
included approximately 2.7 million shares of CacheFlow common stock,
approximately $7 million of assumed liabilities and approximately $2 million in
transaction costs. Substantially all of the $177 million purchase price was
allocated to goodwill. For further discussion regarding goodwill, refer to the
"Asset Impairment" section below.
Entera, Inc.--On December 15, 2000, the Company completed the acquisition of
Entera, Inc. ("Entera"), a company that develops standards-based streaming
content distribution and management technologies, in a stock-for-stock merger
transaction accounted for as a purchase. Purchase consideration was
approximately $411.9 million consisting of approximately 3.4 million shares of
CacheFlow common stock with a fair value of approximately $370.8 million, the
assumption of approximately 400,000 outstanding stock options with a fair value
of approximately $40 million, and approximately $1.1 million in transaction
costs.
The excess of the purchase price over the fair value of the net assets
acquired was valued at $409.1 million. Of this excess, $359.3 million was
allocated to goodwill, $17.6 million was allocated to deferred compensation,
and $32.2 million was allocated to in-process research and development. For
further discussion regarding goodwill, refer to the "Asset Impairment" section
below.
Stock Compensation
The Company recorded deferred stock compensation of approximately $17.4
million, $71.8 million, and $13.6 million for the years ended April 30, 2001,
2000, and 1999. Deferred stock compensation results from a variety of stock-
based transactions. The Company's stock compensation balance generally
represents the difference between the exercise price and the deemed fair value
of stock options and warrants granted to employees, consultants, directors and
third parties on the date such stock awards were granted. However, the Company
has also completed other stock-based transactions that impact deferred stock
compensation such as acquisitions in which the outstanding options of the
acquired entity are assumed, or instances where certain modifications are made
to the terms and conditions of option grants subsequent to the grant date.
Related stock compensation expense is recorded over the option vesting period,
generally two to four years, or immediately if there is no vesting period. The
Company recorded stock compensation expense of approximately $69.2 million,
$38.4 million, and $3.8 million for the years ended April 30, 2001, 2000, and
1999. The Company may record additional compensation in the future if
management decides to grant below-market stock options, assume outstanding
options in any future acquisitions, modify outstanding stock awards subsequent
to their date of grant, or enter into other transactions that may require the
recognition of additional compensation. We expect compensation expense, which
is primarily attributable to amortization of deferred compensation charges, to
impact our reported results through April 30, 2004. Given the balance of
deferred stock compensation on the balance sheet and our recent history of
stock award transactions, we expect stock compensation expense to be a
significant operating expense as this deferral is recognized.
Reorganization Plan
In February 2001, the Company announced a reorganization plan and incurred
$1.9 million in reorganization costs in the quarter ended April 30, 2001 to
complete this effort, which primarily included employee severance costs of
approximately $1.3 million and certain contract termination costs of
approximately $600,000. This plan was instituted in response to an
unanticipated economic slowdown that negatively impacted third and fourth
quarter fiscal 2001 demand for the Company's products, as potential customers
deferred spending on Internet and intranet infrastructure. The reorganization
plan was designed to more closely align spending with our sales projections.
Severance payments to domestic employees were substantially complete at April
30, 2001. The remaining $924,000 accrual relates to international severance
payments and contract termination fee payments to be made in future periods.
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<PAGE>
Asset Impairment
In April 2001, management performed an impairment assessment of long-lived
assets and determined that certain enterprise level goodwill recorded in
connection with the Company's Springbank and Entera acquisitions is not fully
recoverable. The assessment was performed primarily due to the significant
decline in the Company's stock price, the net book value of assets
significantly exceeding the Company's market capitalization, and the overall
decline in industry growth rates, which indicate that this trend may continue
for an indefinite period. As a result, the Company recorded a $272.9 million
impairment charge in the fourth quarter of fiscal 2001 to reduce goodwill to
its estimated fair value based on the market value method. The estimate of fair
value was based upon the Company's average market capitalization, which was
calculated using the Company's average closing stock price surrounding April
30, 2001. The remaining goodwill will be amortized using the straight-line
method over the remainder of its three-year life.
Additionally, the impairment charge includes a $650,000 write-off for
leasehold improvements that will be abandoned in the first quarter of fiscal
2002. These assets relate to a research and development facility in California
which is being relocated in connection with the Company's reorganization plan.
Results of Operations
The following table sets forth, as a percentage of net sales, consolidated
statements of operations data for the periods indicated:
<TABLE>
<CAPTION>
Year Ended April 30,
------------------------
2001 2000 1999
------ ------ ------
<S> <C> <C> <C>
Net sales................... 100.0 % 100.0 % 100.0 %
Cost of goods sold.......... 40.6 38.3 46.9
------ ------ ------
Gross profit................ 59.4 61.7 53.1
Operating expenses:
Research and development.. 28.3 32.9 57.3
Sales and marketing....... 71.6 98.7 97.6
General and
administrative........... 10.8 16.2 29.4
Stock compensation........ 70.8 131.2 53.7
Goodwill amortization..... 101.3 -- --
Acquired in-process
research and
development.............. 32.9 -- --
Restructuring............. 1.9 -- --
Impairment of assets...... 279.1 -- --
------ ------ ------
Total operating
expenses............... 596.7 279.1 238.0
------ ------ ------
Operating loss.............. (537.3) (217.4) (184.8)
Interest income............. 6.8 12.9 2.3
Interest expense............ (0.3) (2.5) (5.1)
------ ------ ------
Net loss before income
taxes...................... (530.8) (207.0) (187.6)
Provisions for income
taxes...................... 0.3 0.3 --
------ ------ ------
Net loss.................... (531.1) (207.3) (187.6)
Accretion of preferred
stock...................... -- (6.7) --
------ ------ ------
Net loss available to common
stockholders................ (531.1)% (214.0)% (187.6)%
====== ====== ======
</TABLE>
Net Sales. Net sales increased to $97.7 million in fiscal 2001 from $29.3
million in fiscal 2000 and $7.0 million in fiscal 1999. This increase was
attributable to higher sales volumes resulting from the introduction of our new
600, 700, 6000 and 7000 series products and growth in our customer base as we
expanded our sales force. However, due to a weakening macroeconomic outlook,
our third quarter fiscal 2001 revenues fell significantly below market
expectations and our fourth quarter fiscal 2001 revenues, while consistent with
revised forecasts, were flat compared to the previous quarter.
28
<PAGE>
During fiscal 2001 and 2000, no customer accounted for more than 10% of our
net sales, and during fiscal 1999, three customers accounted for an aggregate
of approximately 33% of our net sales. Net sales from international operations
were $57.6 million, or 59% of net sales in fiscal 2001, $14.1 million, or 48%
of net sales, in fiscal 2000, and $3.1 million, or 44% of net sales, in fiscal
1999. We expect international revenue as a percentage of total revenue to
remain relatively constant in the future compared to fiscal 2001.
Unless macroeconomic conditions improve sooner than anticipated, we believe
near-term demand for our products will remain soft in fiscal 2002. Once
conditions improve, we expect our net sales to increase as a result of
continued acceptance of our products in the marketplace and the introduction of
new products, although our current year-over-year growth rate in our net sales
is not expected to continue in the future.
Gross Profit. Gross profit increased to $58.0 million in fiscal 2001 from
$18.1 million in fiscal 2000 and $3.7 million in fiscal 1999. This increase in
gross profit was primarily attributable to the introduction of new products,
their growing acceptance in the marketplace, and higher sales volumes.
Excluding a one-time $3.9 million inventory write-down in the fourth quarter of
fiscal 2001, gross margin increased to 63.4% in fiscal 2001 from 61.7% in
fiscal 2000 and 53.1% in fiscal 1999. During the second half of fiscal 2001,
excess inventories were built up in anticipation of projected sales volumes
that never materialized as a result of the sharp deterioration in macroeconomic
conditions that caused customers to defer or delay capital expenditures on
information technology. As a result, we wrote down $3.9 million of excess and
obsolete inventories. Excluding this write off, increases in gross margin were
principally due to the introduction of higher margin products in fiscal 2001,
the resulting economies of scale from higher unit production, and cost savings
achieved by outsourcing component manufacturing.
Our gross margin has been and will continue to be affected by a variety of
factors, including competition, fluctuations in demand for our products, the
timing and size of customer orders and product implementations, the mix of
direct and indirect sales, the mix and average selling prices of products, new
product introductions and enhancements, component costs, manufacturing costs
and product configuration. If actual orders do not match our forecasts as we
experienced in the second half of fiscal year 2001, we may have excess or
inadequate inventory of some materials and components or we could incur
cancellation charges or penalties, which would increase our costs or prevent or
delay product shipments and could seriously harm our business.
Research and Development. Research and development expenses consist
primarily of salaries and benefits, and prototype and test equipment costs.
Research and development expenses increased to $27.7 million in fiscal 2001
from $9.6 million in fiscal 2000 and $4.0 million in fiscal 1999. These
increases in research and development expenses in absolute dollars were
primarily attributable to increased staffing and associated support for
engineers required to expand and enhance our product line. Research and
development headcount increased to 204 at April 30, 2001 from 68 in fiscal 2000
and 21 in fiscal 1999. As a percentage of net sales, research and development
expenses decreased to 28.3% in fiscal 2001 from 32.9% in fiscal 2000 and 57.3%
in fiscal 1999. This decrease in research and development expenses as a
percentage of net sales reflects the fact that our net sales during these
periods increased more rapidly than our research and development expenses. We
believe that continued investment in research and development will be required
to remain competitive and expect that research and development expenses will
increase moderately in absolute dollars in future periods. Through April 30,
2001, all research and development costs have been expensed as incurred.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and benefits, commissions, advertising and promotional expenses, and
customer service and support costs. Sales and marketing expenses increased to
$69.9 million in fiscal 2001 from $28.9 million in fiscal 2000 and $6.9 million
in fiscal 1999. These increases in sales and marketing expenses in absolute
dollars were related to the expansion of our sales and marketing organization
as we increased headcount and added sales and support facilities worldwide.
Sales and marketing headcount increased to 211 at April 30, 2001, from 173 in
fiscal 2000 and 30 in fiscal 1999. As a percentage of net sales, sales and
marketing expenses decreased to 71.6% for the year ended April 30, 2001 from
98.7% in fiscal 2000 and 97.6% in fiscal 1999. Should growth in demand for our
products resume, and after we realize potential efficiencies within our sales
and marketing organization, we
29
<PAGE>
expect to increase our sales and marketing expenses in absolute dollars in an
effort to expand domestic and international markets, introduce new products,
and establish and expand new distribution channels. However, should sales
decline further in future periods, we may implement additional cost-cutting
programs to reduce our sales and marketing expenses.
General and Administrative. General and administrative expenses increased to
$10.5 million in fiscal 2001 from $4.8 million in fiscal 2000 and $2.1 million
in fiscal 1999. These increases in general and administrative expenses in
absolute dollars were primarily attributable to increased staffing and
associated expenses necessary to manage and support our growth. General and
administrative headcount increased to 55 at April 30, 2001 from 39 in fiscal
2000 and 10 in fiscal 1999. As a percentage of net sales, general and
administrative expenses decreased to 10.8% for the year ended April 30, 2001
from 16.2% in fiscal 2000 and 29.4% in fiscal 1999. These decreases in general
and administrative expenses as a percentage of net sales reflect the fact that
our net sales during these periods increased more rapidly than our general and
administrative expenses. Should growth in demand for our products resume, and
after we have realized potential efficiencies within our current general and
administrative organization, we expect general and administrative expenses to
increase in absolute dollars as we continue to increase headcount to manage
expanding operations and facilities. However, should sales decline further in
future periods, we may implement additional cost-cutting programs to reduce our
general and administrative expenses.
Stock Compensation. Stock compensation expense increased to $69.2 million in
fiscal 2001 from $38.4 million in fiscal 2000 and $3.8 million in fiscal 1999.
This non-cash charge reflects the amortization of deferred stock compensation
and termination and acceleration charges for the departing chairman and other
employees. Stock compensation has increased significantly in fiscal 2001 and
2000 as a result of the amortization of significant stock compensation, most of
which was recorded in connection with the Company's November 1999 initial
public offering, certain below-market option grants in fiscal 2001, and
unvested options assumed in the Company's December 2000 acquisition of Entera,
Inc. In addition, the fiscal 2001 expense includes a non-recurring deferred
stock compensation charge of $28.1 million in connection with the accelerated
vesting of certain unvested stock options held by the Company's former
chairman. Based on the options granted through April 30, 2001, we expect stock
compensation to remain a significant component of our operating expenses
through fiscal 2004.
Goodwill Amortization. Goodwill amortization increased to $99.0 million in
fiscal 2001 from none in the comparable prior periods. These increases were
attributable to the Company's acquisitions of SpringBank Networks, Inc. on June
5, 2000, and Entera, Inc. on December 15, 2000, which were accounted for as
purchase business combinations. The SpringBank and Entera transactions resulted
in goodwill of $177.0 million and $359.3 million, and each amount is being
amortized over three years on a straight-line basis. A significant portion of
this goodwill was determined to be impaired and was written off in the fourth
quarter of fiscal 2001; therefore, goodwill amortization is not likely to be as
large in future quarters. For additional discussion regarding impaired
goodwill, refer to the "Asset Impairment" section above and the "Impairment of
assets" section below.
Acquired In-process Technology. The Company recorded a non-recurring, non-
cash $32.2 million charge in fiscal 2001 for the value of in-process technology
acquired in the Entera transaction, which relates to in process technology that
had not yet reached technological feasibility and had no future use in the
Company's development activities.
There were two projects included in in-process technology for Entera. The
efforts required to complete the acquired in-process technology included the
completion of all planning, designing and testing activities that are necessary
to establish that the product can be produced to meet its design requirements,
including functions, features and technical performance requirements. The value
of the acquired in-process technology was computed using a discounted cash flow
analysis rate of 50% on the anticipated income stream of the related product
revenues. The discounted cash flow analysis was based on management's forecast
of future revenues, cost of revenues, and operating expenses related to the
products and technologies purchased from Entera. The
30
<PAGE>
calculation of value was then adjusted to reflect only the value creation
efforts of Entera prior to the close of the acquisition. At the time of the
acquisition, the products were approximately 32% and 50% complete respectively,
with approximately $10.9 million and $896,000 in estimated costs remaining,
respectively. The majority of these costs are expected to be incurred by the
end of the next fiscal year. The acquired in-process technology was expensed in
the period the transaction was consummated.
Restructuring. As discussed further in the "Reorganization Plan" section
above, during the Company's fourth quarter ended April 30, 2001, the Company
recorded a non-recurring $1.9 million charge related to certain employee
severance costs and contract termination costs.
Impairment of Assets. As discussed further in the "Asset Impairment" section
above, during the Company's fourth quarter ended April 30, 2001, management
performed an impairment assessment of its tangible and intangible assets and
determined that enterprise-level goodwill associated with the SpringBank and
Entera acquisitions was impaired. As a result, a $272.9 million impairment
charge was recorded to write the Company's net book value down to its fair
value as of April 30, 2001. In accordance with our policy, management will
continue to periodically assess the recoverability of its long-lived assets in
the future. Given the current economic uncertainty, and the general volatility
of the financial markets, and the Company's use of the market value method to
determine impairment charges, if our market capitalization were to again fall
below the Company's net book value for an extended period of time, additional
impairment charges may be recorded.
Other Income (Expense), Net. Other income (expense), net increased to $6.4
million in fiscal 2001 from $3.0 million in fiscal 2000 and net other expense
of $197,000 in fiscal 1999. This increase is primarily attributable to
increased interest income earned on the Company's cash equivalents and short-
term investments, which grew significantly following the completion of the
Company's initial public offering in November 1999.
Provision for Income Taxes. The provision for income taxes increased to
$318,000 in fiscal 2001 from $73,000 in fiscal 2000 and none in fiscal 1999,
and is composed entirely of foreign corporate income taxes. The foreign
corporate income taxes are a function of the Company's international expansion
and the establishment of branches and subsidiaries in various jurisdictions.
The provision for income taxes is based on income taxes on minimum profits the
foreign operations generated for services provided to the Company. The
Company's tax expense for fiscal 2002 will continue to be significantly
dependent on the amount and mix of income derived from sources subject to
corporate income taxes of foreign taxing jurisdictions.
Accretion of Preferred Stock. In fiscal 2000, a non-recurring $2.0 million
charge was recorded in connection with the November 1999 issuance of 280,953
shares of Series D preferred stock at $11.00 per share to accrete the stock to
its fair value. During November 1999, all of the shares of Series D preferred
stock converted to common stock upon completion of the Company's initial public
offering.
Liquidity and Capital Resources
From inception through November 1999, we financed our operations and the
purchase of property and equipment through private sales of preferred stock,
with net proceeds of $37.9 million, as well as through bank loans and equipment
leases. In November 1999, we financed our operations through an initial public
offering of our common stock, with net proceeds of $126.5 million, net of
underwriting discounts, commissions and offering costs. At April 30, 2001, we
had $55.4 million in cash and cash equivalents, $26.2 million in short-term
investments, and $77.9 million in working capital.
Net cash used in operating activities was $54.1 million in fiscal 2001,
$23.6 million in fiscal 2000 and $9.7 million in fiscal 1999. We used cash
primarily to fund our net losses from operations.
Net cash provided by investing activities was $3.5 million in fiscal 2001,
and net cash used in investing activities was $37.9 million in fiscal 2000 and
$971,000 in fiscal 1999. Net cash provided by investing activities was
primarily due to sales of investment securities and cash acquired in business
acquisitions,
31
<PAGE>
partially offset by purchases of property and equipment. Net cash used in
investing activities was primarily attributable to purchases of short-term
securities, and to a lesser extent, to purchases of property, plant and
equipment. We expect that, in the future, any cash in excess of current
requirements will continue to be invested in short-term investment grade,
interest-bearing securities.
Capital expenditures were $9.8 million in fiscal 2001, $4.0 million in
fiscal 2000 and $971,000 in fiscal 1999. Our capital expenditures consisted
primarily of purchases of plant, equipment and software and leasehold
improvements. Current capital commitments are approximately $800,000,
principally for leasehold improvements, office furniture and equipment to be
used in our new research and development facility in Sunnyvale, California. We
expect that our capital expenditures will continue to increase in the future.
Net cash provided by financing activities was $14.5 million in fiscal 2001,
$150.7 million in fiscal 2000 and $5.6 million in fiscal 1999. In fiscal 2001,
we raised $15.0 million from the exercise of employee stock options, partially
offset by employee stock repurchases. In fiscal 2000, financing came from
numerous sources:
. During May 1999, we raised approximately $20.0 million in gross proceeds
from the sale of Series C Preferred Stock at $4.575 per share.
. During October 1999, we raised approximately $2.8 million through the
cash exercise of options granted to a board member and consultant to
purchase 702,380 shares of common stock at $4.00 per share.
. During November 1999, we raised approximately $3.1 million through the
sale of 280,953 shares of Series D Preferred Stock at $11.00 per share.
. During November 1999, we raised approximately $126.5 million, net of
underwriting discounts, commissions and offering costs through the sale
of 5,750,000 shares of our common stock in an initial public offering at
$24.00 per share.
During December 1999, $4.5 million of the initial public offering proceeds
were used to repay all of the Company's outstanding debt. In fiscal 1999, cash
provided by financing activities was primarily attributable to the issuance of
$4.0 million in debt obligations.
We believe that working capital will be sufficient to meet our working
capital and capital expenditure requirements for at least the next twelve
months. Thereafter, we may find it necessary to obtain additional equity or
debt financing. Furthermore, if cash is used for unanticipated uses, we may
need additional capital sooner than expected. In the event additional financing
is required, we may not be able to raise it on acceptable terms or at all.
Recent Accounting Pronouncements
We will adopt Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities" (as
amended by SFAS 138) in the first quarter of our fiscal year 2002. SFAS 133
established new accounting and reporting standards for derivative and hedging
activities. In accordance with the standard, we will prospectively recognize
the fair value of our derivative instruments as assets or liabilities in our
consolidated balance sheet. The resulting gain or loss will be reflected as
other comprehensive income or in earnings, depending upon the achievement of
hedge accounting criteria. As of April 30, 2001, we owned no derivative
instruments.
32
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are subject to certain market risks including changes in exchange rates
and interest rates. We do not undertake any specific actions to cover our
exposures to exchange and interest rate risks and we are not a party to any
risk management transactions. We do not purchase or hold any derivative
financial instruments for trading purposes.
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. As of April 30, 2001, we had approximately $79.1
million invested primarily in certificates of deposit, and fixed-rate, short-
term corporate and U.S. government debt securities which are subject to
interest rate risk and will decrease in value if market U.S. interest rates
increase. We maintain a strict investment policy, which is intended to ensure
the safety and preservation of our invested funds by limiting default risk,
market risk, and reinvestment risk. The table below presents notional amounts
and related weighted-average interest rates by fiscal year of maturity for our
investment portfolio as of April 30, 2001.
<TABLE>
<CAPTION>
Fair
2002 2003 Total Value
------- ------ ------- -------
($ in thousands)
<S> <C> <C> <C> <C>
Cash equivalents
Fixed rate.................................. $50,589 $ -- $50,589 $50,590
Average rate................................ 4.71% -- 4.71% --
Investments
Fixed rate.................................. $26,478 $1,991 $28,469 $28,477
Average rate................................ 5.06% 5.00% 5.06% --
------- ------ ------- -------
Total Investment
Securities.................................. $77,067 $1,991 $79,058 $79,067
======= ====== ======= =======
Average rate.................................. 4.83% 5.00% 4.84%
</TABLE>
Foreign Currency Exchange Rate Risk
We develop products in the United States and sell them throughout the world.
As a result, our financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in foreign
markets. Since all of our sales are currently made in United States dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets. If any of the events described above were to occur, our net sales
could be seriously impacted, since a significant portion of our net sales are
derived from international operations. For the fiscal years 2001, 2000 and
1999, approximately 59%, 48% and 44% of our total net sales were derived from
customers outside of North America. In contrast, substantially all of the
expenses of operating our foreign subsidiaries are incurred in foreign
currencies. Specifically, the exposure includes intercompany loans, and third
party sales or payments. As a result, our U.S. dollar earnings and net cash
flows from international operations may be adversely affected by changes in
foreign currency exchange rates. We, however, do not consider the market risk
associated with our international operations to be material. We do not
currently use derivative financial instruments for hedging or speculative
purposes.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of April 30, 2001 and 2000................ 35
Consolidated Statements of Operations for each of the three years in the
period ended April 30, 2001............................................. 36
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended April 30, 2001................................ 37
Consolidated Statements of Cash Flows for each of the three years in the
period ended April 30, 2001............................................. 38
Notes to the Consolidated Financial Statements........................... 39
Report of Independent Auditors........................................... 58
</TABLE>
34
<PAGE>
CACHEFLOW INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
April 30,
------------------
2001 2000
-------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................. $ 55,356 $ 91,532
Short-term investments.................................... 26,208 33,788
Restricted investments.................................... 765 --
Accounts receivable, net of allowance for doubtful
accounts and sales returns of $1,500 and $350 at
April 30, 2001 and 2000, respectively.................... 14,365 3,112
Inventories............................................... 7,018 4,741
Prepaid expenses and other current assets................. 3,240 1,200
-------- --------
Total current assets....................................... 106,952 134,373
Property and equipment, net................................ 12,563 4,721
Restricted investments..................................... 1,991 --
Intangible assets, net..................................... 164,264 --
Other assets............................................... 1,462 1,640
-------- --------
Total assets.......................................... $287,232 $140,734
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.......................................... $ 6,761 $ 2,465
Accrued payroll and related benefits...................... 6,034 2,611
Deferred revenue.......................................... 7,371 1,375
Other accrued liabilities................................. 8,906 1,487
-------- --------
Total current liabilities.................................. 29,072 7,938
Deferred revenue........................................... 1,409 166
-------- --------
Total liabilities.......................................... 30,481 8,104
Commitments
Stockholders' equity:
Preferred stock:
$0.0001 par value, issuable in series: 10,000 shares
authorized at April 30, 2001 and 2000, respectively;
none issued and outstanding at April 30, 2001 and 2000,
respectively........................................... -- --
Common stock:
$0.0001 par value, 200,000 shares authorized at April
30, 2001 and 2000, respectively; 44,116 and 36,128
shares issued at April 30, 2001 and 2000,
respectively........................................... 4 4
Additional paid-in capital................................ 896,773 264,304
Notes receivable from stockholders........................ (573) (4,713)
Deferred stock compensation............................... (33,348) (43,489)
Accumulated other comprehensive loss...................... (210) (101)
Accumulated deficit....................................... (601,901) (82,805)
Treasury stock, at cost, 775 and 76 shares held at April
30, 2001 and 2000, respectively.......................... (3,994) (570)
-------- --------
Total stockholders' equity................................. 256,751 132,630
-------- --------
Total liabilities and stockholders' equity............ $287,232 $140,734
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
35
<PAGE>
CACHEFLOW INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended April 30,
-----------------------------
2001 2000 1999
--------- -------- --------
<S> <C> <C> <C>
Net sales...................................... $ 97,739 $ 29,277 $ 7,036
Cost of goods sold............................. 39,704 11,212 3,297
--------- -------- --------
Gross profit................................... 58,035 18,065 3,739
Operating expenses:
Research and development..................... 27,682 9,646 4,034
Sales and marketing.......................... 69,935 28,903 6,865
General and administrative................... 10,512 4,757 2,069
Stock compensation........................... 69,168 38,405 3,776
Goodwill amortization........................ 98,987 -- --
Acquired in-process research and
development................................. 32,200 -- --
Restructuring................................ 1,850 -- --
Impairment of assets......................... 272,871 -- --
--------- -------- --------
Total operating expenses................... 583,205 81,711 16,744
--------- -------- --------
Operating loss................................. (525,170) (63,646) (13,005)
Interest income................................ 6,705 3,780 160
Interest expense............................... (313) (747) (357)
--------- -------- --------
Net loss before income taxes................... (518,778) (60,613) (13,202)
Provision for income taxes..................... 318 73 --
--------- -------- --------
Net loss....................................... (519,096) (60,686) (13,202)
Accretion of preferred stock................... -- (1,967) --
--------- -------- --------
Net loss available to common stockholders...... $(519,096) $(62,653) $(13,202)
========= ======== ========
Basic and diluted net loss per common share.... $ (14.44) $ (3.31) $ (2.17)
========= ======== ========
Shares used in computing basic and diluted net
loss per common share......................... 35,950 18,935 6,093
========= ======== ========
Pro forma basic and diluted net loss per common
share......................................... $ (2.30) $ (0.79)
======== ========
Shares used in computing pro forma basic and
diluted net loss per common share............. 27,218 16,626
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
36
<PAGE>
CACHEFLOW INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Preferred Notes Accumulated
Stock Common Stock Additional Receivable Deferred Other Treasury Stock
--------------- -------------- Paid-In From Stock Comprehensive Accumulated --------------
Shares Amount Shares Amount Capital Stockholders Compensation Loss Deficit Shares Amount
------- ------ ------ ------ ---------- ------------ ------------ ------------- ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at April
30, 1998......... 9,970 $ 1 6,017 $ 1 $ 14,646 $ -- $ (98) $ -- $ (6,950) -- $ --
Exercise of
stock options by
employees....... -- -- 6,843 -- 2,049 -- -- -- -- -- --
Issuance of
common stock to
third parties
for services ... -- -- 34 -- 20 -- -- -- -- -- --
Stock
compensation.... -- -- -- -- 156 -- -- -- -- -- --
Issuance of
warrants in
connection with
debt issuance .. -- -- -- -- 437 -- -- -- -- -- --
Note receivable
from stockholder
for the exercise
of stock
options......... -- -- -- -- -- (999) -- -- -- -- --
Interest on note
receivable from
stockholder for
the exercise of
stock options... -- -- -- -- -- (5) -- -- -- -- --
Deferred stock
compensation ... -- -- -- -- 13,569 -- (13,569) -- -- -- --
Amortization of
deferred stock
compensation ... -- -- -- -- -- -- 3,600 -- -- -- --
Net loss ....... -- -- -- -- -- -- -- -- (13,202) -- --
------- ---- ------ --- -------- ------- -------- ----- --------- ---- -------
Balances at April
30, 1999......... 9,970 1 12,894 1 30,877 (1,004) (10,067) -- (20,152) -- --
Issuance of
Series C
preferred stock,
net of issuance
costs .......... 4,372 -- -- -- 19,976 -- -- -- -- -- --
Issuance of
Series D
preferred stock,
net of issuance
costs .......... 281 -- -- -- 3,090 -- -- -- -- -- --
Exercise of
stock options by
employees ...... -- -- 1,785 1 6,421 -- -- -- -- -- --
Notes receivable
from
stockholders for
the exercise of
stock options .. -- -- -- -- -- (3,547) -- -- -- -- --
Issuance of
common stock to
nonemployees ... -- -- 692 -- 2,726 -- -- -- -- 68 --
Repurchase of
common stock
from employees
................ -- -- (289) -- (79) -- -- -- -- (140) (61)
Interest on
notes receivable
from
stockholders for
the exercise of
stock options .. -- -- -- -- -- (162) -- -- -- -- --
Deferred stock
compensation ... -- -- -- -- 71,848 -- (71,848) -- -- -- --
Amortization of
deferred stock
compensation ... -- -- -- -- -- -- 38,426 -- -- -- --
Exercise of
Series A and C
warrants ....... 673 -- -- -- 976 -- -- -- -- (4) (509)
Issuance of
common stock in
an initial
public offering,
net of issuance
costs........... -- -- 5,750 1 126,502 -- -- -- -- -- --
Conversion of
Series A, B, C,
and D preferred
stock to common
stock........... (15,296) (1) 15,296 1 -- -- -- -- -- -- --
Net loss ....... -- -- -- -- -- -- -- -- (60,686) -- --
Unrealized loss
on short-term
investments .... -- -- -- -- -- -- -- (101) -- -- --
Accretion of
Series D
preferred stock
................ -- -- -- -- 1,967 -- -- -- (1,967) -- --
------- ---- ------ --- -------- ------- -------- ----- --------- ---- -------
Balances at April
30, 2000......... -- -- 36,128 4 264,304 (4,713) (43,489) (101) (82,805) (76) (570)
Issuance of
common stock in
stock-for-stock
mergers ........ -- -- 6,125 -- 579,076 (1,649) (17,608) -- -- -- --
Exercise of
stock options
and purchases of
ESPP shares by
employees ...... -- -- 1,721 -- 11,489 -- -- -- -- (2) (46)
Net exercise of
Series B
warrants ....... -- -- 142 -- 485 -- -- -- -- (9) (485)
Interest on
notes receivable
from
stockholders for
the exercise of
stock options .. -- -- -- -- -- (157) -- -- -- -- --
Deferred stock
compensation ... -- -- -- -- 17,355 -- (17,355) -- -- -- --
Stock
compensation
expense related
to modified
employee stock
options......... -- -- -- -- 28,904 -- -- -- -- -- --
Amortization of
deferred stock
compensation ... -- -- -- -- -- -- 40,264 -- -- -- --
Reversal of
unamortized
deferred stock
compensation ... -- -- -- -- (4,840) -- 4,840 -- -- -- --
Acquisition of
treasury stock
and related
notes receivable
settlement...... -- -- -- -- -- 2,385 -- -- -- (421) (2,385)
Repayment of
notes receivable
................ -- -- -- -- -- 3,561 -- -- -- -- --
Repurchase of
common stock
from employees
................ -- -- -- -- -- -- -- -- -- (267) (508)
Net loss........ -- -- -- -- -- -- -- -- (519,096) -- --
Unrealized loss
on short-term
investments..... -- -- -- -- -- -- -- (109) -- -- --
------- ---- ------ --- -------- ------- -------- ----- --------- ---- -------
Balances at April
30, 2001......... -- $ -- 44,116 $ 4 $896,773 $ (573) $(33,348) $(210) $(601,901) (775) $(3,994)
======= ==== ====== === ======== ======= ======== ===== ========= ==== =======
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
Balances at April
30, 1998......... $ 7,600
Exercise of
stock options by
employees....... 2,049
Issuance of
common stock to
third parties
for services ... 20
Stock
compensation.... 156
Issuance of
warrants in
connection with
debt issuance .. 437
Note receivable
from stockholder
for the exercise
of stock
options......... (999)
Interest on note
receivable from
stockholder for
the exercise of
stock options... (5)
Deferred stock
compensation ... --
Amortization of
deferred stock
compensation ... 3,600
Net loss ....... (13,202)
-------------
Balances at April
30, 1999......... (344)
Issuance of
Series C
preferred stock,
net of issuance
costs .......... 19,976
Issuance of
Series D
preferred stock,
net of issuance
costs .......... 3,090
Exercise of
stock options by
employees ...... 6,422
Notes receivable
from
stockholders for
the exercise of
stock options .. (3,547)
Issuance of
common stock to
nonemployees ... 2,726
Repurchase of
common stock
from employees
................ (140)
Interest on
notes receivable
from
stockholders for
the exercise of
stock options .. (162)
Deferred stock
compensation ... --
Amortization of
deferred stock
compensation ... 38,426
Exercise of
Series A and C
warrants ....... 467
Issuance of
common stock in
an initial
public offering,
net of issuance
costs........... 126,503
Conversion of
Series A, B, C,
and D preferred
stock to common
stock........... --
Net loss ....... (60,686)
Unrealized loss
on short-term
investments .... (101)
Accretion of
Series D
preferred stock
................ --
-------------
Balances at April
30, 2000......... 132,630
Issuance of
common stock in
stock-for-stock
mergers ........ 559,819
Exercise of
stock options
and purchases of
ESPP shares by
employees ...... 11,443
Net exercise of
Series B
warrants ....... --
Interest on
notes receivable
from
stockholders for
the exercise of
stock options .. (157)
Deferred stock
compensation ... --
Stock
compensation
expense related
to modified
employee stock
options......... 28,904
Amortization of
deferred stock
compensation ... 40,264
Reversal of
unamortized
deferred stock
compensation ... --
Acquisition of
treasury stock
and related
notes receivable
settlement...... --
Repayment of
notes receivable
................ 3,561
Repurchase of
common stock
from employees
................ (508)
Net loss........ (519,096)
Unrealized loss
on short-term
investments..... (109)
-------------
Balances at April
30, 2001......... $ 256,751
=============
</TABLE>
See accompanying notes to the consolidated financial statements.
37
<PAGE>
CACHEFLOW INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended April 30,
-----------------------------
2001 2000 1999
--------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net loss........................................ $(519,096) $(60,686) $(13,202)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 2,733 774 261
Stock compensation............................. 69,168 38,405 3,776
Noncash charges for goodwill amortization,
acquired in-process research and development,
restructuring charges and impairment of
assets........................................ 405,908 -- --
Interest on notes receivable from
stockholders.................................. (157) (162) (5)
Debt issuance costs............................ -- 256 437
Changes in operating assets and liabilities, net
of cash assumed in business combinations:
Accounts receivable............................ (11,253) (1,759) (1,353)
Inventories.................................... (2,277) (3,809) (525)
Prepaid expenses and other current assets...... (1,869) (1,396) (7)
Other assets................................... 90 (883) (719)
Accounts payable............................... (2,861) 1,001 1,035
Deferred revenue and accrued liabilities....... 5,467 4,686 594
--------- -------- --------
Net cash used in operating activities........ (54,147) (23,573) (9,708)
Investing Activities
Purchases of property and equipment............. (9,759) (4,034) (971)
Cash acquired in business acquisitions.......... 7,813
Sales (purchases) of investment securities,
net............................................ 5,421 (33,897) --
--------- -------- --------
Net cash provided by (used in) investing
activities.................................. 3,475 (37,931) (971)
Financing Activities
Net proceeds from issuance of preferred stock... -- 23,526 --
Net proceeds from issuance of common stock...... 15,004 132,112 1,051
Repurchase of employee common stock............. (508) (140) --
Payments on debt obligations and line of
credit......................................... -- (4,753) (73)
Borrowings from line of credit.................. -- -- 643
Proceeds from issuance of debt obligations...... -- -- 4,000
--------- -------- --------
Net cash provided by financing activities.... 14,496 150,745 5,621
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (36,176) 89,241 (5,058)
Cash and cash equivalents at beginning of year.. 91,532 2,291 7,349
--------- -------- --------
Cash and cash equivalents at end of year........ $ 55,356 $ 91,532 $ 2,291
========= ======== ========
Supplemental disclosure of cash flow information
Cash paid for interest.......................... $ -- $ 309 $ 375
========= ======== ========
Noncash investing and financing activities
Issuance of common stock for acquisition of
businesses..................................... $ 579,076 $ -- $ --
========= ======== ========
Purchase of equipment under capital lease....... $ -- $ 110 $ --
========= ======== ========
Warrants issued in connection with long-term
debt and strategic customer arrangements....... $ -- $ 509 $ 437
========= ======== ========
Accretion of preferred stock.................... $ -- $ 1,967 $ --
========= ======== ========
Issuance of notes receivable to stockholders for
the exercise of stock options and related
interest....................................... $ -- $ (3,547) $ (1,004)
========= ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
38
<PAGE>
CACHEFLOW, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business
CacheFlow Inc., hereafter also referred to as the "Company," was organized
and incorporated in the state of Delaware on March 16, 1996. The Company
operates in one segment to design, develop, market and support content-smart
networking solutions. The Company's sales activities were initiated in the
first quarter of fiscal 1999.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents consisted primarily of commercial paper investments at April 30,
2001 and 2000.
Short-Term Investments
Short-term investments consist primarily of debt securities with original
maturities between three months and two years. Management determines the
appropriate classification of debt and equity securities at the time of
purchase and evaluates such designation as of each balance sheet date. To date,
all marketable debt securities have been classified as available-for-sale and
are carried at fair value with unrealized gains and losses, if any, included in
accumulated other comprehensive income (loss) in stockholders' equity. The fair
value of these securities is based on quoted market prices. Realized gains and
losses and declines in value of securities judged to be other than temporary
are included in interest income and have not been significant to date. Interest
and dividends on all securities are included in interest income.
Restricted Investments
Restricted investments comprise amounts held in deposits under irrevocable
standby letters of credit that are required as collateral for a new research
and development facility operating lease agreement, and for certain inventory
purchases in the ordinary course of business.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist of demand deposit accounts, money market accounts, commercial paper,
corporate debt securities, and trade receivables. The Company maintains its
demand deposit accounts and its money market accounts primarily with one
financial institution. The Company's investment advisors are instructed to only
invest in high-quality, investment grade securities and to limit investment
exposure in any one issue. Management believes the financial risks associated
with these financial instruments are minimal.
39
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company generally does not generally require collateral for sales to
customers. For the years ended April 30, 2001 and 2000, no customers
individually accounted for over 10% of our net sales. For the year ended April
30, 1999, three customers individually accounted for over 10% of our net sales,
for an aggregate of approximately 33% of our net sales.
Concentrations of Supply
The Company currently purchases several key parts and components used in the
manufacture of its Internet caching appliance products from limited sources of
supply.
Concentrations of Sales
The Company's Internet caching appliance product family and related services
have accounted for all of the Company's net sales for the three years ended
April 30, 2001.
Inventories
Inventories consist of raw materials, work-in-process and finished goods.
Inventories are recorded at the lower of cost or market using the first-in,
first-out method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the lesser of the estimated useful life, generally three to five
years, or the lease term of the respective assets.
Intangible Assets
The Company's primary intangible asset is goodwill, which has resulted from
business combinations accounted for as purchases, and is recorded at amortized
cost and is included in "Intangible assets, net" on the Company's balance
sheet. Amortization is computed using the straight-line method over a period of
three years. Accumulated goodwill amortization was $98,987,000 and none as of
April 30, 2001 and 2000, respectively.
Long-lived Assets
The Company evaluates its long-lived assets in accordance with the Financial
Accounting Standards Board's (FASB) Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations, such as property, equipment and
improvements, and intangible assets, when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of the assets.
The Company also periodically assesses the impairment of enterprise level
goodwill in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 17, Intangible Assets. An impairment review is performed quarterly,
or whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. Factors the Company considers important which could
trigger an impairment review include, but are not limited to, significant
underperformance relative to historical or projected future operating results,
significant changes in the manner of use of the acquired assets or the strategy
for the Company's overall business, significant negative industry or economic
trends, a significant decline in the Company's stock
40
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
price for a sustained period, and the Company's market capitalization relative
to net book value. When the Company determines that the carrying value of
goodwill may not be recoverable based upon the existence of one or more of the
above indicators of impairment, the Company measures any impairment using the
market value method. This method estimates fair value based upon the Company's
average market capitalization, which is calculated using the Company's average
closing stock price surrounding the measurement date.
Revenue Recognition
The Company generally recognizes product revenue upon shipment assuming that
evidence of an arrangement exists, the fee is determinable and collectibility
is probable, unless the Company has future obligations for installation or must
obtain customer acceptance, in which case revenue is deferred until these
obligations are met. Maintenance contract revenue is initially deferred when
the customer purchases a maintenance contract and recorded evenly over the life
of the contract. Maintenance contract revenue for the years ended April 30,
2001, 2000 and 1999 was $4,398,000, $360,000 and $25,000, respectively.
Research and Development
Costs to develop the Company's products are expensed as incurred in
accordance with the FASB's Statement of Financial Accounting Standards No. 2,
"Accounting for Research and Development Costs," which establishes accounting
and reporting standards for research and development.
Warranty Reserves
The Company's products generally carry a one-year warranty that includes
factory repair services. Estimated expenses for warranty obligations, including
the cost of replacement parts, are generally accrued at the same time as
related product revenue is recognized.
Income Taxes
The Company uses the liability method to account for income taxes as
required by the Financial Accounting Standards Board's (FASB) Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with the
Financial Accounting Standards Board's (FASB) Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Included in other
comprehensive income (loss) for the Company are adjustments to record
unrealized gains and losses on available-for-sale securities. These adjustments
are accumulated in "Accumulated other comprehensive loss" in the stockholder's
equity section of the balance sheet.
The comprehensive net loss was as follows for the years ended April 30, (in
thousands):
<TABLE>
<CAPTION>
2001 2000 1999
--------- -------- --------
<S> <C> <C> <C>
Net loss available to common stockholders... $(519,096) $(62,653) $(13,202)
Unrealized loss on investments.............. (109) (101) --
--------- -------- --------
Comprehensive loss.......................... $(519,205) $(62,754) $(13,202)
========= ======== ========
</TABLE>
41
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company accounts for stock-based compensation with respect to stock
options granted to employees and officers using the intrinsic value based
method in accordance with Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" and Financial Accounting Standards
Board Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation (an Interpretation of APB Opinion No. 25)." Stock options
granted to non-employees are accounted for using the fair value method in
accordance with Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-based Compensation" (FAS 123). In addition, with respect to stock
options granted to employees, the Company provides pro-forma information as
required by FAS 123 showing the results of applying the fair value method using
the Black-Scholes option pricing model.
The Company accounts for equity instruments issued in exchange for the
receipt of goods or services from other than employees in accordance with FAS
123 and the conclusions reached by the Emerging Issues Task Force in Issue No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services"
(EITF 96-18). Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments
issued, whichever is more reliably measurable. The value of equity instruments
issued for consideration other than employee services is determined on the
earliest of a performance commitment or completion of performance by the
provider of goods or services as defined by EITF 96-18.
Net Loss Per Common Share
Basic net loss per common share and diluted net loss per common share are
presented in conformity with the FASB's Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS 128), for all periods presented.
In accordance with FAS 128, basic and diluted net loss per common share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less the weighted average number of shares of
common stock issued to founders, investors and employees that are subject to
repurchase. Pro forma basic and diluted net loss per common share, as presented
in the condensed consolidated statements of operations, have been computed as
described above and also give effect, under Securities and Exchange Commission
guidance, to the conversion of the convertible preferred stock (using the if-
converted method) from the original date of issuance. The shares used in
calculating the pro forma basic and diluted net loss per common share amounts
also include certain warrants to purchase preferred stock as such warrants
expired upon the completion of the Company's initial public offering of its
common stock in November 1999.
42
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the calculation of basic and diluted net loss
per common share and pro forma basic and diluted net loss per common share (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended April 30,
-----------------------------
2001 2000 1999
--------- -------- --------
<S> <C> <C> <C>
Historical:
Net loss available to common
stockholders............................. $(519,096) $(62,653) $(13,202)
========= ======== ========
Weighted-average shares of common stock
outstanding.............................. $ 40,661 $ 23,555 $ 9,214
Less: Weighted-average shares subject to
repurchase............................... (4,711) (4,620) (3,121)
--------- -------- --------
Weighted-average shares used in computing
basic and diluted net loss per common
share.................................... 35,950 18,935 6,093
========= ======== ========
Basic and diluted net loss per common
share.................................... $ (14.44) $ (3.31) $ (2.17)
========= ======== ========
Pro Forma:
Shares used above......................... 18,935 6,093
Pro forma adjustment to reflect the
weighted effect of the assumed conversion
of preferred stock....................... 7,919 9,970
Pro forma adjustment to reflect the
weighted effect of the assumed conversion
of preferred stock warrants.............. 364 563
-------- --------
Shares used in computing pro forma basic
and diluted net loss per common share.... 27,218 16,626
======== ========
Pro forma basic and diluted net loss per
common share............................. $ (2.30) $ (0.79)
======== ========
</TABLE>
The Company has excluded preferred stock, warrants, outstanding stock
options, restricted shares and shares subject to repurchase from the
calculation of diluted net loss per common share that are antidilutive for all
periods presented. The total number of shares excluded from the calculations of
diluted net loss per common share was (in thousands) 18,289, 14,784 and 16,980,
for the three years ended April 30, 2001, 2000, and 1999.
Foreign Currency Adjustments
Management has determined that the functional currency of the Company's
domestic and foreign operations is the U.S. dollar. Accordingly, the effects of
foreign currency transactions, and of remeasuring the financial position and
results of operations from local currencies into the functional currency, are
included in "interest expense." These amounts have not been material for each
of the three years in the period ended April 30, 2001.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses for
the years ended April 30, 2001, 2000 and 1999 were $2,068,000, $450,000, and
$270,000, respectively, and are included in sales and marketing expenses.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash equivalents and short-term investments, approximate their fair values
based on quoted market prices.
43
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment Information
The Company has adopted the FASB's Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information." The Company operates in one segment to design, develop and market
content-smart networking solutions that are specifically designed, or purpose-
built, to accelerate and manage the flow of information over the Internet
across domestic and international markets.
Recent Accounting Pronouncements
The Company will adopt Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities"
(as amended by SFAS 138) in the first quarter of its fiscal year 2002. SFAS 133
established new accounting and reporting standards for derivative and hedging
activities. In accordance with the standard, the Company will prospectively
recognize the fair value of its derivative instruments as assets or liabilities
in its consolidated balance sheet. The resulting gain or loss will be reflected
as other comprehensive income or in earnings, depending upon the achievement of
hedge accounting criteria. As of April 30, 2001, the Company owned no
derivative instruments.
Note 3. Acquisitions
SpringBank Networks, Inc.--On June 5, 2000, the Company acquired all of the
outstanding capital stock of SpringBank Networks, Inc. ("SpringBank"), a
privately held company organized to develop content management technologies.
The acquisition was accounted for under the purchase method of accounting and
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values on the acquisition
date. Since June 5, 2000, the results of operations of SpringBank have been
included in the Company's Consolidated Statements of Operations. Purchase
consideration totaled approximately $177 million and included approximately 2.7
million shares of CacheFlow common stock, approximately $7 million of assumed
liabilities and approximately $2 million in transaction costs. Substantially
all of the $177 million purchase price was allocated to goodwill, which is
being amortized over three years on a straight-line basis. For further
discussion regarding goodwill, refer to Note 6, "Impairment of Assets".
Entera, Inc.--On December 15, 2000, the Company completed the acquisition of
Entera, Inc. ("Entera"), a company that develops standards-based streaming
content distribution and management technologies, in a stock-for-stock merger
transaction accounted for as a purchase. Purchase consideration was
approximately $411.9 million consisting of approximately 3.4 million shares of
CacheFlow common stock with a fair value of approximately $370.8 million, the
assumption of approximately 400,000 outstanding stock options with a fair value
of approximately $40 million, and approximately $1.1 million in transaction
costs. Since December 15, 2000, the results of operations of Entera have been
included in the Company's Consolidated Statements of Operations.
The fair value of the common stock issued is based on the average closing
price of CacheFlow's common stock surrounding October 10, 2000. The fair value
of the Entera options assumed is based on the Black-Scholes model using the
following assumptions:
. Expected lives of 9 years
. Expected volatility factor of 1.54
. Risk-free interest rate of 6.25%
. Expected dividend rate of 0%
44
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The excess of the purchase price over the fair value of the net assets
acquired was valued at $409.1 million. Of this excess, $359.3 million was
allocated to goodwill, $17.6 million was allocated to deferred compensation,
and $32.2 million was allocated to in-process research and development. For
further discussion regarding goodwill, refer to Note 6, "Impairment of Assets".
The acquired goodwill is being amortized on a straight-line basis over its
estimated useful life of three years. Deferred stock compensation associated
with unvested stock options issued to employees in conjunction with the
acquisition is included as a reduction to stockholders' equity and is being
amortized by charges to operations using a graded method over the vesting
period of each respective option, consistent with the method described in
Financial Accounting Standards Board Interpretation No. 28. For the year ended
April 30, 2001, the Company recorded $6,516,000 of amortization of deferred
compensation related to stock options assumed for Entera employees.
Pro Forma Impact of Acquisitions (unaudited)
The following unaudited pro forma summary presents the Company's
consolidated results of operations for the year ended April 30, 2001 and 2000
as if the preceding two acquisitions had been consummated at the beginning of
the earliest period. The pro forma consolidated results of operations include
certain pro forma adjustments such as amortization of goodwill and deferred
compensation, and the elimination of the charge for in-process research and
development. The pro forma financial information does not purport to be
indicative of what would have occurred had the acquisition been made as of the
beginning of fiscal years 2001 and 2000 or of the results which may occur in
the future (in thousands, except per share data).
<TABLE>
<CAPTION>
For the year ended
April 30,
--------------------
2001 2000
--------- ---------
<S> <C> <C>
Net sales............................................. $ 100,364 $ 29,595
========= =========
Net loss.............................................. $(596,801) $(263,363)
========= =========
Basic and diluted net loss per common share........... $ (14.86) $ (10.51)
========= =========
</TABLE>
45
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4. Balance Sheet Data
Cash equivalents, short-term investments, and restricted investments
consisted of the following (in thousands):
<TABLE>
<CAPTION>
April 30, 2001
----------------------------------------
Estimated
Gross Gross Fair
Unrealized Unrealized Market
Cost Gain Loss Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Money market funds................ $ 2,396 $-- $ -- $ 2,396
Certificates of deposit........... 6,885 -- -- 6,885
Commercial paper.................. 61,824 13 (2) 61,835
Equity securities................. 706 -- (219) 487
Corporate and U.S. government debt
securities....................... 7,953 -- (2) 7,951
-------- ---- ----- --------
$ 79,764 $ 13 $(223) $ 79,554
======== ==== ===== ========
Due within one year............... $ 77,773 $ 13 $(223) $ 77,563
Due between one and two years..... 1,991 -- -- 1,991
-------- ---- ----- --------
$ 79,764 $ 13 $(223) $ 79,554
======== ==== ===== ========
<CAPTION>
April 30, 2000
----------------------------------------
Estimated
Gross Gross Fair
Unrealized Unrealized Market
Cost Gain Loss Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Money market funds................ $ 1,636 $-- $ -- $ 1,636
Commercial paper.................. 66,514 -- (25) 66,489
Corporate debt securities......... 56,399 2 (78) 56,323
-------- ---- ----- --------
$124,549 $ 2 $(103) $124,448
======== ==== ===== ========
Due within one year............... $114,523 $ 2 $ (62) $114,463
Due between one and two years..... 10,026 -- (41) 9,985
-------- ---- ----- --------
$124,549 $ 2 $(103) $124,448
======== ==== ===== ========
</TABLE>
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
April 30,
-------------
2001 2000
------ ------
<S> <C> <C>
Raw materials.................................................. $2,631 $2,380
Work-in-process................................................ 593 317
Finished goods................................................. 3,794 2,044
------ ------
$7,018 $4,741
====== ======
</TABLE>
During the fourth quarter ended April 30, 2001, the Company performed a
lower of cost or market and obsolescence assessment of its inventories and
determined that a portion of its raw material components was recorded above
market and that certain inventories were excess or obsolete. These excess and
overvalued inventories resulted from a sharp deterioration in macroeconomic
conditions during the Company's third and fourth fiscal quarters that caused
customers to defer or delay capital expenditures on information technology.
46
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result, the Company recorded approximately $3,910,000 in additional write-
downs of inventories to the lower of cost or market and to write-off excess or
obsolete inventory as of April 30, 2001.
Property and equipment, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
April 30,
----------------
2001 2000
------- -------
<S> <C> <C>
Computer and office equipment.............................. $ 8,721 $ 3,925
Software................................................... 4,422 1,446
Furniture and fixtures..................................... 1,145 307
Leasehold improvements..................................... 2,150 182
------- -------
16,438 5,860
Less accumulated depreciation and amortization............. (3,875) (1,139)
------- -------
$12,563 $ 4,721
======= =======
</TABLE>
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
April 30,
-------------
2001 2000
------ ------
<S> <C> <C>
Sales and marketing expenses.................................. $1,716 $ --
Professional and consulting fees.............................. 1,964 1,011
Acquisition costs............................................. 1,492 --
Restructuring reserves........................................ 924 --
Warranty reserve.............................................. 950 184
Other......................................................... 1,860 292
------ ------
$8,906 $1,487
====== ======
</TABLE>
Note 5. Note Receivable from Officer
In August 1999, the Company entered into a five-year non-recourse, non-
interest bearing note for $800,000 with an officer of the Company for the
purchase of a primary residence. The note was secured by the officer's primary
residence, and is presented in "Other assets" in the Company's balance sheet at
April 30, 2000. During fiscal 2001, the note and accrued interest were paid in
full.
Note 6. Impairment of Assets
In the fourth quarter of 2001, the Company identified indicators of possible
impairment of its long-lived assets. Such indicators included deterioration in
the business climate for Internet infrastructure companies, a significant
decline in the Company's stock price for a sustained period, and the Company's
market capitalization relative to its net book value. Management performed an
impairment assessment of long-lived assets and determined that certain
enterprise level goodwill recorded in connection with the Company's Springbank
and Entera acquisitions is not fully recoverable. As a result, the Company
recorded a $272.2 million impairment charge in the fourth quarter of fiscal
2001 to reduce goodwill to its estimated fair value based on the market value
method. The estimate of fair value was based upon the Company's average market
capitalization, which was calculated using the Company's average closing stock
price surrounding April 30, 2001. The remaining goodwill will be amortized
using the straight-line method over the remainder of its three-year life.
Additionally, a write-down of $650,000 was recorded in the fourth quarter ended
April 30, 2001, reflecting the carrying value of certain leasehold improvements
to be disposed of in July 2001. The
47
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
leasehold improvements relate to a Sunnyvale, California research and
development facility, which will be relocated in connection with the company's
restructuring plan. No write-downs of long-lived assets were recorded during
the years ended April 30, 2000 and 1999.
Note 7. Restructuring
During February 2001, the Company announced a comprehensive restructuring
plan that involves the following steps:
. Reducing the Company's workforce by 52 employees, which represents
approximately 10% of the Company's workforce;
. Canceling plans for expansion of our Sunnyvale, California headquarters
into larger facilities and relocating a research and development
facility in Sunnyvale, California;
. Downsizing the Company's international operations and discontinuing
plans to fund additional international expansion (the Company will
continue to manage current international investments);
. Canceling certain vendor contracts that existed prior to the
restructuring and enhancing productivity in the Company's operations in
an effort to reduce costs;
In connection with this restructuring plan, the Company accrued
approximately $1,850,000 in the fourth quarter ended April 30, 2001 relating to
employee severance benefits and contract termination costs. As of April 30,
2001, substantially all severance costs related to domestic employees had been
paid and $924,000 remained for certain international employee severance costs
and contract termination costs.
The following table sets forth components of the Company's restructuring
charges for 2001 and the Company's restructuring reserves at April 30, 2001,
which are included in "Accrued liabilities" (in thousands):
<TABLE>
<CAPTION>
Employee Contract
Costs Termination Total
-------- ----------- ------
<S> <C> <C> <C>
Provision for restructuring activities.......... $1,292 $558 $1,850
Cash payments................................... (926) -- (926)
------ ---- ------
Balance at April 30, 2001....................... $ 366 $558 $ 924
====== ==== ======
</TABLE>
Note 8. Stockholders' Equity
Preferred Stock
The Company's Certificate of Incorporation authorizes 10,000,000 preferred
shares. The preferred stock is undesignated and the Board of Directors has the
authority to issue new classes of preferred stock and determine the rights,
preferences and privileges of preferred stock.
Stock Options
In February 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, certain employees were offered
the opportunity to cancel outstanding stock options previously granted to them
in exchange for an equal number of new options to be granted at a future date,
at least six months and a day after the cancellation date. Employees electing
not to participate in the exchange received an option grant equal to 25% of the
number of their unexercised options that had exercise prices greater than $8
per share. The exercise price of these new options will be equal to the fair
market value of the
48
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's common stock on the date of grant. In connection with this program,
1,698,633 options were cancelled for those employees who elected to participate
in the exchange and 1,553,863 options were granted to employees who elected not
to participate. The exchange program is not expected to result in any
additional compensation charges or variable plan accounting. Members of the
Company's Board of Directors and its officers and senior executives are not
eligible to participate in this program.
In November 2000, the Company entered into a termination agreement with its
departing chairman that provided for the immediate vesting of certain unvested
stock options upon the chairman's termination date. The Company recorded a non-
recurring $28.1 million stock compensation charge equal to the difference
between the strike price and the fair value of the underlying stock on the date
the stock option grant was modified, multiplied by the number of shares that
were immediately vested.
The Company granted 677,380 options to a consultant of the Company on
October 13, 1999 to purchase common stock at an exercise price of $4.00 per
share. The options were immediately vested, nonforfeitable and exercisable and
were subsequently exercised. The fair value of the options was estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions: risk free rate of 6.0%, expected life of the options of 0.05
years, 60% volatility and no dividend yield. The Company calculated a value of
approximately $8,129,000 for the consultant's options and recorded this amount
as expense in October 1999.
Common Stock
On November 19, 1999, the Company completed its initial public offering, in
which it sold 5,750,000 shares of common stock (including an over-allotment
option of 750,000 shares) at $24 per share. Upon the closing of the offering,
all of the Company's preferred stock converted to common stock. Proceeds from
the offering were approximately $126,502,000, net of underwriter's discounts,
commissions and offering costs.
The Company has either assumed or has entered into Stock Purchase Agreements
in connection with the sale of common stock to employees, consultants and
directors. The Company typically has the right to repurchase, at the original
issue price, a declining percentage of certain of the shares of common stock
issued based on the employees, consultants, and directors service periods. The
repurchase right generally declines on a percentage basis over four years based
on the length of the each respective employee's continued employment with the
Company, and the director's membership on the Board of Directors under this
agreement. As of April 30, 2001, 2000 and 1999, 3,453,962, 3,987,916 and
4,963,456 shares, respectively, of common stock issued under these agreements
were subject to repurchase.
In September 1999, the Company's Board of Directors approved an increase in
authorized shares of common stock from 60,000,000 to 200,000,000 upon the
completion of the Company's initial public offering of its common stock.
49
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Shares of Common Stock Reserved for Future Issuance
Common stock reserved for future issuance consisted of the following at
April 30, 2001 (in thousands):
<TABLE>
<S> <C>
Common stock reserved for:
1996 Stock Option Plan.............................................. 4,467
1999 Stock Incentive Plan........................................... 12,635
1999 Director Option Plan........................................... 600
2000 Supplemental Stock Option Plan................................. 3,000
Employee Stock Purchase Plan........................................ 3,378
Other option grants................................................. 633
------
24,713
======
</TABLE>
Notes Receivable from Stockholders
In April 1999, the Company entered into a note for $999,900 with an officer
of the Company for the purchase of common stock. The note bore interest at
4.99% and the note and related interest were payable in full on April 12,
2004. The note was secured by 2 million shares of common stock of the Company
owned by the officer. The note was issued with full recourse. During fiscal
2001, the note and related accrued interest were paid in full.
In September 1999, the Company entered into two five-year notes for
$495,000 each with two employees of the Company for the purchase of common
stock. The notes bore interest at 5.98% and the note and related interest were
payable in full in September 2004. Each note was secured by 90,000 shares of
common stock of the Company owned by each employee. The notes were full
recourse. During fiscal 2001, these two employees departed and these notes and
related accrued interest were paid in full.
In October 1999, the Company entered into a five-year note for $2,519,900
with an officer of the Company for the purchase of common stock. The note bore
interest at 5.54% and the note and related interest was payable in full in
October 2004. The note was secured by 420,000 shares of common stock of the
Company owned by the officer. The note was full recourse. During fiscal 2001,
this officer departed and the note together with accrued interest was paid in
full.
In June 2000 and December 2000, the Company assumed numerous promissory
notes in connection with its Entera and SpringBank acquisitions. The terms of
these notes range from three to four years and were provided to officers and
employees of the acquired companies for the purchase of common stock. The
notes are full-recourse and bear interest at rates between 5.54% and 6.69%.
Each note and related interest is secured by shares of common stock of the
Company owned by each officer or employee. As of April 30, 2001, several
former executives and employees who departed the Company after the
acquisitions were consummated paid in full all principal and interest due
under their notes.
Note 9. Employee and Director Stock Plans
In 1996, the Company established the 1996 Stock Option Plan (the 1996 Plan)
under which stock options may be granted to employees, directors and
consultants of the Company and authorized 1,000,000 shares of common stock
thereunder. Through various amendments, the Board of Directors and
stockholders approved the increase in the number of shares authorized for
issuance under the 1996 Plan to 15,643,000. Under the 1996 Plan, nonstatutory
stock options may be granted to employees and consultants, and incentive stock
options (ISO) may be granted only to employees. In the case of an ISO that is
granted to an employee who, at the time
50
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the grant of such option, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company, the per share
exercise price shall not be less than 110% of the fair market value per share
on the date of grant or, granted to any other employee, the per share exercise
price shall not be less than 100% of the fair value per share on the date of
grant. The exercise price for non-qualified options may not be less than 85% of
the fair value of common stock at the option grant date.
Options issued under the 1996 Plan are immediately exercisable, and shares
issued upon exercise of an option are subject to a right of repurchase by the
Company at the original issuance price. The repurchase right lapses as
determined by the Company's Board of Directors, generally 25% after one year
and 2.08% per month thereafter. Shares issued under the 1996 Plan that are
repurchased become available for issuance under the Company's 1999 Stock
Incentive Plan, which is discussed further below.
The 1996 Plan will continue in effect for a term of ten years unless
terminated by the Company's Board of Directors at an earlier date. Any option
granted under the 1996 plan shall be exercisable at such times and under such
conditions as determined by the Company's Board of Directors.
Employee Stock Purchase Plan
In September 1999, the Company's Board of Directors adopted the Employee
Stock Purchase Plan, or ESPP. The plan became effective upon the effective date
of the Company's initial public offering of its common stock. As of April 30,
2001, a total of 3,500,000 shares of common stock have been reserved for
issuance under the plan. Under the plan, eligible employees may purchase common
stock through payroll deductions, which in any event may not exceed 15% of an
employee's compensation, at a price equal to the lower of 85% of the fair
market value of the common stock at the beginning of each offering period or at
the end of each purchase period. The number of shares reserved under the
Employee Stock Purchase Plan automatically increased by 500,000 shares
beginning January 31, 2000, and will continue to do so annually. The Company's
Board of Directors, at its discretion, may reduce the automatic annual increase
in reserved shares.
1999 Stock Incentive Plan
In September 1999, the Company's Board of Directors adopted the 1999 Stock
Incentive Plan (the "Incentive Plan"). As of April 30, 2001, 12,747,276 shares
of common stock have been reserved for issuance. The plan became effective upon
the effective date of the Company's initial public offering of its common
stock. The number of shares reserved under the Incentive Plan automatically
increased on January 1, 2001 by 2,000,000 shares and will increase on an annual
basis by the lesser of 5% of the total amount of common stock outstanding or
2,000,000 shares. Furthermore, any 1996 Plan options that are cancelled or
exercised and subsequently repurchased by the Company become available for
issuance under the Incentive Plan. The exercise price for incentive stock
options and non-qualified stock options may not be less than 100% and 85%,
respectively, of the fair market value of common stock on the option grant
date.
In February 2001, the Company granted 1,091,000 shares of restricted stock
to employees as an employee retention bonus. These shares are exercisable upon
grant and vest 50% on November 26, 2001 and another 50% on February 25, 2002.
The Company recorded $6,403,000 of deferred stock compensation in connection
with this transaction based on the intrinsic value of this stock award on the
date of grant. This deferral will amortize to stock compensation expense on a
straight-line basis over the 12-month vesting period.
51
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999 Director Option Plan
In September 1999, the Company's Board of Directors adopted the 1999
Director Option Plan (the "Directors' Plan"). As of April 30, 2001, 600,000
shares of common stock have been reserved for issuance. The Director's Plan
became effective on the date of its adoption. Each non-employee director
joining the Board of Directors following the effective date of the initial
public offering will automatically receive options to purchase 25,000 shares of
common stock. In addition, each non-employee director will automatically
receive options to purchase 5,000 shares of common stock at each annual meeting
of the Board of Directors held in the year 2000 and thereafter. Each option
will have an exercise price equal to the fair market value of the common stock
on the option grant date. The number of shares reserved under the Directors'
Plan automatically increased by 100,000 shares beginning January 1, 2000 and
will continue to do so annually. The Company's Board of Directors, at its
discretion, may reduce the automatic annual increase in reserved shares.
2000 Supplemental Stock Option Plan
In February 2000, the Company's Board of Directors adopted the 2000
Supplemental Stock Option Plan (the "2000 Plan") under which 3,000,000 shares
of common stock have been reserved for issuance. Employees and consultants are
eligible to participate in the 2000 Plan, and outside directors and executive
officers are not eligible to participate. The 2000 Plan provides for the grant
of nonstatutory stock options to purchase shares of our common stock and
restricted shares of our common stock. The exercise price for stock options
issued under the 2000 Plan may not be less than 25% of the fair market value of
common stock on the option grant date.
Stock option activity under all plans is as follows (in thousands except per
share amounts):
<TABLE>
<CAPTION>
Outstanding Options
--------------------------
Weighted-Average
Number of Exercise Price
Shares Per Share
--------- ----------------
<S> <C> <C>
Balance at April 30, 1998......................... 3,746 $ 0.09
Options granted................................. 5,371 $ 0.61
Options exercised............................... (6,843) $ 0.37
Options canceled................................ (406) $ 0.34
------
Balance at April 30, 1999......................... 1,868 $ 0.51
Options granted................................. 11,743 $18.96
Options exercised............................... (2,477) $ 3.74
Options canceled................................ (480) $11.08
------
Balance at April 30, 2000......................... 10,654 $19.62
Options granted................................. 9,760 $26.14
Options exercised............................... (1,602) $ 5.72
Options canceled................................ (3,977) $46.38
------
Balance at April 30, 2001......................... 14,835 $18.23
======
</TABLE>
52
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table provides segregated ranges of stock options outstanding
at April 30, 2001 (in thousands except per share amounts and contractual
lives):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------
Number of Options Weighted Average Number of Options
Range of Outstanding at Contractual Life Weighted Average Exercisable at Weighted Average
Exercise Prices April 30, 2001 (Years) Exercise Price April 30, 2001 Exercise Price
--------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.01-$ 1.00 1,525 9.14 $ 0.18 1,515 $ 0.18
$ 2.00-$ 3.25 4,215 9.46 $ 2.90 955 $ 2.44
$ 4.00-$ 6.50 2,118 8.39 $ 4.79 1,993 $ 4.77
$ 9.15-$ 18.58 2,183 9.37 $15.95 742 $13.81
$24.00-$ 30.50 3,091 8.84 $28.42 1,372 $26.71
$37.00-$ 82.50 931 9.19 $58.99 110 $60.39
$85.00-$105.00 772 8.89 $91.10 259 $88.17
------ ---- ------ ----- ------
$ 0.01-$105.00 14,835 9.09 $18.32 6,946 $12.74
====== =====
</TABLE>
At April 30, 2001, 6,500,000 shares were available for future option grants
under all plans.
Stock Compensation
For the three years ended April 30, 2001, 2000 and 1999, the Company
recorded deferred stock compensation of $17,355,000, $71,848,000 and
$13,569,000, respectively. These amounts represent the difference between the
exercise price and the deemed fair value of the Company's common stock on the
date such stock options were granted. For the three years ended April 30, 2001,
2000 and 1999, the Company recorded amortization of stock compensation of
$40,264,000, $38,426,000 and $3,600,000, respectively. At April 30, 2001 and
2000, the Company had $33,348,000 and $43,489,000, respectively, of remaining
unamortized deferred compensation. Such amounts are included as a reduction of
stockholders' equity (deficit) and are being amortized using a graded method
over the vesting period of each respective option.
Pro Forma Disclosures of the Effect of Stock-Based Compensation
Pro forma information regarding results of operations and net loss per share
is required by FAS 123, which also requires that the information be determined
as if the Company had accounted for its stock-based awards to employees under
the fair value method of FAS 123. The fair value for each stock-based award was
estimated at the date of grant using the Black-Scholes option pricing model for
the year ended April 30, 2001 and 2000 and the minimum value option pricing
model for the years ended April 30, 1998 with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------------------------
Options ESPP
-------------------------- -----------------
2001 2000 1999 2001 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Risk-free interest rate....... 5.69% 6.25% 6.00% 6.08% 6.25%
Dividend yield................ 0% 0% 0% 0% 0%
Expected life (years)......... 3.93 5.00 5.00 0.62 0.67
Expected volatility........... 2.22 1.29 n/a 2.32 2.37
</TABLE>
The option valuation models were developed for use in the estimation of the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's
53
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
employee stock-based awards have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock-based awards.
For purposes of pro forma disclosures, the estimated fair value of stock-
based awards to employees is amortized to pro forma expense over the vesting
period for stock options and over the six-month purchase period for stock
purchases under the ESPP. Pro forma information follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Year Ended April 30,
-----------------------------
2001 2000 1999
--------- -------- --------
<S> <C> <C> <C>
Pro forma net loss.......................... $(599,118) $(74,940) $(13,261)
========= ======== ========
Pro forma basic and diluted net loss per
common share............................... $ (16.67) $ (3.96) $ (2.18)
========= ======== ========
</TABLE>
The per share weighted average grant date fair value of options granted,
which is the value assigned to the options under FAS 123, was $27.54, $19.79
and $0.14, for options granted for the years ended April 30, 2001, 2000 and
1999, respectively. The weighted average fair value of employee stock purchase
rights issued under the Company's ESPP was $17.68 and $17.36 per share for the
years ended April 30, 2001and 2000 (the year the ESPP was adopted).
Note 10. Income Taxes
The provision for income taxes of $318,000 and $73,000 for the years ended
April 30, 2001and 2000, respectively, is composed entirely of foreign corporate
income taxes. There is no provision for income taxes for the year ended April
30, 1999.
A reconciliation of the income tax provision to the amount computed by
applying the statutory federal income tax rate to income (loss) before income
tax provision is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended April 30,
----------------------------
2001 2000 1999
--------- -------- -------
<S> <C> <C> <C>
Provision at statutory rate.................. $(181,572) $(21,215) $(4,621)
Goodwill amortization and impairment......... 129,923 -- --
Acquired in-process research and
development................................. 11,270 -- --
Future benefits not currently recognized..... 37,236 12,686 2,784
Stock compensation........................... 2,975 8,506 1,475
Other........................................ 486 96 362
--------- -------- -------
Provision for income taxes................. $ 318 $ 73 $ --
========= ======== =======
</TABLE>
54
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
April 30,
------------------
2001 2000
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 22,085 $ 12,659
Stock compensation expenses............................ 31,266 6,547
Inventory reserves..................................... 4,896 443
Other.................................................. 6,600 1,531
-------- --------
Total deferred tax assets............................ 64,847 21,180
Valuation allowance...................................... (64,847) (21,180)
-------- --------
Net deferred tax assets.................................. $ -- $ --
======== ========
</TABLE>
The Company has incurred losses from inception through fiscal 2001.
Management believes that, based on the history of such losses and other
factors, the weight of available evidence indicates that it is more likely than
not that the Company will not be able to realize its deferred tax assets and
thus a full valuation allowance has been recorded at April 30, 2001 and 2000.
The valuation allowance increased $43,667,000 and $15,067,000 during 2001 and
2000, respectively.
As of April 30, 2001, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $58,582,700, which expire in
fiscal years 2011 through 2021. The Company also had net operating loss
carryforwards for state income tax purposes of approximately $27,512,000, which
expire in fiscal years 2004 through 2006. Utilization of the Company's net
operating loss may be subject to substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code and similar
state provisions. Such an annual limitation could result in the expiration of
the net operating loss before utilization.
Note 11. Defined Contribution Benefit Plan
The Company has a defined contribution benefit plan under Section 401(k) of
the Internal Revenue Code, which covers substantially all United States-based
employees. Eligible employees may contribute pre-tax amounts to the plan via
payroll withholdings, subject to certain limitations. The Company does not
match contributions by plan participants.
Note 12. Lease Commitments
The Company leases certain facilities and equipment under noncancelable
operating leases. Certain of the Company's facility leases provide for periodic
rent increases based on the general rate of inflation. Future minimum lease
payments under operating leases are as follows (in thousands):
<TABLE>
<S> <C>
Year ending April 30,
2002.............................................................. $ 5,492
2003.............................................................. 4,740
2004.............................................................. 4,725
2005.............................................................. 4,877
2006.............................................................. 3,715
Thereafter........................................................ 1,224
-------
Total minimum lease payments........................................ $24,773
=======
</TABLE>
55
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense for the three years ended April 30, 2001, 2000, and 1999 was
$5,329,000, $2,342,000, and $1,300,000, respectively.
In October 2000, the Company entered into a short-term lease agreement for a
42,000 square foot research and development facility in Sunnyvale, California
with the intention of negotiating a longer-term lease, which would include
additional facilities to house other corporate functions. The lease term
commenced upon possession in November 2000 and was extended through July 31,
2001. In early 2001, in response to a downturn in the economy, the Company
restructured its operations, declined to negotiate a longer-term lease for
additional facilities, and made efforts to relocate its California research and
development activities.
In March 2001, the Company executed a new, five year operating lease for a
46,000 square foot research and development facility in Sunnyvale, California.
The lease commencement is expected to occur in July 2001, and will extend for a
term of five years from the commencement date. Lease payments escalate annually
and the total future minimum lease payments amount to $11.5 million over the
lease term. As part of this agreement, the Company is required to maintain on
deposit with a major financial institution an irrevocable standby letter of
credit as a form of security totaling $1.9 million which is classified as
"restricted investments" in the long-term assets section of the balance sheet
as of April 30, 2001. The letter of credit expires on April 1, 2002 but will
automatically extend to each succeeding calendar year, up to June 30, 2002,
unless otherwise terminated in writing.
Note 13. Related Party Transaction
In April 2001, the Company entered into a series of agreements with
Loudcloud, Inc., a managed services provider, whose chairman of the board and
co-founder also serves as a CacheFlow director. Pursuant to one agreement,
CacheFlow will outsource the management of its Internet-based applications to
Loudcloud on an annual subscription basis totaling approximately $650,000.
Under a separate agreement, Loudcloud will purchase CacheFlow's caching
appliance products for use in its managed services operations and will begin
offering caching services to its customers. A third alliance agreement provides
that Loudcloud will pay CacheFlow for customer referrals forwarded to
Loudcloud.
Note 14. Litigation
See Note 17, "Subsequent Events" regarding a series of class-action lawsuits
filed against the Company subsequent to our fiscal year 2001.
From time to time and in the ordinary course of business, the Company may be
subject to various claims, charges, and litigation. In the opinion of
management, final judgments from such pending claims, charges, and litigation,
if any, against the Company would not have a material adverse effect on its
consolidated financial position, results of operations, or cash flows.
Note 15. Geographic Information Reporting
The Company operates in one segment to design, develop, market and support
content-smart networking solutions. Total export revenue consisted of sales
from the Company's U.S. operations to non-affiliated customers in other
geographic regions. Sales between geographic areas are accounted for at prices
that provide a profit, and are in accordance with the rules and regulations of
the respective governing authorities. During fiscal 2001, 2000 and 1999, there
were no intra-enterprise sales, and no material long-lived assets were located
in the Company's foreign operations during fiscal 2001, 2000 and 1999.
56
<PAGE>
CACHEFLOW INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of net sales by geographic area (in thousands):
<TABLE>
<CAPTION>
Year Ended April 30,
----------------------
2001 2000 1999
------- ------- ------
<S> <C> <C> <C>
North America......................................... $40,091 $15,349 $3,920
Europe................................................ 21,697 4,982 1,376
Asia.................................................. 35,951 8,946 1,740
------- ------- ------
Consolidated.......................................... $97,739 $29,277 $7,036
======= ======= ======
</TABLE>
Revenues are attributed to geographic areas based on the location of the
customers.
Note 16. Selected Quarterly Financial Data (unaudited, in thousands, except per
share data)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
July 31, 2000 October 31, 2000 January 31, 2001 April 30, 2001
------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net sales............... $ 22,445 $ 32,548 $ 21,225 $ 21,521
Gross profit............ 14,145 20,657 13,487 9,746
Net loss................ (25,314) (25,636) (119,206) (348,940)
Basic and diluted net
loss per common share.. (0.77) (0.75) (3.19) (8.81)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
July 31, 1999 October 31, 1999 January 31, 2000 April 30, 2000
------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net sales............... $ 3,612 $ 4,838 $ 8,033 $ 12,794
Gross profit............ 2,232 2,952 4,951 7,930
Net loss................ (6,557) (20,591) (17,772) (17,733)
Basic and diluted net
loss per common share.. (0.80) (2.35) (0.64) (0.56)
</TABLE>
Note 17. Subsequent Event
Numerous putative securities class action lawsuits have been filed in the
U.S. District Court for the Southern District of New York against certain
public companies, their underwriters, and other individuals arising out of each
company's public offering. The first putative class action complaint against
us, certain of our current and former officers and directors, and certain
underwriters, was filed on June 8, 2001 in the United States District Court for
the Southern District of New York, and is captioned Colbert Birnet, L.P. v.
CacheFlow Inc., et al., Civil Action No. 01-CV-5143. Since then two other cases
have been filed in the U.S District Court for the Southern District of New
York: Powell v. CacheFlow et al. and Wesley v. CacheFlow et al. The Complaints
in these cases generally allege that the underwriters obtained excessive and
undisclosed commissions in connection with the allocation of shares of common
stock in our initial public offering, and maintained artificially high market
prices through tie-in arrangements which required customers to buy shares in
the after-market at pre-determined prices. The complaints allege that the
company and our current and former officers and directors violated Sections 11,
12(2) and 15 of the Securities Act of 1933, and Sections 10(b) (Rule 10b-5
promulgated thereunder) and 20(a) of the Securities Act of 1934, by making
material false and misleading statements in the prospectus incorporated in our
Form S-1 registration statement filed with the Securities and Exchange
Commission in November 1999. Plaintiffs seek an unspecified amount of damages
on behalf of persons who purchased our stock between November 18, 1999 and
December 6, 2000. We anticipate that further lawsuits making substantially
similar allegations may be filed. We believe that these lawsuits may be
coordinated or consolidated. Various plaintiffs have filed similar actions
asserting virtually identical allegations against approximately fifty other
companies. We intend to defend against the allegations in the complaints
vigorously.
57
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
CacheFlow Inc.
We have audited the accompanying consolidated balance sheets of CacheFlow
Inc. as of April 30, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended April 30, 2001. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of CacheFlow Inc. at April 30, 2001 and 2000, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended April 30, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
/s/ Ernst & Young LLP
Walnut Creek, California
May 14, 2001, except for Note 17,
as to which the date is
June 29, 2001
58
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Executives of the Registrant
See the information set forth in the section entitled "Proposal No. 1--
Election of Directors" in our Proxy Statement for the 2001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission with 120
days after the end of our fiscal year ended April 30, 2001 (the "2001 Proxy
Statement"), which is incorporated herein by reference, and the information set
forth in the section entitled "Executive Officers of the Registrant." See also
the information set forth in the section entitled "Compliance with Section
16(a) of the Exchange Act" in the 2001 Proxy Statement, which is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
See the information set forth in the section entitled "Executive
Compensation and Related Information" in the 2001 Proxy Statement, which is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information set forth in the section entitled "Security Ownership of
Certain Beneficial Owners and Management" in the 2001 Proxy Statement, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information set forth in the section entitled "Certain Relationships
and Related Transactions" in the 2001 Proxy Statement, which is incorporated
herein by reference.
59
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
1. Financial Statements
See Item 8 of this Form 10-K
2. Financial Statement Schedules
The following financial statement schedule of CacheFlow Inc. is
filed as part of this Report and should be read in conjunction with the
Financial Statements of CacheFlow Inc.
Schedule II Valuation and Qualifying Accounts and Reserves
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
3. Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
2.1 Agreement and Plan of Reorganization by and among CacheFlow Inc.,
Wildcat Merger Corporation, SpringBank Networks, Inc. and Soren
Christensen (as Stockholder's Agent) (which is incorporated herein by
reference to Exhibit 2.1 of Form 8-K filed by the Registrant with the
Commission on June 19, 2000)
2.2 Agreement and Plan of Merger and Reorganization among CacheFlow Inc.,
Diamond Merger Corp., Entera, Inc. and John Scharber, as
Stockholders' Representative (which is incorporated herein by
reference to Exhibit 2.2 of Form 8-K filed by the Registrant with the
Commission on December 21, 2000)
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(which is incorporated herein by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 No. 333-87997)
3.2 Amended and Restated Bylaws of the Registrant (which is incorporated
herein by reference to Exhibit 3.4 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Amended and Restated Investor's Rights Agreement, dated June 5, 2000
(which is incorporated herein by reference to Exhibit 4.3 to the
Registrant's Registration Statement on Form S-3 No. 333-55744)
4.3 Specimen Certificate of the Registrant's Common Stock (which is
incorporated herein by reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form S-1 No. 333-87997)
10.1 Form of Indemnification Agreement (which is incorporated herein by
reference to Exhibit 10.1 to the Registrant's Registration Statement
on Form S-1 No. 333-87997)
10.2 1996 Stock Option Plan (which is incorporated herein by reference to
Exhibit 10.2 to the Registrant's Registration Statement on Form S-1
No. 333-87997)
10.3 1999 Stock Incentive Plan (which is incorporated herein by reference
to Exhibit 10.3 to the Registrant's Registration Statement on Form S-
1 No. 333-87997)
10.4 1999 Director Option Plan (which is incorporated herein by reference
to Exhibit 10.4 to the Registrant's Registration Statement on Form S-
1 No. 333-87997)
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.5 1999 Employee Stock Purchase Plan (which is incorporated herein by
reference to Exhibit 10.5 to the Registrant's Registration Statement
on Form S-1 No. 333-87997)
10.6 Commercial lease agreement between Registrant, the Arrillaga
Foundation and the Perry Foundation, dated July 14, 1998 (which is
incorporated herein by reference to Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 No. 333-87997)
10.7 Commercial lease agreement between Registrant and Zetron Properties,
Inc., dated April 20, 2000
10.8 Commercial lease agreement between CacheFlow Canada and Wiebe
Property Corporation Ltd., dated May 1, 1999 (which is incorporated
herein by reference to Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)
10.9 Offer Letter with Brian NeSmith (which is incorporated herein by
reference to Exhibit 10.9 to the Registrant's Registration Statement
on Form S-1 No. 333-87997)
10.10 Offer Letter with Alan Robin (which is incorporated herein by
reference to Exhibit 10.10 to the Registrant's Registration Statement
on Form S-1 No. 333-87997)
10.11 Offer Letter with Mike Johnson (which is incorporated herein by
reference to Exhibit 10.11 to the Registrant's Registration Statement
on Form S-1 No. 333-87997)
10.12 Offer Letter with Don Jaworski
10.13 Offer Letter with John Scharber
10.14 Offer Letter with Robert Verheecke
10.15 Consulting Agreement with Marc Andreessen (which is incorporated
herein by reference to Exhibit 10.16 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)
10.16 2000 Supplemental Stock Option Plan (which is incorporated herein by
reference to Exhibit 99.1 of Form S-8 filed by the Registrant with
the Commission on April 11, 2000)
10.17 Michael Malcolm Resignation Agreement (which is incorporated herein
by reference to Exhibit 10.18 of Form 10-Q filed by the Registrant
with the Commission on December 15, 2000)
10.18 SpringBank Networks, Inc. 2000 Stock Incentive Plan (which is
incorporated herein by reference to Exhibit 99.2 of Form S-8 filed by
the Registrant with the Commission on September 8, 2000)
10.19 SpringBank Networks, Inc. Founder's Stock Purchase Agreement (which
is incorporated herein by reference to Exhibit 99.1 of Form S-8 filed
by the Registrant with the Commission on September 8, 2000)
10.20 Entera, Inc. 1999 Equity Incentive Plan (which is incorporated herein
by reference to Exhibit 99.1 of Form S-8 filed by the Registrant with
the Commission on December 18, 2000)
10.21 Entera, Inc. 2000 Equity Incentive Plan (which is incorporated herein
by reference to Exhibit 99.2 of Form S-8 filed by the Registrant with
the Commission on December 18, 2000)
10.22 Commercial lease agreement between Registrant and Sunnyvale VIII
Trust, dated March 30, 2001
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
</TABLE>
61
<PAGE>
(b) Reports on Form 8-K.
A current report on Form 8-K was filed with the Securities and Exchange
Commission by CacheFlow Inc. on February 16, 2001 to report the Company's
financial position and results of operations as of and for the three and nine
months ended January 31, 2001.
A current report on Form 8-K/A was filed with the Securities and Exchange
Commission by CacheFlow Inc. on February 15, 2001 to amend an 8-K previously
filed on December 12, 2000 that reported on the Company's acquisition of
Entera, Inc. The report provides certain required financial information of
Entera, Inc. and certain pro forma disclosures.
62
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Cacheflow Inc.
(Registrant)
/s/ Brian M. NeSmith
July 16, 2001 By: _________________________________
Brian M. NeSmith
President, Chief Executive Officer
and Director
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Brian M. NeSmith and Robert Verheecke, or either
of them, each with the power of substitution, his attorney-in-fact, to sign any
amendments to this Form 10-K (including post-effective amendments), and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact, or his substitute or substitutes, may
do or cause to be done by virtue hereof.
Pursuant to the requirements of Sections 13 or 15(d) the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Brian M. NeSmith President, Chief Executive July 16, 2001
______________________________________ Officer and Director
Brian M. NeSmith (Principal Executive
Officer)
/s/ Robert Verheecke Senior Vice President, July 16, 2001
______________________________________ Chief Financial Officer
Robert Verheecke and Secretary (Principal
Financial and Accounting
Officer)
/s/ Marc Andreessen Director July 16, 2001
______________________________________
Marc Andreessen
/s/ David W. Hanna Chairman of the Board, July 16, 2001
______________________________________ Director
David W. Hanna
/s/ Philip J. Koen Director July 16, 2001
______________________________________
Philip J. Koen
/s/ Andrew S. Rachleff Director July 16, 2001
______________________________________
Andrew S. Rachleff
</TABLE>
63
<PAGE>
SKU 1955-10K-01
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
2.1 Agreement and Plan of Reorganization by and among CacheFlow Inc.,
Wildcat Merger Corporation, SpringBank Networks, Inc. and Soren
Christensen (as Stockholder's Agent) (which is incorporated herein by
reference to Exhibit 2.1 of Form 8-K filed by the Registrant with the
Commission on June 19, 2000)
2.2 Agreement and Plan of Merger and Reorganization among CacheFlow Inc.,
Diamond Merger Corp., Entera, Inc. and John Scharber, as Stockholders'
Representative (which is incorporated herein by reference to Exhibit
2.2 of Form 8-K filed by the Registrant with the Commission on December
21, 2000)
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(which is incorporated herein by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 No. 333-87997)
3.2 Amended and Restated Bylaws of the Registrant (which is incorporated
herein by reference to Exhibit 3.4 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Amended and Restated Investor's Rights Agreement, dated June 5, 2000
(which is incorporated herein by reference to Exhibit 4.3 to the
Registrant's Registration Statement on Form S-3 No. 333-55744)
4.3 Specimen Certificate of the Registrant's Common Stock (which is
incorporated herein by reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form S-1 No. 333-87997)
10.1 Form of Indemnification Agreement (which is incorporated herein by
reference to Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1 No. 333-87997)
10.2 1996 Stock Option Plan (which is incorporated herein by reference to
Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 No.
333-87997)
10.3 1999 Stock Incentive Plan (which is incorporated herein by reference to
Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 No.
333-87997)
10.4 1999 Director Option Plan (which is incorporated herein by reference to
Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 No.
333-87997)
10.5 1999 Employee Stock Purchase Plan (which is incorporated herein by
reference to Exhibit 10.5 to the Registrant's Registration Statement on
Form S-1 No. 333-87997)
10.6 Commercial lease agreement between Registrant, the Arrillaga Foundation
and the Perry Foundation, dated July 14, 1998 (which is incorporated
herein by reference to Exhibit 10.6 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)
10.7 Commercial lease agreement between Registrant and Zetron Properties,
Inc., dated April 20, 2000
10.8 Commercial lease agreement between CacheFlow Canada and Wiebe Property
Corporation Ltd., dated May 1, 1999 (which is incorporated herein by
reference to Exhibit 10.8 to the Registrant's Registration Statement on
Form S-1 No. 333-87997)
10.9 Offer Letter with Brian NeSmith (which is incorporated herein by
reference to Exhibit 10.9 to the Registrant's Registration Statement on
Form S-1 No. 333-87997)
10.10 Offer Letter with Alan Robin (which is incorporated herein by reference
to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1
No. 333-87997)
10.11 Offer Letter with Mike Johnson (which is incorporated herein by
reference to Exhibit 10.11 to the Registrant's Registration Statement
on Form S-1 No. 333-87997)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.12 Offer Letter with Don Jaworski
10.13 Offer Letter with John Scharber
10.14 Offer Letter with Robert Verheecke
10.15 Consulting Agreement with Marc Andreessen (which is incorporated herein
by reference to Exhibit 10.16 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)
10.16 2000 Supplemental Stock Option Plan (which is incorporated herein by
reference to Exhibit 99.1 of Form S-8 filed by the Registrant with the
Commission on April 11, 2000)
10.17 Michael Malcolm Resignation Agreement (which is incorporated herein by
reference to Exhibit 10.18 of Form 10-Q filed by the Registrant with
the Commission on December 15, 2000)
10.18 SpringBank Networks, Inc. 2000 Stock Incentive Plan (which is
incorporated herein by reference to Exhibit 99.2 of Form S-8 filed by
the Registrant with the Commission on September 8, 2000)
10.19 SpringBank Networks, Inc. Founder's Stock Purchase Agreement (which is
incorporated herein by reference to Exhibit 99.1 of Form S-8 filed by
the Registrant with the Commission on September 8, 2000)
10.20 Entera, Inc. 1999 Equity Incentive Plan (which is incorporated herein
by reference to Exhibit 99.1 of Form S-8 filed by the Registrant with
the Commission on December 18, 2000)
10.21 Entera, Inc. 2000 Equity Incentive Plan (which is incorporated herein
by reference to Exhibit 99.2 of Form S-8 filed by the Registrant with
the Commission on December 18, 2000)
10.22 Commercial lease agreement between Registrant and Sunnyvale VIII Trust,
dated March 30, 2001
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
</TABLE>
<PAGE>
SCHEDULE II
CACHEFLOW, INC.
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts and Sales Returns
<TABLE>
<CAPTION>
Balance at Additions-Charged
Beginning of to Costs and Deductions- Balance at
Year Ended April 30, Period Expenses Write-offs End of Period
- -------------------- ------------ ----------------- ----------- -------------
<S> <C> <C> <C> <C>
1999.................. -- 121,000 -- 121,000
2000.................. 121,000 229,000 -- 350,000
2001.................. 350,000 1,207,000 57,000 1,500,000
</TABLE>
Inventory Reserves
<TABLE>
<CAPTION>
Balance at Additions-Charged
Beginning of to Costs and Deductions- Balance at
Year Ended April 30, Period Expenses Write-offs End of Period
- -------------------- ------------ ----------------- ----------- -------------
<S> <C> <C> <C> <C>
1999.................. -- 565,000 -- 565,000
2000.................. 565,000 100,000 288,000 377,000
2001.................. 377,000 5,920,000 3,557,000 2,740,000
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.7
<SEQUENCE>2
<FILENAME>dex107.txt
<DESCRIPTION>COMMERCIAL LEASE AGREEMENT, DATED APRIL 20, 2000
<TEXT>
<PAGE>
Exhibit 10.7
LEASE
FROM
ZETRON PROPERTIES, INC.
LANDLORD
TO
CACHEFLOW, INC.,
TENANT
PREMISES: ZETRON BUILDING
12034 134/TH/ COURT N.E.
REDMOND, WA 98052
DATED: April 20, 2000
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. Premises........................................................... 1
2. Term............................................................... 1
3. Rent............................................................... 1
4. Improvements....................................................... 2
5. Tenant's Early Entry............................................... 2
6. Use and Zoning..................................................... 2
7. Compliance with Laws............................................... 2
8. Environmental Compliance........................................... 2
9 . Repairs and Maintenance............................................ 3
10. Operating Expense Escalation..................................... 3
11. Tax Expense Escalation........................................... 4
12. Payment of Operating and Taxes Escalation Expenses............... 5
13. Insurance........................................................ 6
14. Indemnity........................................................ 7
15. Services and Utilities........................................... 7
16. Alterations...................................................... 8
17. Assignment and Sublease.......................................... 9
18. Casualty and Condemnation........................................ 9
19. Subordination and Non-Disturbance; Estoppel...................... 10
20. Landlord's Right of Entry........................................ 10
21. Signs............................................................ 10
22. Common Areas and Access.......................................... 10
23. Security Deposit................................................. 11
24. Tenant's Defaults................................................ 11
25. Landlord's DefRights and Remedies............................... 12
26. Holding Over..................................................... 13
27. Quiet Enjoyment.................................................. 13
28. Representation of Authority...................................... 13
29. Liability of Landlord............................................ 13
30. Brokers.......................................................... 13
31. Attorneys' Fees.................................................. 13
32. Options to Renew................................................. 13
33. Notices.......................................................... 15
34. Surrender of Premises............................................ 15
35. Entire Agreement................................................. 15
36. Liens and Encumbrances........................................... 16
37. Communication Device............................................. 16
38. Miscellaneous.................................................... 16
(a) Successors or Assigns.......................................... 16
(b) Insolvency..................................................... 16
(c) Partial Invalidity............................................. 16
(d) Recording...................................................... 16
(e) Force Majeure.................................................. 16
(f) Transportation Management Program; Recycling..................... 17
(g) Name of Building............................................... 17
(h) Reserved to Landlord........................................... 17
(i) Headings......................................................... 17
(j) Gender........................................................... 17
(k) Governing Law.................................................. 17
(1) Counterparts..................................................... 17
(m) Prohibition.................................................... 17
39. Execution by Landlord and Tenant................................. 17
40. Entire Agreement - Applicable Law................................ 17
</TABLE>
-i-
<PAGE>
EXHIBITS
- --------
Exhibit A Premises Floor Plan
Exhibit B Legal Description
Exhibit C Premises Improvements
Exhibit D Rules and Regulations
-ii-
<PAGE>
LEASE
-----
THIS LEASE made this______ day of April, 2000 between ZETRON PROPERTIES,
INC. ("Landlord"), a Washington corporation with an office at 12034 134th Court
NE, P.O. Box 97004, Redmond, Washington 98073-9704 and CACHEFLOW, INC., a
Delaware corporation ("Tenant"), with an office at 650 Almanor Avenue,
Sunnyvale, California 94086.
W I T N E S S E T H:
--------------------
1. Premises. Landlord leases to Tenant premises with an agreed rentable
--------
area of twenty eight thousand seven (28,007) square feet as outlined on Exhibit
-------
A (the "Premises") located on the second floor at 12034 134/th/ Court N.E.,
- -
Redmond, Washington 98052 (the "Building"). The Building, the parcel of land the
Building is on and other improvements on the land are hereafter called the
"Property". The legal description for the Land is attached hereto as Exhibit B.
---------
The Premises and the Building were measured in accordance with ANSI/BOMA
Z65.1.1996 standards (the "BOMA Standards").
2. Term. The primary term of this Lease (the "Primary Term") shall
----
commence on the earlier of (a) the date on which Tenant takes occupancy for any
purpose, other than as provided for in paragraph 5, or (b) the date on which the
Landlord delivers the Premises to Tenant Substantially Completed, as hereinafter
defined (the "Commencement Date") and shall expire on 11:59 p.m. on the date
(the "Expiration Date") which is seven (7) years after the Commencement Date,
unless extended in accordance with the terms of paragraph 32 below. However, if
Substantial Completion of the Premises is delayed due to a Tenant Delay, as
defined in Exhibit C, then the Commencement Date shall be the date on which
---------
Substantial Completion would have occurred, but for such Tenant Delay. If not
due to Tenant delays, Tenant may cancel lease if construction permit not issued
by September 1, 2000. As used in this Lease, "Term" shall mean the Primary Term
and any duly exercised Renewal Term. Within thirty (30) days following the
Commencement Date, Landlord and Tenant will execute a document confirming the
Commencement Date and the Expiration Date. Estimated Commencement Date: August
1, 2000.
3. Rent.
----
(a) Tenant shall pay to Landlord, at the address specified by
Landlord, without notice or any setoff or deduction whatsoever except as
expressly allowed herein, as Fixed Rent, the following sums per month or any
part thereof, in advance on or before the first day of each month of the Term,
commencing with the first month of the Term and continuing through the Primary
Term:
Monthly
Monthly Fixed Rent Per Rentable
Months of Lease Term Fixed Rent Square Foot
-------------------- ---------- -----------
1 through 12 $42,010.50 $1.50
13 through 24 $43,480.87 $1.5525
25 through 36 $45,002.70 $1.60684
37 through 48 $46,577.79 $1.66308
49 through 60 $48,208.02 $1.72128
61 through 72 $49,895.30 $1.78153
73 through 84 $51,641.63 $1.84388
Rent for partial months shall be prorated.
(b) Tenant shall also pay all other sums of money that shall become
due from Tenant under this Lease other than Fixed Rent, this being a net lease
("Additional Rent"). As used in this Lease, "Rent" shall mean Fixed Rent and
Additional Rent.
(c) Time is of the essence of this Lease with respect to both
Landlord's and Tenant's obligations hereunder. If Tenant fails to pay any Rent
due hereunder within ten (10) days of the due date, a late charge equal to five
percent (5%) of the unpaid amount shall be assessed and be immediately due and
payable. In addition, interest shall accrue at the rate of five percent (5%) in
excess of the publicly quoted prime rate of Bank of America, N.A. or its
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successor, as such varies form time to time (the "Interest Rate") from the date
due until paid on any Rent which is not paid when due.
4. Improvements.
------------
(a) Landlord will complete the Tenant Improvements provided for in
Exhibit C (the "Tenant Improvements") and Landlord's Work provided for in
- ---------
Exhibit C in a workmanlike manner and in compliance with all Legal Requirements
(as hereinafter defined). All materials used by Landlord shall be new.
(b) The Premises shall be deemed "Substantially Completed" upon the
occurrence of all of the following: (i) construction by Landlord of the Tenants
Improvements and Landlord's Work, for which Landlord is responsible, all in
accordance with the provisions of this Lease; (ii) means of ingress, egress,
parking and loading areas are available for Tenant's use; (iii) the Premises
shall comply with all certificates, permits and approvals required by applicable
laws, statutes, ordinances, orders, codes, rules and regulations of all federal,
state, county, city and local departments and agencies ("Legal Requirements"),
other than the certificate of occupancy and other than for defects attributable
to Tenant's design; and (iv) the remaining work required to make the Premises
fully completed consists of minor details of construction, mechanical
adjustments or decoration, which will not materially interfere with Tenant's use
and enjoyment of the Premises.
5. Tenant's Early Entry Tenant may, twenty (20) days prior to the
--------------------
Substantial Completion date for the Premises, based on Landlords estimate
thereof, without incurring any liability for payment of Rent, enter the Premises
to place its personal property, equipment and trade fixtures in the Premises at
Tenant's risk and expense, provided such does not interfere with or delay or
increase the cost of the Tenant Improvements.
6. Use and Zoning. Tenant may use the Premises only for general office
--------------
purposes, computer lab and limited light assembly, provided that the latter is
conducted in accordance with Legal Requirements and does not disturb the quiet
enjoyment of other tenants. Landlord warrants that applicable law currently
permit the use of the Premises for general office purposes.
7. Compliance with Laws. Tenant shall comply with all Legal Requirements
--------------------
that pertain to the Premises, to Tenant's design of the Tenant Improvements to
the nature or manner in which Tenant uses the Premises or to its alterations,
additions or improvements to the Premises or to its breach of this Lease. Except
for matters for which Tenant is responsible, Landlord shall comply with all
other legal requirements relating to the Property, including the ADA, except
those which are the responsibility of other tenants.
8. Environmental Compliance. Tenant shall comply with all applicable
------------------------
environmental laws and regulations pertaining to the nature or manner in which
Tenant uses the Premises or the alterations, additions or improvements which it
makes to the Premises, including, but not limited to, those related to Hazardous
Substances, and shall not use, store, generate, release or dispose of Hazardous
Substances in, on or about the Premises or Property, except for normal cleaning
and office supplies when used in accordance with Legal Requirements. "Hazardous
Substances" shall mean any matter (whether gaseous, liquid or solid) which is or
may be harmful to persons or property, including but not limited to materials
now or hereafter designated as a hazardous or toxic waste or substance under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
USC 9601, et seq., or as a Hazardous Substance, Hazardous Household Substance,
-- ---
Moderate Risk Waste or Hazardous Waste under the Hazardous Waste Management Act,
RCW Chapter 70.105, or as a hazardous substance under the Model Toxics Control
Act RCW Chapter 70.105D, all as now or hereafter amended, or which may now or
hereafter be regulated under any other federal, state, or local law, statute,
ordinance or regulation pertaining to health, industrial hygiene or the
environment, including, without limitation, (i) any asbestos and/or asbestos
containing materials (collectively "ACMs") regardless of whether such ACMs are
in a friable or non-friable state, or (ii) any matter designated as a hazardous
substance pursuant to Section 311 of the Federal Water Pollution Control Act
(33 USC 1317), or (iii) any matter defined as a hazardous waste pursuant to
Section 1004 of the Federal Resource Conservation and Recovery Act, (42 USC 6901
et seq) pertaining to health or the environment. Tenant shall defend, indemnify
- -- ---
and save Landlord harmless from any claims, fines, penalties, liabilities,
losses, damages, costs and expenses (including reasonable attorney's fees,
expert
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witness fees and other costs of defense) which arise from the Tenant's breach of
its representations, agreements and warranties contained in this paragraph. This
duty shall survive termination of the Lease. To Landlord's actual present
knowledge, there is no Hazardous Substances present on or under the Property in
violation of Legal Requirements.
9. Repairs and Maintenance.
-----------------------
(a) During the Term, except and to the extent not attributable to the
negligence or conduct of Tenant or its employees, agents or contractors or to
Tenant's alterations, additions or improvements or as may otherwise be an
obligation of Tenant under this Lease or attributable to Tenant's breach of this
Lease or Legal Requirements, Landlord shall maintain and repair (i) the roof,
exterior walls, foundations, and building structure of the Building; (ii) the
plumbing, fire sprinkler, heating, ventilation and air conditioning systems,
electrical and mechanical systems located outside the Premises; and (iii) the
parking and common areas of the Property and Building, including their lighting
systems.
(b) During the Term, Tenant shall, at its sole expense, (i) maintain
the interior of the Premises, including all systems therein and all glass in
good order, repair and condition; (ii) be responsible for providing regular
janitorial services for the interior of the Premises and for changing filters
and light bulbs; (iii) maintain all alterations, additions and improvements
which it makes to the Premises and all furniture, trade fixtures and other
personal property therein in good order, repair and condition; and (iv) make all
repairs and replacements caused by Tenant's negligence, unless covered by any
insurance policy maintained by Landlord or unless, and to the extent caused by
the negligence or willful misconduct of Landlord, its agents, contractors or
employees. If Tenant fails to keep and maintain the Premises in the condition
set forth in this paragraph 9(b), Landlord may, at its option after reasonable
notice, put or cause the same to be put in the condition required thereunder,
and in such case, upon receipt of written statements from Landlord, Tenant shall
promptly pay the entire cost thereof as Additional Rent. Landlord shall have the
right to enter the Premises for the purpose of making such repairs upon Tenant's
failure to do so.
10. Operating Expense Escalation.
----------------------------
(a) For purposes of paragraphs 10, 11 and 12, the following
Definitions shall apply.
(i) "Expense Year" shall mean a calendar year.
(ii) "Landlord's Statement" shall mean a statement furnished by
Landlord to Tenant containing a computation or information relating to any
Additional Rent asserted by Landlord to be due pursuant to the provisions of
this Lease, together with reasonable supporting information related to such
Additional Rent when requested by Tenant.
(iii) "Tenant's Proportionate Share" shall be based on the number
of rentable square feet of area in the Premises compared to the total rentable
square feet of area in the Building. If either of these figures shall vary
during the Term, Tenant's Proportionate Share shall be appropriately adjusted.
(iv) "Operating Expenses" shall mean: all reasonable costs and
expenses (and taxes thereon) paid by or on behalf of Landlord in respect of, and
attributable to, the operation, cleaning, repair, replacement, safety,
management, security and maintenance of the Premises, Property and Building and
the sidewalks, curbs, plazas and other areas adjacent to the Property,
including, but not limited to (i) salaries, wages and bonuses paid to, and the
cost of any benefits (including group life insurance) or similar expenses
relating to, employees of Landlord engaged full-time in the operation, cleaning,
repair, safety, management, security or maintenance of the Property, to the
extent so engaged; (ii) social security, unemployment and other payroll taxes,
the cost of providing disability and worker's compensation coverage imposed by
any law or regulation, union contract or otherwise in respect of said employees;
(iii) the cost of electricity, gas, steam, water, air conditioning and other
fuel and utilities and garbage and refuse removal not the obligation of any
particular tenant; (iv) the cost of casualty, rent, liability, fidelity, plate
glass and all other insurance carried by Landlord with respect to the Building,
including all deductibles (currently $1,000); (v) the cost of repairs,
maintenance and painting, reserves for roof repairs
LEASE.2
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(based on Landlord's reasonable estimate thereof and depreciation of the cost of
the roof on a straight line basis over the estimated useful life thereof); (vi)
the cost or rental of all building and cleaning supplies, tools, materials and
equipment; (vii) the cost of supplies, work clothes and dry cleaning; (viii)
window cleaning, guard, watchman or other security personnel, service or system;
(ix) management fees not in excess of then prevailing market rates for
management fees payable for Class A Office Buildings similarly situated with the
Building and Property; (x) charges of independent contractors performing work
included within this definition of Operating Expenses; (xi) telephone and
stationery; (xii) legal, accounting and other professional fees and
disbursements incurred in connection with the operation and management of the
Property; (xiii) association fees and dues; (xiv) decorations; (xv) depreciation
of hand tools and other movable equipment used in the operation, cleaning,
repair, safety, management, security or maintenance of the Property, provided
the original cost of such equipment did not constitute an Operating Expense;
(xvi) exterior and interior landscaping; (xvii) governmental fees and charges
and permits costs; (xviii) depreciation or amortization of capital assets,
improvements, equipment, machinery, furnishings and fixtures on a level basis
over useful lives; (xix) surcharges levied upon or assessed against the Property
or the parking spaces or other common areas; (xx) payments to or for public
transit or carpooling facilities or other facilities or purposes as required by
any governmental agency having jurisdiction over the Building and Property; and
(xxi) all costs incurred by Landlord in connection with complying with
applicable federal, state or local legal requirements.
(v) Notwithstanding the foregoing, "Operating Expenses" shall
not include any of the following: (1) salaries or benefits for Landlord's
executives and employees above the grade of building manager; (2) expenditures
for which Landlord is reimbursed from any insurance carrier, from any tenant
(other than as part of Operating Expenses), including the Tenant, or from any
other source; (3) advertising expenditures; (4) bad debt loss, rent loss, or
reserves for either of them; (5) taxes; (6) financing costs, including points,
commitment fees, broker's fees, legal fees, and mortgage interest and
amortization payments; (7) costs incurred in connection with the initial
construction of the Building; (8) costs incurred in the removal, abatement or
other treatment of underground storage tanks or Hazardous Substances present in
the Building or on the Property; (9) legal fees, space planner's fees, broker's
commissions and other costs incurred by Landlord in connection with leasing
space and negotiating leases with tenants of the Building, or legal fees in
connection with disputes between Landlord and any tenant of the Building, or
between Landlord and any mortgagee; (10) costs of improving, altering,
constructing or redecorating any space leased to tenants of the Building; (11)
costs associated with the operation of the business of the entity which
constitutes Landlord as the same are distinguished from the costs of operation
of the Building, including, without limitation, accounting and legal expenses,
costs of selling, syndicating, financing, mortgaging or hypothecating Landlord's
interest in the Building; (12) the cost of any political, charitable or civic
contribution or donation; (13) structural improvements (as opposed to repairs
and replacements) to the roof, exterior walls, foundation and Building
structure; and (14) amounts paid as ground rental.
(b) For each Expense Year falling wholly or partially within the
Term, Tenant shall pay to Landlord as Additional Rent, Tenant's Proportionate
Share of the Operating Expenses.
11. Tax Expense Escalation.
----------------------
(a) For purposes of paragraph 11 the following Definitions shall
apply.
(i) "Tax Year" shall mean each calendar year.
(ii) "Taxes" shall mean
(1) All real estate taxes, assessments (special or
otherwise), sewer and water rents, rates and charges, and any other governmental
levies, impositions and charges of a similar nature ("Impositions"), which may
be levied, assessed or imposed on or in respect of all or any part of the
Property, whether or not the same constitute one or more tax lots. If, however,
by law, any assessment may be divided and paid in annual installments, then, for
the purposes of this definition, (i) such assessment shall be deemed to have
been so divided and to be payable in the maximum number of annual installments
permitted by law, and (ii) there shall be
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deemed included in Taxes for each Tax Year the annual installment of such
assessment becoming payable during such year, together with interest payable
during such year on such annual installment and on all installments thereafter
becoming due as provided by law, all as if such assessment had been so divided.
(2) Any reasonable expenses incurred by Landlord in
contesting any of the foregoing or the assessed valuation of all or any part of
the Property.
(3) An Imposition based on the income or rents received
therefrom whether or not wholly or partially as a capital levy or otherwise, or
(ii) an Imposition measured by or based in whole or in part upon all or any part
of the Property and imposed on Landlord.
(iii) "Taxes" shall not include penalties or interest paid by the
Landlord on account of Landlord's failure to pay taxes when due.
(b) For each Tax Year falling wholly or substantially within the
Term, Tenant shall pay to Landlord as Additional Rent a sum equal to Tenant's
Proportionate Share of the Taxes.
(c) If, as a result of any application or proceeding or otherwise,
there should be a reduction in the Taxes for any Tax Year in respect of which
Landlord shall have previously rendered a Landlord's Statement, then provided
Tenant is not then in default hereunder, any amounts due from Landlord to Tenant
as a result of such reduction shall be paid to Tenant within twenty (20) days
after receipt by Landlord, unless Tenant advises Landlord within fifteen (15)
days after receipt by Landlord of such refund to include an adjustment for the
succeeding Tax Year to reflect such decrease in Taxes. Landlord may deduct from
such refund all costs and expenses, including reasonable counsel fees, incurred
by Landlord in connection with the application or proceeding to reduce the
Taxes. Landlord shall promptly refund to Tenant, Tenant's Proportionate Share of
any refunds in Taxes received after the Expiration Date of this Lease.
. .
(d) Tenant shall be liable for, and shall pay throughout the term of
this Lease, all license and excise fees and occupation taxes covering the
business conducted on the Premises and all personal property taxes levied with
respect to all personal property located at the Premises. If any governmental
authority levies a tax or license fee on rents payable under this Lease or rents
accruing from use of the Premises or a tax or license fee in any form against
Landlord or Tenant because of or measured by or based upon income derived from
the leasing or rental thereof (other than a net income tax on Landlord's
income), or a transaction privilege tax, such tax or license fee shall be paid
by Tenant, either directly if required by law, or by reimbursing Landlord for
the amount thereof within twenty (20) days of demand.
12. Payment of Operating Expenses and Taxes Escalation.
--------------------------------------------------
(a) At least thirty (30) days prior to each Expense Year after
calendar 2000, Landlord shall advise Tenant in writing of Landlord's estimate of
Tenant's Proportionate Share of the Operating Expenses for the Expense Year and
of the Taxes for the Tax Year. Commencing on the first day of each Expense Year,
and on the Commencement Date, Tenant shall pay as Additional Rent one-twelfth
(1/12th) of Tenant's estimated Proportionate Share concurrently with the monthly
Rent payment.
(b) Within ninety (90) days after the close of each Expense Year,
Landlord shall deliver to Tenant a statement ("Landlord's Statement") showing in
reasonable detail the (i) actual Operating Expenses and Taxes for the previous
year broken down by component expenses; (ii) the amount paid by Tenant during
the Expense Year towards the Operating Expenses and the amount paid by Tenant
during the Tax Year towards the Taxes; and (iii) the amount Tenant owes to
Landlord or the amount of the refund Landlord owes to Tenant. Any amount due
from Landlord to Tenant under this paragraph 12(b) shall be enclosed with
Landlord's Statement, unless Tenant is then in default hereunder. Any such
amount due from Tenant to Landlord shall be paid within twenty (20) days after
receipt of Landlord's Statement.
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(c) Tenant shall have the right once each year within six (6)
months after Tenant's receipt of Landlord's Statement for the prior Expense/Tax
Year to audit Landlord's records with respect to Operating Expenses and Taxes
for such prior year at the location where such records are kept. Tenant shall
give Landlord ten (10) business days prior written notice of the required audit
date. The audit shall be conducted by a certified public accountant on a
non-contingent fee basis, and Tenant shall promptly provide Landlord with a copy
of such audit. If such audit reflects a variance from Landlord's Statement which
is not disputed by Landlord, the parties shall make any payment adjustments
within twenty (20) business days thereafter. If the audit discloses an
overpayment by Tenant of Operating Expenses and Taxes for such year which
exceeds five percent (5%) of the total thereof which is not disputed by
Landlord, then Landlord shall reimburse Tenant for the reasonable out-of-pocket
costs of such audit, but not in excess of Two Thousand Dollars ($2,000), within
twenty (20) days after its receipt of an invoice and accounting thereof. Tenant
shall maintain the confidentiality of all information disclosed through such
audit, except where disclosure is required by applicable law.
13. Insurance.
---------
(a) Tenant shall, at its own expense, maintain comprehensive or
commercial general liability insurance (CGL) IS01988 or later in minimum limits
of Three Million Dollars ($3,000,000) per occurrence for property damage or loss
and minimum limits of $Three Million Dollars ($3,000,000) per occurrence for
personal injuries and death, to indemnify Landlord, Tenant and any lender
designated by Landlord ("Lender") against claims, demands, losses, damages,
liabilities and expenses. Landlord and Lender shall be named as additional
insureds on insurance coverage providing such minimum limits and shall be
furnished with an ACORD 27 Certificate or its equivalent which reflects that
such coverage shall not be canceled nor materially reduced in coverage or limits
without thirty (30) days prior written notice to Landlord and Lender. During the
Lease Term, Tenant shall also maintain at its own expense insurance covering its
furniture, fixtures, equipment and inventory and all improvements which it makes
to the Premises in an amount equal to the full insurable value thereof, against
fire and such other perils as are covered by an all risk policy with plate glass
endorsement, including all glass on the Premises. All insurance required under
this Lease shall (a) be issued by insurance companies authorized to do business
in the State of Washington and having a financial rating of at least A Class X
status, as rated in the most recent edition of Best's Insurance Reports, or with
companies otherwise reasonably acceptable to Landlord; (b) be issued as a
primary policy, or under the blanket policy, not contributing with and not in
excess of coverage which Landlord may carry; (c) in the case of the liability
policy, contain a contractual liability coverage endorsement covering Tenant's
indemnification duty; and (d) with commercially reasonable deductibles. If
Tenant fails to maintain required insurance, Landlord may do so immediately and
Tenant shall reimburse Landlord for the full1 expense thereof within five (5)
days after demand therefor.
(b) Tenant shall not keep, use, sell or offer for sale in or
upon the Premises any article which is prohibited by Landlords insurance policy,
provided Tenant is first made aware in writing of such restriction. Tenant shall
pay immediately any increase in Landlord's premiums for insurance during the
term of this Lease which results from other than the permitted use of the
Premises or from the type of merchandise which Tenant stores or sells on the
Premises, whether or not Landlord has consented thereto. In determining whether
increased premiums are the result of Tenant's use of the Premises, a schedule,
issued by the organization establishing the insurance rate on the Premises
showing the various components of such rate, shall be conclusive evidence of the
several items and charges which make up the insurance rate on the Premises.
(c) Neither Landlord nor Tenant shall be liable to the other
party or to any insurance company (by way of subrogation or otherwise) insuring
the other party for any loss or damage to any building, structure or tangible
personal property of the other occurring in or about the Premises, even though
such loss or damage might have been occasioned by the negligence of such party,
its agents or employees, if such loss or damage is covered by insurance
benefiting the party suffering such loss or damage or was required to be covered
by insurance or permitted to be self-insured under terms of this Lease. Each
party shall cause each insurance policy obtained by it to contain the waiver of
subrogation clause.
(d) Landlord shall maintain, at its expense, during the Term,
with solvent and responsible companies, tire insurance, with standard "all risk"
coverage for the Property.
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Landlord shall maintain, at its expense, during the Term, with solvent and
responsible companies, comprehensive general liability insurance covering
injuries occurring on the Property, which shall provide for a combined coverage
for bodily injury and property damage in an amount not less than One Million
Dollars ($1,000,000).
(e) Neither Landlord nor Tenant shall be liable to the other
party or to any insurance company (by way of subrogation or otherwise) insuring
the other party for any loss or damage to any building, structure or tangible
personal property of the other occurring in or about the Premises, even though
such loss or damage might have been occasioned by the negligence of such party,
its agents or employees, if such loss or damage is covered by insurance
benefiting the party suffering such loss or damage or was required to be covered
by insurance under terms of this Lease. Each party shall cause each insurance
policy obtained by it to contain the waiver of subrogation clause.
14. Indemnity. Landlord shall not be liable for any injury to any
---------
person, or for any loss of or damage to any property (including property of
Tenant) occurring in or about the Premises from any cause whatsoever, except for
personal injuries attributable to the negligence or willful misconduct of
Landlord, its agents, invitees, employees and contractors, to the extent of
their negligence. Subject to paragraph 13(e) Tenant shall indemnify, defend and
save Landlord, its officers, agents, employees and contractors, and other
tenants and occupants of the Property harmless from all losses, damages, fines,
penalties, liabilities and expenses (including Landlord's personnel and overhead
costs and reasonable attorneys' fees and other reasonable costs incurred in
connection with such claims, regardless of whether claims involve litigation)
resulting from any actual or alleged injury to any person or from any actual or
alleged loss of or damage to any property alleged to be attributable to Tenant's
operation or occupation of the Premises or caused by or resulting from any act
or omission of Tenant or any licensee, assignee, or concessionaire, or of any
officer, agent, employee, guest or invitee of any such person in or about the
Premises, including, but not limited to, the deposit or release of hazardous or
toxic materials or substances or Tenant's breach of its obligations hereunder.
Tenant agrees that the foregoing indemnity specifically covers actions brought
by its own employees. The indemnification provided for in this paragraph with
respect to acts or omissions during the term of this Lease shall survive
termination or expiration of this Lease. Except as otherwise specified herein to
the contrary, Landlord shall not be liable for interference with light, air or
view or for any latent defect in the Premises. Tenant shall promptly notify
Landlord of casualties or accidents occurring in or about the Premises.
Notwithstanding the foregoing if losses, liabilities, damages, liens, costs and
expenses so arising are caused by the concurrent negligence of both Landlord and
Tenant, their employees, agents, invitees and licensees, a party shall indemnify
the other party to the extent of the first party's own negligence or that of its
officers, agents, employees, guests or invitees. The foregoing indemnity is
specifically and expressly intended to constitute a waiver of Tenant's immunity
under Washington's Industrial Insurance Act, RCW Title 51, to the extent
necessary to provide the other with a full and complete indemnity from claims
made by the first party and its employees, to the extent of their negligence.
LANDLORD AND TENANT ACKNOWLEDGE THAT THE INDEMNIFICATION PROVISIONS OF THIS
PARAGRAPH 14 WERE SPECIFICALLY NEGOTIATED AND AGREED UPON BY THEM.
15. Services and Utilities.
----------------------
(a) Tenant shall pay prior to delinquency for all electricity,
telephone and any other utilities which are separately metered or submetered to
the Premises and, as part of its share of paragraph 10(a)(iv) Operating
Expenses, for all other utilities which are not separately metered or
submetered. Landlord shall select and control the utility service provider to
the Building and shall have the right at any time and from time to time to
change electrical service provider. Tenant shall cooperate with Landlord to
allow the electrical service provider access to electrical lines and equipment
within the Premises. Landlord shall not be liable for any loss, injury or damage
to person or property caused by or resulting from any variation, interruption,
or failure of utilities or services due to any cause whatsoever, or from its
failure to make any repairs or perform any maintenance. No temporary
interruption or failure of services or utilities incident to the making of
repairs, alterations or improvements, or due to accident, strike or conditions
or other events beyond Landlord's reasonable control shall be deemed an eviction
of Tenant or to relieve Tenant from any of Tenant's obligations hereunder or to
give Tenant a right of action against Landlord for damages, except that if
utilities to the Premises are interrupted for a period
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in excess of three (3) consecutive business days due solely to Landlord's
negligence the Rent and Additional Rent shall be abated thereafter in proportion
to the interruption until utility service is restored.
(b) Landlord shall furnish the Premises with electricity for
office use, including lighting and low power usage (110 volt) office machines,
water and elevator services. Landlord shall also provide routine refuse removal
service on weekdays, other than holidays. From 7:00 a.m. to 6:00 p.m. on
weekdays, excluding legal holidays ("Normal Business Hours"), Landlord shall
furnish the Premises with heat and air conditioning services. If requested by
Tenant, Landlord shall furnish heat and air conditioning services at times other
than Normal Business Hours, and Tenant shall pay for the cost of such services
at rates reasonably established by Landlord as Additional Rent.
(c) If Tenant requires garbage and refuse removal of a
different kind or a more intense level than Landlord customarily provides for
offices in the Building, or if Tenant's garbage or refuse involves other
materials requiring special handling, Tenant shall promptly pay Landlord, as
Additional Rent, for the additional costs and expenses incurred by Landlord in
providing such services and shall comply, at its sole cost and expense, with
procedures established for such by Landlord.
(d) Tenant shall obtain Landlord's prior written consent before
installing lights and equipment in the Premises which in the aggregate exceed
Building Standards. Landlord may refuse to grant such consent unless Tenant
agrees to pay (1) the costs incurred by Landlord for installation of
supplementary air conditioning capacity or electrical systems as necessitated by
such equipment or lights, and (2) in advance, on the first day of each month
during the Term, the amount estimated by Landlord as the excess cost of
furnishing electricity for the operation of such equipment or lights above
normal Building office levels and the amount estimated by Landlord as the cost
of operation and maintenance of supplementary air conditioning units as
necessitated by Tenant's use of such equipment or lights. Landlord shall be
entitled to install, operate and maintain at Tenant sole cost a
monitoring/metering system in the Premises to measure the added demands on
electricity, heating, ventilation and air conditioning systems, resulting from
such equipment and lights and from Tenant's after-hours requirements, and Tenant
shall pay Landlord the cost thereof each mon& within ten (10) days of its
receipt of an invoice therefor.
16. Alterations. Tenant shall not make any alterations, additions or
-----------
improvements in or to the Premises without first submitting to Landlord
professionally prepared plans and specifications for such work and obtaining
Landlord's prior written approval thereof which shall not be unreasonably
withheld for interior work which does not affect the Building structure or
systems. Tenant covenants that it will cause all such alterations, additions and
improvements to be performed at Tenant's sole cost and expense by a contractor
approved by Landlord and in a manner which: (a) is consistent with the Landlord
approved plans and specifications and any conditions imposed by Landlord in
connection therewith; (b) is in conformity with commercial standards; (c)
includes acceptable insurance coverage for Landlord's benefit; (d) does not
affect the structural integrity of the Building; (e) does not disrupt the
business or operations of adjoining tenants; and (f) does not invalidate or
otherwise affect the construction and systems warranties then in effect with
respect to the Building. Tenant shall secure all governmental permits and
approvals, as well as comply with all other applicable governmental requirements
and restrictions. Landlord's consent is not required for interior, non-
structural improvements to the Premises where the aggregate cost is less than
$5,000 and the work does not affect the Building systems or structures. Tenant
shall indemnify, defend and hold Landlord harmless from and against all losses,
liabilities, damages, liens, costs, penalties and expenses (including reasonable
attorneys' fees, but without waiver of the duty to hold harmless) arising from
or out of the performance of such alterations, additions and improvements,
including, but not limited to, all which arise from or out of Tenant's breach of
its obligations under terms of this paragraph 16. All alterations, additions and
improvements (expressly including all light fixtures, heating, ventilation and
air conditioning units and floor coverings), except furniture, trade fixtures
and appliances and equipment not affixed to the Premises, shall immediately
become the property of Landlord without any obligation on its part to pay
therefor. Tenant shall not remove such improvements on the termination of this
Lease unless otherwise directed by Landlord. If requested by Tenant before it
commences alterations, additions or improvements, Landlord will
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advise within five (5) business days of Tenant's request Tenant whether such
work will have to be removed, and the Premises restored, at the end of the Lease
term or its earlier expiration.
17. Assignment and Sublease.
-----------------------
(a) Tenant may, with the prior written consent of the Landlord
which shall not be unreasonably withheld or delayed, assign this Lease or sublet
the whole or any part of the Premises. Landlord shall use diligent efforts to
respond to Tenant within ten (10) business days after its receipt of the
request, if its is provided, together with the identity of the proposed
transferee and financial and operating history for the proposed transferee and a
copy of the transfer document. It shall be reasonable, among other reasons; for
Landlord to withhold its consent if (i) Tenant is in default under this Lease;
(ii) the assignee will not assume all of the obligations of this Lease, or the
sublessee does not agree to be subject to all the terms and conditions of, this
Lease, except those specific to the sublease, e.g., term, rent, improvements;
(iii) the proposed transferee will use the Premises other than wholly for
general office purposes; (iv) Tenant has failed to furnish Landlord with the
information specified above; (v) the proposed transferee will cause Landlord to
be in violation of any agreement with respect to the Property; and (vi) the
transferee's financial condition and operating history are not reasonably
acceptable to Landlord. No assignment or sublease shall release Tenant from
primary liability on this Lease. In lieu of giving its consent to an assignee or
sublessee, Landlord may elect to terminate this Lease, within 15 day notice. The
consent of the Landlord need not be obtained if the sublease is to an affiliate;
provided that Landlord is given prior written notice thereof and provided with
evidence that all insurance required hereunder is in place. Failure to first
obtain in writing Landlord's written consent or to comply with the provisions of
this paragraph 17(a) shall operate to prevent any such assignment, sublease or
transfer from becoming effective. If Tenant assigns this Lease or sublets the
Premises, then all consideration received by Tenant in whatever form and at
whatever time for such assignment or sublease (in excess of amounts payable by
Tenant as minimum rent, in the case of a sublease) shall belong to and be paid
over to Landlord, as and when received by Tenant, to the extent such exceed the
normal and reasonable out-of-pocket costs incurred in connection with such
assignment or sublease. Tenant shall also pay all reasonable legal fees and
other costs - incurred by Landlord in connection with Landlord's consideration
of Tenant's request for approval of assignments or subleases.
(b) If Landlord sells or otherwise transfers the Building or a
portion thereof containing the Premises, or if Landlord assigns its interest in
this Lease, and such purchaser, transferee or assignee assumes in writing
Landlord's obligations hereunder arising thereafter, and Landlord shall
thereupon be relieved of all future liabilities hereunder, but his Lease shall
otherwise remain in full force and effect.
18. Casualty and Condemnation
-------------------------
(a) If the Premises shall be so damaged by fire, other casualty,
acts of God or the elements (a "Casualty"), or partially or wholly taken by
condemnation or threat thereof (a "Taking"), so that they cannot be restored
within one hundred twenty (120) days from the date of the Casualty or Taking
("Substantial Damage"), or if there is any material Casualty or Taking during
the last year of the Term, Landlord may terminate this Lease by giving written
notice to Tenant within thirty (30) days after the date of the Casualty or
Taking. In such case, the Lease shall be terminated as of the date of the
Casualty or Taking and the rent shall abate from that date, and any rent paid
beyond such date shall be refunded to Tenant. If this Lease is not terminated as
provided above, Landlord shall, at its sole cost and expense, restore the
Premises as speedily as practical to the condition existing prior to the
Casualty or the Taking, unless the Casualty was an uninsured Casualty or
Landlord's Lender refuses to make insurance proceeds available for the
restoration, in which event Landlord shall have the right to terminate the Lease
in the same manner and within the same timeframes as provided in the two (2)
preceding sentences. During the restoration period, the rent shall abate for the
period during which the Premises are not suitable for Tenant's business needs.
If Landlord does not restore the Premises within one hundred twenty (120) days
after the date of the Casualty or Taking, as such date may be extended for
Tenant Delays or force majeure events, Tenant may terminate this Lease without
incurring any liability to Landlord, provided Tenant gives Landlord written
notice not less than twenty (20) days after the end of such period and Landlord
does not complete the restoration within ten (10) days after the date of such
notice.
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(b) In no event shall Landlord be liable to Tenant for destruction or
damage to any of Tenant's property including fixtures, equipment or other
improvements, unless the terms of paragraph 13(c) are inapplicable to such
damage.
(c) Landlord reserves all right to the entire damage award or payment
for any taking by eminent domain or a transfer in lieu thereof, and Tenant
waives all claim whatsoever against Landlord for damages for termination of its
leasehold interest in the Premises or for interference with its business. Tenant
hereby grants and assigns to Landlord any right Tenant may now have or hereafter
acquire to such damages and agrees to execute and deliver such further
instruments of assignment as Landlord may from time to time request. Tenant
shall, however, have the right to receive from the condemning authority the
amount offered by the condemning authority in its final offer for Tenant's
moving costs or for the personal property of Tenant which has been taken.
19. Subordination and Non-Disturbance; Estoppel. Unless otherwise
-------------------------------------------
designated by Landlord, this Lease shall be subordinate to all future mortgages
and deeds of trust on the Property, and to any extensions, renewals or
replacements thereof. Landlord represents and warrants to Tenant that as of the
date of this Lease there are no deeds of trust, mortgages or security interests
in effect with respect to the Building or Land. As a condition to the foregoing,
Landlord agrees to deliver to Tenant from any future mortgagee or trustee a
written, commercially reasonable subordination and non-disturbance agreement in
recordable form acceptable to the lender providing that so long as Tenant
performs all of the terms of this Lease, Tenant's occupancy of the Premises
under this Lease shall not be disturbed and shall remain in full force and
effect for the term, and Tenant shall not be joined by the holder of any
mortgage or deed of trust in any action or proceeding to foreclose thereunder,
except where such is necessary for jurisdictional reasons. Landlord represents
and warrants that, as of the date hereof, there is no interest superior to this
Lease. Within ten (10) business days of Landlord's request therefor, Tenant
shall promptly execute and deliver to third parties designated by Landlord an
estoppel certificate or letter in the form requested by Landlord or its lender
that correctly recites the facts with respect to the existence, terms and status
of this Lease.
20. Landlord's Right of Entry. Landlord has the right to enter the
-------------------------
Premises at any reasonable time upon reasonable notice to Tenant, or without
notice in case of emergency, for the purpose of performing maintenance, repairs,
and replacements to the Premises as are permitted under this Lease. During
Business Hours and upon reasonable notice to Tenant, Landlord may, during the
Term, show the Premises to prospective purchasers and mortgagees, and, during
the six (6) months prior to expiration of the Term or when Tenant is in default
hereunder, to prospective tenants. Landlord shall use reasonable efforts not
interfere with or disrupt the normal operation of Tenant's business. Landlord,
and any third parties entering the Premises at Landlord's invitation or request
shall at all times strictly observe Tenant's reasonable rules relating to
security on the Premises. Tenant shall have the right, in its sole discretion,
to designate a representative to accompany Landlord, or any third parties, while
they are on the Premises.
21. Signs. Landlord shall place the Tenant's name and location on the
-----
bulletin board or directory in the Building, and afford Tenant, without charge,
the placing of the customary number of names in the Building directory. Landlord
shall also install Tenant's name, using Landlord's building standard signage, at
the entry to the Premises on monument at Landlord's expense. All other Tenant
signage shall be subject to Landlord's prior review and approval.
22. Common Areas and Access.
-----------------------
(a) Landlord shall at all times have the exclusive control and
management of all parking areas, access roads, driveways, entrances, retaining
walls, exits, truck ways, loading docks, package pickup stations, washrooms,
signs, shelters, air quality monitoring stations, surface and storm water
holding treatment sites or facilities, drainage facilities, landscaped areas,
exterior stairways, elevators, escalators and other areas, improvements,
facilities and special services provided by Landlord for the general use, in
common, of tenants of the Property, and their officers, agents, employees and
customers, including off-site facilities, if any, required by governmental
bodies as a condition of developing the Property ("common areas and
facilities"). To Landlord's actual present knowledge the common areas and
facilities are not in violation of Legal
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Requirements. Tenant shall have the right to use common areas and facilities in
common with other tenants of the Building and others authorized to use the same.
With respect to the common areas and facilities, Landlord shall have the right
from time to time to employ personnel; to establish, modify and enforce
reasonable rules and regulations, a copy of which current rules and regulations
is attached hereto as Exhibit D; to construct, maintain and operate lighting
---------
facilities; to police the common areas and facilities; from time to time to
change the area, level, location and arrangement of common areas and facilities;
to restrict parking by Tenant, its officers, agents and employees so that it is
not on a disproportionate basis relative to rentable area; to temporarily close
all or any portion of the common areas and facilities to such extent as may, in
the opinion of Landlord's counsel, be legally sufficient to prevent a dedication
thereof or the accrual of any rights to any person or the public therein; to
temporarily close for maintenance or repair purposes all or any portion of the
parking areas or facilities, but if such closure is extensive, Landlord shall
provide alternative interim parking; to discourage noncustomer parking; and to
do and perform such other acts in and to the common areas and facilities as,
using good business judgment, Landlord deems to be reasonably advisable with a
view to the improvement of the convenience and use thereof by tenants of the
Building, their employees, invitees and customers, so long as Tenant's use of
the common areas and facilities is not materially and adversely impaired as a
result thereof. Tenant agrees to comply with all common area rules and
regulations established by Landlord. Landlord shall use diligent efforts to
enforce rules and regulations in a non-discriminatory fashion. If there is a
conflict between rules and regulations and the express provisions of this Lease,
this Lease shall control.
(b) Tenant shall be permitted to use up to three (3) parking spaces
on the Property per one thousand (1,000) square feet of rentable area in the
Premises on a non-reserved basis, without additional charge. All common areas
and facilities which Tenant is permitted to use and occupy are used and occupied
under a revocable license. If the amount of such areas or facilities be
diminished, and the amount of such diminution, including any reduction of total
parking area on the Property which does not result in such falling below that
required by applicable law, is not material, then such diminution shall not be
deemed constructive or actual eviction, and Landlord shall not be subject to any
liability, nor shall Tenant be entitled to any compensation or reduction or
abatement of rent.
23. Securitv Deposit. As partial consideration for the execution of this
----------------
Lease, Tenant has deposited with Landlord the sum of Three Hundred Twenty Seven
Thousand Eight Hundred Forty Nine and 78/100 Dollars ($327,849.78). Landlord
shall credit $42,010.50 thereof to the payment of the Fixed Rent due for the
first month of the Base Term, if Tenant is not then in default hereunder, and
shall credit an amount equal to the Fixed Rent due for the thirty seventh, forty
ninth, sixty first and seventy third months of the Primary Term to the Fixed
Rent due for such months if Tenant is not then in default hereunder. Landlord
shall pay Tenant the balance thereof, without interest, within thirty (30) days
after the expiration or prior termination of the Lease term, or any extension
thereof, if and only if Tenant has fully performed all of its obligations under
the terms of this Lease. Landlord shall be entitled to withdraw from the deposit
the amount of any unpaid Rent or Additional Rent not paid by Tenant when due
under this Lease, and Tenant shall immediately deposit an amount equal to that
so withdrawn.
24. Tenant's Defaults.
-----------------
(a) Time is of the essence hereof and if Tenant violates or breaches
or fails to keep or perform any covenant, term or condition of this Lease, and
if such default or violation continues for or is not remedied within ten (10)
days (or, if no default in Rent is involved, within thirty (30) days) after
notice in writing thereof given by Landlord to Tenant specifying the matter
claimed to be in default, or if the default is of such nature that it cannot be
cured within thirty (30) days so long as Tenant commences such cure within said
thirty (30) day period and diligently prosecutes such cure to completion for a
period not to exceed ninety (90) days, then Landlord shall have the following
rights and remedies, at its option which shall not be exclusive, but shall be
cumulative and in addition and supplemental to any and all other rights and/or
remedies that Landlord may have at law or if equity: (a) to declare the term
hereof ended and to reenter the Premises and take possession thereof and remove
all persons therefrom, and Tenant shall have no further claim thereon or
hereunder; or (b) without declaring this Lease terminated, to reenter the
Premises and occupy the whole or any part thereof for and on account of Tenant
and to collect any unpaid Rent and other charges, which have become payable, or
which may thereafter become
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payable; or (c) even though it may have reentered the Premises, to thereafter
elect to terminate this Lease and all of the rights of Tenant in or to the
Premises.
If Landlord reenters the Premises under option (b) above, Landlord shall
not be deemed to have terminated this Lease or the liability of Tenant to pay
any Rent thereafter accruing, or to have terminated Tenant's liability for
damages under any of the provisions hereof, by any such reentry or by any
action, in unlawful detainer or otherwise, to obtain possession of the Premises,
unless Landlord shall have notified Tenant in writing that it has so elected to
terminate this Lease, and Tenant further covenants that the service by Landlord
of any notice pursuant to the unlawful detainer statutes and the surrender of
possession pursuant to such notice shall not (unless Landlord elects to the
contrary at the time of or at any time subsequent to the serving of such notices
and such election is evidenced by written notice to Tenant) be deemed to be a
termination of this Lease. In the event of any entry or taking possession of the
Premises, Landlord shall have the right, but not the obligation, to remove
therefrom all or any part of the personal property located therein, if Tenant
has not already done so, and may place the same in storage at a public warehouse
at the expense and risk of Tenant.
If Landlord elects to terminate this Lease pursuant to the provisions of
options (a) or (c) above, Landlord may recover from Tenant as damages, the
following: (i) the worth at the time of award of any unpaid Rent which had been
earned at the time of such termination; plus (ii) the worth at the time of award
of the amount by which the unpaid Rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss
Tenant proves could have been reasonably avoided; plus (iii) the worth at the
time of award of the amount by which the unpaid Rent for the balance of the term
after the time of award exceeds the amount of such Rent loss that Tenant proves
could be reasonably avoided; plus (iv) any other amount necessary to compensate
Landlord for all losses, liabilities or damages caused by Tenant's failure to
perform its obligations under this Lease, including, but not limited, any costs
or expenses incurred by Landlord in (a) retaking possession of the Premises,
including reasonable attorneys' fees therefor, (b) maintaining or preserving the
Premises after such default, (c) restoring the Premises to the condition in
which they were to be returned by Tenant hereunder, (d) unamortized leasing
commissions, and (e) any other non-capital costs reasonably necessary to relet
the Premises.
As used in items (i) and (ii) above, the "worth at the time of award" is
computed by allowing interest at the Interest Rate specified in paragraph 3(c)
hereof. As used in item (iii) above, the "worth at the time of award" is
computed by using a discount rate of four percent (4%).
For all purposes of paragraph 24(a), all Rent, other than Final Rent,
shall, for the purpose of calculating any amount due under the provisions of
subparagraph (iii) above, be computed on the basis of the average monthly amount
thereof accruing during the immediately preceding twelve (12) month period,
except that if it becomes necessary to compute such rental before such a twelve
(12) month period has occurred then such Rent shall be computed on the basis of
the average monthly amount hereof accruing during such shorter period.
(b) Landlord's remedies hereunder are cumulative, and Landlord's
exercise of any right or remedy due to a default or breach by Tenant shall not
be deemed a waiver of, or alter, affect or prejudice any other right or remedy
which Landlord may have under this Lease or by law. Neither the acceptance of
rent nor any other acts or omissions of Landlord at any time or times after the
happening of any event authorizing the cancellation or forfeiture of this Lease
shall operate as a waiver of any past or future violation, breach or failure to
keep or perform any covenant, agreement, term or condition hereof or to deprive
Landlord of its right to cancel or forfeit this Lease, upon the written notice
provided for herein, at any time that cause for cancellation or forfeiture may
exist, or be construed so as at any future time to estop Landlord from promptly
exercising any other option, right or remedy that it may have under any term or
provision of this Lease.
25. Landlord's Default; Rights and Remedies. The occurrence of the
---------------------------------------
following constitutes an "Event of Default" by Landlord under this Lease: the
failure by Landlord to observe or perform any covenant, agreement, condition or
provision of this Lease, if such failure shall continue for thirty (30) days
after receipt by Landlord and, if Tenant is advised of the name and address
thereof, any secured lender to Landlord with respect to the Building of written
notice from Tenant, except that if such default cannot be cured within such
thirty (30) day period, it shall not be considered an Event of Default if
Landlord commences to cure the default within the
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thirty (30) day period and proceeds diligently thereafter to seek to effect such
cure. If an Event of Default by Landlord occurs, Tenant shall have all rights
and remedies available at law or in equity, subject to the rights of any secured
lender with respect to the Property.
26. Holding Over. Unless otherwise mutually agreed in writing by the
------------
parties prior to such holding over, any holding over by Tenant after the
expiration of the term hereof, with Landlord's prior written consent, shall be
construed as a tenancy from month-to-month on the terms and conditions set forth
herein, except for Fixed Rent which shall be increased to one and one-half (1
1/2) times that in effect during the last month hereof, which tenancy may be
terminated by either party upon thirty (30) days written notice to the other
party, effective as of the last day of a calendar month. If Tenant holds over
without Landlord's consent, it shall be a tenancy at will, terminable at any
time immediately upon notice from Landlord at three (3) times the prior Fixed
Rent level thereafter. If Tenant fails to vacate the Premises after Landlord's
written demand in the case of a tenancy at will, it shall be liable for damages
suffered by Landlord as a consequence of such holding over thereafter.
27. Quiet Enjoyment. Landlord covenants that if and for so long as Tenant
---------------
pays the rent and performs the covenants and conditions hereof, Tenant shall
peaceably and quietly have, hold and enjoy the Premises for the term free from
claims arising by, through or under Landlord.
28. Representation of Authority. Landlord and Tenant represent and warrant
---------------------------
to each other that they have full right, power and authority to enter into this
Lease without the consent or approval of any other entity or person. The
signatories on behalf of Landlord and Tenant represent and warrant that each has
full right, power and authority to act for and on behalf of Landlord and Tenant
in entering into this Lease.
29. Liability of Landlord. Tenant shall look solely to Landlord's interest
---------------------
in the Property, and the rents, issues and profits from the Property for the
satisfaction of any judgment or decree against Landlord, whether for breach of
the terms hereof or arising from a right created by statute or under common law.
Tenant agrees that no other property or assets of the Landlord or any partner in
Landlord shall be subject to levy, execution or other enforcement procedures for
satisfaction of any such judgment or decree; and no partner, shareholder or
other holder of an ownership interest in Landlord shall be sued or named as a
party in any suit or action (except as may be necessary to secure jurisdiction
over the partnership).
30. Brokers.
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(A) Tenant represents that Tenant has dealt directly with and only
with Broderick Group, Inc. (the "Listed Broker") (whose commission shall be paid
by Landlord pursuant to separate agreement), in connection with this Lease and
agrees to defend, indemnify and save harmless Landlord against all claims,
liabilities, losses, damages, costs and expenses (including reasonable
attorneys' fees and other costs of defense) arising from Tenant's breach of this
representation.
(b) Except for Tenant's breach of paragraph 30(a), Landlord hereby
agrees to defend, indemnify and save harmless Tenant against all claims,
liabilities, losses, damages, costs and expenses (including reasonable
attorneys' fees and other costs of defense) arising from the claims or demands
of the Listed Broker and any other brokers or finders with whom Landlord has
dealt for any commission alleged to be due any such brokers or finders in
connection with this Lease or the transactions contemplated hereby.
31. Attorneys' Fees. In the event either party institutes legal
---------------
proceedings against the other for breach of or interpretation of any of the
terms, conditions or covenants of this Lease, the party against whom a judgment
is entered shall pay all reasonable costs and expenses relative thereto,
including reasonable attorneys' fees of the prevailing party.
32. Options to Renew.
----------------
(a) If Zetron, Inc. or its affiliates (collectively "Zetron") does not
require the use of the Premises for its own purposes at the end of the Primary
or Renewal Term, Tenant shall have the option to renew this Lease for two (2)
additional term of three (3) years each (each a "Renewal Term") by giving
Landlord written notice thereof at least nine (9) months prior to the
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expiration date of the Primary Term or the Renewal Term, as applicable. Landlord
shall promptly advise Tenant prior to the end of the Primary or Renewal Term
whether or not Zetron requires such use. Tenant may not exercise this option if
it is then in default hereunder or has previously been in default beyond the
applicable cure period.
(b) If Tenant exercises a renewal option, the Fixed Rent for the
Renewal Term shall be equal to the fair market rate(s) for a three (3) year term
for comparable office space in the greater Bellevue-Redmond area on terms and
conditions comparable to those contained in this Lease (collectively "Fair
Market Rent"), but in no event less than the Fixed Rent payable during the last
month of the Primary Term or Renewal Term then in effect. Landlord shall advise
Tenant in writing of Landlord's calculation of Fair Market Rent not less than
eight (8) months prior to the end of the Primary Term or Renewal Term in effect.
If Tenant disagrees with such calculation, it shall advise Landlord in writing
thereof within twenty (20) days thereafter. If there is a disagreement on such
calculation, the parties shall promptly meet to attempt to resolve their
differences. If these differences as to Fair Market Rent are not resolved within
a two (2) month period, then the parties shall submit the matter to arbitration
in accordance with the terms of paragraph 32(c) so that Fair Market Rent is
determined no later than two (2) months prior to the end of the Primary Term or
Renewal Term then in effect.
(c) If the parties are unable to reach agreement on Fair Market Rent
during the period specified in paragraph 32(b), then within ten (10) days
thereafter either party may advise the other in writing of the name and address
of its arbitrator. The arbitrator shall be a commercial real estate broker or
appraiser with at least ten (10) years of experience with commercial rental
rates in the greater Bellevue-Redmond area. Within ten (10) business days after
receipt of such notice from the initiating party (the "Instigator") designating
its arbitrator, the other party (the "Recipient") shall give notice to
Instigator, specifying the name and address of the person designated by
Recipient to act as arbitrator on its behalf who shall be similarly qualified.
If Recipient fails to notify Instigator of the appointment of its arbitrator,
within or by the time above specified, then the arbitrator appointed by
Instigator shall be the arbitrator to determine the issue. The duty of the
arbitrator(s) shall be to determined the Fair Market Rent. If the two (2)
arbitrators are so chosen the arbitrators so chosen shall meet within ten (10)
business days after the second arbitrator is appointed and, if within ten (10)
business days after such first meeting the two arbitrators shall be unable to
agree promptly upon a determination of Fair Market Rent, they, themselves, shall
appoint a third arbitrator, who shall be a competent and impartial person with
qualifications similar to those required of the first two arbitrators. If they
are unable to agree upon such appointment within five (5) business days after
expiration of said ten (10) day period, the third arbitrator shall be selected
by the parties themselves, if they can agree thereon, within a further period of
ten (10) business days. If the parties do not so agree, then either party, on
behalf of both, may request appointment of such a qualified person by the then
presiding judge of King County Superior Court acting in his or her private non-
judicial capacity, and the other party shall not raise any question as to such
Judge's full power and jurisdiction to entertain the application for and make
the appointment, and the parties agree to indemnify and hold the presiding judge
fully and completely harmless from and against all claims arising out of the
presiding judge's appointment of an arbitrator. The three (3) arbitrators shall
decide the dispute, if it has not been previously resolved, by following the
procedure set forth in this Section. Where the issue cannot be resolved by
agreement between the two arbitrators selected by Landlord and Tenant or
settlement between the parties during the course of arbitration, the issue shall
be resolved by the three arbitrators in accordance with the following procedure.
The arbitrators selected by each of the parties shall state in writing his or
her determination of the Fair Market Rent supported by the reasons therefor with
counterpart copies to each party. The arbitrators shall arrange for a
simultaneous exchange of such proposed resolutions. The role of the third
arbitrator shall be to select which of the two proposed resolutions most closely
approximates his or her determination of Fair Market Rent. The third arbitrator
shall have no right to propose a middle ground or any modification of either of
the two proposed resolutions. The resolution he or she chooses as most closely
approximating his or her determination shall constitute the decision of the
arbitrators and be final and binding upon the parties.
(i) In the event of a failure, refusal or inability of any
arbitrator to act, his or her successor shall be appointed by him, but in
the case of the third arbitrator, his or her successor shall be appointed in the
same manner as provided for appointment of the third arbitrator. The arbitrators
shall attempt to decide the issue within ten (10) business days after the
appointment of the third arbitrator. Any decision in which the arbitrator
appointed by Landlord and the arbitrator
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appointed by Tenant concur shall be binding and conclusive upon the parties.
Each party shall pay the fee and expenses of its respective arbitrator and both
shall share equally the fee and expenses of the third arbitrator, if any, and
the attorneys' fees and expenses of counsel for the respective parties and of
witnesses shall be paid by the respective party engaging such counsel or calling
such witnesses.
(ii) The arbitrators shall have the right to consult
experts and competent authorities with factual information or evidence
pertaining to a determination of Fair Market Rent, but any such consultation
shall be made in the presence of both parties with full right on their part to
cross-examine. The arbitrators shall render their decision and award in writing
with counterpart copies to each party. The arbitrators shall have no power to
modify the provisions of this Lease.
33. Notices. Any notice by either party to the other shall be in
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writing and shall be deemed to be duly given only if sent by registered or
certified mail, return receipt requested, or overnight delivery service, to the
following addresses:
If to Tenant:
CACHEFLOW, INC.
650 Almanor Avenue
Sunnyvale, California 94086
Attn: Facilities Manager
With a copy to:
CACHEFLOW, INC.
At the Premises
Attn: Doug Crow
If to Landlord:
ZETRON PROPERTIES, INC.
12034 134th Court NE
P. 0. Box 97004
Redmond, Washington 98073-9704
Attn: Dan Garretson
with a copy to:
Michael S. Courtnage
Alston, Courtnage & Bassetti LLP
1000 Second Avenue, Suite 3900
Seattle, Washington 98104-1045
Notice shall be deemed to have been given on the date received, if delivered by
overnight delivery service, or, if mailed, three (3) business days after the
date postmarked, unless earlier received or refused.
34. Surrender of Premises. At the expiration or sooner termination of
---------------------
this Lease, Tenant shall return the Premises to Landlord in the same condition
in which received (or, if altered, then the Premises shall be returned in such
altered condition unless otherwise directed by Landlord under terms of paragraph
16), reasonable wear and tear and damage by fire or casualty excepted. Prior to
such return, Tenant shall remove its trade fixtures and appliances and equipment
which have not been attached to the Premises, and shall restore the Premises to
the condition they were in prior to the installation of said items. In no event
shall Tenant remove floor coverings; heating, ventilating and air conditioning
equipment, lighting equipment or fixtures; wall coverings, window coverings; or
other operating equipment unless otherwise directed by Landlord Tenant's
--------------------
obligation to perform this covenant shall survive the expiration or termination
of this Lease.
35. Entire Agreement. This Lease constitutes the entire agreement
----------------
between the parties, there being no other terms, oral or written, except as
herein expressed. No modification
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of this Lease shall be binding on the parties unless it is in writing and signed
by both parties hereto.
36. Liens and Encumbrances. Tenant shall keep the Premises and Property
----------------------
free and clear of all liens and encumbrances arising or growing out of its use,
occupancy and improvement of the Premises. If any lien is filed against the
Premises or Property as a result of the action or inaction of Tenant, Tenant
shall within twenty (20) days after demand provide Landlord with a bond in an
amount sufficient to remove the lien as a matter of record.
37. Communication Device. Tenant shall have the right to install an
--------------------
antenna or satellite "dish", or similar device for the reception and
transmission of signals ("Device"), on the roof of the Building in a location
selected by Landlord, but only for its own use and only in accordance with the
terms of this paragraph 37. The Device shall be installed, maintained, operated,
repaired and removed at the end of the Term, or its earlier termination at
Tenant's sole cost and expense. Tenant shall comply with all Laws relating to
the installation, use and maintenance of the Device and shall not permit it to
be operated in a manner which will interfere with other tenant's Devices, if
such devices are used by other tenants in a commercially reasonable manner. The
plans for the Device and its location shall be provided to Landlord for its
review and approval at least thirty (30) days prior to its installation of the
Device and Tenant shall comply with Landlord's directions with regard to its
installation. Tenant shall install the Device in such manner as will not reduce
the coverage afforded Landlord under its roof warranty and shall reimburse
Landlord for all of Landlord's costs incurred in connection with the
installation or removal of the Device. If the Device is so installed, then, if
Landlord so requires, Tenant shall at its sole expense provide a double membrane
over the roof to be used as a walkway for service and maintenance. There shall
be placed a walkway around the Device in the same fashion for the purpose of
service and roof safety. Tenant shall remove the Device, as and when necessary
for Landlord's roof maintenance work and at the end of the Term and shall repair
any damage resulting from its removal.
38. Miscellaneous.
-------------
(a) Successors or Assigns. All of the terms, conditions, covenants
---------------------
and agreements of this Lease shall extend to and be binding upon Landlord,
Tenant and, subject to the other terms hereof, their respective heirs,
administrators, executors, successors and permitted assigns, and upon any person
or persons coming into ownership or possession of any interest in the Premises
by operation of law or otherwise, and shall be construed as covenants running
with the land.
(b) Insolvency. If a petition is filed under the Bankruptcy Act or
----------
other law to have Tenant reorganized, dissolved or liquidated, or if a trustee
or receiver is appointed for Tenant's assets under the Bankruptcy Act or other
law or if a proceeding commenced to foreclose any mortgage or any other lien on
Tenant's interest in the Premises or on personal property kept or maintained
thereon, or if Tenant makes an assignment for the benefit of creditors not
rescinded or released within thirty (30) days, then Tenant shall be deemed in
default hereunder.
(c) Partial Invalidity. If any term, covenant or condition of this
------------------
Lease or the application thereof to any person or circumstance is, to any
extent, invalid or unenforceable, the remainder of this Lease, or the
application of such term, covenant or condition to persons or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby and each term, covenant or condition of this Lease shall be
valid and be enforced to the fullest extent permitted by law.
(d) Recording. Tenant shall not record this Lease without the
---------
prior written consent of Landlord. However, upon Landlord's request, both
parties shall execute a memorandum of this Lease, in a form customarily used for
such purpose of recordation. The memorandum shall describe the parties, the
Premises and the term of this Lease and shall incorporate the other terms of
this Lease by reference.
(e) Force Majeure. Neither party shall be deemed in default hereof
-------------
nor liable for damages arising from its failure to perform its duties or
obligations hereunder if such is due to causes beyond its reasonable control,
including, but not limited to, acts of God, acts of civil or military
authorities, fires, floods, windstorms, earthquakes, strikes or other labor
disturbances, civil
-16-
<PAGE>
commotion or war. However, the foregoing shall not excuse a party from the
timely payment of sums due under this Lease when specified herein.
(f) Transportation Management Program; Recycling. Tenant shall
--------------------------------------------
cooperate with Landlord in meeting the objectives and complying with the terms
and conditions of any transportation management plan applicable to the Building
or Property. Landlord will provide Tenant with a copy of any such transportation
management plan now or hereafter in effect. In addition, Tenant will cooperate
with and participate in any and all recycling programs now or hereafter in place
with respect to the Building or Property.
(g) Name of Building. Landlord may change the name of the Building at
----------------
any time upon twenty (20) days prior written notice. Any such change shall not
require amendment of this Lease or affect in any way Tenant's obligations under
this Lease, and except for the name change, all terms and conditions of this
Lease shall remain in full force and effect.
(h) Reserved to Landlord. Landlord reserves all air rights over the
--------------------
Premises, the use of the exterior walls, the roof of the Building, and the right
to install, maintain, use, repair and replace pipes, ducts, conduits and wires
leading through the Premises in locations which will not materially interfere
with Tenant's use thereof to serve other parts of the Building and/or the
Property.
(i) Headings. The headings in this Lease are for convenience only and
--------
do not in any way limit or affect the terms and provisions hereof.
(j) Gender. Wherever appropriate in this Agreement, the singular
------
shall be deemed to refer to the plural and the plural to the singular, and
pronouns of certain genders shall be deemed to include either or both of the
other genders.
(k) Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the laws of the State of Washington.
(l) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but which when taken together shall
constitute one and the same instrument.
(m) Prohibition. Tenant covenants that neither it nor any of its
-----------
affiliates or subtenants will attempt to hire any person employed by Landlord or
Zetron any other occupant of the Building,
39. Execution by Landlord and Tenant. Landlord shall not be deemed to have
--------------------------------
made an offer to Tenant by furnishing Tenant with a copy of this Lease with
particulars inserted. No contractual or other rights shall exist or be created
between Landlord and Tenant until all parties hereto have executed this Lease
and fully executed copies have been delivered to Landlord and Tenant.
40. Entire Agreement - Applicable Law. This Lease and the Exhibits
---------------------------------
attached hereto, and by this reference incorporated herein, set forth the entire
agreement of Landlord and Tenant concerning the Premises, and there are no other
agreements or understanding, oral or written, between Landlord and Tenant
concerning the Premises. Any subsequent modification or amendment of this Lease
shall be binding upon Landlord and Tenant only if reduced to writing and signed
by them.
IN WITNESS WHEREOF, the parties hereto have executed this instrument as of
the day and year indicated below.
LANDLORD
--------
Executed this 20 day of ZETRON PROPERTIES, INC.
APRIL, 2000
By /s/ Daniel K. Garretson
------------------------------
Its Executive Vice President
---------------------------
-17-
<PAGE>
TENANT
------
Executed this 19 day of CACHEFLOW, INC.
April, 2000
By /s/ Michael Johnson
------------------------------
Its VP & CFO
------------------------------
-18-
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 20/th/ day of April, 2000, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn
personally appeared Daniel K. Garretson, known to me to be the Executive VP of
ZETRON PROPERTIES, INC., the corporation that executed the foregoing instrument,
and acknowledged the said instrument to be the free and voluntary act and deed
of said corporation, for the purposes therein mentioned, and on oath stated that
he/she was authorized to execute said instrument.
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgment is the person whose true
signature appears on this document.
WITNESS my hand and official seal hereto affixed the day and year in the
certificate above written.
/s/ Brent T. Dippie
-------------------------
Signature
BRENT T. DIPPIE
-------------------------
Print Name
NOTARY PUBLIC in and for the State of
Washington, residing at Kirkland
My commission expires 1/29/04
STATE OF CA. )
) ss.
COUNTY OF SANTA CLARA )
On this 19th day of April, 2000, before me, the undersigned, a Notary
Public in and for the State of CA., duly commissioned and sworn personally
appeared MICHAEL JOHNSON, known to me to be the CFO of CACHEFLOW, INC., the
corporation that executed the foregoing instrument, and acknowledged the said
instrument to be the free and voluntary act and deed of said corporation, for
the purposes therein mentioned, and on oath stated that he/she was authorized to
execute said instrument.
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgment is the person whose true
signature appears on this document.
WITNESS my hand and official seal hereto affixed the day and year in the
certificate above written.
/s/ Cheryl Lawrence
----------------------
[SEAL] Signature
CHERYL LAWRENCE
----------------------
Print Name
NOTARY PUBLIC in and for the State of
CA., residing at CACHEFLOW
My commission expires 11/30/2003
-19-
<PAGE>
Exhibit A
---------
[PLAN APPEARS HERE]
<PAGE>
EXHIBIT B
---------
12034 134/th/ Court NE
- ----------------------
PARCEL A
- --------
Tract C of King County Short Plat No. 480096, recorded under Recording No.
8102090698;
TOGETHER WITH Tract D of King County Short Plat No. 480097, recorded under
Recording No. 8102090699, said Short Plat Nos. 480096 and 480097 being a portion
of the northwest quarter of the southwest quarter of Section 27, Township 26
North, Range 5 East, W.M., in King County, Washington.
PARCEL B
- --------
Lot 3, City of Redmond Lot Line Adjustment No. SS-83-43, recorded under
Recording No. 8403120819, being a revision of King County Short Plat No. 480095
recorded under Recording No. 8102090697, and being a portion of the northwest
quarter of the southwest quarter of Section 27, Township 26 North, Range 5 East,
W.M., in King County, Washington.
TOGETHER WITH an undivided interest in Tract A, as delineated on the face of the
City of Redmond Lot Line Adjustment No. SS-83-43, as recorded under Recording
No.8403120819;
EXCEPT that portion of said Tract A deeded to the City of Redmond for street
purposes by deed recorded under Recording No. 8501070360.
-1-
<PAGE>
EXHIBIT C
DESIGN, CONSTRUCTION AND FINANCING
OF PREMISES IMPROVEMENTS
------------------------
Landlord shall construct improvements on the Premises under the terms
of the annexed lease (the "Lease") in accordance with the terms of this Exhibit
C.
1. Tenant Improvement Costs. As long as Tenant is not in default
------------------------
under the Lease, Landlord shall perform and fund the cost of the design and
construction of Tenant's improvements to the Premises, as performed and outlined
in Exhibit C-l hereto ("Tenant Improvements"), up to a maximum of Thirty Dollars
-----------
($30.00) per rentable square foot of Premises area (the "Maximum") in the manner
provided for in this Exhibit C. If the cost of Tenant Improvements exceeds the
Maximum, Tenant shall be responsible for and pay the excess over the Maximum as
provided for in Section 5 below. The cost of Tenant Improvements shall include
the fees of Landlord's engineers and other consultants, including Landlord's
Architect, for services with respect to the Premises; and all applicable
Washington State sales tax with respect to work performed by the general
contractor. Landlord will not charge Tenant a construction management or
overhead or supervision fee.
2. Base Building. The Premises are currently at the base Building
-------------
level.
3. Design of Tenant Improvements.
-----------------------------
3.1 Space Plan. Tenant and Landlord's Architect shall prepare a
----------
preliminary space plan reflecting the Tenant Improvements for the Premises and
deliver it to Landlord for its review by no later than ten (10) business days
after the date of the Lease. Such space plan shall be sufficient to reflect the
architectural design of the Premises and layout of the Tenant Improvements.
Landlord shall provide Tenant with its written comments and requests for
revisions of such space plan within ten (10) business days after its receipt
thereof. Tenant shall submit a revised space plan to Landlord within five (5)
business days after its receipt of Landlord's response incorporating Landlord's
comments and requests for revisions for Landlord's approval. Landlord's response
will be provided within five (5) business days after its receipt thereof. After
finalization of the space plan Landlord will provide Tenant with an estimate of
the substantial completion date for Tenant Improvements and Landlord's Work.
3.2 Landlord's Architect. Landlord shall engage the services of
--------------------
an architect ("Landlord's Architect") to provide the professional services
required for the Tenant Improvements. Landlord's Architect shall provide all
architectural and engineering service as required for the Tenant Improvements
after the space plan has been approved. Tenant shall work diligently with
Landlord's Architect in preparing preliminary and final plans, specifications
and engineering and construction drawings for the Tenant Improvements and
provide responses within no more than five (5) days after a request therefor.
Prior to Tenant's delivery of written authorization to proceed as provided for
in Section 4.1, Landlord's Architect shall work with and be subject to Tenant's
direction and control with respect to Tenant Improvements subject to Landlord's
approval rights and authority as provided for herein. Landlord's Architect
shall check to see that the work shown on Tenant's plans is compatible with the
basic Building plans. All plans and such modifications shall be subject to the
approval of the Tenant and Landlord, which shall not be unreasonably withheld.
3.3 Contract Administration. Landlord's Architect will provide
-----------------------
construction administration during the execution of Tenant Improvements on the
Premises and will observe progress of that work, attend necessary contractor
coordination meetings, advise Tenant and Landlord on status and progress
payments, prepare a punchlist for any construction deficiencies at completion
and certify the Premises ready for occupancy prior to move-in.
3.4 Tenant Delays. Tenant shall be responsible for delays and
-------------
additional costs in completion of Tenant Improvements and any damages or other
costs incurred by Landlord which are caused by (a) failure to provide adequate
or timely information and direction or responses to Landlord's Architect or
failure to meet space plan or other delivery or response dates set forth or in
the Lease; (b) Tenant's failure to timely authorize Landlord to proceed with
construction of the Tenant Improvements; (c) changes or requests for changes
requested by Tenant in plans after preparation of Final Contract Documents; (d)
delays requested by Tenant; or (e) breach of the Lease
-1-
<PAGE>
11. Tenant shall exercise care and caution to insure that all water
faucets and water apparatus, electricity and gas are carefully and entirely
shut off before tenant or its employees leave the Building, so as to prevent
waste or damage. Tenant shall be responsible for any damage to the Premises or
the Building and for all damage or injuries sustained by other tenants of the
Premises or the Building arising from tenant's failure to observe this
provision.
12. Landlord reserves the right to exclude or expel from the Building
any person who, in the judgment of Landlord is under the influence of liquor or
drugs, or who shall in any manner do any act in violation of any of the rules
and regulations of the Building.
13. Tenant, employees and invitees shall obey all traffic and parking
regulations as posted throughout the Building by Landlord. Tenant is
responsible for informing employees, visitors and clients of parking
regulations. Landlord shall not be held responsible for towing a visitor,
client or employee who does not comply or who is unaware of these regulations.
14. The toilet rooms, urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were constructed,
and no foreign substance of any kind whatsoever shall be thrown therein. The
expense of any breakage, stoppage or damage resulting from the violation of
this rule shall be borne by the tenant who, or whose employees or invitees,
have caused it.
15. Except with the written consent of Landlord, no person or persons
other than those approved by Landlord shall be permitted to enter the Building
for the purpose of providing janitorial or cleaning services. Any additional
common area costs attributable to tenant's carelessness or indifference in the
preservation of good order and cleanliness shall be charged to tenant. Landlord
shall in no way be responsible to any tenant for any loss of property on the
Premises, however occurring, or for any damage done to the effects of any tenant
by the janitor or any other employee of any other person.
16. Tenant shall not interfere in any way with other Building
occupants or those having business therein, or permit any bicycles, animals or
birds be brought in or kept in or about the Premises or the Building, except
for guide dogs as required by law.
17. Tenant shall not use or keep in the Premises or the Building any
kerosene, gasoline or inflammable or combustible fluid or material, or use any
method of heating or air conditioning other than that supplied by Landlord.
18. Landlord will direct electricians as to where and how telephone
and electrical wires are to be introduced. No boring or cutting for wires will
be allowed without the consent of Landlord. The locations of telephones, call
boxes and other office equipment affixed to the Premises shall be subject to
the approval of Landlord.
19. No tenant shall lay linoleum, tile, carpet or other similar floor
covering so that the same shall be affixed to the floor of the Premises in any
manner except as approved by the Landlord. The expense of repairing any damage
resulting from a violation of this rule or removal of any floor covering shall
be borne by the tenant by whom, or by whose contractors, employees or invitees,
the damage shall have been caused.
20. On Saturdays, Sundays and legal holidays, and on all other days
after Normal Business Hours, access to the Building or to the halls, corridors,
elevators or stairways in the Building, or to the Premises may be refused
unless the person seeking access is known to the person or employee in charge
of the Building and has a pass or is properly identified. The Landlord shall in
no case be liable for damages for any error with regard to the admission to or
exclusion from the Building of any person. In case of war, civil disturbances,
mob, riot, public disorder or other emergency, Landlord reserves the right to
prevent access to the Building during the continuance of the same by closing
the doors or otherwise, for the safety of the tenants and protection of the
property in the Buildings.
21. Chair floor pads are required to be used under all chairs with
rollers or casters.
22. Smoking is prohibited in the Premises, in the Buildings and
elsewhere in the Property except in areas, if any, expressly designated for such
by Landlord.
-2-
<PAGE>
23. No tenant and no employees, agents, customers, contractors or
invitees of any tenant shall go upon the roof of the Buildings without the prior
written consent of Landlord.
24. No food, soft drink or other vending machines shall be brought
into or kept about the premises, except in lunch room areas, nor shall any
cooking be permitted (other than by microwave) or for the preparation of coffee,
tea, hot chocolate and similar beverages for the comfort and convenience of a
tenant, its employees, agents, customers and invitees without the prior written
consent of Landlord.
25. No recreational vehicles, boats, trailers, trucks or automobiles
shall be stored in the parking areas at night or on weekends. Any vehicle, boat
or trailer stored in the parking areas at night or weekends shall be removed at
the owner's sole risk and expense.
26. Tenant shall comply with all requirements necessary for the
efficient operation and management of the Park security system.
27. Landlord reserves the right to make such other and further
reasonable and unbiased regulations as in its judgment may from time to time be
needed or desirable for the safety, care and cleanliness of the Premises, the
Building, and the Property and the preservation of good order therein, but shall
give tenant ten (10) days prior written notice thereof.
-3-
<PAGE>
EXHIBIT D
---------
RULES AND REGULATIONS
1. Tenant shall not erect or install or otherwise utilize signs, lights
symbols, canopies, awnings, window coverings or other advertising or decorative
matter on the windows, walls, and exterior doors, or areas otherwise visible
from the exterior of the Premises without first submitting its plans to Landlord
and obtaining Landlord's written approval thereof.
2. Lettering upon the directory board and the doors as required by tenant
shall be performed by the sign company designated by Landlord.
3. No additional locks shall be placed upon any doors of the Premises, and
tenant agrees not to have any duplicate keys or security cards made without the
consent of Landlord. If more than the agreed number of keys or security cards
upon occupying space are needed for any lock, such additional keys or security
cards shall be paid for by tenant at Landlord's normal charge therefor. Each
tenant, upon the termination of the tenancy, shall deliver to the Landlord the
keys or security cards of offices and rooms which shall have been furnished the
tenant or which the tenant shall have had made, and in the event of loss of any
of the keys or security cards so furnished, shall pay the Landlord at Landlord's
charge thereof.
4. No furniture, freight, supplies not carried by hand or equipment of any
kind shall be brought into or removed from the Building without the consent of
Landlord. Such furniture, freight, equipment, safes and other property shall be
moved in or out of, and within the elevators of, the Building only at the times
and in the manner permitted by Landlord, Landlord will not be responsible for
loss or damage to any of the items above referred to, and all damage done to the
Premises or the Building by moving or maintaining any of such items shall be
repaired at the expense of tenant. Any merchandise not capable of being carried
by hand shall be moved utilizing hand trucks equipped with rubber tires and
rubber side guards.
5. Landlord shall have the right to limit the weight, size and to
designate the locations of all safes, file rooms, libraries and other heavy
property within the Building. Maximum uniform floor loading allowed is 65 pounds
per square foot. Tenant warrants that under no circumstances shall they load the
floor in excess of this limit. If excess floor loading is required, all costs
(including engineering) to prepare the floor surface and structure to withstand
excess floor loads shall be borne by the tenant. In no event shall excess floor
loads be permitted without express written permission from Landlord.
6. The entrances, corridors, stairways and elevators shall not be
obstructed by tenant, or used for any other purpose than ingress or egress to
and from the Premises.
7. Tenant will not use or permit to be used in the Premises anything
that will increase the rate of insurance on the Building or any part thereof;
nor permit anything that may be dangerous to life or limb; nor in any manner
deface or injure the Building or any part thereof; not do anything or permit
anything to be done upon the Premises in any way tending to create a nuisance
or to disturb any other tenant or occupant of any part of the Building; and
tenant, at tenant's expense, will comply with all health, fire and police
regulations regarding the Premises.
8. Tenant shall not mark, drive nails, screw or drill into woodwork or
plaster, or paint or in any way deface the Building or any part thereof, or the
Premises or any part thereof or fixtures therein. The expense of remedying any
breakage, damage or stoppage resulting from a violation of this rule shall be
borne by tenant.
9. Canvassing, soliciting and peddling in Building are prohibited, and
each tenant shall cooperate to prevent such activity.
10. The requirements of tenants will be attended to only upon
application at the main office of Landlord. Landlord's employees shall not
perform any work or do anything outside of their regular duties, except on
issuance of special instructions from Landlord. If Landlord's employees are
made available for the assistance of any tenant, Landlord shall be paid for
their services by such tenant at hourly rates established by Landlord.
-1-
<PAGE>
11. Tenant shall exercise care and caution to insure that all water
faucets and water apparatus, electricity and gas are carefully and entirely
shut off before tenant or its employees leave the Building, so as to prevent
waste or damage, Tenant shall be responsible for any damage to the Premises or
the Building and for all damage or injuries sustained by other tenants of the
Premises or the Building arising from tenant's failure to observe this
provision.
12. Landlord reserves the right to exclude or expel from the Building
any person who, in the judgment of Landlord is under the influence of liquor or
drugs, or who shall in any manner do any act in violation of any of the rules
and regulations of the Building.
13. Tenant, employees and invitees shall obey all traffic and parking
regulations as posted throughout the Building by Landlord. Tenant is
responsible for informing employees, visitors and clients of parking
regulations. Landlord shall not be held responsible for towing a visitor,
client or employee who does not comply or who is unaware of these regulations.
14. The toilet rooms, urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were constructed,
and no foreign substance of any kind whatsoever shall be thrown therein. The
expense of any breakage, stoppage or damage resulting from the violation of
this rule shall be borne by the tenant who, or whose employees or invitees,
have caused it.
15. Except with the written consent of Landlord, no person or persons
other than those approved by Landlord shall be permitted to enter the Building
for the purpose of providing janitorial or cleaning services. Any additional
common area costs attributable to tenant's carelessness or indifference in the
preservation of good order and cleanliness shall be charged to tenant. Landlord
shall in no way be responsible to any tenant for any loss of property on the
Premises, however occurring, or for any damage done to the effects of any tenant
by the janitor or any other employee of any other person.
16. Tenant shall not interfere in any way with other Building
occupants or those having business therein, or permit any bicycles, animals or
birds be brought in or kept in or about the Premises or the Building, except
for guide dogs as required by law.
17. Tenant shall not use or keep in the Premises or the Building any
kerosene, gasoline or inflammable or combustible fluid or material, or use any
method of heating or air conditioning other than that supplied by Landlord.
18. Landlord will direct electricians as to where and how telephone
and electrical wires are to be introduced. No boring or cutting for wires will
be allowed without the consent of Landlord. The locations of telephones, call
boxes and other office equipment affixed to the Premises shall be subject to
the approval of Landlord.
19. No tenant shall lay linoleum, tile, carpet or other similar floor
covering so that the same shall be affixed to the floor of the Premises in any
manner except as approved by the Landlord. The expense of repairing any damage
resulting from a violation of this rule or removal of any floor covering shall
be borne by the tenant by whom, or by whose contractors, employees or invitees,
the damage shall have been caused.
20. On Saturdays, Sundays and legal holidays, and on all other days
after Normal Business Hours, access to the Building or to the halls, corridors,
elevators or stairways in the Building, or to the Premises may be refused
unless the person seeking access is known to the person or employee in charge
of the Building and has a pass or is properly identified. The Landlord shall in
no case be liable for damages for any error with regard to the admission to or
exclusion from the Building of any person. In case of war, civil disturbances,
mob, riot, public disorder or other emergency, Landlord reserves the right to
prevent access to the Building during the continuance of the same by closing
the doors or otherwise, for the safety of the tenants and protection of the
property in the Buildings,
21. Chair floor pads are required to be used under all chairs with
rollers or casters.
22. Smoking is prohibited in the Premises, in the Buildings and
elsewhere in the Property except in areas, if any, expressly designated for such
by Landlord.
-2-
<PAGE>
23. No tenant and no employees, agents, customers, contractors or
invitees of any tenant shall go upon the roof of the Buildings without the prior
written consent of Landlord.
24. No food, soft drink or other vending machines shall be brought into
or kept about the premises, except in lunch room areas, nor shall any cooking be
permitted (other than by microwave) or for the preparation of coffee, tea, hot
chocolate and similar beverages for the comfort and convenience of a tenant, its
employees, agents, customers and invitees without the prior written consent of
Landlord.
25. No recreational vehicles, boats, trailers, trucks or automobiles
shall be stored in the parking areas at night or on weekends. Any vehicle, boat
or trailer stored in the parking areas at night or weekends shall be removed at
the owner's sole risk and expense.
26. Tenant shall comply with all requirements necessary for the
efficient operation and management of the Park security system.
27. Landlord reserves the right to make such other and further
reasonable and unbiased regulations as in its judgment may from time to time be
needed or desirable for the safety, care and cleanliness of the Premises, the
Building, and the Property and the preservation of good order therein, but
shall give tenant ten (10) days prior written notice thereof.
-3-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>3
<FILENAME>dex1012.txt
<DESCRIPTION>OFFER LETTER WITH DON JAWORSKI
<TEXT>
<PAGE>
Exhibit 10.12
June 3, 2000
Mr. Don Jaworski
Dear Don:
CacheFlow Inc. (the "Company" or CacheFlow) is contemplating
acquiring Springbank Networks, Inc. (the "Acquisition"). Accordingly, the
Company is pleased to offer you employment, contingent on the closing of the
Acquisition pursuant to the Agreement and Plan of Reorganization dated on or
about the date hereof on the following terms:
1. Position. You will start in a full-time position as the
Senior Vice President, Operations, reporting directly to me. By signing this
letter, you confirm to the Company that you are not, and by accepting such
employment will not become, under any contractual or other legal obligations
that would prohibit you from performing your duties for the Company.
2. Compensation and Employee Benefits. You will be paid a
starting annual salary at the rate of $200,000 payable in accordance with the
Company's standard payroll schedule. As a regular employee of the Company you
will be eligible to participate in a number of Company-sponsored benefits which
are available to all CacheFlow employees.
3. Stock Options. Springbank will assign to CacheFlow Inc. its
right to repurchase your unvested option shares acquired pursuant to the
exercise of the Springbank option granted to you on May 11, 2000 and CacheFlow
will assume all obligations of Springbank under your stock option agreement, in
each case pursuant to the terms of the Merger Agreement signed in connection
with the Acquisition. In the event that CacheFlow is subject to a Change in
Control, as defined in your stock option agreement, prior to your termination of
service with the Company, any unvested shares acquired under the option shall
become vested for an additional 25% of the shares subject to the option.
In the event of your death or disability prior to your
termination of service with the Company, any unvested shares acquired under the
option shall become vested for an additional 25% of the shares subject to the
option.
In the event your employment is terminated by CacheFlow
without Cause, any unvested shares acquired under the option shall be fully
vested.
4. Cause. "Cause" shall mean the occurrence of:
(A) Employee's willful misconduct or gross negligence in
performance of his duties hereunder, including Employee's
refusal to comply in any material respect with
<PAGE>
Mr. Don Jaworski
June 3, 2000
Page 2
the legal directives or written instructions of the Company's Board of
Directors or CEO so long as such directives or instructions are not
inconsistent with Employee's position and duties, and such refusal to
comply is not remedied within thirty (30) working days after written
notice from the Company, which written notice shall state that failure
to remedy such conduct may result in termination for Cause;
(B) Dishonest or fraudulent conduct, a deliberate attempt to do an injury
to the Company or other conduct that materially discredits the Company
or is materially detrimental to the reputation of the Company,
including conviction of a felony; or
(C) Employee's incurable material breach of any element of the Company's
Confidential Information and Invention Assignment Agreement, including
without limitation, Employee's theft or other misappropriation of the
Company's proprietary information.
5. Proprietary Information and Inventions Agreement. Like all
Company employees, you will be required, as a condition to your employment with
the Company, to sign the Company's standard Proprietary Information and
Inventions Agreement, a copy of which is attached hereto as Exhibit A.
6. Employment Relationship. Employment with the Company is for no
specific period of time. Your employment with the Company will be "at will,"
meaning, that either you or the Company may terminate your employment at any
time and for any reason, with or without cause. Your right to receive
compensation or benefits in the event of your employment terminating shall be
governed by the vesting acceleration and other provisions of this letter as
described above. Any contrary representations which may have been made to you
are superseded by this offer. This is the full and complete agreement between
you and the Company on this term. Although your job duties, title, compensation
and benefits, as well as the Company's personnel policies and procedures, may
change from time to time, the "at will" nature of your employment may only be
changed in an express written agreement signed by you and the Chief Executive
Officer of the Company.
7. Outside Activities. While you render services to the Company, you
agree that you will not engage in any other employment, consulting or other
business activity without the written consent of the Company. Notwithstanding
the foregoing, you may own, directly or indirectly, solely as an investment, up
to one percent (1%) of any class of publicly traded securities of any person or
entity, including one which owns a competitive business, and you may own up to
ten percent (10%) of any class of non-publicly-traded securities of any person
or entity provided such person or entity does not compete with the business of
the Company. While you render services to the Company, you also will not assist
any person or entity in competing with the Company, in preparing to compete with
the Company or in hiring any employees or consultants of the Company. From time
to time, you may request consent to engage in outside
<PAGE>
Mr. Don Jaworski
June 3, 2000
Page 3
technical activities that do not negatively impact the Company or your ability
to do your job, in which case the consent of the Company will not be
unreasonably withheld.
8. Withholding Taxes. All forms of compensation referred
to in this letter are subject to reduction to reflect applicable withholding and
payroll taxes.
9. Entire Agreement. This letter supersedes and replaces
any prior understandings or agreements, whether oral or written, between you and
the Company regarding the subject matter described in this letter.
We hope that you find the foregoing terms acceptable. You may
indicate your agreement with these terms and accept this offer by signing and
dating both the enclosed duplicate original of this letter and the enclosed
Proprietary Information and Inventions Agreement and returning them to me. As
required by law, your employment with the Company is also contingent upon your
providing legal proof of your identity and authorization to work in the United
States. This offer, if not accepted, will expire at the close of business on
June 5, 2000.
<PAGE>
If you have any questions, please call me at (408) 220-2200.
Very truly yours,
CacheFlow
/s/ B. M. NeSmith
By: Brian NeSmith
Title: President and Chief Executive Officer
I have read and accept this employment offer:
____________________________________________
Signature of Don Jaworski
Dated:______________________________________
Attachment
Exhibit A: Proprietary Information and Inventions Agreement
<PAGE>
If you have any questions, please call me at (408) 220-2200.
Very truly yours,
CacheFlow
By: Brian NeSmith
Title: President and Chief Executive Officer
I have read and accept this employment offer:
/s/ Don Jaworski
- ----------------------------------
Signature of Don Jaworski
Dated: 6-3-00
----------------------------
Attachment
Exhibit A: Proprietary Information and Inventions Agreement
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.13
<SEQUENCE>4
<FILENAME>dex1013.txt
<DESCRIPTION>OFFER LETTER WITH JOHN SCHARBER
<TEXT>
<PAGE>
Exhibit 10.13
CACHEFLOW INC.
October 10, 2000
John Scharber
Employment Agreement
--------------------
Dear John:
On behalf of CacheFlow Inc. ("Company" or "CacheFlow"), I am pleased to
offer you employment with the Company on the terms set forth below.
1. Position. You will be employed by Company effective as of the
--------
closing of a business combination transaction ("Merger") between CacheFlow and
the Company pursuant to which Merger Sub will merge with and into the Company
(the "Commencement Date") and continuing thereafter until termination pursuant
to Section 6. You will report directly to the Vice President of Engineering. You
will be expected to devote your full working time and attention to the business
of Company, and you will not render services to any other business without the
prior approval of the Board of Directors or, directly or indirectly, engage or
participate in any business that is competitive in any manner with the business
of Company. You will also be expected to comply with and be bound by the
Company's operating policies, procedures and practices that are from time to
time in effect during the term of your employment.
2. Base Salary/Bonus. Your initial base monthly salary will be
-----------------
$195,000, payable in accordance with Company's normal payroll practices with
such payroll deductions and withholdings as are required by law. Your base
salary will be reviewed by the Compensation Committee of the Board of Directors
effective twelve months from the Commencement Date and from time to time
thereafter, and adjusted in the discretion of the Compensation Committee. You
will be eligible for bonuses typically available to employees in comparable
positions.
3. CacheFlow Option. Subject to the approval of the Compensation
----------------
Committee of the Company's Board of Directors, and on or after the date of the
closing of the Merger, you will be granted an option to purchase 100,000 shares
of the Company's Common Stock (the "CacheFlow Option"). The exercise price per
share will be equal to the fair market value per share on the date the option is
granted. The option will be subject to the terms and conditions applicable to
options granted under the Company's 1999 Stock Incentive Plan or 2000
Supplemental Stock Option Plan, as described in the applicable Plan and the
applicable stock option agreement. The option will become exercisable and vest
in twelve equal monthly increments for each monthly anniversary following the
Commencement Date that you are continuously employed with the Company.
4. Pre-existing Shares. Prior to the Merger, you hold vested and
-------------------
unvested shares of Entera. In connection with the Merger and in exchange for the
Entera shares you own as of the date of the Merger, you will receive CacheFlow
shares in accordance with the terms of the Merger Agreement ("Pre-existing
Shares") subject to equally proportionate vesting and at an equivalent rate to
that which was applicable to your Entera shares. As a result of this Agreement,
you hereby agree that 25% of your vested Pre-existing Shares shall become
unvested and subject to repurchase by the Company. Such newly unvested shares
shall vest in six equal monthly increments for each monthly anniversary
following the Commencement Date that you are continuously employed with the
Company. Should your employment with the Company terminate prior to your
completion of six continuous months of employment, then the Company shall have
the right to repurchase 1/6/th/ of the newly unvested shares for each full month
not completed at a price equal to the price you paid for such shares, adjusted
by the exchange ratio applicable in the Merger. The Company shall have 90 days
in which to effect the repurchase of any unvested shares
<PAGE>
pursuant to the preceding sentence. All other unvested Pre-existing Shares shall
vest in accordance with their original vesting schedule.
5. Other Benefits. You will be eligible for the normal vacation,
--------------
health insurance, 401(k), employee stock purchase plan and other benefits
offered to all similarly-situated Company employees. For purposes of determining
Service under such plans you will receive credit for your service with Entera to
the extent permissible under such plans.
6. Employment and Termination. Employment with the Company is for no
--------------------------
specific period of time. Your employment with the Company will be "at will,"
meaning that either you or the Company may terminate your employment at any time
and for any reason, with or without cause. Any contrary representations which
may have been made to you are superseded by this agreement. This is the full and
complete agreement between you and the Company on this term. Although your job
duties, title, compensation and benefits, as well as the Company's personnel
policies and procedures, may change from time to time, the "at will" nature of
your employment may only be changed in an express written agreement signed by
you and the Chief Executive Officer of the Company.
7. Definitions. "Cause" means the commission of an act of
-----------
theft, embezzlement, fraud, dishonesty, gross misconduct or a breach of
fiduciary duty to the Company or a Company or Subsidiary of the Company.
"Involuntary Termination" means your resignation due to a material reduction in
the scope of your duties or responsibilities, a reduction in your salary or
target bonus, or you are required to move your principal place of work outside
Santa Clara, San Mateo or San Francisco counties, California. "Termination for
Death or Disability" means the automatic termination of your employment upon
your death or upon your disability as determined by the Board of Directors;
provided that "disability" shall mean your complete inability to perform your
job responsibilities for a period of 180 consecutive days or 180 days in the
aggregate in any 12-month period.
8. Separation Benefits. Upon termination of your employment
-------------------
with Company for any reason, you will receive payment for all unpaid salary and
vacation accrued to the date of your termination of employment; and your
benefits will be continued under Company's then existing benefit plans and
policies for so long as provided under the terms of such plans and policies and
as required by applicable law. Under certain circumstances, you will also be
entitled to receive severance benefits as set forth below, but you will not be
entitled to any other compensation, award or damages with respect to your
employment or termination.
(a) In the event of your voluntary termination or termination
by the Company for Cause, you will not be entitled to any cash severance
benefits or additional vesting of shares of stock or options or any other
benefits beyond those provided in the first sentence of paragraph 8.
Notwithstanding the foregoing, if your employment is terminated by you or the
Company for any reason on or after six months of continuous employment with
CacheFlow, all of your unvested Pre-existing shares under paragraph 3 herein
shall become fully and immediately vested, and, if applicable, exercisable.
(b) In the event of the termination of your employment by
CacheFlow without Cause or your Termination for Death or Disability, (i) you or
your heirs, as applicable, will be entitled to a severance payment equal to six
months of your current annual base salary (less applicable deductions and
withholdings) payable in accordance with the Company's normal payroll practice
beginning after the effective date of your termination; and (ii) all your stock
of the Company (including any subject to an option to purchase) other than the
CacheFlow Option referred to in Section 3 above shall become fully and
immediately vested and, if applicable, exercisable by you or your heirs, as
applicable. You shall not be entitled to any severance payments or acceleration
of vesting pursuant to the foregoing unless you (i) have executed a general
release of all claims (in a form prescribed by CacheFlow) and (ii) have agreed
not to prosecute any legal action or other proceeding based upon any of such
claims.
In the event of your Involuntary Termination, all of your stock
in the Company (including any subject to an option to purchase) other than the
CacheFlow Option referred to in Section 3 above shall become fully and
immediately vested and, if applicable, exercisable. You shall not be entitled to
any acceleration of vesting unless you (1) have executed a general release of
all claims (in a form prescribed by CacheFlow) and (ii) have agreed not to
prosecute any legal action or other proceeding based upon any of such claims.
(c) No payments due you hereunder shall be subject to mitigation
or offset.
<PAGE>
9. Indemnification Agreement. Upon your commencement of employment
-------------------------
with Company, Company will enter into its standard form of indemnification
agreement for officers and directors, a copy of which is attached to this letter
as Exhibit , to indemnify you against certain liabilities you may incur as an
--------
officer or director of Company.
10. Confidential Information and Invention Assignment Agreement.
-----------------------------------------------------------
Upon your commencement of employment with Company, you will be required to sign
its standard form of you Agreement, a copy of which is attached to this letter
as Exhibit , to protect Company's confidential information and intellectual
--------
property.
11. Noncompete/Nonsolicitation.
---------------------------
General Terms. This Agreement is entered into in connection with
CacheFlow's purchase from Entera of all of the issued and outstanding capital
stock of Entera. The parties acknowledge that it would be detrimental to
CacheFlow if you were to compete with CacheFlow within a specified period of
time in any part of the Business (as defined below) following the closing of the
Merger. The parties further understand and agree that you were a stockholder of
Entera prior to the closing; a key and significant employee of Entera prior to
the closing; and that, as of the closing, CacheFlow paid you consideration in
order to acquire your stock interest in Entera. In addition, the parties agree
that, prior to the Effective Date, Entera was engaged in business in each of the
fifty states of the United States and in the rest of North America, Europe,
Asia, South America, Africa and Australia. (This shall hereafter be referred to
as the "Geographic Region.") The parties further agree that CacheFlow, following
the closing, will continue conducting such business in all parts of the
Geographic Region. As a result of the foregoing, the parties expressly
understand and agree that the non-competition provisions contained in this
Agreement are permissible and enforceable pursuant to the provisions of
California law, including but not limited to Section 16601 of the California
Business and Professions Code.
Non-Competition during Employment. You agree that during your
employment with CacheFlow, you will not engage in any other employment,
business, or consulting activity unless you receive CacheFlow's prior written
approval to hold such outside employment or engage in such business or
consulting activity.
Non-Competition Following Termination of Employment. For purposes of
this Section 11, the Restricted Period shall mean twelve (12) months following
termination of your employment. During the Restricted Period, you shall not, as
an employee, agent, consultant, advisor, independent contractor, general
partner, officer, director, stockholder, investor, lender or guarantor of any
corporation, partnership or other entity, or in any other capacity, directly or
indirectly:
Participate or engage in the design, development, manufacture,
production, marketing, sale or servicing of any product, or the
provision of any service, that directly relates to the business of
Entera at the time of this Agreement or any area of business for which
you are directly responsible while employed at CacheFlow (the
"Business") in the Geographic Region; or
Permit your name to be used in connection with the Business: or
Own, directly or indirectly, solely as an investment, greater
than one percent (1%) of any class of "publicly traded securities" of
any person or entity that owns a business that relates to the Business.
For the purposes of this paragraph, the term "publicly traded
securities" shall mean securities that are traded on a national
securities exchange or listed on the Nasdaq.
Non-Solicitation. During the period commencing on the Commencement Date
and continuing until the first anniversary of the date when your employment
terminates, you shall not directly or indirectly, personally or through others,
induce, encourage, hire or solicit (on your own behalf or on behalf of any
other person or entity) any employee or consultant of CacheFlow.
<PAGE>
Savings Clause. If any restriction set forth in Section 11 herein is
held to be unreasonable, then you agree, and hereby submit, to the reduction and
limitation of such prohibition to the minimum extent necessary to render such
prohibition enforceable.
12. Arbitration. The parties agree that any dispute regarding the
-----------
interpretation or enforcement of this agreement shall be decided by
confidential, final and binding arbitration conducted by Judicial Arbitration
and Mediation Services ("JAMS") under the then existing JAMS rules rather than
by litigation in court, trial by jury, administrative proceeding or in any other
forum. Any arbitration should be conducted in Santa Clara County, California.
13. Miscellaneous.
-------------
(a) Authority to Enter into Agreement. Company represents that
---------------------------------
its President and CEO has due authority to execute and deliver this agreement
on behalf of Company.
(b) Absence of Conflicts. You represent that upon the
--------------------
Commencement Date your performance of your duties under this agreement will not
breach any other agreement as to which you are a party.
(c) Successors. This agreement is binding on and may be enforced
----------
by Company and its successors and assigns and is binding on and may be enforced
by you and your heirs and legal representatives. Any successor to Company or
substantially all of its business (whether by purchase, merger, consolidation or
otherwise) will in advance assume in writing and be bound by all of Company's
obligations under this agreement.
(d) Notices. Notices under this agreement must be in writing and
-------
will be deemed to have been given when personally delivered or two days after
mailed by U.S. registered or certified mail, return receipt requested and
postage prepaid. Mailed notices to you will be addressed to you at the home
address which you have most recently communicated to Company in writing. Notices
to Company will be addressed to its General Counsel at Company's corporate
headquarters.
(e) Waiver. No provision of this agreement will be modified or
------
waived except in writing signed by you and an officer of Company duly authorized
by its Board of Directors. No waiver by either party of any breach of this
agreement by the other party will be considered a waiver of any other breach of
this agreement.
(f) Entire Agreement. This agreement, including the attached
----------------
exhibits, and such other agreements expressly referred to herein, including the
applicable stock option plan, option agreement and related documents and
restricted stock purchase agreement and related documents represent the entire
agreement between us concerning the subject matter of your employment by
Company. To the extent of any conflict between the provision of this agreement
and other agreements referred to in the preceding sentence, the terms of this
agreement shall control.
<PAGE>
(g) Governing Law. This agreement will be governed by the laws
-------------
of the State of California without reference to conflict of laws provisions.
(h) Severability. If any portion of this agreement shall be
------------
determined to be unenforceable, the remaining provisions of this agreement shall
remain in force.
John, we are very pleased to extend this offer of employment to you
and look forward to your joining Company. Please indicate your acceptance of
the terms of this agreement by signing in the place indicated below.
Very truly yours, Accepted October __, 2000:
/s/ Brian NeSmith /s/ John Scharber
- ---------------------- -------------------------------
Brian NeSmith John Scharber
President and CEO
CacheFlow Inc.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.14
<SEQUENCE>5
<FILENAME>dex1014.txt
<DESCRIPTION>OFFER LETTER WITH ROBERT VERHEECKE
<TEXT>
<PAGE>
Exhibit 10.14
[LOGO] CacheFlow(R)
April 23, 2001
Mr. Robert P. Verheecke
Dear Bob:
We are pleased to extend to you an offer to join us as Senior Vice President and
Chief Financial Officer, reporting to myself, the President and CEO.
Per our conversations, I have structured a compensation package that consists of
eight primary components. They are as follows:
. You will receive an annual base salary of $225,000 paid according to
standard company payroll policies.
. You will be eligible to participate in an executive level bonus plan
available generally to other members of the executive management team as
may be authorized and approved by the Board of Directors.
. You will be granted an option to purchase 500,000 shares of the Company's
Common Stock, which represents approximately 1.35% of the weighted average
basic diluted capitalization of the Company. The exercise price per share
will be equal to the fair market value per share on the date the option is
granted. You will vest in 25% of the option shares after 12 months of
service, and the balance will vest in monthly installments over the next 36
months of service, as described in the applicable stock option agreement.
. Should you make an 83B election and exercise some or all your unvested
stock options, the company will issue you a full recourse loan for a
principal amount of up to one million dollars ($1,000,000) at a fair market
rate of interest. Any exercised but unvested stock options shall be subject
to repurchase rights by the Company. The loan will be evidenced by a
promissory note and stock pledge agreement in a form approved by the Board.
. Your option grants will include certain board approved acceleration rights
in the event of a change of control of the Company under the provisions of
the Company's 1999 Incentive Plan and the 2000 Supplemental Plan. These
plans read substantially in part as follows. In the event the company is
subject to a change of control and you are Involuntarily Terminated within
eighteen months following the change of control, your outstanding stock
options will vest immediately prior to your Involuntary Termination and
become fully exercisable. An Involuntary Termination includes 1)
involuntary dismissal or discharge other than for Misconduct, or 2) your
voluntary resignation following (a) a change in your
<PAGE>
Mr. Robert P. Verheecke
April 23, 2001
position with the Company that materially reduces your level of
responsibility (b) a reduction in your level of compensation, or (c) a
relocation of your place of employment by more than 50 miles without your
consent.
. You will receive four (4) weeks of vacation annually accrued as a rate of
6.67 hours per pay period, such vacation will be subject to the Company's
accrual and vacation policies.
. You are eligible for all standard health and welfare benefits according to
the Company's medical, dental and other benefits plan. Information on the
benefits is being supplied to you along with this offer letter.
. Like all Company employees, you will be required, as a condition to your
employment with the Company, to sign the Company's standard Proprietary
Information and Inventions Agreement, a copy of which is enclosed.
While you render services to the Company, you will not engage in any other
gainful employment, business or activity without the written consent of the
Company. While you render services to the Company, you also will not assist any
person or organization in competing with the Company, in preparing to compete
with the Company or in hiring any employees or consultants of the Company.
Your employment with the Company will be "at will," meaning that either you or
the Company will be entitled to terminate your employment at any time and for
any reason, with or without cause. Any contrary representations, which may have
been made to you, are superseded by this offer. This is the full and complete
agreement between you and the Company on this term. Although your job duties,
title, compensation and benefits, as well as the Company's personnel policies
and procedures, may change from time to time, the "at will" nature of your
employment may only be changed in an express written agreement signed by you and
the Company's President & CEO.
This letter and the enclosed Proprietary Information and Inventions Agreement
supersede any prior understandings or agreements, whether oral or written,
between you and the Company. These documents may not be amended or modified
except by an express written agreement signed by you and the Company's President
& CEO. The terms of this letter agreement and the resolution of any disputes
will be governed by California law.
This offer stands until 6:00 p.m. on April 27, 200l and your signature below
acknowledges your acceptance of these terms. We expect that you will start no
later than May 1, 200l.
<PAGE>
Mr. Robert P. Verheecke
April 23, 2001
Bob, I am very excited to have you join CacheFlow as a part of our team. I
sincerely believe that this presents an opportunity for you to make a
significant contribution in helping CacheFlow sustain a market leadership
position
Best Regards,
/s/ Brian NeSmith
- -----------------
Brian NeSmith
President & CEO
CacheFlow Inc.
Accepted:
/s/ Robert P. Verheecke
- -----------------------
Robert P. Verheecke
My Start Date Will Be: May 1, 2001
-------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>6
<FILENAME>dex1022.txt
<DESCRIPTION>COMMERCIAL LEASE AGREEMENT, DATED MARCH 30, 2001
<TEXT>
<PAGE>
Exhibit 10.22
SUNNYVALE VIII TRUST,
a Maryland business trust
Landlord
and
CACHEFLOW, INC.,
a Delaware corporation
Tenant
- --------------------------------------------------------------------------------
OFFICE / R&D LEASE
- --------------------------------------------------------------------------------
Dated
March 30, 200l
<PAGE>
OFFICE / R&D LEASE
Table of Contents
Summary of Terms
Recitals
<TABLE>
<S> <C>
Section 1. Lease of Premises
Section 2. Term of Lease
Section 3. Early Entry
Section 4. Possession; Delay in Delivery of Possession
Section 5. Rent
Section 6. Use
Section 7. Utilities
Section 8. Taxes
Section 9. Condition of Premises
Section 10. Repairs and Maintenance
Section 11. Alterations
Section 12. Entry
Section 13. Surrender of Premises; Holding Over
Section 14. Indemnity
Section 15. Insurance
Section 16. Trade Fixtures
Section 17. Communications Cables
Section 18. Signs
Section 19. Damage and Destruction
Section 20. Condemnation
Section 21. Assignment and Subletting
Section 22. Default
Section 23. Remedies
Section 24. Late Charge
Section 25. Default Interest
Section 26. Waiver
Section 27. Estoppel Certificates
Section 28. Attorney Fees
Section 29. Security for Tenant's Obligations
Section 30. Authority
Section 31. Notices
Section 32. Heirs and Successors
Section 33. Partial Invalidity
Section 34. Entire Agreement
Section 35. Time of Essence
Section 36. Amounts Deem Rent
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 37. Amendments
Section 38. Subordination, Nondisturbance and Attornment
Section 39. Merger
Section 40. Right of Relocation
Section 41. Options to Extend Term
Section 42. Determination of Monthly Rent for Extension Term
Section 43. Improvements
Section 44. Environmental Provisions
Section 45. Publicity
Section 46. Easements
Section 47. Covenants and Conditions
Section 48. Recordation
Section 49. Intentionally Deleted
Section 50. Security Measures
Section 51. Brokers
Section 52. Liability of Landlord
Section 53. Governing Law
Section 54. Parking; Outside Area
Section 55. Force Majeure
Section 56. Quite Enjoyment
Section 57. Offer
Section 58. Governing Law
</TABLE>
Schedule of Attachments and Exhibits
Attachment 1. Index of Defined Terms
Exhibit A. Legal Description of Property
Exhibit B. Description of Premises
Exhibit C. Work Letter Agreement
Exhibit D. Commencement Date Memorandum
ii
<PAGE>
SUMMARY OF TERMS
Date: March 30, 2001
Landlord: Sunnyvale VIII Trust, a Maryland business trust
Tenant: CacheFlow Inc., a Delaware corporation
Premises: The two story office, research and development building located at
477 Potrero Avenue, Sunnyvale, California, the floor plans for which are shown
in attached Exhibit B.
Rentable Area of Premises: approximately 45,823 rentable square feet (subject to
calculation by Landlord's and Tenant's architects as set forth herein)
Outside Area: All areas of the Property located exterior of the Building shell
including the Parking Lot and all landscaped areas and sidewalks.
(Section 2.) Estimated Delivery Date ("Estimated Delivery Date"): April 1, 2001
(Section 2.) Lease Term: Five (5) years from the Commencement Date.
(Section 5.) Monthly Rent: Rent shall commence as of the Commencement Date.
- --------------------------------------------------------------------------------
Lease Months Monthly Base Rent
1-12 $181,001
13-24 $186,431
25-36 $192,024
37-48 $197,785
49-60 $203,718
- --------------------------------------------------------------------------------
(Section 31.) Tenant's Address for Notices:
With a copy to:
CacheFlow, Inc. Miller, Starr & Regalia
650 Almanor Avenue 545 Middlefield Road, Suite 200
Sunnyvale, CA 94086 Menlo Park, CA 94025
Attn.: Director of Facilities and Real Estate Attn: Robin Kennedy
Tel. 408 220-2200 Tel. 650 463-7800
Fax 408 220-2250 Fax 650 462-1010
<PAGE>
(Section 31.) Landlord's Address for Notices:
With copy to:
Sunnyvale VIII Trust Carlyle Realty
CB Richard Ellis Property Management 4675 MacArthur Court
226 Airport Parkway Newport Beach, CA 92660
San Jose, CA 95110
Attn: Diana Florian
Makai Properties
P.O. Box 373
Crystal Bay, Nevada 89402
Attn: Mike Newbro
Mackenzie & Albritton
One Post Street, Suite 500
San Francisco, CA 94104
Attn: Paul Albritton, Esq.
(Section 51.) Broker: CPS Commercial Property exclusively representing Landlord
("Landlord Broker") and Cawley International exclusively representing Tenant
("Tenant Broker").
The defined terms in this Summary of Terms are part of this Lease. In the event
of any conflict between any information shown on this Summary and the Lease, the
latter shall control.
<PAGE>
OFFICE/RESEARCH & DEVELOPMENT LEASE
THIS OFFICE/RESEARCH & DEVELOPMENT LEASE (Lease) is entered into as of March
30, 2001, by and between SUNNYVALE VIII TRUST, a Maryland business trust
("Landlord") and CacheFlow Inc., a Delaware corporation ("Tenant").
RECITALS
A. Landlord is owner of that certain two story building consisting of
approximately 45,823 rentable square feet and improvements (collectively, the
"Building") located at 477 Potrero Avenue, Sunnyvale, California, in the County
of Santa Clara (the "Property") as more particularly described in Exhibit A
attached hereto and incorporated herein by this reference. The Building is
located in a group of eight buildings including 884, 909, 910 and 919 Hermosa
Court, 310 and 324 North Mary Avenue, and 345 Potrero Avenue, collectively
known as the "Central Research Park."
B. Tenant desires to lease from Landlord and Landlord desires to lease to
Tenant the Property, including the Building (the floor plans for which are shown
on Exhibit B attached hereto and incorporated herein by this reference), and
land comprising the Property. The Building and the land are collectively
referred to herein as the "Premises".
C. Landlord desires to lease to Tenant and Tenant desires to lease from
Landlord the Premises on the terms and conditions contained in this Lease.
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Landlord and Tenant (collectively,
the "Parties") agree as follows:
Section 1. Lease of Premises.
Landlord leases to Tenant and Tenant leases from Landlord the Premises on the
terms and conditions contained in this Lease. The Premises will be improved with
the Base Building Improvements to be constructed by Landlord. The "Base Building
Improvements" are as defined in Section 1.02 of the Work Letter, attached as
Exhibit C attached hereto and incorporated herein by this reference. The
"Rentable Area of the Building" are deemed by the Parties, for the purposes of
this Lease, to be Forty-five Thousand Eight Hundred Twenty-three (45,823) square
feet.
Section 2. Term of Lease.
(a) Commencement Date. The Term of this Lease will commence ("Commencement
Date") on July 1, 2001, except as the Commencement Date may be extended one (1)
day for each day that completion of the "Tenant Improvements" (as defined in
Section 1.03 of Exhibit C) is delayed after July 1, 2001 due to a delay in the
"Delivery Date" (as defined in Section 5.01 of Exhibit C) which is not caused by
a "Tenant Delay" (as defined in Section 5.04 of Exhibit C).
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(b) Term of the Lease. The term of the Lease ("Lease Term") will continue from
the Commencement Date for the period of time specified in the Summary of Terms
above, or until this Lease is terminated or extended as otherwise provided for
in this Lease.
(c) Commencement Date Memorandum. Following the Commencement Date, Tenant shall
execute and deliver to Landlord a memorandum of the Commencement Date in the
form of attached Exhibit D ("Commencement Date Memorandum"). The Commencement
Date Memorandum will acknowledge: (i) the Commencement Date; and (ii) Tenant's
acceptance of the Premises.
Section 3. Early Occupancy.
Notwithstanding Section 2(a) hereof, to effect Tenant's program of improvements
to such space, immediately upon the full execution and delivery of this Lease to
Landlord accompanied by the Security Deposit and the Letter of Credit (which
Letter of Credit may be delivered within ten (10) days after such full
execution) required pursuant to Section 29, all terms of this Lease shall be in
full force and effect and Tenant shall have the right to enter into the
Premises, subject to the following terms and conditions:
(a) Tenant's entry prior to the Commencement Date shall be on all the terms and
conditions of this Lease, other than the obligation to pay Rent;
(b) Tenant shall provide evidence of the insurance coverage required by Section
15 of this Lease;
(c) Tenant shall indemnify, defend, and hold harmless Landlord and Landlord's
agents, employees, and contractors against all claims, liability, and damages
arising from Tenant's entry prior to the Commencement Date, unless the same
arise from the (a) gross negligence or willful misconduct of Landlord, its
agents, contractors, or employees until such time as the Base Building
Improvements shall have been completed and (b) thereafter, subject to Section 14
herein, the negligence or willful misconduct of Landlord, its agents,
contractors, or employees.
(d) Tenant's entry prior to the Commencement Date does not constitute the
commencement of the Lease and the expiration date shall not change as result of
such entry by Tenant; and
(e) Between the Delivery Date and the Commencement Date, Tenant shall pay
directly for all utilities and services in connection with its construction of
the Tenant Improvements.
(f) Commencing on the Commencement Date, Tenant shall pay directly for all
charges and assessments for telephone, water, sewer, gas, heat, electricity,
garbage disposal, trash disposal, fire sprinkler and alarm monitoring, real
property taxes, personal property taxes and all other utilities, and for its
share of maintenance charges and services of any kind, if any, that may be
furnished to the Property by Landlord based on Tenant's actual usage of same.
Notwithstanding the foregoing, if, in Landlord's reasonable opinion, such actual
usage cannot be reasonably ascertained, then Tenant's share shall be based on a
fraction equal to the Rentable Area of the Building divided by the number of
rentable square feet contained in the Central Research Park.
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Section 4. Delay in Delivery of Possession.
If Landlord, for any reason whatsoever, cannot deliver possession of the
Premises to Tenant on or before the Estimated Delivery Date as the same may be
extended by any "Unavoidable Delays" or "Tenant Delays", neither Landlord nor
Landlord's agents (including Landlord's Managing Agent as defined in Exhibit C),
shall be liable to Tenant for any loss or damage resulting therefrom, provided,
Tenant shall have the right, as Tenant's sole and exclusive remedy hereunder to
terminate this Lease. The foregoing notwithstanding, the failure by Landlord to
complete the installation of the exterior windows of the Building on or before
April 30, 200l shall not be deemed a failure to deliver possession of the
Premises to Tenant hereunder. Tenant may give written notice to Landlord of
Tenant's intention to terminate this Lease. The notice will set forth an
effective date for the termination, which will be at least ten (10) days after
delivery of notice to Landlord. If Landlord delivers possession to Tenant on or
before this effective date, this Lease will remain in full force and effect. If
Landlord fails to deliver possession to Tenant on or before this effective date,
this Lease will be terminated. Upon such termination, all consideration
previously paid by Tenant to Landlord on account of this Lease will be returned
to Tenant, this Lease will have no further force or effect and Landlord will
have no further liability to Tenant because of this delay or termination.
Section 5. Monthly Rent and Additional Rent.
(a) Tenant agrees to pay monthly rent ("Monthly Rent") during the Lease Term in
the amounts set forth in the Summary of Terms. Monthly Rent shall be payable
without deduction, offset, abatement, prior notice or demand, except as may
otherwise be provided herein.
(b) The Monthly Rent shall be payable in advance on the first day of each month
at Landlord's address as provided herein or at such other address that Landlord
may from time to time designate by written notice to Tenant. In the event that
the Lease Term commences on a date other than the first day of a calendar month
then, on the Commencement Date, Tenant shall pay to Landlord as Monthly Rent for
the period from such Commencement Date to the first day of the next succeeding
calendar month that proportion of the first month's Monthly Rent due hereunder
which the number of days between such date of commencement and the first day of
the next succeeding calendar month bears to thirty (30). In the event that the
Lease Term for any reason ends on a date other than the last day of a calendar
month, then on the first day of the last partial calendar month of such term,
Tenant shall pay to Landlord as Monthly Rent for the period from said first day
of said last partial calendar month to and including the last day of the Lease
Term that proportion of that Monthly Rent then due hereunder which the number of
days between said first day of said last partial calendar month and the last day
of the Lease Term bears to thirty (30).
(c) Upon execution of this Lease, Tenant shall pay One Hundred Eighty-One
Thousand and One Dollars ($181,00l), which amount shall be applied toward the
first payment of Monthly Rent due hereunder.
(d) In the event of a "Chronic Delinquency" (as hereinafter defined), at
Landlord's option, Landlord shall have the right, in addition to all other
remedies under this Lease and at law, to require that Monthly Rent be paid by
Tenant quarterly, in
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advance. This provision shall not limit in any way nor be construed as a waiver
of any rights and remedies of Landlord provided herein or by law in the event of
delinquency. "Chronic Delinquency" shall mean the failure by Tenant to pay
Monthly Rent, or any other payments required to be paid by Tenant under this
Lease, when due in any of three (3) months (consecutive or non-consecutive)
during any twelve (12) month period.
(e) In addition to Monthly Rent, Tenant shall pay to Landlord as additional
rent ("Additional Rent") the following commercially reasonable amounts
(collectively, the "Operating Expenses") which shall be calculated and
determined solely by Landlord:
(i) Taxes relating to the Premises (to the extent not paid by Tenant directly
to the taxing authority) as set forth in Section 8 hereof;
(ii) Insurance premiums relating to the Premises, as set forth in Section 15
hereof, and any deductibles incurred under Section 19 hereof;
(iii) All commercially reasonable maintenance and repair costs directly
attributable to the Premises as set forth in Section 10(e) hereof; provided,
however, that if any such cost is based in whole or in part on real property
unrelated to the Premises (including Central Research Park and owned by Landlord
or its affiliates), then only that part of such expense that is fairly allocable
to the Premises shall be included in Operating Expenses;
(iv) Landlords management fee, which shall not exceed three percent (3%) of
gross Rent paid under this Lease;
(v) All charges, costs, expenses, and other amounts which Tenant is required
to pay hereunder, together with all interest, late charges, penalties, costs and
expenses, including, without limitation, reasonable attorneys fees, legal and
accounting expenses, collection costs, and court costs, that may accrue thereto
or be incurred in the event of Tenant's default, refusal, or failure to pay such
amounts, and all damages, costs, and expenses, including, but not limited to,
reasonable attorneys fees, which Landlord may incur by reason of any default by
Tenant or failure on Tenant's part to comply with the terms of this Lease.
(f) The Operating Expenses shall be paid as follows. Prior to the commencement
of each calendar year of the Lease Term or as soon thereafter as practicable,
Landlord shall give Tenant notice of its reasonable estimate of the Operating
Expenses for the ensuing year of the Lease Term. On or before the first day of
each month during the ensuing year of the Lease Term, Tenant shall pay to
Landlord one-twelfth (l/l 2) of such estimated amount, provided that if such a
notice is not given prior to the commencement of the ensuing year of the Lease
Term, Tenant shall continue to pay on the basis of the prior year's estimate
until the month after such notice is given. If at any time or times it
reasonably appears to Landlord that the actual Operating Expenses for the
current year of the Lease Term will vary from its estimate, Landlord may, by
notice to Tenant, revise its estimate for such calendar year, and subsequent
monthly payments by Tenant for such calendar year shall be based on such revised
estimate.
(g) Within ninety (90) days after the close of each calendar year of the Lease
Term or as soon after such ninety (90)-day period as practicable, Landlord shall
deliver to Tenant (i) a
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statement of the Operating Expenses for such calendar year showing in reasonable
detail the actual Operating Expenses incurred by Landlord, certified by
Landlord, which certified statement shall be final and binding upon Landlord and
Tenant, subject only to Tenant's review as set forth in Section 5(h)
hereinbelow, and (ii) a statement of the payments made by Tenant under Section
5(f) above for such year. If on the basis of such statements Tenant owes an
amount that is less than the estimated Operating Expenses for such year
previously made by Tenant, Landlord at its election shall either promptly refund
the amount of the overpayment to Tenant or credit such excess against Tenant's
next-accruing subsequent obligations to Estimated Operating Expenses. If on the
basis of such statements Tenant owes an amount that is more than the estimated
Operating Expenses for such year previously made by Tenant, Tenant shall pay the
deficiency to Landlord within thirty (30) days after delivery of such
statements.
(h) If Tenant disputes the amount of Additional Rent stated in the statement,
Tenant may designate, within thirty (30) days after receipt of that statement,
an independent certified public accountant reasonably acceptable to Landlord to
inspect Landlord's records. Tenant is not entitled to request that inspection
however, if there is then an Event of Default under this Lease. The accountant
must be a member of a nationally recognized accounting firm and must not charge
a fee based on the amount of Additional Rent that the accountant is able to save
Tenant by the inspection. Tenant shall give reasonable notice to Landlord of the
request for inspection, and the inspection must be conducted in Landlord's
offices, at a location in the Bay Area) at a reasonable time or times. If, after
that inspection, Tenant still disputes the Additional Rent, a certification of
the proper amount shall be made, at Tenant's expense, by an independent
certified public accountant mutually agreed to by the Parties, which certified
public accountant shall not have been engaged by either Landlord or Tenant for a
period of five (5) years prior to the Commencement Date. That certification
shall be final and conclusive. If said certified public accountant discovers an
excess of five percent (5%) or greater in the Operating Expenses charged to
Tenant, then, in addition to such discrepancy amount, Landlord shall reimburse
Tenant for the cost of the aforesaid certification.
(i) Notwithstanding anything to the contrary herein, "Operating Expenses" shall
not include:
(A) Costs or expenses paid by Tenant directly to third parties or as to which
Landlord is otherwise reimbursed by any third party, other tenant, or by
insurance or warranty proceeds; and the cost of providing any service directly
to and paid directly by Tenant.
(B) Interest, principal, attorney's fees, costs of environmental investigations
or reports (except if and to the extent such investigations or reports are
performed on and with respect to the Premises), points, fees, and other lender
costs and closing costs on any mortgage or mortgages, ground lease payments, or
other debt instrument now or hereafter encumbering the Building, or the
Property, or any part thereof.
(C) Insurance premiums to the extent of any refunds of those premiums.
(D) Any bad debt loss, rent loss, or reserves for bad debt or rent loss.
(E) Costs, fees, and compensation paid to Landlord, or to Landlord's
subsidiaries or affiliates, for services in or to the Building to the extent
that they exceed the charges for
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comparable services rendered by an unaffiliated third party of comparable skill,
competence, stature, and reputation.
(F) Costs or expenses associated with:
(1) Operation of the business of the ownership of the Building, Property
or Central Research Park or the entity that constitutes Landlord or Landlord's
property manager, as distinguished from the cost of Building operations,
including the cost of partnership or corporate accounting and legal matters;
defending or prosecuting any lawsuit with any mortgagee, lender, ground lessor,
broker, tenant, occupant, or prospective tenant or occupant; and selling or
syndicating any of Landlord's interest in the Building, Property, or Central
Research Park or any part thereof; or
(2) Landlord's general corporate or partnership overhead and general
administrative expenses, including the salaries of management personnel who are
not directly related to the Building and primariIy engaged in the operation,
maintenance, and repair of the Building.
(G) Advertising and promotional expenditures specifically directed toward
leasing space in the Central Research Park.
(H) Leasing commissions, space-planning costs, attorney fees and costs,
disbursements, and other expenses:
(1) Incurred in connection with leasing, other lease negotiations, or
disputes with tenants, occupants, prospective tenants, or other prospective
occupants of the Central Research Park; or
(2) Associated with the enforcement of any leases of the Central Research
Park.
(I) Costs or expenses incurred (including permit, license, and inspection
fees but excluding utilities) or cash consideration paid in renovating or
otherwise improving, decorating, painting, or redecorating lease premises for
any individual tenant or other occupants of the Central Research Park,
prospective tenants of the Central Research Park, or other occupants of Central
Research Park or in renovating or redecorating vacant lease premises for
exclusive lease to those tenants, prospective tenants, or other occupants.
(J) Costs or expenses arising from any substances, materials or wastes
that were installed by Landlord, its agents, contractors or employees and that,
at the time of installation, any of them knew or should have known to be
Hazardous Substances; or
(K) Costs or expenses incurred to comply with Landlord's obligations under
Sections 10(e), 19, or 44(k)(ii) hereof, except as specifically set forth
herein.
(L) Costs of correction, modification, alteration, or repair of (A) any
structural portion of the Building, Property or Central Research Park due to
faulty construction (other than by Tenant) or (B) structural defects in the
Building, Property or Central Research Park or any portion thereof.
(M) Entertainment, dining, or travel expenses for any purpose.
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(N) Other than (a) replacements of equipment or improvements that have a useful
life (as determined pursuant to commercially reasonable standards) of less than
five (5) years, (b) capital improvements installed on the Premises to reduce
Operating Expenses or (c) any capital expenses required for the Premises to
comply with any law, order, approval or regulation imposed after the Delivery
Date, any capital improvement, capital replacement, or related costs, including:
(1) Costs or expenses incurred by Landlord that are considered to be capital
improvement under generally accepted accounting principles;
(2) Depreciation and amortization as determined in accordance with generally
accepted accounting principles (except on materials, tools, supplies and vendor-
type equipment purchased by Landlord to enable Landlord to supply services that
Landlord might otherwise contract for with a third party to the extent that such
depreciation and amortization would otherwise have been included in the
determination of the charge for the third party's services); and
(O) Costs or expenses incurred by Landlord to construct the shell improvements
or to otherwise perform its obligations under Exhibit C.
(P) The Tenant Improvement Allowance.
(Q) Any costs or expenses as may be expressly excluded from Operating Expenses
elsewhere in this Lease.
(R) Despite any other provision of this Section 5(i), any time this Lease
expressly permits Landlord to include a capital improvement or capital
replacement expenditure as an Operating Expenses, that expenditure shall be
amortized in equal installments over the useful life of that capital improvement
or replacement pursuant to commercially reasonable amortization schedules.
(j) If Tenant shall fail to pay any Additional Rent in accordance with the
terms hereof, Landlord shall have all the rights and remedies with respect
thereto as Landlord has for nonpayment of Monthly Rent.
(k) Monthly Rent and Additional Rent are referred to collectively herein as
"Rent."
Section 6. Use.
(a) Tenant will occupy and use the Premises for research and development,
sales, engineering, general office use and other legal related uses.
(b) Tenant shall not commit any acts on the Premises, nor use the Premises in
any manner that will increase the existing rates for or cause the cancellation
of any fire, liability, or other insurance policy insuring or hereinafter
insuring the Premises or the improvements thereon. Tenant shall, at Tenant's
sole cost and expense, comply with all requirements of Landlord's insurance
carriers that are necessary for the continued maintenance at commercially
reasonable rates of fire and liability insurance policies on the Premises and
the improvements on the
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Premises. However, if such compliance would result in capital repairs or
improvements to the Property, Landlord shall have the right to effect such
compliance and Tenant shall pay to Landlord the cost of such improvement
amortized according to a commercially reasonable amortization schedule;
provided, however, that for any capital repair or improvement that is unique to
Tenant, the amortization shall not exceed the remainder of the Lease Term.
(c) Tenant shall not allow the Premises to be used for any immoral or unlawful
purpose, nor shall Tenant cause, maintain or permit any nuisance, either private
or public, in, on or about the Premises. No sale by auction shall be permitted
on the Premises. Tenant shall not place any loads upon the floors, walls or
ceiling which might endanger or damage the structure; shall not place or spill,
nor suffer to be released or spilled, any harmful substances or Hazardous
Materials (defined herein) in the drainage system of the Building, nor on the
Premises, the Building, or the Property; and shall not overload any electrical,
mechanical, plumbing, sprinkler, or other systems. No waste materials or refuse
shall be permitted to remain on any part of the Premises or outside of the
Building in which the Premises are a part, except in trash container(s) placed
inside exterior enclosures approved by Landlord for that purpose, or inside of
the Building proper where designated by Landlord. No materials, supplies,
equipment, finished products or semi-finished products, raw materials or
articles of any nature shall be stored or permitted to remain on the roof (other
than air conditioning units and antenna installations approved by Landlord as
provided herein) nor outside the Premises. Tenant shall not place anything or
allow anything to be placed near any exterior window or door that is unsightly
from a vantage point outside the Building. No loudspeaker or other device,
system or apparatus which can be heard outside the Building that may injure or
annoy other tenants of Central Business Park shall be used in or at the
Premises. Tenant shall not commit or suffer to be committed any waste in or upon
the Premises. Tenant covenants and agrees Tenant shall not be entitled to any
reduction of Rent hereunder nor shall Landlord have any liability to Tenant
because of diminution of light, air or view by any structure which may be
hereafter erected (whether or not by Landlord), by the use of the Building by
other occupants, or by the use of neighboring buildings or areas by others.
Tenant shall comply with any covenant, condition or restriction affecting the
Premises that is of record as of the date of this Lease or, as to covenants,
conditions or restrictions not of record as of the date of this Lease, only such
covenants, conditions or restrictions which do not adversely affect the Tenant's
occupancy or use of the Premises. The provisions of this Section 6(c) are for
the benefit of Landlord only and shall not be construed to be for the benefit of
any other person, or occupant of the Premises.
(d) Notwithstanding the foregoing Section 6(c), Landlord shall not erect any
new structures on the Property during the Lease Term that will materially
interfere with Tenant's permitted use and enjoyment of the Premises, or
significantly increase Tenant's costs.
(e) Except as otherwise provided in Section 6(e) and in Landlord's Contractor's
warranties, following the Delivery Date, Tenant shall thereafter, during the
Lease Term, at Tenant's sole cost, promptly comply with all laws, statutes,
ordinances, rules, regulations, orders, recorded covenants and restrictions, and
requirements of all municipal, state, and federal authorities now or later in
force, including, but not limited to, all provisions of the Americans with
Disabilities Act (the "ADA"), all seismic and other earthquake protection
measures being required by any governmental entity with jurisdiction with regard
to the Tenant Improvements on the Premises,
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any requirements of Title 24 of the California Code of Regulations, the
requirements of any board of fire underwriters or other similar body now or in
the future constituted, and the direction or occupancy certificate issued by
public officers (collectively, the "Legal Requirements"), insofar as they relate
to the condition, use, or occupancy of the Premises, or the construction of any
Alterations (as hereinafter defined) by Tenant. If Tenant's compliance with
Legal Requirements results in capital repairs or improvements to the Property,
Landlord shall effect such compliance and Tenant shall pay to Landlord the cost
of such improvement amortized over the useful life of such repair or improvement
as reasonably determined by Landlord, (which, in any case, shall not exceed the
remainder of the Lease Term for any repair to improvements unique to Tenant).
The judgment of any court of competent jurisdiction or the admission of Tenant
in any action or proceeding against Tenant that Tenant has violated any Legal
Requirement in the condition, use, or occupancy of the Premises, will be
conclusive of that fact as between Landlord and Tenant.
(f) Except in such circumstances where Tenant's compliance with Legal
Requirements arises in connection with Tenant's particular use of the Premises,
the correction or remediation of a violation arising out of or in connection
with the construction of Tenant Improvements and Alterations done by or on
behalf of Tenant or which violation arises out of or results from the actions of
Tenant or any of Tenant's contractors, employees, licensees, invitees, or
agents, Landlord shall be responsible for compliance with Legal Requirements to
the extent that such compliance requires physical modifications to the
foundation, roof, structural walls or Outside Area.
Section 7. Utilities.
Tenant shall pay promptly (as the same becomes due) directly to the entity or
authority providing and/or billing the same (or reimburse the entity paying for
the same, as the case may be), all charges for water, gas, electricity,
telephone, internet, broadband and other electronic communication service, sewer
service, waste and refuse collection, and any other utilities, materials, or
services furnished directly or indirectly to, for the benefit of, and/or used by
Tenant on or about the Premises during the Lease Term, including, without
limitation, any charges imposed after the Commencement Date. All such utility
services are separately metered to the Premises. In no event shall Landlord be
liable for billings, payment, advancement of money for payment, or reimbursement
to others for or with respect to any of the above services, materials, or
charges, and Tenant shall not be entitled to any abatement or reduction of Rent
nor any rights of constructive eviction or termination by reason of any
interruption or failure of utilities, material, or services to the Premises
during the Lease Term. The foregoing notwithstanding, Monthly Rent shall abate
on a day for day basis on the eighth day and each subsequent consecutive day of
any such interruption or failure of utilities, material, or services to the
Premises that results from the negligence or willful misconduct of Landlord or
any of Landlord's constituent members, partners, agents, employees or
contractors.
Section 8. Taxes.
(a) Tenant shall, as Additional Rent, pay directly to the taxing authority, all
Real Property Taxes (as hereinafter defined) and increases in Real Property
Taxes which result from reassessment of the Property due to changes in ownership
thereof during the Lease Term or
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which result from the reassessment of the Property due to the improvement
thereof, and all installments of assessments that are due or become due from and
after the Commencement Date and on or prior to the expiration or sooner
termination of this Lease. As used herein the term "Real Property Taxes" shall
mean and include (i) all taxes, assessments, levies, and other charges of any
kind or nature whatsoever, general and special, foreseen and unforeseen
(including, without limitation, all installments of principal and interest
required to pay any general or special assessments of public improvements, and
any increases resulting from reassessments caused by any change in ownership of
the Premises or otherwise) now or hereafter imposed by any governmental or
quasi-governmental authority or special district having the direct or indirect
power to tax or levy assessments, which are levied or assessed against, or with
respect to the value, occupancy, or use of: all or any portion of the Premises
(as now constructed or as may at any time hereafter be constructed, altered, or
otherwise changed) or Landlord's interest therein; any improvements located
within the Premises (regardless of ownership); the fixtures, equipment and other
property of Landlord, real or personal, that are an integral part of and located
on the Premises; (ii) all charges, levies, or fees imposed by reason of
environmental regulation or other governmental control of the Premises,
(excluding any penalty or fine imposed on the Premises resulting solely from the
negligence or willful misconduct of Landlord, its agents, contractors or
employees); (iii) any and all permit, inspection, and license fees and other
public charges of whatever nature that are assessed against the Property or
arise because of the occupancy, use, or possession of the Property (including,
but not limited to transit charges, traffic impact fees, housing fund
assessments, open space charges, childcare fees, school fees, or any taxes on,
or which shall be measured by, any rents or rental income, taxes on personal
property, whether of Landlord (if used for the maintenance or operation of the
Building) or Tenant; and (iv) all costs and fees (including reasonable attorney
fees) incurred by Landlord or Tenant in reasonably contesting any Real Property
Tax and in negotiation with public authorities as to any Real Property Tax. If
at any time during the Lease Term, the taxation or assessment of the Premises
prevailing as of the Commencement Date shall be altered so that in lieu of or in
addition to any Real Property Tax described above there shall be levied,
assessed, or imposed (whether by reason of a change in the method of taxation or
assessment, creation of a new tax or charge, or any other cause) an alternate or
additional tax or charge: (v) on the value, use, or occupancy of the Premises or
Landlord's interest therein; (w) on or measured by the gross receipts, income,
or rentals from the Premises; (x) on Landlord's business of leasing the
Premises; (y) based on vehicular ownership, parking, employment, production, or
the like; or (z) computed in any manner with respect to the operation of the
Premises, then any such tax or charge, however, designated, shall be included
within the meaning of the term Real Property Taxes for purposes of this Lease.
If any Real Property Tax is based in part on property or rents unrelated to the
Premises (including adjacent real property owned by Landlord or its affiliates)
then only that part of such Real Property Tax, if any, that is fairly allocable
to the Premises shall be included within the meaning of the term Real Property
Taxes. Notwithstanding the foregoing, the term Real Property Taxes shall not
include and Tenant shall not be responsible for any taxes in the nature of
estate, inheritance, transfer, gift, or franchise taxes of Landlord or the
federal or state net income tax imposed on Landlord's income from all sources.
(b) Real Property Tax Payments. Landlord shall have Real Property Tax invoices
sent directly by the taxing authority to Tenant and Tenant shall pay such
invoices in full no later than twenty (20) days prior to delinquency (and in any
case in a timely manner to avoid penalty) with
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a copy of evidence of payment to Landlord. Tenant shall promptly provide
Landlord with copies of all current Real Property Tax bills and assessments upon
receipt by Tenant and Landlord shall promptly provide Tenant with copies of all
current Real Property Tax bills and assessments which may delivered to Landlord
by the taxing authority following the Commencement Date. If Tenant has
previously been delinquent in payment of any Real Property Tax, Landlord may
elect to collect Real Property Taxes from Tenant in advance, as Operating
Expenses under Section 5 and to pay such Real Property Taxes directly.
(c) Contesting Real Property Taxes. Tenant shall have the right to contest in
good faith with the appropriate government authorities any material increase in
any Real Property Tax or assessment, provided that Tenant takes appropriate
measures to protect Landlord's property from liens relating to such disputed tax
and has reimbursed Landlord for any such tax which may have been actually paid
by Landlord as set forth above. Landlord agrees to cooperate with Tenant in
prosecuting any appeal taken by Tenant as a result of such increase, at no cost
or expense to Landlord, and shall promptly pay to Tenant any refund or reduction
received by Landlord (less any cost to Landlord in securing the refund or
reduction) that was previously paid or reimbursed to Landlord by Tenant.
(d) Tenant shall pay directly to the public authorities charged with the
collection on or before the last day on which payment may be made without
penalty or interest, as Additional Rent, all taxes, permit, inspection, and
license fees, and other public charges of whatever nature that are assessed
against personal property or trade fixtures owned by Tenant or others and placed
by Tenant on or about the Premises, and any interest or penalties applicable
thereto (if any) for non-payment or late payments arising therefrom, and all
installments of assessments against such personal property or trade fixtures of
Tenant that are due or become due from and after the date of this Lease and on
or prior to the expiration or sooner termination of this Lease.
(e) All Real Property Taxes levied on the Premises for the tax year in which
the Commencement Date falls shall be appropriately prorated between Landlord
and Tenant, so that Tenant's obligation will reflect the portion of that tax
year after the Commencement Date. Taxes levied on the Premises for the tax year
in which the Termination Date occurs shall be similarly prorated between
Landlord and Tenant to reflect the period of Tenant's possession of the Premises
during that tax year. Tenant's obligations for Real Property Taxes for the last
full or partial year of the Lease Term will survive the expiration or earlier
termination of this Lease.
(f) If Tenant has not paid any Tax required by this Lease to be paid by
Tenant before its delinquency, or if a Tax is contested by Tenant and that Tax
has not been paid within thirty (30) days after a final determination of the
validity, legality, or amount of the Tax, then Landlord may, but shall not be
required to, pay and discharge the Tax. If a Tax is paid by Landlord, the amount
of that payment shall be due and payable to Landlord by Tenant with the next
succeeding rental installment, and shall bear interest at the lesser of ten
percent (10%) per annum or the highest rate allowed by law from the date of the
payment by Landlord until repayment by Tenant.
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Section 9. Condition of Premises.
(a) Subject to (i) Landlord's enforcement of Landlord's Contractor's
warranties as set forth in Section 4.04 of Exhibit C and (ii) the completion of
Punch List Items as defined and described in Exhibit C, Tenant shall accept
possession of the Premises on the Delivery Date, in their then-existing as is
condition (but excluding any latent defects in the Base Building Improvements),
subject to (A) all applicable laws, ordinances, and regulations governing and
regulating the use of the Premises, (B) the J. Paul Access (as defined in
Section 46), if any, and (C) any easements, recorded covenants, conditions, and
restrictions, licenses, or rights-of-way. Except as specifically set forth
herein, Landlord makes no representation or warranty as to the condition of such
Premises or as to the use or occupancy that may be made thereof.
(b) Landlord warrants that, as of the Delivery Date the structural elements,
elevator, subfloor plumbing, new roof, foundations, and exterior walls shall be
in good working order and condition.
(c) Landlord represents, warrants and covenants that as of the date hereof it
has good and marketable title to the Premises in fee simple and that the same is
subject to no leases, tenancies, encumbrances, liens, defects in title or
restrictions on the transfer of all or a part thereof that would materially and
adversely affect Tenant's use or possession of the Premises. To Landlord's
knowledge, the Building is not located in a designated Flood Zone.
(d) Landlords represents and warrants that as of the date hereof it has not
received written notice from any governmental agency that Landlord has violated,
or that the Premises are in violation of, any Environmental Laws, or any
governmental permit, license or other approval for the use or occupancy of the
Premises issued to Landlord by any Agencies.
Section 10. Repairs and Maintenance.
(a) Tenant shall, at Tenant's sole expense, keep and maintain the Premises,
including, without limitation, interior walls, roof membrane, heating,
ventilation and air conditioning systems, operating systems, fire sprinklers,
alarms, all windows (interior and exterior), window frames, plate glass and
glazing, truck doors, plumbing systems (such as water and drain lines, sinks,
toilets, faucets, drains, showers, and water fountains), electrical systems
(such as panels, conduits, outlets, and lighting fixtures, including lamps,
bulbs, tubes, and ballasts), heating and air conditioning systems (such as
compressors, fans, air handlers, ducts, mixing boxes, thermostats, time clocks,
supply and return grills), interior surfaces of the Premises, store fronts, down
mechanisms, latches, locks, skylights (if any), fire extinguishing systems and
equipment, and all other interior improvements of any nature whatsoever, that
are part of the Premises (collectively, the "Building Systems"). Tenant will
keep such items in good and clean condition and repair (and, subject to the
further provisions of this Section 10(a), by replacing such items as needed),
and deliver to Landlord physical possession of the Premises at the termination
of this Lease or any sooner expiration thereof, in good condition and repair,
reasonable wear and tear excepted. Except to the extent of Landlord's "Grounds
Maintenance" as set forth in Section 10(f), Tenant shall keep and maintain the
Outside Area in good, safe and sanitary order, condition and repair and in
compliance with Legal Requirements in accordance with Section 6(e). All repairs
and replacements required of Tenant shall be promptly made with new
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materials of like kind and quality. If and to the extent Tenant's obligations
under this Section require replacement of a Building System, Tenant shall have
the right to cause Landlord to perform such replacement, and Tenant shall pay to
Landlord as Additional Rent the amortized cost of such improvement over the
useful life of such repair or improvement pursuant to a commercially reasonable
amortization schedule. If the work affects the structural elements of the
Premises or if the estimated cost of any item of repair or replacement is in
excess of Five Thousand Dollars ($5,000), Tenant shall first obtain Landlord's
written approval of the scope of the work, the plans for the work, the materials
to be used, and the contractor hired to perform the work, which approval shall
not be unreasonably withheld or delayed.
(b) Tenant shall maintain a service contract with a licensed repair and
maintenance contractor reasonably approved by Landlord for the maintenance of
all heating, air conditioning, and ventilation equipment servicing the Premises.
The contract should provide for periodic inspections and servicing of the
heating, air conditioning, and ventilation equipment at least once every ninety
(90) days during the term of the Lease.
(c) If at any time during the Lease Term, including renewals or extensions
thereof, Tenant fails to maintain the Premises, make any repairs or replacements
as required by this Section, or maintain service contracts required by this
Section, Landlord shall have the right to, but shall not be required to, enter
the Premises and perform the maintenance or make the repairs or replacements or
enter into appropriate service contracts, as the case may be. Any sums expended
by Landlord in so doing, together with interest at the lesser of ten percent
(10%) per annum or the highest rate allowed by law, shall be deemed Additional
Rent and shall be immediately due from Tenant on demand of Landlord.
(d) Tenant waives the provisions of California Civil Code Sections 1941 and
1942 and any other law that would require Landlord to maintain the Premises in a
tenantable condition or would provide Tenant with the right to make repairs and
deduct the cost of those repairs from the rent.
(e) Landlord shall maintain the structural elements of the Building,
including the foundation, the exterior wall structure, and the roof structure.
Except as set forth in Exhibit C, Landlord will not be required to make, and
Tenant shall be responsible for the cost of, any repair resulting from: any
Tenant Improvement, Alteration or modification to the Building or to mechanical
equipment within the Building performed by, for, or because of Tenant or to
special equipment or systems installed by, for, or because of Tenant; the
installation, use, or operation of Tenant's property, fixtures, and equipment;
the moving of Tenant's property in or out of the Building or in and about the
Premises; Tenant's use or occupancy of the Premises in violation of Section 6 of
this Lease; the acts or omissions of Tenant and Tenant's employees, agents,
invitees, subtenants, licensees, or contractors; fire and other casualty, except
as provided by Section 19 of this Lease; or condemnation, except as provided in
Section 20 of this Lease. Landlord shall have no obligation to commence repairs
under this Section until a reasonable time (not to exceed ten (10) business
days) after receipt of written notice from Tenant of the need for repairs.
Tenant waives any right to repair at the expense of Landlord under any
applicable governmental laws, ordinances, statutes, orders, or regulations now
or later in effect.
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(f) Subject to reimbursement pursuant to Section 5, Landlord shall keep and
maintain all grounds and landscaping in good condition and repair (collectively,
"Grounds Maintenance"). To the extent not included in Operating Expenses, upon
Landlord's election, within ten (10) days after receipt of an invoice from
Landlord, Tenant shall, as additional rent, reimburse Landlord for all
extraordinary costs incurred by Landlord in such Grounds Maintenance if and to
the extent such repair or maintenance arises out of or results from the actions
of Tenant or any of Tenant's contractors, employees, licensees, invitees, or
agents.
Section 11. Alterations.
(a) Following the completion of the Tenant Improvements, Tenant will not make
or allow any additions, alterations, installations, or improvements in or to the
Premises (collectively, the "Alterations") without the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed. The
foregoing notwithstanding, Tenant shall be permitted to install non-structural
Alterations that do not cost in excess of Twenty-Five Thousand Dollars
($25,000.00) annually, do not adversely affect Building Systems or any
structural portion of the Building, and that do not involve the introduction of
any Hazardous Material onto the Premises, provided Tenant notifies Landlord at
least ten (10) days prior to the commencement of construction thereof and such
notice sets forth in reasonable detail the Alterations to be constructed. Such
consent may be conditioned on Landlord's receipt and approval of a set of plans
and specifications for the Alterations no later than fifteen (15) business days
prior to the scheduled construction of the Alterations as well as the use by
Tenant of a contractor or contractors reasonably approved by Landlord. Landlord
shall have the right to seek reimbursement from Tenant for any actual and
reasonable costs incurred by Landlord in the review of such plans. The
installation of furnishings, fixtures, equipment, or decorative improvements
that do not affect Building Systems or the structure of the Premises, shall not
constitute Alterations. All Alterations and any furnishings, fixtures,
equipment, or decorative improvements remaining on the Premises after the
termination or earlier expiration of this Lease shall immediately become
Landlord's property and shall remain on the Premises without compensation to
Tenant. At the time of Landlord's initial approval of Alterations, Landlord
shall notify Tenant whether Tenant shall be required to remove such Alteration
at the end of the Lease Term. For all such Alterations so identified by Landlord
as requiring removal, Tenant shall cause such removal and/or restoration to be
done at Tenant's sole cost and expense and Tenant shall restore the portions of
the Premises subject to such removal to the condition of as of the Commencement
Date of this Lease, reasonable wear and tear excepted. If Tenant fails to cause
such removal and/or restoration to the identified Alterations, or other
furnishings, fixtures, equipment or decorative improvement to be removed by
Tenant upon the termination or earlier expiration of this Lease, such failure
shall be deemed a holdover under Section 13(b) of this Lease. In addition to any
other damages owing Landlord under this Section, Tenant shall owe Holdover Rent
(as hereinafter defined) for each and every day of such failure. All
improvements, additions, alterations, and repairs and the removal and
restoration thereof, as the same may be required under this Lease, shall be
performed in accordance with all applicable laws and at Tenant's sole expense.
Tenant will indemnify and defend Landlord for all liens, claims, or damages
caused by remodeling, improvements, additions, Alterations, and repairs and the
removal and restoration thereof, if required under this Lease. Upon Landlord's
request, Tenant shall provide Landlord with as-built plans for any Alteration
installed by Tenant.
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(b) Before any contract or subcontract is let or other agreement executed for
the performance of any service, or the furnishing of any materials, the total
cost of which exceeds One Hundred Thousand Dollars ($100,000.00), and before
any work of any kind or nature is commenced on the construction of Alterations
for which Landlord's consent is required, upon Landlord's request, Tenant shall
procure and deliver to Landlord a completion bond and a payment bond, both in
form and substance reasonably satisfactory to Landlord, issued by reputable
surety corporations or bonding corporations qualified to do business in
California, guaranteeing or otherwise assuring Landlord that the construction of
the Alterations will proceed to completion with due diligence, that the
reconstruction, when completed, will be fully paid for, and that the Premises
will remain free of all mechanics', laborers' or materialmen's liens or claimed
liens on account of any services or materials furnished or labor or work
performed in connection with the construction of the Alterations.
(c) At least ten (10) days before any construction commences or materials are
delivered for any Alterations that Tenant is making to the Premises, whether or
not Landlord's consent is required, Tenant shall give written notice to Landlord
as to when the construction is to commence or the materials are to be delivered.
Landlord shall then have the right to post and maintain on the Premises any
notices that are required to protect Landlord and Landlord's interest in the
Premises from any liens for work and labor performed or materials furnished in
making the alterations. It shall be Tenant's duty to keep the Premises free and
clear of all liens, claims, and demands for work performed, materials furnished,
or operations conducted on the Premises by or on behalf of Tenant. In the event
that Tenant fails to provide Landlord with the notice required by this Section
11(c), Landlord shall have the right to cause the cessation of such
construction and shall have the further right to file notices of cessation
and/or completion, so as to allow the Premises to be protected from mechanics'
liens.
(d) Tenant will not at any time permit any mechanics', laborers', or
materialmen's liens to stand against the Premises for any labor or material
furnished to Tenant or claimed to hive been furnished to Tenant or to Tenant's
agents, contractors, or subtenants, in connection with work of any character
performed or claimed to have been performed on the Premises by or at the
direction or sufferance of Tenant. Tenant shall have the right to contest the
validity or amount of any lien or claimed lien, upon giving to Landlord a bond
assuring that the lien or claimed lien will be paid, when and to the extent that
the lien is finally determined to be valid and owing. On final determination of
the lien or claim of lien, Tenant will immediately pay any final judgment
rendered, with all property costs and charges, and shall have the lien released
or judgment satisfied at Tenant's sole expense. If, within ten (10) days of the
filing of any such lien, Tenant fails to pay or provide to Landlord a bond
assuring that the lien or claimed lien will be paid, Landlord shall have the
right, upon five (5) days' written notice to Tenant, to pay or bond over such
lien, and take such actions as are necessary to have the lien released and
prevent a judgment against the Premises or Property, and the amount paid by
Landlord shall be immediately due and payable to Landlord, and shall bear
interest at the lesser of ten percent (10%) per annum or the highest rate
allowed by law from the date of payment by Landlord until repayment by Tenant.
(e) Landlord acknowledges Tenant's intent to install an emergency generator
on the Property which installation shall be permitted, at Tenant's sole cost and
expense, subject to Tenant's compliance with all of the foregoing requirements
of the Section 11, including but not limited to,
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Landlord's approval of Tenant's proposed installation, ongoing maintenance and
closure plans (which must include reference to adequate sound, release, exhaust
and safety containment of exhaust and fueling components), Landlord's approval
of the make and model of the equipment to be installed and of the installation
contractor, and compliance with all applicable laws, orders, approvals and
regulations which may be applicable to such generator on the Property. Landlord
shall be provided with copies of all required applications and filings required
for such generator, including without limitation the Hazardous Material Response
Plans and Business Plans required by local public safety agencies. Tenant shall
not install any underground storage tanks associated with such generator. Tenant
shall be responsible, at Tenant's cost, for any additional improvements or
utility installations which may be required by any applicable governmental
agency which result from the installation and operation of the generator on the
Property. Landlord may require the removal of such generator in the event its
operation creates an unreasonable nuisance to other Tenants of Central Research
Park.
Section 12. Entry.
(a) Landlord and its agents, including Managing Agent (as defined in Section
7.01 of Exhibit C) may enter the Premises at any reasonable time upon reasonable
notice to Tenant, or immediately in the case of an emergency, for the purpose
of(i) inspecting the Premises and Building systems; (ii) posting notices of non-
responsibility; (iii) supplying any service to be provided by Landlord to
Tenant; (iv) upon reasonable prior notice, showing the Premises to prospective
purchasers, mortgagees or, during the last six months of the term, to
prospective tenants; (v) making necessary alterations, additions, or repairs as
required by this Lease or to otherwise perform Landlord's duties under this
Lease; (vi) determining whether Tenant is complying with the terms of this
Lease; (vii) performing Tenant's obligations when Tenant has failed to do so
after written notice from Landlord, if required by the terms of this Lease;
(viii) placing on the Premises ordinary for sale signs or, during the last six
(6) months of the Lease Term (as the same may be extended hereunder) for lease
signs; (ix) doing other reasonable and lawful acts that may be necessary to
protect Landlord's interest in the Premises under this Lease; and (x) responding
to an emergency.
(b) Landlord shall have the right to use any reasonable means Landlord deems
necessary and proper to enter the Premises in an emergency. Any entry into the
Premises obtained by Landlord in accordance with this Section shall not be a
forcible or unlawful entry into, nor a detainer of, the Premises, or an
eviction, actual or constructive, of Tenant from the Premises, nor shall such
entry give rise to a claim for rent abatement.
Section 13. Surrender of Premises; Holding Over.
(a) Tenant agrees that, on the last day of the Lease Term, or on the sooner
termination of this Lease, to surrender the Premises, together with all Tenant
Improvements (excepting any Tenant Improvements as shall have been specifically
identified for removal by Landlord at the time that Landlord gives its written
approval of the "Tenant Improvement Plans" and the "Tenant Improvement Working
Drawings," as the same are defined in Section 2.02 of Exhibit C), Alterations,
additions, and improvements which may have been made in, to, or on the Premises
(except moveable trade fixtures installed at the expense of Tenant and Landlord
approved Alterations subject to Landlord's notice, if any, under Section 11 (a),
which shall be removed in
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accordance with Section 11), promptly and peaceably to Landlord in good
condition and repair (normal wear and tear excepted), including, without
limitation: all interior walls cleaned; all tile floors cleaned and waxed; all
carpets cleaned and shampooed; all broken, marred, stained or nonconforming
acoustical ceiling tiles replaced; all windows washed inside; the air
conditioning and heating systems serviced by a reputable and licensed service
firm, left in good operating condition and repair as so certified to by such
firm; the plumbing, electrical, and lighting systems left in good order and
repair, including replacement of any burned out, discolored, or broken light
bulbs, ballasts, or lenses. If Tenant fails to surrender the Premises at the end
of the Lease Term or other sooner termination of this Lease (except if and to
the extent any such failure of surrender arises from the grossly negligent acts
or material omissions of Landlord, its contractors, agents or employees), then
Tenant shall indemnify Landlord against loss or liability resulting from the
delay by Tenant in so surrendering the Premises, including, without limitation,
any claims made by any succeeding tenant founded on such delay. No act or
conduct of Landlord, whether consisting of the acceptance of the keys to the
Premises, or otherwise, shall be deemed to be or constitute an acceptance of the
surrender of the Premises by Tenant prior to the expiration of the Lease Term,
and acceptance by Landlord of surrender by Tenant prior to the expiration of the
Lease Term shall only flow from and must be evidenced by a written
acknowledgment of acceptance of surrender signed by Landlord. The voluntary or
other surrender of this Lease or the Premises by Tenant or a mutual cancellation
of this Lease prior to the expiration of the Lease Term shall not work as a
merger and, at the option of Landlord, shall either terminate all existing
subleases or operate as an assignment or attornment to Landlord of such
subleases as Landlord may elect to retain. After the expiration or earlier
termination of this Lease, so long as Landlord is not in material default
hereunder, Tenant shall execute, acknowledge, and deliver to Landlord, within
ten (10) days after written demand from Landlord to Tenant, any quitclaim deed
or other document required by any reputable title company, licensed to operate
in the State of California, to remove the cloud or encumbrance created by this
Lease from the real property containing the Premises.
(b) At the end of the Lease Term, or any extension, should Tenant
hold over for any reason, it is agreed that in the absence of a written
agreement to the contrary, that tenancy shall be at sufferance only and not a
renewal of this Lease, nor an extension for any further term. Tenant shall pay,
for each month or portion thereof of such holdover, Monthly Rent in an amount
equal to one hundred fifty percent (150%) of the Monthly Rent payable for the
month immediately prior to the end of the Lease Term or any extension thereof
thereafter ("Holdover Rent") and such tenancy shall be subject to every other
term, covenant, and condition in this Lease that is consistent with and not
contrary to a tenancy at sufferance.
Section 14. Indemnity.
(a) Except to the extent caused by the gross negligence or willful misconduct
of Landlord, its agents, contractors or invitees, Tenant agrees to indemnify,
defend, and hold Landlord, and Landlord's employees, agents (including Managing
Agent), constituent parties of Landlord, members, shareholders, directors,
lenders and affiliates harmless from all liability, penalties, losses, damages,
costs, expenses, causes of action, claims, or judgments, including, but not
limited to, attorney fees and costs, arising by reason of any death, bodily
injury, personal injury, or property damage resulting from: (i) any cause
occurring in or about or resulting from an
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occurrence in or about the Premises during the Lease Term, (ii) any act, work,
or things done or permitted to be done or otherwise suffered, or any omission to
act, in or about the Premises by Tenant or by any of Tenant's agents,
subtenants, officers, directors, employees, contractors, licensees, or invitees,
(iii) the negligence or willful misconduct of Tenant or Tenant's agents,
subtenants, employees, invitees, licensees, contractors, and subcontractors,
wherever it occurs in or about the Central Research Park, or (iv) an Event of
Default by Tenant. The provisions of this Section 14(a) shall survive the
expiration or sooner termination of this Lease.
(b) Except as otherwise specifically provided in this Lease, Landlord shall
not be liable to Tenant, nor shall Tenant be entitled to terminate this Lease or
to any abatement of Rent for any damage to Tenant's property or any injury to
Tenant or any of Tenant's employees, agents, or invitees, or loss to Tenant's
business arising out of any cause, other than the gross negligence or willful
misconduct of Landlord, its contractors, agents or employees, including, but not
limited to (i) the failure, interruption, or installation of any heating, air
conditioning, or ventilation equipment; (ii) the failure, interruption, or
installation of any fire sprinklers or alarms; (iii) the loss or interruption of
any utility service; (iv) the failure to furnish or delay in furnishing any
utilities or services; (v) the limitation, curtailment, rationing, or
restriction on the use of water or electricity, gas or any other form of
utility; (vi) vandalism, malicious mischief, or forcible entry by unauthorized
persons or the criminal act of any person; or (vii) seepage, flooding, or other
penetration of water into any portion of the Premises. The provisions of this
Section 14(b) shall survive the expiration or sooner termination of this Lease.
Section 15. Insurance.
(a) Landlord agrees at all times during the Lease Term and during any
extension thereof, to purchase and keep in force commercially reasonable
policy(ies) of insurance covering, with commercially reasonable deductibles: (i)
loss or damage to the Premises by reason of fire (extended coverage), flood,
systems breakdown and those perils included within the classification of all
risks insurance (with sprinkler damage and other appropriate endorsements),
which insurance shall be in the amount of the full replacement value of the
Premises as determined by insurance company appraisers or Landlord's insurance
agent; (ii) Landlord's liability insurance; and (iii) rental income insurance in
the amount of one hundred percent (100%) of up to twelve (12) months' Monthly
Rent (plus sums paid during such period as Additional Rent), and (iv) such other
commercially reasonable coverages as Landlord deems in Landlord's reasonable
discretion to be prudent, customary and necessary for the Premises, including
earthquake coverage, or as may be required by Landlord's lender having a first
lien on the Premises provided such coverage requirements are typical. Such
coverage shall exclude routine maintenance and repairs and incidental damage or
destruction caused by accidents or vandalism for which Tenant is responsible
under this Lease. Tenant agrees to pay Landlord as Additional Rent in accordance
with Section 5(e) of this Lease the cost of such insurance coverage. If the cost
of such insurance is based in part on property unrelated to the Premises
(including Central Research Park and adjacent real property owned by Landlord or
its affiliates) then only that part of such insurance premium that is fairly
allocable to the Premises shall be included in Tenant's Operating Expenses. If
and to the extent such insurance cost is increased due to Tenant's particular
use of the Premises, then Tenant agrees to pay to Landlord the full cost of such
increase. Tenant shall have no interest in nor any right to the proceeds of any
insurance
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procured by Landlord for or with respect to the Premises, except for amounts
specifically designated by the carrier as compensation for (i) tenant
Alterations installed and paid for by Tenant; (ii) Tenant's furniture, fixtures,
and equipment; or (iii) Tenant's moving or relocation costs.
(b) At all times during the Lease Term and during any holdover period,
Tenant, at its sole expense, shall procure and maintain the following types of
insurance:
(i) General Liability and Workers' Compensation Insurance. Tenant shall, at
Tenant's expense, obtain and keep in force during the Lease Term a policy of
workers' compensation insurance and a policy of commercial general liability
insurance with Broad Form Liability, and cross-liability endorsements, insuring
Landlord and Tenant against any liability arising out of Tenant's use or
occupancy of the Premises. Such insurance shall be in an amount satisfactory to
Landlord of not less than $3,000,000 per occurrence and $3,000,000 annually in
the aggregate for all claims. Such policy shall insure performance by Tenant of
the indemnity provisions of Section 14 hereof.
(ii) Insurance for Tenant's Personal Property, Fixtures and Equipment. Tenant
shall, at Tenant's expense, obtain and keep in force during the Lease Term an
all risk insurance policy with a sprinkler damage endorsement for Tenant's
personal property, inventory, alterations, fixtures, equipment, plate glass, and
any Tenant non-standard leasehold improvements located on the Premises, in an
amount not less than one hundred percent (100%) of their actual replacement
value, providing coverage for risk of direct physical loss or damage, including
sprinkler leakage, vandalism, and malicious mischief. The proceeds of such
insurance, so long as this Lease remains in effect, shall be used to repair or
replace the personal property, inventory, Alterations, fixtures, equipment, and
leasehold improvements so insured. Provided such proceeds are applied as set
forth in this Section 15(b)(ii), any insurance proceeds received by Tenant
under such policy shall be the sole property of Tenant, and Landlord shall have
no rights thereto.
(c) Each policy of insurance required to be carried by Tenant shall be issued
by a responsible insurance company authorized to do business in California with
an A.M. Best rating of at least A, and shall be issued in the names of Landlord,
Tenant, and any beneficiary under any deed of trust covering the Premises, if
required by the deed of trust, as their respective interests may appear. Upon
execution of the Lease, Tenant shall deliver to Landlord a certificate for each
insurance policy with all relevant endorsements. Each policy of insurance shall
be primary and noncontributory with any policies carried by Landlord and, to the
extent obtainable, shall provide that any loss shall be payable notwithstanding
any act or negligence of Landlord or any of Landlord's agents (including
Managing Agent), employees, or contractors that might otherwise result in
forfeiture of insurance, shall contain a cross liability endorsement, a
severability clause and contractual liability endorsement covering Tenant's
indemnity obligations under this Lease. Each insurance policy shall provide that
a thirty (30) day notice of cancellation and of any material modification of
coverage shall be given to all named insureds. The insurance coverage required
under this Section may be carried by Tenant under a blanket policy insuring
other locations of Tenant's business, provided that the Premises covered by this
Lease are specifically identified as included under that policy. Tenant agrees
that upon the failure to insure as provided in this Lease, or to pay the
premiums in the insurance, Landlord may contract for the
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insurance and pay the premiums, and all sums expended by Landlord for the
insurance shall be considered Additional Rent under this Lease and shall be
immediately repayable by Tenant.
(d) At all times during the Lease Term and any extensions or renewals, Tenant
agrees to keep and maintain, or cause Tenant's agents, subtenants, contractors,
or subcontractors to keep and maintain, workers compensation insurance and other
forms of insurance as may from time to time be required by law or may otherwise
be necessary to protect Landlord and the Premises from claims of any person who
may at any time work on the Premises, whether as a servant, agent, or employee
of Tenant or otherwise. This insurance shall be maintained at the expense of
Tenant or Tenant's agents, subtenants, contractors, or subcontractors and not at
the expense of Landlord.
(e) Landlord agrees that it will tender and turn over to Tenant or to
Tenant's insurers the defense of any claims, demands, or suits instituted, made,
or brought against Landlord or against Landlord and Tenant jointly, within the
scope of this Section 15. However, Landlord shall have the right reasonably to
approve the selection of legal counsel, to the extent that selection is within
Tenant's control, which approval shall not be unreasonably withheld or delayed.
(f) The Parties release each other, and their respective agents (including
Managing Agent), and employees, from any liability for injury to any person or
damage to property that is caused by or results from any risk insured against
under any valid and collectible insurance policy carried by either of the
Parties which contains a waiver of subrogation by the insurer and is in force at
the time of such injury or damage. However, neither party shall be released from
any such liability to the extent any damages resulting from such injury or
damage are not covered by the recovery obtained by the damaged party from such
insurance. This release shall be in effect only so long as the applicable
insurance policy contains a clause to the effect that this release shall not
affect the right of the insured to recover under such policy. Each party shall
use reasonable efforts to cause each insurance policy obtained by it to provide
that the insurer waives all right of recovery by way of subrogation against
the other party and its agents (including Managing Agent), and employees in
connection with any injury or damage covered by such policy. However, if any
insurance policy cannot be obtained with such a waiver of subrogation, or if
such waiver of subrogation is available only at additional cost and the party
for whose benefit the waiver is to be obtained does not pay such additional
cost, then the party obtaining such insurance shall notify the other party of
that fact and thereupon shall be relieved of the obligation to obtain such
waiver of subrogation rights from the insurer with respect to the particular
insurance involved.
Section 16. Trade Fixtures.
(a) Tenant shall have the right, at any time and from time to time during the
Lease Term and any renewals or extensions, at Tenant's sole cost and expense, to
install and affix on the Premises items for use in Tenant's trade or business,
which Tenant, in Tenant's sole discretion, deems advisable (collectively, "Trade
Fixtures"). Trade Fixtures installed in the Premises by Tenant shall always
remain the property of Tenant and may be removed at the expiration or earlier
termination of the Lease Term or any extension, provided that any damage to the
Premises caused by the removal of the Trade Fixtures shall be repaired by
Tenant, and further provided that Landlord shall have the right to keep any
Trade Fixtures or to require Tenant to remove any
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Trade Fixtures that Tenant might otherwise elect to abandon. Tenant shall not in
any case remove as Trade Fixtures or otherwise any equipment which includes any
integral portion of the Building mechanical, electrical or plumbing systems.
(b) Any Trade Fixtures that are not removed from the Premises by Tenant within
thirty (30) days after the Termination Date shall be deemed abandoned by Tenant
and shall automatically become the property of Landlord as owner of the real
property to which they are affixed.
Section 17. Communications Cables and Antennas.
Regardless of any provisions of this Lease to the contrary, Landlord and Tenant
agree as follows:
(a) Cabling and Equipment. Tenant will be responsible, at Tenant's sole cost,
for the installation, maintenance, and repair of all telecommunication and
network cabling, wiring, and risers running throughout the Premises, together
with all of Tenant's telephones, telecopiers, computers, servers, telephone
switching, telephone panels, and related equipment. Tenant agrees to install,
maintain, and repair the telecommunication and network cabling, wiring, and
risers running throughout the Premises in a good and proper manner.
(b) Right of Entry. In addition to Landlord's other rights of entry under this
Lease, Landlord may enter the Premises after advance reasonable notice to
inspect the antennas, telecommunication and network cabling, wiring, and risers
to assure that the installation, maintenance, and repair are being performed in
a good and proper manner.
(c) Antennas. Tenant shall have the right, at Tenant's sole cost and expense,
to install a satellite receiving antenna, cellular telephone antennas to enhance
cellular telephone signals within the Building, and related equipment on the
roof of the Building for Tenant's exclusive use. Installation of the antennas
shall be subject to all of the requirements of Section 11 including Landlord's
reasonable consent. Landlord's consent to the installation of any antennas may
be reasonably conditioned upon Tenant's receipt of all governmentally required
rights, licenses and approvals for the installation and use of the antennas; the
installation of roof-screening or other aesthetic modifications required to
minimize the visual appearance of the satellite antennas; to the extent
necessary, Landlord's review of an electrical engineer report obtained by Tenant
confirming that Tenant's antennas will not cause any radio frequency
interference with existing antennas or communications facilities at Central
Research Park and, to the extent necessary in Landlord's reasonable discretion,
the use of Landlord's structural engineer, electrical engineer, Building
engineer, architect, roofing contractor or other consultants or contractors in
the location and installation of the satellite antenna to avoid the violation or
limitation of any third party rights and/or warranties or structural impairment
of the roof or Building. Plans for the antennas shall be designed in such a
manner as to minimize radio frequency and visual impacts to the greatest extent
possible and shall avoid any exterior cable trays or other equipment on the
facie of the Building. Tenant shall reimburse Landlord for all costs reasonably
associated with the review and approval of any antenna installations. Tenant
shall maintain and operate the antennas in a manner which will not injure or
annoy, nor cause radio frequency interference, with occupants of the buildings
adjacent to the Building nor the general public. Upon removal of any such
antennas, Tenant shall remove any and all structural improvements required for
installation and shall repair any damage to the Building or roof resulting from
such removal. Except for
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sublessees of no less than twenty-five percent (25%) of the Rentable Area or
assignees of the Lease, the right to install the antennas granted herein shall
be personal to Tenant named herein and cannot be assigned or transferred.
(d) Indemnity. Tenant agrees to indemnify, release, defend, and hold Landlord
harmless against any damages, claims, or other liability resulting from Tenant's
installation, repair, or maintenance of the antennas, telecommunication cabling,
wiring, and risers, including, but not limited to, the costs of repair.
(e) Release. Tenant releases Landlord from all losses, claims, injuries,
damages, or other liability, including, but not limited to, consequential
damages, whether to persons or property and no matter how caused, in any way
connected with the interruption of radio, telecommunications or network services
due to the failure of any telecommunications and network cabling, wiring, or
risers. Tenant expressly waives the right to claim that any interruption
constitutes grounds for a claim of abatement of rent, constructive eviction, or
for termination of the Lease.
Section 18. Signs.
Tenant shall comply with any criteria as to signs in applicable ordinances and
any covenants, conditions, and restrictions recorded prior to the date of this
Lease. Subject to such compliance, Tenant may place and maintain in the Common
Area adjacent to the Building on Landlord's existing monument sign Tenant's logo
at Tenant's sole cost and expense. Furthermore, except for temporary holiday or
special event decorations in compliance with any City of Sunnyvale approved
signage program and as may be otherwise approved by the City of Sunnyvale,
Tenant shall not place any decoration, lettering, or advertising matter on the
glass of any exterior window of the Premises. If Tenant maintains any sign,
awning, canopy, marquee, decoration, or advertising matter in accordance with
the terms of this Section, Tenant shall maintain it in good appearance and
repair at all times during the Lease Term. At the Termination Date, any of the
items mentioned in this Section that are not removed from the Premises by Tenant
may, without damage or liability, be removed and destroyed by Landlord and
Tenant shall be liable to Landlord for the reasonable cost of such removal and
destruction.
Section 19. Damage and Destruction.
(a) If, during the Lease Term, the Premises or other improvements located
thereon or therein are damaged or destroyed, whether partially or entirely, from
any insured casualty, Landlord shall, within ninety (90) days after the
discovery of such damage or destruction, commence to restore the Premises to
substantially the same condition as prior to such casualty and, subject to the
availability of necessary governmental permits to complete such restoration,
diligently prosecute same to completion. Landlord's obligation shall not include
repair or replacement of Tenant's equipment, furnishings, fixtures, cabling,
signage, personal property or non-standard tenant improvements. Damage to or
destruction of any portion of the Building, fixtures, or other improvements on
the Premises by fire, the elements, or any other cause shall not terminate this
Lease or entitle Tenant to surrender the Premises or otherwise affect the
respective obligations of the Parties, any present or future law to the contrary
notwithstanding. If the existing laws do not
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permit the Premises to be restored to substantially the same condition as they
were in immediately before such casualty and Landlord is unable to get a
variance to such laws to permit the commencement of restoration of the Premises
within the 90 day period, then either party may terminate this Lease by giving
written notice to the other party within thirty (30) days after the expiration
of such 90 day period, in which event this Lease shall terminate as of the date
of such notice. Notwithstanding the foregoing, in the event that Landlord
decides under this Section 19(a) or under Section 19(b) within ninety (90) days
following the discovery of such damage or destruction, to demolish the Premises
rather than rebuild them, Landlord may notify Tenant in writing within such 90-
day period of such election, in which event the Lease will terminate as of the
date of such notice to Tenant.
(b) If the Premises are damaged or destroyed in whole or in part by any
uninsured or under insured casualty, Landlord may within ninety (90) days
following the date of discovery of damage: (i) commence to restore the Premises
to substantially the same condition as they were in immediately before the
destruction and, subject to the availability of necessary governmental permits
to complete such restoration, diligently prosecute same to completion, in which
event this Lease shall continue in full force and effect; or (ii) within the 120
day period, Landlord may elect not to so restore the Premises in which event the
Lease will terminate as of the date of such notice to Tenant. In either event,
Landlord shall give Tenant written notice of its intention within ninety (90)
days following such casualty.
(c) If any casualty occurs to the Premises during the last six (6) months of
the initial Lease Term or within the last six (6) months of any extension
thereof so that Tenant's use or occupancy of the Premises is materially
impaired, either party shall have the right to terminate this Lease within
thirty (30) days following such casualty.
(d) In the event that a casualty (not caused by Tenant or any of Tenant's
employees, agents, contractors, officers, directors, invitees, or licensees),
results in the material impairment of Tenant's use or occupancy of the Premises,
the Monthly Rent otherwise payable by Tenant shall be abated based on the extent
to which Tenant's use or occupancy of the Premises is materially impaired by
such casualty from the date of such casualty until (i) the Premises are
substantially completed or (ii) the Lease is terminated as provided in Sections
19(a) or (b), whichever occurs earlier. Except for the abatement of Monthly
Rent, all other obligations of Tenant under this Lease shall remain in full
force and effect and Tenant shall have no claim against Landlord for any loss
suffered by Tenant due to such casualty or any restoration or repair work
undertaken as herein provided.
(e) The provisions of California Civil Code 1932(2) and 1933(4), and any
similar or successor statutes are hereby waived by Tenant and shall be
inapplicable with respect to any damage or destruction of the Premises, such
sections providing that a lease terminates on the destruction of the Premises
unless otherwise agreed between the Parties to the contrary.
(f) The foregoing provisions of this Section 19 notwithstanding, any rights to
any insurance proceeds referenced above of Landlord's lender having a first lien
on the Premises shall supercede the use of such proceeds and Landlord's repair
obligations as set forth in this Section
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19. In such event, and provided neither Landlord nor Landlord's lender elect to
rebuild within the timeframes set forth above, Tenant shall have an absolute
right to terminate this Lease.
(g) Landlord shall provide notice to Tenant within forty-five (45) days of any
damage or destruction covered by this Section 19 if Landlord, in good faith,
believes that the Premises cannot be restored or repaired within one (1) year of
the date of such damage or destruction. Tenant shall have the right to terminate
this Lease for ten (10) days following the receipt of such notice upon written
notice to Landlord. The foregoing provisions of this Section 19 notwithstanding,
and absent the delivery of Landlord's notice under this Section 19(g), Tenant
shall have the right to terminate this Lease upon thirty (30) days notice to
Landlord in the event the Premises have not been substantially repaired within
one (1) year of the date of a damage or destruction covered by this Section 19.
Section 20. Condemnation.
(a) If, during the Lease Term or any renewal or extension, the whole of the
Premises shall be taken pursuant to any condemnation proceeding, this Lease
shall terminate as of 12:01 a.m. of the date that actual physical possession of
the Premises is taken, and after that, both Landlord and Tenant shall be
released from all obligations under this Lease.
(b) If, during the Lease Term or any renewal or extension, (i) thirty-five
percent (35%) or more of the Premises is taken pursuant to any condemnation
proceeding; (ii) less than thirty-five percent (35%) of the Premises is taken
and the remaining portion is not suitable or adequate for the purposes for which
Tenant was using the Premises prior to the taking; or (iii) if by reason of any
law or ordinance the use of the Premises for the purposes specified in this
Lease shall become unlawful, then and after the taking or after the occurrence
of the foregoing described circumstance, Tenant shall have the option to
terminate this Lease by giving thirty (30) days' written notice to Landlord,
and, after the giving of such notice, Monthly Rent shall be paid only to the
date on which Tenant surrenders the affected portion of the Premises.
(c) If only a part of the Premises is taken pursuant to any condemnation
proceeding under circumstances such that Tenant does not have the option to
terminate this Lease as provided in this Section, or if, having the option to
terminate, Tenant elects not to terminate, then Landlord shall at Landlord's
expense promptly proceed to restore the remainder of the Premises to a self-
contained architectural unit, and the Rent payable shall be reduced effective as
of the date of the taking to an amount that shall be in the same proportion to
Rent payable prior to the taking, as the number of square feet of floor area
remaining after the taking bears to the number of square feet of floor area
immediately prior to the taking.
(d) If the whole or any part of the Premises are taken pursuant to any
condemnation proceeding, then Landlord shall be entitled to the entirety of any
condemnation award except that portion specifically allocable by the condemning
authority, if any, to (i) Alterations installed and paid for by Tenant; (ii)
Tenant's furniture, fixtures, and equipment; or (iii) Tenant's moving or
relocation costs. The foregoing notwithstanding, any rights of Landlord's lender
having a first lien on the Premises to any condemnation award referenced above
shall supersede the use of such proceeds and any rights to that award, if any,
granted under this Section 20.
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Section 21. Assignment and Subletting.
(a) Except as specifically permitted pursuant to this Section 21, Tenant shall
not assign or hypothecate this Lease or any interest herein (by operation of law
or otherwise), shall not sublet the Premises or any part thereof, or permit the
use of the Premises by any party other than Tenant, shall not mortgage or
encumber the Lease (or otherwise use the Lease as a security device) in any
manner and shall not materially amend or modify an assignment, sublease, or
other transfer that has been previously approved by Landlord (each a "Transfer")
without the prior written consent of Landlord, which consent shall not be
unreasonably withheld or delayed. Any of the foregoing acts without such consent
shall be void and constitute an Event of Default under this Lease which, at the
option of Landlord, shall terminate this Lease. Notwithstanding anything to the
contrary contained in this Section, provided the use of the Premises does not
change and Tenant fully complies with the remaining provisions of this Section,
including but not limited to subsection (f) below, Tenant may Transfer this
Lease without first obtaining Landlord's consent (a "Permitted Transfer") to a
corporation or other entity which results from a merger, consolidation,
reorganization, or asset sale with Tenant in which the surviving entity (A)
acquires substantially all of the assets of Tenant as a going concern, (B)
assumes, or is deemed by law to be liable for, all of the liabilities of Tenant,
and (C) has after such merger, consolidation, reorganization, or asset sale a
net worth not less than the greater of Tenant's net worth immediately prior to
such Transfer, or as of the date of this Lease.
(b) In the event that Tenant should desire to transfer this Lease, Tenant shall
provide Landlord with written notice of such desire at least thirty (30) days in
advance of the effective date of such proposed Transfer. Such notice shall
include (i) the name and legal composition of the proposed sublessee or
assignee; (ii) the nature of business to be conducted by the proposed sublessee
or assignee in the Premises; (iii) the terms and conditions of the proposed
Transfer; (iv) a current financial statement of the proposed sublessee or
assignee, financial statements of proposed sublessee or assignee covering the
preceding three (3) years, if they exist, and, if available, an audited
financial statement of the proposed sublessee or assignee for a period ending
not more than one (1) year prior to the proposed effective date of the Transfer,
all of which are to be prepared in accordance with generally accepted accounting
principles; (v) a statement of all consideration to be given on account of the
Transfer; and (vi) any other information that Landlord may reasonably request.
At any time (i) within fifteen (15) days following receipt of Tenant's notice,
Landlord may by written notice to Tenant elect to in Landlord's sole and
absolute discretion, if the portion of the Premises to be transferred include in
excess of the greater of (A) one floor or (B) fifty percent (50%) of the
Premises, for in excess of fifty percent (50%) of the then-remainder of the
Lease Term, terminate this Lease as to the space affected as of the effective
date of the proposed Transfer; or within thirty (30) days following receipt of
Tenant's notice (ii) consent to the proposed subletting of the Premises or
assignment of this Lease, or (iii) disapprove of the proposed Transfer, in which
event Landlord shall furnish to Tenant, in writing, its reason(s) for such
disapproval. If Landlord does not elect to terminate this Lease, however,
Landlord shall not unreasonably withhold its consent to a proposed Transfer if
Tenant is not in default under this Lease at the time Tenant requests such
consent. Without limiting other situations in which it may be reasonable for
Landlord to withhold its consent to any proposed assignment or sublease,
Landlord and Tenant agree that it shall be reasonable for Landlord to withhold
its consent in any one or more of the following situations: (i) if, in
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Landlord's reasonable judgment, the net worth of the proposed assignee does not
equal or exceed the greater of Tenant's net worth at the time this Lease is
signed or Tenant's net worth immediately prior to the proposed assignment, (ii)
in Landlord's reasonable judgment, the net worth, business history and
reputation in the community of the proposed subtenant or assignee does not meet
the standards applied by Landlords and owners of similar buildings in the City
of Sunnyvale, or (iii) the proposed subtenant or assignee shall be a then
existing tenant of Landlord or prospective tenant of Landlord (with whom
Landlord or its agent have conducted written negotiations in the preceding six
(6) months), and Landlord is offering comparable space in another portion of the
Central Research Park. In any event, Landlord shall be entitled to exercise its
right of termination in lieu of consenting to a transfer, as set forth above.
(c) Landlord and Tenant agree that fifty percent (50%) of any rent or other
consideration received or to be received by or on behalf of or for the benefit
of Tenant for occupancy of the Premises as a result of any Transfer, in excess
of the aggregate of (i) the Monthly Rent which Tenant is obligated to pay
Landlord under this Lease (prorated to reflect obligations allocable to that
portion of the Premises subject to such sublease), (ii) the leasing commissions,
reasonable attorneys fees and advertising costs paid by Tenant in connection
with the entry by it into the Transfer, and (iii) unamortized initial Tenant
Improvements allocable to the transferred premises (not to exceed fifteen
dollars ($15.00) per square foot amortized on a straight line basis over the
Lease Term at a 10% interest rate), each such amount for (ii) and (iii) prorated
over the remaining months of the Lease Term, shall be payable to Landlord as
Additional Rent under this Lease without affecting or reducing any other
obligation of Tenant hereunder. Landlord's share of such excess rent or other
consideration shall be paid monthly by the subtenant or assignee directly to
Landlord at the same time as such rent or other consideration is payable to
Tenant.
(d) Regardless of Landlord's consent, no Transfer shall release Tenant of
Tenant's obligation or alter the primary liability of Tenant for Rent and
performance of all other obligations to be performed by Tenant hereunder.
Acceptance of Rent by Landlord from any other pers